Markel Group Inc (MKL) 2006 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Markel Corporation first-quarter 2006 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Steve Markel, Vice Chairman of Markel Corporation. Thank you, Mr. Markel, you may begin.

Thank you, and I would like to welcome all of you to the first-quarter Markel Corporation conference call. We released the quarterly results and 10-K last night, and we are very pleased overall with the results. Clearly, we are disappointed in the creep in the hurricane numbers, but we are very pleased with our new programs and, overall, the pricing in the marketplace. And the market generally, I think, is stronger than we would have anticipated three months ago.

Before we begin, I would like to call your attention to risk factors, the Safe Harbor statement and cautionary statement set forth in our filings on Forms 80K, 10-Q and 10-K. Our discussion today could be affected by the matters described in those statements, and we encourage you to read those statements very carefully.

Our program today will follow the same format as previously. Richie Whitt will review the financial results; Tony Markel, our operations; Tom Gainer, the investment results; and then they will return it to me for a few wrap-up comments, and I will moderate the question-and-answer session. With that, Richie, take off.

Thanks, Steve, and good morning, everyone. I'm going to start by reviewing our underwriting operations in the first quarter, followed by a discussion of our investment results, and then I will bring the two together with a discussion of our total results for the quarter.

Starting with the underwriting results, gross premium volume increased 12% to 658 million in the first quarter. This was primarily due to growth in new products and increasing rates in various CAT-exposed businesses, primarily some of our property areas and our marine and energy books of business.

Net written premiums increased 15% to 567 million in the first quarter of 2006. This was due to a higher gross premium volume and higher retentions. Our retention rates increased to 86% in the first quarter of 2006, compared to 85% last year. We continue to work to increase our retention rates where appropriate across our books of business.

Earned premiums increased to 522 million in the first quarter of '06. This is a 6% increase, as a result of higher gross and net written premiums in the first quarter of this year.

Our combined ratio was 94% in the first quarter, compared to 90% last year. Our 2006 combined ratio included 9 points of 2005 hurricane development or approximately 48 million in total. This development on hurricanes was essentially offset by favorable prior-year redundancies in other areas of our business. The largest area of prior-year favorable redundancies was in our Excess and Surplus Line segment, specifically in our Professional and Products Liability unit.

Our expense ratio in the first quarter of 2006 was approximately 34%, compared to 32% last year. You may recall, our 2005 expense ratio benefited from a one-time sale of core [fronts] to the tune of approximately 5.5 million.

Turning the our investment results, average invested assets were approximately 6.6 billion in the first quarter, compared to 6.3 billion in the first quarter of last year. That represents about a 5% increase. Net investment income was approximately 67 million, compared to 59 million last year. The increase was a result of the larger average invested portfolio, as well as higher average invested yields. Our yields have increased to an average of about 4.1% in the first quarter of this year, compared to about 3.8% the first quarter of last year.

Net realized gains in the first quarter were 31 million, compared to 17 million last year. I think we have said on numerous occasions that volatility in realized gains or losses should be expected. Our change in unrealized gains was a decrease of about 51 million this year, compared to 139 million last year. A decrease in the unrealized gains this year was entirely due to the decrease in the market value of our fixed income portfolio. This was a result of the increase in rates here in the first quarter of 2006.

Turning to our total results, bringing together underwriting and investing, net income for the quarter was approximately 77 million, compared to 76 million last year. Comprehensive income was 45 million this year, compared to a comprehensive loss of approximately 26 million last year, and net income per diluted share was $7.67 in the first quarter of '06 compared to $7.47 last year. Shareholders' equity was essentially flat at 1.7 billion, unchanged from year end.

I would like to make just a couple comments, turning to the balance sheet and cash flow. During the quarter, we did repurchase approximately 140,000 shares of common stock for $46 million. This equates to a purchase price of about $328 a share.

Regarding cash flow, operating cash flow was a use of 5 million in the first quarter of 2006, compared to cash provided by operations of approximately 109 million in 2005. This entire difference is a result of hurricane loss payments and reinsurance collections on hurricanes or paid recoverables to be collected on hurricanes at the first quarter. As we move through the year, we would expect the effect of hurricane payments to have a decreasing effect on operating cash flows.

With that, I will turn it over to Tony, let him make some comments on [operating].

Thanks, Richie. You have indicated virtually most of the issues that I was going to highlight, but let me go through a short dissertation, and be willing to answer any questions. As Richie reported, we enjoyed an extremely gratifying and encouraging first quarter from an operational perspective, posting a 94% combined with an increase of 12% in gross written premium, up to 658 million, and a 15% increase in net written premium volume, up to $567 million. This was accomplished in spite of what I would describe at best as a spotty market, but reflects our continuing attempt to reduce our dependence on reinsurance, as our net retentions rose, as Richie indicated, from 84.5% in the first quarter of '05 to 86.2 same period in '06.

The marketplace, as I indicated, is really not doing us any favors, still reflecting a weakening of rates in virtually every sector except for those that were impacted by the hurricanes last year, most notably, CAT-exposed commercial property and offshore energy accounts, where rate increases have been justifiably significant.

I'm certainly not implying that rates on the other classes in general have been pushed down intolerably. Obviously, we would not have shown the growth that we did if that had been the case. But we have got to be extremely careful in the selection and pricing of business. And in spite of our overall growth, we have had to walk away from a fair amount of business where rate levels have gone down below our walkaway price.

I guess the only cloud in an otherwise sunny quarter, as Richie also alluded too, was the claims creep from the '05 hurricanes, specifically Katrina, which proved difficult to project, given the large and delayed influx of claims attributable to the unique devastation caused by that particular storm.

Surprisingly, the adverse development was caused by a small commercial account side, underwritten both here and in the US, as well as in London. And we are looking very strongly at that. While I'm not going to trivialize the impact of the $48 million of additional loss attributable to this event, the most concerning aspect was the embarrassment to an organization that prides itself on reserve adequacy and, yes, even redundancy. And I can assure you that the postmortem has revealed some issues relative to structure and preparedness for an event of that consequence that have been effectively dealt with.

While I'm on the subject of hurricanes and, for that matter, catastrophes in general, a great deal of time has been spent in the last six months strengthening our controls on CAT exposures and our aggregations. As I've indicated in the past, although certainly not embarrassed by our discipline in this area before the storm seasons of '04 and '05, our overdependence on one modeling system did create some surprises, and we have since added a couple of strong stress testing mechanisms to the mix. This has led to some very proactive programs of exposure reduction in some of the hot spots of catastrophe potential, which, candidly, is extremely well-timed, given the reduction in catastrophe treating capacity out there and the corresponding dramatic increase in pricing in terms.

In summary, I can say with a great deal of gratification, a solid quarter with some very encouraging trends reflecting the discipline, focus and continuity of our operations.

And with that, I'm going to turn it over to Mr. Gayner.

Thank you, Tony. Richie gave you the numbers for the quarter, so I will make my comments qualitative and perhaps a bit longer-term in nature. In terms of the headline and the takeaway, I think you can describe investment markets as a place where we think credit spreads are too narrow across the markets. As a consequence, we're focusing our investments at the high-quality end of the spectrum in both fixed income and equities. We're short in duration, high in credit quality, and we mean that for both the fixed income and the equity world.

As a result of this belief, which we have held for the last 12 to 18 months, I would characterize us as somewhat out of phase with the market. Recent investment performance is under some pressure as the higher-risk end the investment spectrum has done a bit better over the past few quarters. I am comfortable with being out of phase. In absolute terms, we are earning acceptable long-term returns on the equity portfolio and our coupon on the fixed income portfolio.

Being out of phase over the long term has actually served us quite well. Over the last five years, we have earned 9.4% on our equity portfolio versus a return of 3.7% for the S&P. Over the last 16.25 years, as long as I have got investment records, we have earned 11.4% versus 9.1% on the S&P, and fixed income returns are slightly over 6% for that timeframe.

In short, we continue to add value, both from our decision to allocate investment dollars to equities at a higher than normal rate for the industry and from our stock selections. I am happy with being out of phase with the market right now, because I think the market is giving us a wonderful opportunity to purchase some of the highest-quality, most successful, most durable and globally powerful businesses at the most reasonable valuations I have seen in decades. We currently have roughly 85% of shareholders' equity in equities, and I expect us to continue to keep this relatively fully invested position, given the opportunities we see in the markets and the prospective returns we anticipate.

With that, let me turn it over to Steve.

Thank you, Tom. Markel's business is solid, and 2006 is off to a very good start. I think Richie, Tony and Tom have covered all the really important points about the quarter. There's only, really, one thing I would like to add in closing, and it relates to our international operations. Although Markel International was adversely impacted by the creep in our hurricane losses in the first quarter, I hope that those numbers do not mask a very important fact, something we're pleased about and I'm happy to report, that their ongoing results for the first quarter are sub-100% combined ratios. And our expectation is that, barring further catastrophes in the year, that Markel International will now operate at a run rate, with an underwriting profit, as expected. As you know, it's been a while for us to complete a process of not only focusing the business in the right direction and developing an underwriting culture, more consistent underwriting profits, but also to build our loss reserve positions so that we're comfortable with the reserve levels in London. And we believe we have now achieved those major goals, and that the future of the international business should be reporting profits, as with all other parts of the Markel operation.

With that, operator, I would like to open the floor to any questions anyone might have.

(OPERATOR INSTRUCTIONS)

It looks like this might be a first, in that we have no questions. And if we were that complete, that is quite okay. But likewise, we would be happy to answer any questions if anyone wants to sign on.

Well, operator, hearing no questions, we have no need to keep these lines open any further.

Thank you. There's no questions in queue.

Thank you very much. Enjoyed being with you and wish you all a very, very good day.