Markel Group Inc (MKL) 2010 Q1 法說會逐字稿

Greetings, and welcome to the Markel First Quarter 2010 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, Steve Markel, Vice Chairman for Markel. Thank you, Mr. Markel. You may begin.

Thank you, Operator. And thank all of you for joining the first quarter Markel conference call. During our call today, we may make forward-looking statements. Additional information about factors that can cause actual results to differ materially from those projected in our forward-looking statements is described under the captions Risk Factors and Safe Harbor and Cautionary Statements in our most recent annual report on Form 10-K and quarterly report on Form 10-Q. Our quarterly report on Form 10-Q, which is filed on our website at www.markelcorp.com, also provides a reconciliation to GAAP of certain non-GAAP financial measures which we may discuss in the call today.

Again, thank you for joining us. Two thousand and ten is off to a very good start. We're very pleased with the way the first quarter is evolving. While the insurance markets continue to be very, very tough, they are starting to show some signs of improvement. Our combined ratio in the first quarter came in at 101%. That's not bad in relationship to the current market conditions or the earthquake in Chile. But, obviously, 101% is not what we would like to see.

The investment results enjoyed a great first quarter. And we're off to a very, very good start on that side. And, most importantly, book value per share rose to $296 per share, up 4.8% from the level at December 31.

Without any further ado, I'll turn the call over to Richie Whitt, who will review our financial results. He'll then turn the program over to Tony Markel, which -- and Tony will talk a bit about the marketplace and our operations. And finally, Tom Gayner will review our investment results. Richie?

Thank you, Steve. I'll follow the same format I've used in the past -- start with a discussion of our underwriting operation, follow that up with a discussion of the investment results and then bring the two together with a discussion of total results for the quarter.

Moving right into the underwriting results, gross premium volume was basically flat at about $490 million in 2010. Net written premiums were actually up a little bit compared to prior year at $447 million in the first quarter. Our retentions increased to about 91% from 90% in 2009. We've been hovering in that 90% range for quite a while now. Earned premiums decreased about 10% compared to first quarter 2009 due to lower gross in net written premiums over the past several quarters, particularly within our property cash relief and professional liability programs in the US.

As Steve said, our combined ratio for the first quarter was 101% combined compared to 95% combined in 2009. The 2010 current accident year loss ratio was a 72% compared to 68% in 2009. This increase was due to $17 million of losses from the Chilean earthquake.

Favorable redundancies on prior year loss reserves decreased to 9 points of favorable development, compared to 12 points of favorable development in 2009. The decrease was due to lower redundancies in our professional and product liability programs compared to 2009, and also included $13.7 million of adverse development on an errors and omissions program for mortgage servicing companies.

Our expense ratio decreased to 38% from 40% in 2009. However, the fourth -- the first quarter of 2010 did include a favorable arbitration settlement and an anticipated insurance recoverable -- we wouldn't expect to see those repeat in other quarters -- which together benefited the combined ratio by approximately 2 points. In both periods, One Markel costs or Atlas program costs were approximately 2 points on the combined ratio.

Turning to our investment results, investment income was essentially flat for 2009 at $68 million. Lower interest rates were partially offset by a larger portfolio. We did have some re-allocation of cash to the long-term portfolio in the first quarter. And this should benefit investment income in future quarters.

Realized gains were $16 million compared to $55 million of realized losses in 2009. The majority of the 2009 losses related to write-downs for other than temporary declines and the fair value of equity and fixed income securities.

The big story on the investment side -- unrealized gains increased $145 million before tax due to increases in both our equity and fixed income portfolios. Obviously, Tom will be going into further details in his comments shortly.

Looking at our total results for the first quarter of 2010, we reported net income of $43 million compared to $16 million in 2009. As Steve said, book value per share increased almost 5% to $296 per share at March 31, 2010.

Turning to the cash flow statements and balance sheet, I'll make a few comments. Regarding cash flow, operating cash flow was $4 million in 2010 compared to operating cash flow of $13 million in 2009. Historically, first quarter is our lowest cash generating quarter as we pay employee bonuses, agent incentives, pension contributions and other items of that sort in the first quarter. We obviously would expect the numbers to improve in the second quarter.

Regarding the balance sheet, we held approximately $1 billion of cash and investments in our holding company at March 31, 2010.

And finally, anticipating questions on the subject, I can confirm that Markel has as much as $15 million of net loss exposure to the recent Transocean deep water Horizon rig loss, which has been dominating the headlines. Clearly, this situation continues to evolve. And our loss estimates could change. Given the severity of the situation and our reserving philosophy, it is likely that we will reserve for our full exposure in the second quarter.

At this point, I'll turn it over to Tony to discuss operations. Thank you.

Thanks, Richie. Steve sort of alluded to the current environment in his opening remarks. But I made a note here that I could have recorded and replayed exactly what I said at the end of the fourth quarter in reflection of the current marketplace and our view of the current economy.

From our perspective, there seems to be virtually no discernable economic rebound, particularly in the mid market arena, where our -- most of our insurance companies concentrate. And that's coupled still with a feeding frenzy created by new, hungry entrants into most of the specialty niches. And that continues unabated, although there is some evidence -- and Steve alluded to it briefly -- that maybe the rates are bottoming. But we sure don't see any measurable rebound at this stage of the game. And every new and renewal piece of business continues to be a real struggle and a real fight.

Unfortunately, we are not planning for or expecting a quick turnaround in either one of those key market barometers. So we've got to keep our nose to the grindstone with regard to sales and marketing efforts that, frankly, have helped us shore up and stop some of the volume erosion, which I'll discuss in a minute.

As Richie said, our unsatisfactory 101% combined ratio was driven in part by catastrophe losses, primarily the Chilean earthquake, but also, the recognition of compressed margins caused by the continuing white-hot marketplace. We cannot as an industry deny that margins have been severely compressed. And it's got to come out and reflect in the numbers at some point. I would say with a great deal of pride that our reserve confidence levels continue to be at the same level that they've always been. And I'm not sure that some of the other industry reported numbers reflect that type of continuity and consistency and competence levels of their reserves. So it's not unusual to end up with a combined ratio creep as a result of true reflection of the rate levels that have been lost over the last few years.

With regard to the individual segments as we now report them, the E&S excess and surplus lines area for the quarter has shown net written premium down by 8%. But I would share with you at this stage of the game that the conversion to the regional One Markel setup in this segment is starting to pay dividends. And we were virtually flat in March, very close to it in terms of buy and loss. And in April, the early returns look like it's going to be a nice little up-tick. So we are starting to realize the momentum and the traction that we've felt all along since the first of the year.

Clearly, if we end up with an up-tick in April, it'll be strong evidence that this initiative is going to continue to solidify itself with corresponding enthusiasm from our wholesale clients and their personnel alike.

This segment is prepared to introduce two new products to the marketplace that I discussed last quarter, or at least introduced to you. And that is a D&O team and a new transportation team, both of which are ready to launch sometime before the end of the second quarter, which does nothing more than just broaden our array of products to the One Markel appointed producers. And there's a great deal of enthusiasm out there for them.

During March, we rolled out some substantial improvements in terms and conditions on some of our historic products -- historically profitable products. And we already can see the fruits of those changes in increased production. And the early returns are extremely encouraging.

In short, in this E&S segment, the environment is still, frankly, very unimproved or unimproving. But our continued measures to combat it, I think, as I said, are gaining real traction.

In the specialty admitted area, it's basically been business as usual. That operation has concentrated a great deal, as I mentioned before, on coordinating sales and marketing efforts. And their volume through the first quarter is showing a smidgeon of up-tick, but with a lot of optimism and a lot of potential expansion accounts and so forth on the table.

And the same thing is true in our London operation, where they have shown nice growth as a result of their stability and continuity in terms of management, but in addition, the branch expansions into Stockholm, Singapore and Madrid, along with the acquisition of Elliott Special Risk in Toronto, which has not really added measurably to the numbers yet, but obviously we think is going to a real shot in the arm. And those things have contributed to what look like -- looks like a very, very solid first quarter from a buying standpoint in London.

In short, not much change in the environment. A lot of things going on internally to combat them. A lot of investment in the future. Richie mentioned -- referred to the Atlas IT initiative, which is a very, very time consuming but worthwhile project to enhance what we're doing, particularly in the excess and surplus lines area.

So there's a lot of activity within Markel. Unfortunately, the outside environment is not particularly great. But I think we're doing a pretty good job of combating it. And, as I said earlier, the April numbers on early returns would indicate that maybe we are gaining a little bit of a production toehold.

So with that, needless to say, I'll be willing to answer any questions during the Q&A. And I'll turn it over to Tom Gayner.

Thank you, Tony. Good morning. As I was preparing for this call, I reviewed the comments I made a year ago on the 2009 first quarter conference call. I said at the time, quote, I know that I'm not telling you anything you don't already know when I report that investors markets remain difficult during the first quarter of 2009. It was the sixth consecutive quarter of decline in the S&P 500. And the biggest percentage decline using that measuring rod since 1979. End quote.

Well, today, I'm also probably not telling you anything that you don't already know when I tell you that markets are off to a good start in 2010. And we are pleased with our investment results. Yea. Telling you good news that you already know is more fun than telling you bad news that you also already know. Now, in no way do the returns from any one quarter deserve much in the way of accolades or criticism. However, it remains more pleasant to have good news for you, like we do today.

Specifically, we earned 2.6% on our investments during the first quarter of 2010. Our fixed income results were a positive 1.9%, as we earned the coupon attached to the portfolio plus a smidge of price appreciation as interest rates moved down slightly during the quarter.

On the equity side, we started off the year with a return of 9.3% for the quarter. And we are very happy with the results. As of March 31, 2010, equities now represent 52% of shareholders' equity as compared to 48% at year end and 43% a year ago.

We are continuing to modestly and steadily add to our equity positions in many of the same companies that we have now owned for years. Our focus remains on the high-quality global leaders with great franchises. While these holdings are starting to produce solid returns for us, we believe they remain attractively priced. And we continue to steadily add to our holdings. With equities of 52% of our shareholders' equity, we continue to have dry powder and room to continue to increase our equity holdings. Compared to the high-quality fixed income alternatives that we would invest in, we're not giving much, if any, current income. And we're putting ourselves in the position to capture future growth.

Markel Ventures, prominently known as other on the financial statements, showed aggregate revenues of roughly $40 million in the first quarter. We're very pleased with the results of our controlled subsidiaries to date. And we expect to continue to add to our holdings over time.

The total capital committed to Markel Ventures now approaches $100 million. And we expect double-digit cash flow returns from these holdings. Funding for these investments came from our position of excess liquidity, where we have and will continue to earn almost no return with interest rates at current levels.

We remain modestly short in the maturities of our bond portfolio, with a duration of 3.8 years. We are also committed -- also remain committed to very high-quality securities as we remain concerned about inflation, the credit worthiness of many borrowers and the possibility of higher rates across the board. We don't want to be in the position of someone who bought a 30-year government bond in Greece six months ago. I'm guessing that person doesn't feel too good about the next 29 and a half years.

During the last several years, we've maintained a fortressed balance sheet, with excess liquidity and high quality as the guiding forces. That has served us well and enabled us to continue to take advantage of opportunities in insurance, non-controlled public investments and controlled Company activities.

We also manage our investment activities in a very low-cost fashion. Our total expenses of managing and administering the portfolio are running at 13 basis points a year. I am pleased that the sum of these advantages adds up to a book value per share that now stands at another record high of $296.

As the fundamentals of our insurance business improve and premium volumes increase, we will look to continue to maintain and use our strong balance sheet to add value. We have the unique circumstance of being able to do that in the insurance markets, the public security markets and the private securities markets. I look forward to continuing to press these advantages. And I look forward to your questions.

With that, let me turn it back over to Steve.

Thank you, Tom. I just have a few closing comments before we open the floor for your questions. At Markel, our focus is unchanged. We seek to earn consistent underwriting profits and superior investment returns to build shareholder value. We are proud of our record of doing so in the past. And expect the same for the future.

I want to thank you for your support, and also hope to see you Monday at our annual shareholders' meeting in Richmond, Virginia.

And with that, I'd like to open the floor to your questions.

Thank you. We'll now be conducting a question-and-answer session. (Operator Instructions.) One moment, please, while we pool for questions. Thank you. Our first question is coming from the line of Mark Hughes with SunTrust Bank. Please proceed with your question.

Thank you very much. I'm sorry if you might have given this earlier. I missed your initial comments. But gross written premium -- what was the organic change year over year?

It was about flat, Mark. It was -- I'm looking for my notes here, sorry -- $490 million in the first quarter. We had a tiny bit of FX effect there. But, basically, numbers were flat in 2009.

And I heard you say that the London operation was quite strong. What else contributed to that result?

Well, basically, as Tony said, in London we were up a bit, about 7% or 8%. In the US, we were down about 6% or 7%. The increase in London would largely be driven by some of the newer products we talked about in recent quarters, such as equine and PFR as well as up. Yeah, I just got a -- my guys for helping me out there. Our PFR line, professional liability lines in London were also up. So, up in the UK, down in the US.

Great. Thank you very much.

Thank you. Our next question is from the line of Beth Malone with Wunderlich Securities. Please proceed with your question.

Okay, thank you. Good morning. As everyone's aware, there's quite a bit of catastrophes in the first quarter for the insurance industry. And apparently the Transocean event keeps growing in terms of loss. Can you give us a sense of -- I guess this is for Tony -- how much more capacity would have to come out of the market before we'd start to see a change in pricing? Or whether the dynamic of the marketplace has changed where that's not going to be a catalyst?

Beth, I -- it's such a relatively small segment comparatively that I think it's going to have to -- and don't forget, most of the liability, as I understand it, is not insured -- the cleanup and that type of thing. So I don't know -- frankly, I have no real optimism that the loss is going to make any fundamental change across the board. It clearly will send messages to the marine sector, where the offshore stuff is a significant piece of it. But I just can't see it being so dramatic in its impact on the rest of the market.

Yeah. I would agree with what Tony said. It is having a positive impact on the marine lines, particularly in London. But as Tony said, industry-wide I don't think this is an event that will impact the overall insurance industry. But, clearly, it'll help the marine lines, and particularly the oil side of the -- the rig side of the business.

Okay. All right, thank you. And then, a question for Tom. On municipal bonds, there's been a lot of discussion about the quality of those. And you all do have some exposure to municipal bonds. Are you changing your attitude or investment strategy as regards to munis?

No. The main tool to manage that risk, in my opinion, is spread. So we do carefully monitor how much we have in any jurisdiction, number one. And number two, we're at the top of the ladder of munis. We don't buy special-purpose revenue bonds, industrial development bonds or any of that kind of stuff. We're GOs and very essential public services -- water and sewer, major airports and things of that nature. So we've got the top of the food chain. And we spread it.

Okay. And then, one other question for you -- on the new types of investments, these private investments or where you take control, what's the criteria -- what are you really looking for? They seem kind of disparate in the types of business you're willing to invest in. Is there a certain checklist that you go through?

Well, Beth, you're correct in that they are disparate in what they do. But what they have in common is, they produce cash flow. These are wonderful, center of the plate, steady Eddie businesses that are not subject to a lot of technological swirl when you're looking at the business itself. The criteria that we use to select them is the exact same criteria that we've had for public equity securities forever and ever, mainly because we think about it the same way.

We've never been interested in buying stock. We've been interested in buying businesses. And what we look for in a business is, A, a profitable one with good returns upon unlevered capital. So a good return on equity, which does not need a bunch of leverage to get there. Two, management teams that have equal measures of talent and integrity. Three, a business that either has reinvestment opportunities and the ability to grow and redeploy that capital at attractive rates of return or capital discipline; i.e., dividends or share repurchases.

And one of the beauties of the controlled investments is that that capital discipline actually is my job. I approve the capital budgets and the balance sheets of the Company. So if the managers of those businesses can use capital productively, we support them in that. If not, and they earn good profits, well we bring that to Richmond and then we reallocate it. So we don't have to rely on outsiders to do that for us. We do it ourselves.

And then, the fourth and final discipline is price, making sure that we're paying fair prices, which means we'll earn a return on our investment which mimics the underlying economics of the business.

So I think you'll continue to see them as somewhat of an eclectic collection, because they serve different industries. But the good news is that they all produce cash. And they do so in a reliable and dependable fashion.

Okay, thank you. And then, one last question on the underwriting side of things. Is -- can you see or quantify the impact of the economy on pricing or demand on your particular lines of business? Has it been a material factor in pricing? And if we see this improvement in -- this recovery from a recession, are we going to see the opposite effect on the kind of risks that you're insuring?

Yeah, Beth, I don't think there's any question about it. You know, with our -- particularly in the excess and surplus lines area. And even though, in the US especially arena, where our focus has always been on sort of middle market, we've never been a real competitor for a large Fortune 500 insurance risk, that type of thing and, therefore, depended on contractors and artisans and middle market business, entertainment centers of small to medium consequence. And so, our focus has always been and -- on the middle market. And that stood us in good stead. Because it creates a whole lot less volatility than being over-dependent on a limited number of risks.

But the downside is, economically, I think this is where the breadbasket has really been hit. And using contractors as a prime example, you don't have to look very far in your own back yard to see construction, both commercial and residential, down, and all the artisans that are dependent upon it. And that was really one of the bread-and-butter things that we wrote. So when construction comes back -- and that's just one segment as an example -- it clearly will increase the number of opportunities and prices themselves. We'll see how the marketplace -- the insurance marketplace responds. But we're getting hit with the loss of demand in terms of failures and bankruptcies and downsizing, revenue, even where companies are able to stay in business. So that's had a major impact, in addition to what I've described as the white-hot competition that we've got.

Okay. Well, thank you.

Thank you. Our next question is from the line of John Fox with Fenimore Asset Management. Please proceed with your question.

Yeah, hi. I have three questions. The first one is -- maybe I missed it. Is there a breakout between what the value of the public equity portfolios for the new quarter and the private investments?

No, the public equities are reported as they always have been, as equities. The private are consolidated onto the totality of the balance sheet.

Okay. Well, the line that's investment and affiliates, which used to have a number, is now blank. So you're saying that just all the various asset and liability categories are now consolidated within the--?

Yeah. And there are two parts to that. That used to represent our investment in first markets.

Right.

Coming out of that is now in the public equity portfolio as a whole.

Okay. So the $1.5 billion is just publicly traded securities and nothing from Markel Ventures?

That is correct.

Okay. My second question is, could you just expand on the mortgage program, or I guess in the E&S segment where you had some reserve take-ups, and just give us a little bit more information about that?

Yeah, John, it's fairly simple. I mean, we wrote errors and omissions coverage for some of the mortgage and mortgage servicing companies. And, obviously, when the mortgage boom was going, there was certainly allegations of maybe some errors in underwriting, and maybe some fairly quick and dirty applications, all those sorts of things going on. As a result of that, there's been losses, some pretty bad loans made out there. And people are looking for insurance coverage. So we did insure some of the mortgage servicing companies. And they are getting some knocks on their door in terms of some of these bad loans that people made to try to obtain coverage.

Okay. I mean, I know this is always difficult. But have you gone the limits on this? Or do you feel -- obviously, there was a lot of fraud in the mortgage business. So is this a problem that can continue? Or how do you feel about that?

We think -- and this is -- I have to caveat it like we always do. I mean, we've looked at it really hard. And we've put up our best estimate of reserves on it. And we think we've done a pretty good job of it. But there's still always the possibility it can go out. No, we're nowhere limits, clearly. But the years that were causing the problems appear to be 2007, 2008. When people think you owed them money, you usually find out about that pretty quickly in terms of these types of things.

Right.

So we don't think it has a terribly long tail to it. So we think we have a pretty good handle on it. But it's reserves.

Right, I understand. It's the insurance business. My last question is a little more strategic. And when I look at your results -- and I know it's a soft market. You don't want to write a lot of premium right now. But the ROE's low. And your investment leverage is the lowest it's been in at least ten years, in terms of investments to equity. So if we got a better insurance market, is this something where you could write a lot more premium and bring that investment leverage up? Or are you running low leverage just because of the uncertain environment and the financial crisis, et cetera? So could you just talk about the -- your investment leverage at this point and what could happen in better times? Or are you going to continue to run low leverage to be safe?

You're right. And it's an important point. And I think we are in the process of increasing our commitment to the longer term assets, and particularly publicly traded equities. But it is a process itself that's slow. I think if we had been perfect, we may have put more money in a year ago when we were more conservative. But it could have been another shoe. And it could've been the worst thing we could've possibly done. We've always practiced sort of dollar cost averaging in terms of moving in and moving -- we don't typically make huge decisions that would move the needle in massive ways.

And so it's a question -- you know, we're not in a rush to get rich. We'll rather do it slow and steady. And we would be moving the leverage or the equity exposure higher over time. But, likewise, we see the opportunity to do some of those -- the public -- or the private equity things as well. So we are cautious.

Yeah, like --

And we hope to see other insurance opportunities. So --

My question isn't so much around the equity percentage -- I probably didn't phrase it very well. But if I look at your total investments to your shareholders' equity, it's 2.5 times.

The -- well, that's more a function of the premium volume and the mix of long-tail versus short-tail premium. It is -- that's running more 2.5, 2.6 times as opposed to 3. Or two or three years ago, four or five years ago it was 4-to-1. I think 4-to-1 is not likely to happen again.

Right. But even 3-to-1 would significantly increase your return on equity.

And we would love to -- we would love to see that number higher. And that is more a function of writing longer-tail business and the dollars of premium relative to the dollars of capital. And the dollars of premium has been flat-lining for the last several years. And so, it will take a spurt in that number to cause the total investment leverage to return. And we would hope that would happen in a harder, more -- less competitive market. And, likewise, were it not to happen, it just means we have excess capital in the insurance business and opportunities to do something else with that excess capital.

Yeah. And, John, let me jump in to try to answer your question as well. One of the key things to keep in mind is that there's some very straightforward math involved. So, for instance, over the last five years roughly, when we've been dealing with a soft insurance market and not much in the way, if any, of premium growth, well, the really, really great news is that we've been compounding the book value -- the shareholders' equity -- at about 11% through that period of time.

Right.

Which is our job. Now, what can and should happen is that if you get into a hard insurance market, probably the initial spurt of growth in the insurance premium volume will be faster than that. It'll be a bigger number. And that'll create investment assets, because that's -- the reserves and the liability pool will grow.

Right.

At that period of time. And that's where investment leverage, which you speak of, directly comes from. And we're -- we would love to have an environment where we have greater investment leverage. Because what that means is we are reacting to the conditions of a hard market. We can't cause a hard market. But you can rest assured that we will react in exactly the way you would like us to should we find ourselves in one.

Right. So the answer to my question is that you're not running extra low to be extra conservative. If you could write another $500 million or $1 billion of premium at the right price, you would.

If the market would give us that opportunity, we would meet them more than halfway.

And then you're -- you would have more invested assets and the returns would go up.

Absolutely.

As Martha Stewart would say, that would be a very good thing.

Right. Okay, thank you.

Our next question is from the line of John Neff with Acre Capital Management. Please proceed with your question.

Hi. Thank you. I was just wondering if you could elaborate and maybe differentiate a little bit more between your comments, Steve, I think, about not seeing a rebound in premium pricing versus the written premium volume stabilization that you saw in March year over year than the up-tick in April. In other words, if pricing isn't cooperating yet, what is it about the One Markel-Markel traction that's driving the up-tick in written premiums if pricing is not a tailwind here?

I think the simplest way to describe it is, we quote a whole lot of business that we don't get to write. And I think as Markel One is gaining traction, we're both quoting a lot more business. So the number of quotes we're submitting or issuing is higher. But, also, the percentage of those that come back and say, yes, I'll buy, is also increasing. And so you're right. The pricing is not a hell of a lot better. And we're still missing more than we're getting. But it's not as Draconian as it was at the end of last year or January and February.

(Inaudible.)

Again, it's not a long enough period of time that I would wave too many flags. But it's nice to have at least some positive news.

Yeah.

John, --

Steve, This is Richie. I might just jump in there. Steve nailed it. I mean, pricing is no better, and in some places is actually worse. But one of the things we've seen as a result of One Markel is our submission volume is up significantly. And as a matter of fact, in the last quarter submissions were up roughly 15% over the previous year. And really, you've got to get times at bat in this business. The more times at bat you get, the more you can find. And it's a tough market. But we're generating more times at bat with the new model.

And I would add, if you go back to the fundamental reason for the entire transition to the One -- the regional One Markel structure, it was to become further important and meaningful to our wholesale distribution partners in both product expansion and proximity and service, not implying any change in underwriting, risk selection or pricing.

And the -- as they said -- both Steve and Richie said, the number of quotes is going up because the value of the Markel franchise as result of the conversion to the regional structure is becoming much more apparent to our wholesale partners. We're doing a better job in servicing them. And they are giving us more shots at the business that they had been placing elsewhere because of the changes to One Markel. So the volume increase that we have been struggling for, recognizing that we had to achieve it without compromising underwriting integrity, at least for the short run looks like it's getting some traction.

Thank you very much.

Thank you. Our next question is coming from the line of David West with Davenport & Company. Please proceed with your question.

Good morning. First one, I think, for Tony. The 10-Q mentioned one reason for the lower premiums at the excess and surplus and higher at specialty admitted was a shift in the way property liability coverage was being distributed. Could you give a little more color on that, please?

We just -- I think -- Richie, you'll have to back me up on the specifics -- but I think it just refers to changing some of the products in terms of recording, David, over from the E&S side to the specialty admitted side. I don't think it's anything more fundamental than that. Richie?

Yeah, Dave, Tony hit it right on the head. We had -- we have two programs that we for management purposes transferred over to the specialty division from the excess and surplus lines side of the house, just because of some of the characteristics of that business felt more like the specialty side of our business.

Any rough dollar figure on that?

It was about $6 million.

Okay, very good. And, Richie, while I've got you on the line, a couple odds and ends. The sequential change in the amortization rate was pretty substantial. Could you give some color as to your expectation for that line item going forth?

I've got some people scurrying for some numbers. But the big change, obviously, Dave, is we had the two acquisitions in Markel Ventures in the fourth quarter -- Ellicott and PSI. And so that obviously increased it for the quarter. For the full year, we're thinking about $15 million.

Okay, thank you. And the tax rate -- I guess you would say that roughly just under 31% would probably be a reasonable estimate for the full year at this point?

Yeah. Yeah, I think in that range is pretty good for the full year. And the thing everybody needs to keep in mind is -- and this is a good thing -- you know, Markel International has been pretty solidly profitable the last few years. And at best, Markel International's tax rate will be 35% when it's profitable. And that's going to tend to offset the very nice impact we have from our muni portfolio in the US. So that sort of high 20s, 30 range is pretty good, we think.

Very good. And it looked like you repurchased some shares, a little over $4 million. Is that something -- was that a one-time event? Or something you think you maybe might continue doing?

Dave, we issue a little bit of restricted stock in the first quarter of each year. And that was actually just in the market to sort of keep everything flat, and actually ended up buying a little bit more than we issued in restricted stock.

Great. And then, as for Tom, a couple of questions. Tom, it looks like in the Q, the Parkland Ventures, you made a pretty good acquisition there. I think $23 million was deployed in the first quarter. Any comment as to relative size of that? Does that double their operations? Or what impact does that have at Parkland?

It slightly more than doubles the size of their operations. Actually, it was a single-purchase transaction from a large seller, who decided that running and managing the mobile home business is actually tougher than it might look on a spreadsheet in a big city. So we have some experience in actually doing it. And we are looking for transactions like that.

From the standing start in 2008, it's gone from zero to four communities. In 2009, we went from four to 12. That particular acquisition took it from 12 to 19 in one fell swoop. And we've subsequently closed on one more since then. So as we stand right now, we own 20 communities.

Okay, great. And was that large transaction, was that done kind of in the middle of the quarter? Or at quarter end? Or--?

First part of March, I think.

First part of March. Okay, great. And then, as you noted, you had a very nice increase sequentially in your net investment income. It didn't look like your credit default slot impacted things much. But was this sequential increase mostly from the redeployment of excess cash?

Yes.

Okay.

And let me make one other point. And this actually technically relates to John Fox's question. John, there was a statement that you made about the ROE coming down because of the reduced leverage. While that's true in the GAAP net income sense of things, in the comprehensive income sense of things, I fundamentally disagree with that proposition. And you can get back in the queue, and we can go back and forth on it, if you want. Because one of the things that'll happen as leverage comes down is that we can increase the allocation of the portfolio to equity, where we would expect to earn a higher rate of comprehensive income.

And that ties back to the fundamental strategy of matching. When we have growing insurance premium revenues and growing insurance float, we'll match that off in fixed income. But if you went to the other extreme and just wanted to picture it in your mind, if we had absolutely zero investment leverage at all, we would have 100% equity allocation to the portfolio. So we won't get to either extreme. But we will follow the direction of whatever the inherent leverage of the business is, which has the effect, really, of maintaining the same sort of expectations of comprehensive return on equity, no matter what the conditions are.

And I think that adaptability and flexibility is one of the things that's very different about Markel than a lot of other places. So I just wanted to make sure I got that point across.

Well, and I think Tom makes a really good point there. As Markel Ventures grows, the investment leverage, while always an incredibly important metric, it's going to be harder just to focus on that. Because as we said, we're looking to buy controlling interest in these companies. They're fully consolidated in our balance sheet. And they're not financial institutions such as insurance companies. So as we go forward, you're not just going to be looking at investment leverage to really think about the kinds of returns Markel Corporation's return (inaudible).

So, Dave, do you want to ask any questions on John Fox's behalf while you have the microphone?

No, I think you've been very responsive. Thanks.

Thanks.

Thank you. Our next question is from the line of Michael Nannizzi of Oppenheimer Funds. Please go ahead with your question.

Thank you. Just -- Richie, if I could ask one question about the expense ratio in E&S, it looked like it came down a bit in the first quarter as well as the fourth in last year. And I think you had mentioned somewhere about a couple of points of difference resulting from a one-time item in the quarter. But it looks like it's about maybe 20 million differential notional. Is there something else in there? Or is that a good run rate to think about?

Well, now, I think the -- in terms of overall expense ratio, that sort of 40 expense ratio, unfortunately, that's really about where we are today. We had a lot of moving parts in the first quarter, I guess is the best way to put it.

Okay.

As I said, we had that arbitration settlement that benefited us. And, obviously, I wouldn't expect that to recur in future quarters. We also had -- and we didn't necessarily mention this in the Q, because it just wasn't -- it didn't rise to the level of materiality, but we did have some lines of business last year that were running a little hot. And so we had reduced our deferred acquisition costs on them. And they're doing better this year. And so, we're actually increasing deferred acquisition costs. So you kind of get the double impact there. So there was a lot of noise in the first quarter. But I think you ought to think in terms of 40 as an expense ratio right now for us, given the soft market.

Okay. So like somewhere in the low 40s there, just like the other portfolios. Okay. And then, if I could, just one question about the E&O that you wrote on mortgage servicing companies. Was this the first quarter where you recognized some changes to the loss picks? And can you talk about any other -- what other business similar to that you write as well? Thank you so much for answering my questions.

Sure. No, we've been watching that one for a while, Michael. And the numbers really hadn't been as substantial in previous quarters. So, now we've been watching it probably for the last year or so. We did a bit of a drains up here in the recent quarter and put up a more material number, the 13.7 million that we talk about in the Q.

In terms of other business like it, we talk about the universal program, which, of course, has been impacted by sort of the mortgage boom. But they're totally different programs. And they're really the only two things that we have that seem to have significantly impacted by, I'll call it the mortgage crisis.

Okay. Thank you again for answering my questions.

Thank you. Our next question is from the line of Meyer Shields with Stifel Nicolaus. Please proceed with your question.

Okay, thanks. If I can talk with Tom, can you get a sense as to the gross dividend yields on the recent additions to the equity portfolio?

I'm sorry, Meyer, I'm going to ask you to speak up a little. I'm having a little trouble hearing you.

That's probably me. I'm sorry. Is that better.

Yes, thank you.

Okay. Can you ballpark the dividend yield on the recent additions to the equity portfolio?

In terms of the controlled companies?

No, in terms of the equity securities.

And the dollar size amounts?

Yeah, I'm asking -- yes.

Basically, we're putting $10 million or $15 million a month into the equity portfolio. And that's really been consistent for the last 12, 18 months.

Okay. And the dividend yields on those, they've been in line with (inaudible)?

In general, 2.5%, 3% on a lot of the names. Some of them are lower than that. It's interesting. We've been buying Wal-Mart for three or four years now. When we first started buying Wal-Mart, probably the yield was 1.5%. Well, the stock price is about the same as what it was three years ago. The dividend has, I think, been plumped by double-digit amounts each of the last three years. I can't remember what's Wal-Mart's exact yield right now. But it's probably up to 2.5%. And I sure do like the trend.

Okay.

And the point is, there isn't a whole lot of give-up between what we get on the dividend when we buy something like that versus anything we get in the short-term portfolio. In fact, what comes out of the short-term portfolio usually (inaudible).

Right. Okay, so that's what I thought. And with regard to the shift from the excess and surplus lines to specialty admitted, is there actually a change in the paper? Is this actually going through admitted paper? Or is it just a management decision or something?

No, no change in the paper. Nothing like that. It was really just a management change. And again, it was largely because, just from the characteristics of that business, the folks that are over-managing the specialty side, I mean it just sits better with those guys.

Okay. That covers me. Thanks so much.

Our next question is from the line of Mark Dwelle with RBC Capital Markets. Please go ahead with your question.

Yeah, I think most of my colleagues have beaten you up enough. But I've got two last couple of questions. The Transocean loss, would that be London market?

Yes, that's all in our London market operations.

And the second question is -- and this question's specifically for Tony -- you commented in your remarks that you had made some improvements related to some particular E&S products, and that had improved terms and conditions. And when I think of improved, I would think tighter, which obviously wouldn't generate more sales. Maybe you can just clarify a little bit -- I'm sure your not relaxing your terms and conditions -- so what you really meant by that.

Well, in fact, we are, Mark. We, over the last -- one of our staples and most profitable lines had always been the small binding authority where we give authority to MGAs in the field with an underwriting box of some restrictive nature. And it had always stood us in good stead. Well, the market frankly caught up with us and passed us.

And we woke up about a year ago and realized that we were losing market share. The economy affects this area as well. But we were still even losing market share of the available business in that segment. And we realized that some of our forms were antiquated and really hindered production, because they were confusing. Some of our carriers had done a better job of simplifying what they were doing. So we did make some enhancements. We actually cleaned up the policy. We broadened some terms, with definite sensitivity to the exposure involved. And in general, I think in one fell swoop, we caught up from having fallen behind three or four years ago. And -- but it is an enhanced product that we think dramatically increases our traction to our wholesale partners, with very little -- very little retreat, should I say, on the underwriting terms and conditions.

Okay.

And Mark, if I could actually jump in as the investment guy talking about the insurance side of the house, to some extent it's a reasonable analogy to think about a budgeting process. And if you had a budgeting process that looked at what you did last year, and then adjusted it for this year, over a period of time that sort of process works. But it is a certain way of doing things.

That's completely different from a zero-based budgeting process, where you look at things from a ground-up nature. And I think much of what Tony is saying is, we looked at a lot of these forms where there were certain things that we had developed clauses and exclusions for over the years. And we would start each year with all of that, plus whatever else we learned this year. Well, some of that language that was 12 or 15 years old becomes quite antiquated. And those are exclusions that really are not relevant in today's world. So the real fundamental underlying effort, which ties to everything else you're hearing around here about Markel One and taking a fresh look and trying to be easier to do business with is to look at what does the insured need? And what are the risks? And what are fair -- what's a fair price to underwrite and take that risk? So it's almost like there was a zero-based budgeting approach to a lot of the forms, which play out in terms and conditions, that I think addressed the things Tony was talking about.

Okay. That's helpful. One last quick question -- Tom, amongst the $480 million something that you've got in foreign debt investments, any of that in any of the countries that are popularly called -- well, we know what they're popularly called -- anything with some unusual exposures there?

We're fortunately not [Greecey] at all.

Okay.

Well put.

Thank you. Our final question is from the line of Jay Cohen with Bank of America. Please proceed with your question.

Thanks. I guess for Tony, two questions. The first is, you talked about the one program where you broadened terms a little bit. From a marketing standpoint, are you seeing a bigger picture trend of terms and conditions loosening up among your competitors? And then secondly, Tony, if you could, talk about -- or Richie -- talk about the claims trends that you're seeing from a frequency standpoint.

Sure, Jay. Without question, the number of new entrants, the frothiness with regard to the surplus of the industry has created all kinds of issues and increased competition. And not the least of which has been starting to broaden terms and conditions, eliminate exclusions, accepting exposures that heretofore were sort of frowned upon, all in the name of trying to at least stabilize volume, if not increase it.

I clearly think that where we broaden -- and let me go back to Tom's comment -- the Essex, which was our primary E&S carrier, original one, and was well-known for this binding authority business, had created policies of a very restricted nature. And we -- it served us in good stead. But it got to the point where a lot of the endorsements had no applicability to the insured and scared the hell out of the agents, both wholesale and retail, in terms of selling it and the potential that it had for E&O, and so forth. So we really appealed more to the agent in terms of policy cleanup and eliminating some unnecessary, frankly production -- the things that negated production, we eliminated and cleaned the policy up more in response for our wholesale and retail channel partners than we did dramatically enhancing the terms that are passed on to the insured.

But I would tell you as a general rule that the market has clearly let its guard down over the last three or four years with regard to exposures that they in general had disdained prior to that.

That's great. And what about from a claim standpoint? Are you seeing any change in the frequency which, I guess, generally for the industry has been fairly good?

Jay, this is Richie. We are clearly seeing frequency pickup in the triangle as -- well, not frequency, but clearly we're seeing the deterioration in pricing in our triangle. But, quite honestly, we're not seeing quite as much as we sort of built into our rates -- our picks. So it's holding up reasonably well.

But clearly, if you look at our triangles, and I would guess if you look at anybody else's triangles, you're starting to see the fact that we've been given back rate for the last five years. Maybe the trend isn't as bad as we put up when we put up the current accident year. But it's clearly there. And as Steve and Tony and everybody have said, the entire industry's at a place where the returns just don't make sense right now.

Jay, I don't think there's been a significant change in either frequency or severity, with the possible exception of a couple of lines. The whole issue relative to the northward move in the triangles is associated with the give-back of premium over the last three or four years.

Exactly.

Yeah, that makes sense. And then, you brought up the causative return. I guess, looking at your numbers, on an operating basis, if you take out the development and you take out the (inaudible), you're kind of in the low to mid single-digit returns. And clearly, you guys have a more unique investment style. And you add value and grow book value through that as well. But it's got to get pretty hard to overcome on an operating basis what are pretty low returns at this point. And part of the issue is the capital. And clearly, you have the ability to take that excess capital and generate returns on the investment side. But the other issue potentially is to reduce the E, which is something you haven't done historically. Any thoughts about a more aggressive buy-back at this point?

Probably not at this point in time, Jay. I think the bigger issue -- and you're sort of hitting on it -- we probably are a little bit more conservative in the way we handle loss reserving. I think you would find, and certainly I believe strongly that in the next three or five years you'll be able to prove through hindsight that in 2010, the vast majority of property casualty insurance companies are operating at huge underwriting losses. And that can't -- that's not sustainable. And we will see a better insurance market. Because people don't want to throw away capital by writing business at lousy rates. And we will see more and more companies throw up their hands and say, this isn't for me. And we'll have opportunities to grow and expand and build our business in lots of different ways. And I think today, more than ever, having a strong financial position and being in a position of strength is going to pay us huge dividends.

Okay.

And so, we're quite prepared to -- and you're right, we have several hundred million dollars worth of excess capital right now. And if it was smart just to buy back stock, that would be an option. And if we were pessimistic about the insurance industry for the next ten or 15 or 20 years, maybe we would do that.

Likewise, if our shareholders were not long and stable supporters of Markel and were looking for an exit in the next week or two or month or two or year or two, the circumstances might be very, very different, where there's pressure to try to buy stock to hold the stock price up or something. And that's just not the way that we think about things. And so, it is a very different and distinctive characteristic that you're dealing with at Markel.

I'd like to hop in with one additional addendum to Steve's comments that it's something of a paradox. And Richie and I were talking about it just the other day. You know, internally the energy level and the enthusiasm that exists around the halls is really something quite extraordinary. And if you look at the numbers, you sort of wonder why that would be.

Well, I can tell you in the history of Markel that this is not the first time something like this has happened. Because when you get the right people in the right positions, and you can see that there are business things you've been working on and problems that you really have gained a lot of ground on, the very nature of insurance accounting itself with the lag features means that the outside world can't really tell that for a while. And then you layer on top of that the fundamental conservativism of Markel, our lag -- what the underlying reality inside the building is going to be even further delayed from what people outside the building can see.

And having been here 20 years, I remember early days of the Shan deal. I remember early days of Terra Nova. And I remember paradoxical periods like this when an outside observer might say, why are you guys so happy? And what is it you're so upbeat about? And in point of fact, we knew we had taken on some really big, hairy projects and really stretched ourselves to make it happen. But we could tell that it was working. And I think right now the initiatives around the Company, fundamentally on the insurance side and on the investment side, we just have a big sense that it's working. So that translates into energy. And I think you'll see it in numbers over the course of the next two, three, five years. I don't know when. But the ingredients are there.

Got it. Great answers. Thanks.

Well, ladies and gentlemen, we very much appreciate your support of Markel and your participation in the call today. As always, the management team at Markel will be available to answer any questions you might have. So if you have anything further, don't hesitate to pick up the phone and give us a call.

And again, I'd like to remind you that we are having our annual shareholders' meeting in Richmond, Virginia on Monday. And we look forward to seeing many of you there. Have a great day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.