Markel Executive Insights: Specialty Admitted Expense Ratio, DAC Accounting Change

On Thursday, Markel Corporation (NYSE:MKL) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with investors and analysts.

Specialty Admitted Expense Ratio

Mark Hughes – SunTrust: The expense ratio in the Specialty Admitted was up a bit year-over-year. Is that higher level going to be sustained going forward?

Richard R. Whitt, III – President and Co-COO: There were two things that were unusual in the quarter. The DAC expense which Anne talked about, we had some severance in the quarter, and we had the write-down of some systems in the quarter.

Mark Hughes – SunTrust: So the DAC could be sustained perhaps with the others now?

Richard R. Whitt, III – President and Co-COO: That’s correct.

Mark Hughes – SunTrust: OF the increase, how much was the DAC, I’m sorry if I missed that?

Anne G. Waleski – VP and CFO: For Specialty Admitted, you can expect that the DAC piece will be larger in the first and second quarter than it will be in the latter half of the year. So it’s about 4 points on Specialty Admitted in the first quarter.

Mark Hughes – SunTrust: Then the London current year losses were quite low, as low it’s been in some time, I know that’s a volatile business but any reason to assume that will change, the current accident year – should we keep (indiscernible) 67%?

Richard R. Whitt, III – President and Co-COO: Well, there’s a couple things going on there. We’ve over the last few years added some businesses that have fairly low loss ratios, but maybe slightly higher expense ratios, and the two that I’m thinking about are Elliott Special Risks and our trade credit businesses. They have low loss ratios, but higher than typical expense ratios. So, there’s a bit of a mix thing going on there. Also it was a very quite quarter in terms of catastrophes, so that also is impacting. So, I think that it was a good quarter in terms of the current accident year. I don’t know that we could expect that every quarter going forward during this year.

Mark Hughes – SunTrust: Other than that, just any thoughts on pace of favorable development going forward, it’s down a little bit year-over-year, but still at a very healthy level, what’s the – what can you say about that?

Anne G. Waleski – VP and CFO: I think, we expect it to continue to be healthy, so I’m not expecting any big differences in the future quarters.

Richard R. Whitt, III – President and Co-COO: The only thing I would add to that, Mark, the market has been softening for five, six years now so, while we always attempt to establish a fairly consistent margin of safety with the market margins shrinking, I think, it’s likely unless the market starts to tick up which we think it started to, those things will keep continue to drift down.

Anne G. Waleski – VP and CFO: Move a bit down.

DAC Accounting Change

Alison Jacobowitz – Bank of America Merrill Lynch: Hi, thanks. It’s Alison Jacobwitz actually, just a follow-up to the last question, in part, I don’t know, is it possible at this point for you to give maybe more – a little bit more specifics on the DAC accounting change and how it’s going to come through the rest of the year. I think you said something in the Q about $43 million over nine months, we’ve got $20 million in the first quarter, is it that $23 million we should look for the next couple of quarters and how should we look at that? Then also, if I heard it if you could talk about the favorable change in the swaps this quarter that added the $11 million to investment income. I’m sorry I don’t have the quarterly history I’m sure that’s lumpy, but how you might be thinking about that if there is anything you put around that?

Anne G. Waleski – VP and CFO: Allison relative to the DAC question there was bout four points in the first quarter. My best swag would be that you could take three points in the second quarter, then two points, then one point and it may move around a little bit, but that would be a reasonable swag. Relative to the credit default swaps it has moved around a fair amount quarter-to-quarter. Some markets just moved in enough of the right direction in this quarter that we ended up with a pretty positive outcome.

Thomas S. Gayner – President and Chief Investment Officer: There is nothing really to add to that, but the history is that every quarter there is some movement and that it would net towards zero over time.