Greetings. Welcome to the Markel first quarter 2010 earnings conference call. At this time, all participants are in the listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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. 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 could 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 Statement 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. 2010 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 tough, they are starting to show some signs of improvement.
Our combined ratio in the first quarter came in at 101%. It'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 good start on that side. 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, Tony will talk a bit about the marketplace and our operations. 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 operations, follow that up with a discussion of the investment results, 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 and net written premiums over the past several quarters, particularly within our property casualty and professional liability programs in the U.S.
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 nine points of favorable development compared to 12 points of favorable development in 2009. The decrease was due to lower redundancies in our professional and products 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 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 two points. In both periods, One Markel cost or Atlas program costs were approximately two points on the combined ratio. Turning to our investment results, investment income was essentially flat to 2009 at $68 million. Lower interest rates were partially offset by a larger portfolio. We did have some reallocation 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 in 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 31st, 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 31st, 2010.
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 Deepwater 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. 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 discernible economic rebound, particularly in the mid-market arena where most of our insurance companies concentrate. That's coupled still with a feeding frenzy created by new hungry entrants into most of the specialty niches. That continues unabated. Although there is some evidence, and Steve alluded to it briefly, that maybe the rates are bottoming. 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. We've got to keep our nose to the grindstone with regard to the 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, 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. 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. I'm not sure that some of the other industry-reported numbers reflect that type of continuity and consistency and confidence levels of their reserves. 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 showed net written premium down by 8%. 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.
We were virtually flat in March, very close to it in terms of volume loss. In April, the early returns look like it's going to be a nice little uptick. 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 uptick 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 our 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 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. 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. We're already starting to 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. 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've mentioned before, on coordinating sales and marketing efforts, and their volume through the first quarter is showing a smidgen of uptick, but with a lot of optimism and a lot of potential expansion accounts and so forth on the table. 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. In addition, the branch expansions into Stockholm, Singapore, and Madrid, along with the acquisition of Elliott Special Risks in Toronto, which has not really added measurably to the numbers yet, but obviously we think is going to be a real shot in the arm.
Those things have contributed to what looks like a very solid first quarter from a volume 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. Richard mentioned, referred to the Atlas IT initiative, which is a very time-consuming but worthwhile project to enhance what we're doing, particularly in the Excess & Surplus lines area. There's a lot of activity within Markel. Unfortunately, the outside environment is not particularly great. I think we're doing a pretty good job of combating it. As I said earlier, the April numbers on early returns would indicate that maybe we are gaining a little bit of a production toehold. With that, needless 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 investment markets remained 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 1939." End quote. 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. Yay. Telling you good news that you already know is more fun than telling you bad news that you also already know.
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 at 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 up much, if any, current income, and we're putting ourselves in the position to capture future growth. Markel Ventures, finally 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. 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 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 fortress 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. I also hope to see you on Monday at our annual shareholders meeting in Richmond, Virginia. With that, I'd like to open the floor to your questions.
Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull 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, gross written premium, what was the organic change year-over-year?
It was about flat, Mark Hughes. It was $490 million in the first quarter. We had a tiny bit of FX effect there, basically numbers were flat to 2009.
I heard you say that the London operation was quite strong. What else contributed to that result?
Basically, as Tony Markel said, in London we were up a bit, about 7%-8%. In the U.S., we were down about 6%-7%. The increase in London would largely be driven by some of the newer products we've talked about in recent quarters, such as equine and PFR as well was up. Yeah. My guys were helping me out there. Our PFR line, professional liability lines in London were also up. Up in the U.K., down in the U.S.
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, 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. I don't know. Frankly, I have no real optimism that the loss is going to make any fundamental change across the board.
Yeah.
It clearly will send messages to the marine sector where the offshore stuff is a significant piece of it. I just can't see it being but 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. As Tony says, industry-wide, I don't think this is an event that will impact the overall insurance industry. Clearly it'll help the marine lines and particularly the oil side of the rig side of the business.
Okay. All right. Thank you. 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. We do carefully monitor how much we have in anyone's jurisdiction, number one. Number two, we're at the top of the ladder of munis. We don't buy special purpose revenue bonds, industrial development bonds, any of that kind of stuff. We're GOs and very essential public services, water and sewer, major airports, things of that nature. We've got the top of the food chain, and we spread it.
Okay. One other question for you on the new types of investments, these private investments or where you take control. 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 stocks. We've been interested in buying businesses. What we look for in a business is, A, a profitable one with good returns on 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. 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. 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 back to Richmond, we reallocate it. We don't have to rely on outsiders to do that for us. We do it ourselves. 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.
I think you'll continue to see them as somewhat of an eclectic collection because they serve different industries. The good news is that they all produce cash, and they do so in a reliable and dependable fashion.
Okay. Thank you. 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? If we see this improvement in this recovery from a recession, are we going to see the opposite effect on the kinds of risks that you're insuring?
Yeah, Beth, I don't think there's any question about it. Particularly in the excess and surplus lines area, and even though in the U.S. specialty arena, where our focus has always been on sort of middle market. We've never been a real competitor for large Fortune 500 insurance risks, that type of thing, and therefore dependent on contractors and artisans and middle market business entertainment centers of small to medium consequence. Our focus has always been on the middle market. That stood us in good stead because it creates a whole lot less volatility than being overdependent on a limited number of risks. The downside is, economically, I think this is where the breadbasket has really been hit.
Using contractors as a prime example, you don't have to look very far in your own backyard to see construction, both commercial and residential, down, and all the artisans that are dependent upon it. That was really one of the bread and butter things that we wrote. 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. 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. 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 of 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 at the end of the 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. With a line that's investment affiliates, which used to have a number, is now blank. You're saying that just all the various asset and liability categories are now consolidated.
Yeah, there are two parts to that. That used to represent our investment in First Market.
Right.
The First Market coming out of that is now in the public equity portfolio as a whole.
Okay. 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&F 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. Obviously, when the mortgage boom was going, there was certainly allegations of maybe some errors in underwriting and maybe some fairly quick
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. 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 know this is always difficult, have you gone to limits on this? Obviously, there was a lot of fraud in the mortgage business, is this a problem that can continue, or how do you feel about that?
We think, I have to caveat it like we always do. We've looked at it really hard, we've put up our best estimate of reserves on it, we think we've done a pretty good job of it, there's still always the possibility it can go out. No, we're nowhere near limits, clearly. The years that were causing the problems appear to be 2007, 2008. When people think you owe them money, you usually find out about that pretty quickly in terms of these types of things.
Right.
We don't think it has a terribly long tail to it. We think we have a pretty good handle on it's reserves.
Right. I understand. It's the insurance business. My last question is a little more strategic. When I look at your results, I know it's a soft market, you don't want to write a lot of premium right now, the ROE is low and your investment leverage is the lowest it's been in at least 10 years in terms of investments to equity. 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? Could you just talk about 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, it's an important point, I think we are in the process of increasing our commitment to longer-term assets, particularly, publicly traded equities. It is a process that's also slow. I think if we had been perfect, we may have put more money in a year ago when we were more conservative, it could have been another shoe, it could have been the worst thing we could have 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. It's a question. We're not in a rush to get rich. We'll rather do it slow and steady, we would be moving the leverage or the equity exposure higher over time.
Likewise, we see the opportunity to do some of the public or the private equity things as well, we are cautious.
Yeah.
We hope to see other insurance opportunities.
My question isn't so much around the equity percentage. I probably didn't phrase it very well. If I look at your total investments to your shareholders' equity, it's two and a half times.
Well, that's more a function of the premium volume and the mix of long-tail versus short-tail premium. That's running more 2.5, 2.6 times as opposed to 2 or 3 years ago, 4 or 5 years ago, it was 4 to 1. I think 4 to 1 is not likely to happen again.
Right. Even 3 to 1 would significantly increase your return on equity.
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. The dollars of premium has been flatlining for the last several years. It will take a spurt in that number to cause the total investment leverage to return. We would hope that would happen in a harder, less competitive market. 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. 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. For instance, over the last 5 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 great news is that we've been compounding the book value, the shareholders' equity, at about 11% through that period of time.
Right.
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. That'll create investment assets because the reserves and the liability pool will grow.
Right
at that period of time. That's where investment leverage, which you speak of directly, comes from. 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 that.
Right. 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.
You would have more invested assets, and the returns would go up.
Absolutely.
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 Akre Capital Management. Please proceed with your question.
Hi, thank you. I was just wondering if you could elaborate, 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, and then the uptick in April. In other words, if pricing isn't cooperating yet, what is it about the One Markel traction that's driving the uptick 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. As One Markel is gaining traction, we're both quoting a lot more business. The number of quotes we're submitting or issuing is higher. Also, the percentage of those that come back and say, "Yes, I'll buy," is also increasing. You're right that the pricing is not a hell of a lot better, and we're still missing more than we're getting. It's not as draconian as it was the end of last year or January and February. Again, it's not a long enough period of time that I would wave too many flags. It's nice to have at least some positive news.
Yeah.
Hey, John, this is Richie. I might just jump in there. Steve nailed it. 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. Matter of fact, in the last quarter, submissions were up roughly 15% over the previous year. Really, you got to get times at bat in this business. The more times at bat you get, the more you can bind. It's a tough market. We're generating more times at bat with the new model.
I would add, if you go back to the fundamental reason for the entire transition to 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. As both Steve and Richie said, the number of quotes is going up because the value of the Markel franchise, as a 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. They are giving us more shots at the business that they had been placing elsewhere because of the changes to One Markel.
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 is getting some traction.
Thank you very much.
Thank you. Our next question is coming from the line of David West, 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 E&S 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?
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 reporting, David, over from the E&S side to the specialty admitted side. I don't think it's anything many more fundamental than that. Richie?
Yeah. Dave, Tony hit it right on the head. We have two programs that we, for management purposes, transferred over to the specialty division from the excess and surplus line 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. Richie, while I 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 expectations for that line item going forward?
I've got some people scurrying for some numbers, the big change, obviously, Dave, is we had the two acquisitions in Markel Ventures in the fourth quarter, Ellicott and PSI. That obviously increased it for the quarter. For the full year, we're thinking about $15 million.
Okay. Thank you. 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. I think in that range is pretty good for the full year. The thing everybody needs to keep in mind is, and this is a good thing, Markel International has been pretty solidly profitable the last few years. At best, Markel International's tax rate will be 35% when it's profitable. That's going to tend to offset the very nice impact we have from our muni portfolio in the U.S. That sort of high 20s, 30 range is pretty good, we think.
Okay, very good. It looked like you repurchased some shares, a little over $4 million. Was that a one-time event or something you think you might continue doing?
Dave, we issue a little bit of restricted stock in the first quarter of each year. 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.
Okay, great. As for Tom, a couple of questions, Tom. It looks like in the Form 10-Q, the Parkland ventures, you made a pretty good acquisition there. I think $23 million was deployed in the first quarter. Any comment on the 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 a mobile home business is actually tougher than it might look on a spreadsheet in a big city. We have some experience in actually doing it, and we are looking for transactions like that. From a standing start in 2008, we've 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. As we stand right now, we own 20 communities.
Okay, great. Was that large transaction, was that done kind of in the middle of the quarter, at quarter end, or?
First part of March, I think.
First part of March. Okay, great. As you've noted, you had a very nice increase sequentially in your net investment income. It didn't look like your credit default swap impacted things much, was this sequential increase mostly from the redeployment of excess cash?
Yeah.
Okay.
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. You can get back in the queue, and we can go back and forth on it if you want. One of the things that'll happen as leverage comes down is that we can increase the allocation of the portfolio to equities, where we would expect to earn a higher rate of comprehensive income. 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.
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. 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. I think that adaptability and flexibility is one of the things that's very different about Markel than a lot of other places. I just wanted to make sure I got that point across.
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 interests in these companies. They're fully consolidated in our balance sheet, and they're not financial institutions such as insurance companies. 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 is building.
Dave, do you want to ask any questions on John Fox's behalf while you have the microphone?
I think you've been very responsive. Thanks.
Thanks.
Thank you. Our next question is from the line of Michael Monahan of OppenheimerFunds. 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, both relative to the fourth and last year. 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 different notional. Is there something else in there, or is that a good run rate to think about?
Well, no, I think that 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, is, I guess, 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 reoccur in future quarters. We also had, and we didn't necessarily mention this in the Q because 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 cost on them, and they're doing better this year. We're actually increasing deferred acquisition costs. You kind of get the double impact there. 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.
Like somewhere in the low 40s there, just like the other question. And if I could, one question about the E&O that you wrote on mortgage servicing company. Pardon me.
Was this the first quarter where you recognized some changes to the loss picks, and can you talk about what other business similar to that you write as well? Thank you so much for answering my questions.
Sure. We've been watching that one for a while, Michael, and the numbers really hadn't been as substantial in previous quarters. No, 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. They're really the only two things that we have that seem to have been significantly impacted by, I'll call it the mortgage crisis.
Great. 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 start with Tom, can you give us a sense as to the rough dividend yield 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.
No, it'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.
The dollar size amounts?
Yeah.
I mean, 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. The dividend yields on those basically in line with the current portfolio?
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 Walmart for three or four years now. When we first started buying Walmart, 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 bumped by double-digit amounts each of the last three years. I can't remember what Walmart's exact yield right now, but it's probably up to 2.5%, and I sure do like the trend.
Okay.
The point is, there isn't a whole lot of give up between what we get on the dividend on when we buy something like that versus anything we get in the short-term portfolio. In fact, when it comes out of the short-term portfolio, usually it's a bump.
Yep.
Right. Okay. No, that's what I thought. 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 to admitted paper, or is it just a management change?
No, no change in the paper, nothing like that. It was really just a management change. Again, it was largely because just some of the characteristics of that business, the folks that were over managing the specialty side, it just fits better with those guys.
Okay. That covers me. Thanks so much.
Our next question is from the line of Michael Dwyer with RBC Capital Markets. Please go ahead with your question.
Yeah, I think most of my colleagues have beaten you up enough, but I got two last couple of questions. The Transocean loss, would that be London Market?
Yes. That's all in our London Market operations.
All right. The second question is, this question is specifically for Tony. You commented in your remarks that you had made some improvements related to some particular E&S products and that it improved terms and conditions. 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 you're not relaxing your terms and conditions, what you really meant by that.
No. In fact, we are, Mark. 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. It had always stood us in good stead. Well, the market frankly caught up with us and passed us. 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. 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. We did make some enhancements. We actually cleaned up the policy.
We broadened some terms with a definite sensitivity to the exposure involved. In general, I think in one fell swoop, we caught up from having fallen behind three or four years ago. It is an enhanced product that we think dramatically increases our attraction to our wholesale partners with very little retreat, should I say, on the underwriting terms and conditions.
Okay.
Mark, if I could actually jump in as the investment guy talking about the insurance side of the house. To some extent, as a reasonable analogy to think about a budgeting process.
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. I think that much of what Tony is saying is if 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.
The real fundamental underlying effort, which ties to everything else you're hearing around here about Markel One and taking fresh looks 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's a fair price to underwrite and take that risk. 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 address the thing that Tony was talking about. Okay. That's helpful. One last quick question. Tom, amongst the $480 million 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. Just anything with some unusual exposures there? We're fortunately not Greece-y at all. Good. Well put.
Thank you. Our final question is from the line of Jay Cohen of Bank of America. Please proceed with your question.
Thanks. I guess for Tony, two questions. The first is, you talked about the one program that you've 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? 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, increased competition, 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, let me go back to Tom's comment. The Essex, which was our primary E&S carrier, original one, was well known for this binding authority business, had created policies of a very restricted nature.
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. 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. 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. What about from a claims 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 tick up in the triangles. Not frequency, but clearly we're seeing the deterioration in pricing in our triangles. Quite honestly, we're not seeing quite as much as we've sort of built into our rates or our picks. It's holding up reasonably well. 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 rates for the last five years. Maybe the trend isn't as bad as when we put up the current accident year, but it's clearly there. As Steve and Tony and everybody have said, the entire industry is 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. You brought up the concept of returns. I guess if you look at your numbers on an operating basis, if you take out the development and you take out the cats, you're kind of in the low to mid single-digit returns. Clearly you guys have a more unique investment style, and you add value and grow book value through that as well. It's got to get pretty hard to overcome from an operating basis what are pretty low returns at this point. Part of the issue is the capital. Clearly you have the ability to take that excess capital and generate returns on the investment side. The other issue potentially is to reduce the E, which is something you haven't done historically. Any thoughts about a more aggressive buyback at this point?
Probably not at this point in time, Jay. I think the bigger issue, and you 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. That's not sustainable. We will see a better insurance market because people don't want to throw away capital by running business at lousy rates. 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.
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. We're quite prepared to-- 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. If we were pessimistic about the insurance industry for the next 10 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 a 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.
That's just not the way that we think about things. 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, and it's something of a paradox, and Richie and I were talking about it just the other day. Internally, the energy level and the enthusiasm that exists around the halls is really something quite extraordinary. If you look at the numbers, you sort of wonder why that would be. Well, I can tell you in the history of Markel, this is not the first time something like this has happened. 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.
Then you layer on top of that the fundamental conservatism of Markel, our lag of what the underlying reality inside the building is going to be even further delayed