Good morning, welcome to the Markel Corporation third quarter 2018 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then One on your touch-tone phone. To withdraw your question, please press star then Two. During the call today, we may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They are based on current assumptions and opinions concerning a variety of known and unknown risks. Actual results may differ materially from those contained in or suggested by such forward-looking statements.
Additional information about factors that could cause actual results to differ materially from those projected in the forward-looking statements is included 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. We may also discuss certain non-GAAP financial measures in the call today. You may find a reconciliation to GAAP of these measures in the Form 10-Q, which can be found on our website at www.markelcorp.com in the investor information section. Please note this event is being recorded. I would now like to turn the conference over to Tom Gayner, Co-Chief Executive Officer. Please go ahead.
Good morning. My name is Tom Gayner, Co-CEO of Markel, it's my pleasure to welcome you to our third quarter 2018 year-to-date conference call. Along with my Co-CEO, Richie Whitt, joining us today is our Chief Financial Officer, Jeremy Noble, in his first conference call in his new position. Richie and I are pleased to welcome Jeremy in his new role at Markel as he returns to Richmond following his stint in an operating role in our U.K. operations. Richie and I are both delighted with the perspective and operating experience that Jeremy brings to the CFO role, we hope that this is his first conference call among many. The purpose of these calls is to share with you the results we just reported and to provide you with some commentary about the state of our underlying business at Markel.
We hope to convey some sense of how we are doing, our prospects, and our outlook. Also, we hope these calls provide a forum to answer your questions and to respond to whatever issues are on your mind. As to highlights and headlines, I'd like to start off by updating a statement I made in our 2017 annual report letter. In that letter, I stated that 2017, excuse me, stands as a transformative and watershed year for Markel. Let me update that statement to say that the transformation and watershedding we referred to in 2017 continue in 2018.
Our announced acquisitions of Nephila to our growing and market-leading insurance-linked securities activities and Brahmin to our Markel Ventures operations, along with the growth and continuous retooling and refinement of our existing operations, all stand as examples of how we continue to work towards our goal of building one of the world's great companies. Jeremy will share the numbers with you in a minute, but qualitatively, I will assert that they were good and that they reflect substantive economic progress at your company. Everything happening at Markel is pointed in the same direction. Our three diversified engines of insurance operations, investments, and Markel Ventures would graph out as up and to the right. We're excited about our ability to do even more. At this point, I'll turn the call over to Jeremy to review the financial results.
Richie will follow with some comments about our insurance operations. Then I'll return to cover our investment activities in Markel Ventures, followed by your questions. With that, Jeremy?
Thank you, Tom. Good morning, everyone. Our comprehensive income for the first nine months of 2018 reflects contributions from all three of our engines and demonstrates the value of having diversified operations. Our underwriting operations produced an underwriting profit despite catastrophe losses during the period. Our Markel Ventures operations continue to make significant contributions to our overall results. With our investment portfolio, 2018 reflects strong performance in our equity portfolio year to date, while our fixed income portfolio was unfavorably impacted by rising interest rates. Total operating revenues grew 32% to $5.8 billion in 2018. The increase was primarily attributable to a 54% increase in revenues from our Markel Ventures segment, a 12% increase in earned premiums from our underwriting operations, and $408 million of net investment gains for the first nine months of 2018.
Starting with our underwriting results, gross written premiums were $4.5 billion for the first nine months of 2018 compared to $4.1 billion in 2017, an increase of 9%. The increase in gross premium volume was attributable to the contribution of premium from our new collateral protection business, which we acquired in November of last year, and our new Markel Surety acquired in May of 2017. We also saw organic growth across most lines within our insurance segment. Year to date, retention of gross written premiums decreased from 84% in 2017 to 83% in 2018. This decrease was driven by lower retention on our personal lines business within the insurance segment and on our property product lines within the reinsurance segment.
Earned premiums increased 12% to $3.5 billion for the first nine months of 2018 due to higher written premiums in our insurance segment. Our consolidated combined ratio for the first nine months of 2018 was 94 compared to 108 last year. The 2018 combined ratio included underwriting losses of $76 million, net of reinstatement premiums from Hurricane Florence and Typhoon Jebi, or two points on the consolidated combined ratio. The 2017 combined ratio included underwriting losses of $503 million, net of reinstatement premiums from hurricanes Harvey, Irma, Maria, and the earthquakes in Mexico were 16 points on the consolidated combined ratio. Excluding the impact of catastrophe losses in both 2018 and 2017, our combined ratio was flat the prior year. Next, I'll cover the results of our Markel Ventures segment.
Revenues for Markel Ventures for the first nine months of 2018 increased to $1.4 billion, compared to $933 million a year ago. The increased revenues were primarily attributable to Costa Farms, which we acquired in August of 2017, as well as higher sales volume in both our products and services businesses. Operating income for Markel Ventures was $60 million for the first nine months of 2018 compared to $71 million last year. EBITDA was $128 million for the first nine months of 2018 compared to $121 million last year. In 2018, operating income and EBITDA were both impacted by expenses related to an investigation or remediation associated with the manufacture of products at one of our businesses, and an impairment charge related to intangible assets at this reporting unit. These expenses were partially offset by the contributions of operating income and EBITDA attributable to Costa Farms in 2018.
Turning to our investment results. Net investment income increased from $304 million for the first nine months of 2017 to $320 million this year. The increase was driven by short-term investment income, primarily due to higher short-term interest rates. Net investment gains included in net income were $408 million for the first nine months of 2018 compared to net investment losses of just under $2 million in 2017. Net investment gains for 2018 included $417 million of pre-tax gains attributable to the increase in the fair value of our equity portfolio. As a reminder, effective of January 1st, 2018, all changes in the fair value of equity portfolio are included in net income rather than in other comprehensive income. Net unrealized investment gains decreased $384 million during the first nine months of 2018, reflecting a decrease in the fair value of our fixed maturity portfolio resulting from rising interest rates.
Given our long-term focus, variability in the timing of investment gains and losses is to be expected. If we take a look at our total results for the year, our effective tax rate was 32% in both 2018 and 2017. As previously discussed, the impact of our decision to elect to treat two of our U.K. subsidiaries as U.S. taxpayers beginning in 2018 added $102 million or 11% to the 2018 effective tax rate. Our estimated annual effective tax rate, which excludes this impact, was 20% in 2018 compared to 28% in 2017. The decrease in estimated annual effective tax rate was primarily attributable to the decrease in the U.S. corporate tax rate from 35% to 21% as a result of the tax reform legislation enacted in the fourth quarter of 2017.
We reported net income to shareholders of $623 million for the first nine months of 2018, compared to a loss of $40 million a year ago. Comprehensive income to shareholders for the first nine months of 2018 was $305 million compared to $546 million a year ago. Comprehensive income for the period was driven by net income, the components of which I just discussed, which was partially offset by the decline in the fair value of fixed maturities since the end of 2017. Finally, I'll make a few comments on cash flows, capital, and our balance sheet. Net cash provided by operating activities was $763 million for the first nine months of 2018 compared to $599 million for the same period in 2017. Operating cash flows for 2018 reflected higher net premium collections and lower payments for employee profit sharing and income taxes compared to the same period in 2017.
2018 also included higher claims payments, driven in part by the 2017 catastrophe losses. Invested assets of the holding company were $3.1 billion at the end of September, up from $2.7 billion at December 31st, 2017. The increase in invested assets is primarily due to dividends received from certain of our U.K. subsidiaries. We are well positioned to fund our acquisitions of both Brahmin and Nephila from resources on hand. Total shareholders' equity stood at $9.8 billion at the end of September. Now I'll turn it over to Richie, who will talk more about our underwriting results.
Thanks, Jeremy. Good morning, everyone. Today, I'll focus my comments on the underwriting operations. I will also provide brief updates on State National and our Markel CATCo operations and provide a little bit of color on our pending acquisition of Nephila. First, I'll start with our insurance segment. Gross written premiums for the quarter are up $150 million or 14% compared to third quarter of 2017. On a year-to-date basis, writings are up to $454 million or 15%. As Jeremy said, the acquisition of Markel Surety and the State National collateral protection line added $51 million of premiums in the quarter and $171 million of premiums on a year-to-date basis. Premium growth for both the quarter and on a year-to-date basis, excluding these newly acquired product lines, was driven by organic growth in our general liability, professional liability, and personal lines product lines.
Earned premiums for the segment were up 14% for the quarter and 16% on a year-to-date basis for similar reasons to the gross written premium increases. The combined ratio for the insurance segment was 96 for the third quarter of 2018 compared to 119 last year. The 23-point decrease in the combined ratio was largely driven by lower cat losses in 2018 compared to 2017. Cat events added four points to the 2018 year-to-date combined ratio compared to 31 points in 2017. The remaining change in the combined ratio was due to a decrease in favorable development on prior accident year losses and a slightly lower expense ratio. The prior accident year loss ratio was also unfavorably impacted by the growth in earned premiums. The expense ratio decreased due to benefiting from growth in earned premiums, partially offset by higher profit-sharing expense.
The year-to-date combined ratio for the insurance segment was 92 versus 101 for the same period last year. The 9-point decrease in the combined ratio was again largely driven by lower cat losses in 2018 versus 2017. Cat events added 1 point year to date for 2018, compared to 11 points in 2017. The remaining change in the combined ratio was due to slightly higher favorable development on prior accident year losses and a decrease in the attritional loss ratio. The decrease in the attritional loss ratio was attributed to decreases across multiple lines, including the impact of our recent acquisitions. Those lines of business carry a lower overall loss ratio than our average portfolio loss ratio. Partially offset by higher attritional losses in our marine and energy product line.
The benefit from the increase in favorable development on prior accident year losses was reduced due to the impact of higher earned premiums. Next, talk about the reinsurance segment a bit. Gross written premiums for the quarter are up $4 million or 2% compared to third quarter 2017. On a year-to-date basis, writings are down $90 million or 9%. The increase in gross written premium in the quarter was due to higher premium volumes in our general liability product line due to timing of renewals on multi-year contracts. That was offset by the impact of higher assumed reinstatement premiums on the cats in 2017. The decrease in gross written premium on a year-to-date basis was driven by a large specialty quota share entered into in the first quarter of 2017 that did not renew in 2018, along with a decrease in our property lines due primarily to non-renewals.
We've non-renewed marginal property business where rates and/or terms did not improve sufficiently to meet our profitability targets. As mentioned in previous quarters, significant volatility in gross written premium volume can be expected in our reinsurance segment due to individually significant deals and timing of renewals on multi-year contracts. Earned premiums for the segment decreased by 13% for the quarter and 2% on a year-to-date basis due to the impact of assumed reinstatement premiums in the third quarter of 2017. The combined ratio for the reinsurance segment was 115% for the third quarter of 2018, compared to 183% for the same period last year. The 68-point decrease in the combined ratio was driven by lower cat losses in 2018 compared to 2017. Cat events added 16 points in the third quarter of 2018 compared to 95 points in 2017.
The decrease in losses from cat events was partially offset by a higher attritional loss ratio due to higher losses in our whole account product line, less favorable development on prior year's losses in our property and general liability product lines, and a higher expense ratio largely due to reinstatement premiums from the 2017 cat events. The year-to-date combined ratio for the reinsurance segment was 100% compared to 135% last year. The 35-point decrease in the combined ratio was primarily driven again by lower cat losses in 2018 compared to 2017. Cat events added 5 points year to date compared to 34 points in 2017. The reinsurance segment's 2017 results also included $85 million or 12 points on the year-to-date segment combined ratio of adverse development on prior year loss reserves due to the decrease in the Ogden rate.
Excluding the impact of Ogden, the segment had less favorable development in 2018 compared to 2017 due to adverse development on our property reinsurance lines compared to favorable development in these lines last year. This went along with less favorable development in our whole account and general liability lines this year. The adverse property experience in 2018 was driven by $18 million of adverse development on the 2017 cat events. Year to date in total, between our insurance and reinsurance segments, we've had to increase reserves for the 2017 cat events by only about $1.7 million. Next, I'll make a few comments about State National. As a reminder, the State National business is comprised of two products. The collateral protection insurance coverage, results for which are included in our insurance segment, and a fronting platform, which provides insurance licenses, rated paper, and services for a fee.
We refer to this business as our program services business. This business is almost entirely non-risk-bearing to Markel and is reported separately from our underwriting operations. The collateral protection insurance acquired as part of State National contributed $51 million of earned premiums in the quarter and $138 million on a year-to-date basis. Those are included in the insurance segment operating results. Excuse me, those are gross written premium numbers. The program service business added $561 million of gross written premium in the quarter, and $1.6 billion in the first nine months. This business is a fee business and contributed ceding commission fee revenue of $23 million in the quarter and $67 million during the first nine months of 2018. These amounts are reported in other revenues within our operating results. We are very pleased with our year-to-date results at State National.
They are bang on the forecast they gave us back at the time of the acquisition. Next, I'll talk a little bit about Markel CATCo. Assets under management, including funds held that will be used to settle claims for incurred losses, increased to $6.6 billion at September 30th, 2018. This was up from $6.1 billion at the end of 2017. Markel CATCo's third quarter 2018 total revenues were $18.3 million compared to $1.2 million in the third quarter of 2017. The third quarter of 2017 had to be adjusted for performance fees that were forfeited as a result of cats in 2017. For the nine months of 2018, total revenues were $53 million compared to $19.9 million in 2017.
In terms of Markel CATCo's progression, management fees are well ahead of whatever expectations would have been at the time of acquisition, obviously as a result of the significant growth in AUM that we've had over the three years since the acquisition. As of September 2018, Markel's investment in the Markel CATCo funds was approximately $134 million. We recognized a gain of $2 million in the quarter and a loss of $49 million on a year-to-date basis due to decreases in the net asset value of the funds due to adverse development on the 2017 cat events. Our investment in the CATCo funds, we largely look at that as it's pure cat risk, and then we think of it in terms of our overall cat aggregate as opposed to while it shows up in the investment lines, you should think of it as part of our cat underwriting results.
The adverse development was primarily related to Hurricane Irma as a result of significant reported increases in loss adjustment expense, late claims reporting, and increased Caribbean loss estimates. Next, I'll discuss our pending Nephila acquisition. Over the decades at Markel, we've built both organically and by adding talented teams to enhance our specialist capabilities. Continuing this tradition, we look forward to closing the Nephila acquisition hopefully before the end of the year, and quite honestly, hopefully well before the end of the year. Nephila is the preeminent insurance-linked securities manager in the world. They bring deep and long-term investor relationships, energy, creativity, and innovation in matching investor risk appetites with client needs. Nephila has over $12 billion of assets under management for over 300 geographically diverse investors.
We believe that adding Nephila's unique capabilities and scale to our specialty insurance and reinsurance, State National, and Markel CATCo capabilities is a game changer. We look forward to working with Frank Majors, Greg Hagood, and the entire Nephila team to bring an even broader range of solutions to our insureds and production partners. We also look forward to bringing new, attractive investment opportunities to our Nephila and Markel CATCo investors. This is only the very beginning. Please stay tuned. Last, just some brief market commentary. There's really not a whole lot new to talk about in the last three months. The market remains competitive, but we continue to achieve modest single-digit rate increases in many of our lines of business. It will be interesting to see if this year's catastrophe losses has any impact on the rating environment.
Even with lower catastrophe losses this year, 2018 is still shaping up to be another unprofitable year for most property writers. This is due to poor attritional results. 2018, at least to this point, has not been a particularly heavy cat year. In fact, it probably would be a little bit below average at this point, and yet I would suggest most people are probably very disappointed with the property results. We continue to push for rates where needed and have shed business we believe do not meet our profitability goals. With that, I'd like to turn it over to Tom.
Thank you, Richie. Good morning. I'm pleased with our investment results for the first nine months of 2018. In our equity portfolio, we earned 9%, and in fixed income, we were down 0.4%. Our total return after all FX adjustments, as well as the return from the ILS activities, which are included in our investment results, was a positive 2.1% through September 30th. My main takeaway from our investment activities is that we continued our steady as she goes approach and process in our investment choices. We stuck to our guns of our four-part strategy of investing in profitable businesses with good returns on capital and modest debt, with management teams with equal measures of talent and integrity, with reinvestment opportunities at fair prices.
Our total publicly traded equity portfolio now stands at 66% of shareholders' equity compared to 63% at year-end. That reflects our steady, methodical purchasing throughout the year of equities that met our four-part test. That ratio also moved up a bit due to the decline in the valuation of the fixed income portfolio. At a 66% exposure, we continue to participate in the long-term economics and growth of the underlying businesses our common stock portfolio represents. We also have ample liquidity and a margin of safety to absorb normal market volatility and keep buying. As we've all seen in the trick or treat month of October, we've had the trick part of lower overall stock prices, and we've been able to enjoy the treat part of continuing to invest in quality companies at lower and more attractive prices.
That volatility and our behavior in the face of that are nothing new. Our consistency amidst varied conditions helps us to earn the significant returns that we've earned over the years. We will continue to act in a disciplined and consistent manner. On the fixed income side, I'm pleased to report that the decline in market valuation was entirely attributable to the increase in interest rates and mark-to-market math. There were no credit issues in the portfolio. As we said before, we keep our duration roughly matched to the duration of our insurance liabilities in between four and five years. Including cash, the duration is roughly four and a quarter years, and we don't expect it to get too much lower than that. With rising interest rates, recurring interest income is starting to increase.
Additionally, growing dividend streams from our high-quality equity portfolio continued to drive increases in recurring investment income. For the first nine months of 2018, net investment income rose from $304 million to $319 million as a result of these factors. At Markel Ventures, total revenues grew to $1.4 billion compared to $936 million a year ago. While reported EBITDA grew only modestly to about $130 million compared to about $120 million a year ago, there were approximately $62 million of non-recurring charges in the 2018 number from the unpleasant factor of goodwill write-offs and charges, and the good factor of payments of performance-based earn-out agreements. In aggregate, the Markel Ventures companies continue to perform in line with our expectations, and the recurring EBITDA margins for 2017 and 2018 for the group stood steady at slightly more than 13%.
While that percentage will change in different environments, I think that the stability in that percentage year-over-year begins to describe the normalized earnings power of the Markel Ventures group of companies. I'm also pleased to report that we did indeed close on our Brahmin acquisition on October 1st, and we're excited to welcome the Brahmin group into the Markel family. Brahmin stands as a great entrepreneurial success story, and we look forward to their continuing growth and build-out of the Brahmin brand and product line. I hope you'll head to brahmin.com yourself, shop, and purchase a quality bag. They have products for men and women, and I'll share with you that my wife and I are both happy customers, and that we paid full retail price for our purchases after the October 1 close. With that, I'd like to open the floor for questions. Allison?
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause for a moment to assemble our roster. Our first question today will come from Mark Hughes of SunTrust. Please go ahead.
Thank you very much. Good morning.
Good morning.
The attritional losses in reinsurance, I think they were up a little bit in the quarter. Would you expect them to continue at the higher end of the recent range?
Mark, I think some of that's mix. If you kind of parsed my comments, we've been shrinking property business, just given the rate environment this year, and we've actually been growing some in professional and general liability. Those two would carry a higher loss ratio than the property loss ratio. I think most of that would be mix. If we continue on that path, which at least at the moment, I think is probably the path we would be on, yeah, we'd probably be a little bit higher in terms of the attritional.
Also in reinsurance, I think you had some adverse in the general liability product line that's clearly offset elsewhere, but anything going on there? Any commentary on inflation? Anything like that?
Well, I think we've seen some development, actually, some of it going all the way back to the credit crisis in GL. GL is very long tail, and we never like to have adverse development, but I guess it wouldn't be surprising to see it. We're working hard to make sure we're on top of that. In terms of commentary on GL trends today, I think I said it last quarter, I think we're starting to see the evidence of potential inflation in the overall economy that will find its way through to losses, casualty and professional losses. We're also seeing, over the years, some rollback in terms of tort reform. We are planning for, in terms of our business plans, we're planning on seeing more trend.
More claims trend in the lines.
Finally, how should we model the tax rate going forward? I know the U.K. impact had brought the number into the low 30s. On a go-forward basis, what sort of numbers should we use?
Yeah. Actually, post-tax reform and some of the elections that we've made with regards to our U.K. subsidiaries and treating those as U.S. taxpayers for U.S. tax purposes kind of simplifies a lot of that tax rate differential associated with foreign operations. Mark, I would really suggest take the U.S. statutory tax rate at 21%, you should think of the normalized period, our effective tax rate will come in slightly lower than that. Some of that differential being linked to things like tax-exempt investment income. Slightly under 21%, the U.S. statutory tax rate.
Very good. Thank you.
Our next question today will come from Jeff Schmitt of William Blair. Please go ahead.
Thanks. Good morning, everyone. Looking at the State National Program Services business, it looks like fronted premiums there are up about 25% year to date, 26%. Where are you seeing that growth, and how sustainable is that?
Some of it's growth in existing programs, Jeff, some of it's the pipeline of programs that they're constantly working on to bring onto the platform. Yeah. I don't have papers in front of me to, 25%. I know it's pretty solid growth. We would hope to continue to grow. The pipeline remains full at State National. The model, I think the need for the model, is strong, particularly with the growth of ILS and other models in terms of accessing insurance risk. I don't know if 25% is the right number, but we believe growth should continue to be strong.
Mm-hmm. Okay. Looking at the ceding fees there, I guess historically, they look to be about 5%-6%. Since the deal, I guess year to date, it looks to be like it's in the low fours. Is that right, and what may be driving that?
Again, I don't have the numbers right in front of me. Yeah, I think the fees can range anywhere from probably 4%-6%. Obviously, the bigger the programs become, we have some flexibility to offer some discount for scale. It might just be the growth and the onlining of new programs that would be depressing that number a little bit at this point.
Okay. One last one on Nephila. It sounds like that should close fairly soon. Would that be integrated with CATCo? I mean, are there some benefits there, or would that be run separately?
They'll be run separately. The products are different enough, their investor bases are actually pretty different as well. They'll continue to be run separately. There will be strong collaboration between our insurance and reinsurance operations, CATCo, Nephila, and State National. In fact, there are already quite a bit of business happening between those various entities, even before the acquisition of Nephila. We would expect that to increase after we close the deal.
Okay. Thank you.
Our next question will come from John Fox of Fenimore Asset Management. Please go ahead.
Okay. Thank you. Good morning, everyone. I have a number of questions. First for Jeremy. Expense ratio was up a little bit and that was also up in the June quarter. Is there anything going on there interesting, or is that just costs of doing business going up?
Yeah. Some of that's going to be down to mix, we still have some of the sort of the way the acquisition costs come through in the expense ratio. Profit sharing is a more significant component of the expenses in 2018 versus 2017. That creates some variability, particularly in the quarter year-over-year, because clearly we have the impact of the catastrophes last year. There's not a lot of additional sort of news, if you will, in the expense ratio. I'd kind of link it to mix, acquisition costs, and profit-sharing movements.
Okay, great. Thank you. Then, does anyone have any insights on Hurricane Michael versus Florence? You want to talk about industry-wide? Is it higher, lower? Anything you can share with us there?
Well, John, I don't know if you've had a chance to see the Q yet, we did put a range in there. It's still pretty early days, we put a range of $60 million-$120 million net. I think most people would believe, including the modeling firms, that Michael is a bigger event than Florence. Michael's going to be more of a wind event, whereas Florence was more of a flood event.
Right.
Not as much flood is covered as wind. I think in terms of insured losses, Hurricane Michael will likely be larger. It's still very early days, and it hit as either a four or even potentially a five. I don't know. They've been looking at that. Just given the magnitude of the storm and how deep It was still blowing pretty hard when it got to Virginia because it came right over us, we can tell you that.
Yeah.
I think it's going to take a while to get a handle on those numbers.
Okay. No, that's great. Thank you. Richie, since I have you on the line, the program services, you mentioned the amounts, and they're in the other display in the Form 10-Q. Are there expenses that go against that? You gave the revenue figures, is that because it's a commission that really just falls to the bottom line?
There's definitely expenses. I just was kind of trying to highlight the revenue kind of trajectory there. Clearly, we have expenses that go against those fees. You can see those in the segment disclosures.
Okay, that's in Other.
Other, yeah.
Okay, got it. Nephila, probably for Tom. Tom, business model-wise, should we think about that like an asset management business? It goes in the Other segment, there's a fee on the assets and then a corresponding expense, and we should think about like that as a multiple of EBITDA type business. Is that the right way to look at it or not?
Yes.
Yes.
Okay. Thank you for the complete answer. Yeah, go ahead.
I was just going to add to that.
There's no me, go ahead.
It was pretty clear, wasn't it?
Yes.
Obviously, it's both. In terms of our economic participation in it's a fee business. What the business is doing is it's selling underwriting acumen for a fee. I look at it, while our economics in the business are obviously fees, it's still an underwriting business. We want to make sure we do a good job underwriting for those investors.
John-
Yeah, you can confirm or deny this. When I think about your cat exposure, I think about insurance, reinsurance, your investment in CATCo fund, then the stream of income you get from CATCo over time, which when there's a cat, goes down. Is that the right way to think about it?
Yes. There's two components. The management fee is not as impacted. Performance fees are obviously highly impacted by a catastrophe.
John, let me add to Richie's comments, both in his earlier remarks plus his response. As he said, this, along with CATCo and State National and Nephila, that's a hat trick. The collection of the three really is indeed a game changer for Markel. The addressable market of what it is that we can underwrite is bigger than it used to be. Yeah, you think about it like an underwriter, and frankly, we think about our investments the way an underwriter would, risk reward. The addressable market is bigger than what we have previously looked at, which is one of the underlying aspects of why we're so excited about this.
Okay, great. Thank you. My last question is, with the 2 deals over $1 billion, I know you have a lot of cash at the holding company, do you anticipate issuing any debt to close these deals?
No. As Jeremy said, we have access to $3 billion at the holding company. Half of that sitting in sort of cash and short-term. We've already closed on the Brahmin deal the 1st of October, we've got excess capital from resources on hand to close Nephila.
Yeah.
Okay. Terrific.
Thanks, John.
Yeah, thank you.
Our next question will come from Scott Heleniak of RBC Capital Markets. Please go ahead.
Hi, good morning. First question is just on the Nephila acquisition. Can you just talk about the growth opportunities you're going to have there in ILS once those two come together and maybe some of the growth? I know you mentioned they're kind of standalone, have different business units or strategies, but could you talk about how those might kind of work together and the opportunities for growth that you'd have together as opposed to standalone companies?
Sure. There's a number of things we're very excited about. In fact, we've started getting the teams together to talk about what the opportunity set might look like in anticipation of the close. We want to be ready to fire off the starting line as soon as it does close. Obviously, we've managed for our shareholders roughly $10 billion in capital. Then through Nephila and Markel CATCo, we manage another almost $20 billion in capital for our investors. There's just so many more opportunities that we can address with $30 billion of capital than we could with $10 billion of capital. I think in terms of the solutions we can offer to our insureds and to our production partners, it's so much larger. It's a complete game changer in that regard. State National and Nephila already worked together previously.
We would expect that relationship to continue to grow and probably grow at a faster rate now that we're all part of the same family. Distribution. We can, through our insurance and reinsurance operations, offer access to distribution to both Nephila and CATCo that they might not have previously had. Looking at it from the other side of the coin, the investor universe, both of these companies, CATCo and Nephila, are very adept at going out and raising capital. They present a very appealing investment proposition to investors, and they have penetrated that market very well. As we all know, that is a huge addressable market. We're looking at it from both sides. There's a lot more risk in this world that can be insured, and there's a lot more investable capital out there that could be put against those risks.
We look at both sides of it and the opportunity, we quite honestly believe, is massive.
Okay, that's a good comprehensive answer. One other quick one along those lines too is, other lines there's been discussion, I think Willis put out a paper about ILS shifting to other kind of non-property lines, cyber liabilities. Could that be in the mix as well?
Yes. I think everybody's been looking for that to happen at some point.
Nephila has already moved to primary in terms of property, so they do both reinsurance and primary now. I think that will go along a continuum. You probably won't see the next thing being excess workers' comp. It would probably be something more closely aligned with property, shorter tail. Cyber, as an example, is something that people are looking at. I think that will develop over time, and I do believe shorter tail casualty will find its way into the ILS markets before too long.
Okay. Just switching gears too to Hurricane Michael, just a couple quick ones on that. Appreciate the loss guidance. Do you have any sense on where those might split out by unit? The % mix, reinsurance versus insurance, where you're going to see kind of a heavier loss total, or is it sort of split down the middle?
That's really hard to say right now. We're still polling our divisions for their estimates at this point.
Okay.
I couldn't give much insight to that.
Okay. Just one last follow-up too on Michael. Is there any significant impact to Costa Farms from Hurricane Michael that might show up in Q4?
No.
No? Okay.
Specializing in one-word answers today.
That's fine. Sometimes that's all you need.
My colleagues are stunned, yes.
Okay. Thanks a lot, guys.
Our next question today will come from Bob Farnam with Boenning & Scattergood. Please go ahead.
Yep. Hi there. Thanks. The Brahmin deal, it sounds like you get a full fourth quarter out of them. How do you see the revenue playing out in terms of maybe for the fourth quarter and for the full year?
Yeah, there will be some seasonality. Obviously, Christmas is an important time of the year for them, but it's not massively seasonal business.
Okay. Any ballpark in terms of an annual revenue target?
No, we're not talking breaking that out separately at the moment.
Okay.
Depends on how much you buy.
Yeah.
Help us out.
It sounds like the collateral protection business is going according to plan. How about the new surety business? Is it too early to tell how that business is performing relative to your expectations?
No, I probably should have mentioned that. Again, this is kind of strange. All three of those are pretty much bang on the projections or the forecast they would've given us back at the time of the acquisitions.
Okay. Any impact from the economy? Will that have much of an impact on the surety book, do you see?
Not so far, and I'm going to knock on the table. Obviously when the economy starts to run into headwinds, that tends to show up in the surety market. Our guys, they're veterans. They are veterans, and they understand the cycle that goes into surety, and they understand the very close connection it has to the economy and to the construction market. They are prepared. I guess that's what I'd say.
All right. Great. That's it for me. Thanks.
Ladies and gentlemen, this will conclude our question and answer session. At this time, I'd like to turn the conference back over to Tom Gayner for any closing remarks.
Thank you very much. Thank you for joining us, and we'll chat with you next quarter. Thanks.
The conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your line.