Earnings Call: Q2 2017

Jul 27, 2017

Quarterly report

Good morning, and welcome to the Martell Corporation Second Quarter 2017 Conference Call. All participants will be in listen only mode. 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 ks 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 Web site 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 Gaynor, Co Chief Executive Officer. Please go ahead, sir. Good morning. This is Tom Gayner, Co CEO of Markel. It's my pleasure to welcome you to our first half conference call. Today's call is not a normal, regular, every quarter, same old, same old sort of conference call. We've got some great news to report to you on several fronts. As Scott Redman from Redman Asset Management reacted when he saw the 3 press releases, Markel scored a hat trick. He's right, we did. We'll cover each of those three goals today during the course of this call. First, Anne Wilezki, our CFO, will give you the numbers on the first half results at Markel. As I wrote in the annual report, at Markel, we think in a dual time horizon structure of forever and right now. The results that Anne will report to you represent the right now accomplishments of your company. They provide the fuel that enables us to pursue the forever achievements of things like adding State National and Costa to the Markel family. 2nd, Richie Whitt, my co CEO, will discuss our acquisition of State National. We are excited about the ongoing evolution of Markel and how we are adapting to the rapid pace of change in the insurance industry. The acquisition of State National and the skills and abilities they bring into this organization, along with the CATCo business we acquired a few years ago, along with the ongoing improvements in our long standing insurance operations, give me great confidence in our future. Richie will give you more background on State National as well as the rest of our insurance operations in a minute. 3rd, I'll come back and give you a quick update on our investment operations in Markel Ventures results during the first half of the year and tell you a little bit about Costa Farms. After that, we will all be available for any questions you might have. With that, Pam? Thank you, Tom, and good morning, everyone. I'll steal Tom's phrase and just say that during the first half of the year, we also scored a hat trick relative to acquisitions. Yesterday, as Tom said, we announced our agreement to acquire State National within our insurance operations and Costa Farms within our Markel Ventures operations. State National is a leading specialty provider of property and casualty insurance services that include both fronting services and collateral protection insurance coverage. Costa Farms is a Florida based privately held grower of house and garden plants. We couldn't be more excited about the strategic opportunities these acquisitions will provide and are proud to join forces with each of these industry leaders. During the Q2, we also completed the acquisition of SureTech Financial Corporation, one of the largest privately owned surety companies in the U. S. Operating results attributable to this acquisition are included in our U. S. Insurance segment. We are very excited about all three of these. I'm also happy to report that our financial performance for the first half of twenty seventeen was strong and reflects positive contributions from our underwriting, Markel Ventures operations. Growth in book value per share was driven by significant returns on our investment portfolio. Now let's move into the results for the 1st 6 months of 2017. Total operating revenues grew percent to approximately $2,900,000,000 in 2017. The increase was primarily attributable to a 6% increase in earned premiums, which reflects higher earnings in all three of our underwriting segments. We also had higher investment income and higher revenues from Markel Ventures as compared to last year. Starting with our underwriting results, gross written premiums were $2,800,000,000 for the first half of twenty seventeen compared to $2,700,000,000 in 2016, an increase of 6%. The increase in gross premium volume was attributable to premium growth in all three of our underwriting segments with the largest increases in the Reinsurance and U. S. Insurance segments. Higher gross written premiums in our Reinsurance segment were attributable to 2 large specialty quota share treaties that were written in the Q1 of 2017, partially offsetting these new contracts was lower premium volume in our property, auto and general liability lines of business. The increase in gross written premiums in the U. S. Insurance segment was attributed to our personal lines, general liability and workers' compensation product lines, as well as premiums from our new surety business. In the International Insurance segment, higher gross written premiums were due to new business in our marine and energy and excess liability product lines, partially offset by an unfavorable impact from foreign currency exchange rate movements. Market conditions remain competitive. Consistent with our historical practices, we will not write business when we believe prevailing market rates will not support our underwriting targets. Net written premiums for the 1st 6 months of 2017 were $2,400,000,000 up 7% from last year for the same reasons I just discussed as well as a 1 point increase in the retention rate from 84% last year to 85% this year. Earned premiums increased 6% to $2,000,000,000 for the first half of twenty seventeen due to the higher premium volume in all three underwriting segments. Our consolidated combined ratio for the 1st 6 months of 2017 was 95% compared to 90% last year. The increase in the combined ratio was driven by less favorable development on prior year loss reserves. As we discussed in the Q1, the consolidated combined ratio for the 1st 6 months of 2017 included $85,000,000 or 4 points of adverse development on prior year loss reserves in our Reinsurance segment resulting from the decrease in the Ogden rate, which is used to calculate lump sum awards in UK bodily injury cases. The expense ratio for the 1st 6 months of 2017 reflected lower profit sharing expenses and the favorable impact of higher earned premiums on our general expenses, which remained relatively flat compared to last year. These favorable items were offset by higher variable expenses primarily in our Reinsurance segment due to changes in mix of business. Now we'll move into the results of Markel Ventures. Revenues from Markel Ventures increased to $601,000,000 compared to $584,000,000 a year ago. Higher revenues across our non manufacturing operations were partially offset by lower revenues in certain of our manufacturing operations due to lower sales volumes. Net income to shareholders from Markel Ventures for the year was $35,000,000 in 2017 and EBITDA was $91,000,000 both of which were in line with 2016 results. Now turning to our investment results, investment income increased from $186,000,000 for the 1st 6 months of 2016 to $200,000,000 this year. Net realized investment gains were $38,000,000 in both periods. Given our long term focus, variability in the timing of realized and unrealized gains and losses is to be expected. Looking at total results for the year, our effective tax rate was 27% in the first half of twenty seventeen compared to 26% a year ago. We reported net income to shareholders of $220,000,000 in the first half of twenty seventeen compared to $239,000,000 a year ago. Comprehensive income for the period was $566,000,000 compared to $607,000,000 a year ago. And as a result book value per share at the end of June 2017 was $6.43 an increase of 6% since the end of 2016. To wrap up, I'll make a few comments on cash flows and the balance sheet. Net cash provided by operating activities was $238,000,000 for the 1st 6 months of 2017 compared to $70,000,000 for the same period of 2016. Operating cash flows for 2017 included higher premium collections in the U. S. Insurance segment, lower claims settlement activity primarily in our international insurance segment and lower payments for employee profit sharing compared to 2016. In the Q2 of 2017, we used cash of $91,000,000 to repay our 7.2% senior notes at maturity. Invested assets at the holding company were $2,000,000,000 at June 30, 2017 compared to $2,500,000,000 at December 31, 2016. The decrease in invested assets is primarily the result of our acquisition of SureTech and the repayment of our senior notes during the Q2 of 2017. With that, I'll turn it over to Richie to talk more about underwriting results. Thanks, Anne. Good morning, everybody. Today, I'll focus my comments as I traditionally do on our underwriting results in Markel CATCo and finish up by discussing our recently announced State National deal. First, I'll start with our U. S. Insurance segment. Gross written premiums are up $64,000,000 or 9% compared to the Q2 of 2016. On a year to date basis, writings were up 56,000,000 or 4% to last year. Results attributable to our new Markel Surety Businesses added $13,000,000 of gross written premium in the quarter and year to date as it closed in the second quarter. Premium growth excluding Markel Surety is driven by continued growth in our personal lines, primarily our classic car programs, workers' compensation and several of our general liability lines on both a quarter to date year to date basis. Earned premiums are up 8% for the quarter and 6% for the year due to the similar drivers as the gross written premium increases. The combined ratio for U. S. Insurance segment was a 93% for the 2nd quarter as compared to 94% for the same period a year ago. The decrease in the combined ratio for the quarter is due to more favorable development on prior year reserves in 2017, driven by adverse development in the Q2 of 2016 on our medical malpractice and SpecMed lines. The year to date combined ratio was 93 compared to 91 in 2016. The increase in the year to date combined ratio is due to a 2 point increase in our current accident year loss ratio. This is consistent with the Q1. This increase is due to higher attritional losses across multiple product lines in the segment. Next, I'll discuss our International Insurance segment. Gross written premiums are up 37 Q2 of 2016. On a year to date basis, writings are up $19,000,000 or 3% to last year. New business in our marine and energy and excess liability lines during the Q2 of 2017 drove this growth. The smaller increases in writing on a year to date basis is due to the new business in the quarter, partially offset by lower premiums in our professional liabilities and product lines during the Q1 of 2017. Earned premiums were up 11% for the quarter and 4% for the year due to similar drivers as in the gross written premium. The 2nd quarter combined ratio was 86% compared to 101% for the same period a year ago. The decrease in the segment combined ratio in the quarter was mainly driven by more favorable development on prior year loss reserves in 2017, most notably in our professional liability lines and a lower expense ratio due to the write off of software development costs in the Q2 of 2016. Also the impact of higher earned premiums in 2017 had an effect. The current accident year loss ratio was also favorable in the quarter driven entirely by the 2 point impact in the Q2 of last year related to the Canadian wildfire losses. The year to date combined ratio was 93 compared to 91 in 20 16. The decrease in the year to date combined ratio is driven by similar factors to the quarter, including higher prior year redundancies in 'seventeen, most notably in our excess liability line and a lower expense ratio due to lower profit sharing expenses, the previously mentioned software development write off last year and the impact of higher earned premiums in 2017. I'll discuss the results of our Reinsurance segment. For the Q2, gross written premiums for the segment are down $22,000,000 or 8% compared to the Q2 of 2016. On a year to date basis, writings are up $73,000,000 or 10 percent to last year. For the quarter, premiums are down due to decreases in our credit, surety, property and auto lines. For the year, growth was primarily driven, as Ann stated, by the 2 new large specialty quota share treaties from the Q1, totaling $137,000,000 Excluding these contracts, year to date premium is down about 9% due to decrease in our property, auto and general liability lines. As I've mentioned many times, significant volatility in gross premium volume can be expected in our Reinsurance segment due to the size of individual contracts and the timing on renewals of multiyear contracts. The 2nd quarter combined ratio for the segment was an 85 compared to 86 last year. The year to date combined ratio was 108% compared to 84% last year. As discussed last quarter, the increase in the year to date combined ratio was driven by adverse development on prior year reserves, driven by the 85,000,000 strengthening in UK Motor reserves also often referred to as the Ogden rate change, which added 19 points to the segment's year to date combined ratio. Excluding the impact of the strengthening in the U. K. Motor reserves from the year to date results, there was slightly less favorable development in prior year loss reserves in both the quarter year to date in our property and workers' comp lines. The current exiting year loss ratio was down 7 points in the quarter and 3 points year to date. Last year's losses included $21,000,000 of underwriting losses related to the Canadian wildfires, which added 10 points to the quarter and 5 points to the year to date results in 2016. Excluding the impact of Canadian wildfires from last year, the current accident year loss ratio increased slightly in both the quarter year to date due to change in mix of business and the impact on the current year loss ratio of unfavorable premium adjustments. The expense ratio for the quarter is up 2 points due to higher acquisition costs, due to increased mix of quota share deals with higher commission expense in recent periods. This is largely offset by the impact of higher earned premiums. The year to date expense ratio is flat to prior years. A couple of comments on market conditions and other items. I feel a little bit like a broken record here. Regarding market conditions, there's really not much new to report since last quarter. All markets remain competitive, as Ann said, and we would continue to describe most areas of the market as flat to say 5% off versus much larger reductions last year. As Ann noted, the acquisition of SureTech closed during the quarter and they are now being reported in our results. John Knox and the team are settling into life at Markel and we're delighted to have those guys on board. Also happy to report that our Markel CATCo operations continue to perform well with assets under management of 4,400,000,000 at June 30, 2017, up from $3,400,000,000 at December 31, 2016. We continue to invest just over $200,000,000 into Markel CATCo funds as of June 30, 2017. Obviously, we had a very nice quarter, but as Tom and Ann alluded to, the real news is the 2 acquisitions that we announced yesterday. I'll cover State National and then turn it over to Tom. I think as everyone knows at Markel, we're always working to find profitable businesses that create competitive advantage. State National helped us to continue to pursue these objectives. With the addition of State National's market leading program and lender services, our product and service portfolios and overall revenue streams will be further diversified. On the program side, State National is the largest and longest standing pure play U. S. Fronting business with approximately $1,300,000,000 in gross written premium in 2016 and over 60 programs. State National provides its clients the conduit to transfer risk to capital providers in a very cost effective and capital efficient manner. Given the changes that are occurring in our industry, we see State National as being uniquely positioned to participate in these trends. Also worth mentioning is the critical role State National can and will play in leveraging Markel's InsurTech and digital distribution investments and adding to Markel's 3rd party capital capabilities. On the lender service side, State National is the leading capital protection excuse me, collateral protection insurance provider in the U. S. This space represents a significant opportunity for growth. We have great respect for Terry Ledbetter and the State National leadership team. They're strong, experienced and like us, focused on long term results. At Markel, we have a track record of providing talented management teams with the support and latitude they need to execute strategic plans to profitably grow their businesses. We look to build upon State National's accomplishments and infrastructure and use our capital reinsurance capabilities, product platforms and strong relationships to help them expand their opportunities. That being said, State National is going to be run as a stand alone business unit. In almost all respects, it will be scale enhanced business as usual for State National. We expect the deal to close in the Q4 of 2017, of course, subject to regulatory approvals and satisfaction of the other closing conditions. As Terry and I discussed yesterday, close can't come soon enough as we cannot wait to get started. Now, I'd like to turn it over to Tom. Thanks. Thank you, Richie. In keeping with the right now part of our forever and right now time horizons, I'll start with the right now of our first half investment results. In short, we're very happy with them. In our publicly traded equity portfolio, we earned 10.4% through the first half of the year. In our fixed income operations, we earned 2% and the total return from the portfolio after all investment expenses and foreign exchange adjustments was 4.8%. Those are wonderful results on an absolute and relative basis. More important than the 6 months is that these results are just part of a wonderful long term result. The schedule that the Investment Accounting Department hands me starts in 1989. That in and of itself is a tale about our long term culture. We have a working schedule that touches 4 decades of results. In our equity investments, we're now up to an unrealized gain of $2,600,000,000 The total equity portfolio stands at a little over 5 $300,000,000 There's an old saying about a bird in the hand is worth 2 in the bush. Yes, that's true, and we're there. And speaking of bushes, the 3rd goal in our hat trick that we announced yesterday is the addition of Costa Farms to Markel. Costa is the leading supplier of ornamental plants in the country. I love everything about this deal. First, the management team led by Hochi Smith and Maria Costa Smith are 3rd generation family members that have spent their lives building Costa Farms into the number one firm in their industry. They will continue to lead the firm and build the business going forward with a permanent capital structure and a forever time horizon. They were already doing this. We didn't need to change their focus at all. We just need to support them in the work they were already doing. 2nd, the product is new every year and recurring in annual cycles of growth, renewal and replacement, especially for those of us like me, it may not be great at keeping plants alive. Costa's mastery of growing beautiful plants and the logistics involved in getting them into the hands of their customers provides a strong argument that they will continue to grow in the future. 3rd, this is the largest addition to Markel Ventures so far. We finished 2016 with revenues of 1,200,000,000 and EBITDA of $165,000,000 Through the 1st 6 months of 2017, we're on track to produce similar revenues and EBITDA this year. Our cyclical transportation related businesses are cooling off a bit from their white hot pace of last year and our other businesses continue to make steady forward progress that we expect from them. Markel Ventures continues to produce free cash flow and make distributions back to Markel. While we are not disclosing the terms of the cost of transaction and the seasonality of the business means there will not be that much of an impact in 2017 from this deal, it should make a material and meaningful difference to our results in 2018. Casa, along with the rest of Markel Ventures, makes Markel more resilient and adaptable due to the additional and diverse cash flows they produce. As my friend, Mark Hughes of Lafayette Investments said after our Cottrell deal, congratulations on adding another leading company in an industry that I didn't even know existed. Mark might feel the same way today and he's right to do so. Costa is a leading company at what they do and they add to our goal of Markel of building 1 of the world's spring companies. Today is indeed a day we celebrate the hat trick of meaningful earnings in the first half of the year, the addition of State National and all that it represents and the addition of Costa and all that it represents to the future of Markel. In total, these two deals will add about a third to the overall revenue base of Markel and we purchased these with internally generated cash. We will not be issuing any equity to finance these deals. I want to thank my partners at Markel. You might imagine, this has not been a lazy summer around here. People have been busting their pails to get these deals done, and I want to publicly thank them for their efforts. I also want to thank our long term shareholders who are partners in building Markel. A long term focus is increasingly rare in today's world and we couldn't continue to build your company without the long term support and encouragement of our capital partners. Thank you. We will continue to do our best to validate your unique trust in us. With that, let's stop, take a breath, try to answer your questions. Thank you, Mr. Gaynor. At this time, we will begin the question and answer session. And your first question will come from Mark Hughes of SunTrust. Please go ahead. Thank you. Good morning. Could you talk about the growth at State National that you expect? How do you see the overall market expansion here? And then what do you think you'll be able to add through the combination relative to that overall growth rate? Mark, this is Richie. Obviously, if you've studied State National's recent results, they've had tremendous growth in both of their markets, both the program services and lender services. And then I would say, as I kind of pointed out in my comments, I think the changes that are occurring in the insurance market in terms of InsurTech, in terms of 3rd party or alternative capital as some people call it, the sort of secular trends look very good for the business model that they've created. In terms of future growth, I mean, given that they've been growing so fast, it would be dangerous to project that kind of growth to continue. But we think they are set up both with the model that they have created and the trends, secular trends that we see in the insurance business to have good, very good growth as they go forward. In addition, I think just becoming part of Markel, a bigger company with the relationships, our capital, all the resources that we can bring to bear, I think that does nothing but help State National continue to build out their model. So could not be more excited, but we haven't sat down in our models and put a specific number on it. We but we do expect significant growth. The U. S. Business here, gross written premium was up nicely. You say market conditions are still competitive, largely unchanged compared to the recent trends. But was there something you like better this quarter? Was it marginally more attractive in 2Q compared to last quarter? Again, I'll take that one. I wouldn't say the market was different at all in the second quarter. We have well over 100 products at Markel and they don't all move in the same direction at the same time. First quarter, we talked about that extra week of processing last year versus this year. I think we had some catch up as a result just getting through the Q2. I think some of that smoothed out in terms of the writings. And also, as I said, not all programs or products move in the same direction. While it's very competitive, we've got some products that are growing nicely and have good prospects. And we talked about some of those, the classic car program, workers' comp, a number of others. So we continue to grow in those areas where we might be shrinking in some other areas due to competitive pressures. And final question, any inflation you're seeing in workers' comp losses? Or trends there are still pretty benign? I think we continue to look for those, but nothing outside of expectations at this point. But sort of steady as she goes right now. Thank you. And your next question will come from Douglas Ott of Andavari Associates. Please go ahead. Good morning, everyone. How are you? Good morning, Anthony. Good. First question is about Costa. From the press release, you made it sound like they reached out to Markel first. Is that the case? Ask me that again, I couldn't quite follow. From the press release, you made it sound like Costa reached out to Markel first. That is correct. That is correct. Awesome. And so the follow-up is just could you talk about what Markel has been doing that enables a company like Costa to reach out to an insurance company? Well, the Markel Ventures operation first started in 2,005. So we're 12 years down the path of buying an eclectic collection of businesses that are diverse that produce cash flow that fit very nicely with our permanent capital structure and long term time horizons because they add to the diverse streams of resiliency and cash flow that we build this company on. We've become increasingly well known in the marketplace and different people know it, different people people have had very good experiences with Markel ownership, different people have built their businesses for more than a decade now under the wing of Markel Ventures. So word gets around and sometimes the phone rings, sometimes it rings with something fantastic like Costa. Okay. Can you share with us what kind of margins the company has and what's their growth rate been like over an economic cycle? Good and good. Thanks. Next question. Okay. About State National, my basic understanding just weren't able to acquire the company due to the conflicts of interest that a fronting business has with the side of the capacity providers. Could you talk more about this and why Markel was comfortable with acquiring State National when others were not? Sure. Yeah. And that clearly was an item that we had to think about and we talked about it at length with the State National leadership team. A couple of things, we're going to State National is going to continue to be run as a standalone entity underneath Markel. And I think everybody has to have and everybody largely does in our industry today has to have a grown up attitude about these things. We do a lot of business with a lot of people and in some places we are partners and in some places we compete. And we all seem to manage to be able to put the walls between where we can partner and where we can compete. We're going to make sure we have the necessary controls in place such that people who want to partner with us on the state national side, who may actually compete with us in another place of the organization, we'll be comfortable that both those relationships can continue without causing harm to their business. So, we're very comfortable that State National can be a part of Markel. We actually think while there is some chance for us to be competitors, we think our relationships actually help more. And finally, this isn't new to us, as Tom just pointed out to me. We're in primary insurance and reinsurance. There's obviously the potential to be competing with some of your clients there, and we're able to separate those items. In terms of CATCo, again, there's the potential for conflict of interest that we manage. So we fairly quickly were able to get comfortable that we can manage that in terms of state and national. All right. Very good. Thank you. That's it for me. The next question will be from Jeff Schmitt of William Blair. Please go ahead. Hi, good morning, everyone. Good morning, Glenn. A question about State National. The collateral protection business seems to be pretty technology intensive there. Can you maybe discuss how their technology is? And are any do you foresee any additional investments needed there? You're absolutely right. There's a lot of service being provided along with the product on the collateral protection side. And that really is one of State National's competitive advantages is the technology that they have developed there. They are helping their over 600 clients on the collateral protection side manage over 6,000,000 auto loans. And their technology has been built in a way that it's scalable, but they could add more business without adding a tremendous amount of cost. So we feel very good about the technology. The State National folks have done a wonderful job of thinking about how they can scale that business without adding cost. And that is their that is one of their competitive advantages in that market. Okay. And then can we get a sense on what capacity you'll have left after these deals close to make additional acquisitions? How much dry powder would be left? Well, first off, we're going to take a nap and rest for a little while. The number one and after we do that, we're going to digest and work on the businesses that we have. This is substantial addition to the size and scale of Markel. As I mentioned, we are able to pay for it with the cash and liquidity that we have on hand. The good news is we have profitable businesses, which keep refilling that well as time goes by. So the history of Markel, if you've studied it since the very beginning, is that we have bootstrapped our way up and done larger and larger deals as time has gone by, done tuck in deals where there were specific and unique opportunities to do so. I think if you saw us do a deal in the next couple of months, you better assume that it's the most spectacular thing you've ever seen because we would prefer to focus and work on what we have right now for a while. But after that, expect us to continue do the same sorts of things we've done for years years. Okay. Yes, that's understandable. And then on the insurance side, are you seeing any change in loss cost trends in the U. S, particularly on severity? Yeah. I think we've had a very benign period of time for a number of years now. And I think some of the distress that people are starting to have is not only just the fact that pricing has been under pressure for quite a while, but think we are starting to see some pickup in trend as the economy has improved quite honestly. That tends to drive those sorts of things. It's not anything outside of what would be expected, but I think it's fair to say that the very, very benign period that we've all enjoyed for probably the last close to a decade, that seems to be changing modestly. Okay. Thank you. Your next question will come from Mark Dwelle of RBC Capital Markets. Please go ahead. Yes, good morning. I'll start with a question for Tom. What perennials are you recommending for summer butterfly gardening this year? My tactical recommendation will be all of them. Just make sure it has a Costa Farm sticker on it. No worries. With respect to that, can you just give us a ballpark of what sort of the revenue size of that business is? I mean, not something specific, just to kind of something to anchor against? Sure. It would round to $500,000,000 Sure. Okay. There was an article in the Miami Herald that I would direct you to that talks a little bit about the company. Okay. I had not found that one yet. While we're on the ventures, it looked like ventures had a pretty good quarter from a revenue growth standpoint, but there didn't seem to be a lot of follow through in terms of either EBITDA growth or net income growth. Was there something particular to either this quarter or last year that caused that to kind of not follow through? Right. Well, as I said in my prepared comments, the transportation related businesses were white hot last year. So they're cyclical and last year they were sort of in peak market conditions. Those businesses are sort of ratcheting down a bit, not dramatically, but a bit. And there's dramatic swings in the EBITDA of those businesses depending on kind of the market condition they find themselves in. That's going to be a normal pattern that you're going to see from them forever. So when things are good, they are really, really good. And when things are challenged, it falls off pretty dramatically. That said, the rest of the businesses, I call them steady eddies, and they continue to pound it out. And I want to make sure that, that term steady eddy is something we should be handing out gold medals for. That is not a term of attrition at all. The ability to grind out improved operations year after year after year after year is stunning in the ability to do that. And we have a collection of businesses that do that, that are run by fantastic people. And so they're all going well. Okay. Those are all my questions on ventures. On the international book, I guess I've been surprised to see the amount of growth that's there. Most of the commentary that I hear from many of your competitors talks about a lot of pricing pressure in the international market. And I know historically that when prices are falling, I usually don't see Markel growing. So you could talk a little bit more about kind of what you're seeing there? And marine and energy, I know, is getting some rate, but I don't hear the same related to excess liability and some of the other lines you mentioned. Right. If you look under the covers, it probably would make a little more sense to you, Mark. You're absolutely right. The London wholesale business today is as competitive as I've ever seen it. That market is really bumping along the bottom, I would say, or at least I hope. So we are actually in terms of our London wholesale business, that business is down. And as a result of the competitive nature of it. Where we have been able to achieve growth is in our retail businesses. So our businesses that are out in the regions of the UK and our offices that we have in the Netherlands and Spain and Germany. We're seeing nice growth in those operations and it may feel like it's coming overnight. We've been working on this for a couple of years now and we're starting to see the fruits of all that effort. So it's not an overnight sensation. It's been something we've been working on very hard and we're starting to see it come to us. The other thing that has happened is we picked up just like we kind of talked about on the reinsurance side, sometimes you pick up large programs. We have picked up a large program that fits inside our marine and energy business unit there and that came online pretty strongly in the second quarter. So you're absolutely right. The London wholesale market is extremely challenged and we are decreasing there. And what we've been doing is working really hard to diversify the business so that we can grow in other areas. Mark, that would be helpful. And I want to jump in one more point about cyclicality of Markel Ventures that I think is important just qualitatively to understand. These businesses are very capital efficient in general. So they continue to produce very nice cash flows and don't require that much in the way of capital reinvestment. And net net net, if you looked at sort of the cumulative distributions of the Markel Ventures business, that's enough to fund things like Costa. So they produce cash, which is what we care about more than the seasonality or what quarter they earn it in. Thanks for that. And I appreciate the color on the international out, very helpful detail that isn't obvious from just the raw numbers. So those are all my questions. Thanks. Thank you. The next question will come from Bob Farnam of Boenning and Scattergood. Please go ahead. Yes, thanks. Hi and good morning. With State National, you mentioned a couple of times about the benefits to the other Markel operations. Could you provide more detail on that? Sure. A couple just quick examples. We, like a lot of people, are starting to look at the insurtech space. And State National, I think they are ideally situated to sort of be the go between the InsurTech folks and sort of your standard insurance carrier types. Those are really it's a clash of cultures there, I would say. The InsurTech folks are used to things happening lightning fast and with minimal regulatory issues and all that, and that's not insurance. So there almost needs to be a translator between InsurTech folks and standard insurance folks. And that is a role that State National plays wonderfully. And we see them helping us with our InsurTech initiatives, sort of being that translator between us and those folks. And we think we can help a lot of other people do that as well. Also, just in terms of CATCo, 3rd party capital, alternative capital, whatever you want to call it, we certainly want to develop more product there. And State National, obviously, as I said, we believe they are a perfect conduit between those risks that choose to go that direction and third party capital. So they can help us as well as others in terms of their product delivery efforts in that space. So we see a lot of benefit there. We think we can help them in terms just in terms of our deep relationships in the industry. They, of course, have very deep relationships. It can only help when you combine the strength of our organization and their organization. Right. Okay. Thanks for that. And I guess one minor thing. In the U. S. Segment, you note nonrecurring actual acquisitions have taken out of the expense ratio? For the period, it would be immaterial. Okay. All right. That's it for me. Thanks. Thank you. The next question will come from Rob Half of Wells Fargo Securities. Please go ahead. Yes. Good morning. A couple of questions. Just starting on market conditions, there was a comment made on a competitor's call that they are seeing more standard carriers move into the E and S market. And I'm curious if you're seeing a similar trend in your markets and whether or not that's accelerating? Yes. I don't know if that's so much a trend or just the statement of what always happens in insurance. Whether it's accelerating, I don't think it's accelerating. The market is sort of 0 to flat in most places. Now that's a very general statement. But that is always happening. Standard markets trying to see trying to attach or go after the specialty business. So I'd say it's no worse than it's been and market conditions are relatively stable to what they've been for the last several months. Okay, great. Thanks for that. And then Anne, I was wondering if you could remind us what your target level of holding company liquidity is, especially on the heels of the 2 acquisitions that have been announced. And if you could sort of walk us through how you see that liquidity position moving through the remainder of the year? Yes, I would say that liquidity is an important concept around here and something that we are very mindful of on a regular basis. As Tom said, we plan to pay for the deals out of cash and I would believe that by the time we get to year end, we will, as Tom also indicated, replenish a fair portion of that. Okay. So is sort of a $1,000,000,000 a number you like to operate around or something higher than that? I don't know if you can put a firm number on it. I probably would not like to put a firm number on it because firm numbers tend to always be wrong, but I would say we wouldn't expect to go below that number. Okay. And then last questions on the rating agencies. I saw A. M. Best already affirmed. S and P, it looks like they've downgraded. I was curious if you guys have talked to Moody's and if you have any expectations there? We have talked to Moody's and they don't believe there'll be any change in the ratings, but I don't know that they have confirmed that. And just to put a fine point on it, S and P downgraded the corporate debt rating, but they did affirm the financial strength rating on the insurance company. Yes, I saw that. Great. That's it for me. Thank you very much. Thank you. And ladies and gentlemen, this will conclude our question and answer session. I would like to turn the conference back over to Tom Gayner for his closing remarks. You very much for joining us. We look forward to catching up with you soon. Thank you. Bye bye. And this concludes our conference call for today. Thank you for attending the presentation. At this time, you may disconnect your line.