Earnings Call: Q4 2012

Feb 5, 2013

Greetings and welcome to the Markel Corporation 4th Quarter 20 12 Earnings Call. At this time, all participants are in a listen only mode. A brief session after the session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tom Gaynor. Thank you, Mr. Gaynor. You may begin. Thank you. Good morning, everyone. My name is Tom Gayner and along with my colleagues Anne Wilefki, Mike Krell and Richie Witts, we welcome you to the Markel Corporation's 4th quarter conference call. Before we get started, we are required to remind you of the Safe Harbor provision, so here goes. As a reminder, comments made on today's call may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements may relate either to Markel to our proposed acquisition of Molterra Capital Holdings Limited and the operations of the combined company after the acquisition. 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. Please refer to the full disclosure regarding the risks that may affect Marcellus, Ultera and the proposed transaction, which may be found in our February 4, 2013 press release as well as in Markel's and Ultera's most recent annual reports on Form 10 ks, quarterly reports on Form 10 Q and the joint proxy statements discussed as relating to the transaction. Finally, please note that the following communication is not an offer to sell or a solicitation of an offer to buy any securities or a solicitation of any of those or approvals. We urge investors and security holders to read the registration statements on Form X-four, including the joint proxy statement perspective and all other relevant documents filed with the SEC and Markel, Ultera and their respective directors and executive officers may be deemed to be participants in any solicitation of proxies in connection with proposed transactions. Information regarding the interest of these participants can be found in the joint proxy statement prospectus and Markel's and Ultera's proxy statements filed with the SEC for the 2012 activities. We may also discuss certain non GAAP financial measures in the call today. You may find a reconciliation gap of these measures in the press release, which can be found on our website at www.markelcorp. Com in the Investor Information section. Well, with that said, we're pleased that you are joining us this morning as 2012 stands as an extensible year at Markel. We're also pleased with the financial results that we are reporting to you this morning and we hope you like the numbers as well. More importantly, we hope to give you at least some glimmer of understanding of what is going on around here operationally and some insight into the underlying business reality that these numbers attempt to describe. The actions, steps and transactions that we undertook in 2012 changed the arc of our future and we hope that you are as excited and as confident as we are that these are productive steps forward for Markel and its shareholders. As always, we look forward to your thoughtful questions about the business. And with that, as we kick off, I'd like to turn things over to Anne. Thank you, Tom, and good morning, everyone. I'm really happy to be able to report today that we had an outstanding year. Clearly, as Tom said, there's been a lot going on in Marcon 2012, particularly in the final months. I'd like to take a moment now and recognize all of our associates, who have driven our accomplishments and results. Without them and their efforts on a day to day basis none of this would be possible. Our financial results for the year were very strong benefiting from robust investment performance, underwriting profits on our ongoing business and increased revenue and profitability from our non insurance operations, which we refer to as Markel Ventures. Our favorable year to date underwriting performance was driven by lower losses for catastrophe events in 2012, more favorable development of prior year loss reserves and lower attritional losses. Our total year to date operating revenues grew 14% to $3,000,000,000 in 2012 from $2,600,000,000 in 2011. The increase is due to a 9% increase in revenue from our insurance operations and a 54% increase in revenue from Markel Ventures. Moving into the underwriting results. Gross written premiums for 2012 were $2,500,000,000 which is an increase of 10% compared to 2011. The increase in 2012 was due to higher gross premium volume in each of our 3 operating segments. Net written premiums were $2,200,000,000 up 8% to the prior year. Retentions were down slightly in 2012 at 88% as compared to 89% in 20 11. Earned premiums increased 8%. The increase in 2012 was due to higher earned premium volume each of our 3 operating segments. Increases in gross, net and earned premiums have all benefited from higher volume rate increases in our recent insurance acquisitions in the Specialty Admitted segment. Our combined ratio was 97 for 2012 compared to 102% in 2011. The combined ratio for 2012 includes 1 $107,000,000 or 5 points of underwriting loss from Hurricane Sandy. The combined ratio for 2012 also includes $43,000,000 or 2 points of expense related to our prospective adoption of the new DAC accounting standards. The 20 11 combined ratio included $152,000,000 or 8 points of underwriting losses related to the catastrophe events, which occurred last year in the U. S, Thailand, Australia, New Zealand and Japan. Setting aside the impact of the prospective adoption of the new JAK accounting standard in 2012 and the effects of catastrophes in both 2012 and 2011, the improvement in our year to date combined ratio was primarily due to lower current accident year loss ratios in the excess and surplus lines and London Insurance Market segment. Favorable development on prior year loss reserves represented 19 points on the combined ratio in 2012 as compared to 18 points of the 2011 combined ratio. The increase is a result of more favorable development on prior year loss reserves in the Specialty Admitted and London Insurance Market segments. In the London Insurance Market segment, the favorable development included $39,000,000 from the 2,001 prior accident years. While we believe it is possible that there will be additional redundancies on prior year loss reserves in 20 13, we caution you not to place undue reliance on this favorable trend. Next, I'll discuss the results of our non insurance operations, which we call Markel Ventures. In 2012, year to date revenues from Markel Ventures were $489,000,000 compared to $318,000,000 in 20 11. Year to date net income to shareholders from Markel Ventures was $13,500,000 in 20 12 as compared to point $7,000,000 in 20.11. EBITDA was $60,000,000 in 20.12 as compared to $37,000,000 in the prior year. Revenues, net income to shareholders and EBITDA from Markel Ventures increased in 2012 as compared to 2011, primarily due to our acquisitions of WI Holdings Inc. Weldship in late 2011 and Hathco in 2012. Turning to our investment results. Our investment income was up 7% in 2012 to 282,000,000 dollars Net investment income for 2012 included a favorable change in the fair value of our credit default swap of 17 compared to an adverse change of $4,000,000 in 20.11. Excluding the change on the fair value of the credit default swap, lower investment income on our fixed portfolio was offset by increased dividend income on our equity portfolio. Net realized investment gains were $32,000,000 in 20.12 as compared to $36,000,000 in 2011. Net realized gains for 2012 included $12,000,000 of write downs other than temporary declines in the estimated fair value of investments as compared to $20,000,000 in 2011. Unrealized gains increased $354,000,000 before taxes in 2012, driven by increases in equity securities. Tom will go into further detail on investments and Markel Ventures in his comments. Finally, looking at our total results for We reported net income to shareholders of $253,000,000 compared to $142,000,000 in 20 11. Book value per share per share increased 15% to approximately $404 per share at the end of 2012, up from 3 $52 per share at year end 2011. I want to take a moment to remind everyone about the change to our EPS calculation, which first occurred in the Q2 of 2012. This change was required as a result of our recognition of redeemable non controlling interest for some of our Markel Ventures minority shareholders who have the option to put their shares to us in the future generally at a fixed multiple of EBITDA. At the end of each reporting period, the carrying value of this redeemable non controlling interest is adjusted to management's current best estimate of the redemption value. The purpose of the adjustment is to record the potential cash obligations we may have to the non controlling interest shareholders. For the Q4 of 2012, the redeemable non controlling interest balances were marked down $3,400,000 For the full year, the balance was marked up $3,100,000 The change is recorded through retained earnings and adjust net income to shareholders when calculating EPS. This calculation will be presented in our 10 ks. Turning to cash flows and the balance sheet. Net cash provided by operating activities was approximately $392,000,000 for the year ended 2012 as compared to approximately 3 $11,000,000 for the same period of 2011. The increase in net cash provided by operating activities was due to more underwriting cash flows as a result of higher premium volume and increased cash flows from Markel Ventures. Investments and cash at the holding company were approximately $1,400,000,000 at the end of 2012 as compared to a little less than $1,200,000,000 at the end of 2011. The increase in invested assets is primarily the result of over $400,000,000 in dividends and loan repayments from our domestic and international insurance subsidiaries during the Q4 of 2012. In December 2012, Markel announced it had entered into a definitive agreement to acquire Alpower Capital Holdings Limited for consideration of approximately $3,100,000,000 Transaction is expected to close in the first half of twenty thirteen. In January, 2013, Markel announced that it completed the previously announced acquisition of Accenture Insurance Company. Through Accenture, Markel will underwrite insurance exclusively for Hagerty Insurance Agency and Hagerty Classic Marine Insurance Agency throughout the U. S. At this point, I would like to turn it over to Mike to further discuss operations. Thanks, Ann. Good morning. Total gross written premium for Markel North America increased 14.6% year over year in the Q4 and 10.9% for the 12 months ending December 31, 2012. The E and S segment's gross written premium increased 9.1% in the 4th quarter and 7% for 23.4% in the 4th quarter and 17% for 2012. Within the E and S segment, I'm pleased to report that all five regions gross written premium increased in the 4th quarter and for 2012. This steady growth supports our belief that the One Markel strategy is a success and that most service issues are behind us. This belief is further supported by the feedback that we received recently from our binding and brokerage councils when they met in Florida. During the Q4, our E and S professionals conducted over 233 agent meetings at NAPSLO and 72 meetings at the Plus Conference. This increased interaction with our agents is well organized and is one of the reasons for our organic growth. The E and S segment's combined ratio for 2012 was 93.7%. This increase over prior year combined ratio was driven by the impact of the change in accounting methodology for deferred acquisition costs and the impact of Hurricane Sandy. The specialty division's growth was driven by the continued conversion of Tomco's business to Markel paper. At the beginning of the year, we told you that we expected to book $60,000,000 in 2012 and we actually booked $79,000,000 We expect to have all of Tom Co's business converted to Markel paper during 2013. The team at First Comp continues to execute their plans to improve results through rate increases and geographic reorganization. 1st Comp was also a strong contributor to the Specialty division's growth in 2012 with gross written premiums totaling $257,000,000 The combined ratio of 107 point percent for 2012 for the Specialty division was affected by the change in accounting methodology for deferred acquisition costs, one time employee separation costs, write off of an IT system and the impact of Hurricane Sandy. As mentioned during the Q3 call, we will begin booking premium the Hagerty Collector Car Business in 2013 and we're looking forward to a very successful 1st year with this fine specialty partner. During 12, our product line leadership group and underwriting team achieved an overall rate change of approximately 4%. The property business had the largest increase. However, we achieved positive rate movement on almost every line of business. Also during the 4th quarter, the product line group transferred 12 experienced underwriters to regional roles in order to put some of our best underwriters closer to our customers. These underwriters produced $4,000,000 of new business in the last 2 months of 2012, which supports our theory that putting more experienced authority in the field will further improve service and ultimately result. With regards to new products, we're launching an energy program and an professional liability program. We also picked up a national lawyers program that should result in $10,000,000 of new business in 2013. Looking back on our results in North America for 2012, we cannot help but feel very good about what was accomplished during the year. Our E and S segment under John Latham's leadership exceeded budget and prior year revenues, while continuing to improve service, streamline the organization and expand our visibility with agents. As pointed out earlier under the leadership of our Regional President, Steve Girard, Scott Collar, Sarah Gavilek, Susan Swanson and Greg Ruble all five regions grew in 2012. The appointment of Jeff Lamb, the Chief Underwriting Officer for the segment and Evans Nash to the Head of Marketing has increased the cooperation and communication between our product line leaders and our regions continuing to fuel organic growth. Within our Specialty division, the appointment of Greg Thompson as President of Markel Specialty completed the leadership team of that division. The continued integration of First Comp has progressed according to plan under Matt Parker's leadership. The Tomco acquisition and integration has also gone according to plan. Markel America grew organically under Audrey Hankins' leadership and our Carrier Alliance business had a stellar year under Mary Pat Joyce's leadership. We reorganized the Specialty Commercial Business under direction of Don Face and Alex Martin and positioned that unit for a successful 2013. Jerry Albanese, Executive Vice President and Chief Underwriting Officer and his team of product line leaders achieved positive rate movement in vast majority of our product lines, added new products and enhanced others during the quarter of 2012. Tom Smith and his team did a great job leading the charge on our brand initiatives, website development and sales initiatives. So often in today's hurried pace, we fail to that comprise Markel's North American operation and all of our leaders and associates around the world for what they accomplished in 2012. Now I'll turn the call over to Richie. Thanks Mike and good morning everybody. Markel International had a great year in 2012. Gross written premium increased 8% to $887,000,000 Significant areas of growth continue to be marine energy and liability as well as catastrophe exposed property. Throughout the year, we continue to see price increases on catastrophe exposed property and marine energy and liability business. However, as the year 12 renewal business was approximately 4%. Cat property increases were generally in the 10% to 20% range. Marine Energy and Liability has increases in certain areas and many areas of market still remains very competitive particularly in our professional liability, relatively flat. International's combined ratio for 2012 was 89 percent, which included 2 points of expenses related to the adoption of the new DAC accounting standard. This also included approximately $50,000,000 or 60 points of loss and reinstatement premiums from Hurricane Sandy in the 4th quarter. The 2012 results 2012 results as Dan said benefited from $192,000,000 of prior year favorable development across a variety of programs. We've said it many times, but I'll repeat it. We always strive to establish reserves that are more likely redundant than deficient. However, the releases we experienced in 2012 are more than we would normally expect and are the results of the favorable developments that I mentioned across a number of products including significant favorable reserve development of $39,000,000 in 2,001 prior reserves. I want to just turn to Ultera and just talk about what we've been doing since the announcement in December 2019. We have been extremely busy since that announcement. Before the end of the year, we filed our joint proxy, which went effective on January 18 and was for February 26. We're in the process of obtaining regulatory approvals. We already have clearance under the Hart Scott Rodino Act and have made filings with insurance regulatory authorities in the U. K, Ireland, Brazil and the U. S. While we can't predict the timing of the approval process with any great certainty, we believe that the transaction could close as early as April 2013. During January, we made multiple visits to most of the Ultera offices and held meetings with Ultera's associates. These visits have our findings from due diligence. Ultera's people are extremely impressive and will be great additions to Markel. We formed a cross functions integration team led by Peter Minton, COO of Ultera and that's comprised of associates from both Markel and Ultera. The team is working on a short term tactical and long term strategic goals for the integration. Our short term goals are to quickly integrate the companies under the Markel brand with in detail to our Ultera associates shortly after the shareholder vote in February. At a very high level, we envision a structure that includes the existing Markel Insurance operations of E and S Specialty and International plus reinsurance and large account business units. We're just getting started on the task of building the new Markel, but we are pleased with the progress to date and are excited for the deal to close, so that we can move on at full speed with the integration process. And now I'd like to turn it over to Tom. Thanks. Thank you, Richie. Comprehensive. I want to start off my comments with a bad word and I plan to repeat it about a 1,000 times because it is such an important descriptor of how we think about things at Markel. I suspect that we have new folks joining the conference call compared to previous periods and I'd like to convey a bit of how we view our challenges and opportunities in running this business. At Markel, we think about things comprehensively. We have a comprehensive set of tools to create comprehensive income and all of them worked in 2012. The sum total of our comprehensive income from doing so was approximately $500,000,000 Just to provide you with some frame of reference on that number, the entire retained earnings of the Markel Corporation didn't exceed $500,000,000 until the end of 2004, 8 short years ago. 2,004 was the year we celebrated the 75th anniversary of Markel. That means we made more money in 2012 than we made cumulatively in the previous 75 years up to 2004. Now 2012 is just the latest chapter in the story of Markel And these results would not have happened without the hard work, the values and the culture that was created by all of them before. That said, the results are accumulating nicely and the work of 2012 should produce even better outcomes in the years to come. The components of comprehensive income are 1, underwriting results 2, investment investment results 3, Markel Ventures results and 4, capital management activities. On cylinder 1, underwriting results, Anne already gave you the numbers and Mike and Richard spoke about our insurance operations. Fortunately, we've got some good underlying trends in place in our insurance operations existing mark out activities as well as those at Alterra and we are even more optimistic about the prospects for the combined organization. On cylinder 2, the investment side, today is a fun day to report our investment returns. The numbers are good and it's always more fun to talk about good results than bad. That said, before I get too far into the numbers for 20 12, I'd like to reiterate that these numbers are just outcomes. They are mere shadows cast by the underlying reality of the value and principles that guide our approach. The joy of Martell is that our values and principles remain unchanged. Every year, every quarter, every month and every day, we try to do our best to serve our customers across diverse markets, whether that means meeting insurance needs, supplying taking or dredging equipment or slicing pickles. We also stick to conservative and time tested principles on how to manage the investment funds these activities generate. In 2012, the results were very pleasant. In some years, it will not be as good. The good news though is that when you work from the right set of principles and values, more years are good than not. And time has a way of validating a sound long term approach such as what we've practiced at Markel for decades. In 2012, all the factors available to produce comprehensive income were positive. All of them contributed to the total and there were no negatives. The total investment return on the portfolio was 9%. We earned 19.6% on our equity investments and 5.1% on our fixed income portfolio. Over the last 23 years, we've earned nearly 200 basis points of excess return per year compared to the S and P 500 index and our equity investments and we've earned more than 3 50 basis points of excess return from equities compared to the Barclays Aggregate Fixed Income Index. We're happy to accept a bit of volatility to earn these returns since they add up to real money in the pockets of Markel shareholders over time. And 2012 continues to build upon this record of adding value. On the fixed income side, we earned 5.1% for the year and I'm very pleased with this I remain of the belief that the number one feature in the investment landscape is that interest rates are too low. They keep going lower and lower, although the early days of 2013 are a tad different so far. Our response to this development is to keep owning bonds shorter and shorter maturity. Simply put, we just don't think that we are being paid appropriately accept the risk of owning longer term bonds. And that effect of this is that we are tactically building on balances of cash and cash life fixed income securities. Don't worry, we haven't fallen in love with cash and we do not expect to have this barbell of cash at one end of the investment portfolio development and equities from Markel Ventures operations at the other end is very little in between for us. What we have created is the option of redeploying this cash when opportunities arise. Fortunately, with low interest rates and a flat yield curve, the opportunity cost of doing so is nil. We're incorporating this thinking into our anticipated actions once the Altria deal closes. And I want to assure all of our shareholders that the mantra for fixed income as well as our equity activities is safety first. I believe that we will be presented with interesting and attractive investment opportunities over the next several years and we have relatively unique structural and tactical advantages, which should create good outcomes for Markel. Stay tuned. On cylinder 3 at Markel Ventures, we enjoyed revenues of approximately $490,000,000 in 2012, up over 50% from $317,000,000 in 2011. Markel Venture's EBITDA grew over 60% from $37,000,000 to $60,000,000 and we remain optimistic about our opportunities in 20 13. Markel Ventures contributes cash flow to the comprehensive picture at Markel in excess of the reported net income since the amortization expense related to purchase accounting is a non cash charge and not reflective of the underlying profitability of the ventures coming. I'm pleased with the results of our Markel Ventures Group and the returns that they are producing. Currently, we remain somewhat quiet on the acquisition front given our focus on Ultera, but the opportunities to grow and expand this feature of Markel remain vast. As the old saying goes, when your only tool is a hammer, everything looks like a nail. The beauty of Markel is that we are not limited to working with just a hammer. When you look at our opportunity set in insurance, investments, industrial equipment and machinery, healthcare, real estate, our other products and services along with the cylinder 4, our capital allocation discipline and activities. We have a comprehensive toolkit of hammers, drills, screwdrivers, wrenches, saws, measuring tapes, T squares, levels and duct tape. We have and will use all of them at appropriate times and places to create the sort of comprehensive returns for you like what we are reporting today. This is an amazing and unusual toolkit that continues to work well for our shareholders and we look forward to working on the projects on our to do list in 2013 and beyond. With that, I'd now like to open the floor for your questions. So, Tanya, we could open up the call, please. Thank you. We will now be Our first question comes from Mark Zueli with RBC. Please proceed with your question. Hey, good morning. Just a few questions to start off with. Richie, you gave the amount of Sandy losses that had impacted Markel International. Could you provide the same information for the other breakout. The details will be in the K for sure. The total was 107, so you can probably take Ritchie's number and back out to the other 2, but I don't have the split with me. Okay. Is it to assume that nearly all the rest was on the E and S segment just by majority? Hold on. I'm looking at something that Mike just handed me. Mark, we'll give you a call with that. But I don't think we got the numbers handy. No worries. The second question I had, you'd indicated the Essentia deal will close or has closed and will begin booking revenues for 2013. In general, what's the size of the gross revenue opportunity there? Just maybe something that what they did in 2012 for example? We don't have their final 2012. Keep in mind that we don't own Hagerty. It's a privately owned firm. What we've said so far is if you go back to a couple of years ago and look at the BEST reports that they had booked $170,000,000 in Essentia. So you can that's a fact. And then you can assume that they're a growing organization and we expect them to continue to grow in 2013. Okay. So 170 is kind of my baseline starting point and I can assume what I want over top of that? Yes. Tom, you normally provide the duration of your portfolio, the fixed income portfolio. Could you give us that information? Sure. Including cash, it's less than 3 years now, which is a record blow. Okay. So really no change from kind of what you had said in the Q3? 90 days short. Fair The last question I had was really just a pricing environment sort of question. You had suggested mid single digits. Is that fairly broad across most of the product lines? Or I guess my comment specific to the E and S and especially admitted business. Is that fairly broad across most lines of business? Or are there some that are standing taller than that? The property is standing taller in both segments. The larger increases were in the property segment and then more modest increases in some of the casualty lines. On average, middle single digits and we expect the same kind of environment in the early part of this year. Okay. I'll stop there and let somebody else have a chance. Thanks. Our next question comes from Ray Radelli from Macquarie Group. Please proceed with your question. And Tom, I can certainly appreciate duct tape being a tool used. I appreciate that analogy. The one question I just want to hit on quickly with the portfolio. I mean assuming that the Alterra acquisition goes through, maybe you can talk about what you envision for the portfolio for the longer term just given that their portfolio allocation is a little bit different than Markel? Sure. Longer term, it will be recast into the nature and the form and substance in the same way we've been doing things at Markel for a long time. The barbell right now is a tactical decision. That is not a fundamental strategy. It's just to preserve optionality and time when there's very little opportunity cost to do so. Longer term what we would hope to do is to deploy a good chunk of that into the equity sort of securities and things that are positive total returns over time and the speed and the pace of that will largely be driven by opportunities. And then I guess on the fixed income side any sort of type of asset class that is more attractive? I know in terms of duration short, but corporate or municipal bonds any color there? Yes. In general sort of cash is king in that regard because if you add some numbers of relative returns or basis points on top of the benchmark rate, you still get a very low nominal total return. So the idea of taking credit risk for just small amounts of this, it doesn't seem like that good an idea to me. So very high credit quality and just higher and higher all the time. Okay. Thank you very much. And by the way, I mean that also is a tactical statement about today's market. Should the opportunity set be different be different and the rates in different securities be different and more attractive over time? We are completely intellectually open minded and willing to go wherever it makes sense to get. Got it. Thanks for the color. Our next question comes from Matthew Berry with Lane five Capital Management. Please proceed with your question. Hello, everybody. I have a quick sort of long term question, which is if we were to see an extended period of inflation, could you just talk me through the sequence of impacts across the business across sort of current year expenses and then prior year reserve adjustments current year reserves and so on? And then the steps that you'd take and how we would see that impacting the financials? Sure. In that case, Tom, you can't be precise in sequencing these because you really don't know what the form and nature of inflation would take. So the ultimate answer to your question though is that rough rough essentially onethree 65th of whatever business is on the books, whatever expense picture we have, whatever operations we have, that sort of expires each day and you come to business the next day and you get to reprice your insurance rates, you get to rethink about what resources you need to run the business and you try to make good, confident, logical decisions on account of that. We are not victims of huge fixed commitments and huge fixed assets, which can be trapped in the form of inflate going into inflationary environment and we get to redo 100 and 365 of our business every single day. And what would happen in the period of inflation, deflation, stable prices whatever is we'd remerp that business the next day when we came to the office. Okay. All right. Thank you, Tom. Our next question comes from Graham Maynard with Loeb Capital. Please proceed with your question. Hi, guys. Yes. I'm just calling on the deal front. I'm just wondering if there's sort of any updates in terms of the regulatory approval fronts and just timeline in general. Thanks. Kind of as I said earlier, we're proceeding apace with the regulatory approvals. Obviously, the states and the various regulatory entities you can't control their timing, but things seem to be moving along nicely. And with any luck, we think we could get this done in April. April really. Okay. All right. Thank you very much, guys. Our next question comes from Ron Bobman with Capital Returns. Please proceed with your question. Hi. Thanks a lot. Congrats on the Alterra prospects and the progress so far. I had a couple of questions as it relates to the combination. On the Markel Investment Portfolio and the equity holdings that you have, where liquidity isn't an issue, should we assume that you'll sort of gross those positions larger reflecting a larger investment portfolio that you'll now be managing? Yes. I don't want to imply that's going to happen at day 1 after the close. It will depend on let's just say liquidity and relative pricing and what it looks attractive to do. But over the period of time that's exactly what should happen. Thanks. And then my other question on the combination sort of corporate organizational structure. And what I mean is obviously you've got I presume numerous U. S. Insurance entities that are capitalized that you use for different purposes in lines. And I'm sure Alterra brings some number of those as well as I think you both have a presence at Lloyd's if I'm not mistaken. I'm wondering if there's much material opportunity for you to sort of streamline where capital sits in the sort of underwriting entities globally and for you to sort of more efficiently or at least to sort of extract capital out from under some of these regulated entities? There's certainly opportunities to streamline it significantly. On day 1, the goal would be to make sure we don't disrupt anything we're doing for clients. So we'll do the short term things first and then we'll come back and start looking at the legal entity structure. But I think it's safe to assume we can over the next year or so really streamline the capital in the various companies. We don't need as many insurance companies as we'll have after this deal is completed. And we'll work on what's the best solution for that and make sure our people have the right paper available to write the business. How about Lloyd's? Thanks, by the way. Lloyd's will have will go forward with 1 syndicate and one managing agent and that will be Markel Syndicate 3,000. Our next question comes from Meyer Shields with Stifel Nicolaus. Please proceed with your question. Thanks. Good morning, everyone. Hi. I apologize if this has been covered before. But can you go through, I guess, the progress on the 1st comp book and any reserve changes that happened in the 4th quarter? I think the book's progressing as we expected it would probably even some early days after the acquisition. And there weren't really much in the way of adjustments during the quarter. Yes. There this is Mike. They are absolutely executing on plan. They've really reorganized with regards to geography and where they're writing business. We have given them different targets moving down incrementally to where we want them to be. And they've hit every target that we've laid out there for them. And we're operating a year in advance. We've already given them their target for 2014 and they're executing on that as well. So we're very pleased with the progress they've made and what they're doing in that business. Okay. And I think Mike you talked before about the more rapid conversion of Tomco premiums onto Markel paper. Is that because Tomco is growing faster than you expected or you're just converting it faster? We converted faster. When we set out to do this, we weren't sure of the time frame of converting some of these programs. I guess, we'll finish converting them in 2013. So 2014 would be the 1st year that we had 100% of the Tomco business on Markel paper. But we just converted it more faster. But they are growing and they did have a good year. Okay. Great. Thanks so much. Our next question comes from Doug Neuwerter with SunTrust Robinson. Please proceed with your question. Hi. Good morning. I just had one question about the I guess on the liability side, especially your loss cost trends maybe in the North American business. It seems like it's still a pretty benign, I guess, legal or judgment environment, especially on your longer tail business. I just didn't want to if you had any color on that Mike. Just how they're trying to look like you're still having considerable amount of favorable development. I realize a lot of that is conservatism. So I just is there any have you seen any changes or fluctuations in the underlying drivers behind frequency or severity especially in the long tail months? I don't think this is Richie. I don't think we're seeing anything significant. But trend continues to move out there. Although I think it's fair to say and I think most people would say it's probably been more benign than we would have expected over the last several years. But there clearly is some trend out there just not to the level it's been in some historical periods. So we still need to get price increase to deal with the trend that is there. And I'll get on the soapbox a little bit and say the whole market needs some rate to continue the rates to continue to move to get to a good level across the various lines. And I'll add that we were very disciplined Gerry Albanese and his team are very disciplined in getting rates in 2012 and we expect them to operate exactly the same way in 2013. So would it be fair to say that you're at or maybe slightly above loss cost trends with the rating right now? Every line is going to be a little bit different. But certainly our intention is to set our pricing to be above the loss cost trends because we want to set each one to an underwriting profit. But each of our products is in a different place. We've got over 100 of them and we have to do sort of portfolio management as you would expect. Okay. Thanks a lot for your answers. That's all my questions. Thanks. There are no further questions in queue at this time. I would like to turn the call back over to Mr. Gaynor for closing comments. Thank you, Merrick. Thank you very much for joining us. We look forward to chatting with you again soon. Good bye. This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.