Good morning, and welcome to the Markel Corporation third quarter 2015 earnings 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. Please note this event is being recorded. 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 10-Q, which can be found on our website at www.markelcorp.com in the Investor Information section. The presenters today for Markel Corporation will be in the following order: Mr. Tom Gayner, President and Chief Investment Officer, Ms. Anne Waleski, Executive Vice President and Chief Financial Officer, Mr. Mike Crowley, President and Co-Chief Operating Officer, and Mr. Richie Whitt, President and Co-Chief Operating Officer. I would now like to turn the conference over to your host, Mr. Tom Gayner.
Please go ahead, sir.
Thank you, Denise, and good early morning. We understand if we use a rounding, there may be as many as tens of people on the call, and we welcome you to our third quarter conference call for Markel. My name is Tom Gayner, and I'm joined, as usual, by my colleagues Anne Waleski, Mike Crowley, and Richie Whitt. Anne will brief you on the financial results. Mike and Richie will discuss our insurance operations, and then I'll return with comments on our investment results in Markel Ventures. As always, we thank you for your interest and support of Markel.
Report that our year-to-date underwriting results are outstanding, contributing just under $300 million to pre-tax profits for the first nine months of 2015. All three ongoing insurance segments contributed to this result by producing a lower combined ratio compared to a year ago. While our underwriting results have made a significant contribution to shareholder value, the favorable impact from underwriting was muted by our investment results for the first nine months, which were adversely affected by volatility in the equity markets. Our total operating revenues grew 4% to $3.9 billion in 2015 from $3.8 billion in 2014. The increase is driven by higher revenues from Markel Ventures. Other revenues, which include revenues from Markel Ventures, were up 30% to $817 million from 2014.
Going back to the underwriting results, gross written premiums were $3.7 billion for the first nine months of 2015, compared to $3.8 billion in 2014, a decrease of 3% driven by a decline within our reinsurance segment. During 2014, we ceased writing auto reinsurance in the U.K., and we also decreased our non-standard U.S. auto reinsurance business. Foreign currency exchange rates also had an unfavorable impact on the year-over-year change in gross written premiums. However, even at a constant rate of exchange, gross written premium volume declined 1%. Market conditions continue to be very competitive, especially within the property and marine and energy product lines. Consistent with our historical practices, we will not write business when we believe prevailing market rates will not support our underwriting profit targets.
Net written premiums for the first nine months of 2015 were $3 billion, down 3% from the prior year, and our net retention was in line with the prior year at an 82%. Earned premiums were $2.9 billion for 2015 and were flat prior year. At a constant rate of exchange, earned premiums for 2015 would have increased 2% compared to the same period a year ago. During the period, we saw organic growth in several specialty division product lines within our U.S. insurance segment, which was offset by a decline in earned premiums for the reinsurance segment for the same reasons I just mentioned. Our consolidated combined ratio for the first nine months of 2015 was an 89% compared to a 97% a year ago. The decrease in the combined ratio was driven by more favorable development on prior accident year loss reserves in 2015 compared to 2014.
For the same period a year ago. As I have mentioned in prior calls, during the first quarter, we entered into an asbestos and environmental reinsurance agreement which had a one point favorable impact to the combined ratio for the first nine months of 2015. In addition to the impact of this reinsurance transaction, we experienced more favorable prior year loss reserve development driven by our U.S. in our global insurance division for 2015 compared to adverse development in 2014, as well as the impact of adverse development on our architects and engineers and brokerage excess and umbrella product lines in 2014. The more favorable development in the international segment in 2015 is driven by case reserve reductions for a small number of large general liability and professional liability claims. Lastly, our 2014 results included $27 million of adverse development on our asbestos and environmental reserves.
We completed our 2015 asbestos and environmental review in the third quarter without adjustment to held reserves. Before moving on, I would also like to comment on the second asbestos and environmental reinsurance transaction, which we reported as a subsequent event in our Form 10-Q. Late last week, we completed a retrospective reinsurance transaction to cede a portion of our U.S. asbestos and environmental exposures. The impact to earnings, if any, resulting from a change in the estimated volatility of our consolidated net reserves for unpaid losses and loss adjustment expenses as a result of this transaction will be reflected in our fourth quarter results of operations.
While we recognize that the two 2015 ceded reinsurance transactions related to our asbestos and environmental reserves will have the short-term impact of reducing investment income, we have significantly reduced the future uncertainty around these exposures and have increased our flexibility regarding capital allocation. Moving on to Markel Ventures. On a year-to-date basis, revenues from Markel Ventures were $784 million compared to $595 million in the same period a year ago. Net income to shareholders from Markel Ventures for the nine-month period was $14 million in 2015 compared to $16 million in 2014. EBITDA was $76 million in 2015 compared to $66 million in 2014. The increase in revenues from our Markel Ventures operations during 2015 was primarily due to our acquisition of Cottrell in July of 2014. Additionally, we've experienced higher revenues within our other manufacturing operations, due in part to higher sales volume in 2015 compared to 2014.
Likewise, EBITDA from our Markel Ventures operations increased in 2015, primarily due to our acquisition of Cottrell and more favorable results within our manufacturing operations. This increase was partially offset by an increase in our estimate of the contingent consideration obligation associated with the acquisition of Cottrell. As I mentioned last quarter, a portion of the purchase consideration for Cottrell is based on their post-acquisition earnings through 2015, which we expect will exceed our initial projection. As a result, our estimate of the fair value of the contingent consideration increased by $27 million in 2015. The decrease in Markel Ventures net income for the first nine months of 2015 is also a result of the contingent consideration adjustment for Cottrell. Turning to our investment results. Net investment income for the first nine months of 2015 was essentially flat to a year ago, coming in at $271 million.
Net realized investment losses for 2015 were $3 million compared to net realized investment gains of $29 million a year ago. The net realized investment losses in 2015 were driven by a $23 million adjustment for other-than-temporary impairments attributable to equity securities. Net realized investment gains in 2014 included $4 million of other than temporary impairments. Net unrealized investment gains decreased $397 million for the first nine months of 2015 compared to an increase of $499 million for the same period last year. The declines in net unrealized investment gains this year was attributable to decreases in the fair value of our equity and fixed maturity portfolios compared to prior year-end. Looking at our total results for the year, our effective tax rate was 21% in 2015 compared to 25% a year ago.
The decrease in the tax rate in 2015 was driven by foreign tax credits for foreign taxes paid. In previous periods, taxes paid in foreign jurisdictions were not available for use as tax credits against our U.S. provision for income taxes. In 2015, we anticipate a sufficient amount of earnings from our foreign operations will be taxable in the U.S. This will allow us to recognize the benefit of significant foreign tax credits against our U.S. provision for income taxes. A similar benefit may not be available in future years. We reported net income to shareholders of $385 million in the first nine months of 2015, compared to $204 million a year ago. Comprehensive income for the period was $98 million compared to $517 million a year ago.
As a result, book value per share at the end of September 2015 was $552, an increase of 1% since the end of 2014. Finally, I'll make a couple of comments on cash flows and the balance sheet. Net cash provided by operating activities was $550 million for the first nine months of 2015, compared to $537 million for the same period of 2014. Operating cash flows for 2015 included higher cash flows from our Markel Ventures operations, partially offset by higher payments for income taxes compared to the same period of 2014. Operating cash flows for the period was net of approximately $70 million of cash paid in connection with the first quarter 2015 asbestos and environmental reinsurance transaction that I have previously mentioned. Excuse me.
In $29 million of cash paid to complete a novation that transferred our obligations under a reinsurance contract for life and annuity benefits to a third party. Invested assets at the holding company were $1.3 billion at September 30th, 2015, compared to $1.5 billion at December 31st, 2014. With that, I will turn it over to Mike to talk about the U.S. insurance segment.
Thanks, Anne. Good morning. As we've mentioned earlier, the U.S. insurance segment comprises all direct business written on our U.S. insurance companies and includes all of the underwriting results for wholesale and specialty divisions, as well as certain products written by our global insurance team. Gross written premiums for the U.S. segment were $1.9 billion for the first nine months of 2015, an increase of 1% over prior year. This increase is due to continued growth in our wholesale division casualty lines, as well as our Hagerty Classic Car program and our workers' comp product lines, both within our specialty division. Partly offsetting this favorability are declines in our wholesale property, excess and umbrella, and environmental lines. As mentioned in previous calls, we have also exited certain lines of business. We maintained our underwriting discipline throughout the year.
The U.S. insurance segment combined ratio for the third quarter of 2015 was 90%, compared to 95% for the same period a year ago. The combined ratio for the year was 89%, compared to 97% for the nine months ended September 30th, 2014. The decrease in the combined ratio for the year is driven by more favorable development of prior accident years' loss reserves, as well as lower current accident year loss ratio and a lower expense ratio. Prior year losses were favorable by two points, driven by favorable developments in our global insurance division in 2015, primarily our inland marine product line, compared to adverse development in 2014. The current accident year loss ratio benefited from lower attritional losses across each of our divisions.
Finally, the decrease in our expense ratio was primarily due to higher earned premiums in our specialty division, driven by the premium growth I mentioned earlier, as well as lower general expenses. The rate environment in North America remains challenging, as has been the case throughout 2015. We're still achieving modest single-digit rate increases on our smaller accounts in the specialty and excess and surplus lines divisions. The large account excess property and casualty business in our global division is still under significant rate pressure. We are experiencing more opportunities in the global professional and marine lines. In September, a number of our Markel professionals attended the NAPSLO conference in San Diego, and we conducted over three from our specialty and global divisions attended the CIAB, The Council of Insurance Agents & Brokers Conference in Colorado Springs.
The information garnered from numerous meetings with our agents and brokers in attendance supported our belief that there remains strong opportunity for profitable growth in our specialty divisions. During the quarter, our product line leadership made progress on several new product line leadership is also working on new filings and enhancements to aid existing products. We continue to focus on expense management and operational efficiency with the same commitment that we give to underwriting profitability. Our talent pool is as strong or stronger than it's ever been, and we're continuing to recruit bench strength wherever possible. We remain confident in our ability to continue to produce solid results through superior talent, underwriting discipline, and expense management. Richie?
Thanks, Mike, and good early morning to everybody. I'm just going to say if we keep this early start time, I'm going to focus my comments on our underwriting results for the first nine months of 2015 for both the international insurance and reinsurance segments. Both segments continue to produce outstanding underwriting results through the third quarter of this year. First, I'll start with international insurance segment, which includes business written by our Markel International division, as well as certain products written by our global insurance division. For the year, gross written premiums declined just over 1% to $912 million. The year-to-date combined ratio was 87% compared to 95% in the prior year. The decrease in premium writings is primarily due to the continued impact of the strong U.S. dollar.
Excluding currency impacts, gross written premium volume actually increased 4% for the year due to continued growth in our professional liability product lines in both divisions, as well as growth across multiple product lines in the Markel International division. The lower segment combined ratio was driven by more favorable prior year takedowns, partially offset by a higher expense ratio. Prior year losses were favorable by 12 points, driven by higher redundancies in the Markel International division across multiple product lines. We also experienced favorable development in our global insurance division, which had slight adverse development through nine months in 2014. The expense ratio has increased nearly four points due to higher profit-sharing costs, higher general expenses, and lower earned premium this year.
Next, I'll discuss the results of the reinsurance segment, which includes treaty reinsurance programs written by our global reinsurance division, as well as that written by our Markel International division. Gross written premiums for this segment decreased 12% for the year to $876 million, down from $1 billion a year ago. The segment is also seeing the effect of the strong U.S. dollar. In excluding currency impacts, the decline for the year was 9%. As we've disclosed and talked about a number of times, at the end of last year, we made the decision to cease writing U.K. motor reinsurance business and to take smaller line sizes in our non-standard auto U.S. book. You're now seeing this show up in the year-over-year comparisons of gross written premium volume. The combined ratio for the reinsurance segment was 92% compared to 97% last year.
The reduction in the combined ratio was driven by a seven-point decrease in our loss ratio, partially offset by a higher expense ratio. The decline in the loss ratio is comprised of a lower current accident year loss ratio due to lower property losses in 2015, as well as more favorable development on prior years' loss reserves across both divisions. The increase in the expense ratio is due to higher commissions and lower earned premiums this year. Just a few operational comments. When it comes to discussing competition, I'm starting to feel a little like a broken record each quarter on the earnings call. As Mike and Anne discussed, market conditions remain extremely competitive, and that's very little change from what we reported to you in the first and second quarter this year.
Speculation has now started in earnest on what's going to happen with rates on the January 1 renewals. Our expectation is that without some sort of catalyst, pressures on rates are going to continue. As a result, underwriting discipline is going to become even more important as we enter 2016. I would also like to mention that we continue to make good progress towards closing our previously announced CATCo transaction, and we expect to close in the next several weeks. To refresh everyone's memory, CATCo is an insurance-linked securities asset manager that currently manages $2.7 billion of retrocessional and traditional reinsurance portfolios for clients around the world. CATCo's business generates management and performance fee income on its assets under management.
We expect a smooth and efficient transition of the CATCo business into Markel, and we've already started planning how our reinsurance operations and CATCo will collaborate going forward to bring our entire suite of traditional reinsurance and ILS products to our ceded clients. With that, I'd like to turn it over to Tom to discuss investments and ventures.
Thank you, Richie. The good news at Markel is that we enjoy a set of what I would call structural advantages as we continue to build the long-term value of this company, and they are as follows. First, we operate a successful insurance business with a long-term record of underwriting profitability. Second, we operate a high-quality and low-cost investment operation that amplifies the returns generated from the insurance business. Third, we have a diverse set of majority-owned industrial and service businesses in the form of Markel Ventures that increasingly contributes to our overall results. Prospectively, we can and we will allocate capital among those opportunities in search of the best long-term results. It's always the most fun when we can discuss each of those components when all of the cylinders are firing.
The reality, though, is that's not always the case, and that is the circumstance so far in 2015. The good news is that even without all cylinders firing, our overall investment returns for the first nine months were a negative 0.3% in local currency terms and a negative 1.2% after the foreign exchange effects. Equities were down 5.3%, and fixed income earned a positive return of 1.3%. If I had only one word to describe all of our investment operations, it would be quality. In fixed income, that's relatively easy to quantify and describe. 97% of our holdings are rated A or better. We also do our own credit work in addition to that of the rating agencies, and I'm happy to report to you that our quality is as high as we know how to make it.
In our equity operations, we maintain a similar discipline and focus on quality. Equities are not rated in the same way as bonds, and as such, I don't have a statistic to cite which would correlate to quality. I can assure you, though, that we underwrite each and every equity security we purchase with thoughtfulness and a desire to own durable, long-lasting, profitable businesses. In a world with increasing rates of change, that job is getting harder rather than easier. We remain dedicated to our longstanding commitment to this effort, and I'm optimistic that our discipline The overall duration depending on the nature of our insurance reserves. As you can see, we are, as we have been, a bit short of that duration target. We will work to try to keep the duration between the four and five-year bandwidth as we reinvest maturities and cash flows.
Historically, this number has ranged between roughly 50% and 80% over the last 25 years. That allocation is a residual of our views on finding specific investment opportunities which meet our four-part thought process, as well as our overall view of our insurance operation opportunities and the overall investment markets. As you can see, we've got some dry powder on our balance sheet. I think the option value of having quickly available capital to deploy as opportunities present themselves is a big advantage for Markel going forward. I would also add that we incur very little in the way of opportunity costs in doing so, given the low overall level of yields and investment returns all along the curve. Additionally, I think it's worth pointing out that at cost, our equity portfolio has a dividend yield of over 3%.
In short, we're getting the yields we would get on fixed income and the upside of owning equity securities in the current environment. While that number is based on historical cost, it isn't too hard to pencil out similar dynamics for the equities we're buying today. Oftentimes, current dividend yields roughly equal what we could get on high-quality fixed income securities. One or two dividend increases starts to open up a gap in our favor over time. On Markel Ventures, we are enjoying a very solid year overall. Revenues advanced $784 million from $594 million a year ago. As we spoke about in the second quarter, we have the very high-class problem that one of our recent acquisitions is doing better than we projected at the time of purchase. As such, the earn-out payments associated with that deal are higher than we first forecast.
We are accounting for that payment as an expense item in 2015 rather than capitalizing those costs. This item will be fully accounted for this year. We are reporting EBITDA from Markel Ventures of $76 million versus $66 million a year ago. If you adjust for this one item, the run rate for EBITDA would be in excess of $100 million through the first nine months of the year. Within Markel Ventures, some of our businesses tend to correlate quite highly with the overall level of the U.S. economy. We've had a very good year in those businesses. We understand the basic cyclicality inherent in those operations, and we fully expect their results will fluctuate over time. That said, we are very happy with the returns on capital being generated by these companies over reasonable time periods, and we'd be delighted to own more of these kinds of businesses.
While we would like to own more Markel Ventures type businesses, it seems that the rest of the world would like to do so as well. As such, we've regularly encountered pricing that goes beyond what we think we should pay, and we've remained disciplined and on the sidelines so far in 2015. We continue to actively engage in many discussions, and I'm confident that we'll productively deploy capital in certain special circumstances as well as in a more favorable overall pricing environment in the future. Meanwhile, we continue to learn from and support our successful managers of these operations. We also continue to look for ongoing opportunities to improve across each and every company within Markel Ventures. We will never stop doing so. As I said at the beginning of my comments, we enjoy a unique set of structural advantages at Markel.
In a rapidly changing world, our first and foremost advantage remains our unchanging, deeply rooted culture, as described by the words of The Markel Style, first penned in 1986. Your management team and all of the people of this organization looks forward to meeting the challenges of building on our worldwide set of insurance, investment, and industrial and service opportunities, and now we would welcome the chance to answer any questions. With that, Denise?
Thank you, Mr. Gayner. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone 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. Your first question this morning will come from Jeff Schmitt of William Blair. Please go ahead.
Hi. Good morning, everyone.
Morning.
With the CATCo acquisition closing, I guess, at the end of the year here, is there still an appetite for M&A in 2016, or what are your thoughts on that?
I'll attempt that one, and you guys kick in any time. Jeff, we've been acquisitive over the years, Tom was talking about the current environment right now. The problem seems to be right now, a lot of other people seem to think those companies would be great strategic fits as well. The things we look for when we're doing acquisitions is the culture has to be a fit. That's number one. Needs to be a good strategic fit, a good reason for it. Obviously it's got to be at a fair price, and that's probably the one we're having the most trouble with right now. Oh, yeah.
I completely concur with Richie's comments, and we're hunting all the time, and sometimes, frankly, we get surprised by the opportunity we come across just as much as you are. We know about it a little before you do, but we'll keep hunting, and we'll keep you posted.
Okay. On the pricing front, with pricing remaining pretty difficult here, are you seeing any of the standard writers move in some of the E&S lines more than usual or?
Yeah, Jeff, this is Mike. I've been in this business for, this is now my fifth decade, and whenever you have the pricing situation we have today, you're going to have the standard carriers moving into the E&S space. I think the advantage that we have is that we have not one insurance division, not just an insurance division, but we have our U.S. specialty business, we have our global business, and we have the international business. Market conditions are competitive, but as I mentioned in my comments on the smaller U.S.-based business, we're still getting modest rate increases. Certainly in this type of environment, we are going to see the standard carriers move in, but they'll also move out as they have in the past.
Mm-hmm. Okay. Thank you.
Jeff, I'd like to add one editorial comment to that.
Yes.
Obviously, the investment side was the toughest part of the house for us, but we breathe the same air as everybody else. The investment operation environment that we're operating in is the same that every insurance company is. While everything is competitive, I don't think anybody's under the delusion that they can operate in a sloppy fashion on the underwriting side and make it up on investments. The nature and tone of competition and where that bar is set in terms of underwriting profitability is lower this time around than what it would've been in previous cycles. That's somewhat good news.
It's hard to get the volumes, and we have to compete for every piece of business that we have, but I think everybody is competing in a more disciplined fashion than they were in previous cycles, and that's a function both of the lower level of investment returns and better underwriting data and technology that gives people better insight into what the costs of what they're writing are.
Right. Okay. That's helpful. Thank you.
The next question will come from Mark Dwelle of RBC Capital Markets. Please go ahead.
Hi. Good morning. Just a few questions. Let me start with CATCo. Richie, it seems like that's a little bit less typical of a normal Markel acquisition. Maybe you could just talk a little bit about how that fits in, what some of the ambitions you might have for it. Then, I guess the other question I have related to CATCo, is that going to be folded into the international unit, or is it going to be picked up as one of the other segments?
Sure. Well, first, I'll take the easy one first. Markel CATCo, as it will be called when going forward. We're going to set that, since it is a little bit different as you recognize, Mark, it's going to sit alongside our reinsurance division. We expect Tony Belisle, who is going to be running CATCo for us, and Jed Rhoads, who runs our reinsurance division, those two teams are going to be working very closely together because we think there's a lot of synergies, a lot of opportunities to collaborate across those two platforms. They'll sit beside each other and that array of product set we hope to make available to our seated clients. You did mention it's a little bit different than what we've done before. The reality is the insurance market's a little bit different than what it was 5 or 10 years ago.
Insurance-linked security business, alternative capital, as people called it initially, it's just simply capital now, has been coming into our market over the last 5, 10 years, and that trend is going to continue, quite honestly, and it's going to continue to become more and more meaningful. We got a small taste of that with our purchase of Alterra, with their NewPoint facility that they had had for quite a long time before the acquisition. Jed Rhoads and myself, we talked about the fact we felt like we needed to be more meaningful in that ILS space going forward. CATCo provided us that opportunity. Like I said, we really view that as kind of extending our product set across the reinsurance space, both traditional and ILS.
Then going forward, we hope to develop new products, and that could potentially mean moving into different areas of insurance as opposed to just reinsurance.
Mark Dwelle, I'll add one editorial comment here, too. While you correctly categorized this as being different than what we've been doing to date, frankly, that's typical of almost every deal we've ever done. Part of the reason to do the acquisitions we've done over our 30-year history as a public company is to learn, to expand, to recognize that the world keeps changing. We pick up people and skills and talents and opportunities that we didn't have internally. I think that is an absolutely typical and recurring feature of Markel.
Will continue to be so.
will continue to be so.
Just to follow up on some of that. To characterize CATCo, is the skill set here, is this an underwriting skill set, or is this more of a brokerage and asset management or placement type of skill set? I guess I'm trying to be clear on which bit of the house you're bringing to bear in making this ultimately successful.
There's really two skill sets. The one that in my mind is the preeminent skill set is the underwriting, and that's where we spent a tremendous amount of time was understanding and getting comfortable with the underwriting that CATCo does. We believe they do a fantastic job of underwriting the business. It's a skill set we're very familiar with. We're underwriters at heart at Markel. The ILS combines two skill sets. It brings that underwriting skill set to the table along with raising funds. It's a fund manager. The other skill set, and one that Tony and his team possesses, is the ability to go out and explain the story that CATCo has and the skill set that they have to investors, such that they are willing to invest in the funds.
It is a bit of a hybrid, and it's a model, quite honestly, that we're going to see more and more in our industry.
Okay. That's helpful on that. Let me ask a second question, changing gears to the tax rate. You've documented throughout the year the pluses and minuses on that. I guess this quarter, this was primarily a true-up to get to now that you can have some better visibility of full-year results to true your full-year provision into that 21-odd% full-year rate.
That's right.
I would-
The way you do it quarter is just the mechanic to get there.
Right. All else equal, would it make sense that the fourth quarter number would be somewhere in that same ballpark?
Should be.
Still. Go ahead.
Sorry, go ahead, Mark.
I was going to say then, but still no view yet on next year as to whether there's any likelihood that this credit will carry forward into 2016 outlook.
I don't believe today that the credit will carry forward, but it's hard to know for sure. We would likely think next year would be more typical in the mid to high 20s from a tax rate. The real story on the tax rate this year is higher pre-tax income than we projected, which is a good news story that results.
Some environmental retro that you did. To the extent that ultimately produces any gains or losses, I think you mentioned it was a $10 million odd gain or loss rather on the initial transaction before any revisitation of reserve setting. Is that going to show up in the other segment or is that going to be in one of the North American segments?
It should show up in the other segment.
Got it. That's all my questions for now. Thanks.
All right. Thanks, Mark.
Again, if you would like to ask a question, please press star, then one. Your next question will come from James Davis of Silver Point Capital. Please go ahead.
Hi, guys. Thanks for taking my question, and congrats on a long track record of great performance.
Thank you.
The 15% compound book value growth track record is what caused us to take a look at the company. As we've been doing our diligence, we've noticed some changes in the company that suggest that book value growth is likely to be meaningfully lower in the future. We wanted to get your thoughts to make sure we're thinking about this the right way. The two big changes that seem to have taken place in the company are, first, investment leverage has declined meaningfully. 10 to 20 years ago, investments were about 4 times your book value. Today this is only about half that, 2.1 times your book value. Second, investment yields have declined meaningfully. 10 to 20 years ago, portfolio yields were in the 5% range versus 2.2% today.
Our math suggests these two factors combined to create a pre-tax ROE drag of about 15% relative to previous periods, making it tough to get to double-digit ROE without a significant rally in the equity market. We seem to be seeing this play out this year as a relatively minor hiccup in equity markets has resulted in flat book value growth for the year. Are we missing something or have these changes made historical returns very tough to meet going forward?
This is Tom. I'll try to take those. Compared to 10 or 20 years ago, I think you're correct. The amount of premium leverage we can get relative to our equity capital is lower. Specifically what we can do in the face of that is that we can increase the allocation to higher total return securities because the reason we would have a fixed income portfolio is predominantly to over-collateralize the insurance liabilities and the claims payments that we expect to make. If we have less leverage and we're writing less business, what that means is we can allocate a higher percentage of the portfolio to equities where we would expect to pick up a higher return. The second point you mentioned is lower overall investment yields. I would agree with that. I would also suggest that the higher yields occurred during a period of higher inflation.
Nominal yields are lower, but real yields have not decreased as much. Nominally, it's a lower return environment, that's correct, but in a real sense, if we make high single-digit, low double-digit returns in a zero interest rate world, both the nominal yields and the inflation circumstance that we face, that would be a spectacular economic outcome, and we're optimistic about our ability to do so.
Okay, got it. That makes sense. With the equities, as you mentioned previously on the call, you're currently at kind 54% of book value versus the historical range of 50%-80%. In terms of the opportunity to increase to higher return assets, we're not necessarily seeing that right now. Is there an intention to increase that allocation to try to make up for that difference? Is the first question. On the second question, makes perfect sense, lower inflation, lower nominal yields. I guess, are we right to think that that just translates into lower nominal ROEs as well going forward relative to what we've seen in the past?
That's the math of lower nominal ROEs. In real terms, as I said, we're going to try to do the best we can in real terms. We've generated excellent returns for a long time, and hope we have the formula in place to continue to do so. In terms of the additional allocations to the equity portfolio, whisper some good ideas to me after the call, and then we'll put it to work. Just like the acquisition question, we work all day, every day, looking for things. At the moment, we're driving down the road, tapping the brakes a little bit, just as a function of being picky about what we buy. As we see things, and we hunt for them every day, we do have the capital to put money into the equity portfolio, and we would love to do so when we see it.
Makes perfect sense. Did I hear correctly that in the current environment, the view is that kind of high single-digit moving into the low double-digit would be a great outcome?
Yeah, we don't make forward-looking forecasts or any expectations of that sort. When you pencil out the math that you did, I don't think you're doing that incorrectly.
Got it. Then just final question. We've always admired the discipline at the company. Like you said, there's a lot of headwinds in the market right now. The investment leverage and rates, which we talked about, but like you pointed out, pricing's weakening, equity markets are a little more difficult, trading at elevated multiples on above-trend margins. The private acquisitions are certainly tougher given the prices out there today. In terms of your core business, like you said, accretive acquisitions are tougher as it seems like there's a M&A premium kind of built into everything that's trading out there.
Is the right way to think about Markel right now that it's a tough environment, you've reduced leverage, you're kind of retrenching, and we'll have a period of lower returns, but as the market changes, there'll be the ability to play more offense and move to higher returns at some point in the future?
Well, let me split that. I think Richie alluded to this a bit in his discussion of CATCo. It's always tough. Markets are always competitive, so I don't think there's anything new about that than what has been the case during all of the time that the record you speak so kindly of was created. It's always tough. Frame capital into two forms. There's financial capital and there's intellectual capital. Financial capital is what a lot of people have a lot of. There's a lot of money slashing around everything, and that leads to the comments about insurance industry pricing, acquisition pricing, things of that nature. Intellectual capital, that's scarce, and that's where the returns really can be generated.
Just like Richie was talking about the creativity behind the folks at CATCo and what they are doing, a good portion of the returns they generate is because they thought of stuff. They were creative, and they applied intellectual capital. That is similarly the case in the Markel Ventures operations. We are looking at businesses that have the markets they have and have the customers they have because they creatively have found a way to take care of their customers. They tend to operate in markets that are not distorted by big gobs of financial capital. Similarly, you look at the historical set of businesses that Markel underwrites in our insurance world. We need expertise. We need creativity. We need people who know what they are doing in different and unique lines of business. There is really nothing about that that changes.
I think creativity and intellectual capital will always be able to earn a return. The principals of those industries do not necessarily sell for the highest price. We were successful in some of those acquisitions because the principals were looking for a long-term place and a good fit for their employees and for themselves, and for patient capital for the long term to continue doing what they were doing, rather than be gobbled up and chopped up and stripped and flipped and whatever. I think those opportunities still exist, and will present-
That's a huge advantage, and we compete against the same gobs of capital, so we understand exactly what you are going through. Appreciate you answering the questions. I guess our last thought is just when we look at the current valuation of the stock, it seems like the market is expecting the same future returns as what they have seen in the past in terms of the stock trading at 1.5 times book value. That's kind of the root of the questions. We think the franchise is very valuable, the opportunity is very valuable. We are just trying to figure out right now kind of what price makes sense. Thank you so much.
Right. We do not comment on valuation, but we thank your interest and your questions. Thank you.
Thank you.
The next question will come from David West of Davenport & Company. Please go ahead.
Good morning.
Morning, Dave.
Mike, a question for you. I guess my grasp on time is not real good, but you've been in the workers' comp business now at least three or four years. Could you give a little more color about pricing trends in workers' comp? Are you making underwriting profits in that line of business now?
The answer is yes. That's been a tremendous success story. When we acquired FirstComp, I guess it was 2010, there was work to be done there. The environment was tough. Their geographical mix of business, some of the other mix of business was not what we thought was the right path for the future. Matt Parker, who now heads our specialty division, Chad Bertucci, who's now running FirstComp, and the entire team there have absolutely executed on a plan that has been perfect in terms of the restructure of the business geographically, product line, pricing-wise. The pressure on the pricing there is not as significant as it is in other lines right now. Yes, they are making underwriting profits.
They have their expense ratio well under control as well as anybody in our business. We couldn't be more pleased with the plan that they executed over a span of two or three years and where they are today.
Okay, great. Thank you for that. I think in Anne's comments, when you talked about the impairments taken this quarter, it was, I think, mostly on the equity side of things. Could you provide some color on that? Was that a mechanical process, or did one or two securities particularly, you think, warrant the impairment charge?
Yeah, Dave, there's a mechanical process that triggers the reviews, so that is consistent. We've been doing it that way for quite some time. Half of that came from energy securities and oil prices. To harken back to the earlier comment I made about quality, Exxon is our largest position, and Schlumberger is our second largest in the energy world. Those are last men standing in that entire food chain that exists. In point of fact, and you already see it happening with Schlumberger, they have the balance sheet to be able to acquire things during a very tough market. We make sure that we invest with people that we think make it to the other side, and not only make it to the other side, but are better off by the time you get there. We don't have what I would consider speculative energy positions.
Exxon and Schlumberger would account for, I don't know, 80% or 90% of the total amount we have in energy, so I'll fight with those guys.
Very good. Thank you. Then lastly, on the Cottrell incremental compensation, does that agreement, does that accrual just through the end of this year? Does it carry on into 2016 at all?
Nope. Done in 2015.
Very good. Thanks so much.
Thank you. Bye, Dave.
At this time, we will conclude the question and answer session. I would like to turn the conference back over to Thomas Gayner for his closing remarks.
Thank you very much. We'll chat with you next quarter. Take care.
Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation.