Earnings Call: Q3 2012

Nov 9, 2012

Quarterly report

Greetings and welcome to Martell Corporation Third Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your speaker, Tom Gayner, President. Thank you. Thank you. Good morning and welcome to the Markel Corporation's 3rd quarter conference call. We're pleased to bring you today's report on our solid year to date economic returns and we look forward to your thoughtful questions about our strategy, performance, recent developments and plans for our future. We'll also cheerfully answer your other questions. To start off, our Chief Financial Officer, Anne Wilevsky, will review the overall numbers in the 1st 9 months. Then my Co Presidents, Mike Crowley and Richie Whitt, will discuss our international and domestic insurance activities. I will then cover investments and the Markel Ventures operations. Then we will open the floor for your questions. Before getting started with today's lineup, the rules say we need to repeat the Safe Harbor statement, so here goes. During our call today, we may make forward looking statements. Additional information about factors that could cause actual results to differ materially from those projected in the forward looking statements as described 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 on our website at www. Markelcorp.com in the Investor Information section under non GAAP reconciliation or in our quarterly report on Form 10 Q. With that, let me turn it over to Anne. Thanks, Tom, and good morning, everyone. As I will discuss in more detail in just a minute, our financial results for the quarter benefited from strong investment performance, underwriting profits on our ongoing business and increased revenue and profitability from Markel Ventures company. Our favorable year to date underwriting performance was driven by fewer than anticipated catastrophe events in the 1st 9 months of 2012. However, we do have exposure to losses from the storm that hit the East Coast last week. Our underwriting claims and catastrophe management teams are currently reviewing our exposures, but we do not expect to have solid estimates of our losses for several more weeks. Our losses from Sandy will however be estimated before year end and will be reflected in our Q4 results. Now we'll get into the financial results. I will follow the same format in discussing results as in past quarters. I will focus my comments primarily on year to date results. I'll start by discussing our underwriting operations followed by a brief discussion of our investment results and bring the 2 together with a discussion of our total results. Our total year to date operating revenues grew 13% to $2,200,000,000 in 2012 from $1,900,000,000 in 20.11. The increase is due to an 8% increase in revenue from our insurance operations and a 51% increase in revenue from our non insurance operations, which we refer to as Markel Ventures. Moving into the underwriting results. Gross written premiums for the 9 months of 2012 were $1,900,000,000 which is an increase of 8% compared to 20 11. The increase in 2012 was due to higher gross premium volume in each of our 3 operating segments. Net written premiums were up 7% to the prior year at $1,700,000,000 Retentions were flat in 20 12 at 89%. Earned premiums increased 8%. Again, the increase in 2012 was due to higher earned premium volume in each of our 3 operating segments. Increases in gross net and earned premiums have all benefited from our recent insurance acquisitions in the Specialty Admitted segment. Our combined ratio was 96% for the 9 months of 2012 as compared to 105 percent in 2011. The combined ratio for 2012 includes $41,000,000 or 3 points of expense related to our prospective adoption of the new DAC accounting standard and $9,000,000 or less than 1 point of underwriting loss from Hurricane Isaac in 2012. The 20.11 combined ratio included $133,000,000 or 9 points of underwriting losses related to the catastrophe events, which occurred last year in DAC accounting standard in 2012 and the effects of catastrophes in both 2012 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 segments. Favorable development on prior year's loss reserves represented 17 points on the combined ratio in both 2012 2011. Included in the favorable development is $31,000,000 of unfavorable loss reserve development on asbestos environmental exposures within our discontinued lines segment. We completed our annual review of these exposures during the Q3. During this year's review, we reduced our estimate of the ultimate claim count, while increasing our estimate of the number of claims that would be closed with an indemnity payment. Based upon this information, prior year loss reserves for asbestos and environmental were increased. Next, I'll discuss the results of our non insurance operations, which we call Markel Ventures. In 2012, year to date revenues from our non insurance operations were $345,000,000 compared to $229,000,000 in 20 11. Year to date net income to shareholders from our non insurance operations was $8,600,000 in 20 12 compared to $8,900,000 increased in 2012 compared to 2011, primarily due to our acquisitions of WI Holdings Incorporated, Wellchimp in late 2011 and Havco in 2012. Next turning to our investment results. Investment income was up 6% in 2012 12 to just under $208,000,000 Net investment income for the 9 months of 2012 included a favorable change in $2,700,000 in 2011. During 2012, financial markets improved and credit spreads narrowed which favorably impacted our credit default costs. Net realized investment gains were $25,000,000 in both 2012 2011. Net realized gains for the 9 months of 2012 included $4,000,000 of write downs for other than temporary declines in the estimated fair value of investments compared to $15,000,000 in 20 11. Unrealized gains increased unrealized gains increased $330,000,000 before taxes in 2012 driven primarily by increases in equity securities. Tom will go into further detail on investments in his comments. Looking at our total results for 2012, the effective tax rate was 19% in 2012 compared to an effective tax rate of 17% in 2011. The increase is primarily due to anticipating a smaller tax benefit related to tax exempt income as a result of projecting higher pre tax income for 2012 as opposed to 20 11. We reported net income to shareholders of $197,000,000 compared to $92,000,000 in 20 11. Book value per share increased 12% to $3.95 per share at September 30, 2012, up from 3 $52 per share at year end. Finally, I'll make a couple of comments on cash flow and the balance sheet. Net cash provided by operating activities was approximately $240,000,000 for the 9 months ended September 30, 2012 compared to approximately $261,000,000 for the same period of 2011. The decrease in net cash provided by operating activities was due to lower underwriting cash flows for the London Insurance company were approximately $1,100,000,000 at the end of September as compared to a little less than $1,200,000,000 at December 31, 2011. The decrease in invested assets is primarily the result of acquisitions made during 2012. With this, I will turn it over to Mike to further discuss operations. Thanks Anne. Good morning. The 3rd quarter results for both E and S and Specialty divisions were again positive from a gross written premium perspective. As S gross written premium increased 6.9% for the quarter versus 2011 and 6.3% for 9 months versus 2011. The Specialty division gross written premium increased 9.1% for the quarter and 14.9% for 9 months compared to the same period in 2011. The growth in the Specialty Admitted segment was substantially due to the booking of $17,000,000 in the quarter $43,000,000 year to date from the Tomco acquisition, which was announced in January and a 16% increase in volume for workers for the workers' compensation line of 1st comp was offset by reduced volume in our Accident and Health, Property and Casualty and Individual Risk Business in the Specialty division due to the decision to exit certain lines of business. The combined ratio for the E and S segment was 89% for the quarter 91% for 9 months compared to 89% and 88% respectively for the same period in 2011. The combined ratio for the Specialty Admitted segment was 109% for the quarter and 108% for the 9 months compared to 116 percent and 109% for the same periods in 2011. With regards to the expense ratios, the E and S segment expense ratio was flat for the quarter and slightly better for 9 months excluding the impact of the new Dacker County methodology and the increased profit sharing accruals. For the Specialty division, the expense ratio excluding Dacker and higher profit sharing expenses in 2012 was slightly improved for the quarter, but flat year to date compared to 2011. Clearly, one of the highlights for the quarter was our announcement of the new Hagerty Markel relationship. We are extremely pleased that Hagerty's management chose to select Markel as its underwriting partner for the future. As all of you know, Hagerty is widely known as the broker in the collector car and boat insurance business. They are a well managed highly focused specialty firm that continues to grow their business. Markel looks forward to a long and profitable relationship with Nikhil Hagerty and his team. Another important highlight for the specialty division was the appointment on Monday of this week of Greg Thompson as President of Markel Specialty. Greg has been in the insurance business for over 30 years. He led Tomco for 32 years growing it from a small operation to a large program administrator. Markel acquired Tomco on January 1, 2012 and in his new role Greg will report directly to me. I am confident that his leadership and experience will be a great boost for our Specialty division. Additional highlights for the Specialty division include Markel American launching a new product targeted at avid bicyclists, which offers physical damage for high end bicycles and liability and medical payments for the rider. Markel agents new to 1st comp submitted more than 3,000 new accounts year to date resulting in new premiums in excess of 6 figures. Also year to date 611 First Comp agents have signed producer agreements with Markel, which should contribute to our cross selling efforts. Regarding the E and S segment, the recent creation of the Chief Underwriting position is producing positive results. Jeff Lam is proving to be a valuable link between product management and the regions and our product line leadership group. Our E and S division is working closely with our product line management on growing profitable lines of business. During the quarter, we also shifted 13 experienced underwriters to direct underwriting roles in the regions. Our goal is to get more experienced underwriting of our E and S associates attended the annual NAPSLO conference where we held 243 meetings with various agents and brokers. Based on those meetings, we remain very encouraged about our opportunities to continue to grow our E and S business. I'd like to congratulate Scott Color, who heads our West region on his appointment to the NAPSLO Board. I'm also pleased to announce that Phil Frieda joined Markel as Managing Director for Public Entity Business. Phil brings more than 20 years public entity experience to Markel and previously managed a significant book of this business. Our goal is to significantly expand our position in this niche, which has been very profitable for Markel. Also Mike Baughte has been promoted to Managing Director of Casualty. Mike will continue to shoulder his responsibilities for our umbrella business. He has 25 years experience and is well equipped to direct this important line of business from Markel. Throughout North America and the entire company, we continue to work aggressively to reduce costs. Richie and I have asked the leaders of all of our shared services to focus on process improvement and deliver their services more efficiently. These efforts are critical to reducing our expense ratios and our leaders have embraced this initiative. Finally, with regards to the rate environment, rates remain stable, enabling Markel to achieve single digit rate increases on cat property business and workers' compensation. The casualty business remains competitive, but we expect to continue to achieve modest rate increases there as well. At this point, we anticipate a similar rate for 2013. I'll turn the call over to Ritchie to talk about our international operations. Ritchie? Thanks, Mike. Good everyone. I'll start off and talk a little bit about results at Markel International for the 1st 9 months and then I'll cover off a few things at the corporate level. During the 1st 9 months of 2012, Markel International's gross written premiums grew 4% to 705,000,000 dollars There was a little bit of FX effect on that. If you had kept a constant rate of exchange, it would have been about 6% growth. Significant areas of growth continue to be in the energy and catastrophe exposed property areas. This has been partially offset by declines in professional liability lines. Pricing trends that we talked about in the first two quarters have largely continued in the Q3. We continue to see price increases on cat exposed property in the marine energy business. However, as the years progress, price years progressed, price increases in these areas have moderated. Our overall average price increase on renewal business for the 1st 9 months of the year was right around 5%. Cat property increases have generally been between 10% 20% and energy has seen single digit increases. All the other lines have seen relatively stable pricing. Despite price increases in these areas, in many areas the markets still pretty competitive. As an example, while we've been able to maintain or modestly push pricing in our Professional Liability division, premium volume is down against prior year as a result. International's combined ratio for the 9 months of 2012 was an 88. That includes 2 points of expenses related to the adoption of the new DAC accounting standards. Obviously, as opposed to the significant cat losses experienced in 20 11, our 1st 9 months of 2012 results include minimal catastrophe losses with Hurricane Isaac being the largest single event at approximately $3,000,000 The 9 months results also benefited from $119,000,000 of prior year favorable development across a variety of programs. I know we've said it a lot of times and I'll say it again, we always strive to establish reserves that are more likely redundant than deficient. However, the releases we've experienced in the 1st 9 months at Markel International are more than we normally would have expected and are the result of favorable development across a number of the product lines including the 2,001 and prior reserves. Moving to the Markel level. While the 1st 9 months of 2012 as Ann said were benign from a catastrophe standpoint, Markel's 4th quarter will be impacted by Hurricane Sandy, which hit the Northeast U. S. Last week. Our thoughts go out to all those affected, which includes many of our market associates. We're currently working to assist our policyholders with their claims and recovery efforts, but it's still very early in the loss adjustment recovery phase and we're going to have to work over the next several weeks to determine the storm's financial impact to Markel. Finally, I'd like to mention 2 promotions at the Markel Corporation level. Brad Cascaden has been promoted to Executive Vice President of Markel. Brad has been with Markel for over 25 years many of these years as our Chief Actuary. Brad and his team have been instrumental in implementing and safekeeping our reserving philosophy, which has been one cornerstones of our success over the years. Brad will be adding IT to his areas of responsibility and is going to be moving to Richmond to join our senior executive team. Ron Harrig is going to be stepping into the role of Chief Actuary for North America. Ron has been Brad's partner for many years and played a critical role in the recent implementation of our data warehouse. Just like to congratulate both Brad and Ron. I inadvertently failed to mention them on last quarter's call. At this point, I'd like to turn it over to Tom and afterwards we'll be glad to take the questions. Thank you, Richie. In what I'm sure comes as relief to my colleagues, my comments today will be shorter than usual since I think the numbers largely speak for themselves. As Van mentioned earlier, book value per share rose to a new record high of $3.95 as of September 30. Our Our comprehensive income so far in 2012, dollars 426,000,000 created an increase in book value per share of roughly $43 or 12% during the 1st 9 months. I'm very happy with those results and I hope you are as well. As to some details, during the 1st 9 months, the total return on the investment portfolio was 7.4%. Equities enjoyed a return of 15.5% and fixed income produced a positive overall return of 4.5%. At Markel Ventures, we enjoyed a great Q3 and that brought year to date results closer to my expectations. Revenues totaled approximately $45,000,000 and EBITDA totaled roughly $41,000,000 This compares to revenues of $228,000,000 a year ago and EBITDA of roughly $34,000,000 As always, a reconciliation of EBITDA to net income is available on the Markel Corporation website. Additionally, during the quarter, we completed the acquisition of Trumpt Bakery Systems in the Netherlands, which makes equipment for pizza, pastry, pie and bread makers. We also purchased controlling interest in Reading Bakery Systems, which makes bakery equipment for the production of crackers, pretzels, cookies and other baked snacks. They will operate as part of our AMF Bakery Systems business and we think we will do very well with these businesses as long as the Atkins diet doesn't become popular again. Additionally, the growth of Markel Ventures should provide our shareholders with positive returns and cash flows even when we're seeing news headlines that affect the term results of our insurance business. We are relentless in our drive to build the value of the Markel Corporation and Markel Ventures should continue to be a growing force to help make that happen. In the equity portfolio, our focus on high quality securities as well as our commitment to continuing to invest in equities paid off. During the 1st 9 months, we earned 15.5% compared to the S and P 500 all the time. I'm comforted by the fact that we earned these returns in 2012 despite not owning one of the most popular stocks of all time, which contributed several 100 basis points to this year's S and P return. We have a long history of earning excellent investment returns without owning the stocks that most people are talking about. And over time, this approach has served to reduce risk and create outperformance during tough periods. Over the last 23 years, a longer and more meaningful time frame, we've outperformed the S and P 500 by 150 basis points a year. Our equities have also outperformed the Barclays Aggregate Bond Index by 2 80 basis points a year, which demonstrates the value we add to our shareholders by sticking with the relatively unpopular idea of investing in stocks. Equities now represent roughly 62% of our total shareholders' equity, up from 55% at year end. We continue to steadily and regularly add to our equity investment portfolio and we expect to continue to do so. As you've heard from my colleagues, revenues are going up around here and we've got ideas for where to invest the money. In our fixed income operations, we earned a total return of 4.5%. I'll repeat what I've repeated before and be just as surprised to say at this time as the last time. Interest rates moved lower yet again during the Q3, so we over earned the coupon from our bond portfolio. Yet again, I continue to be amazed that this is happening and we remain ever more defensively positioned for this portfolio. Duration for the overall bond portfolio is now at a new record low for us of slightly less than 3 years. The perverse good news is that the opportunity cost of holding an ever shorter duration bond portfolio continues to go down. Given the low rates at the front and long end of the curve, we could not stretch for yield even if we wanted to. There isn't any worthwhile yield out there to be had. As such, we have a portfolio where the difference between what one would call cash and equivalents and longer term fixed income instruments continues to diminish. That means that for all practical purposes, we have a lot of cash and all of the options that go with it such as deploying it at higher rates of return when we get the chance to do so. It also means we're protecting our balance sheet against a rise in interest rates even more than last quarter and last year. You might recognize the familiar sound of these comments. I remain convinced though that this is a prudent way to manage the portfolio. In total, the comprehensive results of our insurance, investment and Markel Ventures operations produced excellent results for your company so far this year. I'm excited as we continue our long term path of building 1 of the world's great companies and we look forward to your questions. With that Kathleen, if you would open the mic for questions. Thank you, sir. Our first question is coming from Adam Klotner of William Blair. Your line is live. Thanks. Good morning, everyone. Nice quarter. Hey, Adam. A couple of different questions. You mentioned that you're discontinuing a couple of lines in the E and S segment A and H some properties from specialty. Roughly how big are those books of business? And if they It was in the specialty segment. Specialty, sorry, specialty meant. We're not exiting. A couple of lines that we're exiting Adam are very small. Okay. They've been lines that we've had for a while. We just aren't growing them. But also in the A and H segment, we're exiting several lines that just haven't been possible for us. And we are shrinking our A and H division because of that. But I don't have the 13? 30? Mostly so. Some of the lines we've not announced yet and that will happen over the course of next year, but those are the smaller lines. I mean they're really small. But all of this is to improve our results and our loss ratio on the Specialty business. Okay. And your accident year loss ratios ex catastrophes again were good and lower than last year. But sequentially, they were up in the 3rd quarter compared to the first half in both E and S and Specialty Admitted. I guess why were they up a little? Adam, I think that's primarily related to adjusting our profit sharing accrual in the Q3, which is something we do each year. We'll be looking at it again this year in Q4 given the storm that just occurred. But I think that's what's driving what you're seeing. Okay. Makes sense. And then as far as first comp, what sort of rate increases are you getting on that book of business? And will that business be more profitable going forward you think? Yes. First comp is trending to exactly the way we want it to trend. And they're in the same boat. They're getting 4% or 5% freight increases. But we're also as I said in the last quarter call changing our geographic mix there. I mean they're on track to do exactly what we right direction. The trends are good. And they're not only adjusting rate where they can, but they're changing their geographic mix. And we're exiting some areas where it's not possible to be in the cockpit. Okay. That was all my questions. Thank you. Thanks. Thanks. Thank you. Our next question is coming from Arash Soleimani from Stifel Nicolaus. Your line is live. Hi, good morning. Good morning. Just a couple of questions here. I know you talked about rates a little bit. But looking at CIB and Markets Cup recently, it looks like they ticked down. So my question is, is that just lumpiness? Or is that indicative of a trend? I just wanted to get your thoughts around that. I would say it's lumpiness. I mean, if you look at the CIB analysis and other analysis some of them should have been ticking down a little bit, but it was minor. It's lumpy. Okay. That's fair. And then I think you mentioned something about the tax rate for the 1st 9 months. But looking at the Q3, what was that attributable to the pretty low tax rate there? Yes. During the Q3, we changed our of the lower rate in the quarter, which ultimately changed the expected tax rate for the year downwards. Okay. Okay. And then just sort of back maybe to the not necessarily the rate environment, but in terms of the specialty business heading back to E and S, is that continuing? Is that slowing down and accelerating? Just wanted to get some thoughts around that. In terms of what the volume or the rate? Just the volume. Standard carriers. You're talking about the E and S segment or you're talking about those specialty segments? I'm sorry. Let me clarify. I was talking more about the carriers sending business back or letting the specialty carriers handle that business more so than they have in the past. Probably the only way I can answer that is that we continue to be pleased with the submission counts that we're getting. And obviously, our E and business is growing based on all of the business that we had. I attended a lot of myself at NAPSLO. We're very encouraged with our relationships with wholesale brokers. And we're seeing some modest improvement there in business pulling back. It's not a certainly not a waterfall at this point. Okay. Great. Thank you so much for your time. Appreciate it. Thank you. The question is coming from Ron Bobman of Capital Returns. Hi, good morning. I have some Sandy E and S questions of a general nature. I was wondering if you could talk a little bit about the prevalence in product, how prevalent flood sub limits appear in that line of business or that sub segment? And then also sort of BI, how often are there sort of constraints or limitations of coverage with respect to BI in core E and S commercial products? Thanks for your thoughts on that subject. Well, Richie is going to jump in on this too. But a lot of it has to do with the perils obviously that are insured under our property policy. And if there is no flood coverage for the property, there's not going to be any flood coverage for business interruption. It depends on risk. We like some flood not a lot of flood. And our exposure is more wind. Yes. And I think Ron, I think it's going to be all across the board. I mean different people are going to do different things in terms of the flood sub limits or the waiting period for the business interruptions. I mean, it's going to be all over the map. But typically as Mike said, there's no flood coverage for the property. There'll be no flood coverage for the DI. And it all depends if people do have flood coverage, there's usually pretty substantial deductibles on those policies. So it's going to be different depending on what the property is and who the coverage is with. Is there anything uniform or common practice in the New York, New Jersey, Pennsylvania E and S market whereby those policies as compared to other geographies had more or less flood sublimiting or there is? There's really nothing standard in the business anywhere. I think that clearly sometimes you think that if you think of the Southern East Coast or you think of earthquake in California, you tend to think that that's a more exposed area. That's a more what area? More exposed area. But in terms of but there's not there's just no standard. I mean, exposure in New York and New Jersey as we unfortunately found out. But everybody knew it was there. It was just a matter of the frequency. Right. And it is a kind of thing where one E and S company may have had a more restrictive form or underwriting selection process? I mean, certainly that could happen. I mean, again, there's no standard. Any other thoughts worth sharing on the topic of BI or flood in E and S or in the context of Sandy? I think we're all just going to have to wait and see how the situation is obviously still developing. I mean the recovery efforts were delayed with the recent storm. So I think it's going to just take everybody a little while to see what the actual situation ends up being. I mean everybody's seen the numbers that the industry numbers that people have been attempting to predict. And I think most people feel those are going to continue to creep upwards. We're just going I think we all just need to let the people work on recovery and let the claims come in and we'll figure out what it looks like. Is it safe thanks for your thoughts. Is it safe to assume that call it the pressure or the occurrence in personal lines with respect to storm sub limits not being wind storm sub limits basically being hysteretted. Is it safe to assume that we're not going to face that in the commercial area in any form? I would say it's going to I mean everybody remembers in Katrina there was obviously lots of legal action and the Departments of Insurance were active in terms of interpreting helping to interpret what they thought coverage meant. So I would suggest and I would assume that it would be a similar situation that you would see people trying to work through what the coverage is. So I expect a very similar situation there. All right. Thanks everybody. Best of luck. Thanks. Thank you. Our question is coming from Ray LaDolla of Macquarie. Thanks and good morning everyone. So just to follow-up a little bit on Sandy. I'm not going to ask estimates or anything of that nature. Just curious in terms of business segments, do you think you'll have exposure in each one? Or is the specialty admitted Thanks. And then I know Tom had mentioned the amount of cash Okay. Thanks. And then I know Tom had mentioned the amount of cash you guys have. Just curious on I know you've been a little bit acquisitive on the in the Markel Ventures side, but just curious in terms of 2 on the insurance side, how is the M and A environment looking these days? Well, I would say on the insurance side, it's normal. I mean, we see things. We have things presented to us. And as we've said on this call before, we may look at 10 or 15 or 20 things before we find one that we quite find attractive. And then of course then it's a matter of can we do a deal that meets our return results requirements. And I'd just echo Mike's comments. I mean in terms of the acquisition environment, fortunately Markel has become a well known acquirer of insurance and other businesses. So as a consequence, we get a lot of inbound phone calls. And the good news about that is to find the one that you really want to do. It helps to look at a lot that you don't. So being part of the flow is very helpful and we continue to see robust flow. Okay. That's helpful. I mean in terms of return requirements, is there any sort of benchmark that we should be thinking about when you guys look acquisitions? Well, before we would lay out a dollar of capital that we have any discretion about at all and this would be the public equity investment portfolio, looking at an insurance company deal, looking at a non insurance company deal. It's got to start with double digits for us to be willing to expend capital and that remains the case. Okay. That's helpful. Thanks again. Thank you. Our next question is coming from John Fox with Canaccord. Your line is live. Yes. Good morning, everyone. Good morning, John. Two questions and a comment. Did I miss it in London, if I'm reading this correct, the written premium was down. Did you comment on that? It's down a little bit in the Q3, John. I mean, it's up year to date. Right. But we've been doing some acquisitions and opening offices over the last several years. And so I mean I think we've kind of gotten to a sort of steady state in London now. And as I said, we've had some nice growth in the cat exposed property and the marine and energy. But the other side of that is we've had a little bit of shrinkage on some of our professional liability lines, because as I was saying, they're still fairly competitive there. Okay. Yes. I just want to follow kind of general lift in rates that would be I mean, am I being too optimistic or the rate increases are not that great or? No. We're still getting we're still seeing rate increases. The other thing and Mike pointed out is we did discontinue our U. S. Finding property earlier in the year. So that obviously is impacting it a little bit. But there's no concern there. It's sort of what we would have expected for the Q3. Okay. And then I know you guys talk year to date, but I have another question on the Q3. And if I'm doing this correct with the accounting change, but the expense ratio looked higher than it has been and I'm just using the 225,000,000 dollars Yes. John, again, I think that's the profit sharing accrual, the incentive comp accrual increase that we did in the 3rd quarter. Okay. Yes. John and this is something that's probably worth just talking about for everybody. Okay. So we have pretty we've had very nice prior year redundancies come through this year. We pay out our profit sharing to the underwriters as the years develop. So as we have more favorable development, we increase the profit sharing accruals. So that prior year development, it's wonderful when it comes through, but it has an impact on the current year expense ratio when we have to put up the bonus accruals. We love having to do that quite honestly. Yes. Terrific. Okay. And the comment is for Tom Gayner. The 10 year treasury yield has declined 1 basis point since the end of the quarter, Tom. Well, the rate of change is flowing there. That's one thank you. Thank you. Thank you. Our next question is coming from Scott Heleniak from RBC Capital Markets. Yeah. Good morning. Good morning, Scott. Just wondering if you any other details on the Hagrid acquisition you made. I'm assuming that's an MGA you convert to fees to premiums. But can you talk about what kind of size that book might be? The only thing that we have said is that if you look at the AM Best guide for 2011, Essentia was for the that we're acquiring a shell company there. Essentia was for the Hagerty business and their previous carrier and they had $170,000,000 in that entity in 2011. Okay. And how much of that do you plan to keep? I don't know if you're going to talk about that. Hagerty is a growing business. Okay. All right. Fair enough. And then I wanted to talk to ask just about the pricing environment. Some of the competitors have talked about how they expect rates to increase pretty significantly next year in the Northeast, just because of what we're seeing with Sandy on property. Do you see that playing out? And if so, do you think that has any kind of staying power? I think we have to wait and see. As I said in my earlier comments, obviously, I can understand why somebody would say that. Right. But we're expecting right now, we're expecting the same kind of rate environment in 2013 that we've seen so far in 2012 and we're planning accordingly. Okay. And then just the final question I had was just on Markel Ventures. I think the target that you gave a few years ago was to reach eventually reach $500,000,000 You're kind of running almost at that run rate $500,000,000 in revenue. And just wondering if there's a particular target where you see that going in the next sort of 5 to 10 years or longer term? So the real target is to lay out capital and produce double digit returns for having done so and to do that in a claw walk run fashion. And we continue to do that. You're correct the run rate of revenue is probably north of $500,000,000 at this point. We continue to see opportunities and we're pleased in large part with the way the businesses are run and developing. But we're also learning lessons as we go along and we'll continue to be prudent. And if I look at 5 or 10 years, I would certainly expect it to be a bigger business, but that will come in lumps depending on our skills and the opportunities we see. All right. Thanks. Thank you. Our next question is coming from Jay Cohen, Bank of America Merrill Lynch. Your line is live. Thank you. A couple of questions. I guess, if you could break out in the international business, roughly what percent of that business would be catastrophe reinsurance? Catastrophe reinsurance is probably about $60,000,000 $70,000,000 book of business. That's very helpful. Thank you. And then secondly, obviously, the Venture's earnings, it's a relatively new business. It's growing. It's hard to pin down quarter to quarter from our standpoint. There does seem to be just looking the last 2 or 3 years some seasonality where the Q3 seems to be bigger from an earnings standpoint. Am I reading too much into this? Well, a little bit. We do have one business that is very concentrated in the Q3, but it's small. I mean that's our dorm room furniture business for colleges and universities. You can think about when students are out of school that is when we scramble and put everything in place and send their bill. So the biggest chunk of earnings is indeed concentrated in the Q3, but that is a relatively small business. The other factor is just sort of the luck of the draw over the last couple of years. The capital equipment business by definition is a lumpy business and we've just happened to hit some larger orders during the Q3, but I wouldn't assign seasonality to those factors. Got it. That's helpful. Thanks, Tom. Thank you. Our next question is coming from David West of Davenport and Company. Good morning. Hey, David. Good morning. Mike, one for you first. In your comments on the casualty environment, you described it as competitive. Do we infer from that that rates are flat? Or are you getting any rate increase at all? We're still getting modest single digit rate increases there. It's just more competitive I think than maybe some of the property lines this year. But we're getting rate increases there Dave. Okay. All right. Very good. Thanks for that clarification. And Tom just looking at Venture the EBITDA margin year to date it's running about 12% versus 15% last year. I guess given your pretty conservative nature the way you both things at Markel and account for them, as you're being acquisitive should you expect some pressure on the EBITDA margin adventures? No, not really. I mean the businesses that we look at typically they have to be double digit EBITDA margins to be attractive to us. So some businesses will have higher EBITDA margins. Oftentimes, they have a little higher capital spending requirement. So you sort of net that out. I mean, I'm looking at the true cash returns. But as a general rule, I want double digit EBITDA margins and would not I mean, I'd be disappointed if they go below that. Thanks so much. Thank you. Our next question is coming from Bob Barnum of KBW. Hi there. Good morning. I just have one question on reinsurance. I know you're not heavy users of reinsurance at all, but just curious if you can tell us what type of property cat reinsurance coverage you have? Well, we have several pieces of reinsurance around profit and cash. And so it's a little hard to kind of give you a thumbnail sketch of it. One of the things you can do AM Best in their reports they put kind of a quick and dirty profile of the reinsurance and that might be worth looking at. But basically we have those risk insurance. So for example, we have some quota share on some of our business. We have some excess of loss reinsurance that will come into play. And then we buy cat reinsurance, which for the majority of our business attaches at about $100,000,000 and then we will participate to some extent in layers as it goes up. But it's not as easy as telling you we've got one tower. We have various towers and we have various types of reinsurance both risk and cat that will respond. Okay. Thanks. I'm showing no further questions Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.