Earnings Call: Q2 2012

Aug 9, 2012

Quarterly report

Greetings and welcome to the Markel Corporation Second Quarter 2012 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Tom Gayner, President of Markel Corporation. Thank you, Mr. Gayner. You may begin. Thank you, Manny. I appreciate it. Good morning and welcome everyone to the Markel Corporation Q2 conference call. We're pleased that you are joining us as we all look forward to sharing the good news of our substantial year to date progress in 2012 in building the value of your company. Over the last several years, we've been telling you about the transformation underway at Markel. We've told you about the growth of our insurance operations through entry into new geographical areas, our new products and our acquisitions. We've told you about our focus on improving the operating efficiencies in our business and how we've restructured the company to increase our revenues from existing customers. We've also told you about our expanded investment activities through Markel Ventures, which now owns controlling interest in about a dozen profitable manufacturing and service businesses. We've told you about how Markel has more ways and more flexibility to create value for our shareholders than ever before. And it is now delightful to begin to show you the fruits of these efforts rather than just telling you about them. As is our custom, our Chief Financial Officer Anne Wilevsky will lay out the overall numbers from the first half. Then my Co Presidents, Mike Crowley and Richie Witt will discuss our domestic and international insurance activities. I will then cover our investment in Markel Ventures operations and then we will open the floor for your questions. Before getting started with today's lineup though, the rules say we need to repeat the Safe Harbor statement, so here it 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 is described under the captions Risk Factors and Safe Harbor and Cautionary Statements 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 reconciliations or in our quarterly report on Form 10 Q. With that, Anne? Thank you, Tom, and good morning, everyone. Before I get to a discussion of our financial financial results, I will point out a couple of accounting items new to the quarter and the year. First, I'm sure you have all noticed some changes in our statements this quarter. Redeemable non controlling interest is a new line item on the balance sheet this quarter. For all periods presented, we have reclassified amounts previously included in the non controlling interest balances for relevant Markel Ventures affiliates to this line item. This is required because some of the Markel Ventures minority shareholders have the option to sell their shares to us in the future generally at multiple of EBITDA. In addition to the reclassification, there is an adjustment recorded on these redeemable non controlling interest balances. As of the end of each reporting period, the carrying value of the redeemable non controlling interest is adjusted to the calculated redemption value if that price is higher than the current carrying value. The purpose of the adjustment is to record the potential cash obligations we may have to the non controlling interest shareholders. This quarter redeemable non controlling interest balances were marked up by $8,200,000 The adjustment is recorded to retained earnings and reduces net income to shareholders when calculating earnings per share. You can find the earnings per share calculation in footnote 2 and additional information regarding our contingent obligations to the non controlling shareholders in footnote 8. The second item I would like to point out was previously discussed in our Q1 conference call filings, but I'd like to remind everyone that we chose to prospectively adopt the new DAC accounting standards. As of June 30, 2012, that we have covered these new items, I will review the 2012 financial results. I will follow the same format in discussing results as in past quarters. I will 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 operating revenues grew 12 percent to $1,400,000,000 in 2012 from $1,300,000,000 in 2011. The increase is due to a 10% increase in revenue from our insurance operations and a 30% 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 6 months of 2012 were just under $1,300,000,000 which is an increase of 9% 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 approximately $1,100,000,000 up 9% to the prior year. Retentions were up slightly in 2012 at 89%. Earned premiums increased 9%. 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 93% for the 1st 6 months of 2012 compared to a 107% in 2011. As a reminder, our 20 11 combined ratio included $99,000,000 or 10 points of underwriting losses related to the catastrophe events, which occurred last year in the U. S, Australia, New Zealand and Japan. Setting aside the impact of the prospective adoption of the new DAC accounting standard in 2012 and the effect of catastrophes in 2011, the improvement in our year to date combined ratio was due to a lower current accident year loss ratio and to more favorable development of prior year's loss reserves within the London Insurance Market segment compared to the same period in 2011. The improvement in the current accident year loss ratio was due to lower attritional current year losses in the Access and Surplus Lines segment and the London Insurance Market segment. Favorable redundancies on prior year's loss reserves increased to $191,000,000 or 18 points of favorable development compared to 100 and $51,000,000 or 16 points of favorable development in 2011. The increase was primarily due to more favorable development of prior year's in the London Insurance Market segment. Favorable development on prior year's losses in 2012 was primarily on the 2008 and 2009 accident years and occurred in a variety of programs across our international divisions. Now 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 $191,000,000 compared to 147 from our non insurance operations, Markel Ventures was $400,000 in 2012 compared to $4,700,000 in 2011. Revenues from Markov Ventures increased in 2012 as compared to 2011, primarily due to our acquisitions of Faking Technology Systems Incorporated and WI Holdings Incorporated in late 2011 as well as Tapco in 2012. Next some information on our investment results. Investment income was up 7% in 2012 to just under 144,000,000 dollars Net investment income for the 6 months of 2012 included a favorable change in the fair value of our credit default swap of $12,000,000 which compares to $600,000 in 20 11. During the Q1 of 2012, financial $20,000,000 compared to $13,000,000 in 2011. Net realized gains for the 6 months of 2012 included $1,000,000 of write downs for other than temporary declines in the estimated fair value of investments as compared to $5,000,000 in 20 11. Unrealized gains increased $194,000,000 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 23% in 20 12 compared to an effective tax rate of 14% in 2011. The increase is primarily due to anticipating a smaller tax benefit related to tax exempt investment income as a result of projecting higher pretax income for 2012 than in 2011. We reported net income to shareholders of $147,000,000 compared to $39,000,000 in 2011. Book value per share increased 8% to $3.80 per share at June 30, 2012 at year end. I'll now make a few comments on cash flow and the balance sheet. Net cash provided by operating activities was approximately 105,000,000 dollars for the 6 months ended June 30, 2012. That compares to approximately $100,000,000 for the same period of 20 11. The increase in net cash provided by operating activities was due to higher cash flows from underwriting activities as a result of higher premium volumes in each of our 3 operating segments, partially offset by increased claim settlement activity during the Q1 of 2012, primarily in the London Insurance market segment. Investments in cash at the holding company were approximately $900,000,000 at June 30 as compared to a little less than $1,200,000,000 at the end of 2011. The decrease in invested assets is primarily the result of acquisitions made during 2012. On July 2, 2012, the company issued $350,000,000 of 10 year 4.9 percent unsecured notes for net proceeds of $347,000,000 A portion of the proceeds was used to redeem the company's 7.5 percent unsecured senior debentures due August 22, 2,046 at a redemption price of $150,000,000 Remaining proceeds will be used to partially refund the repayment of the company's 6.8% unsecured net to be February 15, 2013. At this point, I will turn it over to Mike to further discuss operations. Thanks, Anne. Good morning, everyone. I'm pleased to report that the 2nd quarter North American results were positive from As measured against the Q1, our North American underwriting segments achieved better rate results in the 2nd quarter with rates increasing 4.5% on average versus 3.4% in the Q1. We believe that a better comparison of the progress made in our ability to increase rate is to look back at the same period in 2011. Last year, the majority of North American business segments had rate decreases and the total book generated a minimal increase through the 1st 6 months of 2011. We are making progress. With regards to premium growth, the E and S regions grew by 4.1% bringing growth year to date to 6.1%. The total E and S segment grew by 1.7% for the quarter and 6% year to date. The difference being the growth numbers for the E and S regions and the entire segment, difference is the impact of exited lines of business that were booked in 2011 for the same period. The Specialty Admitted segment grew 25.5 percent for the quarter and was up 18.1% year to date over the same period in 2011. This growth is fueled by the addition of $26,000,000 of Tomco premiums and growth in the Markel First Comp Business. Our existing property and casualty businesses and our agribusiness also were up for the quarter and the year. Markel American, our personal lines division generated 5.9% growth for the quarter and 5% year to date. The combined ratios for all North American segments improved for the quarter versus the same period in 2011. The Specialty Admitted segment improved 5 points from 102 to 100 and 7 from 92 in 2011. The Tomco transition which we closed January 1 this year continues that transition continues in a very positive manner. We still believe that we will book approximately $60,000,000 on Markel paper in this fiscal year. First Cop is executing their plan for improved results through price increases, geographic analysis and reallocating volume to favorable territories plus expense reduction efforts. Cross selling at 1st comp is showing improvement with 145 agents completing their Markel producer agreements bringing the total count of agents who have initiated this process to 602. In June, 89 Markel first comp agents requested a Tomco producer agreement bringing that total to 325 so far this year. In the E and S segment, binders increased at a higher rate than submissions reflecting some improvement in the market as well as some benefit from our efforts to call non performing agents and reduce the receipt of submissions that offer little opportunity to Markel. We completed and released Phase 2 of our broker portal in the E and S division, which included the addition of more than 120 property and casualty class codes in the quick quote rate function for rating, quoting and binding. Across all E and S regions, we conducted a total of 4 89 agency visits, hosted 3 producer events and held underwriting conferences in 4 regions. In addition, during the quarter, we were pleased to announce several new promotions of significance. Jeff Lamb, who has been with Markel for 11 years serving most recently as Head of Underwriting in our Mid South region was promoted to Executive Underwriter for the E and S division. Evans Nash who has been with Markel for 17 years has assumed the role of Managing Director of Wholesale Marketing. Evans recently was in charge of our binding business. He replaces Wendy Houser who is transferring back to our Mid South region to fill the senior position left over by Jeff Lamb's promotion. I'd like to point out that Wendy just did a terrific job in her role as Managing Director Wholesale Marketing and we expect the same results from Wendy in the Mid South region. Each of these individuals brings a wealth of knowledge and talent to their respective positions. Our ability to promote from within is evidence of the depth of talent in Markel. In summary, we're pleased with the performance in North America in the quarter, but we will not lose sight of the fact that continuous improvement is both necessary and possible. I'd like to turn the call over to Richie Witt. Thanks, Mike. Good morning, everybody. During the 1st 6 months of 2012, Markel International's gross written premiums grew 7% to $514,000,000 Significant areas of growth continue continue to be in the marine and energy and our catastrophe exposed property lines both treaty and open market property. We continue to see price increases on catastrophe exposed property and marine and energy business. However, as the year progresses, these price increases appear to be moderating to some extent. Our overall average price increase on renewal business in the 1st 6 months of the year was approximately 5%. Cat property increases have generally been between the 10% 20% range and energy has seen low single digit increases. All the rest of our lines on the international side are relatively stable, maybe a point or 2 up, a point or 2 down, but pretty stable I would say. So despite solid price increases in several of the lines of business in the first half of the year, there is still a pretty competitive market and there is still quite a bit of capacity out there. International's combined ratio for the 1st 6 months of 2012 was 86%. That includes 3 points of expense related to the adoption of the new deferred acquisition cost accounting standard that Ann mentioned. As opposed to the significant cat losses that we experienced in the first half of twenty eleven, our 1st 6 months of 2012 results, they really include minimal catastrophe losses. In addition, Markel International's 2012 combined ratio included $86,000,000 of favorable development on prior year reserves. This included $18,000,000 of takedown on 2,001 and prior year reserves. We always strive to establish reserves that are like more likely redundant than deficient at Markel. However, the releases we experienced in the 1st 6 months are more than we would normally expect. And as Ann said are the result of favorable development across a number of product lines including that 2,001 and prior reserve release that I mentioned. I want to congratulate William Sobein and the international team on this really strong start to the year. Our goal for the second half of the year is going to be to continue to build on this positive momentum, continue to look for opportunities to properly grow the international franchise. Finally, switching gears, I'd also like to mention a significant accomplishment for our IT, Finance, Actuarial and Information Systems teams Information Management teams excuse me. During the Q2, we went live with the 1st phase of a data warehouse, which includes all of our excess and surplus lines business. We're already seeing the benefit of being able to better analyze our excess and surplus lines data. We'll be able to provide our underwriters and product line leaders with significantly better information about production, profitable classes, classes that need corrective action. We believe that over time better access to this information is going to help us gain a competitive advantage. With that, I'd like to turn it over to Tom. Thank you, Ricky. As Ann mentioned earlier, book value per share rose to a new record high of $380 as of June 30. Our comprehensive income so far in 2012 of $279,000,000 created an increase in book value per share of roughly $28 or 8 percent during the 1st 6 months of the year. I'm happy with those results and I hope you are as well. I'm also especially pleased that those results occurred even though we were not hitting on all cylinders. Specifically, while we enjoyed excellent results from our insurance and equity investment operations as well as positive returns from our fixed income portfolio, the results at Markel Ventures were below my expectations. The fact that we can hit new records in book value and compound capital at the rates we did despite not hitting on all cylinders is very encouraging to me. The reality is that it is highly unlikely that encouraged by what we've built and are continuing to build at Markel. We've got more cylinders than we used to and more chances to keep the engine going forward. We'll let the politically minded of you debate whether we built that ourselves or not, but the numbers seem to indicate that somehow or another Markel's long legacy of creating enduring value continues. As to some details, during the first half, the total return on the investment portfolio was 4 0.5%. Equities enjoyed a return of 9.7% and fixed income produced a positive overall return of 2.9%. Markel Ventures consolidated results however as I said were below my expectations for the 1st 6 months. On revenues of approximately $190,000,000 EBITDA totaled 9,400,000 dollars This compares to revenues of $146,000,000 a year ago and EBITDA of $9,900,000 As always, a reconciliation of EBITDA to net income is available on the website. In the equity portfolio, our focus on high quality securities paid off. During the 1st 6 months, we 9.7% compared to the S and P 500 total return of 9.5%. Over the last 15 years, a longer and more meaningful timeframe, we've outperformed the S and P 500 by 170 basis points per year. We've also outperformed the Barclays' aggregate bond index by 2 20 basis points per year, which demonstrates the value we add to our shareholders by investing in stocks. Equities now represent roughly 60% 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. 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 2.9%. Interest rates moved lower debt again during the Q2, 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 with that portfolio. Duration for the overall bond portfolio is now at a record low for us of 3. The perverse good news is that the opportunity cost of holding an ever shorter duration bond portfolio is going down. Given the low rates at the front and long end of the curve, we couldn't stretch for yield even if we wanted to. There just isn't any worthwhile yield out there to be had. As such, we have a portfolio where the differences between what one would call cash and equivalents and fixed income continue to diminish. That means for all practical purposes, we have a lot of cash and all the options that go with cash such as deploying it at higher rates of return as time goes by. It also means we are protecting our balance sheet against the rise in interest rates even more than last quarter last year and I believe that's a good idea. Finally, let me address Martell Ventures. As I mentioned earlier, we grieve the same air as everybody else and the continued passage of caution in the overall economy caused several sales large ticket capital goods to be pushed out beyond original shipment schedules. There's also some undeniable pressure on our order books and sales prices. Additionally and positively, we are undertaking meaningful expansions at several of our units, which means that we are incurring upfront expenses to build for the future. That said, I'm optimistic about the second half of the year. Our current shipment rates are encouraging. Seasonality helps us in the second half and we should begin to see the beginning of the payoff in both sales and earnings from some of the major expansions underway at the Markel Ventures Company. Additionally, we acquired a petroleum interest in HAVCO late during the Q2. HAVCO is the leading manufacturer flooring for the trailers of the 18 wheelers you see out there on the highway. Subsequent to the end of the quarter, we also acquired TRUMPF, a Dutch baking equipment company, which will join our AMF bakery operations and Adreco, a Dutch dredging manufacturer, which joins our Eloctave dredge operations. These additions should begin to contribute to our second half results. As we look out over the balance of 2012 and into 2013, I expect that the current run rate of revenues for the Markel Ventures Companies should approximate $600,000,000 and that they should produce double digit EBITDA on those revenues. I look forward to reporting those sorts of results to you. Additionally, let me take a few minutes to discuss our culture and history of being very conservative in our accounting judgments. As you heard us say, we have a policy of our reserves being more likely to be redundant than deficient. You can see the evidence that we mean what we say in our history of reserve redundancies. During this quarter, new items called non controlling interest and referred to earlier in the comments is yet another example of what I would consider to be extremely conservative accounting and financial presentation and I'd like to explain it as I see it economically. In many of the Markel Ventures acquisitions, we buy less than 100% of the businesses on day 1. In each and every case, agreements with specific valuation mechanisms have been put in place which Markel will acquire additional ownership over time and move towards 100 percent ownership. When we buy 100% of a business, the price we pay logically goes directly onto our balance sheet and consolidates into Markel Corporation's financial statement. Under accounting rules, which are confusing to me, if we buy say 80% of the business, that amount goes on the balance sheet as you would expect. When we buy the remaining 20%, that stub amount is expensed as a period expense through the income statement and doesn't get placed on the balance sheet as an asset. We've already done this once when we bought the additional 20% interest in AMF that increased our ownership to 100%. That transaction took place in 2010. With this non controlling interest item, we're essentially putting up a provision against our comprehensive income and providing for our expectation of what we will pay over the next several years for the additional minority interest we expect to buy in several of the Markel Ventures entities. I'm thankful for my accounting degree, but I never expected to use it like this. I don't think the treatment follows economic logic, but those are the accounting rules as they currently exist and we follow them conservatively. For additional discussion of this topic, I encourage you to read page 15 of the 2011 Berkshire Hathaway annual report where Mr. Buffet writes about this exact issue in conjunction with the ongoing acquisition of additional percentage ownership of this Marmon subsidiary. I apologize for spending this kind of time on these subjects as well as subjecting you to my philosophy about them. And I appreciate our dedicated and hardworking accountants to spend a great deal of time and diligent effort to understand and comply with the increasing codification of accounting rules. But I think it's worth covering. Unless we all understand and appreciate what goes into comprehensive income, accounting premiums occurring at Martell. Over the years, investors have accorded Martell a premium multiple compared to many of our peers. I think this is the result of our history of producing excellent long term returns as measured by the total comprehensive returns of the business as well as having confidence in the conservativism and dependability of our accounting. A premium multiple also comes from the belief and faith that we will continue to be able to allocate our capital well in the future and earn above average returns from doing so as we have in the past. What makes me so excited is that we have more process and opportunities to effectively allocate capital than ever before in our history. We have the imagination, the creativity and the discipline of execution to make our dreams real. I like our hands. We are now all delighted to discuss our comprehensive results that we are reporting today and we hope that you share our optimism about the future. With that, Manny, if you'd be so kind to open the lines for your questions. Thank you. Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. Our first question is from Mark Hughes of SunTrust. Please go ahead. Thank you very much. Good morning. Good morning. Good morning. In terms of pricing, it sounds like things are getting better in North America. In talking about the Marine and Energy and Canex Plus energy and cash flows property though you did suggest that the pace of improvement had moderated recently let's say. What do you think about the broader P and C environment in the U. S? Is it moderating as well? Or are you continuing to see progress? Mark, Ritchie. How are you doing? The thing I think you got to recognize is those lines of business in London, they've probably started strengthening before some of the other lines, some of the U. S. Lines as an example. So the price increases we're getting in energy and the price increases we're getting on the cat exposed stuff that's on top of price increases we were getting last year. So it doesn't surprise me given that there is still a decent amount of capacity out there that we're not going to continue to see increasing price increases unless we leave. So that doesn't surprise me a lot. I think what Mike would tell you and what Mike said about the Q2 is actually we saw some incremental improvement in the price increases in the U. S. Yes. I agree. And I think I don't want anybody to think that the world isn't still competitive out there because it is. But so far, we've been able we've been working hard to get rate and we've been successful in doing it. And I think we also have to keep in mind that the way we price our products, we're not a lot of times we're not the cheapest guy out there. So we're starting from a different is fairly consistent. There's still some lines like the medical malpractice that are very competitive, but we have been making progress. Got you. The systems you talked about the how broadly are those going to be in much more granular or timely is your information going to be implemented? Is that across most or all product lines? And then, how much more granular or timely is your information going to be? Well, right now it's across really the wholesale division. And so it's all the systems. It aggregates all the information up there. Over time, we'd love to expand that to the specialty areas as well. London has their own sort of systems in terms of looking at their information. It's a good bit more granular than what we've had in the past. And we were having to do a lot of work to combine the information. So we're pretty excited about it. We're able to give our underwriters and product line guys a lot more to work with now. Underwriters and product line guys a lot more to work with now to manage their portfolios. So I think it's a real step forward for us. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. For us. Thank you. Thank you. The next question is from Jay Cohen of Bank of America. Please go ahead. Thank you. Good morning. A couple of questions. On the the E and S business, the premium growth slowed pretty considerably from the Q1 growth rate. I'm wondering what's behind that? Well, we did have an earlier close this year than we did last year. That had a little bit of an impact on and I'm not going to quantify that because we'll just have to deal with it next quarter if we did. But I think the growth rate we're comfortable with. As I pointed out, we've been working hard to reduce the number of I don't want to use the word useless, but the number of submissions that we get where in reality we have very little opportunity to write business and we've been more focused on spending our time on stuff that we really want to write. We're starting to make some incremental progress there. Other than that, we feel very good about where we are in the EMS segment. We feel very good about our submission flow. We feel very good about our buying rates and are very optimistic about the rest of the year. I guess, it does jump around a bit quarter to quarter. I mean if I looked at the first half results is that a better indication? Probably. Yes. Jay, this is Richie. We did have a Mike had mentioned we're constantly adding products. But at the same time, we're constantly looking at products that aren't performing and we'll discontinue those if they're not performing. We have a little bit of noise the numbers around some of those exited lines. And so there is a little bit of lumpiness between the 1st and the second quarter. So I think looking at the growth rates over the 1st 6 months is probably a good way to look at it. Yes. I agree. Great. And then the same question in London. I'm not sure if currency played a role here, but the growth rate had been double digit and it slowed down to about 2% on a written basis? We've got some seasonality obviously to the book in London. A lot of the a lot of places where we're getting a lot of the price increases as well as we were writing more premium is the cat exposed business in January 1 and April 1 are big dates for that, but January 1 in particular. So there's a little bit of seasonality there. But again, I'd probably look at the 6 month growth rate and that's probably a pretty good proxy. That's helpful. And then the last question. The tax rate, just given where you made your money and a lot of it came in the underwriting side, obviously, given that huge reserve release. The tax rate to me seemed a little low. And I can talk offline about this, but is there anything in the tax rate that distorted things at all this quarter? No, nothing unusual. And I'm happy to pick it up with you off line, but there's nothing odd in it. Okay. We will follow-up on that then. Thank you. Thanks, Jay. Thank you. The next question is from David West of Davenport. Please go ahead. Good morning. Hey, David. Probably question one for each of you. First Anne on the accounting side on the perspective adaptation of the new DAC expense accounting, I think earlier you estimated about a $43,000,000 impact for the full year. Is that still a good estimate? That's correct. Okay, great. So we'll and then that'll still be primarily Q3 more Q3 than Q4? Right. Right. It will it's front loaded. In the first half of the year, you'll start to see the quarter number come down and the whole year should be about $43,000,000 Great. And then Tom when I look at the cost basis of the portfolio, I guess, June 30 versus year end, it looks like fixed income basis is down, short term down, but equity up. Is that more of a conscious acceleration of monies toward the equity portfolio? There's a mild acceleration, but it's I think actually if you looked at that pattern, you'd find since Q1 of 2009, we've steadily dollar cost average our way to a bigger and bigger equity position. And the way you could really track that if you wanted to is to look at exactly that at the cost basis. And that's a reasonable number to look at because our turnover compared to the high frequency guys at Knight where the low frequency guys at Markel, our turnover statistics are very low. So that would be a relatively accurate way of seeing the dollars we're putting in the equity portfolio. And I guess it's also just a reflection of the alternatives with a low interest rate environment as well. Yes. But I would say it's really more driven by the fact that we see equity opportunities. We think that's where we get the best long term total return over time when we have the balance sheet in the business we'll do it. Great. And Mike kind of turning to the first comp, the premiums written there have increased year over year. The losses that have been recorded this year also higher than last year. Are those still running within your range of expectations? Yes. They are, David. And 1st comp as I said, we've given 1st comp a plan and they are executing the plan right on target with our expectations. As I mentioned in my comments, they're getting rate increases. They're focusing on geographic analysis moving to areas where there's more opportunity for better business and moving out of some areas where historically the performance has not been good. Last year we added a couple of states. We added Alaska. We added Louisiana. They're focused on their expense reduction. So we're very comfortable that they're executing exactly like we want them to. Are you continuing to move away from California? Well, parts of California, but there are parts of California that we're comfortable with. And they are restructuring their book in California. All right. Very good. And Richie on the international side, you mentioned in the Q that 2,008, 2,009 were the years for the favorable development. You mentioned that across a lot of product lines, but could you add a little bit more color to that? Were there any particular lines that made a meaningful contribution to that favorable development? Yes, David. I mean, it really was across product lines there. I know that sounds like a cop out, but it really was. I think part of the issue is as we've been very concerned about how the market has been with declining in those years. So we were very cautious in how we established the reserves. And we've had some pretty darn good developments the last few quarters. So it really was pretty much a crop. It was professional liability. There was actually some in the property. It was marine and energy. And then of course there was some 2,001 and prior where we've been incredibly cautious with those reserves because that's sort of the old legacy business that came to us when we purchased Terra Nova. So we've been very cautious with those and got to the point where we could release some of those reserves. So it was a really good quarter. The only thing I'd say is that was it was a really good quarter and I wouldn't take that into numbers in the 3rd Q4. Thanks very much. Thank you. The next question is from Scott Heleniak with RBC. Please go ahead. Hi. Thanks. I was just wondering the Tonko book you said that you expect $60,000,000 in premium this year. And I was wondering if you had a target you might call this year for next year for 2013. Is it are you going to get to the once you get to $160,000,000 Yes. They the $60,000,000 is a number that we feel we'll book this year. Obviously, Tomco writes a lot more business than that. But we're also transitioning the business to Markel paper from other carriers. And so the ability to forecast exactly what the slippage might be there is something is not something we want to do at this point. But their volume was considerably more than $60,000,000 Okay. And then just want to touch on the MarCO Ventures. Tom, you mentioned some investments that you're making there. I was just wondering if you could elaborate on maybe some of the areas. Is that across the board? Or was there a few specific divisions? It's across the board. I mean in each of the companies there are some pretty dramatic opportunities to expand. There are competitors who have more leveraged balance sheets and are having competitive difficulties to give us the opportunity to pick up the business. So we're undergoing fairly dramatic physical expansion in a lot of the different business units. Okay. And then just one other one too on Markel Ventures. You acquired 2 Dutch companies in the quarter. Is that was that sort of a one off? Or I mean should we continue to expect to see international acquisitions at Markel Ventures? Well, my insurance colleagues were hanging around Holland, so we were in the neighborhood. No, that just sort of happened to be the case. The Markel Ventures Company in fact, so for decades. AMS at the time they purchased it back in 2,005 might have been 10% or 15% international probably that's more like 35% or 40% these days. So a lot of these businesses are seeing international expansion opportunities. And we don't plan on geography. What we plan on is trying to find what the best business opportunities are and going there. Okay. That's helpful. Now that you explained that correlation there. The other one is just wanted to ask about the foreign government exposure you have. Could you just kind of remind us what exactly you have most concentrated, which countries? And whether you've reduced an exposure to any of those any countries at all this year? Or whether that's changed much this year? Well, the good news is that the exposures haven't really changed because we did not have too much in the way of countries where we didn't want to have exposure that you would read about in the headlines now. What we do is we try to match the liabilities of our insurance policies and sterling and we're going to make a claims payment in one of those currencies. We buy bonds in that currency to the best of our ability to match that liability and we buy the very highest credit quality we can. And we take the results as they are. We don't try to engineer a result that would be better than what the natural circumstances would create. Okay. Thanks a lot. Let me come back to your Tomco question. I'm going to I'm going to give you a little more clarity on looking forward to kind of when we acquired Tomco in the prior year, they had placed over $160,000,000 of premium. There are a couple of programs that Tomco wrote, a couple of their smaller programs that we probably won't move to Markel paper because it's a different underwriting appetite than we have. So that could give you a little more clarity on Tomco. Okay. Thanks. Thank you. The next question is from Ron Baughman of Capital Returns. Please go ahead. Hi, good morning and thanks. I had a question on E and S and Aspen. On the E and S front, I was wondering if you would you touched on you're happy with your I think it's sort of app counts and your buying rates. Would you give us some metrics of how those two stats compared Q2 this year versus Q1 this year? Slightly better. I mean it was not a lot of difference. Okay. Marginally better, but not all that dramatic. And then I had a question about Aspen and changes there. Will Aspen in I wonder if you could share the sort of California rate changes for Aspen of late and I don't have those in front of me. We'd be happy to talk about it. But it's not inconsistent with their rate increases elsewhere, which has been in the neighborhood of around 5%. Okay. And will they be should we think of Aspen shrinking this year compared to last? No. You mean in California? Well, either way. Yes, I was thinking California. At this point, they're not shrinking. Okay. In total. Understood. Thank you very much. Thank you. And the next question is from Meyer Fields of Stifel up 300 basis points or so sequentially. Is that a consequence of the reserve releases? It's 2 things. It's the deferred acquisition accounting, which I which time is the point is that? In London. In London. But anyway, we'll find that. The other thing is with the significant reserve releases, we've got bigger bonus accruals going up. So it's kind of interesting there. We you put up you have prior year reserve releases, but there's no such thing as prior year bonus expense that goes against this year's bonus this year's expense ratio. So a little bit of a miss match when you think about it. Okay. And when we calculate the tax rate for the London segment, should we be using UK corporate tax rates? You say that one again, I'm sorry. Yes. Just if we try and break up the expected tax calculations based on the geographic region produced, I guess, is that reasonable? Should we use U. K. Corporate tax rates for 1 in the insurance market segment? No. The way that U. S. Works is it taxes you at 35% on everything you make in the world. So I mean really the thing you should think about probably is we pretty much have a 35% rate other than our muni portfolio, which is not taxed. Okay, great. Thank you. Thank you. Our next question is from Adam Klauber of William Blair. Please go ahead. Thanks. Good morning. Good morning, Adam. What's your overall loss trend in workers' comp for 2012? And I guess what's that trend what are those programs growing right now? The programs you're keeping the main ones? They're pretty stable. During the transition, we're being very careful and trying to be efficient in what we're doing, because we are transitioning from another company's paper to our paper, which requires notices and everything else. But they're very stable. Okay. Okay. And then finally on the Lloyd's reserve release. I mean you've had significant redundancies, but this is a bigger number. Could you do some sort of review? Or I guess why wasn't it that big this quarter? Look, it really we didn't do anything differently. We like I said, I think we were probably if anything we've been fairly cautious the last few years given the decline in the market. And 2,008 and 2,009 has gotten to an age now where you can believe what you're seeing in terms of development. And that really drove it more than anything. We are very, very consistent in terms of how we work with reserves and put up the margin and safety in terms of our reserves. So nothing really changed other than just we've gotten to a point on those 2 accident years where you can believe what you're seeing. Okay. Thank you very much. And I want to just emphasize one point about the reserve release discussion. We're talking about geography on the right hand side of the balance sheet in terms of accounting whether it's in the loss reserves or retained earnings by the time reserves released. The good news is that over on the left hand side of the balance sheet, the assets, the number is unchanged. The cash was collected a long time ago. It's in the investment portfolio. It's making money sort of no matter what geography you have it on the right hand side of the balance sheet. And I think that's a fundamentally important point that goes into the comprehensive economic thinking of the way we run things around here. Great. Thank you. Thank you. We have no further questions in the queue at this time. I would like to turn the floor back over to management for any closing remarks. Thank you very much. We're glad you joined us. We look forward to seeing you again soon. Thanks. Bye bye. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.