Greetings, 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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, welcome, everyone, to the Markel Corporation second quarter conference call. We are 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 past several years, we have been telling you about the transformation underway at Markel. We have told you about the growth of our insurance operations through entry into new geographical areas, our new products, and our acquisitions. We have told you about our focus on improving the operating efficiencies in our business and how we have restructured the company to increase our revenues from existing customers. We have also told you about our expanded investment activities through Markel Ventures, which now owns controlling interests in about a dozen profitable manufacturing and service businesses.
We have told you about how Markel has more ways and more flexibility to create value for our shareholders than ever before. 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 Waleski , will lay out the overall numbers from the first half. My co-presidents, Mike Crowley and Richie Whitt, will discuss our domestic and international insurance activities. I will cover our investment in Markel Ventures operations, 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, 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 is described under the captions "Risk Factors" and "Safe Harbor and Cautionary Statements" 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 on our website at www.markelcorp.com in the investor information section under non-GAAP reconciliations 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 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 new 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 a fixed 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 $8.2 million. The adjustment is recorded through retained earnings and reduces net income to shareholders when calculating earnings per share. You can find the earnings per share calculation in footnote two and additional information regarding our contingent obligations to the non-controlling shareholders in footnote eight. The second item I would like to point out was previously discussed in our first quarter conference call and filing, I'd like to remind everyone that we chose to prospectively adopt the new DAC accounting standard.
As of June 30th, 2012, we have recognized approximately $35 million or three points of expenses related to the prospective adoption of the new standard. Now 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 two together with a discussion of our total results. Our total operating revenue grew 12% to $1.4 billion in 2012 from $1.3 billion 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 six months of 2012 were just under $1.3 billion, which is an increase of 9% compared to 2011. The increase in 2012 was due to higher gross premium volume in each of our three operating segments. Net written premiums were approximately $1.1 billion, 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 three 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 first six months of 2012 compared to a 107% in 2011.
As a reminder, our 2011 combined ratio included $99 million, 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 effects of catastrophe from 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 Excess and Surplus Line Segment and the London insurance market segment.
Favorable redundancies on prior years' loss reserve increased to $191 million or 18 points of favorable development compared to $151 million for 16 points of favorable development in 2011. The increase was primarily due to more favorable development of prior years' losses in the London insurance market segment. Favorable development on prior years' 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 million compared to $147 million in 2011. Year-to-date net income to shareholders from our non-insurance operations, Markel Ventures, was $400,000 in 2012 compared to $4.7 million in 2011.
Revenues from Markel Ventures increased in 2012 as compared to 2011, primarily due to our acquisitions of Baking Technology Systems Incorporated and WI Holdings Incorporated in late 2011, as well as Havco in 2012. Next, some information on our investment results. Investment income was up 7% in 2012 to just under $144 million. Net investment income for the six months of 2012 included a favorable change in the fair value of our credit default swap of $12 million, which compares to $600,000 in 2011. During the first quarter of 2012, financial markets improved and credit spreads narrowed, which favorably impacted this credit default swap. Net realized investment gains were $20 million compared to $13 million in 2011. Net realized gains for the six months of 2012 included $1 million of write-downs for other than temporary declines in the estimated fair value of investments as compared to $5 million in 2011.
Unrealized gains increased $194 million 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 2012 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 pre-tax income for 2012 than in 2011. We reported net income to shareholders of $147 million compared to $39 million in 2011. Book value per share increased 8% to $380 per share at June 30th, 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 million for the six months ended June 30th, 2012.
That compares to approximately $100 million for the same period of 2011. 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 three operating segments, partially offset by increased claim settlement activity during the first quarter of 2012, primarily in the London insurance market segment. Investments in cash at the holding company were approximately $900 million at June 30th as compared to a little less than $1.2 billion at the end of 2011. The decrease in invested assets is primarily the result of acquisitions made during 2012. On July 2nd, 2012, the company issued $350 million of 10-year 4.9% unsecured notes for net proceeds of $347 million.
A portion of the proceeds was used to redeem the company's 7.5% unsecured senior debentures due August 22nd, 2046, at a redemption price of $150 million. Remaining proceeds will be used to partially refund the repayment of the company's 6.8% unsecured notes due February 15th, 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 second quarter North American results were positive from a rate, premium, and underwriting perspective. When measured against the first quarter, our North American underwriting segment achieved better rate results in the second quarter, with rates increasing 4.5% on average versus 3.4% in the first quarter. 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 first six months of 2011. We are making progress. With regards to premium growth, the E&S regions grew by 4.1%, bringing growth year-to-date to 6.1%. The total E&S segment grew by 1.7% for the quarter and 6% year-to-date.
The difference being the growth numbers for the E&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% 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 million of THOMCO premiums and growth in the Markel FirstComp 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 five points from 102 from 107. The E&S segment improved five points as well to 87 from 92 in 2011.
The THOMCO transition, which we closed January 1 of this year, that transition continues in a very positive manner. We still believe that we will book approximately $60 million on Markel paper in this fiscal year. FirstComp 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 FirstComp 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 FirstComp agents requested a THOMCO producer agreement, bringing that total to 325 so far this year.
In the E&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 cull non-performing agents and reduce the receipt of submissions that offer little opportunity to Markel. We completed and released phase two of our broker portal in the E&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&S regions, we conducted a total of 489 agency visits, hosted three producer events, and held underwriting conferences in four 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&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 of 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 Whitt.
Thanks, Mike. Good morning, everybody. During the first six months of 2012, Markel International's gross written premiums grew 7% to $514 million. Significant areas of growth continue to be in 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. As the year progressed, these price increases appear to be moderating to some extent. Our overall average price increase on renewal business in the first six months of the year was approximately 5%. Cat property increases have generally been between the 10% and 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 two up, a point or two down, but pretty stable, I would say.
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 first six months of 2012 was 86%. That includes 3 points of expense related to the adoption of the new deferred acquisition cost accounting standard that Anne mentioned. As opposed to the significant cat losses that we experienced in the first half of 2011, our first six months of 2012 results, they really include minimal catastrophe losses. In addition, Markel International's 2012 combined ratio included $86 million of favorable development on prior year reserves. This included $18 million of takedown on 2001 and prior year reserves. We always strive to establish reserves that are more likely redundant than deficient at Markel.
The releases we experienced in the first six months are more than we would normally expect and/or, as Anne said, are the result of favorable development across a number of product lines, including that 2001 and prior reserve release that I mentioned. I want to congratulate William Stovin 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 profitably grow the international franchise. Finally, switching gears, I'd also like to mention a significant accomplishment for our IT, finance, actuarial, and information management teams. During the second quarter, we went live with the first 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 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, Richie. As Anne mentioned earlier, book value per share rose to a new record high of $380 as of June 30th. Our comprehensive income so far in 2012 of $279 million created an increase in book value per share of roughly $28 or 8% during the first six 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 of 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 we will ever hit on every single cylinder at once. That said, look at the returns we've earned given that fact. I'm 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 4.5%. Equities enjoyed a return of 9.7%. Fixed income produced a positive overall return of 2.9%. Markel Ventures' consolidated results, however, as I said, were below my expectations for the first six months.
On revenues of approximately $190 million, EBITDA totaled $9.4 million. This compares to revenues of $146 million a year ago and EBITDA of $9.9 million. 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 first six months, we earned 9.7% compared to the S&P 500 total return of 9.5%. Over the last 15 years, a longer and more meaningful timeframe, we've outperformed the S&P 500 by 170 basis points per year. We've also outperformed the Barclays Aggregate Bond Index by 220 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. We expect to continue to do so. Revenues are going up around here. 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 yet again during the second quarter. We over-earned the coupon from our bond portfolio. Yet again, I continue to be amazed that this is happening. We remain ever more defensively positioned with that portfolio. Duration for the overall bond portfolio is now at a record low for us of three. 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 equivalent 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 a rise in interest rates even more than last quarter and last year. I believe that's a good idea. Finally, let me address Markel Ventures. As I mentioned earlier, we breathe the same air as everybody else. The continued passage of caution in the overall economy caused several sales of large-ticket capital goods to be pushed out beyond original shipment schedules.
There's also some undeniable pressure on our order books and sales process. 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. 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 companies. We acquired a controlling interest in Havco late during the second quarter. Havco is the leading manufacturer of 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 Tromp, a Dutch baking equipment company, which will join our AMF Bakery operations, and Idreco, a Dutch dredging manufacturer, which joins our Ellicott 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 million, and that they should produce double-digit EBITDA on those revenues. I look forward to reporting those sorts of results to you. Let me take a few minutes to discuss our culture and history of being very conservative in our accounting judgments. As you've heard me 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 redundancy. During this quarter, a new item called non-controlling interest, referred to earlier in the comments, is yet another example of what I would consider to be extremely conservative accounting and financial presentation. 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 one. In each and every case, agreements with specific valuation mechanisms have been put in place by which Markel will acquire additional ownership over time and move towards 100% 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 statements.
Under accounting rules, which are confusing to me, if we buy, say, 80% of a business, that amount goes on the balance sheet as you would expect. When we buy the remaining 20%, that stub amount is 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, 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. Buffett writes about this exact issue in conjunction with the ongoing acquisition of additional percentage ownership of his 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 who spend a great deal of time and diligent effort to understand and comply with the increasing codification of accounting rules. I think it's worth covering.
Unless we all understand and appreciate what goes into comprehensive income, accounting treatment, and total economic returns, we won't fully understand and be able to reasonably measure the economics occurring at Markel. Over the years, investors have accorded Markel 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 as to open the line for your questions. Thank you.
Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Mark Hughes of SunTrust. Please go ahead.
Thank you very much. Good morning.
Morning.
Morning.
In terms of the pricing, it sounds like things are getting better in North America. In talking about the marine and energy and cat exposed property, though you did suggest that the pace of improvement has moderated recently, let's say. What do you think about the broader P&C environment in the U.S.? Is it moderating as well or are you continuing to see progress?
Mark, Richie, how you doing? The thing I think you got to recognize is, those lines of business in London, they probably started strengthening before some of the other lines, some of the U.S. lines as an example. 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. 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 start to have events or something else happens, capacity starts to leave. That doesn't surprise me a lot. I think what Mike would tell you and what Mike said about the second quarter is actually we saw some incremental improvement in the price increases in the U.S.
Yeah, I agree. I don't want anybody to think that the world isn't still competitive out there because it is. So far, we've been working hard to get rate, and we've been successful in doing it. I think we also have to keep in mind that the way we price our products, a lot of times we're not the cheapest guy out there. We're starting from a different position than maybe some of our competitors are that might be reporting larger rate increases. The market is fairly consistent. There's still some lines, like the medical malpractice, that are very competitive. We have been making progress.
Got you. The systems you talked about, how broadly are those going to be implemented? Is it going to across most or all product lines? How much more granular or timely is your information going to be?
Well, right now it's across really the wholesale division. 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. We were having to do a lot of work to combine the information. We're pretty excited about it. We're able to give our underwriters and product line guys a lot more to work with now to manage their portfolios. I think it's a real step forward 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 questions. On the E&S business, the premium growth slowed pretty considerably from the first quarter 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 it. I'm not going to quantify that because we'll just have to deal with it next quarter if we did. 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. We've been more focused on spending our time on stuff that we really want to write, and we're starting to make some incremental progress there. Other than that, we feel very good about where we are in the E&S segment. We feel very good about our submission flow. We feel very good about our bind rates.
We are very optimistic about the rest of the year.
I guess it does jump around a bit quarter to quarter. If I looked at the first half result, is that a better indication?
Probably.
Yeah. Jay, this is Richie. Mike had mentioned we're constantly adding products, 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 in the numbers around some of those exited lines. There is a little bit of lumpiness between the first and the second quarter. I think looking at the growth rates over the first six months is probably a good way to look at it.
Yeah, I agree.
Great. The same question in London. I'm not sure if currency played a role here, the growth rate had been double digit, it slowed down to about 2% on a written basis.
We've got some seasonality, obviously, to the book in London. 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. There's a little bit of seasonality there. Again, I'd probably look at the six-month growth rate, and that's probably a pretty good proxy.
That's helpful. 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. I can talk offline about this, but is there anything in the tax rate that distorted things at all this quarter?
No, nothing unusual. I'm happy to pick it up with you offline, 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 a question, one for each of you. First, Anne, on the accounting side, on the prospective adaptation of the new DAC expense accounting. I think earlier you estimated about a $43 million impact for the full year. Is that still a good estimate?
That's correct.
Okay, great. That'll still be primarily more third quarter than Q4 impact.
Right. It's front-loaded in the first half of the year. You'll start to see the quarter number come down, the whole year should be about $43 million.
Great. Tom, when I look at the cost basis of the portfolio, I guess, June 30th 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, I think actually, if you looked at that pattern, you'd find since the first quarter of 2009, we've steadily dollar cost average our way into a bigger and bigger equity position. The way you could really track that, if you wanted to, is to look at exactly that, the cost basis. That's a reasonable number to look at because our turnover, compared to the high-frequency guys at night, we're the low-frequency guys at Markel. Our turnover positions are very low. That would be a relatively accurate way of seeing the dollars we're putting in the equity portfolio.
I guess it's also just a reflection of the alternatives with the low interest rate environment as well.
Yeah, 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, we have the balance sheet and the business flow to do it.
Great. Mike, kind of turning to the FirstComp, the premiums written there have increased year-over-year. The losses that have been recorded this year are also higher than last year. Are those still running within your range of expectations?
Yeah, they are, David. FirstComp, as I said, we've given FirstComp 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 a 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 states. We added Alaska, we added Louisiana. They're focused on their expense reduction. 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, there are parts of California that we're comfortable with, they are restructuring their book in California.
All right, very good. Richie, on the international side, you mentioned in the Form 10-Q that 2008, 2009 were the years for the favorable development. You mentioned it cut 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?
Yeah, David, 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 we've been very concerned about how the market was declining in those years. We were very cautious in how we established the reserve. We've had some pretty darn good developments the last few quarters. It really was pretty much across. It was professional liability. There was actually some in the property. It was marine and energy. Then, of course, there was some 2001 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. We've been very cautious with those and got to the point where we could release some of those reserves. It was a really good quarter.
The only thing I'd say is it was a really good quarter, and I wouldn't bake that into numbers in the third and fourth quarter.
Thanks very much.
Thank you. The next question is from Scott Heleniak with RBC. Please go ahead.
Thanks. I was just wondering, the THOMCO book, you said that you expect $60 million in premium this year, was wondering if you had a target you might build this year for next year, for 2013.
The 60 is a number that we feel we'll book this year. Obviously, THOMCO writes a lot more business than that, but we're also transitioning the business to Markel paper from other carriers. The ability to forecast exactly what the slippage might be there is not something we want to do at this point. Their volume was considerably more than $60 million.
Mm-hmm. Okay. Just want to touch on the Markel 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 you're talking about?
It's across the board. 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 that give us the opportunity to pick up some businesses. We're undergoing fairly dramatic physical expansion in a lot of the different business units.
Okay. Just one other one, too, on Markel Ventures. You acquired two Dutch companies in the quarter. Was that sort of a one-off, or should we continue to expect to see international acquisitions of Markel Ventures?
Well, my insurance colleagues were hanging around Holland, we were in the neighborhood. No, that just sort of happened to be the case. The Markel Ventures companies, in fact, Ellicott is the most dramatic example, but they do 80% of their revenue outside the U.S. It's a global company and has been so for decades. AMF, at the time we purchased it back in 2005, might have been 10% or 15% international. Probably that's more like 35% or 40% these days. 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 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 in which countries, and whether you've reduced any exposure to 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 we take in premiums in euros or 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. 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 THOMCO question. I'm going to give you a little more clarity on looking forward. When we acquired THOMCO in the prior year, they had placed over $160 million of premium. There are a couple of programs that THOMCO 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. That could give you a little more clarity on THOMCO.
Okay, thanks.
Thank you. The next question is from Ron Bobman of Capital Returns. Please go ahead.
Hi, good morning, and thanks. I had a question on E&S and Aspen. On the E&S front, I was wondering, you touched on you're happy with your, I think it's sort of accounts 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. It was not a lot of difference.
Okay. Marginally better, but not all that dramatic. Then I had a question about Aspen and changes there. I wonder if you could share the sort of California rate changes for Aspen of late.
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. Should we think of Aspen shrinking this year compared to last?
No. Oh, you mean in California?
Well, either way. Yeah, I was thinking California.
At this point, they're not shrinking.
Okay.
In total.
Okay, understood. Thank you very much.
Thank you. As a reminder, ladies and gentlemen, it is star one to ask a question. The next question is from Meyer Shields of Stifel Nicolaus. Please go ahead.
Thanks. Good morning, everyone.
Hey, Meyer.
Good morning.
Two quick questions, if I can. One, on the international or the London side, we saw the expense ratio up 300 basis points or so sequentially. Is that a consequence of the reserve releases?
It's two things. It's the deferred acquisition accounting, which, how many points is that?
In London?
In London. We'll find that. The other thing is with the significant reserve releases, we've got bigger bonus accruals going up. It's kind of interesting there. You have prior year reserve releases, there's no such thing as prior year bonus expense. It goes against this year's expense ratio. A little bit of a mismatch when you think about it.
Okay. When we calculate the tax rate for the London segment, should we be using U.K. corporate tax rates?
Can you say that one again? I'm sorry.
Yeah. 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 a London insurance market segment?
The way the U.S. works is it taxes you at 35% on everything you make in the world. Really the thing you should think about probably is, we pretty much have a 35% rate other than our Munich portfolio.
Munich portfolio, yeah.
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 in California workers' comp?
I don't have those with me. I don't have that information here.
Okay. That's fine. As far as THOMCO, 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 at what we're doing because we are transitioning from another company's paper to our paper, which requires notices and everything else. They're very stable.
Okay. Finally, on the Lloyd's reserve release. You've had significant redundancies, this is a bigger number. Could you do some sort of review, or I guess why it wasn't that big this quarter?
Well, really, we didn't do anything differently. 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. 2008 and 2009 have 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 consistent in terms of how we work with reserves and put up the margin of safety in terms of our reserves. Nothing really changed other than just we've gotten to a point on those two accident years where you can believe what you're seeing.
Okay. Thank you very much.
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 are currently. 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 for the no matter what geography you have it on the right-hand side of the balance sheet. 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 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.