Markel's Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 8.13 | About: Markel Corporation (MKL)

Markel Corporation (NYSE:MKL)

Q2 2013 Earnings Conference Call

August 8, 2013 10:30 am ET

Executives

Thomas S. Gayner – President and Chief Investment Officer

Anne G. Waleski – Vice President and Chief Financial Officer

F. Michael Crowley – President and Co-Chief Operating Officer

Richard R. Whitt III – President and Co-Chief Operating Officer

Analysts

Jay A. Cohen – Bank of America Merrill Lynch

Mark Dwelle – RBC Capital Markets

Adam Klauber – William Blair & Co. LLC

Doug R. Mewhirter – SunTrust Robinson Humphrey

Dave McKinley West – Davenport & Company LLC

Operator

Greetings and welcome to the Markel Corporation Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Tom Gayner; President and CIO. Thank you Mr. Gayner, you may now begin.

Thomas S. Gayner

Thank you. Good morning everyone. My name is Tom Gayner and along with my colleagues, Anne Waleski, Mike Crowley, and Richie Whitt, we welcome you to the Markel Corporation’s second quarter 2013 conference call.

Before we get started, we are required to remind you of the Safe Harbor provision. 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 included under the caption 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 on the call today. You may find a reconciliation to GAAP of these measures on our website at www.markelcorp.com in our quarterly reports on Form 10-Q.

Thanks again for joining us this morning. We are very excited to share our report card from the first half from Markel, or as I like to call it Markel 3.0 for the first half of 2013. The headlines of the first half is that we enjoyed positive comprehensive income during the first half of 2013.

The components driving that result includes underwriting profitability and our insurance businesses, organic growth in our premium volumes as well as the growth derived from acquisitions, positive investment returns from our portfolio, operating profitability in our Markel ventures businesses and organic growth in those operations as well as the growth from acquisition. Those statements are true even after factoring in the transactional expenses incurred to put Markel 3.0 on the field.

We could not be happier with our prospects and the long-term opportunity embedded in this company. We’ve got multiple cylinders to power the economic engine and this reports shows forward progress and the promise of how it should work in the future.

While this report contains a lot of moving pieces and discrete items, we will attempt to provide as much priority as we can to run each of them, and provide you with the reasons as to why we are so excited about our future.

We hope you agree and we look forward to the thoughtful questions from our fellow owners of this firm as well as the collections from those who buy and sell the stock. With that as prologue, let’s start opening up this lovely (inaudible) of the report with Anne to review of our first half results. Anne?

Anne G. Waleski

Thank you Tom and good morning everyone. We look to say we had a very busy quarter with major activities focused on our May 1, 2013 acquisition of Alterra. The transaction was valued at $3.3 billion including $2.3 billion of Markel common stock and other equity considerations and $1 billion of cash. The transaction resulted in approximately $560 million of goodwill and the intangible assets.

At the May 1, 2013 transaction date, all of our assets and liabilities including identifiable intangible assets were set fair value with the excess of transaction, consideration, ever fair value allocated to goodwill. The three months significant adjustments were to investments, license annuity benefits and unpaid loses in LAE reserves.

At acquisition, the amortized cost basis as a fixed maturity portfolio was reset in fair value, and the difference between the estimated per value and the par value of the securities with $552 million. So we also fair value adjustments to life and annuity benefit reserve of $330 million, and to unpaid losses in LAE reserves of $147 million. You can find details on these adjustments in footnote 3 of our Form 10-Q.

The integration process is in full swing and we are just beginning to see the benefits of our enhanced sale. Despite significant merger and acquisition costs in the period we met our goal of generating underwriting process on a consolidated basis for the first six months of 2013. The legacy Markel operations had strong performance and the legacy operations performed within expectation.

Our total operating revenues grew 30% to $1.9 billion in 2013 from $1.4 billion in 2012. The increase is due to a 27% increase in revenue from our insurance operations, which includes $225 million from the Alterra segment. And a 64% increase in revenue from our non-insurance operations which we refer to as Markel Ventures.

Moving into the underwriting results for the first six months of 2013, gross written premiums of $1.8 billion, which is an increase of 42% as compared to 2012. The increase in 2013 was primarily due to the inclusion of $342 million of gross written premium from the Alterra segment from May 1, 2013. As well as higher gross premium volume in the Specialty Admitted in Excess and Surplus Lines segment. The increase in Specialty Admitted is driven by premiums from the Hagerty and THOMCO businesses. Within the Excess and Surplus Lines segment, the increase is due in part to the impact of more favorable rates and improving economic conditions.

Net written premiums for 2013 were approximately $1.6 billion, up 39% to the prior year for the same reasons I just mentioned.

Net retention was down in the first six months of 2013 at 86%, compared to 89% in 2012. The decrease in net retention is due to the inclusion of premiums written by Alterra from May 1, 2013. Net retention in the Alterra segment for the period was 74%. Excluding premiums written by Alterra, consolidated net retention would have been flat over the period.

Earned premiums increased 29%. The increase in 2013 was primarily due to the inclusion of $225 million of earned premium from the Alterra segment from May 1, 2013 as well as higher earned premium volume in the Specialty Admitted and Excess and Surplus Lines segments. The increase in Specialty Admitted is due to earned premiums from the Hagerty and THOMCO businesses.

Our combined ratio was 98% for the first six months of 2013 as compared to 93% in 2012. The increase in the combined ratio for the quarter was driven by a higher current accident year loss ratio and less favorable development on prior year loss reserve compared to the same periods in 2012. The results were also impacted by the Alterra segment, which added 8 points to the year-to-date combined ratio, primarily driven by $62 million of merger and acquisition costs and $25 million of statutory losses.

Favorable redundancies on prior year loss reserve increased to $204 million or 15 points of favorable development, compared to $191 million or 18 points of favorable development in 2012.

The expense ratio for 2012 was unfavorably impacted by the perspective adoption of the new DAC accounting standards, which increased our expenses by $35 million or 3 points on the 2012 combined ratio.

Next, I will discuss the results of Markel Ventures. In the first six months of 2013, revenue from Markel Ventures were $314 million, compared to $191 million in 2012. Net income to shareholders from Markel Ventures was $11 million in 2013, compared to $400,000 in 2012. EBITDA was $40 million in 2013, compared to $19 million in 2012.

Revenues net income to shareholders and EBITDA from Markel Ventures increased in the first six months of 2013, compared to the same period of 2012, primarily as a result of more favorable results at AMF Bakery Systems and our acquisitions of Havco and Reading Bakery Systems in 2012.

Turning to our investment results next; investment income was flat in 2013 and just under $143 million. Net investment income for 2013 included $17 million of investment income attributable to Alterra, which was net of $21 million in amortization expense from adjusting Alterra’s fixed maturity securities to a new amortized cost basis at the Acquisition Date.

Net investment income also included favorable changes in the fair value of our credit default swap of $7 million as compared to $12 million in 2012. Excluding the impact of Alterra and the credit default swap, net investment income for the first six months of 2013 decreased compared to 2012 due in part to a decrease in our fixed maturities and an increase in our cash and cash equivalents.

Net realized investment gains for 2013 were $30 million, compared to $20 million in 2012. Included in that realized gains were $5 million of other-than-temporary impairments as compared to $1 million in 2012.

Tom will go into further details on investments in Markel Ventures in his comments.

Looking on our total results for the six months, the effective tax rate was 28% in 2013 compared to an effective tax rate of 23% in 2012. The increase is primarily due to the impact of including the operations of Alterra and the company’s effective tax rate beginning an acquisition and anticipating a smaller tax benefit related to tax-exempt investment income as a result of projecting higher per-tax income for 2013 than in 2012.

We reported net income to shareholders of $170 million compared to $147 million in 2012. Book value per share increased to approximately 12% to $452 per share at June 30, 2013 from $404 per share at year-end. The increase is primarily due to equity issued in connection with the acquisition of Alterra and $109 million of comprehensive income to shareholders.

Finally, I’ll make a couple of comments on the cash flows and balance sheet. Net cash provided by operating activities was $240 million for the six months ended June 30, 2013, as compared to $105 million for the same period of 2012. The increase was driven by higher cash flows from underwriting activities at Markel Ventures. The increase in cash flows from underwriting activities is primarily a result of the acquisition of Alterra, which added $38 million in the period and higher premium volume primarily in our Specialty Admitted and Excess and Surplus Lines segments.

Higher cash flows from Markel Ventures were driven by increases at AMF Bakery Systems and our acquisitions of Havco and Reading Bakery Systems in 2012. Invested assets at the holding company were $1.1 billion at June 30, 2013, compared to $1.4 billion at December 31, 2012. The decrease in invested assets is primarily the result of cash paid for the Alterra acquisitions, partially offset by a net increase in debt.

At this point, I would like to turn it over to Mike to further discuss operations.

F. Michael Crowley

Thanks, Anne. Good morning. The result for the second quarter of 2013 for legacy Markel in North America was slightly better than the first quarter of 2013. Gross written premiums for North America increased 28.9% for the quarter and are up 25% for the first six months of 2013. The combined ratios improved as well.

The E&S segment had another excellent quarter with gross written premiums increasing 20% year-over-year compared to the second quarter of 2012 and 15% year-to-date compared to the first six months of 2012. For the third consecutive quarter all five regions of the E&S segment grew their volumes.

The E&S segment’s combined ratio for the second quarter was 76.9%, an improvement of 9.8 points from the same period of 2012. The combined ratio for the first six months was 77.2%, an improvement of 14.4 points compared to 2012. Prior year losses were favorable due to higher takedowns consistent with Markel’s historical practices.

The effective results reflect our continued efforts to improve efficiency and service to our agents and brokers. It also reflects our ongoing marketing initiatives designed to better inform our agents and brokers about our underwriting appetide and as a result (inaudible) ratio has increased.

The Specialty Admitted segment’s gross written premium increased 41% year-over-year for the second quarter compared to 2012 and 39% for the first six months compared to 2012. This increase, as Anne mentioned, was driven by the THOMCO and Hagerty lines of business.

Second quarter combined ratio for the Specialty segment was 106% or 3.4 points higher than the same period in 2012. This increase is the result of higher expenses on the Hagerty and THOMCO business, which is a lagging earned premium. Excluding Hagerty and THOMCO, the expense ratio would have been five points lower for the quarter.

The combined ratio for the first six months was 107%, slightly lower than the same period in 2012. During the quarter, we implemented a plan to exit certain unprofitable lines of business and non-renewed specific accounts within lines that we will continue to underwrite. This action is the result of an in-depth review that we discussed in our first quarter comments. We fully expect these actions will improve our underwriting results going forward to discuss the division.

I’d also like to point out that our FirstComp business continues to grow and the results were improving according to our original long-term plans. Under Gerry Albanese’s leadership, our product line leadership grew, as we have got in the process of integrating Alterra’s underwriting operations into Markel. Leaders for wholesale property or the account property, professional liability, inland marine and large account casualty have been announced.

In addition, the senior underwriting teams for all of these lines of business have been meeting and working together to develop and implement a consistent and coordinative approach to our business going forward. With regards to the current rate environment, overall rate increases continue as getting paid averaging about 4% across all lines of business.

I’d like to take this opportunity to congratulate and thank our Markel associates and all the former Alterra associates for their efforts during the integration process. I’m very confident in saying that we are well on our way to being one Markel.

I’ll turn the call over to Richie Whitt for his comments.

Richard R. Whitt III

Thanks Mike, good morning everyone. I will start my comments with Markel International’s first half results and then give an update on the Alterra acquisition. Markel International had a good first half of 2013.

Gross written premiums increased about 2% to $526 million. Areas of growth included our specialty book as well as our Singapore and Netherlands branch offices. Second quarter pricing trends were largely in line with recent quarters modest price increases. Despite some price increases, however in many areas the market remains competitive rather it was particularly so in the cat property reinsurance, professional liability, retail and equine areas.

Property tax reinsurance rates began to fall in the second quarter as additional competition including ILS markets impacted rates. Florida rates were up anywhere from 10% to 25% at June 1 renewal, and as a result Markel International and legacy Alterra reduced writings of Florida business at 6/1/2013.

International combined ratio for the first six months of 2013 was a 90%. This compared to 86% in the first three months of 2012, the increase was primarily due to less favorable loss reserve development in 2013. Both years benefitted from relatively light catastrophe losses.

Now I’d like to give an update on our acquisition of Alterra as Anne said, we close the deal on May 1, and everyone remains focused on a smooth transition and realizing the potential of the new Markel. We continue to make good progress bringing the two organizations together. We successfully combined our New York, Richmond and London offices at this point. We are also rebranding all operations at Markel, and hope to have this effort completed in all major markets before the end of the year.

We’ve kicked off our budgeting and planning process for 2014. This process is going to give all operations both new and old the opportunity to work together to layout a strategy for 2014 and beyond. We’ve already had several meetings and more scheduled to provide opportunities for our people to work together to capitalize on our now expanded capabilities.

While we have made tremendous strides in a very short period of time, we still have some work to do with our systems in our back office processes in order to fully integrate all elements of legacy Alterra operations into our business model.

As such we are managing and reporting the results of legacy Alterra operations which include U.S. insurance, Alterra Lloyd's global insurance and global reinsurance at our Alterra segments and expect to continue to do this through the remainder of the year.

We have several initiatives in place to make the changes in systems and processes which are required in order to implement a new segment reporting structure for the first quarter of 2014. You are also going to note that we have included the legacy Alterra life and annuity book, which is in runoff in our other discontinued line segments.

We will continue to make good progress on the integration, despite modest cat losses in the second quarter, Alterra legacy operations are performing as expected through the first half of the year.

With that I would like to turn it over to Tom.

Thomas S. Gayner

Thank you, Richie. There are three things I hope to cover this morning. Item one, from the past investment results in our public securities portfolio; item two, the first half results of Markel Ventures; and item three, an update on our initial actions for the investments that we added as a result of the Alterra acquisition.

As to item one, I am very pleased with our results through the first half. In our equity and fixed income portfolio, we earned total returns of 16.7%, a negative 1% respectively. The total return for the portfolio was 2.5%. The equity results speak for themselves and I am very happy with them.

While equity returns always have them and always will be volatile, we’ve earned a double digit return on our equity portfolio for the last 24 years of roughly 200 basis points advantage compared to the S&P 500 Index. No steroids were used to achieve this result.

In addition to the out performance of the S&P 500 equity index, each returns produced roughly 450 basis points advantage compared to the Barclays Aggregate Fixed Income Index. We have added value both through our allocation decision to own equity as opposed to fixed income alternative and we have added value in our specific equity selection. We have also been very cost efficient and kept those funds working for the benefit of our shareholders with low portfolio turnover.

In our equity portfolio, the past indication for the last several years, we continue to predominantly earn a set of high quality global successful company. In many cases, the dividend yields comfortably exceed what we can earn on the appropriate fixed income alternative. We also continued our long standing process of step by step measure and selective addition to the equity portfolio through the first half.

In our fixed income portfolio, we continue to maintain a portfolio of the highest credit quality that we confine and we continue to let the duration roll in. Last quarter, I repeated our belief that we remain of the opinion that interest rates were too less and it’s the risk of longer term fixed income commitments outweighs the rewards.

During the second quarter, interest rates did indeed begin to move upwards a little bit and we minimized the damage that would otherwise have occurred with our short duration stands.

The portfolio assets we added from the Alterra acquisition for longer duration and the combination moved our duration out approximately 1 year from approximately 3.5 years, 4.5 years. We will continue to let that number roll in a bit and we will move it out only when interest rates and perspective returns look better to us than they do now.

The net of all this is that our fixed income portfolio could go to a Halloween party dressed as catch and pull it of. Halloween can be scary and I’m sacred at what could happen in interest rates. So we’ll continue to be cautious and deliberate as we redeploy the portfolio.

At June 30, equities represented 44% of our shareholders equity compared to 62% at year-end. That decrease in percentage comes solely from the map of adding in the Alterra balance sheet. We invested in equity during the first half, the investment returns was strongly positive and the value of the fixed income portfolio went down due to the rise in interest rates.

The addition of the Alterra portfolio was a sluggish de facto of reallocation of investment allocations and it is appropriate for you to assume that we will methodically and opportunistically guide the equity investment percentage back up for the historical levels over time.

On slide number 2, Markel Ventures operations also performed very well during the first half. Our other revenues of $330 million in income statement are largely those of the Ventures company, as revenue were 50% compared to last year. Other expenses were $293 million up 47% from a year ago.

Now those expenses include non-cash amortization and purchase accounting entries that are separate and distinct from the ongoing operational performance of the Markel Ventures company. As such, these EBITDA and our internal review management of incorporation, and EBITDA more than doubled at $40 million in the first half, compared to $19 million in the previous year. A reconciliation of EBITDA to GAAP net income is available on our website (inaudible).

We are very happy with the underlying economic performance of our Markel Insurance Company. While the overall business environment remained extremely competitive and full of challenges. The managers and teams of Markel Insurance Company are doing a first grade job of building our businesses. They operate with the Markel style just like our insurance operations, and the focus on market leadership, excellence, innovations and having fun while doing so is paying off.

We expect to continue to add the Markel Ventures over the long-term.

Item 3, as we look to date roughly 70 days ago when we close the Alterra transaction, the biggest single challenge and opportunity on the asset side of the development is the future investment in capital allocation decisions that we will make with the (inaudible) player as well as the cash we can generated by our (inaudible).

We’ll invest the money in the same way we’ve invested in the opportunity over the years, specifically on the fixed income side, we’ll continue to focus on high credit quality and maintaining the duration that a shorter than our national position of matching duration of the insurance liability for our bond portfolio.

We will continue to do this until interest rates are higher than they are today, and we feel that we are being paid appropriately to accept the risks as longer term commitments.

On the equity side, we have a vibrant and profitable insurance place. We have a strong balance sheet and plenty of cash. Our constraint is finding appropriate idea and protecting and preserve it in balance sheet.

For now, we will continue to methodically invest in many of the same securities that we are already in. Prices are still reasonable in many cases and we will pick up investments yield from the dividend it self.

Given the position of Markel 3.0, we have a lot of dry powder and we look to deploy that aggressively as opportunities present themselves.

We’re in an unique and what I think is a fantastic position and we are capital deployed, and what to be a rapidly changing environment. Rest assured is the same discipline as thought processes we used for decades to make these decisions for Markel to remain in place. I am optimistic about our opportunities to make positive capital allocation decision in the coming years as well as the ultimate results from Markel shareholders.

I know that analyst report for Markel really is a comprehensive income in their estimates and discussions about it, but comprehensive income is what we as shareholders ultimately receive (inaudible). As such that is what we focus on the issue with this company.

I am pleased to report positive comprehensive income for the first half of 2013 despite the transition expenses, and we are optimistic about our opportunities going forward.

With that I’d like to open the floor for questions. Open up the floor?

Question-and-Answer Session

Operator

Thank you, sir. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question is from the line of Jay Cohen of Bank of America Merrill Lynch. Please proceed with your question.

Jay A. Cohen – Bank of America Merrill Lynch

Thank you. Several questions, I guess the first, in the Specialty Admitted area, you had mentioned that there is some lines that you were exiting, I am wondering, if you can give us a sense of how big they are as we go forward as how the meaningful impact on revenue growth there.

F. Michael Crowley

There are several lines. Jay, it’s Mike. There are several lines. None of them among themselves are significant. I think over a 12-month period, you could see possibly a $40 million reduction there in those lines of business in total all lines included.

Jay A. Cohen – Bank of America Merrill Lynch

Got it. That’s very helpful. And then, I guess on the E&S side, the premium growth accelerated pretty noticeably from the first quarter. In the Q1 call you mentioned pricing economy. From the pricing standpoint it didn’t sound like the price increases accelerated that all and the economic growth doesn’t seem terribly robust. I’m wondering kind of really what’s behind that acceleration.

F. Michael Crowley

It’s pretty simply, Jay. We expect the last few years refreshing our product, improving our service to our agents. We are well past the one top mark initiative that we had for the E&S operations, and quite frankly our relationships and our efficiency and our proven products and our service to our larger wholesale brokers, and really all of our wholesale brokers is paying off significant organic growth, this organic growth.

Jay A. Cohen – Bank of America Merrill Lynch

Got it. Thank you.

Operator

Our next question is from the line of Mark Dwelle of RBC Capital Markets. Please proceed with your question.

Mark Dwelle – RBC Capital Markets

Yeah, good morning. A couple of questions. Starting the investment portfolio, there is the asset adjustment there and a portion of that, I guess is, I’m understanding the footnote, is going to be amortized back through investment income. Can you just talk through the mechanics of that a little bit and maybe give some sense of from a big picture standpoint, how long of a time this will kind of be a drag during [offset] against the investment income line?

Anne G. Waleski

Yeah, Mark, basically you have to add the acquisition date, take the portfolio to fair market value and then over the life of the assets you amortize it back down to par. So it will be amortizing over the course of the duration of the portfolios. So call it, 4.5 years to 5 years.

Richard R. Whitt III

Yeah, this Mark, this is Richie. If you think about it, what you’ve basically done is converted the Alterra portfolio. You had a book yield coming through the P&L. Now you have the effective yield coming through the P&L with the amortization of that premium.

Mark Dwelle – RBC Capital Markets

And again, just to kind of clarify slightly with the numbers. The mark on that adjustment was $552 million and it’s $552 million that’s being amortized over whatever the duration would be. And then, I guess I would presume that to the extent that Tom decided to sell some of those that would accelerate that more quickly?

Thomas S. Gayner

That’s correct.

Richard R. Whitt III

Okay. And then, I guess likewise I would suppose that that won’t be a terribly straight line oriented amortization. It’s going to depend – apart from the sales, it’s going to be a weighted duration. So some of that may stay with us for well beyond 4.5 years.

Anne G. Waleski

That’s a fair statement. It’s little hard to predict.

Mark Dwelle – RBC Capital Markets

Right. Okay. That’s my first question. My second question, more for Tom, also staying on the investment portfolio. Is the investment income earnings in the quarter setting aside these amortizations and the additions of the Alterra portion. It seems like the legacy Markel portion was relatively lower. Were you more oriented into cash just an anticipation of the deal. Was there some aspect of the positioning that would have made, the core of the legacy run rate lower than unlike would have expected otherwise?

Richard R. Whitt III

I mean we were building cash in expectation of the transaction, but also have been building cash by rolling down the duration curve. So that’s just a math of what interest rates are short end of the curve.

Mark Dwelle – RBC Capital Markets

Okay, you certainly did that. The second question related to the portfolio repositioning. I mean, I have been watching you in action for many years I know that you will do this opportunistically, and kind of take the opportunity as the market allows. But you have a general timeline in terms of the assets classes that came over from Alterra that may not be completely consistent with things that you historically owned in terms of recognizing any gains or losses there or would you more plan to just what that mature off and then redirect the proceeds.

Richard R. Whitt III

I would tell you in the context in sort of a 80:20 rule. 80% of it things that we are comfortable just sort of letting them roll off and 20% we are taking and will continue to take some more immediate actions, but in the 80:20 rule context, it can roll off appropriately.

Mark Dwelle – RBC Capital Markets

Okay. All right. I guess that is my last question on the investment portfolio. One other question kind of more operationally. In one of the notes with respect to the Specialty Admitted business, just been unclear about this impact of the (inaudible) I said there was $62 million that I wasn’t clear whether that related to just Hagerty premiums in the quarter, whether that was Hagerty, THOMCO, and any other acquisition premiums in the quarter within the Specialty Admitted business?

Richard R. Whitt III

It’s primarily on Hagerty.

Mark Dwelle – RBC Capital Markets

Okay. I will stop there. Thank you.

Operator

Our next question is from the line of Adam Klauber from William Blair. Please go ahead with your questions.

Adam Klauber – William Blair & Co. LLC

Hi, thanks. Good morning. Couple of different questions. Specialty Admitted are the combined ratio support THOMCO and FirstComp still running above the average of the segment, and are they improving from what they were last year?

Richard R. Whitt III

Yeah, they both are but keep in mind that we also continue to build the margin and safety and all of those lines of business. Hagerty, THOMCO and FirstComp. Hagerty, I mean that’s easy. THOMCO has some extra expenses in it. The FirstComp business as I said earlier on the call is absolutely trimmed these exactly according to plans. So we feel very good about the actions they have taken with regards to their expense ratio, with regard to geography in which they claim it. In August they are allowing less California business, so we feel good about that plan.

Again, overall the specialty segment, we’ve taken our newly hard look, if all products that we have and all of the programs that we have in specialty and the plan that we put in place and initiate it beginning in the second quarter, is that very specific plan targeted to improve the overall profitability in specialty.

Adam Klauber – William Blair & Co. LLC

So is FirstComp today running, is the margin better today than it was a year ago or is it still running pretty high combined.

Richard R. Whitt III

Yes, it’s been.

Adam Klauber – William Blair & Co. LLC

Okay. That’s helpful. As you take a look at the Alterra business, which you’ve been doing, but it sounds like, you’re still looking at the positioning. Do you think that business will be trimmed down over the next year or so, compared to what it was last year?

Thomas S. Gayner

That’s hard to say, I can tell you that some of our lines of business in the large property, the larger excess casualty, the inland marine the large professional lines. They are tracking right according to their plan.

Richard R. Whitt III

This is Richie. Volume was pretty flat for the first six months. There is probably just like in our existing or legacy Markel operations. There is always launch and looking at and may be getting out but at the same time there is things you’re doing or things that are growing. So I think it’s a little early to say, whether we think it would trend down or trend up.

Adam Klauber – William Blair & Co. LLC

Okay. Is it fair to say, you’re still accessing that or do you think you have a pretty good feel for it now.

Alan I. Kirshner

Well, we are looking at it as if I think we’re starting our 2014 planning, I mean that’s where we are really going to dig into it, and the leaders of the various areas, that’s and what they think the business plan looks like for next year. So I think a lot better in the next couple of months as we work through that process.

Thomas S. Gayner

Let me just add there, I just got back from (inaudible) earlier in the week meeting with several of the leaders of these lines of business. One, we continue to be very, very impressed with the talent and with those leaders and with their philosophy with regards to the line of business, which is very consistent with Markel historically.

So at this stage of the beginning, it’d be hard for us to say that we could feel much better about the talents that joined Markel.

Adam Klauber – William Blair & Co. LLC

Okay. And then as far as the favorable reserves development, just on a ballpark basis, is that pretty evenly spread over the last say seven, eight years, before we just say there is more in the old years versus say the last three, four years?

Thomas S. Gayner

In other words, what accident years?

Adam Klauber – William Blair & Co. LLC

Yeah, is it a ballpark?

Anne G. Waleski

For the release of this quarter?

Adam Klauber – William Blair & Co. LLC

Yeah.

Anne G. Waleski

They were spread pretty good, E&S was primarily in the casualty business and now it’s over a number of years and what I meant, it was primarily the 2010 years.

Adam Klauber – William Blair & Co. LLC

Okay, that’s helpful. And then just a technical question; on the amortization of the investment income, will that increase or decrease investment income?

Anne G. Waleski

It decreases investment income.

Adam Klauber – William Blair & Co. LLC

Okay, that’s what I thought. Just double checking. Thank you very much.

Thomas S. Gayner

Thank you.

Operator

Thank you (Operator Instructions) Our next question is from the line of Jay Cohen with Bank of America Merrill Lynch. Please proceed with your question.

Jay A. Cohen – Bank of America Merrill Lynch

Yeah, thank you. Just a quick follow up on that last one. When you do amortize the mark on the investments, will it show up in the net investment income or will it I should say if it’s right. If you sell some of these securities and the amortization is accelerated, does that amortization show up in realized gains or realized losses or in net investment income?

Anne G. Waleski

Right. So in the instance of the sale of a security, it will flow through realized.

Jay A. Cohen – Bank of America Merrill Lynch

Okay, that makes sense. Doesn’t always make sense? That does. The second question is on the Alterra business; as you had mentioned with THOMCO and Hagerty, you go through the prices once you buy something you’re getting that business on to your reserving methodology, which almost always is more conservative, what we hear is more conservative. I recall in the past with Markel International that process took several years. How long would you expect that process to take with Alterra?

Richard R. Whitt III

Jay, it’s Richie. You bring up Terra Nova and I’ll just say that the fact that that one took longer than we expected. We had issues this year, recall with Terra Nova and that probably took us longer than we would have expected. At this point in the game and I think we said that when we were talking about the due diligence we did on Alterra, we felt pretty good with the level of reserve they have. We didn’t feel like they were quite to the standard or the margin of safety that we like to carry. So I think we’re really – it certainly doesn’t get done in a year, but as we sit here today over the next two years to three years that’s what I’m sort of thinking.

Jay A. Cohen – Bank of America Merrill Lynch

That’s helpful. You mean the Terra Nova deal was clearly done in a different time. So I see the difference and I appreciate the response. Thanks.

Richard R. Whitt III

No problem.

Operator

Thank you. (Operator Instructions) Our next is from the line of Doug Mewhirter with SunTrust. Please go ahead with your question.

Doug R. Mewhirter – SunTrust Robinson Humphrey

Hi, good morning. Just two questions. First, Mike about workers’ comp market I know that the rates across the board has been outperforming P&C rate trends. How did you see that sustainability of those trends and also do you feel that Markel’s participation in that is sort of outperforming the market or lagging in the market?

F. Michael Crowley

Rate increases in the FirstComp are getting our little higher than some of our lines of business. We don’t see that changing in the near future, but it’s hard to predict. Obviously we’d like for it continue for proceed in the future, and it’s hard to tell, but the rate increases we are hearing from FirstComp is that higher than some of our other lines of business. So keep in mind we’re also changing the geographic spread there too, which is also positive.

Doug R. Mewhirter – SunTrust Robinson Humphrey

Okay. Thanks for that. And my second and final question is more of a Opera related question. Roughly what was the overlap between, I guess what used to be called the original Opera U.S. business on the smaller side, and your Markel’s E&S business? I know you did compete in certain areas.

F. Michael Crowley

We did and the E&S business is being rolled into our E&S operations here and our teams are working together to deal with any potential (inaudible) that we have, will be consistent in our underwriting philosophy there. With regards to other lines of business, not as much at all. Alterra, on the large casualty, large property to pressure line, for the most part plays an area will be in that.

Richard R. Whitt III

This is Richie. And one of the nice things we’re seeing is even where we may be let’s say, both on an account, well it’s a bigger organization now, so we don’t immediately have to say, we had to drop one of these participations. We can have a bigger appetite now with $6 billion of capital and also what we’ve done and said, we’re trying and keeping both.

Doug R. Mewhirter – SunTrust Robinson Humphrey

Yes, it’s definitely a fair point. So, and just actually the clarification. Mike, you mentioned that you will be rolling the smaller Alterra E&S into the Markel units, for reporting purposes will it still be in the Alterra segment though?

F. Michael Crowley

For the rest of this year.

Unidentified Analyst

Okay, thanks. That’s all my questions.

Operator

Thank you. Our next question is from the line of David West from Davenport & Company. Please go ahead with your question.

Dave McKinley West – Davenport & Company LLC

Good morning. Question for Tom; as you are facing these investment alternatives, what do you see in terms of valuation levels for public equities versus what you are seeing in the private equity market when you evaluate the opportunities for ventures?

Thomas S. Gayner

I would say in the private world, prices have gone up more dramatically and more consistently across the board than will be the case in the public world. So the multiples we were paying of the things that we have bought in Markel Ventures in 2008, 2009, that generally speaking is not available right now and you will notice, we have been quiet, we haven’t bought any major platforms within Markel Ventures for a while.

In public market, there tends to be more dispersion. So you will have headlines of things that are wildly popular and wildly unpopular at the same time, so making a general statement meaningless in the public markets than it does in the private market. So I’d say the opportunity set is actually a little bigger on the public side than the private side as we said right now.

David McKinley West – Davenport & Company LLC

Thanks very much.

Operator

Thank you. At this time, there are no additional questions. I’d like to turn the floor back to management for closing comments.

Thomas S. Gayner

Thank you very much. Thank you for joining us. We look forward to catching with you again soon. Bye-bye.

Operator

This concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation.

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Markel Corp (MKL): Q2 EPS of $2.24 misses by $3.96. (PR)