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Markel Corporation (NYSE:MKL)

Q3 2013 Earnings Conference Call

November 7, 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

Doug R. Mewhirter – SunTrust Robinson Humphrey

Mark A. Dwelle – RBC Capital Markets LLC

Jay A. Cohen – Bank of America Merrill Lynch

Operator

Greetings and welcome to the Markel Corporation Third 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 Chief Investment Officer. Thank you Mr. Gayner, you may now begin.

Thomas S. Gayner

Thank you Rob, good morning and welcome to the Markel Corporation’s 2013 Third Quarter Conference Call. My name is Tom Gayner and it is my privilege to greet you this morning and in a few minutes turn things over to our Chief Financial Officer, Anne Waleski and Markel’s President Mike Crowley, and Richie Whitt to give you a brief update on how things are going at Markel these days.

Prior to this call, I was speaking with one of your long term shareholders about the conference call process. He told me that he has owned the stock for about 20 years and never called us boring. He said that he really couldn’t imagine us saying anything in the call that would change his mind about Markel and his long term ownership of the stock. I thank him for his honesty and actually I agreed with him.

Our number one goal is actually to still be here 20 years from now and delivering a report just as boring as this one. I suspect what he told me was true for our loyal and long-term owners to provide us with the capital we need to run this business. I also suspect that it’s true for shorter term followers of the stock that usually issue a sell recommendation immediately following this call.

As the character Inigo Montoya, said in The Princess Bride, "You keep using that word. I do not think it means what you think it does." I will leave it to those of you who would access to the long term part of the Markel to decide which unchanging point of view you wish to embrace. The force that propelled the 27 year line on the chart up into the right cannot be found within the sales of the spread sheet.

Boring works for me when it comes to talking about our financial results. We shouldn’t be that excited. I am all in favor of grinding it out along the same lines that we have through our 27 years as a public company. We’ve looked after the capital that you entrusted to us and we produced wonderful returns for the owners of this company.

Roughly speaking, the longer you run Markel the more money you can make. And by the way while it may look and sound boring, I can promise you that we’re having a lot of fun doing this. There is not a day that goes by when I don’t hear laughter at this office. In addition, they are some days when we are simply stunned by what happens. I promise you that we are not bored.

With that frontloaded, let me we share with you what I do consider the lower scoring part of our cost. I’ll ready the Safe Harbor statement, but our General Counsel advises me to share with you.

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 in 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. Anne?

Anne G. Waleski

Thank you Tom. For always starting it out with a smile. Good morning everyone. I’m pleased to be able to report as for the first nine of 2013, we have produced strong underwriting results and profitable growth in each of our legacy operating segments.

The Alterra segment has performed within our expectations and we continue to make significant progress with the integration efforts. Our total operating revenues grew 39% to $3 billion in 2013, from $2.2 billion in 2012. The increase is due to 42% increase in revenues from our insurance operations which includes $531 million from the Alterra segment and a 41% increase in revenues from our non-insurance operations which we refer to as Markel Ventures.

Moving into the underwriting results, for the nine months of 2013 gross written premiums were $2.9 billion, which is an increase of 53% compared to 2012. The increase in 2013 was primarily due to $715 million of premiums from the Alterra segment since our acquisitions on May 1, 2013.

As well as higher gross premium volume in the Specialty Admitted and 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 $2.4 billion, up 39% in 2012. The decrease in net retention is due to the inclusion of premiums written by Alterra from May 1 to September 30, 2013. Net retention in the Alterra segment for the five months period was 66%, net retention for the legacy Markel segments was flat at 89% for both periods.

Earned premium increased 44%, the increase in 2013 was primarily due to $530 of earned premium from the Alterra segment for the five months ended September 30, 2013. As well as higher earned premium volume in the Specialty Admitted and Excess and Surplus Lines segment. The increase in Specialty Admitted is due to earned premium from the Hagerty and THOMCO businesses.

Our combined ratio was 97% for the first nine months of 2013 compared to 96% in 2012. The increase in the combined ratio was due to a lower prior year loss ratio, partially offset by a lower expense ratio compared to the same period in 2012.

During 2013, the benefit of the favorable development of prior years loss reserves had less of an impact on a combined ratio when compared to same period of 2012 due to higher earned premiums in the current year.

The 2013 results were also impacted by the Alterra segment which added six points to the combined ratio, driven by $70 million of merger and acquisition costs and $33 million of catastrophe losses.

Favorable development on prior year loss reserves increased to $281 million or 12 points compared to $260 million or 17 points in 2012. These amounts are net of $28 million from 2013 and $31 million from 2012 of unfavorable loss reserves development on asbestos and environmental exposures within our discontinued line segment. We completed our annual review of these exposures during the third quarter of each year. During this year’s review, our expectation of the severity of the outcome for new claims increased and we increased our prior year loss reserves accordingly.

The decrease in the expense ratio for the first nine months of 2013 is driven by higher earned premiums in our legacy Markel segments compared to 2012. Partially offset by the impact of the merger and acquisition costs incurred by Alterra. Excluding the merger and acquisition costs incurred in 2013, the inclusion of Alterra had a favorable impact on the expense ratio.

Alterra has had a lower expense ratio than we have had historically. The expense ratio for 2012 was unfavorably impacted by the prospective adoptions of the new tax changes, which increased our expenses by $41 million or three points on the 2012 combined ratio.

Next I will discuss the results of Markel Ventures. In the first nine months of 2013, revenue from Markel Ventures were $486 million, compared to $345 million in 2012. Net income to shareholders from Markel Ventures was $18 million in 2013, compared to $9 million in 2012. EBITDA was $64 million in 2013, as compared to $41 million in 2012.

Revenues net income to shareholders and EBITDA from Markel Ventures increased in the first nine 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 in 2012 of Havco and Reading Bakery Systems.

Next, we will turn to the investment results; investment income was up in 2013 to just under $229 million. Net investment income for 2013 included $44 million of investment income attributable to Alterra, which was net of $39 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 swaps of $9 million as compared to $14 million for 2012. Excluding the impact of Alterra and the credit default swap, net investment income for the first nine months of 2013 decreased compared to 2012 due in part to a decrease in our fixed maturities and an increase in cash and cash equivalents.

Net realized investment gains for 2013 were $41 million, compared to $25 million in 2012. Included in net realized gains were $4.6 million of other-than-temporary impairments as compared to $4.2 million in 2012.

Tom will discuss investments further in his comments.

Looking on our total results for the nine months, our effective tax rate was 28% in 2013 compared to an effective tax rate of 19% in 2012. The increase is primarily due to higher estimated earnings tax of a 35% rate and due to 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 $182 million compared to $197 million in 2012. Book value per share increased approximately 14% to $462 per share at September 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 $253 million of comprehensive income to shareholders.

Finally, I’ll make few comments about cash flow and the balance sheet. Net cash provided by operating activities was $542 million for the nine months ended September 30, 2013, compared to $240 million for the same period of 2012. The increase was driven by higher cash flows from underwriting activities and investment activities Markel.

The increase in cash flows from underwriting activities is primarily a result of the acquisition of Alterra and higher premium volumes primarily in our Specialty Admitted and Excess and Surplus Lines segments.

Investment assets at the holding company were $1.1 million at September 30 compared to $1.4 billion at year-end. The decrease in invested assets in primary the result of tax paid to the Alterra acquisition, partially offset by a net increase in debt.

I’d like to close with a quick mentions of the announcement we made on October 9, 2013 regarding our offer to acquire Abbey Protection, the UK based integrated specialist insurance and consultancy group. Subject to shareholder and regulatory approval we expect this to close in January of 2014.

At this point, I will turn it over to Mike to further discuss our operations.

F. Michael Crowley

Thanks, Anne. Good morning. The results for legacy Markel in North American operations were very good and continued the positive trend we have seen during the year. Gross written premiums increased 20% over prior year in the third quarter and 23% over prior year for nine months. The E&S segment performed well again with all five regions again showing growth.

Gross written premiums increased 8% over prior year in the quarter and 12% over prior year for nine months. The combined ratio of 87.8% for the quarter was one point better than prior year. The year-to-date combined ratio was 80.9% compared to 90.6% for the same period last year.

The segment continues to improve operating efficiency and the service to our agents and brokers. Confirmation of this comes from the fact that annualized premiums for underwriter is up over 85 and the upgrades to our wholesale broker portal continues to receive very positive reviews from our agents.

During the quarter we announced that John Latham, President of E&S division will be stepping down from that position on January 1, 2014. John has regarding his plans for retirement in 2016 and has elected to spent his final few years at Markel, focusing on our customers and assisting me with special projects. John has done exceptional job, leading the E&S division over the past few years and he is to be commended for the excellence results that we are realizing today. I want to emphasize that this is John’s decision and he will remain fully engaged at Markel over the next couple of years.

Bryan Sanders, who joined Markel with the Alterra acquisition, will assume the position of President of the E&S division effective January 1, 2014. Bryan has a long and outstanding background in the wholesale world, having been in the industry for 32 years. He has served in leadership positions with Alterra, Max Specialty and HRH where we worked together. We have great confidence that Bryan will continue the success achieved under John’s leadership.

The Specialty Admitted segment also had a very good quarter. Gross written premiums increased 37% over prior year in the quarter and are up 39% year-to-date. The combined ratio in the quarter was 90.3% or 18.9 points lower than prior year due to lower calendar year loss ratio and higher prior year takedowns. Year-to-date combined ratio was 100.8% or 7.4 points lower than prior year.

As Anne said, the increase in gross written premiums in the Specialty division continues to be driven by the Hagerty and THOMCO business. In the segment we’re continuing to execute on our plans, which we talked about in the last call, to exit unprofitable lines and non-renew certain specific accounts in order to improve our underwriting results for this segment.

With regards to our product line leadership, head by Gerry Albanese, the quarter was very active. We are continuing to execute plans integrating the Alterra professionals within the product line leadership group. We have successfully combined brokerage property teams and have adopted the Alterra property integration tools and pricing for the book.

Mike Miller who led the Marine Practice at Alterra has expanded his responsibilities and has both Commercial Ocean Marine and Inland Marine reporting to him. We continue to hold joint product line meetings across the organization, bringing professionals from Alterra, Wholesale Specialty and Markel International to foster closer working relationships among these professionals. Meetings have been held with the marine property, professional liability and energy teams.

We’ve also now consolidated all of our homeowner spaces into our Personal Lines division under Audrey Hanken’s leadership. Previously this business resided in Alterra Wholesale and our Personal Lines operations. The only comment that I will make regarding to the rate environment is that we are still getting modest rate increases although down slightly from earlier end of year.

In summary, a very good quarter for North American operations. I’ll now turn the call over to Richie Whitt.

Richard R. Whitt, III

Thanks, Mike and good morning everyone. I’ll start my comments with Markel International’s nine-month results and then give an update on the Alterra integration. Markel International had an amazingly consistent and sticking with Tom, seeing somewhat boring results for the first nine months of 2013. When I say boring I mean that in the absolute best of ways. Boring is good in insurance.

International produced consistently strong results driven by solid prior accident year reserve releases and life catastrophe losses. Gross written premiums increased 3% to $725 million. Areas of growth included a specialty book as well as our Singapore and Netherlands branches.

Pricing trends have been very consistent throughout the year with modest single-digit price increases. However, in many areas of the market things remain competitive, particularly in cat-exposed property, both insurance and reinsurance, professional liability, retail and equine line.

There is much discussion in the industry on where pricing trends are headed right now. At Markel, we’re going to continue to push for price increases. Given the current interest rate environment there really is no room to reduce rates and produce acceptable returns.

International’s combined ratio for the nine months of 2013 and 2012 was an 88 combined. As I said previously, both years benefited from relatively light catastrophe losses and solid prior accident year reserve releases. While the nine months results were delightfully boring at Markel International, the team was extremely busy in anything but bored, with the integration of Alterra going on and the announcement of the proposed acquisition of Abbey Protection.

As Anne said, if all goes as expected this deal will close in January next year. We’re extremely excited to add the Abbey team to Markel International. Abbey adds unique retail products and services to our international insurance portfolio and we see opportunities to grow their already strong franchise in legal expense and professional fee protection.

Now, I’d like to give a quick update on the acquisition of Alterra. It’s been approximately six months since the deal closed on May 1. We’ve made excellent progress bringing the two organizations together and with everyday that passes same yield more and more like business as usual. As Ann stated, Alterra’s results have largely been in line with our expectations and this is the really important statement as our expectations for Alterra are very high.

Within the Alterra segment premium volume in the global insurance and reinsurance divisions have met and in some cases exceeded expectations and they’re in line with prior year’s volumes. The lines of business that will ultimately become part of Markel International in excess and surplus have also performed well.

The Alterra segment results for the nine months, which includes $70 million of merger and acquisition cost are again in line with our expectations and we have begun the process of establishing a margin of safety on loss reserves. Obviously this is similar to what we have done with all past acquisitions. We’re looking forward to the day in the not too distant future when we no longer talk about legacy Markel and legacy Alterra and simply discuss our Markel results. I believe we’re well on our way at this point.

As I stated last quarter, we still have some work to do with our systems and our back office process is in order to fully integrate all elements of Alterra operations into our existing model. As such, we are managing and reporting the results of the legacy operations which include U.S. insurance, Alterra Lloyd’s global insurance and global reinsurance as our Alterra segment and expect to continue to do this for the remainder of the year.

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

With one quarter to go we’re on target for an excellent year with outstanding underwriting process and very nice book value growth.

Now I’d like to turn it over to Tom.

Thomas S. Gayner

Thank you, Richie. As we’ve alluded to earlier, we are delighted to report our year-to-date results figures. In our investment operations, 23.2% on our equity portfolio for the first nine months of 2013. Amazingly enough that can outperform the 350 basis points compared to the S&P 500 term of 19.7%, and we repeat, with 350 basis points ahead. Normally I would expect to underperform in a [indiscernible] markets since we are conservative and defensive in nature, we won’t complaint about that though. More importantly, this continued the multi decade record of secured investment returns.

I think it’s fair to say that our four part investment discipline of investing in profitable businesses with good returns on unlevered capital with honest and talented managers, capital discipline and reinvestment opportunity at fair prices worked. It is time tested and we are sticking to it.

In our fixed income operations, we earned a return of negative 0.6%. Interest rates are moving up and deploy among others going bankrupt as such we are keeping our duration short and credit quality is high as we know how to make it.

In total, we are in the 4.5% of our investments and I am very pleased with those results as they contributed meaningfully to the comprehensive income of the Markel Corporation. We are methodically adding capital to our equity portfolio and expect to continue to do so.

At Markel Ventures total revenues was 40% to $486 million from $345 million a year ago. Our share of EBITDA from the Company rose 54% to $64.2 million, up from $41.5 million a year ago.

During the third quarter, we added Eagle Construction to the family. Eagle is the leading Richmond based home builder and we have known the principles of the company through generations. We formally worked with them together for several years in our Markel Eagle joint venture and we are delighted to welcome the home building organization to Markel.

One data point that might help to understand our respect for Eagle is that in 2008 and 2009, when the construction industry collapsed and home building stood at the very epicenter of the financial crisis, Eagle remained profitable. These are our kind of people and we couldn’t be happier because they are with us now.

Finally, I would like to close with one thought that a thing separates Markel from so many other companies and even from Markel in its earlier days, mainly from where we sit today, we get to see opportunities to deploy capital in our existing insurance businesses, new insurance opportunities, publicly traded securities, privately held businesses, expansions and additions to businesses we already own and to an increasingly robust network of people we know and have done business with.

Some people would call this deal flow. I think better name for it is idea flow, because it creates a 360 degree view of the world. I believe this is highly unusual and incredibly valuable. Most companies are more constrained in their notions of what they can and will do and how they think about the allocation of capital.

We are a comprehensive company. We have a comprehensive idea flow that covers a lot of fronts and we have experience at successfully reinvesting our capital in all sorts of businesses all around the world. There is not a long list of organizations with those characteristics and it demonstrates our efforts, we’re doing it reasonably well. Hang on to us, we are just getting started and we look forward to your questions about the firm.

Rob, if you’d open up the floor for questions, please.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session (Operator Instructions) Thank you, our first question is from the line of Doug Mewhirter of SunTrust Robinson. Please proceed with your question.

Doug R. Mewhirter – SunTrust Robinson Humphrey

Hi, good morning. I just had really one question for Mike. That is the – in the Specialty Admitted business, the reserve releases in this quarter actually accelerated and I was just wondering what accident years or what sublines or segments did you see that. And I guess related to that question, just how your efforts to I guess reprice or improve the worker’s comp business is going?

F. Michael Crowley

So one, it’s going very well, and two, FirstComp drove a lot of that and what was it, less than 12 years.

Anne G. Waleski

Right.

F. Michael Crowley

Yes, that where we had the releases, but that business is performing very well and while it also has to do with the move of premium from California to non-California business and its growth.

Doug R. Mewhirter – SunTrust Robinson Humphrey

Okay. And actually it just reminded me of another question. There has been a couple of competitors in the worker’s comp space who had some trouble, and I am not sure, how much overlap you had with them, but has that triggered any positive disruption in the market for you or you may be seeing more submissions or you’re getting tiny bit more price leverage because of maybe less supply in the market?

F. Michael Crowley

We are getting rates, I can’t comment on where that business is coming from. We are growing, we are getting rate, we are moving into different geographic areas. And the business I have said for a number of quarters that FirstComp is performing and on the path that we have set out for them when we acquired them in November of 2010. And they’re executing their business extremely well in a tough comp environment. We couldn’t be more pleased with the direction of that business.

Doug R. Mewhirter – SunTrust Robinson Humphrey

Okay, great. Thanks. That’s all my questions.

Operator

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

Mark A. Dwelle – RBC Capital Markets LLC

Yes. Good morning. Just a couple of questions. Richie, you had talked a little bit about heavy protection. Can you just give us a little sense of kind of what their historic level of premiums has been and where their combined ratios are and things like that just to kind of frame the possibilities there?

Richard R. Whitt, III

Sure, sure. It’s a bit of a hybrid business Mark. And so you have to think of it in terms of revenues really quite honestly, because it’s both an underwriting business and a service business. Historically, about £40 million in revenue, so call that about 60 million, they’ve been able to drop about £10 million, call it about 15 million to the bottom line. And it’s a combination of underwriting risk, where they take underwriting risk on – legal protection or other professional services like where if a person is brought in on a tax audit or something like that by the internal revenue in the U.K.

As well as they provide services such as legal advice and some of that tax advice. So it’s an interesting business because it’s a little bit insurance, it’s a little bit service. It fits very nicely into our retail operations, it gives us additional product set to offer our small to medium size retail customers and so we think it’s really kind of expands what we can do in the U.K. retail market.

Mark A. Dwelle – RBC Capital Markets LLC

Thanks that’s really helpful background. And question I guess maybe for Anne or Tom, the level of cash on the balance sheet that was in the investment classification book, just the actual cash, it’s probably be the highest I’ve ever seen it, is this just taking the opportunity to build cash resources with the debt markets the way they’ve been or do you have some other kind of allocation in mind for some of that cash?

Thomas S. Gayner

Well, the number one spectacular reason that it keeps growing and these are making a lot of money. So that is a good thing.

Mark A. Dwelle – RBC Capital Markets LLC

So…

Thomas S. Gayner

The bottom portfolio for instances, as I’ve said is not really much of the yield curve, it’s the yield line. So the opportunity cost have staying short and staying in cash and persevering all of the optionally for what you want to do with it. Doesn’t incur much in the way of opportunity cost, so those were some factors going on there.

The other factors will be we did just do a major acquisition and we’ve had another one in the works right now. We are buying companies to Markel Ventures. We got a lot of opportunity to deploy that. But has always you can expect us to be careful and methodical about the way we would go about it. And you can also expect at some point that, we have higher interest rate which I expect moves invest the bond portfolio in a longer term fashion than what we do right now.

Mark A. Dwelle – RBC Capital Markets LLC

Okay, fair enough and one last thing, just numbers question for Anne, when you were saying the portion of amortization related to the Alterra piece of investment income that was $39 million you had said?

Anne G. Waleski

That’s correct.

Mark A. Dwelle – RBC Capital Markets LLC

So the earn $44 million and the amortization was $39 million so really almost no benefit value at this quarter?

Anne G. Waleski

No.

Thomas S. Gayner

No, that $44 million was net of the $39 million.

Anne G. Waleski

Right.

Mark A. Dwelle – RBC Capital Markets LLC

Got it.

Thomas S. Gayner

And also, that’s sort of an interesting feature of our financial since we took over

Alterra, you are not seeing a huge increase in investment income because of that amortization but where you are seeing it is in the cash flow, $540 million of cash flow is a significant increase over what we had at this point in the last year. And that amortization sort of explain some of the difference between what are you seeing through the P&L and what you are seeing on the cash flow statement.

Mark A. Dwelle – RBC Capital Markets LLC

Okay. That was very helpful, thanks, I’ll hop back.

Operator

Thank you. Our next question comes from the line of Jay Cohen, Bank of America. Please proceed with your question.

Jay A. Cohen – Bank of America Merrill Lynch

Yes, thank you. A couple of questions. First, is in the third quarter it looks like, the Ventures business earnings were a bit low quite a bit lower than the run rate of what we had been seeing. I’m just thinking kind of other revenues minus other expenses, what’s going on there?

Anne G. Waleski

Jay, I don’t actually think there is anything significant going on there if you are comparing it to the prior period, could just be timing of orders but and looking through the quarterly results there wasn’t anything worthy of note.

Jay A. Cohen – Bank of America Merrill Lynch

Because it looked to me like the net of other revenues and expenses even running $15 million to $20 million this quarter looks like it was close to $8 million, do you think even though that’s look like a big drop is nothing unusual at all?

Anne G. Waleski

And there wasn’t anything unusual, in our analysis but I’m happy to take it up with you offline and kind of go through it. But nothing came up worthy of note, like I said, there can be some timing and some seasonality in the numbers but nothing, worthy of comment.

Thomas S. Gayner

If I were – this is a bit of guess from my part, what we look at in terms of looking at the businesses and how they are doing, EBITDA and the cash generation of business itself. And we talked about that earlier in the call the numbers, and Markel Ventures portfolio in terms of doing is fine. We had previously introduce as a rough short cut, the other revenues and other expenses has a pretty good proxy for what’s going on. There are other things that go on and other revenues and other expenses that Mike just told that number would be but the directional information we gave on the revenue and the EBIT of Markel ventures is pretty good description of how things are going there and they’re going pretty well.

Jay A. Cohen – Bank of America Merrill Lynch

Got it, do you think it has become a bigger part of the income statement, it would be great to get better disclosure around that, since it’s going to growing as well. just one quick request that’s all? Second question the amortization of the Alterra investment portfolio which is obviously holding back GAAP investment income, can you talk about what that number looks like going forward?

Anne G. Waleski

The amortization number for Alterra is investment portfolio will be taken across the duration of the portfolio basically, so it’s going to run for I would guess three or four years. It probably looks close to the same quarter-over-quarter although it will come down some as we sell securities.

Richard R. Whitt, III

Yes, so maybe a way to think about it, I think it’s roughly in helping out I guess $20 million a quarter right now? The duration of the portfolio is about probably five years.

Anne G. Waleski

Four to five years.

Richard R. Whitt, III

And so that $20 million should sort of trail-off over the next four years or so from that $20 million down to nothing as those securities mature. It’s a pretty big number I mean when the day we bought the day we bought Alterra was probably the – close to probably the low for the rates and they cut back up since then. So we marked the portfolio pretty significantly on May 1 and that’s what we are amortizing through.

Jay A. Cohen – Bank of America Merrill Lynch

Got it. That makes sense. I’m sure it’s in the Q, just in the – unamortized portion, what is that equal right now?

Richard R. Whitt, III

I don’t know. And I’m not sure it’s in the Q, but I’m sure that’s something we’d be willing to put in going forward, if it’s not.

Thomas S. Gayner

We’ll get something to you, Jay.

Jay A. Cohen – Bank of America Merrill Lynch

That’s great. Thanks. That’s helpful. I’ll re-queue with other question. Thank you.

Operator

(Operator Instructions) The next question is from [indiscernible]. Please state the question.

Unidentified Analyst

Hello everyone.

Richard R. Whitt, III

Hello.

Unidentified Analyst

A couple of questions, Richie you spoke about establish a marginal safety for the Alterra book, I noticed that the current yield loss ratio has improved quarter-over-quarter, I know five year developments in there in the Alterra segment. So could you describe how that first desk looks and will evolve over time and how it will impact the financials.

Richard R. Whitt, III

Sure, very consistent with what we’ve done in all past acquisitions, we have a policy or a philosophy at Markel of being more likely redundant and efficient. And when we buy company we sort of thread our way into that philosophy by adding a margin of safety to the current accident year. The reason for the decrease year-over-year was catastrophe losses in the prior year primarily but I can assure we did take the actuarial pick and did very consistent methodology to add a margin of safety to the reserves in the question, and we’ll be doing that as we go forward.

Margin and safety that we’ve added depends on the type of business that it is and impact acquisition that’s been anywhere from 4 point to 10 point on the business on the current accident year as we earned that business. And what I got to tell you here is that it’s in that range of what we’re adding to Alterra current accident year as it’s earned on to our books.

Unidentified Analyst

Okay. And given that’s consistent with what I see over the long run in terms of reserve releases and how that cycle works that makes sense. And then one to Tom, which is, I wouldn’t in my limited experience handle this, describe the majority of them as profitable high return investment capital with solid management and create reinvestment opportunities. So could you describe what you see that’s different perhaps to Eagle and how they run that business different from the typical home builder?

Thomas S. Gayner

Well, the great thing about Eagle as demonstrated by the fact that they remained profitable is miserable in an environment as you can have is that intellectual capital of the organization is really what matters and you have people who have outstanding relationships with subcontractors and a network of people who can get things done. So the size of the Eagle organization relative to what they do in terms of the people that aren’t their payroll is actually relatively small and expecting accordingly it can expand and shrink back depending on the set of opportunities that are out there and they’ve successfully done it for two generations.

So we have a lot of confidence in our ability to continue to do that in that flexibility and striking part of Markel as you see the advantage for them in the sense that it is the appropriate time to add capital and to try to seize opportunities and push ahead, we can support that further. At the same time when it’s time to go and reverse that and shrink and put it down. That’s okay because that can redistribute that capital back to us and we’ll find other ways to put it to use.

If you’re a standalone model volume company you don’t typically add the possibilities. Thanks for the time that we have happening in our insurance businesses as opposed to one line in the insurance we have 100 and different time some of the need capital and others are generating capital and then the overall profit environment put the capital to good use.

Unidentified Analyst

That makes sense. Thank you very much.

Operator

Thank you. (Operator Instructions) Thank you. There are no further questions at this time. I would now like to turn the floor back to management for closing comments.

Thomas S. Gayner

Thank you very much. We look forward to speaking with you 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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