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Markel Corporation (NYSE:MKL)

Q1 2012 Earnings Call

May 10, 2012 10:30 am ET

Executives

Tom Gayner - President

Anne Waleski - Chief Financial Officer

Mike Crowley - Co-President

Richie Whitt - Co-President

Analysts

Mark Hughes - Suntrust

Alison Jacobowitz – Bank of America-Merrill Lynch

Scott Heleniak - RBC Capital Markets

Meyer Shields - Stifel Nicolaus

John Fox - Fenimore Asset Management

Operator

Greetings and welcome to Markel Corporation's First 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. (Operator Instructions) As a reminder, this conference is being recorded.

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

Tom Gayner - President

Thank you so much. Good morning and welcome to the Markel Corporation 2012 first quarter conference call. We are glad that you are joining us and we look forward to your thoughtful questions about our business.

As is our custom, our Chief Financial Officer, Anne Waleski, will layout the numbers from the first quarter, followed by my Co-President, Mike Crowley and Richie Whitt, would comment about our international and domestic insurance operations. I will then discuss our investment and Markel ventures operations a bit, and then we will open the floor for questions.

Before getting started, the rule says we need to repeat the Safe Harbor statement. So here it goes.

During our call today, we may make forward-looking statements. Additional information about factors that could cause actual results to differ materially from those projected in the forward-looking statements is described under the captions Risk Factors and Safe Harbor and Cautionary Statements in our most recent Annual Report on Form 10-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 reconciliation or in our Quarterly Report on Form 10-Q. With that, Anne?

Anne Waleski - Chief Financial Officer

Thank you, Tom, and good morning everyone. I plan to follow the same format as in prior 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.

I am pleased to say that for 2012 we are off to a good solid start. Total operating revenues grew 18% to $733 million in 2012, up from $622 million in 2011. The increase is due to a 15% increase in revenues from our insurance operations and a 43% increase in revenues from our non-insurance operations, which we refer to as Markel Ventures.

Moving into the underwriting results, first quarter 2012 gross written premiums were just under $650 million, which is an increase of 10%, compared to 2011. The increase in 2012 was due to higher gross premium volumes in each of our three operating segments. Net written premiums were approximately $580 million, up 12% to the prior year. Retentions were up slightly in 2012 at 90% compared to 88% in 2011. Earned premiums increased 14%. This increase was driven by a 23% increase in earned premium from the London Insurance Market segment.

First quarter 2011 net written and net earned premiums for the segment were reduced by approximately $9 million of reinsurance cost, associated with losses incurred during the first quarter a year ago.

Our combined ratio was 100% for 2012, compared to 112% in 2011. The combined ratio for 2012 includes $20 million or 4 points of expense related to our prospective adoption of the new GAAP accounting standards. The 2011 combined ratio included 15 points of underwriting losses related to the three catastrophe events, which occurred last year in Australia, New Zealand, and Japan. Excluding the impact of the prospective adoption of the new GAAP accounting standards in the first quarter of 2012, and the effect of the catastrophes in the first quarter of 2011, our combined ratio improved by 1 point. This improvement was due to a lower expense ratio and a lower current accident year loss ratio, partially offset by less favorable development of prior year's loss reserve. The improvement in the expense ratio is primarily due to an increase in earned premium. 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 to lower attritional and large energy losses in the London Insurance Market.

Favorable redundancies on prior year's loss reserves decreased to $64 million or 12 points of favorable development, compared to $75 million or 16 points of favorable development in 2011. The decrease is primarily due to less favorable development of prior year's losses in the Excess and Surplus line segment.

In the first quarter of 2011, we resulted significant portion of our outstanding liabilities associated with an Errors & Omissions program from mortgage servicing companies and as a result reduced loss reserves by $16 million.

Next I will discuss the results of our non-insurance operations, which we call Markel Ventures. In 2012, revenues from our non-insurance operations were $97 million, compared to $68 million in 2011. Net income to shareholders from our non-insurance operations was $200,000 in 2012, compared to $2.4 million in 2011. Revenues from our non-insurance operations increased in 2012, compared to 2011, primarily due to our acquisitions of Baking Technology Systems Incorporated and WI Holdings Incorporated in late 2011. The decrease in net income to shareholders from our non-insurance operations is a result of decreased shipments for the quarter in our manufacturing operations where we expect to see improvements as the year progresses.

Turning now to our investment results. Investment income was up 14% in 2012 to just under $80 million. Net investment income included a favorable change in the fair value of our credit default swap of $11 million. During the first quarter of 2012, financial markets improved, and credit spreads narrowed, which favorably impacted the CDS.

Net realized investment gains were $12 million, compared to $11 million in 2011. There were no other-than-temporary impairments in either period.

Unrealized gains increased $214 million before taxes in 2012, driven by increases in equity securities. Tom will go into further details 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 $57 million, compared to $8 million in 2011. Book value per share increased 6% to $373 per share on March 31st, 2012, up from $352 per share at year-end.

Finally, I will make a few comments on cash flow and the balance sheet. Net cash used by operating activities was approximately $64 million for the three months ended March 31st, 2012, compared to net cash used by operating activities of approximately $9 million for the same period of 2011. The increase in net cash used by operating activities was due to increased claim settlement activity, primarily in the London Insurance Market Segment.

Historically, first quarter is our lowest cash generating quarter as we pay employee benefits, agent incentives, pension contributions, and other items of that sort in the first quarter. We really expect cash from operations to improve in the second quarter.

Investments in cash held as a holding company were approximately $1 billion at March 31st, as compared to a little less than $1.2 billion at the end of the year 2011. The decrease is due in part to the purchase of THOMCO in January 2012. Mike will discuss that acquisition further in his comments.

And at this point I will turn it over to Mike.

Mike Crowley - Co-President

Thanks, Anne, good morning. First quarter results for North American operation showed increases in gross written premiums for both the Wholesale, E&S, and Specialty divisions. The wholesale gross written premiums increased 11% over the same period in 2011 and the specialty division gross written premiums increased 10% over the same period last year.

Market conditions remained transitional with moderate increases in many lines. Rates for wind exposed property accounting more significantly than other lines and yet some lines such as medical malpractice and specified medical remained very competitive. We see other insurance companies announcing rate increases. It is worth noting in our opinion that in our experience, some insurance companies were announcing rate increase on renewal business, are continuing to price new business very aggressively.

At Markel, we maintained the consistency of our underwriting discipline on both renewals and new business; we are seeking right on both.

With regards to the wholesale division, during the quarter, the division conducted agency counsel meetings for both our binding and brokerage businesses. At these meetings we always try to create an atmosphere that is conducive to candidate feedback and I am not suggesting that any of our agents on these cannibals were shy they are not. The feedback that we received was generally positive and supportive of the one Markel mile. Criticism was limited and mostly centered on response times, and John Latham President of our Wholesale Division, and his team have initiated several projects to address the concerns raised and have already reported back to counsel members on their efforts.

Marketing activities in the Wholesale division were aggressive during the quarter with over 388 agency visits made by our regional personnel. We continue to believe that we were appropriately staffed in the divisions at all of our regions to serve our agents and brokers.

In the Specialty division, the increase in net gross written premiums was driven by growth in premiums at Markel American our personalized division, Markel FirstComp, the agriculture division, and our carrier alliance business. Offsetting some of the growth were declines in our accident health and program units.

The A&H premium fell due to our exits in several programs due to lack of profitability and Markel programs also terminated several programs for the same reason.

The significant highlight during the quarter was the closing of the THOMCO acquisition in early January. Greg Thompson and his team were a terrific addition to the Markel family.

Britt Glisson, our Chief Administrative Officer, Robin Russo, our Executive Underwriter for Specialty, and Tom Smith, Head of Sales and Marketing, corporately, are working closely with Greg and his team on the transition of THOMCO's business. The moving of this business to Markel Paper was light in the quarter but will be accelerated during the remainder of the year with a full impact of the acquisition being felt in 2013.

Also during the quarter we announced several key executive promotions. John Tyson, who joined the company in 1989, was promoted to lead Markel Specialty Commercial.

Mark Nicholas, who also has been with the company over 20 years, was promoted to oversee, not only our A&H business but our carrier alliance business and Personal Lines Division.

Audrey Hanken, was promoted the President of Markel America. Audrey joined Markel America over 17 years ago and has played a key role in building our Personal Lines business. She previously served as Head of Underwriting and Product Development.

Mary Pat Joyce was promoted to President of Prairie State, our carrier alliance business and she joined Markel in 1999 and most recently Head of Operations with Prairie State.

Matt Parker, was promoted to President of Markel FirstComp. Matt has been with FirstComp for over five years and most recently was Chief Operating Officer.

All of these individuals had significant experience in their respective areas and in cases of John, Mark, Audrey, and Mary Pat, significant tenure with Markel.

Hopefully these promotions are evidence to you of Markel's ability to fill key positions from within, which is one of the defining strengths of our company.

With regards to our product line leadership group during the fourth quarter Markel of 2011, Markel great philosophy to 2012 was announced to communicate to all of our underwriters. During the first quarter of 2012 all divisions Markel International, Wholesale, and Specialty, showed positive rate increases. Given the results we saw in the quarter we were optimistic that we can meet our rate increased targets in 2012.

The pipeline leadership also initiated several processed improvement in standardization projects to streamline our closed bond and issuance capabilities. We efficiently launched Markel website to all North American Associates on March 30th, establishing a protocol and standardization for underwriting guidelines across all product lines.

We also established protocols for internal communication between regions in the PLL Group. All of this is being done to improve our speed and clarity when communicating quotes and other information to our agents and brokers.

Other highlights include the addition of a contracted pollution liability policy to our binding origin, and developing a ISO claims made platform in addition to our proprietary form to meet the needs of our customers.

While still spotty we are pleased to see continued improvement in the rate environment and growth in the number of product lines. However be assured we will not lose our focus on our sales and marketing efforts. Being in front of our agents and brokers and including our processes and speed of delivery we remain at the forefront of what we do everyday.

I'll now turn to call over to Richie Whitt. Richie?

Richie Whitt - Co-President

Thanks, Mike, and good morning everybody. What a difference a year makes? Pleased to report our solid start to 2012 at Markel International. Our combined ratio was 97% in the first quarter of '12 and mentioned the perspective adoption of the new GAAP accounting standards. The adoption of this standard added 3 points to Internationals first quarter combined ratio.

You will obviously recall that we got off to a difficult start in first quarter of 2011 reporting a combined ratio of 152% with significant statutory losses from several events around the globe, including the Australian floods and New Zealand earthquakes and the Japanese earthquakes and tsunami.

As compared to the start of 2011, the first quarter of 2012 is relatively quiet and I can tell you in the insurance business quiet is a good thing.

In the first quarter of '12 International gross written premiums were up 9% to $278 million. We continue to experience growth in our marine and energy division, most notably in our energy book.

We are also seeing solid growth in our catastrophe exposed property writings. Premium growth in both of these areas were aided by rising prices. We are seeing single digit price increases on marine energy and liability business and increases between 10% and 20% on average for catastrophe exposed property business. Unfortunately the pricing environment in other areas of our book remains competitive. While prices no longer appear to be falling, competition remains strong for professional liability, equine, trade credit, and in our various retail markets around the world.

As Mike mentioned there is always some differential between new business pricing and renewal business pricing. But there has been a bigger and bigger disconnect recently as what Mike said people seem to be getting tougher on renewal but are being pretty aggressive on new business.

Our international leadership team led by William Stovin in Germany, Brazil focused on growing in the areas where appropriate prices are achievable and we are working to maintain our discipline in the areas that still remain competitive. So much to the U.S. the pricing environment appears to be improving but it's far from hard market at this point.

We also to continue to focus on profitably growing our retail branch offices around the world, our latest offices in Rotterdam, and Munich, are settling in and are off to good start. Our retail management team is also working to develop standardized processors and procedures to use across our retail branches in order to more efficiently write these small but profitable policy.

In summary, we are happy to be off to a good start in 2012 and we will stay patient as this market continues to involve.

Now, I turn it over to Tom.

Tom Gayner - President

Thanks, Richie. As you have heard so far, there is lot of positive momentum around Markel these days and I'm glad to tell you that's true for our investments and Markel Ventures operations as well.

On the investment front, we earned a total return of 4% for the first quarter, with fixed income earning 1.3%, and equities earning 11.5%. As has been the case for more quarters than I can believe now, interest rates started the period low, and then went lower. As such, we earned a total return of more than what we should expect from the underlying coupon return over to cost. We continue to believe that interest rates are unnaturally low and given that belief we continue to choose to protect the balance sheet by maintaining our bond portfolio at a lower duration than what we would naturally like.

In effect, we are incurring an opportunity cost to do so. This is consistent with our focus on the balance sheet at Markel. There will come a time when this decision should add meaningful value to our shareholders. We will be the first to point that out to you when it does.

On the equity side, we earned a total return of 11.5% for the quarter and we continue to steadily and methodically increase our equity investment commitment. It now stands at 59% of shareholders equity, up from 54% at year-end 2011. We have additional capacity to increase our equity holdings and we continue to do so as we have for the last few years. We believe that our portfolio of global, dominant, profitable companies, represent the best big opportunity to earn good long-term rates of return, and as such, we continue to steadily and methodically add them to the equity investment portfolio.

On the Markel Ventures front, during the first quarter, revenues were just shy of $100 million and are included in the other revenues line of our income statement. EBITDA totaled $9.4 million. As always, a reconciliation of EBITDA to GAAP net income is available on the website. Frankly, the first quarter EBITDA levels were below our budgeted expectation. This was due to a combination of normal seasonality, our lumpy businesses, not getting as many lumps of business as the top indicates, and the exempting of the meaningful growth opportunities at certain of the Ventures company.

We remain optimistic about meeting our annual goal, since the seasonality will improve as the year goes on, and we have good order books and backlog in some of the lumpy businesses. Also the growth initiatives, and the associated expenses will continue, but they should begin to bring appropriate revenues and profits with the passing of time.

Additionally, just after the quarter ended, we added Havco to the Markel Ventures family. Havco is the leading manufacturer of wood floorings for the trailers, tractor trailer, and has a multi decade history of leading market share and profitability. Havco is led by Bruce Bader, and a well established management team that will be staying and leading Havco into the future. We are proud of the ongoing continuity of management at all of the Markel Ventures companies, and are glad to welcome Bruce and his team to the family. I am confident it will earn fine rates of return on our capital.

In order to give you some frame of reference about the magnitude of the growing Markel Ventures operations, I will tell you at this point, the annualized revenue run rate of Markel Ventures should approach $500 million, and we continue to expect double-digit EBITDA margins from the collection of these businesses.

Please remember that the Safe Harbor statement that I started out with, I hope that information is somewhat helpful as you consider the size and scale of this growing component of value creation for Markel shareholders.

To summarize, we are optimistic about what is going on at Markel these days. As Mike and Richie reported, we are seeing better insurance markets, and we are continuing to refine and improve on every aspect of our operation. We are off to a great start on the investment side, and we look forward to reporting this full year of operations from the Markel Ventures group of companies.

We appreciate the long-term nature of our shareholders to our interest in earning a successful long-term business and we now look forward to your possible questions. With that, I will open the floor for Q&A

Question-And-Answer Session

Operator

Thank you, sir. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question is coming from Mark Hughes from Suntrust. Please proceed with your question.

Mark Hughes - Suntrust

The expense ratio in the specialty admitted was up a bit year-over-year. Is that higher level is going to be sustained going forward?

Tom Gayner

There were three things that were unusual in the quarter. The DAC expense which Anne talked about, we have some severance in the quarter and we have the write down of some systems in the quarter.

Mark Hughes - Suntrust

So the DAC could be sustained perhaps but the others not?

Anne Waleski

That's correct.

Mark Hughes - Suntrust

Of the increase how much was the DAC? I'm sorry if I missed out.

Anne Waleski

For specialty admitted, hand on one sec, I'll check for pair of unusuals. You can that the DAC fees will be larger in the first and second quarter than it will be in the later half of the year. So, it's about four points specialty admitted in the first quarter.

Mark Hughes - Suntrust

Okay. And then the London, the current year losses were quite low, lowest we've seen in some time. I know that’s a volatile business but any reason to assume that will change? The current accident year should be -- keep it at plus 67%?

Tom Gayner

Well, there's a couple of things going on there. We've, over the last few years, added some businesses that have fairly low loss ratios but maybe slightly higher expense ratios in the 2s and I'm thinking about our Elliott Special Risks and the trade credit businesses. They have low loss ratios but higher than typical expense ratios. So, there is a bit of a mix thing going on there. Also it was a very quiet quarter in terms of catastrophes, so that also is impacting.

So, I think that it was a good quarter in terms of the current accident year. I don’t know that we could expect that every quarter going forward during this year.

Mark Hughes - Suntrust

And then just any thoughts on pace of favorable development going forward? It's down a little bit year-over-year but still at a very healthy level. What can you say about that?

Anne Waleski

I think we expect it to continue to be healthy. So, I'm not expecting any big differences in the future quarters.

Tom Gayner

But the only thing I'd add to that, Mark, is the market has been softening for the last six years now. So, while we always attempt to establish a fair bit of consistent margin anxiety, with the market margin shrinking I think its likely unless the market starts to tick up which we think it started to, those things will keep continue to drift down.

Anne Waleski

Little bit, yeah.

Mark Hughes - Suntrust

Okay, thank you.

Operator

Thank you. Our next question is coming from Jay Cohen from Bank of America-Merrill Lynch. Please proceed with your question.

Alison Jacobowitz – Bank of America-Merrill Lynch

Hi, thanks, its Alison Jacobowitz actually. Just a follow up to the last question in part. I don’t know, is it possible at this point for you to give maybe more a little bit more specifics on the DAC accounting change and how it’s going to come through rest of the year. I think you said something in the queue about $43 million over nine months we got $20 million in the first quarter. Is it that $23 million we should look forward for the next couple of quarters and how should we look at that? And then also I don’t think I heard it if you could talk about the favorable change in the swap this quarter that added the $11 million to investment income. I’m sorry I don’t have the quarterly history, but just I’m sure this lumpy, but how you might be thinking about that if there is anything you put around that?

Anne Waleski

Okay and relative to the DAC question its about 4 points in the first quarter I mean that swag would be you could take 3 points in the second quarter then 2 points and 1 point and it may move around a little bit, but that would be a reasonable swag. Relative to the credit default swap it has new grand and paramount quarter-to-quarter some the markets just move in enough of the right direction this quarter that we ended up with a pretty positive outcome.

Alan Kirshner

Nothing really add to that, but the history is that every quarter there is movement it would net to zero over time.

Operator

Our next question is coming from Scott Heleniak from RBC Capital Markets.

Scott Heleniak – RBC Capital Markets

I was wondering if you could touch a little more on the comments you made about new business being a lot more competitive I’m assuming that’s been a change over the last couple of quarters now. Just curious if you could touch on what areas that you’re seeing that increased new business competition is it by class or is it small versus medium or what was that?

Mike Crowley

Scott its Mike. I don't know that we're seeing an increase over the last couple of quarters. What my point is what we are seeing and is that our underwriting discipline is consistent on business as it is on renewable and what we are seeing if we read the press releases we are seeing comments by competitors saying that they are raising rates and we see and we hear from our agents and its fully at across the board large, small whatever, but particularly on the business that we are in which is medium size to small risk. We hear from our agents that some of the carriers that have been very aggressive in the past and during the soft market at raising rates substantially on renewals and yet we see them in the marketplace, where we compete with them been very competitive on new business and not following the same philosophy. So, it’s not, I don’t see the aggressiveness on new business has not increased in the quarter. It has been aggressive.

Scott Heleniak – RBC Capital Markets

Okay. I got it.

Mike Crowley

I’m just pointing out the difference between our underwriting philosophy and maybe some others.

Scott Heleniak – RBC Capital Markets

Okay, that's clear and then just wondering if you could touch on whether you are seeing any big changes on policy terms and conditions over the past few months as the market improved a little bit any movement there?

Mike Crowley

There is nothing real significant.

Scott Heleniak – RBC Capital Markets

Okay. The other thing I had was just a couple of numbers questions, where there any catastrophe losses in the quarter?

Anne Waleski

They were nothing of any materiality. So, a couple of the tornados have been classed as catastrophes, but nothing material in the numbers.

Scott Heleniak – RBC Capital Markets

Okay and just one another thing the Markel ventures you talked about some of the seasonality of the business, so now based on the collection of business you have now is key want to going to be the seasonally weakest or softest quarter and it improves in the second and third quarter. How should we think about the seasonality of the business top and bottom line?

Tom Gayner

Our strength about Q1 is indeed the lowest quarter we have seen in the bill through the year.

Operator

(Operator Instructions) Our next question is coming from Meyer Shields from Stifel Nicolaus.

Meyer Shields – Stifel Nicolaus

I think the question for Mike. I think you noticed $14.5 million first comp related loss was there any adverse reserve development?

Anne Waleski

No, I don’t think so. I think mostly it came out of just where we are preparing in the loss ratio. The reserves are held in there pretty good.

Meyer Shields – Stifel Nicolaus

Okay. So this is just booking in the past market levels.

Mike Crowley

I think the other thing you got to think about Meyer is last year as we are bringing that business on California with relatively small portion of it now that we are keeping a 100% of the business. California is kind of fully loaded in there and our California loss ratio just because what the California market have been the last few years with carrying higher loss ratio is there, but we have been raising prices, when we have been working really hard on California. So, we are optimistic of come down in the future, but California will carry at pretty high loss ratio.

Meyer Shields – Stifel Nicolaus

Okay, that’s helpful. Tom I’m not sure you had read this question, but whether it’s the best of rule or something similar to that. Are you worried about in general equities or equity prices getting a hit if the associated taxation realized gains or dividend changes over the next year?

Tom Gayner

Not really. I mean, the number of factors, the number of variables that go into what the given price of any given equity is going to sell for in a given day is about a million. So, while those might be bad factors I don’t think they are the exclusive drivers on why things sell for what they did. So, we tend to be bottom up people rather than top down people. If we worry about the Buffet rule, the change of tax, it goes on and European politics, etc, etc I think you're drilling a hole and never do anything. And I don’t think that would be the productive way to proceed.

Meyer Shields - Stifel Nicolaus

Okay, and one more question, if I can. I think we started with a discussion on agency feedback on One Markel's positives and negative. Was growth in the quarter impacted, were they on the negative side at all because --

Mike Crowley

I would say, it was impacted on the positive side. Really the feedback on the One Markel results. And we're seeing almost all of our large wholesale producers folks grow with us. They are a couple that haven’t won because they lost a lot of business themselves but we got I might not have worded as well as I could have, just trying to be candid. Really, the only negative response was just trying to help us continue to speed up our response to them in terms of quote bind issue. But the response on the One Markel and the availability of all Markel products to these agents and brokers has been terrific.

Operator

Thank you. Our next question is coming from the John Fox from Fenimore Asset Management. Please proceed with your question.

John Fox - Fenimore Asset Management

I have a few questions. One, thank you for the disclosure on the accounting change. That’s appreciated. In specialty, I was under the impression that last year you had put some reserves up at FirstComp or bring it up to Markel standards for about $30 million last year, and of course its in this quarter this year. So, its my impression that last year wrong or is there something else going on there in terms of bringing it up to Markel standards in addition to what Ritchie said about California?

Mike Crowley

Two things there, John. When we purchased FirstComp we put some reserves up to get to the historical reserves where we thought they needed to be and in line with our more likely than not redundant and margin for safety philosophy. In all their lines of business at Markel as we go forward, we build in a margin of safety on the loss reserves, on the loss ratio because things happen. So, that is part of their more likely redundant than deficient philosophy to have that margin of safety as we move forward. So, there's two pieces there.

What we needed to do when we bought but on an ongoing basis we will continue to put a margin of safety on FirstComp just like we do at all our businesses. That could potentially decrease the amount of the margin could decrease as we become more comfortable with that business but its no different than what we do everywhere else, I guess I'm saying.

John Fox - Fenimore Asset Management

Okay. And is there anything else in this segment, I mean, if you yet back the 14 they wrote at an underwriting loss. Are there other lines of business or any other trends that are significant there?

Mike Crowley

No, nothing really. We feel good about it. We're getting price wherever we can. And with regard to FirstComp, I mean they are focused on improving pricing, they're focused on the risk selection, they're focused on their agency client management and they're also focused, as Ritchie mentioned, on their geographical mix. They went in two new states Louisiana and Alaska last year and then we saw some nice growth there. So, no, I don’t think so.

John Fox - Fenimore Asset Management

Okay. And then THOMCO is in that segment. I thought I heard that’s going to impact next year?

Mike Crowley

Now, very little of the THOMCO business transitioned in the first quarter. We will be transitioning those programs that are moving to Markel paper during the course of the year. Some of bigger programs are later in the year. Their largest program I think we start transitioning in September. So, we won't feel the full impact. I think what we've said in previous disclosures was that we expect about $60 million direct to hit in 2012 with the full impact of the acquisition hitting in 2013.

John Fox - Fenimore Asset Management

Okay. So that’s like an MGA situation rolling under your paper?

Mike Crowley

Right, exactly.

John Fox - Fenimore Asset Management

Okay. And then for Tom Gayner, for Ventures, I believe Havco was in the second quarter, is that right?

Tom Gayner

That’s correct. That didn’t close until April.

John Fox - Fenimore Asset Management

Okay. Did you close anything in the first quarter?

Tom Gayner

No.

John Fox - Fenimore Asset Management

Okay. And so the acquisitions line in the cash flow statement is really for THOMCO?

Tom Gayner

Right, correct.

John Fox - Fenimore Asset Management

Not for Ventures?

Tom Gayner

Correct.

Operator

Thank you. (Operator instructions)

Our next question is a follow-up from Meyer Shields from Stifel Nicolaus. Please proceed with your question.

Meyer Shields - Stifel Nicolaus

All right. Thanks. Just a brief one. When we look at the underwriting profit or the generating profit in the discontinued lines, is that sort of sporadic or is there some sort of ongoing theme that you look for?

Tom Gayner

That is going to be very sporadic. Those lines are discontinued. It is really legacy reserves that are not running off. And I think the small positives you have seen sporadically over the last several quarters is really just the more likely redundant and deficient philosophy of Markel playing out as we are settling our those legacy reserves. We are seeing bits and pieces of redundancy. So, I would not even attempt to project what that could look like going-forward.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over management for any closing comments.

Tom Gayner

Thank you very much. We look forward to updating you next quarter. See you soon.

Mike Crowley

Bye bye.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.

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Source: Markel's Management Discusses Q1 2012 Results - Earnings Call Transcript
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