Markel Group - Earnings Call - Q4 2011
February 2, 2012
Transcript
Speaker 3
Greetings, and welcome to Markel Corporation's fourth quarter 2011 earnings call. At this time, all participants are on a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone wants to require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Tom Gayner, President of Markel Corporation. Thank you, Mr. Gayner. You may begin.
Speaker 2
Thank you, Lilith. Good morning. Privileged this morning to have the dual honor of wishing you happy Groundhog Day and welcoming you to the Markel Corporation 2011 fourth quarter conference call. We appreciate you joining us, and we look forward to updating you on our progress at Markel and answering your thoughtful questions about our business. As is our custom, Anne Waleski, our Chief Financial Officer, will update you on the numbers. My Co-Presidents, Richie Whitt and Mike Crowley, will update you on insurance operations, and then I will speak about our investment operations and Markel Ventures. Before jumping in, the rules say that I must take a little swim in the safe harbor, as much as here goes. During our call today, we may make forward-looking statements.
Additional information about factors that could cause actual results to differ materially from those projected in the forward-looking statements is described under the captions "risk factors" and "safe harbor" and "cautionary statements" in our most recent annual report on Form 10-K, and quarterly report on Form 10-Q, and on pages six to eight of our press release dated February 1, 2012. We may also discuss some non-GAAP financial measures in the call today. You may find a reconciliation to GAAP of these measures either in the press release or on our website at www.markelcorp.com in the investor information section under non-GAAP reconciliation. With that, Anne?
Speaker 0
Thank you, Tom, and good morning, everyone. I am going to follow the same format that I have in prior quarters. I'm going to focus my comments primarily on year-to-date results. I will start by discussing our operational results, followed by a brief discussion of our investment results, and bring them together with a discussion of our total results for the year. Our total revenues grew 18% to $2.6 billion in 2011 from $2.2 billion in 2010. The increase is due to increased revenue from our insurance operations and our non-insurance operations, which we refer to as Markel Ventures. Moving into the insurance results, gross premium volume was just under $2.3 billion in 2011, up 16% compared to 2010. This increase was due to higher gross premium volume in the specialty-admitted and London insurance market segments.
As of December 31, 2011, the specialty-admitted segment included $227 million of gross written premiums from our FirstComp workers' compensation operations, which we acquired in late 2010. The increase in gross written premiums in the London insurance market segment was due in part to an increase in premiums written by Elliott Special Risk, which was converted from an MGA operation to a risk-bearing insurance division during 2010. We also saw significant increases in premium volume within our marine and energy division, due in part to offering larger line sizes and an improved pricing environment. Net written premiums were approximately $2 billion, up 15% to the prior year. Retentions were 89% in both 2011 and 2010. Earned premiums increased 14% and included approximately $200 million of earned premiums in the specialty-admitted segment from FirstComp, compared to $37 million last year.
The increase in earned premium was also due to higher gross premium volume in the London insurance market segment compared to 2010. Our combined ratio was 102% for 2011 compared to 97% in 2010. Our goal was to earn underwriting profits, and we are disappointed that we failed to meet that goal this year. The increase in the combined ratio was due to a higher current accident year loss ratio, partially offset by more favorable development of prior year's loss reserve and a lower expense ratio compared to 2010. The combined ratio for 2011 included $152 million, or 8 points, of underwriting loss related to natural catastrophes, including losses from the Thai floods in the fourth quarter and losses from Hurricane Irene, the U.S. tornadoes, the Australian floods, the New Zealand earthquakes, and the Japanese catastrophe, all of which occurred during the first nine months of 2011.
Our 2010 combined ratio included $17 million, or 1 point of underwriting loss related to the Chilean earthquakes. The 2010 combined ratio also included $75 million, or 4 points of underwriting loss, on two programs now in runoff that were exposed to losses associated with the adverse conditions in the residential mortgage market. Favorable redundancies on prior year's loss reserve increased to $354 million, or 18 points of favorable development, compared to $278 million, or 16 points of favorable development in 2010. The increase was primarily due to more favorable development of prior year losses in the E&F segment. Our 2011 expense ratio was 41%, but down approximately 1 point as compared to 2010. The lower expense ratio in 2011 was primarily due to lower costs associated with our system and business process initiative and lower profit-sharing costs. Next, I'll discuss the results of our Markel Ventures operation.
In 2011, revenues from Markel Ventures were $317 million as compared to $166 million in 2010. Net income to shareholders from Markel Ventures, $7.7 million in 2011 as compared to $4.2 million in 2010. Revenue and net income to shareholders from Markel Ventures increased in 2011 as compared to 2010, primarily due to our acquisitions of RD Holdings, also known as Retail Data, and Diamond Healthcare in late 2010. Moving to our investment results, investment income was $264 million for 2011 compared to $273 million in 2010. Net investment income included an adverse change in the fair market value of our credit default swap of $4 million in 2011 as compared to a favorable change of $2 million in 2010. The decrease in investment income was also due to lower investment yields, which were partially offset by having a larger portfolio in 2011 compared to 2010.
Net realized investment gains were $36 million in both 2011 and 2010. Unrealized gains increased $183 million before taxes in 2011 due to an increase in the fair market value of our fixed maturities. At December 31, 2011, we held fixed maturities of $54 million, or less than 1% of invested assets from insurers domiciled in Portugal, Ireland, Italy, and Spain. We have no exposure to issuers in Greece. We have an additional $730 million, or 8% of invested assets from issuers domiciled in other European countries, including supernationals. Tom will go into further detail on investments in his comments. Looking at our total results for 2011, we reported net income to shareholders of $142 million compared to $267 million in 2010. Book value per share increased 8% to $352 per share at December 31, 2011, from $326 per share at December 31, 2010.
The effective tax rate was 22% in 2011 compared to an effective tax rate of 9% in 2010. Our effective rate in 2010 included 11 points of non-recurring tax benefit related to foreign operations and our decision last year to permanently reinvest from those operations outside of the U.S. Next, I'll make a couple of comments on cash flow and the balance sheet. Operating cash flow was $311 million for 2011 compared to operating cash flow of $223 million for 2010. This increase was primarily due to higher cash flows from underwriting activities in the specialty-admitted segment and positive operating cash flow from our Markel Ventures operations. Investments in cash at the holding company were approximately $1.2 billion as of December 31, 2011, as compared to a little less than $900 million as of December 31, 2010.
The increase from the prior year is primarily due to the issuance of debt during the second quarter of 2011 and dividends from subsidiaries, offset in part by interest payments and stock repurchases. Lastly, we have repurchased 110,000 shares of our common stock for approximately $42 million during 2011. At this point, I will turn it over to Mike to further discuss operations.
Speaker 2
Thanks, Anne. Good morning. My comments regarding the North American segment for the quarter will be brief. We recognize that signals and opinions on the current market conditions are mixed. However, we are clearly seeing a property and casualty market that's in transition. During the fourth quarter, we experienced casualty rates that were flattening and property rates increasing at a modest pace. This is certainly an improvement over the rate environment that we have witnessed for a long time. At Markel Group, we began seeking modest rate increases in November, and to date, our new and renewal business success ratios have remained relatively constant. We're carefully monitoring responses to our rate actions and will seek additional increases where conditions warrant those increases without jeopardizing profitable business. Our underwriters are telling us that competition remains strong, but they're not having to "fight and claw" for every renewal.
While we're optimistic, we'll have to see if this trend will continue in early 2012. At Markel Specialty, excluding FirstComp, premium was up 4% in the fourth quarter versus 2010. Including FirstComp, Markel Specialty was up 24% compared to the fourth quarter of 2010. Year to date, Markel Specialty is up 3% excluding FirstComp and up 53% including FirstComp. The main highlight in the fourth quarter at Markel Specialty was the announcement of our acquisition of Tomco. This deal was closed in early January. Tomco brings to Markel Group a terrific track record of program development and administration, as well as a seasoned and talented group of associates. Greg Thompson and his team will become our admitted program division, and Greg will continue his role leading Tomco as he has done for 32 years.
During 2012, we will concentrate our efforts on moving the majority of Tomco's programs to Markel Paper. We will begin this process in April and continue throughout the calendar year. Other highlights at Markel Specialty include the combination and reorganization of our property and casualty and Markel Risk Solutions units into a more focused commercial business platform. The new unit will be called Markel Specialty Commercial. This combination will result in a more streamlined operation and a more clearly defined underwriting appetite. We also took a myriad of concentrated actions in our accident and health unit to improve the loss ratio. These changes may reduce volume but deliver a much improved loss ratio in 2012. For the fourth quarter, our E&F segment generated growth of 12% in our core product. For the fiscal year, the growth in core products was approximately 7%.
This growth improved dramatically from the first quarter to the fourth quarter, which is evidence that our One Markel initiative is consistently gaining traction with our agents and brokers. Submission activity also increased, lending further support to our belief that One Markel is working and that market conditions are in a transition to a better environment. Our underwriting teams across the five regions of our E&F operations have stabilized, and we now have experienced underwriters for virtually all of our products in all of our regions. We also continued the second phase of overhauling our agents' portal to improve functionality and efficiency for those agents accessing us through our website. We foresee a continued release of additional product classes available for automated pricing, underwriting, and quoting throughout 2012.
During the fourth quarter, our product line leadership group completed a review of all pricing for all major product lines and, as previously mentioned, began implementing changes in November. We are taking a deliberate and class-specific approach to pricing, seeking increases across all product lines. This has been communicated both internally to all of our underwriters and to our agents. With regards to new product developments, we finalized a contractor's pollution coverage form to offer as part of our binding casualty product. We believe this will be popular with our contractor RIFs, which is one of our larger classes in the binding book. In summary, we're ending 2012 optimistic that the rate environment is improving, confident in our underwriting teams, and encouraged by the growth opportunities in both specialty and E&F segments. At this time, I'll turn the call over to Richie Whitt.
Speaker 7
Thanks, Mike, and good morning, everybody. I'll be exceedingly brief with my comments as many of the trends that we discussed in the first three quarters of the year really continued into the fourth quarter. Markel International generated gross written premiums of $148 million in the fourth quarter and $825 million for the year ended 2011. The increases for the year were approximately 14%. This is adjusted for the impact of currency movements. Again, this primarily represented organic growth in our marine and energy division and the ramp-up of written premiums from Elliott Special Risk. Elliott Special Risk is really fully reflected in our financials at this point. As a result of organic growth, strategic acquisitions such as Elliott, and the continued development of our branch office network, 2011 represents the most annual premium we have written since the beginning of our international operations back in 2000.
As we all know, top-line growth is nice, but it's really all about underwriting profitability. Unfortunately, we fell short of our underwriting goals due to $124 million of catastrophe losses, which included almost $19 million of Thai flood losses in the fourth quarter. While none of these individual losses or the losses in total exceeded our risk tolerance, they still contributed to a disappointing underwriting result for the year. It was a record year for insured CAT losses at about $105 billion, but I got to be honest, it doesn't make us feel much better. We've already made adjustments to our catastrophe underwriting strategy, and we're going to continue to refine our approaches as we move forward. The biggest thing that could help us in terms of making our catastrophe business more profitable would be achieving higher prices for our capacity.
Regarding pricing, January 1 renewals in London were up in many lines. We're seeing similar things to what Mike mentioned in the U.S. Property lines, in particular, were up on January 1. I think there was a sense of disappointment, as we might have hoped, that given all the significant activity in 2011, we would have seen a bit more in terms of price movement at January 1. We're going to remain patient and disciplined, and we're only going to put our capacity out there when we feel like the prices are adequate. We certainly can't predict with certainty, but we believe that prices will continue to strengthen for both property, and we think casualty will follow as the year progresses. We're certainly going to be pushing for additional rate on the things we quote, and we'll see what happens.
While we weren't happy to report an underwriting loss at Markel International and at Markel Group, we don't want to lose sight of the many accomplishments our international team had during 2011. We greatly expanded and strengthened our retail branch network and created a management structure to enhance our focus on our retail branch operations. We just recently concluded a small joint venture deal in Germany, which is going to give us the opportunity to start really learning about the German market. Elliott Special Risk, as I said earlier, is fully reflected in our numbers at this point and is performing extremely well. The team there has done a great job. We've added key management talent, and we continue to search for and cultivate opportunities to build out our Markel International footprint and platform. We're well positioned for 2012, and we're really looking forward to it.
With that, I'm going to turn it back over to Tom.
Speaker 2
Thank you, Richie. I'm pleased to report a variety of encouraging items from the investments and Markel Ventures components of Markel Group. First, let's start with investments. In 2011, we earned a total return of 6.5% on our investment portfolio. Fixed income earned 7.6%, and equities earned 3.2%. During the year, interest rates started low and went lower. As a consequence, we've over-earned the coupon rates of return on the fixed income portfolio. We continue to believe that rates are unnaturally low and suppressed by non-market forces. As we painfully observed with natural catastrophes in our insurance operations this year, Mother Nature can swamp man-made artifices when she chooses to do so. Consequently, we remain cautious about what the forces of nature will do when the man-made levees protecting zero interest rates break. As such, we continue to maintain shorter than usual durations in our bond portfolio.
This means we forego current investment income in exchange for protecting the balance sheet of the Markel Group. We are balance sheet-oriented in all we do at Markel, and we will continue to follow this path. We just simply do not believe in an extended period of 0% interest rates, and we are acting accordingly. On our equity investments, we earned 3.2% in 2011. While we don't manage versus the S&P 500, we do find it a valuable bogey to provide a frame of reference about what our investment returns should realistically be over time. I'm pleased to report to you that our return was 110 basis points ahead of that index. More importantly, over the two decades that we keep track of the statistics, we've outperformed by 190 basis points per year.
We certainly think that two decades of data supports our case that we add value in our equity operations both against the S&P 500 index as well as against fixed income alternatives. Our four-part discipline of buying stakes in businesses with good returns on capital run by honest and talented managers with reinvestment opportunities and capital discipline at fair prices works for both public and private investment opportunities. Speaking of private opportunities, 2011 was a very productive year for Markel Ventures. For 2011, revenues came in at about $317 million versus $166 million a year ago, and EBITDA was $37 million, an 80% plus increase compared to the $20 million in 2010. As always, a reconciliation of EBITDA to net income is available on the website.
We added Welch Ship, a manufacturer and lessor of tube trailers that serves the industrial gas market during the fourth quarter, and we continue to have active discussions underway with others who would like to join Markel. We continue to build a reputation as a great home for passionate business people to build their organizations, and we will report to you our progress as it occurs. I'd like to point out that given the lower level of interest rates in general, our investment income line, which is interest and dividend income, declined from $273 million in 2010 to $264 million in 2011. That's not surprising. It's just the math of lower interest rates coupled with our decision to protect the balance sheet by owning predominantly short-term rather than long-term bonds. The investment income line is a gross pre-tax number that doesn't take out interest income, taxes, depreciation, or amortization.
As such, I think it's comparable to, and I am comfortable with, adding the growing EBITDA line from Markel Ventures to get a gauge of what is happening under the hood at Markel. When you do that, the combination of these two items grew from $293 million in 2010 to $301 million in 2011. By the way, we also had gains of $306 million in both years. They're not included in those numbers. I think the fact that this number grew at Markel in the face of lower interest rates and tough overall business conditions should provide you with a sense of optimism about your company. I'm also optimistic about our outlook, and I look forward to speaking with you in the future period to update you as we continue down this path and all the ways in which we can create value in the market.
With that, I'll stop and open the floor for questions. Closed if you...
Speaker 6
Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speakerphones, it may be necessary to pick up your handset before pressing the star key. One moment while we poll for questions. Our first question comes from the line of Arash Shalamani, Blue People Nicholas. Please proceed with your question.
Speaker 4
Hi, good morning. I have a couple of questions. Are you guys still seeing competition from Standard Carriers? If so, how big of an impact do you think that's going to have on the cycle of terms going forward?
Speaker 2
We are continuing to see competition from the standard carriers, and it remains to be seen what that competition will look like. We don't discount it. While the market is in transition, we expect to see continued competition from the standard carriers.
Speaker 4
Okay, thanks. My next question is, have you determined the impact of the new DAC accounting yet on the book value?
Speaker 0
We are going to implement prospectively effective 1/1 as required, and we expect to see an unfavorable impact of approximately 2% on the 2012 expense ratio.
Speaker 4
Okay, it won't affect book value at all since you're doing it prospectively as of now, right?
Speaker 0
That's correct.
Speaker 4
Okay. All right, that's all for me. Thank you.
Speaker 2
Thank you.
Speaker 4
Our next question comes from the line of Mark Hughes from SunTrust Investment. Please proceed with your question.
Speaker 1
Thank you. Good morning. The expense ratio, you think a two-point hit, the underlying expenses, will they hold relatively steady? Or can they just take an improvement there?
Speaker 2
I think we anticipate some improvement, Mark. Obviously, our gross written is growing, our earned premium is growing, and those help a lot. We also are working on the expense side of the equation as well. Yeah, we would expect our expense ratio to improve a bit in 2012.
Speaker 1
Right. The other expenses were up a bit this quarter compared to the other revenues. Was that an anomaly? What should we expect there going forward?
Speaker 0
I don't have handy what that is. My gut instinct is it's coming out of the increased acquisitions in the Markel Ventures realm relative to their increased revenues. We can follow up offline if you want and get you a more specific answer.
Speaker 1
I think it had been running at the expense ratio in recent quarters, I guess relative to the revenue, it was more like 80, high 80s. Would we expect it to return, perhaps, to that kind of level? Again, relative to other revenues.
Speaker 2
Yeah, we don't think about it that way. Let me make one qualitative comment, and I would invite you to speak with Anne Waleski to get the details on this. As I said earlier, both in this call and every other call in the history of Markel Corporation, balance sheet-oriented. I would suggest to you that that applies to the Markel Ventures operations as well. In purchase accounting and in accounting for the transactions that are involved, we tend to be somewhat heavy-handed and try to be as conservative as possible at the balance sheet presentation possible, and if that's at the expense of the income savings, so be it. Given the acquisition activity and the completion of the purchase accounting and that sort of thing, that was probably a bit disproportional in the fourth quarter. I encourage you to follow up with Anne Waleski for the details on that.
Speaker 0
Yeah, as we moved out past and from non-risk to risk-bearing, you may see some shifts there. Like I said, we can take it offline. I can give you the specifics.
Speaker 1
Right, exactly. Any comments you can make regarding where you see a reserve redundancy? You had the very current fourth quarter, which was released as a very good year in 2011.
Speaker 0
Right. The reserve redundancies in prior years have predominantly been in the professional and product liability lines, as well as casualty programs for years between 2004 and 2009.
Speaker 1
What do you think about that going forward?
Speaker 0
I would expect to continue to see prior year redundancies given our conservatism in reserving. It is possible you could see the amount flat now.
Speaker 2
Yeah, Mark, I guess I'd add, you know we talk about this probably every year. We try to make sure at the end of the year, the balance sheet is at least as conservative as it was at the end of the prior year. We've been very consistent in terms of how we set our loss reserves and our confidence in the loss reserves. As Anne Waleski said, the reality is there's just not as much room in the last few accident years as there was in probably the 2008, 2007, 2006 accident years. The reality is I think over time, unless you start seeing price increases, and we hopefully are starting to see price increases, you would expect those numbers to continue to trend down.
Speaker 1
Excellent. Our next question comes from a line of John Fox from Fenimore Asset Bank. Please proceed with your question.
Speaker 5
Okay, thank you. Good morning, everyone.
Speaker 1
Morning, John.
Speaker 5
First for Tom. Tom, could you kind of give us an outlook given the acquisitions you made in the fourth quarter and then possibly you made one in January? Maybe an outlook for Ventures revenue for 2012?
Speaker 2
The acquisition in January, which was Tomco, was on the insurance side. That's not part of Markel Ventures. For instance, if you look at the fourth quarter, the other revenue line was largely described out of Markel Ventures, known to no one. If you times that by four, that wouldn't be wildly wrong for the existing set of businesses that we own. We're busy and we're talking to people, and I don't want it to be too low. Add another family or two to the Markel family over the course of the year, but be stronger than that. The other consistent statement I made about the Markel Ventures revenue in this slide from the earlier segment as well.
I encourage you to look at that reconciliation of the EBITDA to net income and what was taught about a decentralization or double-digit % of EBITDA from the fund revenue line, which I've got to continue to be paid. You can sort of see the progress of tracking through that schedule line regularly for the bank.
Speaker 5
Okay, thank you. I had a question on Tomco, probably for somebody else. Is it possible to quantify that impact? I guess it's going to be in the specialty-admitted line?
Speaker 2
Yes. Tomco placed about $160 million of premium in 2011.
Speaker 5
Okay, you would bring that onto your Markel Paper?
Speaker 2
Not all of it in 2012. We do plan to convert the majority of their programs over time to Markel Paper.
Speaker 5
Okay.
Speaker 2
will start in April.
Speaker 5
Okay.
Speaker 2
Yeah.
Speaker 5
You're not going to see $160 million in 2012. It's going to be sort of a progression as the year goes by.
Speaker 0
It's about $60 million.
Speaker 2
Our best guess today would be $60, but that depends on filings and all sorts of things in terms of how quickly we can get those programs moved.
Speaker 5
Right, okay. That's very helpful. This was probably a dumb question after 2011, but what do you guys, when you underwrite, consider to be "normal cat load"?
Speaker 2
The normal cat load, boy, that's an interesting one. I hope it's something less than $150 million, which is what it was this year.
Speaker 5
Right, I mean, it was 8 points, as I.
Speaker 2
Yeah, no, eight points. We would think eight points. I mean, as I said, Munich Re, at least, is saying they believe this year was a record cat year at $105 billion. Swiss Re kind of has the 2005 and 2011 swap from Munich Re one and two.
Speaker 5
Right.
Speaker 2
You know, eight points. I think we did a reasonable job of managing our catastrophe exposures, and I would be very disappointed if we had another eight-point kind of year. I think I'd have to go look, John, but I think typically we run 2% to 3% a year would be my guess.
Speaker 5
Okay. I'm just wondering if you could talk about the balance sheet philosophy with over $1 billion at the holding company, and the rate of return on debt and on bonds being low, as Tom described, for good reasons. Your yield on your bonds is much lower than your interest expense on your debt, and you have a lot of cash. Your premium to surplus is low. The ratio is low. Why issue debt, and how are you thinking about the cost of your debt in the balance sheet at this point?
Speaker 2
You are correct on each and every one of your points. In the last couple of months, I would say the tempo of activity at Markel Group continues to pick up the pace. In terms of deploying that capital and fully recognizing what it costs, our internal insurance operations can and are growing. We've done a couple of acquisitions on the insurance side, we've done a couple of acquisitions on Markel Ventures, and we also repurchased some stocks. We're going to have to be open-minded about doing all of those things, and every single dollar which is expended on any one of those four items has been something that we think earns pretty good rates of return, and we're productively using that capital. We see a lot of things in front of us that it's nice to have ammo when we're running like that.
Speaker 5
Okay, I'll wait to see those. Thank you very much.
Speaker 2
Thanks, John.
Speaker 5
Our next question goes to a line of Mark Slow from RBC Capital Markets. Please proceed with your question.
Speaker 4
Good morning. A few questions. The rate of growth in the E&F segment was significantly higher in the fourth quarter than what we had seen in a while. I guess after your comments that you hadn't really begun pursuing rate aggressively until sort of the midpoint of the quarter, I was curious if you had a counter for kind of the additional run rate in the quarter.
Speaker 2
This is Mike. I just attended two of our agents' council meetings down in Florida. The basic feedback that we're getting from the agents is the fact that the one Markel decision was the right decision. We have the right underwriters in place in the field. They're pleased with what they've seen with Markel. They say that our breadth of products is at least, if not considerably larger than most of our competitors. There are a lot of factors that are playing into our growth. Clearly, getting some more rate is part of it in the fourth quarter. As you mentioned, we really didn't start going out for some rate increases, and they were modest rate increases until November. We're just seeing traction in the one Markel model. Our efforts are paying off. We feel good about it.
The feedback we got from both our binding and our brokerage agents was very positive. The job we have to do now is just to continue that momentum.
Speaker 5
Would you characterize that then as new business wins or just expansion of business with existing clientele?
Speaker 2
I think both of them.
Speaker 5
Okay, fair enough. With respect to Tomco, could you talk a little bit about sort of what lines of business and what sort of products are involved there that you would hope to bring over to the books over the course of 2012 and 2013?
Speaker 2
They have a number of different programs, and not all of these will read the Markel Paper, but they have a program for childcare centers, social services, medical transportation, senior living, fitness clubs, pest control operators, inflatable rentals, and some others.
Speaker 5
Was it?
Speaker 2
The medical transportation program is their largest.
Speaker 5
Is the underlying product, though, is it a commercial multi-policy, or is it something commercial auto, working home?
Speaker 2
Yes, more packaged business.
Speaker 5
Okay.
Speaker 2
Packaged business, just like our specialty, our mixed specialty business. There are a lot of complementary programs there with the childcare and the social services and some of the other things. It really is a nice fit.
Speaker 5
Okay.
Speaker 2
Imagine, Mark, if you would, that the Pittsburgh Steelers were in the Super Bowl and they won, and you had a party with inflatable rentals, you'd want to make sure your operator has insurance. Tomco would be the provider of that.
Speaker 5
I'll look forward to getting some of that next year, hopefully.
Speaker 2
I guess it's consistent with what we've done before in the specialty-admitted segment.
Speaker 5
Okay. My last question, just you had mentioned the share repurchases for the year. Was there any portion of that that was in the fourth quarter?
Speaker 0
There was a portion of that in the fourth quarter, and that number is $8.9 million to approximately $9 million, about 25,000 shares.
Speaker 5
Okay, thanks very much.
Speaker 1
Our next question comes from a line of Jay Collins from Bank of America Merrill Lynch. Please proceed with your question.
Speaker 4
Thank you. Tom, you gave me a great idea for celebrating when the Giants win the Super Bowl this year.
Speaker 2
Yeah. We're not going to sell the shirt for either ColorTech.
Speaker 4
Just one follow-up on Tomco. Have the margins, the underwriting margins for this business historically been in line with what Markel has produced?
Speaker 2
Yeah, the answer would be yes. Obviously, they're written by other insurance companies, and they have their own pricing and own pricing models. We're comfortable that the business will be underwritten with the same guidelines and the same conservatism that we write other lines at Markel Specialty.
Speaker 4
Got it. Other question, interest expense ticked down a little bit. I don't think there was a big change in the debt outstanding. It seemed to go up a little bit. I'm wondering what's behind that. In the fourth quarter, I'm talking.
Speaker 0
In the fourth quarter? I'm not sure, Jay, but we can pull the details out on that, and I can pick it up with you outside of this.
Speaker 4
Okay. I think that is it for now. Oh, just one thing, the expense ratio. A two-point, all else being equal, a two-point increase in the expense ratio because of the change in accounting for DAC. That goes into 2013 as well, correct?
Speaker 0
No, that should all be in 2012.
Speaker 4
Just in 2012.
Speaker 0
Right.
Speaker 4
That's helpful. Great, thank you very much.
Speaker 2
Thank you.
Speaker 1
Our next question comes from a line of Matthew Berry from Lane 5 Capital Management. Please proceed with your question.
Speaker 4
Hello gentlemen, and lady. I apologize. Okay, Mark, a question for you about FirstComp. Quickly, I may be covering old ground. I apologize if that's true. FirstComp, this year, a nice little bump up in revenues there that you guys can play with, but obviously at this point, it's not profitable and was a weight on Specialty Admitted. What I was hoping you could explain to me is a little bit about the reason for FirstComp's lack of profitability, your plans for addressing it, and the timeline on that. Maybe if you could give me, just by way of explanation, something of a compare and contrast with FirstComp and the rest of the businesses in Specialty Admitted so that we can think about how FirstComp will shake out compared to the other businesses in terms of its long-term profitability track.
Speaker 2
When we acquired FirstComp, you know, we knew what the workers' compensation market looked like, and we knew that this would be a transition to the levels of profitability that would satisfy us going forward. They followed that. I mean, they grew more this year than we had anticipated, but they moved into a couple of new states where they were successful. They continued to manage their California exposure well. You know, it's a challenge. The workers' compensation market is incredibly soft. You have the issue with the various state regulators repressing, you know, the ability to price the comp the way we'd like to. At the same time, you know, we were successful in getting our cost sell efforts underway with the FirstComp salespeople, FirstComp agents. We continue to drive growth in the whole specialty division by selling some of our other Markel Specialty products to the FirstComp agents.
I think we've appointed several hundred FirstComp agents out of the 400 that we identified at this point to sell other Markel products. You know, we clearly are in constant discussions with the FirstComp team, and this is a transition process in terms of their success and our loss ratio. It's just going to take some time.
Speaker 4
Do you have a sense of the rough timeline for moving that forward and how you think profitability will shape that?
Speaker 2
I could give you an outline if I knew what the market was going to do. It's going to be a continuous transition. I think that, yeah, I'll just add to that, maybe Matthew. It's a tough market, and I tell you what, the results at FirstComp right now are probably more about the market than what FirstComp's doing. I think they're doing about everything we could ask them to do. They were able to grow their business a little bit by moving into some other states. They've been deemphasizing California. California is great when it's rolling, and it's terrible when it's at the bottom. What they've done is they've really diversified. They're diversifying their book away from California, which I think is going to shake some of the cycle out of their book going forward.
The other thing we've been doing this year, and we've still got a little ways to go, is we're just getting them in line with our reserving philosophy. That's a bit of a drag at the moment in terms of the results they report. They're moving in the right direction and probably are ahead of what our expectations were at this point.
Speaker 4
Okay, that's very helpful. One thing, this is a fairly general question, Richie. In terms of Markel International and the expansion on the way over there and exciting things going on in Germany and you find a retail branch and so on. Outside of the U.S., do you see, you know, the places that you're going into, do you see underwriting standards are above or below the U.S. in general? Do you consider the international markets ripe for pickings or a tough way to expand?
Speaker 2
You know, it's amazing to me. It doesn't matter where you go in the world. The markets are competitive. Now, some may be slightly less competitive than the U.S., and some are actually more competitive than the U.S., if you can believe that. It's amazing how global the insurance market has become, and they're all fairly competitive. What we've gone in and tried to do is go in with good teams that know that market and know what sort of price they need to be able to make an underwriting profit. We're starting it small. We're not going in there with a big splash. We're going in with small teams and looking to build to $20 million, $25 million of volume. It's a safe strategy that we're pursuing, but I wouldn't kid you, there's no rights-for-the-taking markets out there right now.
We're certainly hoping they're changing, but I wouldn't say any of them are rights-for-the-taking.
Speaker 4
Okay. All right, thank you very much.
Speaker 1
Our next question comes from the line of David from Davenport & Company. Please proceed with your question.
Speaker 2
Hey, good morning.
Speaker 1
Hey, Dave.
Speaker 2
First, maybe a little follow-up as we were talking about FirstComp a little earlier. Could you talk a little bit? I know state by state this can vary, but in general, you gave great color about other pricing trends, but what about pricing trends in general in the workers' comp area?
Speaker 1
We're not seeing a lot of movement there right now, Dave. We expect all the market at some point, but we're not seeing a lot of movement. What FirstComp has done, as I said earlier, they're trying to move to states with the opportunity to get more favorable rates in their mind. Is the right thing to do? Moving out of California, reducing some of that exposure is the right thing to do. I think that keep in mind they write very small workers' compensation policies, and I think as the market does move in a better direction, we could see them moving through there.
They're trying to find states where there's opportunities for them to write the kind of policies that they write on the small businesses and startups at a price that where the rates in that state are simply more competitive than they are, or not competitive, but better in terms of us getting an underwriting profit than some other states.
Speaker 2
Very good. Kind of switching over to the Tomco deal, you mentioned that they did about $160 million related premium.
Speaker 1
In excess of that, yeah.
Speaker 2
In excess. What did Markel formally account for that prior to acquisition?
Speaker 1
Oh, you know, they didn't have anything out there. We didn't close the deal till January.
Speaker 2
Oh, no, no, no.
Speaker 0
No, we didn't write any of that business.
Speaker 2
No, we didn't write any of the business payouts. It was all with our competitors.
Speaker 1
Okay, very good.
Speaker 2
None of that.
Speaker 1
Tom, a quick question for you. There were some modest other than temporary impairment charges in the quarter. What’s constituted those charges?
Speaker 2
Part of volatility.
Speaker 1
For sure.
Speaker 2
It's in the name form of accounting. I reference you to Mr. Buffett's letter to the SEC about that topic if you want to see some other points of view, that's about it, but there's the rule. Nothing that I'm worried about economically.
Speaker 1
Very good. Though the European investment that you mentioned in the press release, that really had nothing to do with it.
Speaker 2
Yeah.
Speaker 0
That had nothing to do with it.
Speaker 1
Thanks so much.
Speaker 2
Very good.
Speaker 1
Our next question comes from a line of Kevin Shields from Pine River Capital. Please proceed with your questions.
Speaker 2
Good morning, and thank you for taking my call.
Speaker 1
Good morning.
Speaker 2
I have two quick questions. Number one, what % of the book are you receiving price better than trend? For this piece of the portfolio, what is the persistency say versus the average of the portfolio of the total?
Speaker 1
That's a price better than trend. I would say in general, you should probably think in terms of trend of three to five. I would say in very, very few places right now are we getting price increases better than trend. For the first time in a long time, we're probably getting prices that, in a lot, well, a lot in some places, at least equal trend. I think we're shooting for three to five in some places. If they stick, we're going to, if you can find some more in it. A pretty difficult question, but I would say the industry in general hasn't been getting anything close to trend in several years. It seems like in the transition that Mike Crowley talked about, we're starting to see some price increases that might be around trend.
Hopefully, by the time we get on this call with you next quarter, maybe we can talk about some prices that maybe are exceeding trend. I think that's probably the best I can do on answering that.
Speaker 4
Okay. For the second question, can you, that loss cost trend range of 3% to 5%, can you maybe flush it out for your major sort of lines of business like Fire and Allied, Workers' Comp, Marine, and other?
Speaker 2
That's really hard, but I would say in general, just in very, very general, you would tend to think of your liability lines at the higher end of that, and particularly your professional liability lines, and then your property and other things are probably at the lower end of that. That's a very general state.
Speaker 4
Thank you.
Speaker 1
Our next question comes from the line of Ron Bobbins at Capital Returns. Please proceed with your question.
Speaker 4
For answered. Somebody made the comment earlier on the call that basically FirstComp was at or sort of ahead of where you, I guess, expected it to be. I'm not sure if that was referring to sort of the transition pace or profitability. I was wondering if.
Speaker 2
It's a hard top line.
Speaker 4
As far as top line, it's not indicative of, I think there was an earnout on the acquisition, whether that earnout is sort of on track to be earned or not. Any insight on that? That's my only question.
Speaker 2
Yeah, the earnout was really on the opening balance sheet. At this point, you know, it's nothing at this point is what the calculation would show. This is worker comp business, so it takes a while to develop, so that could change. The earnout was really about the snapshot balance sheet the day we bought it, not the first business.
Speaker 4
All right. Thanks, guys, and best of luck.
Speaker 2
Thanks.
Speaker 1
Again, if you would like to ask a question, just star one on your telephone keypad. Star one on your telephone keypad. Our next question comes from the line of Ray Idl from Bookwire. Please proceed with your question.
Speaker 4
Good morning, guys. It's just a couple, I don't want to kind of ask all about FirstComp on the call, but a couple of quick ones regarding it. What states are you guys diversifying away from California? I know you had talked about some better premium growth there and some diversification. Any clarity would be helpful.
Speaker 2
We went into Louisiana, and I'm trying to remember what the other.
Speaker 1
St. Louis.
Speaker 2
Louisiana and Alaska.
Speaker 1
Right.
Speaker 2
Seems like there might have been one more. I'd have to get that one for you.
Speaker 1
What the team has been doing is, where they see better profitable states, they've been pushing harder in those states and trying to grow the business there. They've been raising prices, obviously, as a lot of people have in California, particularly in the areas where we're not seeing good performance. To some extent, you're shrinking California or what you're writing in California is a rate you're happy with, a rate you're more happy with. In other states where we're happier with the pricing environment, we're trying to grow in those states. It's really a portfolio balancing exercise that those guys are working through, and I think they're doing a good job.
Speaker 4
Understood. No, I just want to make sure it wasn't some of the more problematic states that other people have talked about, like in Illinois or potentially in New York. I would assume you guys would be targeting the more profitable. I just wanted to double-check.
Speaker 2
Yeah, we have a lot of confidence in their and FirstComp's management in making those decisions. They really have a very strong culture of metrics and understanding their business. We have a lot of confidence that any moves they make will be in the right states.
Speaker 4
Got it. I guess a quick one on the reserves side for FirstComp. I don't know if I did the math right, but I think for the year, there was a little bit of adverse development from that business. I know you guys have a different reserving philosophy. Just curious, is that in any particular accident year, or is it sort of across the board to just get it up to your reserving philosophies?
Speaker 2
I don't want to go into the details, but I want to add a sense of historical perspective to this. If we had to do the FirstComp deal all over again, we would all do it enthusiastically in a New York minute. The point I want to make is that if you look at any deal we've ever done at Markel, we've always had the process of going to be more likely to be redundant than deficient in our reserving. That always has a time lag associated with it where the reserve philosophies are harmonized across the various Markel units. In 2011, a few years ago, we know right now that those reserving philosophies and levels are being harmonized. We can see and feel and taste and touch the business, the underwriting, the intelligence with which they're pursuing their business, that have a great deal of confidence in it.
In the coolest of times, this deal, like all the other deals, will work out well for all Markel shareholders.
Speaker 4
I appreciate that. I know your history as far as reserving is concerned. I guess $6 million doesn't seem like a lot to me. If you're moving around reserves maybe in the older action years or more recent ones, a color like that would certainly be useful from our end. The other question I just wanted to ask quickly about is the catastrophe exposures. I know you guys had taken a step back and kind of looking at what you thought about catastrophes. Do you have any specific metrics that you look at? I know you had mentioned getting price increases. You'd certainly be more willing to maybe deploy some capital for cat exposures. Just trying to get a sense of where you would think about that business going forward.
Speaker 2
We have this, like all the people probably that write this business, we have a lot of metrics we look at. You know, without getting into too much detail, we clearly look at our 1 in 250 return period numbers. We do bootstrap methods and just add up the TIV. We've gotten gates around the coast for wind. We look at the eclectic zones in California and make sure we're comfortable, we're not overloaded in particular eclectic zones. We have lots of metrics we look at. The big thing we're doing right now is just continuing to focus on that and make sure we feel like we're making the appropriate moves. We're looking to increase pricing because we believe this business needs more price given the sort of events we saw in 2011.
I think we've made a lot of changes since 2005 in Katrina, and we believe we've improved our methodology and approach significantly. It's always evolving, and we're always going to keep looking at it and trying to continue to improve because when you write a catastrophe business, you never want to get too comfortable. We're always going to be looking and trying to get better.
Speaker 4
Great. I appreciate the color. Best of luck.
Speaker 2
Thanks.
Speaker 1
Our next question comes from a line of Jay Collins from Bank of America Merrill Lynch. Please proceed with your question.
Speaker 4
Yes, just one quick numbers question. Do you happen to have the statutory surplus as of year-end?
Speaker 0
No, we don't have that yet, sir. It'd be a couple more weeks on that.
Speaker 4
Okay. I guess a more philosophical or theoretical question. The makeup of your earnings between accident year and prior year development is clearly much different than other companies, far different. Essentially, you're not making money on an accident year basis if we exclude the favorable development. I think even if I added back catastrophes, you wouldn't be. There has been this history of conservative reserving at the company. Are you set up where you would expect at least to make money on an accident year basis? In other words, it feels as if you're being way overly conservative, or maybe the world just has to catch up to you. What do you think is closest to the truth?
Speaker 2
I’d say, you know, I don't know that you can get the numbers out of our annual reports. I think you can. I would say that what you just described has been consistent for Markel Group throughout time. We are very conservative on the current accident year, and then over time, as things develop, we allow that to come down. That's just the way we've always done it. I think I mentioned earlier, there's no question, the 2011 accident year is thinner than 2010 was and thinner than 2009 was. We still did everything we could to price it to an underwriting profit, but it's not going to be what 2010 was. It's not going to be what earlier years were.
Speaker 4
It sounds like 2012 is going to be even worse because you're still not, your price increases aren't yet keeping up with claims inflation.
Speaker 2
It's really, you know.
Speaker 4
Underlying pressure there. That's catastrophe losses.
Speaker 2
Right. I guess the thing I'd say there is you estimate trend just like you estimate a lot of other things. The thing that I think has probably surprised a lot of people in the last few years is trend has been somewhat benign. Trend, you name it, on trend, on our development factors, we're going to be conservative on all other. You know, watch it, and our hope and expectation would be that it comes down over time.
Speaker 1
One thing I would add, Jay, in terms of the philosophy, obviously, the accounting was one issue which you rightly raised. The good news is that we do get the cash on day one, regardless of whether we recognize the income from it this year or in subsequent years. These dollars do flow into the investment portfolio and start creating returns for the shareholders.
Speaker 4
Absolutely. I guess one last point, five question on this. I've had other companies tell me that they try to get their accident year numbers as close to accurate as possible because that gives them some insight into pricing. If we're way off either way, it will give us misinformation on how we should be pricing the business. It doesn't seem to be impacting you. I mean, your pricing, from what I hear in the market, is pretty consistent, and you're not way too high or low. Is that just an inaccurate statement that an accident year number has a lot of information content relative to how you price the business going forward?
Speaker 2
I mean, they're certainly linked, Jay, and I think part of why it works for us is we've done it a long time, and we've done it consistently this way. We talk a lot about margin of safety, and we talk about the fact that there is a margin of safety in our loss reserving that may take a slightly different view as we sit down to really come up with a pricing methodology. There might be slightly more conservatism in our reserving pit than there would be in our pricing pit. We spend a lot of time talking about those two numbers to make sure they're not disconnecting. They could be different, but we don't want them to disconnect.
Speaker 4
Got it. That's a helpful answer. Thanks a lot, guys.
Speaker 1
Our last question comes from a line of Ron Bobbins from Capital Returns. Please proceed with your question.
Speaker 4
Sure. Thanks for the opportunity to follow up. Two questions. Evan Greenberg on the ACE call yesterday, I think twice he made comment about the E&S casualty market. I think you heard he used the word, you know, an area of stress or severe stress. I was wondering if you would describe either pockets of or large portions of the E&S casualty market experiencing stress. That was sort of the first I had heard of it described as an extreme. I also noted, I think, but I haven't heard any of the Markels on the call today. Am I right? I mean, is this a new procedure for the calls? Thanks.
Speaker 1
I'll make a two-time at this point. We didn't hear Mr. Greenberg comments from ACE, so he can't comment on the comments we didn't hear. I really don't know how to address that. Jeff, this has been the lineup here for a year now, so a year and a half. We're here, and the Markels, I can trust you, I can assure you are listening as well, and will coach us as soon as we walk out of the room.
Speaker 4
Okay, how about just generally, would you describe E&S casualty as a stressed segment?
Speaker 2
The only comment that I would make is that we are not seeing significant price increases in the E&S casualty market at this time.
Speaker 4
Okay, thanks. That's good.
Speaker 1
There are no further questions at this time. I would like to hand the call back over to Tom Gayner for closing comments.
Speaker 2
Thank you very much. We're glad you were with us, and we look forward to catching up with you soon. Take care.
Speaker 1
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.