Markel Group Inc (MKL) 2014 Q1 法說會逐字稿

Greetings and welcome to the Markel Corporation's first quarter 2014 earnings conference call. (Operator Instructions). I would now like to turn the conference over to your host, Mr. Tom Gayner, President and Chief Investment Officer for Markel Corporation. Thank you Mr. Gayner, youmay begin.

Thank you, Bob. Good morning, and welcome everybodyto the Markel Corporation first quarter conference call. We are glad that you have joined us today. My name is Tom Gayner and with me today are Anne Waleski our Chief Financial Officer, and my Co-Presidents Mike Crowley and Ritchie Whitt.

Anne will go over the numbers with you. Mike and Ritchie will update you on our insurance operations,and I will finish with a few brief comments on our investments and Markel ventures activity. Following that, we look forward to answering your specific questions.

Before we do so, though, I am required to reiterate our Safe Harbor statement. So here it goes. During our call today, we may make Forward-looking statements, additional information about factors that can cause actual results to differ materially from those projected in the Forward-looking statements is included under the captions Risk Factors and Safe Harbor and Cautionary Statement 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 these measureson our website at www. markelcorp..com, and our quarterly report on form 10-Q., With that, I will turn it over to Anne.

Thank you, Tom. And good morning, everyone. Before I go over our first quarter results, I would like to provide some information on our new reporting segment. As we highlighted in our 2013 fourth quarter conference call, and Form 10-K, we are now aggregating and monitoring our underwriting results in the following four segments. U.S. insurance, international insurance, reinsurance, and other discontinued lines.

We believe this segmentation of our underwriting results provides the most meaningful way to look at our performance in comparison to peer group and provide the reporting framework which can be consistently used to more quickly integrate future acquisitions into our financial reporting processes. To recap, the U.S. insurance segment includes all direct business and facultative placements written by our insurance subsidiaries domiciled in the United States. The international insurance segment includes all direct business and facultative placements written by our insurance subsidiaries domiciled outside of the United Statesincluding the Company's syndicate add Lloyd. The reinsurance segment includes all treaty reinsurance written across the Company. Results for lines of business discontinued prior to, or in conjunction with acquisitions, will continue to be reported in the other insurance discontinued lines segment.

As a reminder, the form 8-K filed on April 22nd, 2014, provided a resegmentation of our previously reported results for 2011, 2012, and each quarter of 2013. The segment changes have no effect on our historical consolidated financial results of operations. Effective January 1st, 2014 Syndicate 1400 was put in run off and all legacy Alterra at Lloyd business is now being underwritten on Markel Syndicate 3000

Likewise, since the acquisition, some legacy Alterra U.S. property renewals as well as other new business obtained from legacy Alterra producers are now written so that it is difficult to distinguish them from legacy Markel business. For these reasons and the continued combination of underwriting platforms, systems and product offerings it has become and will continue to be more and more difficult each quarter to separately identify and quantify legacy Alterra results. Increasingly, we are not thinking legacy Alterra or legacy Markel. We are just thinking our Company.

Since that is where we wanted to be, we are glad we are here, and we are glad that it has been a relatively quick process. Now let us talk about offer first quarter 2014 results. The year is off to a solid start.

Our total operating revenues grew 15% to $1.2 billion in 2014. From $820 million in 2013. The increase is driven by the expanded underwriting platform and the larger investment portfolio resulting from the Alterra acquisition. Other revenues were up just under 8%, to $186 million, from $173 million last yearprimarily due to revenue growth within Markel ventures.

Moving into the underwriting results, gross written premiums were $1.4 billion for the first quarter of 2014, compared to $743 million in 2013an increase of 83% with each of our three on going underwriting segments contributing to this growth.

Net written premiums for the first quarter of 2014 were approximately $1.1 billion, up 72% from the prior year for the same reason. Net retention was down in 2014 at 84% compared to 89% in 2013.

The decrease which is in line with our expectations is primarily due to higher use of reinsurance on a number of products in the global insurance and global reinsurance divisions. Earned premiums increased 68% to $949 million for the first quarter of 2014. The increase in 2014 was driven by the inclusion of a full quarter of legacy Alterra product offerings included of each of our three ongoing underwriting segments as well as a full quarter from our Hagerty business.

Our consolidated combined ratio for the first quarter of 2014, was a 95%, compared to a 91% a year ago. The increase in the combined ratio was driven by a higher current accident-year loss ratio, and a lower benefit of prior year loss redundanciespartially offset by a lower expense ratio.

The increase in the 2014 consolidated current accident year loss ratio, is primarily due to a higher current year loss ratio for our international and reinsurance segmentseach of which have a higher proportion of premiums coming from legacy Alterra product offerings then our U.S. insurance segment.

During the first quarter of 2014, legacy Alterra product offerings carried a higher current accident year loss ratio than our other product offerings due to higher attritional loss ratios and applying our more conservative loss reserving philosophy. The consolidated combined ratio for the first quarter of 2014 included $107 million of favorable development on prior year loss reserve compared to $85 million in 2013. The benefit of the favorable development on prior year loss reserves had less of an impact on the combined ratio in 2014 than in 2013 due to higher earned premium volume in 2014. The decrease in the consolidated expense ratio in the first quarter of 2014 was driven by higher earned premiums in each of our ongoing underwriting segments compared to a year ago.

Before moving on to our other results, I would like to make a few comments about our actual 2014 first quarter underwriting results compared to the proforma first quarter 2013 underwriting results. We have included these proforma results in the form 10-Q for informational purposes only,but feel that the additional perspective that this comparison provides is helpful given the fact that the actual results for the first quarter of 2013 included nothing for Alterra.

The proforma results were prepared as if the acquisition occurred on January 1st, 2013, and therefore provide a full quarter of combined Company underwriting results for 2013 in an effort to make the year-over-year comparison more meaningful. On a proforma basis growth premiums written were down $33 million in the first quarter of 2014 compared to a year ago primarily due to lower reinsurance premiums driven by several non renewals and softening market conditions. This decrease is partially offset by an increase in growth written premiums from the Hagerty business.

Net retention of gross premium volume was 84% in the first quarter of 2014 compared to ask 81% on a proforma basis in the same period for 2013. The increase is primarily driven by higher retentions on certain of our reinsurance products. Earned premiums were $949 million in the first quarter of 2014 compared to a proforma $910 million in the same period for 2013. The increase is primarily due to having a full quarter of Hagerty business in 2014. The combined ratio was 94% for the first quarter of 2014 compared to a proforma 92% for the same period of 2013 largely due to a higher current accident year loss ratio in 2014. The increase in the current accident year loss ratio was due in part to applying our more conservative loss preserving philosophy to Alterra's long term lines of business.

When we look at the underwriting results in this manner, we believe it is much easier to see that we have retained a significant portion of the business previously written by the two separate organizations, and that we have been successful in achieving our target of underwriting profits while applying Markel's historically more conservative loss reserving philosophy. Now, I will discuss the results of Markel ventures.

During the first quarter of 2014, revenues from Markel's interest were $171 million compared to $162 million a year ago. Net incomer to shareholders for Markel ventures for the period was just over $1 million in 2014 compared to $3.6 million for the first quarter of 2013. EBITDA was $14 million in 2014 compared to $19 million in 2013. The increase in revenues from our Markel ventures operations during 2014 was primarily due to our acquisition of Eagle Construction in August 2013 partially offset by decrease in revenues from our manufacturing operations.

Less favorable results from our manufacturing operations partially offset by Eagle Construction's contributions resulted in the period over period decrease in net income to shareholders in EBITDA. The results of the run off life and annuity business acquires as part of the Alterra transaction are included in the other (inaudible) lines segment. Their expenses for the first quarter of 2014 included $8.6 million of discounted accretions determined as of the acquisition date.

Investment income was $87 million for the first quarter of 2014 compared to $65 million last year. Net investment income for 2014 was net of $18 million in amortization expense from adjusting Alterra's six maturities securities to a new amortized cost basis at the acquisition date. The benefit of holding a larger portfolio was partially offset by lower yields. Net realized investment gains for the quarter were $17 million compared to $18 million a year ago. There were no other than temporary impairments in either period.

Looking at our total results for the year, our projected effective tax rate was 25% in the first quarter of 2014 compared to 24% a year ago. The increase in the effective tax rate in 2013 was driven by a higher projected earnings taxed at 35% rate in 2014 compared to 2013. We reported net income to share holders of $88 million in the first quarter of 2014 compared to $89 million a year ago. Comprehensive income was $230 million this year compared to $258 million a year ago. And as a result, book value per share at the end of March 2014 was $493.96 as share an increase of 4% since is the end of 2013.

Finally, I will make a couple of comments on cash flows and the balance sheet. Net cash provided by operating activities was $22 million for the first three months of 2014 compared to $56 million for the same period of 2013. The decrease was driven by higher payments for income taxes, employee profit sharing, and agent incentive commissions in 2014 as compared to 2013.

Historically, first quarter is our lowest cash generating quarter based on the payments of the items I just mentioned. We would expect cash from operations to improve in the second quarter. Invested assets at the Homing Company were $1.1 billion at March 30th, sorry, March 31st, 2013 compared to $1.3 billion at the year end 2013. The decrease is primarily due to the timing of inner-company settlements.

With that, I will turn it other to Mike to talk about the U.S. insurance segment.

Thank you, Anne. Good morning. As Anne explained, the U.S. insurance segment comprises all directives and is written on our U.S. insurance companies and includes all of the underwriting results of our wholesale division and our specialty division as well as certain products written by our global insurance team. The U.S. insurance segment had an excellent quarter with gross written premiums increasing 29% over prior year. This increase was due in large part to the Alterra lines of business that are now included in this segment.

Excluding these lines, premium volume increased in the low single digits over 2013 mainly driven by higher volume from the Hagerty business which was new to us in 2013. The combined ratio for the quarter was 96% compared to 91% in 2013. The deterioration in the U.S. insurance segments combined ratio was due in part to adverse development in the architects and engineers lines of business and to higher current accident year loss ratios on the lines within our global insurance division. Generally these lines have higher attritional loss ratios than other products within the U.S. insurance segment.

Additionally, we continue to build a margin of safety on newer lines of business. This was partially offset by increased earned premium on the Hagerty business which carries a low loss ratio. Our U.S. operations are focusing on two key areas that are critical to our results.

First, our executive underwriting team continues to execute our plan to exit under performing accounts and lines of business. This process was begun in 2013 and will continue throughout 2014. In addition, the leaders of our wholesale and specialty divisions are terminating agreements with under performing agents and brokers, those that place little or no business with Markel. This streamlining of our agency group allows us to be more efficient and to provide a higher level of service to those who consistently send up a strong flow of submissions that need our underwriting appetite.

With regards to the rate environment, we are seeing decreases that in some cases are significant on our large business. Specifically, we are seeing these decreases in our property, professional liability, and general liability lines for large accounts. We are maintaining our underwriting discipline and will walk away from business where we cannot justify the pricing. On smaller accounts, we are experiencing rates ranging from flat to moderate single different increases.

During the first quarter, our (inaudible)Management Team met with a number of our largest producers. The feedback we received was very positive with all of these firms commenting on our expanded offerings, the quality of our service, and the fact that we integrated Alterra without any interruptions. of our service to them.

Finally, I would like to take this opportunity to thank Susanne Swanson, President of our Midwest region for her service to Markel. Susanne will be retiring in June of this year after 32 years at Markel. She worked her way up from the ground floor to the regional presence role, and her leadership and enthusiasm will be sorely missed. We hope Susanne visits us often. and we wish her a very happy retirement. I will now turn the call over to Ritchie.

Thank you, Mike, and good morning, everyone. In my comments today, I will focus on our international insurance and reinsurance segments. I will start by discussing the international insurance segment's first quarter results, and then discuss the results for our reinsurance segment and finish up with some recent pricing trends and competition discussion.

As Anne explained, our international segment is comprised of all direct and facultative business written on any insurance companies domiciled outside the U.S. The segments includes business written by our Markel international division as well as that written by our global insurance division. In the first quarter, gross written premiums in the international insurance segment increased 25% to $294 million. The increase is primarily due to business written by the global insurance division which was created after the acquisition of Alterra

The international insurance segment finished the quarter with a 91% combined ratio compared to 94% in 2013. The decrease in the combined ratio for this segment was primarily due to more favorable prior year reserve releases in marine and energy, professional and financial risk in Elliott's special risk units within our Markel international division. This is partially offset by higher loss ratios on the professional and general liability lines of business in the global insurance division. Lines of business written by the global insurance division generally have higher attritional loss ratios than our other products included in this segment. Also, consistent with (inaudible) we are applying our more conservative reserving philosophy on these lines of business. The segments expense ratio was favorable impacted by earned premiums from the global insurance lines of business which carried the lower expense ratios due to lower acquisition costs.

Now I would like to discuss the results of the reinsurance segments. Our reinsurance segments includes all tree reinsurance programs written around the world including that written by our globalling reinsurance division as well as that written by our Markel international division. Gross written premiums for this segment were $490 million in the first quarter of 2014. This was up from $62 million a year ago. The increase in premiums writings was primarily due to products previously written by Alterra which are now part of the Markel international division.

Also the global reinsurance division which was created after the acquisition of Alterrta contributed approximately $315 million of buy in on the first quarter. The combined ration for the segment was a 94, compared to 84 last year, obviously the composition of the segment is very different year-over-year, with the current year having significantly more casualty reinsurance business which carries higher loss and expense ratios than the property reinsurance line that made up the majority of the segment one year agoThis is partially offset by more favorable prior year development coming from property reinsurance lines.

Regarding pricing conditions and competition, the international insurance and reinsurance markets remain extremely competitive. (inaudible)and there have been a number of new entrance in recent months with more likely in the near future. While market conditions are becoming more difficult, Markel is well positioned to succeed.

As we have discussed in the past, we have tremendous diversification among our five insurance divisions. We also have absolutely dedication to underwriting discipline and the willingness and more importantly, flexibility to put down the pen when pricing is not adequate. We have seen less than ideal market conditions many times before, and as Tony Markel once famously said, this is not our first rodeo. We are confident we can navigate in a competitive market. Now, I would like to turn it over to Tom.

Thank you, Ritchie. As promised in the intro, my comments will be very brief this morning. As is always the case, we remain completely focused on the long term growth in the intrinsic value of the Markel Corporation. We measure ourselves on five year rolling financial metrics and the results of any one quarter can vary dramatically from our long ward upward path.

That said, it is always more fun to give you a report after a good quarter than a bad one, and this was largely a good one. Here is the headline for the quarter. We made money in bonds, stocks and Markel ventures. It can be easy to get stuck in the weeds and the details at any one spot within the Markel corporation, but I think it is important to keep a clear view of the big picture results. When we make money, bonds, stocks and Markel ventures as we did this quarter, all of those factors combined to amplify and turbo charge the excellent results produced by our underwriter. In a perfect world, we have that same headline every quarter. This is not a perfect world though (inaudible).

The good news is that we are able to give you that report in more quarters than not. When you start talking about years, the ratio improves, and when you start looking at the more important five year type horizons we use to measure and describe our financial results, we have consistently produced that same headline for years. We expect to continue to do so.

Getting back to the beginning of 2014, the overall investor return in the first 90 days of the year was a positive 2.0%. With equities up 3%, and fixed income up 1.7%. We continue to mange our investments in house effectively as demonstrated by our long term performance at very low cost with total investment management costs being a single digit number of basis points, and with great tact efficiency that comes from our long term and low turnover ownership-oriented approach.

Abraham Lincoln spoke of four score and seven years when he tried to make a point about time. I will describe our long term investment horizon in somewhat differently. But in the same period of time that you could have made two sequential batches of 12-year-old Scott whiskey and be a year into the third one, we have earned 12.5% per year on our equity investments or 160 basis points above that of the S&P 500.

We continue to methodically and systematically add to our equity holdings. Equity investments now comprise 49% of our shareholders equity up from the roughly 40% level immediately following the Alterra acquisition. We continue to find reasonable and productive investment ideas, but we also can be accused of driving the car with one foot on the brakes. So be it. We think it is far more important, to know that we can handle any curves in the road rather than trying to race ahead too fast.

Over time, and with good ideas, we will approach a more normal equity allocation of roughly 80% of our shareholders equity and equity investments. We will move faster markets give us the opportunity to do so, but we will not be rushed by artificial targets. In fixed income we earned 1.7% during the quarter. We started the process of beginning to extend the duration of our bond portfolio modestly, the last few months. The duration of our portfolio now stands at about 3.8, and over time, we would expect to move that to approximately 4.5, and in line with the duration of our insurance liability.

We can pick up a modest amount of investment income as we do this, and we continue to predominately buy municipal securities as we go about this process. In Markel ventures, we earned $14.9 million of EBITDA in the first quarter compared to $19.3 million a year ago.

First quarter results were below our expectations. So we are optimistic that full year results will be better than what the first quarter might imply. Our optimism for the full year comes stems three reasons. One, our home building and dormant furniture businesses are somewhat seasonal, and is the first quarter the lowest level of profitability for those operations. We did not own the home building business in 2013. We did in 2014..

Secondly, manufacturing operations sell capital goods and they regularly experience large swings in orders and deliveries from period to period. 2014 is off to a slow start in those areas, but we remain optimistic about our full year and longer term results.

Thirdly, we continue to fund some rapid expansions in certain operations and incurred a cost of doing so. All of those factors should gradually improve during the course of the year, and we remain optimistic about the prospects of the Markel operations. One of the beauties of Markel from a financial point of view, is that we have proven successful and recurring streams of profit from underwriting investing, and the industrial and service operations in Markel ventures. All of them together can and have historically produced resilient, and on going positive results for our shareholders.

We are glad for the chance to provide you with this regular update, and we look forward to doing so in the future. We are looking forward to it because we are optimistic that we will be able to continue to build one of the world's great businesses, and it is fun to share the news of doing so with our owners. With that, Todd, if you be so kind as to open the floor for questions.

(Operator Instructions) Our first question comes from the line of Mark Hughes with Lafayette Investments. Please proceed is with your question.

Hello. It is mark Hughes with SunTrust. Can you talk about your outlook for interest rates here. You say you are slowly beginning to extend the duration portfolio. What is your view on rates here?

Well, I still think that rates are too low, and they are unnatural. We have had that point of view for a while, and that in the investment business is early enough to be confused with being wrong. We have had a pretty substantial mismatch between the normal match of our insurance liabilities to the investment portfolio. We are not rapidly, to -- move this kind of a - - size of a ship around. It will be very gradual. Get that duration back in line, but rather than let it continue to come in which is what way have been doing for the last couple of years. We are just starting to nudge it out, and we have experience a dramatically different interest rate environment, we got to do, but we will move pretty methodical in moving it out.

Right. In the professional liability area, that is one of the segments you highlighted as the rates coming down, meaningfully. At the same time, you had adverse development in the architects and the engineers. Any more detail you can provide on what is going on there?

Well, this is Mike. It is very competitive in professional ads. And obviously architects and engineers is just one of the professional lines that we run. We run a lot of medical lines. We write lawyers) We write a number of different lines. Where we are seeing the real competitive pricing is in the very large account business, and we do not write really large architects and engineers firms. So it is more in the medical and other professional lines where we are seeing the rate decreases.

Thank you.

Thank you ladies and gentlemen. Our next question comes from the line of Mark Dwelle with RBC Capital Markets. Please proceed is with your question.

Good morning. Couple questionsRitchie you had talked a little bit about the composition on the reinsurance book,and you indicated that it was substantial recasualty. Can you give us a broad general percentage of what portion is still property?

It is about 70% globally, and 30% Markel international. If you use that as a proxy.

Yes., It is probably about 60/40 casualty today. And, obviously, the casualty carries a much higher loss ratio. We had a first quarter with very low catastrophe losses, very low to almost none. So fairly low loss ratio there, but on the casualty business, you have to start out very conservative, and that is really what is driving that combined ratio up for the 40 segment.

That is fine. Thank you. The same question is somewhat in the same vein. What proportion of your business in both the international and the reinsurance segment as well is exposed to currency risk? A lot of what is at Lloyd's is priced and denominated in dollars, but what proportion has an (inaudible) exposure? .

Mark, I would be guessing to give you a number, and we can go back and look to help you out, but you are absolutely right. A lot -- what you find in marine and energy, and you find at Lloyds is a tremendous amount of business even though it is foreign business. It is denominated in dollars. So clearly, our South American business, there is some currency exposure there, although a lot of those contracts are denominated in dollars. So we will have to get back to you with a number. But it is relatively low when you look at our balance sheet. I will guess and say 10% to 15%.

One thing I would add to that, is the investment activity follows the form. To use a reinsurance word on whatever writing in the insurance business. If we are putting liabilities of our books in any foreign currency, typically we will high investments in that currency as wellTo keep it economically matched.

Actually that is where my question started. I was looking that you had between 10% and 15% of your investment portfolio denominated in foreign bonds, and that is actually where I started. So it ended up pretty close to the answer.

That's - - That would be 10% to 15%, that would equate to probably 10% to 15% of the reserves being in those foreign currencies. The business is probably in that realm. In terms of the original currency of the premium we are writing.

Okay. The last question I had relates to the Abby protection business) I found somewhere in the cue that business had about $3 or so million of revenues in the quarter. When we talks about it initially, the annual run rate was in the $50 million to $60 million range. I guess that implies to me that there is probably a reasonable amount of seasonality to that? I hope that you could just comment that just helped clarify the revenue stream comes through on that one.

That is what I thought. The revenues for Abby, Mark revenues for Abby show up in two different places. The insurance business that we right is part of our gross written and earned premium. that is going to be the majority of that $60ish million in revenue. There is a service component to the business. Professional services component to the businessAnd that is what you are seeing. I guess you are picking that up in other revenues other expenses.

Right.

That is the professional service component, $3 million for the quarter, $12 or so million probably for the year is what we would be looking for there. So that would be the split. The total of $60 million, $12 million or so coming from services, the rest of it earned premium on insurance business.

I see, that solves that, thank you. No more questions.

Thank you. Our next question comes from the line of Matthew Berry with Lane Five Capital. Please proceed with your question.

Hello, everyone. So as a start to get comfortable with earning this the global reinsurance operation. I just wanted to get your high-level thoughts, especially Ritchie's on the global operation seems like a departure from the way I have always thought about Markel's sort of cost skill set on the underwriting of bringing their in investment knowledge and expertise concerning specific risks. It feels to me like it would be harder to price appropriately given the lack of knowledge of the underlying lists. How do you get comfortable that this is something we can earn a valuable underwriting profit on over the cycle? After all, I value the cost free flow pretty highly.

A couple of things there. We have five insurance divisions. The reinsurance division is one of those. We have quite a bit of diversification amongst the products. I like reinsurance as a business. I like it even better if it is one of my five businesses because then I have the flexibility to lever that up and go down quite honestly when the markets are not where we would like to see them. Reinsurance is a business that can add value for us considerably over time, and the fact that we have the flexibility the way we are structured really adds to that.

Obviously with the Alterra acquisition, we picked up a team of extremely experienced underwriters. WE talked about when we did our due diligence on AlterraWe came away feeling very comfortable with the expertise of the underwriters and the underwriting philosophy which is possibly even more important. These guys are very much - - while we are writing treaty insurance, it feels very much like individual account underwriting the way it is approached.

So I have a lot of confidence in our ability to get the pricing correct on the business. Now, with that may mean in a soft market like we are currently experiencing is we may write less. And I fully expect that, if market conditions stay challenging in reinsurance.

So I feel very good about the reinsurance operation as part of Markel. Second, I would like to add, this is where the mindset and the culture of Markel is quite relevant to this. And in the way that all of our business are unique and diversified parts, we are willing to do more of the things where the profit opportunities are good. And less of the ones that are not

And we have the ability, because we are diversified throughout the Company in different types of insurance, different types of investments as well as Markel ventures to hold ourselves to the standard that an owner wouldof whether it makes sense to do it for the long run or not. And reinsurance fits that to a tee.

There are times when you really want to write as much of that business as you possibly can, and there are times when you do not. But you will not get any of the good stuff if you not there and in the market and have talented people making the decisions. And as long as there are long term owners and people have a long time horizon we will be just fine with it.

Okay. Tom, if you could just very quickly continue to -- on that theme and from your angle. How does the reinsurance float differ in terms of the length and volatility of the tail, and how does that impact your job in terms of managing the portfolio?

Well, the good news is it does not differ at all in the sense that it is catch, and we get to invest it. What we will do, and this is a discussion we coordinate, with the actuary. We look at what the expected liabilities are. So for writing business,we keep that money pretty short. If we are writing liability business, we will keep that a little bit longer. That is really consistent with what we do for any piece of float that comes in here whether it is primary or reinsurance.

Okay. I have one final one which is just historically, you guys have split out acquisition costs in your annual -- from other underwriting expenses in your annual filings on a per segment basis. I didn't notice that in the 8-K. which you released with the new segmentation. It is helpful to me when I think about Markel and actually compare you guys against some of the other firms to think about, how you go about acquiring the business and to think about acquisition costs. I just wanted to double check that you were intending to keep splitting out acquisition costs for me.

Matthew, I believe that the intent and it was the case in the 10-K. I do not think we intended to communicate vis-à-vis the 8-K that we were discontinuing that practice.

Okay, good. that is great. Thank you very much, Anne.

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

Thank you. And thank you to you guys for giving us the historical data on the new format. That was really helpful for our modeling. So appreciate that. Let me start with some questions on the non-insurance piece. Tom, you had mentioned manufacturing had a slow hurl. What products are we talking about? Is there particular product where you saw that sluggishness?

Sure. here were three lines in the manufacturing world. One, we make the equipment for commercial bakers and those are major installations where a bun that you are going to eat a hamburger on at a fast food restaurant, or a loaf of bread you are going to buy at a store. Those are multi million dollars projects that go over multiple years.

So that is something of a business. the other business that is lumpy is our dredge business. We call dredges that range in cost from $250,000 to $300,000 if you want something for your backyard up to something north of $10 million. The $10 million plus dredges, we would hope, to sell three of those in five yearsin any one quarter. That can distort the results quite a bit. The other business that we have in that area that a bit in the first quarter is our business that makes truck flooring, wood crisis in case you follow that, were up.

That compressed margins a bit, and it compressed it a little bit ahead of our opportunity and ability to get some price increases, but we subsequently had some price increasing there. So that should reason them out for about the rest of the year, but those are the manufacturing businesses that were off to a bit of a soft start in the first quarter.

That is great. Very helpful. Secondly with the Abby consulting business which shows up in this other business. There was -- I guess a net loss in the quarter, and I do not if it was a seasonality effect there, or from an annual standpoint should we expect an earnings contribution from that business?

Yes. We would expect - - first of all, that business supports the underwriting business. So we probably are not looking for massive margins on the consulting business, because in effect, it does support our ability to get the insurance business. So I think overtime, we certainly want to at least cover our cost and make a little bit on that consulting business. And actually, we are looking to add consulting services. We would over time maybe even hope to expand the margins on that.

Got it. That is helpful. And then the other piece, which again loss money in the quarter, but I know it can jump around quite a bit is the run off business for the life and annuity business. Can you give us any sense of what your expectation is for an earnings contribution from from that business?

I might actually refer this one to Nora here, who is our controller. The accounting for the life business you are basically amortizing off the discount. And so that number is pretty setunless you change assumptions somewhere along the line.

So I think it was about $8 million or so of expense in the quarter. Barring anything unusual, that is about what we would expect it to be over the next 3-quarters, and you can - - I think of it sort of like interest expense. It is just amortization of the discount, on those life reserves. On that life liability.

And I guess the revenue associated with the assets in that business show up elsewhere in your --

That was received years ago. Keep in mind, you have received the revenue and put them on the books, and now you are just amortizing off the discount.

We do earn some investment income while we are - -.

Quite a bit.

There is that.

The investment income is what I am saying. That shows up elsewhere.

It is showing up in the investment segment.

Got it. That makes sense. Very good. I have got a couple other - - Let me stop here, if there's no other questions, I will buzz back in.

Thank you, Jay.

There are no other questions at this time. Jay, would you like to ask your additional questions.

Yes. If you do not mind. The question had to do with going through a process is this year, where you -- I will phrase it rebasing the Alterra reserves to fitted more with your own approach. And I remember the exact same thing happening with Tera Nova. And that worked out really well. Over time, you ended up moving the reserves out of that business. My question is, how long do you believe this process would take to get these reserves on to - - again, your approach for setting reserves?

Well, Jay, that is in some ways unanswerable, and I know that is a non-answer, but the issue you have is we did a lot of due diligence around the reserves on Alterra's balance sheet when we bought them, and we felt that they were adequate. Maybe even slightly redundant, but not to the levels that we at Markel tend to carry.

As we go forward, we are building a margin of safety on the premium that we earn , or we are attempting to build a margin on the safety that we earn going forward on Alterra. The question is going to be, how do those reserves that we were the balance sheet from day one behave? If they behave well,it will take us less time. If we have a little development out of them, it will take us longer. In general, and is if you remember back to Tera Nova, it takes -- I will say three to four years to really - - on a balance sheet the size of Alterra's it take I would think about three to four years for us to feel good about those reservesthe way we feel good about legacy is Markel reserves.

I seem to recall that three to four years playing out with Tera Nova. I guess I thought possibly this might be shorter in that when you bout Tera Nova it was a very difficult time in the industry, right. Reserves for a lot of companies were quite short where I would have suspected that Alterra's reserves given the industry conditions were in better shape than Tera Nova's were back in 2001 or whatever that was.

That is a fair assumption. And we are a little over -- we are a year into this. The deal closed May 1st a year ago. Things have gone well in the first year. But -- some of these reserves are long tail, and I would like more time to look at them. I hope you are right. And I would like to see it be less than that three to four. I would rather underpromise and over deliver. If that happens we are all very happy.

Yes, something you guys have done historically. I appreciate those answers, thank you.

Thank you, Jay.

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

Great. Well, thank you for joining us. We look forward to chatting with you next quarter. Bye, bye.

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