May 1, 2013
Executives
Tom Gayner - President & CIO Anne Waleski - VP & CFO Mike Crowley - President & Co-Chief Operating Officer Richard Whitt - President & Co-Chief Operating Officer
Analysts
John Fox - Fenimore Asset Management Jay Cohen - Bank of America Merrill Lynch Mark Dwelle - RBC Capital Markets Adam Klauber - William Blair Doug Mewhirter - SunTrust Ray Iardella - Macquarie
Operator
Greetings and welcome to the Markel Corporation First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode.
A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Tom Gayner; President and Chief Investment Officer. Thank you, sir.
You may now begin.
Tom Gayner
Good morning everyone. This is Tom Gayner and along with my colleagues, Anne Waleski, Mike Crowley, and Richard Whitt, we welcome you to the Markel Corporation first quarter 2013 conference call.
Before we get started, we are required to remind you of the Safe Harbor provision. So, here it goes.
During our call today, we may make forward-looking statements. Additional information about factors that could cause actual results to differ materially from those projected in the forward-looking statements is included under the captions Risk Factors and Safe Harbor and cautionary statement in our most recent annual reports on Form 10-K and quarterly report on Form 10-Q.
We may also discuss certain non-GAAP financial measures on the call today. You may find a reconciliation to GAAP of these measures on our website at www.markelcorp.com in our quarterly reports on Form 10-Q.
Thanks again for joining us this morning. We are off to a good start in 2013m but that's really only the small part of the story.
It’s a big, big day around here as we've now closed the Alterra transaction and today marks the first day of a new era at Markel. We welcome our new shareholders and associates; we look forward to discussing our recent results, our plans for the future and answering your thoughtful questions about your company.
With that, let's get started with Anne’s review of the first quarter results.
Anne Waleski
Thank you, Tom and good morning everyone. As I'll discuss in more detail in just a minute, we are off to a great start in 2013.
We've had strong underwriting results, robust investment performance and increased revenue and profitability from our non-insurance operations which we refer to as Markel Ventures. Premium volumes has benefited from acquisitions and organic growth.
Our favorable underwriting performance for the quarter was driven by a lower expense ratio, more favorable development of prior year loss reserves and lower attritional losses. Our total operating revenues grew 12% to $820 million in 2013 from $733 million in 2012.
The increase is due to a 6% increase in revenues from our insurance operations and a 67% increase in revenues from Markel Ventures. Moving in to our underwriting results, first quarter 2013 gross written premiums were $743 million, which is an increase of 15%, compared to 2012.
The increase in 2013 was primarily due to higher gross premium volumes in the Specialty Admitted segment. As previously announced, effective January 1, 2013, we acquired Essentia Insurance Company which underwrites insurance exclusively for Hagerty Insurance Agency.
Hagerty is the leading insurance provider for classic cards, vintage [birds], motorcycles and automotive collectible. Gross premium volume attributable to the new Hagerty business and THOMCO which was acquired in January 2012, contributed $63 million to the Specialty Admitted segment for the first quarter of 2013.
Net written premiums were approximately $663 million, up 14% to the prior year. Net retention was down slightly in 2013 and 89% compared to 90% in 2012.
Earned premiums increased 7%. This increase was driven by a 19% increase in earned premiums in the Specialty Admitted segment.
Our combined ratio was 91% for the first quarter of 2013 compared to 100% in 2012. The 2012 combined ratio included $20 million or 4 points of expense related to our prospective adoption of the new DAC accounting standards.
Excluding the impact of this adoption of the DAC standard in the first quarter of 2012, the decrease in the combined ratio in the first quarter of 2013 was primarily driven by more favorable development of prior year loss reserves in the excess of surplus line segment and lower attritional losses in each of our three operating segments compared to the same period of 2012. Favourable redundancies on prior year’s loss reserve increased to $78 million or 14 points of favourable development compared to $64 million or 12 points of favourable development in 2012.
Now I’ll talk a little bit about Markel Ventures; in the first quarter of 2013, revenue from Markel Ventures $162 million as compared to $97 million in 2012. Net income to shareholders from Markel Ventures was $4 million in 2013 compared to $200,000 in 2012.
EBITDA was $19 million in 2013 as compared to $9 million in 2012. Revenues, net income to shareholders and EBITDA from Markel Ventures increased in the first quarter of 2013 compared to the same period of 2012, primarily due to more favourable results at AMF Bakery Systems in our acquisition of Havco in 2012.
Now taking and look at our investment results, investment income was down 19% in 2013 to just under $65 million. Net investment income for 2013 included a favourable change in the fair value of our credit default swap of $3 million as compared to $11 million in 2012.
Net realized investment gains for the first quarter of 2013 were $18 million compared to $12 million in the first quarter 2012. There were no writedowns for other than temporary impairments in either period.
Unrealized gains increased $250 million before taxes in 2013 driven by increases in equity securities. Tom will make further comments and give further details about investments in his comment.
Looking at our total results for the first quarter, effective tax rate was 24% in 2013 compared to an effective tax rate of 23% in 2012. The increase was primarily due to anticipating a smaller tax benefit related to tax exemption investment income as a result of projecting higher pretax income for 2013 than in 2012.
We reported net income to shareholders of $89 million as compared to $57 million in 2012. Book value per share increased 7% to $431 per share at March 31, 2013, from $404 per share at year end.
Finally, I will make couple of comments of our cash flow and the balance sheet. Net cash provided by operating activities in the first quarter was $56 million that compares to net cash used by operating activities of $64 million for the first quarter of 2012.
The increase in net cash provided by operating activities during the first quarter of 2013 was driven by higher tax lifts from underwriting activities as a result of increased volumes primarily in the Specialty Admitted segment and decreased claims settlement activity as compared to the first quarter of 2012. Additionally, the three months ended March 31, 2013, include higher tax lifts from Markel Ventures partially offset by higher profit sharing payments compared to the same period of 2012.
Invested assets of the holding company were $1.6 billion at March 31, 2013 compared to $1.4 billion at December 31, 2012. The increase in invested assets is primarily the result of our March 2013 debt issuance of $500 million partially offset by the repayment of $250 million of unsecured senior notes in February 2013.
Finally, as Tom noted, everyone here is very excited about today’s closing of the Alterra acquisition and the future possibilities that this transaction provides for both employees and shareholders of the combined company. With that, I’ll turn it over to Mike to further discuss our operations.
Mike Crowley
Thanks Anne. Good morning.
The results for the first quarter of 2013 for North American operations were very good in a number of areas. The growth business (inaudible) for North America operations increased 20.6% year-over-year and the expense ratio improved in both segments.
The E&S segment had excellent first quarter. Gross written premium increased 10% year-over-year, once again all five regions in the E&S segment saw an increase in the gross written premiums.
This increase was driven by the growth in a number of product lines including excess and umbrella, medical, casualty and environmental. The E&S combined ratio for the quarter was 77.5%.
The expense ratio improved year-over-year by 5.7% driven by the accounting change for DAC in 2012 with a reduction in corporate allocations. Prior year losses were favorable due to higher takedowns across multiple lines in 2013 compared to 2012.
Keep in mind that these take downs are consistent with Markel’s historical practices. E&S segment continues to improve efficiency, reducing the number of agent appointments, limiting access to certain products where prior activity had been unproductive and better educating the agents about what to submit and what not to submit based on Markel’s appetite and success in our target product lines.
This improvement in efficiency is supported by the fact that binders increased 29% on almost the same number of [closed] issues. All-in-all a simple quarter for the E&S segment.
The specialty segment growth that (inaudible) increased 37.2% as a result of booking more gross written premium for THOMCO compared to the first quarter of 2012 and the addition of the Hagerty business. We began booking Hagerty premium on January 1 of 2013.
Excluding comp sale in Hagerty, the specialty division premium volume decreased slightly as a result of our terminating certain accident and health program and transfer of the garage business in E&S segment. The combined ratio in specialty segment was 108.5% which is a 4.9% improvement versus 2012.
This decrease was partially due to a decrease in FirstComp loss ratio which is the result of pricing increases and a geographical shift to more profitable non California business. The expense ratio improved to 43.2% from 47.2% in 2012.
This improvement is primarily driven by the accounting change for DAC which added 4% to the expense ratio in the first quarter of 2012. Excluding Hagerty and THOMCO, the Specialty admitted expense ratio is down 4.6 points in addition to the impact of DAC mentioned above.
This is driven by lower headcount, lower profit sharing costs and lower overhead charges. The expense ratio was negatively impacted by the fact that we front loaded some assets and expenses for Hagerty.
FirstComp and THOMCO businesses were still in transition and we continue to build margin of safety and loss reserve in these product lines and on the Hagerty business consistent with Markel preserving the pricing philosophy. We are currently conducting a detailed review of all specialty product lines for those specialty product lines that need improvement i.e.
rates; plans are in place or will be implemented to improve results. It’s important to note that we achieved rate increases of approximately 4% on North America business with the largest increase found in workers’ compensation and property.
These rate increases in the E&S and specialty segments along with some economic growth by our customers is a key factors in our premium growth. Within our product line leadership, we made several changes.
We withdrew from railroad third-party and taxing lines of business earlier this year. These lines have not shown progress on corrective actions and therefore we decided to stop running this business.
During the fourth quarter call, we mentioned moving a number of underwriters from the product line group to regional roles to be closer to our agents and brokers. This has reduced (inaudible) added to our frontline underwriting expertise and is producing additional premium as well as adding to the efficiency mentioned earlier in the E&S segment.
All of our product line leaders and managers have been busy with the Alterra transition and our plans have been announced. Richie will speak more to the Alterra deals in his comments.
Richie?
Richard Whitt
Thanks Mike, good morning everybody. I will start off with a few comments about Markel International’s first quarter and then give an update on the Alterra integration.
Markel International had a nice start to 2013; gross written premiums increased 7% to 296 million. Areas of growth included our Specialty and Professional Liability division as well as our Singapore and Netherlands branches.
First quarter pricing trends were largely in line with recent quarter’s modest price increases. International achieved an overall average price increase of almost 3% in the first quarter.
Despite price increases in certain areas and many areas of the market, things remain competitive. Particularly in the professional liability, retail and equine divisions.
International combined ratio for the first quarter of 2013 was a 92%. This compares to 97% in the first quarter of 2012, and remember that the first quarter of 2012 included approximately three points for the adoption of the DAC accounting standard.
The 2013 results have benefited from a slightly lower current accident year loss ratio, very low catastrophe losses in the quarter and 22 million of prior year favourable developments across a variety of programs. Finally I would like to recognize the Markel International folks for going live with their multi-year initiative to replace their core underwriting systems.
They went live on the new system in April, and whilst still in the early stages with the systems things are going well. There is still plenty of work to do to fully embed and take advantage of this system, but this is an important milestone in accomplishment for the entire International team.
Moving to Alterra, give an update on our acquisition, since our initial announcement of the deal on December 19th, this has been a constant area of intense focus for countless Markel and Alterra associates, want to welcome the Alterra associates to our Markel family and want to thank all Alterra and Markel associates for their tireless work over the last four months, as we’ve all prepared for close and made progress on the integration. It really is a testament to the bench strength at Markel and Alterra that we could work as hard as we have on the integration over the past four months and still produce great results in the first quarter.
The integration team has done an excellent job getting us ready for the day one close. We’ve necessarily been focused on day one activity.
Just an example would include large item like defining and communicating new reporting lines, client communication, website updates, we have been combining certain reinsurance protection and we have been working on our combined branding strategy. We’ve also been focused on what you would likely consider more administrative but also critically important items like email addresses, systems access, bank and trust account access.
We arrive at the close date having made excellent progress in all areas. We are now moving our attention to longer term initiative and making sure we have a smooth transition for our clients and our new associates.
Our message for both clients and our associates is stay enhanced business as usual. Over the next several quarters we will continue to more tightly integrate the two newly created divisions of global insurance and global reinsurance, as well as the business lines that are going to be merged into our excess and surplus and Markel International divisions.
Similar activities are obviously taking place across all support areas. As of today’s close, I’d sum up our progress is very good, but with lots of heavy lifting to do to achieve our goals for the combined operations of the new Markel.
Now I would like to turn it over to Tom.
Tom Gayner
Thank you, Richie. Good morning again.
As all this morning is covered three items, item one the first quarter investment results and our public security portfolio. Item two, the start of the year from (inaudible) operations; and item three, our perspective plan for our new expanded investment portfolio we now manage as a result of the Alterra acquisition.
Item one, the year is off to a flying start and our equity and fixed income portfolios we have a total returns of 13.1% and 0.5% respectively. The total return for the portfolio was 3.5% and I am very happy with those results.
While any one quarter is essentially leading the way in with those returns were earned means a great deal. In our equity portfolio, we continue to own a set of high quality global successful company.
In many cases, the dividend yields comfortably exceed what we can earn on appropriate fixed income alternatives. We also continue our longstanding process of step by step measure and selective additions to the equity portfolio.
In our fixed income operations, we continue to maintain the portfolio of the highest credit quality that we can find and we continue to let the duration roll in. In the repeat statement from previous quarters and now year, we believe that interest rates are too low and the risks of longer-term fixed income commitments outweigh the rewards.
As such, we continue to build the portfolio that increasingly resembles cash. Stay tuned for our plans on what we will do with the cash.
On March 31, equities represented 65% of our shareholders' equity, up from 52% at year end. It’s worth pointing out to our new and longstanding shareholders that our approach in managing our equity portfolio remains quite tax efficient.
With low turnover and stocks to go up over time, we now sit on an unrealized gain of $1.3 billion. We've provided for the taxes in our financial statement, but those taxes remain deferred until such time as we actually sell the securities and realize the gain.
It's worth remembering that at the 35% tax rate, the deferred tax associated with this gain would be roughly $450 million. I know that you all love hearing about accounting just as much I love talking about it, but I think it's worth taking a minute to engage in a little thought experiment on this topic.
Imagine if our balance sheet was only comprised of the unrealized gains in the equity investment portfolio, in that case we would have an asset of $1.3 billion on the left hand side of the balance sheet and a liability of $450 million for future taxes and equity capital of $850 million on the right hand side. The net effect of this dynamic is that we've got the entire $1.3 billion working for us as shareholders on a reported equity capital base of $850 million.
This is incredibly tax efficient and helps our recorded return on equity over time. Over the decade this component of our balance sheet and capital has grown larger and larger, and is a meaningful contributor to total shareholder returns at Markel and not a common feature in the insurance world.
I'm glad to report that those balances continue to grow during the first quarter by following the same discipline we've used to build it for decades. On to item two, Markel Ventures operations also performed very well during the first quarter of 2013.
Our other revenues of $172 million that you see in the income statement are largely those of the Ventures companies. Those revenues rose 55% compared to the last year.
Other expenses of [$152 million], up 52% from a year ago. Back to accounting again, those expenses include non-cash amortization and purchase accounting metrics that are separate and distinct from the ongoing operational performance of the Markel Ventures Company.
As such, we use EBITDA in our internal review and management of those operations. As Anne noted earlier, EBITDA more than doubled to $19.4 million in the first quarter compared to $9.4 million in the previous year.
A reconciliation of EBITDA to GAAP net income is available on our website. Item 3, the biggest single challenge and opportunity on the asset side of the balance sheet this time is the future investment and capital allocation decisions that we will make with our growing cash balances, which are now augmented by the addition of investment balances from Alterra.
We will invest the money in the same way as we invested the assets of Markel over the years. Specifically, on the fixed income side, we will continue to focus on high credit quality and maintaining the duration that is shorter than our natural position of matching the duration of the insurance liabilities through our bond portfolio.
We will continue to do this until interest rates are higher than they are today and that we feel we're being paid appropriately to accept the risk of longer-term commitments. While this penalizes current investment income, this doesn’t penalize as very much at today’s low rates of interest across the curve.
On the equity side, these are vibrant and profitable insurance business. We have a strong balance sheet and plenty of cash.
Our constraint is signing appropriate ideas and protecting and preserving the balance sheet. For now, we will continue to methodically invest in many of the same securities we already [earned].
Prices are still reasonable in many cases and we will pick up investment yield from the dividends as we go. Given our new circumstances, we will have a lot of dry powder and we will look to deploy that more appropriately as opportunities present themselves.
I cannot predict when the general environment will produce an opportunity, but I am confident that it will. As many people say about the weather wherever they live, if you don’t like it, wait 5 minutes and it will change.
We are in a unique and what I think is a fantastic position and that we have capital to deploy in what could be a rapidly changing environment. Rest assured that the same disciplines and thought processes we used for decades to make those decisions remain implied.
I am optimistic about our opportunities to make positive capital allocation decisions in the coming years as low as the ultimate results from Markel shareholders. As we begin this new era at Markel and took a moment this morning to look at our first annual report and to remind myself of what this team has accomplished for you in the years since we went public in 1986.
Immediately following the public offerings, we had shareholders' equity of about $16 million and a total investment portfolio of approximately $13 million. We [built] the process of reinvesting our earnings and making sound capital allocation decision for a long time and I think it’s fair to say the results should speak for themselves.
To add one more note on a sense of perspective, the comprehensive income of in the first quarter of 2013 of $257 million exceeded our entire cumulative earnings during our first decade as a public company. I know that analysts report on Markel really address comprehensive income and their estimates and discussions about it, but the comprehensive income as what we as shareholders ultimately receive as owners of this business.
As such it’s what we focused on as the stewards of this company. It's undeniable that we face the challenge as we begin to integrate the Opera operations into Markel and reinvest our new larger basic capital.
The good news is (inaudible) and we are excited and optimistic about doing it again now and into the future. With that, I would like to go ahead and open up the floor for your questions.
Operator
(Operator Instructions) Our first question comes from the line of John Fox with Fenimore Asset Management. Please proceed with your question.
John Fox - Fenimore Asset Management
I have a few questions, first to Tom Gayner, you mentioned the healthcare portfolio, do you have a sense of how long it will take to make that look more like a Markel portfolio?
Tom Gayner
Yes, lot of that really is going to be optimistically driven John. So in the pricing environment that we are operating in today, it’s going to be pretty methodical and just step by step.
If market opportunities present themselves, we will act expeditiously, but I don't have a brief to mention for you.
John Fox - Fenimore Asset Management
Okay. And Tom where we take the equities that the stock portfolio as a percentage of Markel shareholder equity?
Tom Gayner
Look at the end of the quarter we were at 65% right and that obviously come goes down, like adding a bunch of cash and a fair capital. My goal would be to get that back to that sort of ratio and in fact go beyond that as we see good opportunities to do so, but we will let it go down before we start to rebuild.
John Fox - Fenimore Asset Management
Okay, and then I think these other two questions are for Mike.
Tom Gayner
And by the way before we you start after Mike’s question, do you have any yeah really good idea coming me later.
John Fox - Fenimore Asset Management
Okay, I will. Mike, a number of insurance companies have talked about you know organic price increases in the first quarter; I wanted to have a perspective on your business, do you see kind of a natural increase in prices and what that number might be?
Mike Crowley
Well, as we said, we are seeing something in the range of 4% in North America now with a little more in workers’ comp and property and right now I think that's just continuing. I don't see it going up a lot from here and I don't see it going down, but right now we are just kind of found the same kind of trend.
John Fox - Fenimore Asset Management
Okay. And Rich you mentioned three in international still kind of low single digit?
Richard Whitt
Yeah. I think its amazing you know we talked about the different markets, but there tends to be a lot of similarity in terms of how they move, so 3% over there, 4% here is consistent.
John Fox - Fenimore Asset Management
Right. Okay and then, now the results, these are terrific results for the first quarter, but you know Specialty Admitted line is not terrific and I am just wondering your thoughts on that, are you looking at taking different actions or there seems to be an outlier of the three segments at this point?
Mike Crowley
Well a couple of things are going on there John, one, in the quarter about 66% of the revenue was specialty is coming from three new businesses, FirstComp, THOMCO and the Hagerty business and all of those businesses are being subjected to our conservative reserving practices for a period of time and in addition the expense ratio for THOMCO and for Hagerty in the first quarter is high because of things that are going on there; we frontloaded a lot of expenses for Hagerty. We run $30 something million of business, but we only earned about $4 million of investment booking of contingencies and other things that drive that expense ratio way up in the first quarter and that will trend down during the course of the year.
The expense ratio for the Specialty excluding that is 38.6%, so everybody else is moving in the right direction and FirstComp has made great strides in their expense ratio and in their loss ratio they are following the trend that we set in place for them when we acquired them in late 2010. So there are a couple of lines of business in the Specialty segment that are not performing the way we would like them to do and we are taking action on those.
Operator
Thank you. The next question comes from the line of Jay Cohen with Bank of America Merrill Lynch.
Please proceed with your question.
Jay Cohen - Bank of America Merrill Lynch
Are you going to be putting out any I guess proforma information as far as working the Alterra numbers into new presentation; it’s hard to update the model when we don't know where all the numbers are going I guess?
Anne Waleski
Yeah, Jay we will be filing an 8-K, but it will probably be 10 weeks from now.
Jay Cohen - Bank of America Merrill Lynch
Okay. That’s fine.
Thank you very much.
Operator
Thank you. The next question comes from the line of Mark Dwelle with RBC Capital Markets.
Please proceed with your question.
Mark Dwelle - RBC Capital Markets
A couple of numbers questions to start out with; you provided the split of proportion of the Markel Ventures revenues in the other revenues. Could you give us the portion of the expenses that are in the other expenses lines and where is that with that?
Tom Gayner
Yeah while Anne looks for those numbers I'll give you the total other revenues of it, she has the exact Markel’s figures…..
Anne Waleski
Yeah, right, so Markel Ventures related revenues were $162 million. The associated expenses were about $145 million.
Mark Dwelle - RBC Capital Markets
$145 million, thank you. A second question…..
Tom Gayner
And like Mark, that includes the non-cash expenses. EBITDA on that.
Mark Dwelle - RBC Capital Markets
Right, of course. The second question, did you have any particular on a catastrotrophe losses in the quarter.
I didn’t see any references and I could think of any but just thought that if there were any, you could highlight them.
Richard Whitt
Nothing of significance Mark and also obviously we in the (inaudible), we had some take downs actually on Sandy in the quarter. So in a sense we had a negative on (inaudible).
Mark Dwelle - RBC Capital Markets
Alright and then somebody had mentioned in their opening remarks, I think it was you Richie the integration of kind of combined reinsurance platform to cover the combined entities. Is there anything you can share with respect to that in terms of how that’s going to affect the ratio of gross to net premiums?
Obviously it's my job to figure how many dollars of premiums do they add in, but I would like to at least start with the ratio if you could?
Richard Whitt
Sure, Mark what I think I could tell you this year is, we are starting to look at programs and how we can combine them. I think the first step quite honestly is actually to bring them together, and we are not so much focused on moving retention as we are, just kind of getting to fewer programs right now.
So you know, I would tell you that for 2013, if you sort of took the mix of our retention and Alterra’s retention, that’s probably where we will end up, whatever that is in the middle, and I don’t have that number in hand. And after we kind of get through this initial phase during 2013, next year we’ll start looking critically at those retention levels and my assumption would be we start bringing those up some.
But this year to do no harm right now. We just wanted to start putting things together.
Operator
The next question comes from the line of Adam Klauber with William Blair. Please proceed with your question.
Adam Klauber - William Blair
How was the general E&S environment; are you seeing much flow over from the standard market?
Tom Gayner
I think we are seeing some Adam, it's hard to measure. We like to think that a lot of our growth has come from the fact that we’ve done a much better job articulating to our producers; exactly what we want is also a result of the last couple of years of upgrading our coverages and our forms.
We’ve been a lot more active with our brokers in terms of been out, knocking on doors, asking for the business, and so I think that’s drawing a lot of it as well. It's hard to put a number on of what we are seeing roll over from standard market, I think we are seeing some of that.
Adam Klauber - William Blair
And then as far as for the overall company your accident year loss ratio excluding cats was down by roughly 200 basis points, how much of that is due to white weather?
Anne Waleski
Sorry can you repeat that?
Adam Klauber - William Blair
How much of that is due to just weather being pretty [lighter] in winter?
Tom Gayner
It's going to be a little bit of that. There is no question first quarter was a very light for weather, but also we were seeing the impact of modest price increases that we’ve gotten over the last couple of years; that’s starting to help us the loss ratio as well.
It’s probably it's a mix of the two.
Adam Klauber - William Blair
Okay. And then as far as what do you think on the loss trends in workers comp, and I guess I keep distinguish California versus non-California would be helpful?
Tom Gayner
Well, the loss ratio obviously improving at first comp but keep in mind as we said on other calls, FirstComp has been restructuring their business and moving a lot more toward non-California business and more attracted states, so I don’t have the numbers right in front of me, but the California comp business is down substantially from a couple of years ago, and the trends not only are they loss trends but they are expense trends moving absolutely in the right direction, they are managing their business just as we ask them to.
Richard Whitt
The only thing I’d to add to that as you can expect, I mean the trends in work comp sort of near of what is going on in medical so it’s higher than the overall economy and California as it is have always been higher than the rest for the country, but I don’t think we are seeing anything crazy there, I think its sort of continuation of what’s been obtained.
Adam Klauber - William Blair
Okay, and then finally if you had a pretty good press release and I know release isn’t going to reserve release but they are going to jump around but was there any one or two items driving that release?
Anne Waleski
The release was predominantly on casualty lines, but it was spread across several years.
Operator
(Operator Instructions) Our next question comes from the line of Doug Mewhirter with SunTrust. Please proceed with your question.
Doug Mewhirter - SunTrust
First Rich as you said the (inaudible) numbers questions. I know the expense ratio in the lending market division had quite an improvement below 40% first time in a while, is there anything there with any particular credits or you are just more (inaudible) better scale?
Richard Whitt
No, you know obviously we have the DAC adjustment in the first quarter of last year, and so it’s probably not as dramatic as maybe it appears on the surface. I think you are right that the underlying trend is down some and I think it’s primarily more volume you know, we are getting more volume and we are able to spread our fixed costs a little further.
So, good news.
Doug Mewhirter - SunTrust
Yeah, it’s definitely. And Tom, you had a pretty comprehensive overview of how you are going to bring Alterra’s portfolio around.
Is there going to be any particular I guess for lack of a better term liquidation events in advance of that where you definitely overweighed Alterra’s cash just because you would rather get something more stable to bring over Markel or would be more you would take the portfolio and move I guess as you find opportunities to up your investments on the Markel side you will liquidate the Alterra’s investments on a case by case basis?
Tom Gayner
Yeah, the good news is that the vast majority of the Alterra investment portfolio is just fine. It’s high quality fixed income investments and those will largely remain in place, and that's a pretty smooth integration process.
They did pursue things in the realm of alternative investments and we've already, I mean they have been very cooperative and helpful in terms of liquidating some of that ahead of the closing, that process will continue and it will take some time as the half life associated with that and frankly this time next year there will be some of that. But that is largely an independent process compared to where we are deploying capital and cash.
I'm hard pressed to imagine the scenario where we want to invest where we can right now, so we can go about whatever changes we are making on Alterra in a very methodical and orderly way and we've got plenty of cash to fund investment ideas as they happen and they are two distinct things.
Operator
Our next question comes from the line of Ray Iardella with Macquarie.
Ray Iardella - Macquarie
Just I guess a quick question, Tom you spent a lot of time on the Alterra portfolio asset side, but maybe can you give us an update on how you are thinking about reserves for Alterra and now that I guess you have a little bit more time to take a look at them and maybe how you know if there's any need to bring them up to the Markel standards given sort of you know the way you guys approach reserve?
Richard Whitt
Yeah, what I'd say there is when we did our due diligence at Alterra, we felt comfortable with the reserve levels that there was a redundancy probably not at the same level as our reserving standard but solid reserve and that was very reassuring when we got through the due diligence. Obviously we've been spending a lot of time with the Alterra folks over the last four months and we haven't seen anything that would change our opinion of what we saw the due diligence and you know similar to other acquisitions that we've done in the past, it will be a you know Tom talked about methodical process, it will be a methodical process to bring them into line with Markel’s reserve and standards as we go forward.
And probably the best thing I would tell you in terms of purchase adjustments if you will is to look at the performance that were part of our debt issuance back in March. That would give you an idea of what we are talking about or thinking about doing, and I think that's pretty much in line with where our thinking is today.
Ray Iardella - Macquarie
Okay, I'll take a look at those documents.
Operator
Thank you. Mr.
Gayner, it appears there are no further questions at this time. I would like to turn the floor back over to you for any concluding remarks.
Tom Gayner
Great, thank you very much. Thank you for joining us.
We look forward to seeing you all soon. Take care.
Operator
Thank you. Ladies and gentlemen, this does conclude today’s teleconference.
You may disconnect your lines at this time. Thank you for your participation.