© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the Markel Corporation Second Quarter 2018 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions]
During the call today, we may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They are based on current assumptions and opinions concerning a variety of known and unknown risks. Actual results may differ materially from those contained in, or suggested by, such 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 Report on Form 10-K and Quarterly Report on Form 10-Q.
We may also discuss certain non-GAAP financial measures in the call today. You may find a reconciliation to GAAP of these measures in the Form 10-Q which can be found on our website at www.markelcorp.com in the Investor Information section. Please note this event is being recorded.
I would now like to turn the conference over to Tom Gayner, Co-Chief Executive Officer. Please go ahead, sir.
Good morning and thank you Denise. This is Tom Gayner. It is my pleasure to welcome you to the Markel second quarter conference call. I'm joined this morning by my colleagues Anne Waleski, our CFO; and Richie Whitt, our Co-CEO. The purpose of these calls is to share our financial results with you. To provide you with some commentary about the numbers and what they mean in terms of the economic progress of your company and to answer your questions. The headlines for the first half of 2018 of the revenues grew 23% from $2.9 billion to $3.5 billion.
Operating income grew 13% from $367 million to $416 million. Net income declined 2.7% from $219 million to $213 million and comprehensive income declined from $565 million to a negative $10.5 million a year-ago. When you look at that series of numbers, a reasonable first question might be, well how is Markel doing? The answer is that we're doing well. It's complicated to take the steps necessary to understand that answer, but we'll do our best to provide commentary as to why we have confidence in saying so.
In short Markel grew revenues are 20% compared to a year-ago. We deploy capital and made acquisitions to increase our revenue base and the size, scale, and abilities of your company. At the same time, we competed, adopted, worked hard and learned more about how to grow throughout all of our existing and new operations.
In our Insurance business we increased our written premiums 14% from $2 billion to $2.3 billion. We did so profitably but the combined ratio of 91 compared to 95 for the first six months of 2017. We also often continue to increase the range of our Insurance related capabilities. Richie will update you on our conditions and circumstances in our Insurance operations in a few minutes but suffice to say that we are pleased with these results in an ongoing difficult and challenging Insurance industry environment.
And our investment operations and net investment income grew 6.9% from $199 million to $213 million. This part of the investment equation is the most consistent and stable component of our investment returns. It represents interest and dividend income from our portfolio of equity and fixed income securities.
By contract again the losses from our portfolio or and we'll likely continue to be quite volatile in any given quarter or year. It is where year-over-year comparisons become some of arbitrary and not necessarily in keeping with underlying economic reality. For example in 2018 we're reporting net investment losses of $17.7 million compared to gains of $38.5 million in 2017.
Additionally, under the new industry accounting treatments in place for 2018 or unrealized gain and losses, now flow through the income statement rather than just the balance sheet. While this new accounting makes no economic difference our net income account the first six months of 2018 is placed unrealized loss of $220 million compared to unrealized gain of $340million a year-ago.
Over a longer and more meaningful time period, our investments earned positive in appropriate returns. We are confident that will continue to be the case. We don't worry too much about the short-term volatility. We unusually charted out when things are going down and we don't excessively celebrate short-term period when the reported numbers are positive.
Our Ventures operations revenues grew 61% from $600 million to $970 million. EBITDA declined 15% from $97 million to $82 million. The primary driver of increased in revenues comes from our ownership of Costa Farms, but Markel Ventures grew on an overall basis even without considering the impact of Costa.
Frankly, we faced unexpected challenges in one of our operations within Markel Ventures during the quarter. We took actions to deal with them and we posted charges totally $48 million to deal with the issues. It's charges is non-recurrent and should not mark our results going forward. Absent those charges the EBITDA would have increased more proportionally to the revenue growth that would also be my expectation going forward.
At this point, I'll turn the call over to Anne to provide you with more details on the array of numbers on our report. Richie will then discuss our Insurance operations and I'll return with comments about our Investment and Ventures operations. Anne?
Thank you, Tom and good morning everyone. I'm happy to report our performance for the first half of 2018 was strong. Our underwriting Markel Ventures operations have made substantial contribution to our results during 2018 largely attributable to profitable growth from acquisitions made in 2017. Our Investment returns were slight unfavorable market movements and our fixed maturity portfolio due to rising interest rates.
However, we continue to maintain a long-term focus with our investment strategy. Total operating revenues grew 23% to approximately $3.6 billion in 2018. The increase was primarily attributable to a 14% increase in earned premiums and a 62% increase in revenues from our Markel Ventures. The increase in earned premiums and other revenues was partially offset by net investment losses for the first six months of 2018 compared to net investment gains last year.
Starting with our underwriting results, gross written premiums were $3 billion for the first half of 2018, compared to $2.8 billion in 2017, an increase of 7%. The increase in gross premium volume was attributable to the contribution of premium from our new surety business, which we acquired in May 2017 and our collateral protection business which we acquired in November of last year. We also saw organic growth across most lines within our Insurance segment.
Retention of gross written premiums decreased from 85% in 2017 to 83% in 2018. This decrease was driven by lower retention on our classic car business within the Insurance segment and on our property product lines within the Reinsurance segment. Earned premiums increased 14% to $2.3 billion for the first half of 2018 due to higher written premiums in our Insurance segment and higher earnings in our Reinsurance segment related to increased premiums volume 2017.
Our consolidated combined ratio for the first six months of 2018 was 91% compared to 95% last year. As I've mentioned previously, the 2017 consolidated combined ratio included $85 million or 4 points of adverse development on prior year loss reserves in our Reinsurance segment resulting from the decrease in the Ogden Rate, which is used to calculate lump sum awards on UK bodily injury cases.
Now, let's talk about the results of the Markel Ventures segment. Revenues from Markel Ventures for the first six months of 2018 increased to $971 million compared to $601 million a year-ago. The increased revenues are primarily attributable to the third quarter 2017 acquisition of Costa Farms as well as higher revenues in both our products and services businesses.
Operating income from Markel Ventures was $37 million for the first half of 2018 compared to $64 million last year. EBITDA was $82 million for the first half of 2018 compared to $97 million last year. The decrease in both operating income and EBITDA was primarily due to expenses related to an investigation and remediation associated with the manufacturer products at one of our businesses and to an impairment charge related to intangible assets at this reporting unit. These expenses were partially offset by the contribution of operating income and EBITDA attributable to Costa Farms in 2018.
Now taking a look at our investment results. Investment income increased from $200 million for the first half of 2017 to $213 million this year. The increase was driven by short-term investment income primarily due to higher short-term interest rates and higher dividend income due to increased equity holding and dividend rates compared to the same period of 2017.
Net investment losses included in net income were $18 million for the first half of 2018 compared to net investment gains of $38 million in 2017. Net investment losses for 2018 include $9 million of pre-tax losses attributable to the decline in the fair value of our equity portfolio.
As we discussed last quarter effective January 1, 2018, all changes in fair value of the equity portfolio are included in net income rather than other comprehensive income. Net unrealized investment gains decreased $282 million during the first half of 2018, reflecting a decrease in the fair value of our fixed maturity portfolio. Given our long-term focus, variability in the timing of investment gains and losses is to be expected.
Taking a look at our total results for the year, our effective tax rate was 47% in 2018 compared to 27% a year ago. As I mentioned last quarter, the impact of management's decision to elect to treat two of our UK subsidiaries as U.S. taxpayers beginning in 2018 added $102 million or 25% to the effective tax rate.
Our estimated annual effective tax rate, which excludes this impact as well as certain other items that are infrequent or unusual in nature, was 20% in 2018 compared to 27% in 2017. The decrease in the estimated annual effective tax rate was primarily attributable to the decrease in the U.S. corporate tax rate from 35% to 21% as a result of the tax reform legislation enacted in the fourth quarter of 2017. We have reported a net loss to shareholders of $214 million for the first half of 2018, compared to $220 million a year ago.
Comprehensive loss to shareholders for the period was $11 million compared to comprehensive income to shareholders of $566 million a year ago. The comprehensive loss for the period was driven by the decline in the fair value of fixed maturities since the end of 2017, which was largely offset by net income for the period. Book value per share was $683 at the end of June 2018 compared to $684 at the end of 2017. I think we can call that flattish.
Finally, I'll make a few comments on cash flows in the balance sheet. Net cash provided by operating activities was $308 million for the first half of 2018, compared to $238 million for the same period of 2017. Operating cash flows for 2018 reflected higher premium collections, higher cash flows from our Markel Ventures and lower payments for employee profit sharing compared to the same period of 2017.
2018 also included higher claims payments largely driven by the 2017 catastrophe losses. As of June 30, 2018, we've paid 61% of our total estimated losses on the 2017 catastrophes. Invested assets at the holding company were $2.4 billion at June 30, 2018 and $2.7 billion at the end of the year 2017.
The decrease in invested assets is primarily due to an increase in loans and capital contributions of our subsidiary and interest payments associated with our unsecured senior note.
With that, I'll turn it over to Richie to talk more about our underwriting results.
Thanks, Anne, and good morning, everyone. Today, I'll focus my comments on underwriting operations and also provide a brief updates on State National and Markel CATCo.
So, first I'll start with the Insurance segment. As a reminder, starting in the first quarter of this year, we have consolidated the operating results of our previously reported U.S. Insurance and International Insurance segment into a new single Insurance segment. All results from prior periods from the two separate segments have been combined, so you can compare those.
Gross written premiums for the quarter are up $125 million or 11% compared to the second quarter of 2017. On a year-to-date basis, writings were up $305 million or 15%. The acquisitions of Markel Surety and the State National collateral protection line, added $51 million in premium in the quarter and $118 million in the premium on a year-to-date basis.
Premium growth for both the quarter and on a year-to-date basis, excluding the newly acquired product lines was driven by organic growth in our general liability, professional liability, and personal lines product lines.
Earned premiums for the segment are up 14% for the quarter and 17% on a year-to-date basis, due to similar reasons as the gross written premium increases. The combined ratio for the Insurance segment was 92% for the second quarter of 2018, compared to 91% for the same period a year-ago.
The one-point increase in the combined ratio was driven by the impact of higher earned premiums, which reduce the impact of the prior year's loss reserve releases on the combined ratio.
The benefit of higher earned premiums on the expense ratio was offset by an increase in G&A expenses from the newly acquired Surety and Lender Services businesses. Those two businesses have a lower loss ratio, but a higher expense ratio associated with them.
The year-to-date combined ratio for the Insurance segment was 90% versus 91% for the same period last year. The one-point decrease in the combined ratio was driven by a lower current accident year loss ratio, due to large traditional losses on property lines in 2017 and the impact of the lower attritional loss ratios from acquired businesses.
Next I'll talk about the Reinsurance segment. Gross written premiums for the quarter were down $39 million or 16% compared to the second quarter of 2017. On a year-to-date basis, writings were down $95 million or 12%.
The decrease in gross written premiums in the quarter was driven by lower premium volumes and the general liability and property product lines due to the timing of renewals of multi-year contracts and non-renewals in the property book.
The decrease in gross written premium on a year-to-date basis was primarily driven by a large specialty quota share treaty entered into in the first quarter of 2017 that was not renewed along with the decrease in our property lines due primarily to two contracts that were not renewed.
During the first half of the year, we had non-renewed marginal property business where rates and or terms did not improved sufficiently to meet our probability targets. As mentioned in previous quarters, significant volatility in gross premium volume can be expected in a Reinsurance segment, due to the individually large deals and timing of renewals on multi-year contracts.
Earned premiums for the segment are flat for the quarter and up 5% on a year-to-date basis due to gross written premium growth from 2017 contracts earning in to this year. The combined ratio for the Reinsurance segment was 90% for the second quarter of 2018, compared to 85% for that same period a year ago. The 5 point increase in the combined ratio was due to less favorable development on the prior year's loss reserves.
Contributing to the increase in the prior year's loss ratio was less favorable development on prior year's loss reserves on the whole account product line and adverse development from the 2017 cat events of $5 million. Partially offset by more favorable development maturity in the Marine and Energy product lines.
The year-to-date combined ratio for the Reinsurance segment was 94% versus 108% for the same period a year-ago. The 14 points decrease in the combined ratio was driven by more favorable development on prior year's loss reserves and a lower current accident your loss ratio and expense ratio. As Anne previously discussed many times the first quarter of 2017 results for the Reinsurance segment included $85 million or 19 points on the segment combined ratio of adverse development related to the decrease in the Ogden Rate.
Excluding the impact of Ogden, the segment had less favorable development in 2018 compared to 2017 due to adverse development in our property reinsurance lines compared to favorable development and property the previous year. The adverse development experience in 2018 as driven by $17 million related to the 2017 premium cat events.
On a year-to-date basis in total Insurance and Reinsurance segment increased reserves for the 2017 cat events by approximately $5 million. The decrease in the current accident year loss was ratio for the first six months in 2018 was due to higher earned premium as a result net favorable premium adjustments this year compared to net unfavorable premium adjustments last year. The decrease in the expense ratio was due to lower profit sharing expenses in 2018 compared to 2017.
So next, I'll make a few comments about our State National acquisition. As a reminder State National business is comprised of two primary products, a collateral protection insurance coverage, result for which are included in our Insurance segment, and a fronting platform which provides insurance licenses, rated paper and services for a fee. We refer to this business as our program services business. This business is non-risk-bearing to Markel and is reported separately from our underwriting operations.
The collateral protection insurance line contributed $42 million of gross written premium to the quarter and $88 million on year-to-date basis to the Insurance segment operating results. It also produced a solid underwriting profit. The program services business added $555 million in gross written premiums in the quarter and $1 billion for the first six months.
The business also contributed $23 million in the quarter and $45 million during the first half of 2018 in ceding commission fee revenue from the gross written premium funded during the period. This was reported in other revenues within our operating results. We're very pleased with the State National year-to-date results.
Moving to Markel CATCo, assets under management including funds held that will be used to settle claims from incurred losses increased to $6.6 billion at June 30, 2018, up from $6.1 billion at the end of 2017. As of June, 2018, Markel's investment in the Markel CATCo funds was approximately $132 million.
We recognized investment losses of $28 million in the quarter and $51 million on a year-to-date basis due to decrease in the net asset values of the funds, due to adverse development on the 2017 cat events. The adverse development was primarily related to Hurricane Irma as a result of significant increases in loss adjustment expense, late claim reporting and increased Caribbean loss estimates.
Finally, I'll end with some market commentary. Honestly there is not much new to report from last quarter. The market remains competitive, but we are achieving modest thing digit rate increases in many of our lines of business. The highest rate increases are in property however despite continued increases in losses from the 2017 cat events inexplicably property price momentum had slow through the first half of the year.
Interesting you can see underwriting pain beginning to pick up in the market, whether it would be Lloyd's franchise tried to remediate underperforming lines of business or companies having earnings misses due to underwriting misses, underwriting pain is increasing.
I have also personally noted that many more of today insurance headlines are about insurers going out of lines of business. While one-year ago all the news seemed to be about insurers entering new lines of business or adding underwriting teams. There are also clear signs of inflation pressure are building in the real economy. I define the real economy is the one where you and I buy stuff versus the fantasy economy the government reports on that seems to exclude the stuff that people buy.
Full employment leading to wage inflation, tariffs leading to increases in commodity cost and replacement costs and the gradual erosion of tort reform are all leading towards rising claims cost inflation. Every day at Markel, we are stressing to our underwriters the absolute necessity of price increases and underwriting discipline. Unfortunately it has been proved over and over again, severe underwriting pain is required before the insurance industry will collectively get its act together and price risk appropriately. At Markel, we see the pain coming and we are working hard to ensure that we are not impacted when it gets here.
Thanks for your time today and now I will turn things over to Tom.
Thank you, Richie. Investment results during the first half reflected a normal pattern of short-term volatility. In our equity portfolio, we were up a modest 1.5% during the first half. Of the last 5.5 years, we are up 222% cumulatively. Over that time frame, we've been up as much as 33% in a single year and down as much as 2.5% a year. I would happily find out for those results for the next 5.5 years and we continue to invest each day with that same discipline that it produces such outstanding long-term results.
Publicly traded equity stood at 64% of shareholders' equity at June 30 compared to 62% a year end. We continue to modestly and steadily add to our equity portfolio and we think the recent volatility allows us the chance to purchase wonderful long-term businesses at attractive prices. That is exactly what we are doing.
In our fixed income operation, we were down 0.3% during the first half. In the last 5.5 years, we are up 14.2% cumulatively. The best year in those five was up 6.5% and the worst was flat.
I think this longer-term comparison highlights why we allocate so much of our investment portfolio to equities. I would also sign up right now for these types of fixed income results over the next 5.5 years since they reflect the underlying actions of buying the highest credit quality securities that we can find roughly matching the duration of our bonds to that of our insurance liabilities and minimizing frictional costs along the way.
I'll also point out that the net investment income from an interest income and dividends totaled $213 million during the first half, compared to a $199 million a year ago, an increase of roughly 7%. This higher recurring portion of our total return stems from rising interest rates and increasing dividends from our high quality equity securities. This line is much less volatile than the unrealized gains and losses, and I'm pleased with this progress and expect more to come.
In Markel Ventures, we reported revenues $971 million versus $600 million, an increase of 61% while EBITDA declined 15% to $82 million versus $97 million. I am highly optimistic that we will enjoy the portion of increases and profitability going forward to go along with the increased size and scale at Markel Ventures.
All of our businesses face challenges such as competitive market conditions, labor market price and availability pressures, steel price volatility, packing and transportation bottlenecks and numerous other factors. Despite those sources, the Group continues to make economic progress and produce good returns from Markel.
Over time EBITDA should highly correlate to total revenues. One of our unique competitive advantages at Markel is our focus on the long-term results and long-term common sense behavior in all aspects. If you are trying to figure out a normalized earnings power sort of number for Markel Ventures, I would take a normalized revenue number and a normalized EBITDA percentage number to get normal economic earnings. I look forward to reporting on the Group's results in coming period and demonstrating that very outcome.
During the quarter, we also announced a formation of Rosemont Investment Group as part of Markel Ventures. Transport cottages doing just with 18 years of successful history in running Rosemont. In this business, we will be investing in the ownership of the best of asset management firms. We are exciting to announce this edition to Markel Ventures and we're optimistic about the multiple opportunities we are already seen in light of this announcement.
With that, I hope we've given you some sense for why we are confident then Markel is indeed doing well and I'd like to open the floor for your questions. Denise, if you would open up for questions.
Thank you, sir. [Operator Instructions] And your first question this morning will come from Mark Hughes of SunTrust. Please go ahead.
Thank you. Good morning.
Good morning.
The step up sequentially in the Markel Ventures revenue, I think you were at $439 million in terms of other revenue in the first quarter of the $628 million. How much of that was seasonality versus underlying growth?
Yes, it's a mix of both and cost which we refer to several times. Second quarter will be one of the biggest seasons of the year. Third quarter will be not quite that in fourth and first quarter are the lowest. So there is a seasonality factor involved.
You look at - I think you're organic growth in the Insurance segment, you'd mention mentioned general liabilities and professional liability as a stand up there? Can you talk about maybe the price or rate that you're seeing there in any particular updates on Medical and Professional Liability?
I would say of those areas, we're seeing sort of low single-digit increases in pricing. Clearly, we'd love to see more but that's what the market provides at the moment. And with the growth in the economy, I think most of the growth we're seeing into not price. I think we're going to - there's a good economy out there. There's a lot of construction going on. And as a result, we're seeing more businesses.
In terms of medical, I would say that still one of the lines that struggling to gain price direction to start going up. I think resulted have been for the most part poor for people in medical in the recent years. But for whatever reason, pricing hasn't responded yet. So that would be one. I said most lines were seeing sort of the single-digit increases. Medical is probably one of the areas where we're still waiting to see some increases.
And then finally, you mentioning Lloyd's that they are doing I think a comprehensive review. Have you seen any behavioral changes in your relevant markets?
I think so. I mean the news as I sort of pointed out, year-ago it seems like everybody was reporting on adding lines of business or adding teens and in the last several months, particularly since the Lloyd's announced their drive to work on sort of the lines of business that were hurting the market. You're seeing people move out of lines of business or teams leaving and so I think reality is starting to set in.
Thank you.
Thank you. The next question will be from Jeff Schmitt of William Blair. Please go ahead.
Hi, good morning everyone. Question on Costa Farms just about the - how is the business doing after the inventory loss by last year? I mean did that have any effect on the quarter or were or was that sort of property grown and had no impact?
Yes, in addition to the seasonality question that Mark asked before that is magnified and stood at a little bit more by the fact that indeed. We are still recovering from the hurricane to a certain amount. So just with growing cycles what they are. Sometimes I think couple of weeks. Sometimes take a couple of months. It takes a while to refill the entire pipeline.
So the main gateway I would say is A the business doing well and we are as delighted as we possibly could be - will be affiliation and the cost family and the nature that business. It would be in the State annualized the current year results or latter results if they both have a lot of distortion to it. But remember we have a long-term focus at Markel and when you start look at that thing over years as a market shareholder I think that we're very happy as part of the family.
Okay. And then did I may missed heard a minute to go when you talk about this seasonality of cost farms? Did you say the fourth and first quarters were lower? I would think the fourth would be higher from with Christmas but is that not the case?
Well, I'd like you to see how much it is it cost to buy point say to get it versus some of the others that would buy different points from the year. Correct there's a plan but it tend to be something that there's a price promotion by the retailers and won that and so to speak but the second and third quarter so highest parts of their business.
Okay. Is there anything more you can say on the investigation charge in the goodwill impairment? I mean is there potential for that to - for there to be more charges?
Well, we'd up our best estimate what we think the total expenses involved are and that's the same process and philosophy and way was what insurance reserve and deal with uncertainty in life and we have a history of conservative candidate doing our very best to recognize things quickly and at the incident we know - you know what is in there after responsible.
Okay. And then last one you'd mentioned some pressure on losses from toward activity? Is that are you saying that anecdotally or can you quantify that in anyway?
Hard to quantify, but things in the world and work in cycles and a few years back there was a lot of effort at reform and ever since then planted bar has been sort of chipping away at that. And you continue to see that I mean in States like Florida, Texas, California you know there's been significant erosion and toward reform in those areas and start to show up in the loss cost, I think quantify it for you, but it's just kind of what happens as markets change.
Are there any lines in particular that they are seeing the most aggressiveness?
Probably one of the areas and this has been talked about a lot on calls - probably the last years in auto. You're seeing really eye watering verdicts in some of the auto claims, particularly like trucking, things of that sort. Commercial auto in particular where it really looks like judgments are more to punish then to make people whole.
Okay. Thank you.
The next question will be from Bob Farnam of Boenning & Scattergood. Please go ahead.
Yes. Hi, good morning. I have a question on the expense ratio in the insurance operations. So consolidated expense ratio is by 39% in the second quarter, gradually trending down over the last five years or so from the low 40s to the high 30s. I understand the surety and the collateral protection business is going to put some upward pressure on that, but I'm just curious where do you see that expense ratio going over time? Can we expect that to come down?
Bob, I'll take this, and you guys are welcome to jump in. I mean that is absolutely our goal for that to continue to trend down, Bob. By adding surety and the lender services business - cloud protections, sorry, we've kind of gone the other direction in terms of mix. That probably adds a point just in terms of mix of business, but in our underlying sort of G&A cost and everything, we've done a nice job of reducing those. So as long as businesses generates sufficient underwriting profits, we will be indifferent as to the loss ratio components and the expense ratio component, but sort of the headline number gets pushed up as a result of adding those businesses.
The other thing that tends to happen throughout the year is our bonus accruals tend to bounce around and add some volatility. And I think you see a little bit of that in the second quarter as well. So we still believe the underlying trend is reduction to the expense ratio, it just didn't show up as well with the no rates right now.
Right. And as you say, it's probably more important combined ratio basis than looking at expenses ratio versus loss ratio. Actually another question for you. So there is substantial growth in the program services business, gross written premium in the second quarter relative to the first quarter. Is there any seasonality to that state national book?
No there's no seasonality, but much like we talk about there can be big transactions in our reinsurance segment. In the State National funding programs, those can be big programs, and when they come on, they move the numbers rather quickly. So I think it's more a factor of when new programs come online and how big those programs are. So there's probably going to be a little more volatility in that than some of that are on the lines of business.
So should we look at maybe the first six months and use that more of a trend going forward? Is that…
Yes. I mean we're certainly experiencing growth in the lender services business. It can be bumpy from quarter-to-quarter, but the underlying trend is growth.
Okay. And the last question for me is it looks like you received your license to reinsure business in India. I don't know much about the market in India. What's the opportunity there in your mind?
Well I think the opportunity is one of the most populated countries in the world with a rapidly growing middle class or rapidly growing GDP. It's been a very close market to insurance companies outside of the country. That's been changing gradually over the last few years and has change to the point where we're willing to invest in the company in a small way - in the country in a small way. I wouldn't expect to be talking about huge writings in India on the next several calls. We want to get there. We want to learn about the culture and how the business works and hopefully grow as that economy grows.
And likely reinsuring domestic writers is that likely…
Correct. Which we've done historically, we've just done it from Singapore or we've done it from London. So they are hoping us to have the feet on the ground, people there have relationships and know the culture and that's the step we've taken now.
Okay. Very good. Thanks for that.
The next question will be from Mark Dwelle of RBC Capital Markets. Please go ahead.
Hi, good morning. A lot of my questions already been covered, but a couple for Tom. Within Markel Ventures, a lot of those businesses use steel, for lack of a better description. Are you seeing any cost pressures yet? And any anticipation of cost pressures or your ability to pass that cost along? Should it occur to customers as a result of tariffs and whatnot?
In a word, yes and it's not just cost. It's availability. So just getting your hands on steel to run the business is more of a challenge today than it was a year-ago. Now everybody works hard and figures that out but yes, that's up item these days.
Okay. Secondly, I mean you've made some comments already about the charge in the quarter and the goodwill impairment there. Was that item or that issue as subject to litigation? It appeared in the contingency section, it wasn't clear from that placement whether that was a litigation item or just something that you guys were investigating?
That's an internal and we have to put contingencies like what we did in a standard business practice.
That's fine, thanks. And I guess the last question that I had, again it relates to the tax rate, I'm still struggling to get my arms around this - this quarter seem to be a little bit higher than the first quarter. I didn't know and if you have any kind of guidance or way of thinking about that tax rate to try to help us kind of pin that down a little bit more exactly?
No, I mean I think it was slightly higher than the first quarter, 20% versus 19%. So I mean I think something in low 20s, high-teens is probably a fair guess. As we've talked about though whether it UK tax selection that we made earlier or it the movement in the equity portfolio that tax rate is going to move around some. But I would think that that effect is annual tax rate of 20-ish is probably a fair enough estimate for your purposes.
Right, okay. That's kind of what I thought as well. I think those are all my questions and most of the guys had to be already covered the other ones I have. Thanks.
Thank you.
And the next question will be a follow-up from Mark Hughes of SunTrust. Please go ahead.
Tom, I just had a general question. Your view on the strength of the economy, the sustainability of kind of this GDP we've seen lately and if there is inflation on the way, how are you thinking about the equity portfolio?
Yes, I'll take that and there is two different parts to estimate strength and sustainability. In terms of strength, I mean it's blooming times out there. So whenever you want to look count a construction cranes trying to hire somebody looking at labor markets, trying to get a hold. Was there any one of those measures that you want to look at? The conditions are about running as hot as I could remember in a long, long time.
Sustainability, your guess is as good as mine. That crystal ball stuff and we don't know. I don't really have anything to add on that. In terms of the equity portfolio itself and the insurance pricing risk that Richie referred to. This is the kind of stuff that he and I talked about on a regular basis to keep one another informed on both side as to what we're seeing and thinking about and trying to make sure we're communicating throughout the organization to do the best we can.
We've always been very cognitive of sort of real pricing power in the business as we invest in now and we've also always had a pretty high proportion of activity securities. We are - those are dynamic businesses that we even live and move and change and adapt to whatever circumstances they find themselves. And so part of the answer to your question and protecting Markel is to increase the allocation to equities in a prudent and reasonable way because those are inflation protected in a better way than a bond would be by definition.
Thanks for that.
You bet.
And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Tom Gayner for his closing remarks.
Thank you very much. We'll talk to you next quarter.
Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.