Markel Group Inc (MKL) 2002 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Markel Corporation 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.

If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Steve Markel. Thank you, Mr. Markel. You may begin.

Thank you, and thank all of you for participating this morning in Markel Corporation's second-quarter earnings conference call.

Before we begin, I would like to call your attention to our safe harbor statement set forth in our press release and forms 8-K, 10-Q and 10-K. Any discussions today which involve forward-looking information or anticipated results could be affected by the matters described in our safe harbor statement, and we encourage you to read those statements.

The good news for the quarter is that there, again, is no bad news, no surprises. We're very excited with the insurance marketplace, and particularly the specialty market, where we are enjoying very significant volume increase and pricing and rates remain very, very strong.

Our U.S. profits continue to be very, very good. Our Markel international results continue to get better, and our investing results are solid and we are finding increasing opportunities to invest the very positive cash flow that's coming from our growing business.

I think today we're going to be reasonably brief to allow for lots of questions. As usual, Darrell Martin, our chief financial officer, will review the numbers. Tony Markel, the chief operating officer, will review the operations, both here in the U. S. and internationally. Tom Gaynor is with us, our chief investment officer who will make a few comments about our investing strategies and after each of them make a few comments, I'll have a few words to wrap things up and moderate the questions and answers. Without further adieu, Darrell, would you run through the numbers.

Sure. Good morning. Thank you, Steve. Before I get started, I just wanted to let you know that our 10-Q should be filed and available by the midweek next week. Probably not later than Wednesday. And it obviously will have a lot more detail and more comprehensive discussion of our operating results for the quarter and six months year-to-date than our press release.

As Steve mentioned, generally the trends that we're seeing in the quarter are very similar to those that we discussed in the first quarter. My comments are going to focus more on the year-to-date numbers, since I think the six-month trends probably are a better indicator of how we're doing year to year.

First, as usual, I'm going to talk about the underwriting results. Consolidated premium volume was over a billion dollars for the six months ended June 30, 2002. It was 1,042,000,000, a 25% increase over the prior year. Our North American operations continue to grow very nicely. Total growth in earned premium volume in North America for the current six-month period was 54% over the prior year, and it was 56% in the current quarter.

Our international operations are very much on track with our expectations, and we expect those operations to generate 600 to $650 million in volumes for the year in total, and our discontinued lines continue to reduce, in terms of size of earned premium, as well as impact on our results of operations. Primarily, the only business being reflected on a gross written basis in discontinued lines is [Core France], which is held for sale, as you well know.

Most of the gross - growth in gross premium is coming both from increased submissions and pricing increases. I suspect Tony will talk a little bit more about those in a few minutes.

On a net basis, we retained about 75% of the gross premiums written. That's comparable to the same six-month period a year ago. And on an earned basis, we had $674 million of earned premium. Again, a 25% increase over the prior year.

The more significant story, I think, is related to the combined ratio or underwriting results for the year-to-date. We reported a combined ratio of 102% for the current six-month period, compared to 107% a year ago, a very substantial 5-point improvement on a much larger earned premium base. We're very pleased with that. Markel North America continues to show very solid underwriting profits, with a 96% combined ratio, quarter and year-to-date, compared to a 98 and a 97 comparable prior year and prior quarter.

Markel International continues to show improved operating results as well, with a 107 combined ratio in the current quarter and a 109 year-to-date. The 109 compares to 114 in the prior years.

The - I think the real story in the improvement in our combined ratio really shows up in the expense ratio. We reported an expense ratio in the current six-month period of about 32% compared to approximately 36% expense ratio for the prior year. That improvement is due to reduced commissions being paid to brokers, reduced overhead, actual dollars of overhead that we have, but obviously it also is benefitting from increased earned premium volume.

So it's a combination of those three things that are driving our expense ratio down very nicely.

The loss ratio is slightly improved. Not substantially. We reported about a 70% loss ratio in the current quarter, compared to about 71 a year ago. While we are monitoring and measuring and trying to estimate the impact of pricing on our book of business, we are taking minimum natural benefit for any indicated price increases on renewal books through this point in time because such a large portion of our business is new. We're going to wait and see that business develop over time before we recognize the impacts of those pricing changes.

So we think we're very much on track from the underwriting side, and Tony, as I say, will have some more comments on that in a moment.

From the investing side, our portfolio grew to $3.8 billion as of June 30. That compares to about 3.6 billion at year end, and somewhere near that, I think, at the end of the first quarter.

Our net investment income was 84 million dollars year-to-date compared to about 85.6 or 85.7 the prior year. The growth in our portfolio is being offset by lower yields on our fixed income securities. So net-net of that is probably a slight reduction in net investment income.

Net realized gains in the current quarter were $17 million compared to 7 million a year ago, 7.8 million a year ago. That was a little bit higher than normal, probably. We did reallocate one of our portfolios that was primarily the international portfolio. That portfolio was brought into Richmond, is being managed in Richmond now, as opposed to being managed in London and we did reallocate and take some gains on existing securities there in reinvesting those funds.

Changed in unrealized gains in the current quarter was - we had approximately a $2 million loss. So our total return on our portfolio for the six-month period is about a 5.4% annualized yield. So it's perhaps a little lower than we would like for our business model, but a significant improvement over the first quarter.

Tom will have some more commentary, I'm sure, on the investment area in a few minutes as well.

On a net income basis, we reported approximately $40.3 million in net income, in the current six-month period, compared to approximately $9 million for the same period in 2001.

As you know, we did implement FASB 141 and 142 effective January 1, and there is no amortization of goodwill imbedded in the 2002 numbers. In the prior year, there was approximately 9.6 million of goodwill amortization included in the net income number, so on a comparable basis, our $40.2 million of net income in the current year would have been approximately 18.6 in the prior year.

So still very substantial improvement in net operating results.

That converts to, on a per share basis, our core operations - as you know, we focus on core operations, which is before realized gains and amortization expenses. Our core ops for the current six-month period was $3.32 per share compared to $2.11 per share a year ago.

Shareholders' equity at the end of June 30 increased to $1.1 billion. Book value per share was $114.71. So with that, I think I'll turn it over to Tony and let him make some additional comments on the operating results and - Tony?

Thanks, Darrell. Basically, the news, as Steve and Darrell both said, we feel extremely good about - I referred to this quarter with people yesterday it's sort of a Holiday Inn quarter. No surprises. And that's the second quarter that things have fallen pretty well as expected. We're continuing to take advantage of the marketplace in the U.S. with the outstanding continuity that we have in staffing over here, and I think we've made significant progress toward the goal of underwriting profitability at Markel international. Let me flesh out a little bit on both sides of the Atlantic at the risk of perhaps repeating some of the numbers that Darrell gave you.

In North America, our gross volume, as Darrell indicated, was - for the six months, was 694 million, which is up 54% over last year, and I think indicative of the continuation of the hard market. The second quarter is even up 12% over the first quarter. So we see a continuation of the marketplace - a favorable marketplace that we're enjoying.

The earned premium, similarly, is 417 million in North America for the first six months, which is up 43% over last year, and 12% over the first quarter of this year.

Combined ratio specifically for the six months was 95.6 - excuse me. 95.8, and the second quarter showed even slight improvement over that with a the 95.6 number.

So very, very gratifying.

Every one of the six U.S. divisions showed outstanding growth. Actually, the minimum growth over the same six months for any one of the single divisions was 27%.

Submission activity, which is where everything starts, particularly on the surplus lines side, the four surplus line subsidiaries, was substantial. In the aggregate. And although restrained somewhat in terms of maintaining our service levels, it was a nice problem to have, and I think our people responded beautifully into the teeth of these increased opportunities.

Price increases continued to meet and in some products exceed our expectations. We talked in the past about commission reductions as a result of the increased pricing, and they are very much consistent with what we discussed in the first quarter in North America and are a major part of helping to produce the gratifying reductions in our expense ratio that I think Darrell alluded to.

The environment continues to produce the turmoil, I guess, in the standard marketplace with Hartford and travelers sort of taking a look at their issues, St. Paul has clearly been very proactive in looking at their products. On the standard side, CNA is obviously reassessing a lot of their book. So as I indicated, the opportunities flowing into the surplus lines side continue to be extremely positive and gratifying. And even in the specialty side, I'm not sure whether we had discussed this last quarter, but there are a couple of new players who - or a couple of old surplus lines specialty competitors who have dropped out of the marketplace, which - in the form of caliber one, which is the PMA company and American equity, which was the Citigroup company, which have really added to the positive environment, and we haven't seen much activity on the other side of the fence from new players, although some activity in the specialty marketplace is expected from some of the new Bermuda entries.

Not a lot to talk about in terms of specific projects or events during the second quarter. We're still working on a long-term IT project to effectively try to create continuity with our six U.S. divisions, and we're starting an intern program to home-grow some talent, and I tell you, it's got to be an innocuous quarter when those become the operational highlights.

On the international side, you know, where Darrell and Steve both alluded to very positive developments, our gross volume on continuing operations was 327 million for the six months, which is down 11% from last year's same time and actually down a little bit from the first quarter, but very much in line with expectations, very much in line, you know, as a result of the re-underwriting that continues to go on, and is clearly in line with what we expected.

The earned premium of $242 million on the international side is actually up 23% over last year, which in some measure, I think, reflects growing retentions on the book as opposed to laying off so much reinsurance from the inherited operations and so to be inherited MO.

Combined ratio, as Darrell alluded to internationally is down a couple of points from 109 first quarter to - I mean the second quarter's down to 107, six months is 109, and we feel extremely good about those results. We think the loss ratio obviously is still somewhat impacted by a business that was put on the books early last year that we thought well at the time, but clearly is not carrying some of the increases that we've enjoyed over the last six and nine months. We are dealing with the expense issues, but as we discussed, you can't turn those on a time, so some of the - the 107 is clearly still an expense overhang, and we'd like to think that we're continuing to reserve on a conservative basis, and as Darrell alluded to, I don't think in that regard that we've really taken into any significant consideration some of the major pricing increases that we've enjoyed.

So when we report 107 in the second quarter, we feel extremely good about it.

Commission reductions continue on track, and are a significant piece of the expense reduction situation, and our six-month expense ratio is still very, very much improved over last year, as expected.

Rate increases are in line with all of our expectations, and there doesn't seem to be any diminution of the levels that we saw in the first quarter, which we find gratifying as well.

I reported to you last quarter that one of our major initiatives was reorganization of the support units, following a reorganization of the underwriting side, and we received a plan within the last 30 days that looks solid in terms of all the support units over there and it's been approved and the implementation of that is starting right now with, obviously, resulting goals of increased efficiency and continuing to hack at the expense ratio, given our downsized volume.

We talked about the need for continued formalized education and training of some of our managers, a lot of whom have been battlefield promoted, and that initiative is ongoing as we speak, and I'm very gratified with what we've put together there.

We're starting to look outward, in terms of marketing and sales, and you've heard me allude to that, and in addition, challenging some of the franchises that we have chosen to continue to go forward with as to how to make - how to become more masters of our own destiny in those as opposed to sort of being swept along with the entire market, and I think we've really got our people thinking out of the box in that regard, which is - which is really sort of consistent with where we are in the turnaround over there.

You're probably aware on a macro basis that Lloyds has recently announced some recommendations, and what we think are some very gratifying changes in the structure, discipline, and control over there, all of which we think will stabilize and strengthen the platform. We're currently studying those recommendations to determine if, in our opinion, they've gone far enough, and to the extent that they have fallen short of what we were hoping for, obviously we'll continue to constructively lobby for modifications that we think are essential to make sure that Lloyds continues to be the worldwide force that we view it as.

All in all, the quarter met expectations in virtually every recent, and most significantly, the details on the quarter and the results will be posted on both sides of the operation and give us a great deal of confidence that we're on the right track in the UK and that the positive environment in this marketplace continues to have legs. So I'll pass it over to Tom Gaynor and let him talk about investments and try to leave as much time as possible to answer any specific questions that up might have.

All right. Good morning. Thank you, Tony.

Before I get into the investment numbers from the past quarter, I'd like to make a few qualitative comments about our investment approach at Markel.

As many of you who have been familiar with us for a long time know, we've maintained a consistent investment discipline for many years. We are not newly converted to the recent movement towards corporate integrity and sound businesses. We didn't recently become concerned about excessive option grants and misleading accounting. We've been vocal and active about these issues for years.

To review, we generally consider equity investments through four rough filters. The first is that any business we consider investing in should be profitable and enjoy good returns on capital. We've been around long enough to know that more promises are made than actually delivered on, so we insist on solid evidence that any stock we buy is a share in a profit able business.

Second, we look for corporate management teams that are both talented and honest. One without the other, does us no good as investors. If people are honest but not talented, they may be very nice people but they are not the ones to move the business forward. If they are talented but not honest, they may make plenty of money for themselves in the short run, but that probably won't do us any good as outside investors.

We've been concerned about this issue for years and we've consistently objected to excessive option grants and misleading accounting. We're grateful for some company in this fight that now shares our view that these issues are, indeed, important.

Thirdly, we look for businesses with the opportunity to reinvest their profits back into the business and grow, thus creating the ability to compound our capital over long periods of time. Absent good reinvestment opportunities, we look for companies to exhibit capital discipline by paying appropriate dividends or re-purchasing their stock.

Fourthly, we pay close attention to the price we pay for securities that exhibit the above characteristics. It doesn't do us much good to buy the companies that meet our tests if the price we have to pay is too high for us to earn a reasonable return from our purchase price.

Finally, these common-sense thoughts are always done in the context of a long-term view of investing. Markel is a long-term oriented company in everything we do, including investments. We are investors seeking long-term returns, not traders looking for short-term trading gains.

All of these sentiments are nothing new for us. We've believed and practiced them for years and plan on continuing to do so in the future. By sticking to these beliefs, we saved a lot of the heartbreak currently being experienced by equity investors. Sticking to our principles kept us away from the now imploding areas of the stock and bond markets.

Now, on to the numbers.

For the second quarter, our equity portfolio produced us negative total return of approximately 6%, and for the first six months the total return was a negative 2.7%.

This compares quite favorably to the S and P 500 declines of negative 13.4% and negative 13.7% for the same periods.

It's no fun to report negative numbers but we think that the strong relative performance demonstrates the validity of our disciplined and conservative investment process.

Since December 31, 1999, we have earned roughly 43% on our equity investments, while the S and P has suffered a decline of approximately 30%. This is a huge gap in performance, and our longer-term record remains something of which we are very proud and has played a significant part in the building of shareholder value at Markel.

On the fixed income side, I'm pleased to report that there is very little to report. We had virtually no exposure to the telecom or technology world, and we earned the returns that we should have, consistent with our long-term strategy of maintaining the duration of four to five years and high credit quality. Our total return for the first six months from fixed income, including cash, was 4.3%. Additionally, during the second quarter, we consolidated all investment management functions in Richmond. This should result both in expense savings going forward, as well as higher total returns available from restructuring the portfolio to a longer duration than had historically be used by the UK operations.

Going forward, we are beginning to incrementally and steadily increase our equity investments. At June 30th, our equity investments represented only about 14% of our total investment portfolio. This is the lowest percentage of equity since I joined Markel in December of 1990.

Many factors go into our asset allocation position. Pleasantly, right now, the confluence of improved underwriting results and attractive equity purchase prices should allow us an opportunity to utilize our investment discipline to build shareholder value in the future.

With that, I'd be happy to answer any of your questions when we get to the Q and A period. Steve?

Thank you. A couple comments to wrap things up and we'll open it to questions on the - relative to the balance sheet. As you all know, on the liabilities side, loss reserves are our single largest and most relevant liability that we manage, we think, very intelligently. Our goal, of course, is to continually try to assure ourselves that our reserves are more likely redundant than deficient, and at quarter end June, we feel very strongly that the quality of our reserving level is every bit as strong, if not stronger, than March or at year end, and we're very, very hopeful that the price increases that we're enjoying on the underwriting side, in fact, are improving our margin for safety.

Additionally, during the quarter, and in fact virtually since we made our first estimate, there's been no deterioration in our selection for the September 11th loss reserves. We're very comfortable with our position there and see no need to strengthen those reserves. It's, in fact, I think proving to be a solid reserve, as best we can tell, although it's - it's fair to say that the final claims have not yet been settled there, so there is some future uncertainty, but we certainly feel very, very good about our position and have had no reason to think it's necessary to increase those reserves.

On the assets side, clearly our investment portfolio is the major factor and Tom's eloquently described our investing activities and views. Our portfolio grew in the six months this year by $200 million, from 3.6 billion to 3.8 billion, and this growth is obviously the result of the growing premium volume, and as you all know, building this float represents a solid source of future earnings for Markel for years and years and years to come, and we're very pleased to see the portfolio growth from operating cash flow and expect this to continue to be a very strong element of increasing shareholder value for Markel for the time to come.

With that, I'll wrap up our formal presentations and be pleased to respond to any questions you may have. Operator, if you'll open the floor to questions. 00:27:32

Ladies and gentlemen, at this time we will be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. To remove your question from the queue, please press star 2. And for the participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Again, to ask a question, please press star 1 on your touch-tone keypad, and if you are using speakerphone equipment, please pick up your handset before pressing the star keys. We'll pause for just a moment.

Our first question comes from Blair Sanford with Cochran [inaudible]. Please state your question.

Good morning, everybody. Three questions, really.

One is, what kind of expense savings have you already achieved from consolidating the syndicates in London, and what kind of expense savings might you, looking forward, expect to achieve?

Darrell, you want to take care of that?

Yeah, I'm not sure that I could really quantify the dollar magnitude of the expense savings at this point in time. As Tony said, we're continuing to consolidate administrative functions, et cetera.

I will tell you that from just purely a processing point of view, it is much, much simpler operating with one syndicate than multiple syndicates, but, you know, there is a tail on those older syndicates that we still have to administer today.

So, you know, the prior two years from, you know, 2000 and 2001, those older syndicates are still open so we have that administrative process still to deal with. So I'm not sure there's a lot of dollars of savings, specifically, relative to that yet.

I would just add that the objective was more creating one team in that regard, Blair, than it was trying to attack any synergies. I mean, clearly some of the support units will get some of some overlap, but the real beauty of it is to take what was 11 disparate units in the international operation, 8 of them in Lloyds, and effectively create one Markel international and that really has made major strides.

Okay. Good. Two more questions.

Tom, you're probably salivating this past month with the market decline. Can you give us any ideas as to any additional allocation that's been put into the equity markets since June 30?

Well, we're going to be measured about how we do the additional commitments to the equity markets because I'm not going to pretend to be a genius at knowing what the exact bottom is or how low things are going to be. But, you know, we are putting some cash flow regularly, sort of week by week, into the - into the equity markets and ticking off ideas one at a time as we see them tested out. We hope that over the next course of the next quarter or two that there will be a noticeable difference in the equity allocation.

Okay. Good enough. And then finally, on the World Trade Center losses, at what point would you expect - obviously, things are looking fine now, but can you characterize the tail for us, as it applies to Markel?

The expectation is that the large property component of the reserve could be resolved, you know, in a short period of time if the parties really could come - come to some agreement. If that issue is litigated, however, it could be quite some time and I really don't know what the politics on rebuilding in Manhattan has to do with the speed of that settlement. But I suspect that somehow or another, the - the plan for rebuilding will, in fact, drive, to some extent, how that settlement is resolved. So I think - you know, my personal judgment would be that, you know, the fact that there's a court date within 30, 60, 90 days is maybe irrelevant to what the ultimate settlement time frame is on the property side.

Now, I'm not an expert in this, Blair, so I'm probably not the best one to be asking. There's still some liability issues being litigated in terms of the people who have opted out of the - the federal program, and that litigation could take quite a few years, I would think, depending upon the nature of that litigation and its - it's just in its beginning phases.

So, you know, I think it's fair to say that the final resolution could be quite a few years. But I think people will be able to get a better grip on the number much more quickly than that. I don't understand some of the other companies who had adverse development exactly what's been driving that, and I think as best I can tell, it's coming out of health and accident side, life insurance side, maybe, where we have very little exposure.

So that might be one of the reasons why we've been immune to this second wave of World Trade Center loss increases, although I'm not really familiar with some of the other companies' problems, again, but that's my impression.

Well, that helps a lot. Thanks a lot.

Our next question comes from John Fox with [inaudible] asset management. Please state your question.

Hi. Good morning, everyone. My question is around your asbestos reserves and, you know, that situation is coming to a head again in the industry. If you could kind of talk about your exposure, what your reserve position is at this time. Thanks.

John, how are you doing this morning.

I'm doing great, Steve.

Good. We did, as you know, a fairly intensive study towards the end of last year in the international operations on asbestos, and we were able to develop a lot of data with respect to some of the underlying claims and some of the information that had been developed and had a fairly meaningful increase in the Markel international reserves to deal with that.

In the international side since then, we have not revisited the review in the same depth, but we do review individual case developments and monitor individual claims as they proceed, and we've had, again, in the six months of this year, no reason to believe that the studies done at the end of last year were inappropriate in any way.

On the United States side, we have some exposure associated with the old Griffin acquisition, the associated insurance company, and on the claims that we're handling there, there have been some developments but for the most part, those developments have been well within the reserves that Markel had previously established. I think it might have been two years ago we put some additional reserves up there.

And fortunately, the size of our losses in - from the U.S. companies is fairly modest, and net retentions are fairly modest, and for the most part, the reinsurers behind that business are still in a position to pay, so I think we're - we feel fairly comfortable about that, although the - you know, I think unless as a society we decide to stop compensating people who are not truly injured from asbestos, as long as it is a grab-bag for everybody to participate in, you know, the problem is going to continue. And maybe there is no end in sight. But I think it's more rational to assume that the day will come when non-injured people are not entitled to compensation for having had any ancillary exposure to asbestos.

Okay. Some of the companies have talked about, you know, how big the reserve is and the survival ratio and that sort of thing. I mean, do you find those types of things meaningful and do you have those numbers for Markel, or -

They are available for Markel and they are, you know, a benchmark, but they are just one of many, and looking at that particular benchmark, Markel is - and I don't have the numbers in front of us for each of the divisions - is reasonably strong.

Okay.

It is really based on whether you're a reinsurer or a direct company or where in the cycle you are, and I think an important point to note is that unlike a lot of companies, Markel does not discount any of its loss reserves, and likewise, unlike a lot of companies, Markel has not used financial structured reinsurance products to move off balance sheet the liabilities associated with things like asbestos.

So our number is - is undiscounted, gross, one hundred percent, and in fact the number we would expect on our books to pay out over 50 years.

Okay. Thank you.

Our next question comes from Beth Malone with [Advest]. Please state your question.

Thank you. Good morning. I have a question on the international operation. Could you give a little more guidance on where you see the combined ratio over the next - what your goals are over the next 12 to 18 months? And also, on the expense ratio, how much do you see - I mean, I know you've had success in bringing it down. Is there a limit to how much that expense ratio - are we getting close to where you can't really reduce it too much more than where it already is?

You know, Beth, our goal basically is to produce loss ratios on the current pricing that coupled with reasonable expense ratios and obviously that goal is going to be sub-a hundred. You know, obviously the last six or nine months, the pricing has really been gratifying and even before that, we had the first vestiges of the turnaround. Our objective overall always is to produce an underwriting profit. I think we've been pretty Frank about continuing expense overhang because of the size of the operation we inherited and it's got to have some moderate impact on us, you know, for a while, but we've made some tremendous strides and Blair's question earlier concerning the synergies relative to the amalgamation of the syndicates into one, there will be some - there will be some side benefits in terms of some support units.

But our objective is still to produce a hundred percent. We obviously want to build in some conservative reserving, where we can, and I feel we're well on the way to accomplishing exactly what we wanted. And I mentioned the 107. You know, we feel good about the pricing, we feel that we're getting our expenses in line, and we feel like hopefully we're taking some advantage to build in some real nice reserves.

So I don't want to really quantify exactly where we're going to be and when we're going to be, but suffice it to say we feel like what we're doing now on all fronts, relative to the combined, is going to achieve our long-term objective.

Okay. And as regards expense reductions, do you -

We're getting there. We're getting there, but you don't take a one billion dollars operation, reduce the volume down to 600 million and so forth, and effectively turn it around. But we've got - we're really - we're getting - we're getting there. We've got some more improvements to make, and they will come over the next couple of years.

Okay. Thank you.

Our next question comes from David West with Davenport and company. Please state your question.

Good morning. I was just curious if you'd kind of characterize the operating cash flow in maybe a little more specific terms and also, do you have any major claims payment or do you have a specific claims paid number for the quarter?

We don't - we do not have any specific claims payment data right now, but in terms of the growth in the portfolio, the vast majority of that came from operating cash flow, and that's probably going to approximate $150 million in the quarter. Or six months. I'm sorry. A large portion every that was in the [inaudible] quarter.

Very good. You mentioned earlier, obviously you do have a lot of new business on your books this year, and your retention ratio has been very steady. Do you anticipate, as that portfolio seasons a little bit, that - you know, in light of let's assume that reinsurance prices remain fairly stable, of that retention ratio starting to gradually increase?

We certainly would hope so, David, yes.

Okay. All right. Well, thank you very much.

Our next question comes from John Keith with [inaudible] Baker. Please state your question.

Thank you. Tony, if you're in Richmond, that must be good news for Markel.

Want thank you, John. I appreciate it. My wife doesn't feel that way but I appreciate the remark.

A couple of questions. Can - can you talk a little bit about the commission cuts that you referenced regarding brokers? And can you tell us who is seeing the commission cuts? Is it - is it by geography or by type of broker or by type of line of business?

Well, you know, in fairness, I started to use the term we've taken advantage. That's not a fair term. But the price increases that we've got, clearly I don't think it's inconsistent to tell the broker, hey, you - you know, you were making X number of dollars at the prior pricing and it's okay to make X plus 20% based on the increased pricing but it really is - you're not justifiable in making X plus 40%, so use examples. And so we've taken the opportunity on both sides pretty consistently, on both sides of the operation, to judiciously and I think appropriately reduce commissions back, not effectively taking all the windfall away from the brokers but that which frankly is, you know, at the top end of the scale. And, you know, it varies by operation. The only areas where we really have not had the opportunity to effectively reduce commissions pretty much are in our personal lines operation in the U.S., which, you know, is a pretty stable situation, and our program business in the U.S. But by and large, everything over - with a couple of exceptions, overseas and all the surplus lines operations in the U.S. have met with the clients and agreed upon fair, equitable reductions in the commissions, and they have stuck and they are significant in terms of their size.

John, in the aggregate, it represents about two points on the commission line that is not - is lower in the first six months this year compared to the same period last year.

That's both.

And that's U.S. and international. Another sort of flavor relative to Tony's comments the appropriate perspective also is that when rates were coming down over the 15-year period preceding the more recent time, the brokers were not bashful about insisting upon more and more commissions to supplement their income if the prices were coming down. And to remain competitive in the marketplace, insurance companies accommodated them.

So it's - it's part of the ebb and flow of the business that as prices go up, commissions come down, and unfortunately, vice versa.

Is that more of a - a phenomenon in the - in surplus lines or specialty admitted market.

Yes.

Than it is a standard?

Yeah. The specialty admitted business, our program business and our personal lines business we have not - which are relatively small to our total in the U.S., but those two operations, frankly, have not been as impacted by the significant increases that we've enjoyed in the surplus lines and therefore, really have not necessarily done much on the commission side.

Uh-huh. Secondly, Tony, can you talk a little bit about - about rate hikes? Can you be specific as to who is seeing them and where and et cetera?

You know, we - we've talked about the increases. Surplus lines, you know, continuous to go up at double digits, pretty well everywhere. The - the increases overseas vary by product, as you can appreciate, and we've talked about this before, and the second quarter - I guess the underscoring thing, the thing worth really underscoring is second quarter showed no reduction in that - depending on the line, I mean marine and aviation increases have been very, very significant because of the impact of 9/11 and the other losses, but in general, the entire market has gone up. Probably the least increase - and we don't have a lot to do with overseas - has been the motor side, where the increases have been just barely double digit but they come on the heels of two or three years of rate increases and, you know, we sort of - the - in '99, '00 and '01, we got some fairly substantial increases in the motor side, so the fact that they are not up in the area where marine and aviation and property and the other UK stuff are is not surprising. But the increases are meeting all of our expectations.

John, one way, I think, to sort of explain this a little bit. We measure it very precisely, or try to measure it very precisively on each of our business units, but the truth is there is no way when the terms and conditions change, the deductibles go up or the limits come down or some other variations. The final numbers that we produce are very subjective and they're based upon a large amount of assumption and then you have the mix between new business and renewal business. It's easy when you renew an account to put a number on it, but it's almost if on a renewal piece of business we're charging a hundred percent more than the other guys charge. It's pretty relevant to what our price increase is, because I might be only 20% more than we would have charged had that guy been a customer.

[inaudible] 10 as to 15% at the low end but much higher at the high end. I think the best way to sort of generalize what we're comfortable in doing is sort of the volume increases that we're seeing, we think are roughly one-third price and two-thirds volume, and that seems to continue to represent, I think, a good feel or touch for what we're seeing in the prices.

But it's - it's really difficult to take 40, 50 different products and amalgamate this data and come up with a number that would be very perisize because it wouldn't be very meaningful.

Uh-huh. Right. Thanks. Last question for Darrell. Darrell, it looks like you paid down some debt during the quarter, yet interest expense increased during the quarter. Is that solely due to FAS 132 adjustments?

No, no. I think the interest expense in the quarter, probably the blip in there is, as you know, we recorded the redemption of $35 million of the lines that occurred on June 5th, and there was, you know, issuance costs that had been deferred and were being amortized relative to that issues, and when we brought back in $35 million of those lines, we wrote off to interest expense, you know, a proportionate share of the issuance costs.

Right. Okay. Okay. Thank you very much.

Our last question comes from Mark [inaudible] of Salomon Smith Barney. Please state your question.

Yes. Good morning. Got a couple of questions.

Number one, I guess following up on the international underwriting results, in the past you've indicated that you had some degree of comfort that - I believe that by the fourth quarter of this year, that you might be able to produce break-even or better results on the international side, and I know you've - you were pretty cautious and qualified those remarks, but I was just wondering, are you comfortable making that statement still today, or can you just kind of shed some more light on that?

I think, Mark, the price increases that we've been seeing would certainly indicate that achieving that in the fourth quarter is not unrealistic. Whether it, in fact, happens and how we choose to establish the reserves at that point in time is yet to be seen, but it's - we're clearly getting rate increases across the board in half of the last several months and quarters, in fact, that it would not be unrealistic to believe that should happen. And it really will evolve around the qualitative judgments we make about wanting to make sure that the balance sheet is conservatively stated.

Okay. Okay. Fair enough.

On the - my second question is, on the rate of gross premiums retained net, that jumped quite a bit in the quarter as we would expect. I know you're making the move to use less reinsurance protection on the international side, and as a matter of fact, the retention ratio there jumped to about 90%, but I'm just, you know, trying to - for modeling purposes, should we assume retention levels on the international side of around 90% going forward, or was there some type of anomaly in the quarter?

I think the anomaly was more in the first quarter, but the blended average over the period of time - the first quarter, the larger charges were relative to some of the reinsurance purchases, but, you know, I think I would sort of average the numbers. It should be, I guess, mid-to high 80s is the number I'm thinking is sort of reasonable. Maybe mid-to low 80s.

But we don't set any numeric or quantifiable objective. You know, we're applying the same type of reinsurance purchasing posture over there that we've always applied over here and our first objective is to retain as much as we can gross, consistent with our financial appetite. We have dramatically reduced the limits that were being purchased over there and reducing dependence on reinsurance in that regard, and we've increased some of the retentions consistent with the increasing pricing and you know what's as a risk bearer as as opposed to an arbitrager. So you're going to see, I think, a solid increase in retentions but we don't set any hard and fast quantifiable objective as a percentage of gross premiums. It's whatever falls out of the - falls out of the operational side after applying those overviews.

Okay. And then my final question is: In the specialty admitted segment, the combined ratio came in at 105%. That strikes me as the highest it's been in quite some time. At least eight quarters or so. If not a little bit longer. Can you provide some comment on that.

Yeah. All of the loss - losses that we referred to were in the specialty admitted side and that was, you know, two, two-and-a-half million dollars , and if that was eliminated, I think they would be close to a break-even for the quarter.

Right. Okay. Thank you very much.

Gentlemen, there are no further questions at this time.

Great. Thank you very much. We appreciate all of you participating with us today, and your long-term support of Markel, and feel free to give us a call if you have any further questions. Again, thank you very much for your support and have a great day.

This concludes today's conference. Thank you for your participation.