Markel Group Inc (MKL) 2003 Q1 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 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Steve Markel, Vice Chairman of Markel Corporation. You may begin.

Thank you, operator. And thank all of you for joining us in the first quarter conference call. As you all know, Markel released our financial results yesterday afternoon and I'll refer you to page 4 in our press release where we have our Safe Harbor statement and anything we talk about in this conference call is covered under that Safe Harbor statement.

Our procedure today will be the same as in prior conference calls. After a few brief remarks that I will make, Darrell Martin will review the financial results, Tony Markel will discuss some of the operating information in the first quarter and Tom Gayner will talk about investments. He'll turn it back to me for a few concluding remarks and we will certainly try to stay around to answer all of your questions and be as responsive as we possibly can.

We're very pleased with our first quarter. Revenues were strong, loss experience was favorable. Underwriting profit is solid. Very significant cash flow and portfolio growth. All in all, a very, very positive first quarter and it looks like 2003 is going to be a very good year for Markel and we're very excited about that and our future. Without further adieu, I turn it over to Darrell.

Thank you, Steve, good morning. Before I get started, let me mention that our 10Q should be available midweek next week. It should be filed by the middle of the week. So, our full MDNA and disclosures, normal disclosures will be included there, obviously.

As usual, I'm going to focus at a very high level of cover underwriting results and make some comments about our investment results for the quarter. I'll turn it over to Tony to follow up commentary on the operations and Tom Gayner on the investment side of the house.

First on the underwriting side, our consolidated gross premium volume for the first quarter was slightly under $645 million, 24% increase over the first quarter a year ago of $518 million. We are seeing growth, growth, through all our business units. EMS unit was up 30%. Specialty admitted was up 24.

Our London market actually grew 17% in the quarter. That growth is due as we've mentioned before in prior quarters, due to increased submissions as well as increased and -- pricing and very strong growth in the first quarter. Looking at the year, we still believe that the 15% target for the year is appropriate in our view at this point. Obviously we will monitor this as we go along, but this first quarter is in line with our expectations for, you know, how the whole year would flow through. So, it's very much in line with our expectations.

On a net written basis, the premium dollars that we kept, we are retention percentage was about 74%, up a little bit from a year ago. Again, pretty much in line with our expectations and earned premiums were $432 million for the quarter, a 32% increase over the prior year. The real story as is always the real story with us is our combined ratio to the profitability of the business we wrote. We reported a consolidated 96% combined ratio for the quarter, compared to 102 combined ratio a year ago. And a 99 in the fourth quarter of 2002. All our units, again, are showing substantial improvements.

The ENS segment leading the way with an 88% combined, it's important note that our London insurance market operations ran at a 103 combined for the quarter and that's the fifth quarter in a row that their combined ratio has been improving. The real story in the combined ratios this quarter compared to a year ago is in the loss ratio as Steve said. The loss component this year is 65% in the current quarter compared to 72% a year ago. The reduction is really due to several factors, changes in underwriting coverages, improved selections and pricing, all those items are starting to emerge, the impact of those items are starting to emerge from the favorable market conditions and changes in underwriting approaches that we have taken over the last several years, so, they are starting to emerge at this point and this is the first quarter that it's really shown up in this -- in this way. So, we're very, very pleased with the underwriting results for the quarter and I'm sure Tony will talk more about that.

On the investment side, our portfolio grew from $4.3 billion at year-end to in excess of $4.4 billion at the end of the first quarter. Most of that growth came directly from strong cash flow from operations, about $100 million, a little over $100 million. And so we're very pleased with that and again, that's in line with our expectations, as well. Net investment income for the quarter was $45 million compared to about $41 million a year ago. Again, as we've said in prior quarters, the larger portfolio, the benefits of that is being offset to a certain extent by lower rates that we're getting on our fixed portfolios and we are allocating more money to the equity portfolio and tax exempt.

So, net investment income, while it increased to 45 from 41 a year ago, the yields have actually decreased as a result of those -- those items. Net realized gains is about $6.5 million for the current quarter, compared to 35.6 a year ago. And the -- 5.6 a year ago. And as we've said before, the timing of realized gains is highly variable. The change in unrealized gains, the valuation of our market value of our portfolio in the current quarter was a decrease, an unrealized loss of about $30 million. Most of that associated with our equity portfolio and I'm sure Tom will talk a little bit about that in a few minutes.

Net income for the -- for the quarter, $36.4 million. Other comprehensive income was a reduction of about $18 million primarily attributable to the unrealized loss on our portfolio, comprehensive income was 18.6. Compared to 4.3 a year ago. As you know, we look at our operations on a per-share basis, we focus on core operations. Those are our results exclusive of realized gains and amortization expenses. Our per-share cooperations was $3.44 for the quarter. That's a record. Obviously we're very pleased with that. That compares to $1.54 a year ago. To that, we had 43 cents in realized gains, 17 cents in amortization expense for net income per share of $3.70 per share. Compared to 1.73 cents a share a year ago. Very, very pleased with that.

Shareholders equity likewise grew in the first quarter to $119.72 a share. Up from $117.89 a share at year-end. So, the net income that we earned was offset to some extent by the unrealized loss on our portfolio showing approximately a $2 increase in net book value per share. So, with that, I'll turn it over to Tony for some commentary on operations.

Thanks, Darrell. I'm going to be relatively brief this morning. I think the quarter has just been outstanding in every respect and the numbers, as Darrell has outlined, really speak for themselves. At gross premium volume, as he indicated, was up 24% over the same period last year and equally impressive, we took another 12% increase over last quarter, so, it clearly reflects a continuation of the gratifying environment that we've been in and even more important and Darrell eluded to it, as well, in terms of our emphasis on combined ratio, the 96 compares to 102 first quarter last year, but compares to 99 last quarter.So, the strides that we've made in both growth as well as profitability are clearly evident within the numbers.

North American, you know, what can you say? It's an operation that's mature, we have continuity of staff, people understand the message and as I said all along, they're uniquely positioned to take full advantage of this marketplace and on both the ENS and specialty admitted side have clearly done so. Markel Reeves, the formation of that, is really dwelling and getting ready to get off the ground on the casualty fact side. So, we haven't seen the impact of that yet, but they're right on target and we expect them to make some significant contributions down the road.

Obviously since the Terra Nova acquisition, the real issue and the real terms of getting our overall results has been transitioning the issues at Terra Nova and bringing into the Markel culture and I -- I just feel terrific about -- about where we are with them at this stage of the game. The platform has clearly been set. We've got the people that believe in our culture. As I've said before, we continue to tinker a little bit, but we've basically got the products that we think have long-term legs and potential profitability and most importantly we have put the culture, the Markel culture of underwriting profitability in our style of management in place over there and I think it is definitely been embraced.

You're well aware that we announced a couple of weeks ago that Jeremy Cook is going to leave us to come back to the states to accept a job with Marsh and McLenan. We're very disappointed in a lot of respects, he's been a long time friend and he's done a terrific job, as committed to, over the last three years in helping us get to the point where we are today. I can't say enough about, you know, the efforts under some pretty trying circumstances that he's made. But that said, I think he leaves a -- a terrific legacy of people and I'll talk a little bit about a couple of side bars relative to that in a minute, but our people believe in the -- in what we're doing, even though it is countercultural in some respects to what takes place over in London. I think they're excited about their uniqueness and the results that they're starting to enjoy. And I have no doubts whatsoever that the staff that we've got will continue -- continue to -- to produce the types of results that we're looking for.

We've immediately started strategizing relative to his replacement and simply put, you know, we're going to start the interview process and the search process within the next week. Our objectives are to first and foremost to get somebody in there who will carry our culture and our style forward. That's -- that's sacro-sanked. If we can find somebody that brings London market experience and can effectively plow the business the way we want it managed, with our focus and our unique style, that will be great. I'm not sure we're going to be able to. It could be difficult get that hybrid , but we're going to try for a relatively short period of time to find an individual who brings both capabilities to the table. If we can't get that individual, clearly we will look for someone -- we will look within the organization to effectively get somebody over there who hits the ground running relative to the Markel style and our culture of underwriting profitability.

The -- the story that I wanted to relate to you basically and I think it -- it says volumes about where we are in the transition over there, as I've had an opportunity since Jeremy's announcement to talk to four or five of his key lieutenants, just assuring them of our continued commitment and talking to them in a little bit specifically about our strategy for seeking his replacement. And to a man, in individual conversations, the one thing they were most concerned about was us trying to get a high-flyer or someone who would come in and effectively erode the platform, the culture and the focus that they have embraced over the last three years. And I -- I was -- I can't tell you how gratified I was to hear that because to me it -- more than the numbers or more than obviously the growing -- growing and more glowing results that we're seeing over there, their adaptation and embracing of our style clearly says volumes to me and I -- I felt very, very good about it. So, it's a little bump in the road. Not to diminish Jeremy at all because he's done a great job, but we will find a worthy replacement and we will continue to build on -- on what we have effectively applied for and we've already set. As I said,I think we're in great position.

You know, before I turn it over to Tom, there are a couple of editorial comments that maybe I'd like to make. The marketplace continues in general to be extremely strong in both activity and pricing. On both sides of the Atlantic. I think the -- the pricing really continues to reflect gratifying, albeit perhaps moderated increases in virtually every segment with the possible exception of large highly-focused -- you know, highly visible property risks where resolve seems to be wavering a little bit. But we don't see any areas where reductions have come into play yet. So, we find that extremely gratifying and I think from my perspective, if you look at the landscape out there and you look at the tremendous reserve increases that continue to be acknowledged and you look at the fact that -- I don't think there's an industry pundit that would suggest even with those reserve increases that the industry is adequately reserved and you look at the tremendous reduction that both the portfolio reduction as well as some of the underwriting losses have done to the capital base of the worldwide insurance industry and you look at the changes at the top, I don't know how many management changes have been affected over the last couple of years, but clearly there are a lot of new heads of state in major insurance companies around the globe. You look at the investment environment, you look at the rating agency downgrades and you look at the number of dhaps are imploding or selling off books of business, most notably, the most recent announcement on Kemper. And candidly, I think the landscape is pock-Marked with enough turmoil and enough uncertainty to lead me to believe that we've got a still, a pretty good run and some legs left on this hard market, which obviously we think we are uniquely positioned to take full advantage of.

The other comment that I would make is -- is a discussion that we had at a manager's meeting in January and ocean reef. Where we took our top 15 or 16 people, including the heads of each of our eight operating entities, some corporate staff in the executive committee, just to talk a little bit out of a two or three-year time frame to sort of do some strategic planning. One of the questions I raised at that time, given the investment environment, was do we feel the need to modify our focus on a 20% return on equity, which has clearly been articulated as our objective since the -- we went public back in 1986. Because, obviously, the investment environment changes our economic model and cutting right to the chase, to a man, in spite of the fact that obviously it puts a lot more pressure on underwriting profits to make up the loss of investment income, everyone at that table said that they felt that we had the horses, we had the marketplace and we had the culture, not to be forced to effectively compromise in the hurdles that we've set for ourselves and they recommitted themselves to -- to frankly goner the underwriting profits necessary in the short run to -- to make up for the slack and the -- the downsizing in the investment returns until the investment market returns -- returns back up to something more akin to our original premise -- our premise on -- on returns on our investment portfolio. I thought it was an extremely gratifying response. It says volumes about the type of people and their belief in the unique culture and sort of our way of doing things and I thought that it's certainly worth sharing with -- with our shareholders.

So, with that, I -- I guess basically I hope you detect in my voice just an extreme excitement about what we've done and what we've got out in front of us. I think the -- the operations are beautifully lined up to continue to take full advantage of this marketplace and even beyond when things start slowing down and I couldn't be happier with our progress. So, I -- when we get into the Q&A, I will be more than happy to answer any other questions and with that, Tom, I'll turn it over to you to talk about the investment side.

All right, thank you, Tony. We'll try to take up the slack here in the investment department. [ Laughter ] But two components to my comments this morning, one is performance, second is asset allocation issues that developed during the quarter. First off, in terms of performance, the total return for the portfolio was a positive .8%. Equites declined 5.6% while fixed income earned a positive 1.7%. I continue to be very pleased with our positive returns in the tumultuous investment environment. Equites as I mentioned were tough in the first quarter. We've done extraordinarily well in the 3-year-old plus bear market but had a tough first quarter in 2003. I am pleased to report to you that as of the close of business yesterday, we've had an excellent start to the second quarter and we've earned back the declines of the first quarter plus some.

Fixed income basically earned a two part. Rates didn't change much during the quarter and we earned the coupon without a lot in the way of price changes. We remain somewhat defensive in the fixed income markets because of our concern about rising interest rates. Our duration is closer to four years and our normal range is between 4 and 5 years. We will not stretch in fixed income in either duration or credit quality. We want to protect the balance sheet and give the underwriters the capital they deserve to write the business that they are seeing right now.

In terms of asset allocation, as Darrell mentioned, during the quarter our cash flow was approximately $100 million. We invested approximately half of that, or $50 million, into equities. Given the positive returns in fixed income and the negative returns in equity, the equity waving of the portfolio actually declined from 14.4% of the mix to 13.8% since December 31 of last year. With improved underwriting results continuing, increased capital strength of 4 percentage 10-year bond rate, ongoing cash flow and opportunities in the equity market which meet our discipline, I expect our asset allocation toward equities will grow.

As I mentioned earlier, the second quarter is off to a good start. Investment leverage is growing and I'm optimistic that we will produce appropriate returns from the investment portfolio. I'd be happy to yield any specific questions during the Q&A. Now over to Steve.

Thank you, Tom. And Tony and Darrell. As you all can detect, we're recently enthused with the first quarter and the prospects for the remainder of the year as well as: As well into the future.

I'll wrap up just a couple of points. Total investments, cash and cash equivalents at the end of March were $4.4 billion as was previously mentioned. $100 million higher than -- than year-end. Shareholders equity is $1,178,000,000. Investment portfolio per share is just under $450 a share. Book value per share is just under $120 a share. And importantly, our investment leverage, the total portfolio to book value, increased from 3.7% at year-end to 3.8% and it's our -- I'm sorry, 3.7 times book value to 3.8 times book value. And as you all know, our model is targeted for roughly four time investment leverage and we certainly see with the premium volumes we and the cash flows in the business, that -- that ratio continuing to increase.

As Tony pointed out, we are focused on compounding book value at a high rate over a long period of time. Our target has been 20% and we remain committed to that target and as Tony mentioned, we recommitted to that target very, very recently in spite of the relatively low interest rate environment and are committed to make up the difference with larger underwriting profits. The first quarter with a 96% combined ratio, I think is very indicative of this because we certainly expect that combined ratio to improve with the passage of time, thereby creating the margin in our model to compound book value at a high rate over a long period of time and as previously mentioned we continue to target 20% growth in book value per share and truly believe it is obtainable. With that, I'll ask the operator to open the program for questions. We thank you all for your participation and support.

Thank you, Mr. Markel. Ladies and gentlemen, at this time, we will conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. To remove your question from the queue, please press star 2. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Matthew Heimerman with Goldman Sachs. Sir, please state your question.

Good morning, gentlemen. I had a couple of questions. The first one is in looking at your underwriting results and trying to think of them on an accident year basis, what type of improvement are you seeing year-over-year '03 versus '02? That's my first question. I will rattle the rest off. In the ENS market, segments specifically, is the combined ratio reported this quarter indicative of what you could potentially get the rest of the year? It was better than what I was looking for.

Matt, let me ask you, go back not first one, year-over-year -- go --

Oh, year-over-year, the accident year combined ratio, you know, what type of improvement are you looking for just on that basis, at a consolidated level?

Accident year consolidated level. Did you understand that? Do you want to answer?

Yeah, yeah. I think our expectation is that we would see 4 or 5 points in improvement in the loss ratio between those two years.

And then the second question is was there anything going on in the ENS segment that drove that combined or is it indicative of what the business is capable of generating in this type of environment.

It's capable to continue at that level.

Okay. And with regards to the portfolio allocation --

Let me clarify with one point. That includes the properties that's somewhat catastrophe-exposed. So, you know, clearly, it continues at that level with earthquake -- without earthquakes.

Primarily the California exposure, correct?

Yeah.

And with regards to the portfolio allocation , is the goal basically to get back up to kind of a 15%, 16% equity allocation?

Actually, I would expect it to go beyond that.

Okay.

It's not going to happen over the course of the next quarter or two unless there's some extraordinary moves in the equity or fixed income markets, but I would expect we will be steadily Marching to get the number between 20 and 25 over the course of the next 20 years.

So, the allocation of new cash flow, kind of 50/50. That could continue?

That's the way it turned out in the -- in the first quarter and we don't really think about it in explicit terms like that, we just think about sort of what the opportunities are in the equity market and what the cash flows are and what the capital position is and to the extent that all of those things line up as they are right now, we're -- we're going to be putting money into the equity portfolio.

Okay.

The run rate right now is, in fact, about $4 million a week.

Okay.

You know, we can increase that or decrease that based upon what we see and what's going on, but that's what's happening in the first quarter and continuing into April.

Okay. One final question is: On the tax rate, the decline there, how much of that is sustainable versus, you know, nonsustainable?

Yeah, we think -- we think the -- the tax rate did -- did reduce to 33% effective tax rate in the first quarter. We think that is sustainable for the year. A couple of factors that drove that, one is we did elevate some debt from Terra Nova last so it becomes fully tax deductible and we can take the full tax bit for that going forward as well as the allocations to tax exempt portfolios. So, they're going up. So, we think the 33 is sustainable.

Thank you, gentlemen.

Thank you, Matt.

Next we have air question from Marco Pinzon with Smith Barney. Please state your question.

Good morning, got a couple of questions. Number one, I guess it's not clear, did you have any prior year reserve development in the quarter?

Yeah, there was some. Nothing of any -- any significance, I don't think. But, you know, you always have some pluses and some minuses but it's embedded in the normalized run rate from a loss perspective, nothing out of the ordinary.

Okay. And my second question is -- on your reinsurance recoverables, you -- you wrote down some of the recoverables on discontinued lines. Can you kind of update us and give us some new color on your risk or comfort with your overall reinsurance recoverables, particularly in light of I guess increasing concerns in -- in the industry about that issue and -- and maybe as part of that, could you kind of give us a breakdown as to how much of it might relate to companies that are rated below "A"?

Yeah, let me try to deal with that, Marco, in the first quarter and discontinued lines, we had a $5 million charge that was related to our continuous and continuing review of, you know, our reinsurance bad debt exposures. What we do is, every single quarter we review every single balance on all of our companies, all of our divisions, all of our product lines and basically on an individual reinsurer basis, we make a bad debt provision, you know,some cases it's 5 or 10%. In some cases it's 40 or 50%. In others it's 80 or 90%. And we modify those percentages based upon our experience in dealing with the folks and our conservative judgment about where our likely recovery is and our -- our thought process about any sort of ongoing connotation discussions. There are literally hundreds of different reinsurers and those percentages move around and the aggregatation of looking at the entire portfolio of reinsurance balances resulted in a $5 million increase. There isn't any one company or any one area that, you know, that impacted that. It's the, you know, moving one company from 20 to 25% and another one from 70 to 80. And that, you know,. [ INDISCERNIBLE ] -- is what drove the number.

There's also an ongoing process where claims that are in -- in potentially in IB&R state get allocated to a specific claims file. The process of making an estimate of your bad debt of IB&R is, clearly, a much greater and more subjective process than after you've assigned that IB&R to a specific claim and specific policy year and it gets allocated to a specific reinsurance contract, where, in fact, you have a name to associate with it. So, to some extent, that's also going on every single quarter, but I think what's important is we're monitoring this like a hawk and look at it every quarter and where the numbers fall out, they fall out and we're collecting a lot of balances and as I hope you notice in the first quarter, the total recoverables is down by a fairly decent number.

Our next question comes from Stephen Peterson with Cochran Caronia Securities. Please state your question.

Good morning. I was wondering if you light be able to give me just a quick update on the core France situation in Europe? And whether we -- we -- you're seeing any activity there? Or if it's sort of business as usual as far as that -- that is concerned? That's my first question. The second question is for Tom. Someone had given us a run rate for new equity investments of about $4 million a week or so. I'm wondering if that's mostly flowing into names that you already have significant positions in or if that money is going into some new -- new issues?

Thank you, Steven. I will deal with the first and let Tom answer the second. As most of you know, we own a reinsurance subsidiary based in Paris, Corey France. Corey France had a very good year last year in 2002 and we're certainly expecting and business is strong and very profitable there today, as well. It is included in our other category and a couple of years ago we announced that it was available for sale and given the marketplace and particularly the reinsurance marketplace in this relatively small size, we did not get a lot of interest in finding buyers and have effectively not pursued aggressively, at least, the sale of Corey France. So, it is very much a continuing part of the Markel organization and is now contributing to our profitability. While it's a small company, it's at a good, solid management team, a good business franchise and is making us some money, so, we're continuing to enjoy our ownership in relationship with the management team and the people.

And do you foresee maybe reclassifying that into maybe your international segment sometime in the future? Or...

We're leaving it in other right now because it's -- the way the SEC requires segment disclosure is based upon the way it's managed and it's managed independently of the London operation currently. So, we're sort of obligated to keep it in a separate category, but it's not sort of big enough to have its own.

Okay, terrific.

Anyone want to deal --

Yeah, let me talk about the names we're buying. You may recall, I described our investment process as basically having four lenses we would consider any one particular company through. The first is if it's a profitable business. The second is it is run by management teams that are in equal measures, both honest and talented. The third is that it have reinvestment opportunities in the business or lacking that, excellent capital discipline and the fourth that it be -- we're able to buy it at a reasonable price. Now, what makes my job both hard and easy at the same time is that there are just not a whole lot of companies which really get through all of those four filters, so, that being the case, the bulk of the dollars and the bulk of the things we're buying now are things that we have owned previously and before. And it's an ongoing hunt to try to find new things that would meet that fourth part test and I think we'll have -- we'll continue to have some success there, but not a whole lot of new names I can talk about.

Okay. Terrific. Thank you very much.

You're welcome.

Our next question comes from Chuck Acree with Acree Capital Management. State your question.

Good morning.

Good morning, Chuck.

Just a couple things. The -- going back to the reinsurance recoverable issue, I don't have the number in front of me now, but it's more than a single whole number multiple larger than shareholders equity. You all continued to review that and I guess you took what is it, $8 million writedown in that in the first quarter, does that sound right?

5.

5. Okay. You already talked about that. I don't remember your answering the question about how much of that was below A-rated companies. Did you answer that?

It hasn't changed materially since the 10K.

Okay. Second question, Tony, you made an observation about pricing and I thought I understood him to say that there were some cases where maybe the prices weren't increasing anymore but he didn't see any signs of -- of declines. Duds that mean that -- that in their some parts of the business that the pricing is just now flat, there is no growth associated with pricing any longer? And if that's the case, how large a portion of your business is that?

Tony, do you want to... I'd be glad to. Chuck, that's pretty much it. We're seeing -- I believe we didn't expect to get 50 on top of 50 on top of 50 add into the item. But in virtually every category we're seeing moderately nice increases on top of the very substantial increases that we've gotten over the last couple of years, with the possible extension of with the possible extension of some of the high profile property business where rate increases or -- are very, very minimal and it is sort of a flattening. I don't think there's any real aggressive price reductions at this stage of the game. I don't think we're seeing reductions at all, but the -- there is not a -- not a rate increase of consequence coming on that sector and --

What kind of risks are those? And how much of your...

It would be large, large multilocation properties of the fortune 1,000 variety. And, you know, between our London operation and our U.S. operation, we've got a moderate exposure to them, but nothing of consequence.

Okay. Then one last question, actually relates to a point you raised, Tony and that was the issue of the commitment to a 20% compound growth rate in book value and I notice reading in the proxy that without explanation, while you all remain committed to that, you have -- it appears to be lowered the standard by a measurable amount for on which bonuses are set. And -- on which bonuses are set. And could you all discuss that?

Sure, let me -- let me -- let me take the -- the opposite tact, one of the things that -- that we've gotten as a result of the commitment that we got at our management meeting and has been carried down to the troops at the individual locations, relative to the commitment to produce the increased underwriting profits to make up for the -- the reduction in investment income, has been the caveat that the bonus bogeys from an underwriting standpoint will be adjusted accordingly with the understanding that when the investment returns -- because you can't set up a target without creating a response relative to incentive comp and that type of thing. So, one feeds the other and the caveat, obviously, is that when -- we're going to reduce the combined ratio hurdles accordingly now when the investment environment is down at this level and when the investment environment goes back up in fairness to our employees who have taken the mantel of leadership and responsibility at this time, we will -- we will raise those -- those hurdles back up accordingly. So, from a practical standpoint, other than the moderate change we made in the overall -- some of the overall bonus targets that was in the proxy, the -- the line share of bonus targets and hurdles have been adjusted to more demanding levels from an operational standpoint because of our recommitment to the 20% growth in book value and the demand that that puts on -- on larger underwriting profits. Chuck, I'll -- I'll add to that, that the -- that given the -- the level of bonuses that the executive team has taken in the last couple of years, it's not had a hell a big impact on our bonuses. [ Laughter ]

Right.

But, you know, in a 4% world, I think a 15% compound growth in book value per share would be a target that would justify a positive bonus. And in the former formula, that was sort of the starting point threshold and it was originally established when we were probably living in a 7 to 10% world. We still are targeting 20%. We want to earn 20%, we think we can, but we think it is our view that if, in fact, having suffered a zero bonus with returns at lower levels that when we get back to 20, I think the calibrations of that formula is very, very appropriate and I think that by almost any standard in corporate America, it will continue to be judged conservative fair and very shareholder friendly.

I think probably -- I'll speak for myself and say I certainly have no problem with you all lowering the threshold level to start the bonus because I think overall you do a great job. What surprised me a little bit from a point of view from the Markel style was simply that there was no explanation with it. And so am I to conclude that since the explanation is that it is largely interest rate level-driven that should we get in a higher rate environment, we'd expect to see the thresholds go back up?

Absolutely.

Okay, great, thank you.

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

Good morning. Just a -- wanted to ask -- I think most of my other questions have been answered, but in your 15% gross premium target that you've laid out, does that include anything for the new Markel [Re] or is it excluded this year because it's in the start-up mode.

The 15% would include it, but the dollars involved probably won't have an impact of the changes one way or the other. David, yeah, I'll add to that. We, you know, we're really excited about John coming aboard and that whole new operation, but candidly in '03, it's not a material number in the -- in the budget.

Okay. Very good. And then, Tony, a quick follow-up on Markel Southwest, I know you cited in the annual you weren't as happy as you'd like to be in the trends there and made management changes. Can you provide us an update?

Yes, as a matter of fact, I'm talking to you from L.A. and I was in Scottsdale yesterday. We're extremely pleased with what they've done. They -- we didn't get as to where we wanted to quite as fast. There were a couple of products where candidly we -- we weren't as -- we weren't as reactive or proactive, should I say, as we should have been. And candidly, we expected to be a little bit further along, but I think they've taken the bit and they've made the necessary changes and I'm very, very comfortable where they are today, albeit I expected it to be sooner, but I'm pleased with where we are today.

Great quarter, thank you very much.

Our next question comes from Elizabeth Malone with Advest. Please state your question.

Thank you, congratulations on the quarter and I have a question for Tony. On the London operations, you've often -- maybe you already addressed this and I missed it, but addressed what your goals were in terms of combined ratios and where you are? And could you just reiterate, based what happened in the first quarter or where we are in terms of on target for that?

Yeah, I think so, Beth, I mean, you know, we're -- we're treating everything conservatively over there and obviously our results in North America allow us to -- to do that and -- but I am very, very pleased with the pricing and risk selection and have been through the entire 2002 and going into '03 and, you know, our objective is to bring them in line with the underwriting results that we expect out of North America and I think we're making some tremendous progress in that regard.

Are you suggesting that -- that you'll get London to an 88% combined rate there?

Well, let's put it this way. I'm suggesting that they -- depending on the type of business and everything we've established the exact same things that we've done in the United States and without having the weighted averages of the various products in our expectations weighted by the products in front of me, I can't suggest London will ever be at 88, but individually, everyone has the exact same bogeys that their counterparts in the U.S. have.

And a last question, kind of generally, after the first quarter and this was certainly much better than -- based on the estimates that are out there, than anybody had anticipated and most of it came from the ENS line in the North America. Is there anything in the marketplace that you see right now that would prohibit Markel from being able to achieve earnings levels of this magnitude in the subsequent quarters in 2003?

No.

Okay. Thanks.

Simply put.

Our next question comes from Peter Kenner with Tivoli Partners. Please state your question.

My question was just answered regarding the combined ratio on London insurance market. But congratulations on a good quarter.

Thank you.

Thank you, sir. Our next question comes from Paul Melton with UBS Payne Weber, please state your question.

Hi, good morning, guys. My question comes regarding asbestos, do you have any update on your exposure to any asbestos claims?

No developments in the first quarter. We obviously continue to monitor, you know, on a daily/monthly basis, but there's nothing that we have to report at the end of the first quarter that's any different than in a material way than what was in our year-end and 10K filings.

Thank you, that was very simple. Thanks.

Next we have a question from David Lewis with SunTrust Robinson Humphrey. Please state your question.

Good morning. Tony, can you talk about new competitive issues? I know some of the larger multilines moves in to the basic more to mid-size commercial type opportunities out there. And I know when the rates started hardening a, lot of people kind of moved out of your more specialized market in the more traditional risk, you see any change in that or are anticipating any change?

No, not really, David. Nothing of consequence. You know, the standard carry, I'm talking about the old iron carry, is still seeming to be, trying to reposition themselves and find out where they are. We haven't seen anything that slowed down the movement of business into the specialty marketplace, you know, I mean they're -- they're very positive signs that make Kemper being the most recent. We didn't -- we didn't do anything with it, but we took a look at a lot of the specialty products on the block as a result of their downsizes before they announced they weren't going to make it at a and obviously that's in addition to sort of the turmoil in the marketplace. You know, some of the -- some of the dry powder in terms of a couple of the Bermuda start-ups are -- are, you know, aggressively expanding into the specialty marketplace, but they're primarily looking at the high end and although we've got some exposure to that competitive aspect, you know, most of our business -- is really sort of in the bread and butter middle range. So, even their entry into sort of the U.S. specialty marketplace does not have a major impact on most of our lines.

Okay,. And let me follow up, again on the combined ratio question. You did, I think it was what, 103 out of international in the quarter?

Right.

Are you indicating that that should, barring any other major catastrophes, see sequel improvement over the next several quarters?

Absolutely. I think this is a -- Darrell was telling me, I'm calling you from L.A. so I don't have the benefit of a lot of my data, but I think we talked earlier that this is the fifth quarter that we've shown improvement and needless to say, 103 is -- is not where we -- where we -- where we target and we're continuing to move that regard.

And so it's also most -- most, you know, make you believe that you're fairly comfortable with where you've gotten reserves over the past couple of years, too.

We're really getting -- we're effectively, you know our posture in terms of reserving has always been to reserve conservatively and we feel good about our London reserves.

And how about on the asbestos side specifically, most of that being in London, I assume you look at it pretty closely every quarter and no real change in expectations from the fourth to the first quarter end?

Steve you just answered that, but why don't you flush it out. No change.

Thanks very much.

Our next question comes from Shawn Henden with Lockheed Martin. Please state your question.

Yes, Steve, in the letter of shareholders you mentioned that, you know, the $75 million last year was a record, but the per-share earnings were a little disappointing and obviously that relates to the issuance of shares I guess in 2001. And I guess going forward, I'm not asking you to make a commitment to anything, but going forward, you know, if -- if cash flow continues to grow in the next several years or whatever time frame you'd like to use, is a -- on the plate for reconsideration, a repurchase of shares when looking at that against what you might expect from publically-traded equites in your portfolio?

Certainly an arrow in the quiver and something we're always conscious of. Obviously, our first desire is to put capital to use in the business and help it compound in the future at a high rate. But, you know, if three, four, five years into the future we're looking at a soft market and the business is generating excess capital, buying back stock is clearly something we would want to do with it and I mean we really are focused on compounding book value per share over a long period of time and reducing the denominator is often the easiest way to make it happen.

Okay, thank you.

Our next question comes from Renee Scinto with Scinto capital. Please state your question.

Good morning. I apologize, I haven't had a chance to look at the release. But I wonder if the results were impacted by currency translation in the quarter?

Not material.

And second question is, in terms of your assumptions for the remainder of the year, what do you have in terms of investment income returns? Any particular equity component?

Well, our goal is to compound book value to 20% rate over a long period of time. We don't have monthly or quarterly equity goals, but it's our sort of thought process that, you know, over the last 20 or 30 years, I think total equity returns has probably still been in the 10, 11% kind of range, if you go back 20 or 30 years, clearly the last five it's not been like that. We would continue to think that we can find companies that we can invest in at a fair price who can grow their value at that sort of rate or higher and so, you know, I would, if I were to pencil in an equity return, I would expect it to be north of 10%.

Great. Thank you.

Our next question comes from Charles Gold with Scott and Stringfellow. Please state your question.

Gentlemen, congratulations and also thank you. My question concerns cash flow. I think the cash flow in '02 was $507 million or roughly that number. And in the first quarter it was 104 versus 50. Would it be fair to say that if the year unfolds like you see it unfolding that that number would be a 650 to 750 number? And if that's true, would that put, assuming no up or down in the market, not giving you credit for further increase on what Tom's done from March 31 to April 29 and no material change in interest rate, would that make the assets over $5 billion investable assets and therefore the investments per share for 500 or 510 or 15 sort of number?

Thank you, I think that was reasonably close, Charlie. The first quarter is normally our weakest in operating cash flow for a number of reasons. Association the numbers you throw out are not unrealistic. I'm not making -- acknowledging that there are projections per se, but they're in the ballpark of what's very, very realistic. Thank you.

Thank you.

Gentlemen, we have a follow-up question. Marco Pinzon, please state your question.

Thank you, I got cut off before. I wanted to finish up on the reinsurance recoverables. I think if I remember the way that you spelled it out in the K and maybe I'm wrong Washington you lifted your top 10, the top 10 reinsurers that you had exposure to, it accounted for half of your recoverables. I'm trying to figure out overall, you know, what -- with respect to the other half, how much of that relates to other companies that might be rated below A?

I don't have the number in front of me, Marco and I think we probably can put something together that would be responsive to that. But the, you know, we feel very, very comfortable with our position has been. I have to get the number, I don't have it.

Fair enough. And one more question how much of the earned premiums coming out of discontinued lines is Corey France.

Almost none.

Almost none. But you're still running through a lot of losses from that. Is that --

Corey France is operating at a process and the numbers that we would be recording for Corey France would be probably very close to 100% combined ratio but the business is a little bit better than that. The major expense in there is unallocated loss up from expense cost.

Okay.

And it's just getting -- the arithmetic is charging that against Corey France's premium, but it's not Corey France's results.

Is the write-off of the recoverable running through the combined ratio number as well?

Yes.

Okay, that helps. Thank you.

Mr. Peterson, please state your question.

Just a quick follow-up on sort of the -- the -- the capital discussion that was taking place a couple of questions ago. If your top line continues to grow at the rapid rate that we've been seeing it grow for the last couple of quarters, taking a different perspective, how are you in terms of surplus premium to surplus and rating agency pressure and our -- what might we look at additional capital raising actually in the future versus a share repurchase? And my second question just goes to a quick technical question on what paid losses were in the quarter?

Oh, the paid loss number, I think, unfortunately, we will have to wait until we release the 10 Q. The -- the first question, though, in terms of capital raising, we expect to raise a whole lot of capital. We would like to raise it all by earning it. The current model that we have, I mean clearly last year our U.S. premiums were up 50% and about the same number the year before, this year the numbers in the mid 20 range, so, and our forecast is even less than that. We have more than enough capital to deal with sort of the current run rate and our forecast. And, in fact, I think we -- we more likely to have the other issue as a problem or an opportunity than the former. But clearly we'd like to earn our capital from this point forward as best we can.

Okay. Terrific. Thank you.

Mr. Kenner, please state your question.

My question has to do with tort reform and asbestos and the possibility or likelihood of something being passed in Washington with the fund that they're talking about. What are your thoughts on that? And how would that impact Markel?

I'll make a couple of comments and Tony, you can respond as well. This is not just personal view, Tony is involved with the NAI and other industry organizations, he will share his view, as well. If this happened, I think it would be very good for Markel as well as the industry, our relative exposure to the asbestos problems and the other issues is much, much smaller than the other industries. It's not as big a problem for Markel, so, this resolution will not be as big a benefit. But on balance, I think it's positive and something that we should all route for. In terms of its likelihood of happening, I would be a little more skeptical about secretarying it or factoring it in at this point in time. And in terms of the way we conduct our business, we -- we probably are not -- I hope and believe that we are -- since it is sort of unknowable that, we're not planning on it.

Steve, I can't add much to that!

All right. Thanks very much.

Gentlemen, there are no further questions at this time.

Thank you, operator. And thank all of you for participating and those of you who have long-time been loyal Markel shareholders, we appreciate your support and we look forward to seeing you in person soon. So, have a great day and we look forward to talking to you in the future.

Thank you again, gentlemen. This concludes today today's teleconference.