Markel Group Inc (MKL) 2003 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 '*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 President of Markel Corporation. Thank you, Mr. Markel, you may begin.

Thank you. And welcome to everyone to join us in the Markel Corporation earnings conference call. I would like to introduce our speakers today. I am Steve Markel, Vice Chairman, and I'll make a few comments in the front end and narrate the questioning at the end. Darrell D. Martin, our Chief Financial Officer is with us, and he will review the financial results for the quarter and the six months. Paul Springman, who is Executive Vice President of Markel Corporation, joins us today and will be reviewing our operations both in London and in North America. Tom Gayner, our Chief Investment Officer, will review the investment activities for the quarter. And when they're complete, we'll open the floor to your questions. Unfortunately, Tony Markel cannot join us today as he is attending the funeral of a very dear friend of his.

Before we begin, I would like to call your attention to our Safe Harbor and cautionary statements set forth in our press release in forms 8-K, 10-Q and 10-K. The discussions today could be affected by the matters described in those statements, and we encourage you to read those statements very carefully. As most of you know, at Markel, we are focused on long-term results. Since March of 2000, we have been working diligently to build a solid specialty insurance business in the London market patterned after what we have done so well in the U.S. Since our initial public offering in 1986, we have been focused on long-term growth by compounding book value per share at high rates and over a long period of time. So please forgive me for a minute if I share with you some really great short-term quarterly results.

Underwriting in the first quarter continues to show our excellent premium growth and combined ratios across all lines of business continued to improve. Overall for the quarter, we reported a 95% combined ratio. Our investing returns were also great. The equity returns in the quarter were up over 20%. Net income for the quarter was just under $60 million or $5.97 a share, a company record. And comprehensive income for the quarter was up just over $150 million. Shareholders' equity is now some $1.3 billion or $135 a share. And the investment portfolio is up to $4.8 billion. Both our float and our cash flow are growing. It's a wonderful time to be in the specialty property, casualty insurance business, and with that I'll turn it over to Darrell D. Martin to review the numbers.

Thank you, Steve. Good morning. Before I get started, let me just mention that our 10-Q will be available by midweek next week, hopefully by Wednesday. That should be available for your review and obviously it will contain the very in-depth MD&A that provides some additional information to the comments we will be making today.

As usual, I will address my remarks in sort of two parts. One is related to the underwriting results on a consolidated basis. And the second our investment results. I'm going to make my comments relative to the six months ended June 30 year to date, and as Steve mentioned, we from the underwriting side continue to enjoy very good results, very positive trends. Some of what we reported in first quarter, but for the first six months gross written premium was approximately $1.3 billion, up 21% from the same period a year ago. That growth in premium continues to be derived from increases in submissions and improved pricing across our product lines.

We mentioned in the first quarter and we still believe that our goal for the full year 15% increase over the prior year still appears to be appropriate. We would expect that premium volume growth to start to decline a little bit in the next two quarters as we compare it to obviously much higher volumes in the prior period. So we're still thinking in terms of the 15% total increase for the year. On net written basis, we reported about $951 million of net written premium or 75% retention rate that compares slightly increase from the prior year, but very much on track with our business plan as well. Earned premiums increased to 871 million or 29% over the prior year. Obviously, as a direct result on the growth and net written premiums.

The real story as usual we looked our underwriting profitability, and our combined ratio for the six months year to date was a 96% combined ratio compared to 102%, combined ratio a year ago. That's approximately a $50 million improvement in profitability on the combined ratio basis purely from underwriting for the six-month period. These results are strong despite two adverse events, if you would, that are included in the 96-combined ratio this year.

First, there was an $11 million adverse development that we have included coming out of our brokerage excess and surplus lines of business, that adverse development is related to the 96 through 2000 years and it continues to be associated with casualty books primarily California contractor's books of business. We're very disappointed with that emergence, but we're paying close attention to it and hopefully we'll have gotten it correct. The second item is approximately a $10 million provision that's included in the other or discontinued lines of business.

For the year to date, we have increased provisions for uncollectible reinsurance estimations for reinsurance amounts that may prove to be uncollectible. We have also included in there a charge related to exiting lines of business and office closure. During the quarter we did dispose of our motor book of business, and closed an office in association with our net operation and so we have included some costs associated with those exits. Overall, very strong results. We're very pleased with that and I'm sure Paul will add some comments about the individual business units in his remarks in just a moment.

From the investing side, as Steve mentioned our portfolio grew to $4.8 billion at June 30, up from 4.3 at year end. Net investment income grew to approximately $91 million compared to $84 million a year ago. The increase in portfolio obviously is being tempered by the reduction in yields that we're realizing on our investments. And I'm sure Tom will make some comments about that in a few minutes as well. Year to date, we have realized gains of approximately $43 million, principally from the bond portfolio. We have sold some certain governmental securities and reallocated that to higher yielding and in some cases municipal tax exempt monies, and so we have recognized $43 million in realized gains year to date as we mentioned, continuously the timing of realized gains is very variable, so while that's a large number it is not necessarily a continuing number.

The real story in our portfolio, I think, this quarter, as Steve mentioned, is the change in the unrealized gains, the appreciation for the six months is $104 million, and unrealized appreciation in the portfolio. In the quarter that number was approximately $135 million. So the sum of our investment results to total return of 10.4% year to date and in excess of 18% for the quarter. So those were terrific results and as I say I'm sure Tom will comment on that in just a moment. Net income for the six months year to date was little in excess of $95 million compared to $40 million a year ago. Other comprehensive income was approximately $75 million, principally as a result of the increase in unrealized gains on our portfolio that I mentioned a moment ago.

And so comprehensive income was $170 million for the six months to date. Core operations, a number that we look at on a per share basis, which excludes realized gains and amortization expense was more than twice the $3.32 a year ago. It came in at $7.08 year to date, realized gains added another $2.85, and amortization expense was 27 cents year to date for a net income of $9.66 per diluted share, for the first six months. I will mention that as of June 30, we have completely amortized all of our intangible assets exclusive of good will. So the amortization expenses are down at this point. Comprehensive income was $17.23 a share. Steve mentioned book value increased, shareholders' equity increased to $1.3 billion at June 30 or $135 a share, 15% increase year to date.

Obviously, that's a number that we pay close attention to because our goal is to build shareholders' value over the long term and we have set a target of 20% per year of course in that regard. So with that, obviously we're very pleased with these results for the first six months. And with that I'll turn it over to Paul Springman to make a few remarks about the operations side.

Thank you, Darrell. I'm delighted to be with you this morning and especially glad to have good news to share with you today. Let me start first in our North American division. Quite frankly, the numbers speak for themselves. In North America, we have a combined loss ratio in our excess and surplus lines segment of 88% and our -- in our specialty admitted business of 92%. Our gross premium writings are up 22% for the quarter, and 25% for the six-month period of time. We are enjoying and maximizing the continued favorable market conditions that we have shared with you over the past several quarters.

Our new business submissions remain at or near all-time count highs. Standard companies continue to re-underwrite their portfolios, creating more and more opportunities for specialty organizations such as Markel. We are selling rate increases across the board in virtually every one of our product lines. And we anticipate that these favorable market conditions will last for a good long time.

At Markel International, we have recorded a combined loss ratio of 102% for the six-month period, which marks the seventh consecutive quarter of improvement. Gross premium writings are up 6% for the quarter, and 12% for the year. Recently, AM Best has recognized Markel International Insurance Company with an upgrade to A-minus (Excellent). We'd like to publicly thank and commend especially the hard efforts of our team at Markel International and I'd like to spend a few extra minutes to update everyone on several areas of focus at Markel International.

On July 10th, we announced two senior appointments. First, Gerry Albanese from our Shand Evanston group in Chicago has been named President and Chief Operating Officer at Markel International, and Richie Whitt from our Corporate Finance Group here in Richmond has been named Executive Vice President and Chief Administrative Officer. This gives us several advantages and an excellent platform to continue to build for the future. These two gentlemen understand our culture of underwriting profits and will continue down the same path that's been established over the last 2.5 to 3 years. Both of these gentlemen are very strong Markel-proven North American leaders, both being recognized in previous years with our most distinguished award, the Chairman's' Award. It gives our senior group at Markel International the opportunity to build future leaders from inside the company that will take us to the next level several years down the road.

For the first time, this really sets the stage for our future at Markel International. We will plan our profitable growth around four segments. The current favorable market conditions that we enjoy there offer us tremendous opportunity to grow our existing book organically. With the addition of Jerry and Richie, there will be more focus on new product development at Markel international in the future. We also intend to export several successful U.S. products and begin marketing them in the U.K. And a fourth platform for our future growth is a possible geographic expansion of our very successful retail service company concept. To round out the team at Markel international, we're in the process of adding a chief marketing officer to strategize with our Divisional Managing Directors and also to add a chief claims officer whereby we can realize economies across business unit lines and develop cohesive claim strategies and best practices over a period of time. I'm certain you will share with me the excitement and the enthusiasm that we have not only for the short run, but in the long term for both Markel International and Markel North America. It's my pleasure now to turn it over to Tom Gayner, our Chief Investment Officer.

Thank you, Paul. Well, Steve was delighted, Darrell was delighted, and Paul was delighted and I'm going to be delighted too. And what I'm delighted about is that I can report that both sides of the house at Markel enjoyed fabulous results during the second quarter and for the year to date. On the investment side, equities were up over 20% during the second quarter and 14% for the year to date. By contrast, the S&P of 500 rose 11.8% so far in 2003. This continues our decade-plus record of meaningful out performance in our equity investments and we're very proud of those results. On the fixed income side, we under returned 4.4% for the first half and these are also excellent results. Together, the portfolio earned 6.6%.

Sometimes people look at reported net income and forget about comprehensive income. Rest assured that we don't. It's real money and we made over 150 million of it at Markel this quarter. Analysts can choose to model this or not. Most do not to its unavoidable lumpings. We will continue to make as much of it as we know how despite the lack of analytical interest in the subject. We invested approximately $100 million of our cash flow into equities during the first half of the year, and we're funding these investments out of cash flow. Our fixed income mix is shifting slightly towards monies and away from governments and corporates. This reflects our increasing underwriting profitability in the increased relative attractiveness of tax-free securities to us, as well as the desire to let the economic duration of the bond portfolio continue to drift in a bit. There also has been significant tightening in corporate bond spreads and consequently fewer attractive opportunities on the corporate bond side.

The first and foremost mission of the investment department for the last few years has been to protect and build on the capital base at Markel in order to keep our underwriters supplied with capital for the favorable insurance opportunities that they are seeing in this market. I'm delighted to say that we accomplished this mission. Our growing capital base from the comprehensive income now begins to increase our investment flexibility in options. At this point, equity stands at 729 million or 15% of the investment portfolio up from 515 million or 13% at year-end. Equities are about 55% of shareholders' equity and that fact coupled with our increasing underwriting profits gives us plenty of room to keep buying as opportunities and ideas present themselves. We remain disciplined and methodical in our growing equity allocation and we will continue to be so. I remain excited about our prospects for continuing to compound the book value of Markel through our investment activities and I look forward to your questions. With that, let me turn it back to Steve.

Thank you, Tom, Paul, and Darrell. While we can celebrate our second quarter results, unfortunately, they're now history. And it's time to recognize that we've got to continue to build book value per share into the future. We certainly expect with our model for profit to continue to achieve our goals, but to do so we'll require that we continue to improve our combined ratios and continue to deliver excellent investment results. I'm very confident that we'll be able to do so. And with that, I'd like to open the floor to questions.

Ladies and gentlemen, at this time we will be conducting a question and answer session. If you would like to ask a question, please press '*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 '*2'. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the '*' keys. Our first question comes from Tom Cholnoky with Goldman Sachs. Please state your question.

Good morning, Steve and everyone. A couple of quick questions. First of all, you quantified some of the adverse development, but you also referred to favorable development, I believe, in the international sort of specialty lines. If you can quantify that that would be number one. Number two, could you talk a little bit more about London and some of the softening that we're hearing about in the short tail lines? Let's go with those two.

Yes. I'll deal with the first and I'll ask Paul to talk about the London market conditions particularly softening in the short tail lines. But in terms of loss development, in the aggregate, I'm pretty sure we had modest favorable development for the six months. And it was over than the specific line that Darrell pointed out, it's pretty well spread across all business units. As you know, Tom, we seek when we establish reserve early periods to establish a margin of safety, so that we try to be highly confident that we're more likely right than wrong. And with over now -- probably over a hundred different products at which we're setting reserves, you know, going to be right a certain number of times and wrong a certain number of times. But the idea is that the redundancies overweigh the deficiencies. But it is no one particular area that we saw extraordinarily high redundancies. The one area we did see deficiency is the area Darrell as pointed out.

Well, I guess I'm confused about one thing though Steve. You reported in the specialty admitted in first quarter in 98 combined and in the second quarters it's down to 91.7. That's a sequential drop and you did actually cite favorable development in your press release. That's what I'm trying to quantify.

Yeah.

Is 92 a run rate in specialty admitted, is that what you're saying?

Right. I think the comment that Steve made is in the aggregate on a consolidated basis and watched as it relates to the segments, you're correct. We did have favorable developments coming out of the specialty admitted segment. And, you know, I think we would expect to continue to see that sort of development coming out of those segments.

So you saying at 92 combined ratio and specialty admitted is a good run rate?

Well, for that type of business it certainly should be. You have to understand also that that's a relatively small piece of what we do. But, you know, short term; more of it is short tail business. So in order to earn the 20% return on the capital we invest there, it needs to be highly profitable. So, you know, we set those targets very aggressively for those business units.

So, Paul, you want to comment on the conditions in London on the short tail line?

Sure. Here, again, Tom I would say that, you know, our core business is a professional indemnity and our retail service company until a lesser extent marine and energy and reinsurance and accident divisions are clearly still selling significant rate increases in virtually every product in all four of those divisions. We have started to see a leveling of rates in a portion of our property business, our open market brokerage property business especially on our Fortune 1000 accounts that reach all-time level highs post September 11th. And very similarly, in our aviation division, many of the market surcharges that were rolled on post September 11th have begun to roll off. But in both cases, rates are well above what we consider a burn level and are still highly profitable segments of our book of business.

Great. Thank you.

Thanks, Tom.

Our next question comes from Stephan Petersen with Cochran Securities. Please state your questions.

Good morning. First a couple of questions are for Tom, I was wondering if you mentioned that I didn't catch the duration of your fixed income portfolio. And second of all, I know you sort of have a target of somewhere around 20% of the portfolio in equity. And I'm kind of wondering what the cash run rate is that you expect going forward and at what point you might expect to hit that 20% bogey?

In terms of the duration, it's still roughly 4.5 years. I think that there's some nuances to that with a higher component of monies in the mix. The monies are not as price volatile when you take into account the tax effect nature of them, in terms of general level interest rates. That's what cash flows in general are pretty good right now. So I would say on an economic basis or even though the number would calculate out to about 4 1/2, it's really a smidge shorter than that, which I think is appropriate and we're continuing to let that drift in a little bit. In terms of the 20% total of the portfolio in equity, that is still roughly the order of magnitude that I'd like to see in things. We did move it from 13 to 15 during the first six months of the year. We put $100 million in. I think our investment flexibility continues to increase, given both the cash flow and the earnings and opportunistically we'll look to do that, as soon as we find the right set of ideas to make that happen. And I wouldn't put a specific date or target as to when I would expect that to be the case because it's more dependent on when we see the opportunities being there.

The 100 million you just mentioned, that's pretty much in line with what you did in first quarter?

Correct.

Perfect. Last quick question on the reinsurance recoverables, the $10 million provision, did I understand that to mean the $10 million all for reinsurance recoverables or did that also include the charge for -

That included all three items that Darrell pointed out.

Okay, all right. Was that a pretty routine adjustment in terms of uncollectible reinsurance?

Yeah, that wasn't extraordinary.

So there wasn't any particular event or discussions with reinsurers that prompted that action this quarter versus another quarter?

No.

Okay. Terrific. Thank you.

Our next question comes from David Lewis with SunTrust Robinson Humphrey. Please state your question.

Thank you. Good morning.

Good morning, David.

Can I hit on a couple of questions in a little more detail? One, what's your exposure to score and maybe another troubled reinsurers? Obviously you have taken care of it, but how can you protect yourself there and how can you have avoid having $10 million charges from time to time on the reinsurance psyche? Get more letters of credit? What's the opportunity out there?

That is the key issue. First on the score. I'm not aware that we have any material balances if any from score. It's not a significant player. I don't think it's even there at all. I'm not aware of that 100%. Again the magnitude of the corp charge in the quarter was not 10 million, but that was one of three items and I think probably a third or less was associated with the reinsurance issues. But the important point is what I think that you're alluding to, for many years in the United States, Markel has had a policy of very diligent review and approval process to do business with reinsurers at the front end.

And then in addition, we establish effectively lines of credit for each reinsurer with whom we do business. And if the balances were to exceed the internal lines that we establish we ask and require that those reinsurers post security in order for us to continue to do business and expand the balances beyond those sort of internal lines and we have had very little problem in getting the reinsurers to agree to that. And those contracts generally require the balances in excess of a threshold are fully funded. That if there's a change in the financial status of that reinsurer that they have to fund additional balances and finally, if there's a change in ownership or management of those companies then the funding requirements increase. And we've instituted and implemented those same procedures with our London market operations and we believe that that will protect us as well as it can. Unfortunately, the nature of the business is that we cannot be totally protected.

I think another fundamental issue in terms of the way we managed the business that is a little unique and different is that, as you know, David, I think our focus is on underwriting profit at the top line. And making sure that the business is profitable both for us as a direct writer, but also is profitable for our reinsurance partners. We're not in the business of trying to leverage cheap reinsurance rates where our reinsurance partners are exposed to significant losses where we're making a lot of money. Typically, the expectation is the business is to be price right at the 100% level and everybody participating in it is going to participate in profits. And as long as that atmosphere and the attitude and the relationship we develop with our reinsurers means that for the most part they're not meaningful disputes in terms of payments, because we're not trying to leverage and reinsurance a stupid deal. Now, that's not the way everybody conducts their insurance business. And it's certainly not the way some of the predecessor companies that we acquired over time conducted their business.

And I think virtually all of the reinsurance issues that we have to deal with are the result of sort of the different management philosophy in dealing with reinsurers. So we feel pretty comfortable. We have great relationships with the people we're placing our reinsurance with and we think we have mutual respect and we think the relationships are very, very profitable for both of us.

Great. That's helpful. In moving to the London market loss ratio, although continuing to improve, seemed to improve a little less than what had the last several quarters. I think your original goal is to get to an underwriting profit in 2003 or toward the end there. What's the prospect for that, do you have a change of opinion?

Well, the goal is the same. We want to make underwriting profits in the London as well as the U.S. And in fact, in the long run, there's no reason in our view why the London market shouldn't deliver the same margins of profitability as the U.S. And we think we're on track for getting there. You know, a significant part of the difference between the 102 in the second quarter and where we want to be is our continuing to be cautious on the reserving side because of the newness of our business model and the history which was significantly less good. And so we believe we're achieving all of the price increases and virtually all of the soft information we receive would imply that things might in fact be better. We're continuing to be very, very cautious.

But clearly, our goal is to get it down into same sort of levels you're seeing in the U.S. if not better. I mean, again it's a functional duration of the business and the float that it generates. The goal is to achieve the same rates of return on capital, whether we deploy it in the London market or in the U.S. market. And I think we'll get there. It's not instant gratification by any stretch of the imagination.

Final question. Can we get any more detail of where the pricing both domestically and international stand relative to a year ago as, obviously the rates we're hearing are slowing. Can you give us an idea of the magnitude there?

I'll make one comment and I'll ask Paul to follow up on that. In the aggregate I feel highly confident that I can say the price level of business on the books today is better than the price level was three or six or 12 months ago because we have consistently achieved rate increases. What we're seeing is that the magnitude of those rate increases is slowing down. You know, there's also been to some extent a slowing of the economy and so the judgment about the magnitude of rate increases today is a little more ambiguous in terms of measuring it because if an underwriter could argue that the exposure is declining, we're now -- you start comparing apples and oranges when you are comparing price levels. A good example is in the aviation world, passenger miles are down. You know, if the rate is up on a passenger miles, but the total passenger miles are down, you know, the premium dollars may be declining or leveling off. So it's not as certain and it's little bit more judgmental about exactly what is the impact of that rate increase. Paul, do you have anything you'd like to add to that?

No. I think Steve's exactly right, David. I think the magnitude or the speed in which prices is going up has slowed, but the key is they continue to go up in virtually every product area from all-time highs in 2002. And we think that we're well ahead of any sort of inflation or trend factors and we feel very positive about the results in the direction of the business.

Thank you.

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

Thank you. Most of my questions have been answered. We too are delighted with the quarter and congratulations. I did have some questions on the market in the U.S. Are you seeing any new competition come into the marketplace on the access and surplus line side?

Well Beth, we are seeing a little bit more competition from some of the Bermuda-based companies that are coming on shore with casualty operations and with professional liability operations. We think we have a distinct advantage over most of them and that we've got the good old fashioned bricks and mortar in place and the people in the systems already there taking advantage of the opportunities. We are seeing an increased appetite from a few of our fellow excess and surplus lines underwriters, but for the most part we continue to see additional churning and re-underwriting coming out of the standard marketplace and as I mentioned in my initial comments our submission levels are new business offerings which is our best barometer of the marketplace continue to be at or above all-time high levels. So we're very encouraged by that trend.

In your press release you noted that you anticipate that between the domestic and London markets that you expect more 2003 to have a 15% gross premium rate of growth. Through the six months, the domestic was up 21%, I think, and London was up 6. Does that indicate that you anticipate in the second half that gross premium rate of growth for domestics will be slower than it had in the first half?

Yeah. Your arithmetic is correct. It's just the number is our best guess.

Do you anticipate that London is going to accelerate since it's only at six, does it go higher and domestic goes lower?

Yes. Six was our quarter best. I think year to date it's 12 in London.

Okay.

You know, the number alternately as you know, we discontinued and sold the renewal rights in London of our automobile book of business and we've cut back some of the casualty reinsurance business we're writing. So really is a function of the -- the ongoing business is growing a little faster to overcome lines of business that are being cut back. And, so it's a blended answer. You know, we're trying to -- hopefully that number may be a little conservative, but that's sort of our best guess.

The final question. In the domestic market, are you still seeing opportunity to introduce new products or grow some new businesses in the U.S. on the E&S side?

Yes I absolutely got in and Paul will share you couple of examples.

Just last month Beth, we made an announcement that we have entered into the alternative risk market arena. Our market research shows that more than 40% of the commercial insurance buyers in the marketplace today have some proportion of their coverages in alternative risk transfer mechanisms.

And we were delighted to have Roger Griner join our team. Roger brings 35-plus years of experience with Genesis from ( ) group and the alternative risk transfer business will be set up as a business of Markel. So we look for it to be up and running later this year. We're delighted to do that. We also think there is an opportunity I mentioned to sell some of our U.S. products in the U.K. We think there's an equal opportunity to take some of our U.K. products and sell them into the U.S. marketplace.

None of the seven U.S. subsidiaries of Markel are involved in any aviation-related businesses. And that is a real specialized business and we hope to take our existing network of Markel wholesale distribution channel partners that we have and make available to them this highly specialized product that's underwritten in service from the U.K. And that's just one of several products that we're looking to expand back this way into the U.S. from Markel International.

Okay, thank you.

Our next question comes from John Fox with Fenimore Asset Management. Please state your question.

Hi. Good morning, everybody. I have a short-term question. Can you talk about the amount of unrealized in the bond portfolio at the end of the quarter? You gave a total amount and then just what is -- obviously it's gone down. What's happened since rates have spiked up?

The number of unrealized in the sixth -- Darrell, you got the number --

Yeah. The total unrealized at the end of June of about $250 million net of tax, 40% of that number is attributable to the bond portfolio.

Okay.

60% is roughly the equity portfolio.

Okay. And do you have a --

The magnitude of Backing up in July, we don't have a number for July yet. But you're right, it would be less than that in July 30th.

Okay. And anything else you're doing on the bond side other than the monies with rates going up at this point?

Generally, we're letting the duration drift in.

Okay.

But we still have a lot of positive cash flow as well.

Yeah. And the cash balance is building which gives us option value. So whether we're going to explore that market in longer term bond -- the best thing that can happen to us from the investment and income point of view is that the rise in rates would happen quickly because with the duration having drifted in, and the cash flow that we have in the cash balance balances, you turn around and re-deploy it at higher rates next week as opposed to letting Chinese water torture happen over a period of time. So just see what happens and we'll be thoughtful about doing what we think is the best thing to do.

I said it was a short-term question, Tom.

I think the other side of it, John, it's really important is what we've done is important to the future is that we're operating on an assumption that we are going to be living in the lower interest rate environment for some period of time. At least from an underwriting perspective.

Okay.

And therefore, we are expecting and have communicated very clearly with all the operating divisions and have adjusted all of the underwriting profit sharing programs to this -- a world of lower interest rates whereby our expectation is that the business units need to continue to deliver increasingly larger underwriting profit margins. As you know, two years ago, the model was if we could get anything under 100, the investment side of the house could get us to the 20% target. We realized today that is not the case and the 95% combined ratio in the second quarter needs to be improved upon and our business plan's going forward and when we enter the plan for '04 undoubtedly it will continue. But we expect to have a significant component of underwriting profits to this model so that we can continue to deliver high returns on capital over a long period of time.

Okay. Thank you.

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

Good morning. The question goes at the interest expense line, I guess other questions have been answered here. But you issued the 10-year debt earlier this quarter. The old 10-year will be maturing in November. I guess shorter term over the second half of this year I was kind of interested in what your feelings, what you thought would happen on the interest expense line. And a associated question I wonder if you can update us on your current availability on your credit revolving facility?

Sure. I'll take that. The current credit facility that we have, we had 300 million. Nothing outstanding under that facility at this point in time. The 250 million that we issued earlier in the year, we used some of the proceeds to pay off the outstanding facility balance at that point. So facility is totally unutilized at this point. As it relates to the interest expense, the cost, I would expect the balance of the year to sort of be somewhere to where -- what we had I think, in the current quarter. So that's probably a normalized sort of run rate.

Thank you very much.

Our next question comes from ( ) with First Boston. Please state your question.

Good morning. You provided some very useful insights into the overall marketplace. I would like to maybe get some more details. Based on your press release, you mentioned on page 3, I believe, that the rate increases have been slow and in certain lines of business. Can you specify which lines you were referring to?

Basically it's the short tail property lines and aviation to some extent. For the two lines that we are seeing some slowing in the growth rates.

Okay. I know you're a significant share holder of RLI. Do you think RLI is seeing the same pricing pressures?

That question really should be directed to them.

Thank you. Will do. And then regarding your discussions with rating agencies sort of the good news at Markel international, but could you give us a sense of where you are in your discussions with Markel as a whole and then whether they are a significant milestones, we can expect in the relatively near future?

I think I can safely say that I cannot predict the near future with regard to the rating agencies at all. I think our relationships with all of the agencies are very, very good. I think as it relates to our balance sheet, they're virtually no concerns. I think our balance sheet by itself would justify substantially, meaningfully higher and better ratings across the board and if there is an issue that needs to be dealt with any -- as any agencies that might feel that we have not completed the task of rebuilding and turning around our international operations and simply the operating results in our international business is the only negative I'm aware of that's sort of holding us back. And, you know, externally I think there are a lot of issues that are making rating agencies in the aggregate very, very nervous.

And unfortunately those external factors that create that, whether it's the personnel turnover or their failure to predict some Enrons and Worldcoms or, you know, other issues that are causing them to generally be afraid. Those things we can't deal with. But that's a real part of the environment and I think the recognition that the international operations achieved an increase in their rating in an environment where if not nine out of ten, probably 99 out of 100 rating changes are negative. So I think we're in great shape. We certainly don't have any concerns about where our ratings are. And, you know, we'd like to see them reflect the reality of our significantly improved business.

In terms of our long-term goals, we would like to on our, somewhere on the debt rating side achieve very, very high investment grade ratings. And right now they're not there. So, our goal is to see them significantly improved over time. But we think it's purely a matter of demonstrating the effectiveness of our operating results and that will cause that to change.

Thank you. Regarding how you would like to achieve your goals in terms of debt rating, what levels, do you think, should we be focusing on now? Underwriting is improving --

I think we have to keep doing what we're doing and the rating agencies will -- you know, if we build it they will come.

Did you have any intangible book value per share?

The total book value per share is $135 at the end of the quarter. Intangible book value was just under $98 a share.

Thank you very much.

Our next question comes from Gary Johnson with Reliance. Please state your question.

My questions have been answered. Thank you.

Our next question comes from Jay Cohen with Merrill Lynch. Please state your question. Mr. Cohen, your line is open.

Our next question comes from Paula Fetterman with First Albany. Please state your question.

Could you please bring us up to date on what level of statutory capital you have and also how much cash there is at the holding company level?

I don't have the data on the statutory numbers at this point in time. Significant amount of cash of the holding companies, but I don't have the number in front of me, but it's growing.

So it's in excess of the last year-end number?

It's over $100 million. I don't have the year number in front of me either.

Thank you.

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

Yeah, I just have a follow-up question. I just want to clarify, the amortization expense which was about 10 cents in the second quarter. We won't be seeing that going forward in the following quarters?

Correct.

Okay. I just wanted to clarify. Thank you.

Our next question comes from Stephan Petersen with Cochran, Caronia Securities.

Just a quick follow-up for Mr. Springman. We have been hearing sort of early rumblings that the way Lloyd's look at quarter share reinsurance, may be changing in terms of sort of the equity credit, that sorts of backups give backups give some of the writers there. And I was wondering if could you comment on that and whether or not you thought that might have any sort of either short-term or long-term implications for your operations in London?

I guess a couple of points, Stephan. First of all, Markel is not involved in any qualifying quarter share reinsurance agreements, but to the extent of the rest of the marketplace or a big portion of the marketplace is and to the extent that those are now being brought under scrutiny by Franchise Performance Director, when those are non renewed or discontinued in the future, those will certainly inure to Markel's benefit. We just haven't believed in leveraging reinsurance in the past. And it's clearly not something that intend to do in the future. So, we applaud the efforts by the franchise performance directors' office and we think it's clearly steps in the right direction. And we support it fully.

Just in terms of general, do you know if they're looking at those situations on a case by case basis or is that sort of just an overall kind of thing that's going to keep rolling out over time?

I think both that some of the more flagrant violators in the marketplace are being looked at very, very closely right now. And we understand that all of the syndicates will have that as part of their review process when their 2004 business plans are discussed later this fall.

Terrific. Thank you for the insight. I appreciate it. Thank you.

Our next question comes from John Keefe with Ferris, Baker Watts, Inc. Please state your question.

Thanks. What type of commodity ratio do you have in your mind that is necessary for you to achieve the kind of ROE that you'd like to get?

At this point in time, John, I don't want I want to be specific. But I certainly expect it to continue to drift down from the levels that we're currently looking at.

Very good. Thank you.

Our next question comes from David Lewis with SunTrust Robinson Humphrey.

Thanks. Quick question on tax rate. It looks like it was running about 33% by my calculation in the first half versus 36 a year ago. Is that primarily because of the monies and what do you think happens in the second half?

I think the 33% run rate is what we expect the annual tax rate to be. And the major reason for that is in 2002 there was interest costs on the international side that we do not get to take a tax benefit for and we elevated that debt to our U.S. holding company so that we could make it tax deductible. So that was a major reason for the drop in the effective tax rate.

(indiscernible) we got assumption then for '04 for now?

Yeah, I mean that's as probably as good as any I can tell you.

Okay great, thanks.

Gentlemen there are no further questions at this time.

Thank you very much. I appreciate everybody's participation today and thank you for your support over a long period of time. And as always, if you have any further questions or comments, do not hesitate to get in touch with us directly. Have a wonderful day and again thank you very much.

This concludes today's conference. Thank you all for your participation. All parties may disconnect now.