Markel Group Inc (MKL) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Markel Corporation's earnings conference call. At this time all participants are in a listen only mode and a brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 and telephone keypad, and 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. Thank you, Mr. Markel. You may begin.

Steve Markel Thank you, and welcome to the Markel Corporation third quarter conference call. Before we begin this morning, I would like to call your attention to our Safe Harbor statement set forth in our press release in forms 8-K 10-Q and 10-K Any discussion today which involves forward looking information or anticipated results could be affected by the matters described by our Safe Harbor statements and we encourage to you read those statements. Our program today will be as in prior quarters, after my initial comments Darrell Martin, our Chief Financial Officer, will review the quarter and year-to-date financial numbers in some detail. Tony Markel will review the operations, both throughout the North American operation units and our international units. Tom Gayner will make a few comments about our investment results and performance and strategy. And finally, I'll moderate the question-and-answer period and maybe make a few wrap-up comments. As we disclosed to you last week, our third quarter results include two very disappointing charges. First, a $50 million charge related to increases in reserves, primarily in the 1997 to 2001 time period, at the company's investors, broker's excess and surplus lines unit. And secondly a $55 million charge for increases in our asbestos and environmental reserves. Before I turn the tram program over to Darrell, Tony and Tom, I would like to explain these two issues in somewhat greater detail. First, I'll discuss the charge at investors. As you all know, Markel's corporate philosophy is focused on the balance sheet and seeking to have our loss reserves set at levels to be more likely redundant than deficient. A key component of making this work is to get the individual claims right. . We spend a lot of time and energy making sure that claims are processed in accordance with Markel's standards, that they're handled aggressively and fairly, and the case reserves are establish as quickly as possible at realistic settlement values. To make sure this process continues, for many years we have had what we call a claims, peer claims review where claims experts from different divisions rotate around the company and investigate and review and effectively audit the claims operations of our other business units. At our investors business unit the last review was conducted in mid-2001, and it was scheduled in part because of the departure of our claims manager. This claims review process reviews a sample of claims and determines how claims are being handled, documented, and reserved. The result of the review done in mid- 2001 was generally very positive. While there were certainly recommendations, the overall findings of that report indicated that at least at that time and at least based upon the sample that was conducted at that point in time, that the claims department was operating within the Markel standards and guidelines. Since the 2001 review we have had continuous staff turnover in the department at the investors unit, and earlier this year we saw some claims development trends that were concerning and accelerated the 2003 claims reserve process or claims peer review process from the fourth quarter into the third quarter. That review was completed in the third quarter and indicated that the Markel standard of handling claims aggressively and fairly and getting reserves established as quickly as possible at realistic levels was, in fact, not happening and reserves were not being posted in a manner which we expected. As a result, we have obviously had to take a great deal of action. First and foremost, we have had to revise the actuarial assumptions. Actuarial assumptions are based upon the premise that the underlying data is, in fact, accurate, and where individual claims reserving is not consistent, claims, actuarial processes, obviously, need to be adjusted. As a result, we have reviewed the actuarial assumptions and as a result of booked an additional $50 million in loss reserves in the third quarter. We believe that this amount anticipates the total cost of the problems that we have identified and do not expect that there will be further charges. We have also had further changes in our management staff at this unit. There have been significant price increases and changes in the underwriting which were implemented back in later, the latter part of 2000 and 2001 and have continued throughout 2002 and 2003, and as a result we believe that our current business is well underwritten and well-priced and the problems that we have identified relate primarily to the policy years between 1997 and 2001. We're obviously very disappointed in this problem and that we failed to recognize the problems more quickly; however, we also believe that we have, in fact, identified the problems and dealt with them in an appropriate way, and also disclosed them to you in an appropriate way. This problem should not have a continuing impact on Markel's operations, and clearly we fully expect to do a much better job of monitoring, controlling the claims operations so that this particular problem clearly will not occur again. There are a lot of reasons and circumstances that we could point to relative to the turnover in claims or failure to supervise the process at the regional level, but fundamentally the process and the responsibility for the problem resides here in Richmond at the executive office, and it was our failure to supervise it properly and properly communicate and train the claims people so that the Markel standards would be followed. We certainly will respond to any further questions you might have later in our program on this issue but now let me address the $55 million increase in reserves for asbestos environmental claims. As with our other businesses, we monitor and review individual claims on a daily basis. We review business segments in greater detail on a quarterly basis. And particularly with the asbestos and environment Alex pour use, we have a very in-depth annual review. We have completed this review in the third quarter for our as asbestos and environment Alex pour use throughout the company, both in North America and at our international business units. Claims activity for asbestos and environmental claims has and is continuing to increase, and as a result we have increased our reserves by $28 million in the United States and $27 million at Markel international for our asbestos and environmental exposures. There are two significant claims, two large claims that represent somewhat over 30% of this total increase, and to give you a bit of flavor for the types of issues that we need to deal with, I think describing these two claims, at least in general terms, might give you a better understanding of our environmental and asbestos exposures. The first claim I'll describe is an environmental claim involving the cleanup of quite a few of environmental sites in very -- several different locations. The claim has been well known to us for many years. It has been in coverage litigation for many years. And the insured had loss previously at both the trial court level and at the appellate court level. Unfortunately for us, they recently prevailed at the state Supreme Court level, and the case was returned to a lower court for further proceedings. Due to this reversal, it became obviously necessary for us to reevaluate our exposure. As a result, we reviewed estimates for all the site remediation costs with obvious focus on the few sites that might have affected some of our policy years. And as a result of that review, we increased our reserves to levels which we think will be appropriate relative to the exposure. A circumstance where, after many years of being successful in the judicial system, the courts decided to move in a different direction. The second claim that I'll describe relates to an asbestos matter. This claim involves a prepackaged bankruptcy where the insured filed just earlier this year and we were first put on notice and sued in coverage litigation. The bankruptcy proceeding is an attempt by the insured to settle a large group of asbestos claims using a trust fund. The insured had not previously pursued us at all, and earlier this year was our first notice that we were involved in this matter. In this particular case the global settlement is for a very significant amount of money. While our participation is for less than 1% of the proposed global settlement, even 1% of $1 billion adds up to $10 million, and this claim, our participation is less than that, but between the two, you can see that represents about 30% of our total charge and gives you a flavor for the types of circumstances that unfortunately we have to deal with. By themselves, these two claims may not have required us to adjust the reserves, but in the current legal environment, which is very unfavorable, and with plaintiffs' attorneys taking full advantage of this environment, filing ever increasing numbers of claims, we felt it was prudent for us to increase our reserves. As a result of the specific events these two claims as well as a few others that we have dealt with in the past few months and as well as a broader review of the overall environment, we felt it was prudent to increase our asbestos and environmental reserves by $55 million. While I'm not sure how relevant it might be, this increase increases our payment survival ratio from a number that was in the mid-to-high teens to a number now that is in the low-to-mid 20s. This survival ratio is on the high range of others in the industry. The Markel companies, fortunately, were not meaningful market participants when asbestos products were manufactured or prior to 1987 when policy exclusions for asbestos and environmental claims were broadly applied. We fully expect that the trend of ever-increasing numbers of claims in this area will soon peak and begin to decline. Unfortunately, we just don't know when. We're hopeful, of course, that there will be tort reform and other national legislation which will improve the situation. Clearly, the way our society is handling asbestos claims is not an appropriate transfer of funds from one group to another, but there is very, very little that we can do about it. With that on the two problems for the quarter, I'm pleased to share with you that we do also have quite a bit of good news to report. And for this I'll let Darrell, Tony, and Tom take over. Darrell.

Thank you, Steve. Good morning. Before I begin, let me just mention that our 10-Q will be filed not later than Wednesday of next week, November the fifth, so it will contain obviously full MD&A at that point in time. My commentary will focus on the year-to-date performance primarily. We'll be happy to answer questions about the quarter after the -- during the Q&A period, and first let me start with the underwriting operation and follow-ups with the investment operation results. On the underwriting side, our gross written premium for the nine months ended September 30 was $1.9 billion, an 18% increase over the prior year. This increase is consistent with the view that we've had for the prior several quarters, and it's due to increasing submissions and rate increases at all our business units, but we are seeing some specific lines of business either flattening or actually declining in pricing in certain circumstances. We believe those prices, however, are still adequate to achieve our underwriting profitability targets. at this point in time. The 18% increase year-to-date we have projected or we have talked about a growth rate for the full year of about 15% previously. We believe that number is still appropriate in terms of the expectation for the full 12 months of 2003. On a net basis we retained $1.5 billion of that premium, about a 76% retention ratio. That was up from a 72% retention ratio a year ago. Due primarily to probably three factors, one, we actually have changed some of our reinsurance treatise during the year to retain more of the business that we write; the mix of business is a little different this year from prior years, so we retained more of different types of business than previously; and in the international operation a year ago, our retention ratio as a percentage was somewhat depressed due to specific reinsurance charges that the international operation incurred, so the 76 was, you know, pretty much in line with our expectations, but increasing over time. Earned premiums, $1.3 billion, you up 23%, a direct result of the growth volumes and retentions. As Steve mentioned, the real story this quarter is our combined ratio, as usual it's our focal point for the quarter or for the nine months we reported a 101% combined ratio. Obviously, not achieving our goal of underwriting profitability. Compared to a year ago of 105% combined ratio. I do think it's important to highlight what is included in those numbers. In the 2002 nine-month number was additional charges of $44 million related to asbestos and reinsurance charges, and the 105 includes 4 percentage points associated with those charges. And so otherwise we would have been at 101. In 2003 the 101% combined ratio includes the $105 million that Steve mentioned, the $50 million in investors and the $55 million associated with asbestos and environmental, and the magnitude that of 105 is 8 percentage points embedded in the 101, so otherwise a 93 combined ratio for the year-to-date. We do not like to think of ourselves as step 4 sort of performance, but I think it does highlight the strength of the underlying book of business and the profitability embedded in those operations. I'm sure Tony will talk a little bit more about that in a few minutes. On the investment side, our portfolio has grown 16% since year-end to $5.0 billion. $5.0 billion, up from 4.3 at year end. Large portion of that growth is actually come from cash flow from operations, approximately $450 million of that growth, and the cash flow is increasing quarter over quarter, as you would expect, with the growth in the top line. But in addition, the portfolio valuation has increased. The underlying market value of the portfolio has increased approximately $130 million through the first nine months, so that's very strong performance. Some of that has been realized gains. Some of it has been unrealized gains. But still very strong performance. And financing activities have added $75 million to the portfolio and the balance made up of miscellaneous items, but the portfolio growth is very encouraging and, again, very much in line with our expectations. In terms of investment performance, again, the story in the nine-month numbers are similar to the commentary I made previously. Our net investment income was $137 million through the first nine months compared to $126 million a year ago. Obviously, that's reflecting a larger portfolio, but lower rates that we've been experiencing. We did have realized gains through the first nine months of about $36 million. We have previously mentioned that the realized gains line is highly variable and, in fact can in, in the current quarter we realized some bond losses for tax planning purposes, and we recognize the loss of about $7.3 million in the realized gains and losses line in the quarter, but for the year-to-date almost $35.8 million of realized gains. Most of that being the bond portfolio, a small portion being equity. Again, the change in unrealized is the real story in terms of our total return for the year. We have a -- through the first nine months we have a $91.4 million increase and the change in unrealized gains. The bonds actually are down about $12 million. The equities are up about 103. So very, very strong performance, very pleased with that. Our total return on the portfolio through the first nine months on an annualized basis is about 7.5% compared to 6.5% a year ago, so, again, very strong performance, and I'm sure Tom will talk about that in a few minutes. Net income for the first nine months is $78.8 million. Other comprehensive income adds another 63.4. So the total comprehensive income for the fir nine months is $142 million. I will point out that amortization-expense of intangibles other than goodwill was fully amortized as of June 30, so there was no amortization-expense embedded in the current quarter. And as usual, in our fourth quarter this year we will do our goodwill valuation update. Do not expect any surprises there at all, so we expect that to hold steady. On a per-share basis we focus on core operations. As you know, that excludes realized gains and amortization-expense. Some of The sum of those three item is net income. Net income per share on a fully diluted basis was $7.99 through the first nine months. Core operations contributed $5.90 of that. That compares to $4.97 a year ago with core op.'s being $2.66. Book value per share, total equity that has increased from $1.2 billion to $1.3 billion year-to-date or per share $132 per share up from $118 year-end. A 12% increase. I would point out one other thing on the balance sheet, just refer you to that. We did replace our existing credit facility during the third quarter. The expiring credit facility was due to expire in '04. We replaced that with a $220 million credit facility that expires in December of '06. We have focused on a core group of banks as participants in this facility. We did receive improved terms. Obviously, extended the maturity, and have attractive pricing attached to the new $220 million facility, so that was something that we did do in the quarter, and I think it sets up pretty well from a liquidity point of view for the near term. With that, I will turn it over to Tony for additional commentary on the operational side.

Tony Markel Thanks, Darrell. Good morning, everybody. Before I comment on general operations, I want to make a couple of brief comments regarding the issues that Steve elaborated on in his opening remarks. The asbestos issues is a growing societal problem that continues to have somewhat of a life of its own, as Steve pointed out, and hopefully Congress will come up with a solution that has some finality to it, but you can tell from our reserve increase we're not banking.

on it and the additional reserve that we have established as the press release notes, is on a totally undiscounted basis in spite of the an expected 50-year pay out period, and we feel it's based on our latest analysis which takes into consideration the changing dynamic of that this increase should provide our usual target conservativism. But Steve did rightly point out that it is an issue that continues to evolve. The reserving problem that investors unfortunately is a horse of another color. It's clearly an embarrassment. It's understandably a blow to our credibility. It's an issue that that has evolved over the last 18 to 24 months, and was picked up through our internal audit controls

as Steve pointed out. Our message of reserve and conservativism has never been stronger and has never wavered at any of our locations, but the turnover and resulting lack of continuity in the claims department and investors over the last 24 months has, in our opinion, at least been partially responsible for giving the clarity of that message and perhaps candidly should have been a red flag for us to have picked up the potential problem. Local management, frankly, was asleep at the wheel in this regard. We have acted quickly. I think we have acted very decisively. And once the audit of everyone and their claim files is complete, we will have acted completely thoroughly. Steve indicated we are managing the unit with corporate personnel until strong replacements can be hired, so we're confident that we have the people on-site to make sure that the issue is resolved behind us, and we move forward. We still believe very strongly in the business that investors and the staff up there has unreservedly shown the resolve to get over this hurdle. Obviously, the shame of it is the fact that all of our other units are doing so well, as evidenced by our ability to digest these significant reserve increases with only a minor net loss for the quarter. As I said at the outset, we're embarrassed, which obviously is a bad thing, but we're also humbled, and in maybe in the long run that will be a good thing. The organization has clearly proven its ability to produce underwriting profits regardless of the state of the mark place, and I'm confident it will continue to do so. The market in general continues to be very strong and very positive. Darrell alluded to the fact that there might be some slow-up, but candidly, we still are seeing moderate or at least inflationary increases in virtually every one of our lines of business with the few exceptions that we noted in the press release, and even where rates are flattening, in those particular areas we're still comfortable with the adequacy of the rate levels that have been achieved up to this point. Our growth, although not in the dramatic proportions that we have enjoyed over the last couple of years, is still very solid, as evidenced by the fact this tower gross volume for the third quarter was 11% over the third quarter same period last year, and is actually still 9% higher than last quarter. Our underwriting results still reflect only a 1% underwriting loss for the nine-month period in spite of the aforementioned large reserve increases, and those reserve increases account for 22 additional points of combined ratio for the quarter and 8 points of additional combined ratio for the nine months of '03. We're confident that by the time the fourth quarter rolls through, that we will return this operation to underwriting profitability for the full year. Markel re, our newest unit that was introduced late in '02 and early in '03 continues to gain a real toehold into the casualty and alternative risk factor market places and looks like it's being set up for a solid future The other North American units are all taking advantages of their experience and continuity and are producing outstanding results to a unit in terms of both premium growth as well as underwriting profitability. And Markel International with its new leader ship in place, both Jerry Albanese and Richy Witter are over there firmly in place and moving forward. Markel international is really showing some strong stability and improvement every day and is actually targeting judicious expansion both if product offerings and potentially geographically. The stars are lined up, the marketplace is still very positive, and in spite of this hurdle, this temporary set back, we think that the market dynamics still line up beautifully with especially niches, and we're con if confident that we will once again return the results that you've come to expect from us. With that, I'd be glad to answer any questions when we get No. the Q&A but I will turn it over to Tom Gayner.

Thank you, Tommy. Four points from the investment side this quarter. Point No. 1, we had a sol quarter year-to-date on the investment side. We're boring and profitable. Equities for the third quarter were up about 3.6% for the year-to-date up 18.2%. I continue to focus on the long-term because that's what we're all about here. Since December of 1990 through the end of the third quarter of '03 we're up 15.4% in the compound annual growth rate. The SS&P in that time frame is up 10.6 %. That's almost 500 basis points of out performance, over 12 and three quarters years. I'm very happy with those results and just couldn't be more pleased with the way things are going on the equity side. Point No. 2, we're increasing the cash flow in the dollars we're putting into the equity market, and that's in contrast to the insurance industry in general. We lowered our equity investment allocations in the 1990s as a percentage of the total portfolio, and we've been increasing it over the last year or two. That leaning against the wind has serve us quite well. Specifically, from December of last year we had about $550 million in the equity portfolio, or 13% of the total. At the end of September it was $800 million, and that's up to about 18% of the total. About $100 million of that came from investment return and at and $150 million from additional cash flow, so we're on track for putting $200 million of cash flow into equity this year as we have spoken about for the last several quarters. Point No. 3. The fixed income returns are what they should be. For the quarter it was flat. For the year-to-date it was up 4.3%. Again, I stress the notion that the portfolio is as it should be. I.e., it's high quality. It's slightly at the short end of the four-to-five-year duration range which is appropriate given the duration of our insurance liabilities and our slight defensive posture about rising interest rates, and it's balanced relatively equally between governments, Corp. rats and municipal sectors. Point No. 4 as I expected to continue steady on going allocation to. equities. The market seems to be offering up a reasonable number of ideas that meet our oft discussed four part test of, one, profitable businesses with good returns on capital; two, management teams with equal measures of talent and integrity; 3, reinvestment opportunities and/or capital discipline; and four, fairly priced. There's still is plenty of room to allocate dollars to the equity portfolio and earn additional returns. Investment returns have been a significant contributor on the ongoing growth to book value that is our goal on at Markel. Despite is head wind of a rising ten-year treasury from 3.72% a year ago to 3.83% there at year end 3.96 September 30th the book value at Markel has grown from 115.45, to 117.89 to $132.24 up 14-1/2% over that last 12-month period I'm pleased with the contribution from investments that we've made in both protecting and building the shareholders' equity, and I look forward to answering your questions. With that, I'll turn it back over to Steve.

Steve Markel Thank you, Darrell, Tony and Tom. To wrap things up before we open the floor to questions, I'd like to make a few sort of summary comments. Business is very good. While we're very disappointed with the recent charges, we're very, very optimistic about where we stand and what Markel's future looks like. Our balance sheet remains extremely strong. Our margin of safety is still there. We did not reduce it to mitigate or lessen the I am impact of these problems. Operating cash flow has we have never been better, $100 million in the first quarter, 150 in the second, 200 in the third quarter, year-to-date over $450 million. Things are rolling along pretty good in that department. In investment portfolio is almost at $5 billion. at September 30. That is over $500 a share. And as Tom just pointed out, our equity allocation is increasing and will position us for sphere your long-term investment performance. Book value is $132 a share, and the ratio of portfolio to book value is increasing and closing in on that four-to-one ideal situation. Again, we are embarrassed and humbled as Tony pointed out, about the problems we are disclosing this quarter, but we remain very, very optimistic and enthused about our long-term business prospects. With that, I will open the floor to questions.

Operator; Certainly. Ladies and gentlemen, at this time we will be con duct a question-and-answer session. If you would like to ask I question, please press star 1 on your telephone keypad. A confirmation will indicate your line has been placed in the question queue. You may press star 2 if you'd like on remove your line from the question queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Thank you.

)) First question from David Lewis of SunTrust Robinson Humphrey.

Good morning. Couple of questions. First, what was the dollar amount of favorable reserve development in the third quarter and would you actually release that same amount are had you not taken the reserve additions in the period? Obviously, if you exclude the 22 points due to reserve additions to on the combined and 88.5% I don't think would be sustainable. Give us some comments on that, please.

I'll let Darrell deal with that.

Yes. I prefer to stay away from trying to quantify any kind of reserve release. We didn't do anything out of the ordinary in the quarter. I think what you're seeing in terms of the, sort of the with and without measurement, if you would, is a result of the very strong pricing that we've been talking about over the past couple of years and good profitability embedded in the business, so I would expect, you know, very strong performance going forward. I would expect it to continue.

Again, the key point is that the margins of safety that we try to keep level, if you will, are every bit as strong at the end of September as they were at the end of June and probably better than they were at the beginning of the year.

I understand. I guess what I'm trying to do is kind of come up with an earnings run rate based on the current profitability of the business.

Yes. No, I understand exactly.

I just want to talk about this. So if we're talking about a combined ratio on the entire company below 90% that means you did over $8.00 a share in earnings in the quarter before the reserve additions, and I don't think we ought to move our numbers up $32.00 so that's where I'm trying to kind of work around. .

Our goal, and I think it's achievable, to compound book value ate 20% rate, and so booked today at $132 between our operating earnings capacity and our overall investment returns, we fully expect to add $26 to book value. That's our target. That's what we'd like to see happen. Now, obviously, because of the investment component of that is not going to be as smooth, and as we've seen with asbestos and other problems from an operating perspective it's not going to be that smooth, but that's what we think we can do and think it's very realistic.

Let me go at it a different way. Why do you that I that the targeted combined ratio for the company, a range would be in 2004 without any additional or further reserve additions? I mean, are we talking something in the 95 to 97% range?

Yes. Or lower. I mean, today's world, with the investment yields that are available, the idea of having an underwriting break even, which is sort of what the model called for with four-to-one eleven in the 7-1/2% pretax called for. Those investment yields are not routinely available in today's 4%, ten-year treasury market, and so we fully expect that we -- our business plan is to run the business with low-to-mid-90 combined ratios to be able to consistently compound the 20% rate.

Okay. And just one other thing, what's the tax rate expectation for the fourth quarter in 2004?

Darrell?

Well, 33% is our current tax rate, and that is based on our expectation for the full year of '03. I don't know that it's going to change dramatically in '04. I wouldn't expect it to change dramatically.

Right. Thanks very much.

Thank you. Our next question will be coming from Matthew Heimermann of Goldman Sachs.

Good morning. Two questions. I just was wondering if you could talk a little bit more specifically about the international segment, what's really driving or what new opportunities are presenting themselves that's contributing to the growth. And then additionally, just give a little bit more market color domestically about what lines you're seeing increased or where pricing trends might be moderating.

Market and both internationally.

Mathew on the international side, that growth has been moderate up until this point and I think it's going to be continue to be somewhat moderate, but as we talked about in the past, we really didn't start looking outward for growth opportunities until we felt we had gotten the platform squared away behind us, and obviously we feel that way. We've got talented Markel leadership in place now, and we're starting to look at some new product opportunities. We're starting to create some synergies between some of the specialty niches that we've always done in the states and maybe introducing some of those products overseas. There has been a real sharing of information on some of those specialty niches, so we think that we can add new products over there on thing ha we have experienced over here. We've been very, very successful in our branch setup in the UK in producing very profitable volume, primarily professional liability, and we are currently looking to see if there are any opportunities to maybe put a branch on the continent in some countries where the opportunities look favorable, but that's an ongoing project and we're not in a position to even determine whether or not it's feasible yet. But the point I think is that we're looking upward and onward. We're in a position where we're looking outward now instead of introspectively. And the morale, the whole structure over there has never been better. We really feel great about what we've accomplished and where we are in the scheme of things. As it relates for the North American marketplace, and I guess real at the market is one of international proportions now, so the comments are almost universal regardless, most of the casualty lines are continuing to carry, as I indicated, moderate to at least inflationary and in most cases greater than increases on top of what we have achieved over the last couple of years. If there has been any slippage in terms of rate increases, it probably boils down to three or four areas. One is property, large property risks, the increases seems to be moderating to level right now. We're surprised that at that, but candidly, we think that the rate levels on large property are at least adequate at this stage, so we'd like to have seen them continue to go up given the World Trade Center loss backdrop and everything, buts they seem to be leveling off. Some marine lines seem to be leveling off. Aviation, which really only affects our international operation, has probably the one area that maybe has given up some rate territory, but the reaction was so aggressive post World Trade Center that perhaps we think there was some room in selected classes in the aviation side to actually give up some rate territory. So I would say that those three areas are the ones where we're not continuing to see very gratifying increases, albeit certainly not of the exponential variety that we saw in the previous two years.

Can I just ask one quick follow-up? One of the things we're hearing about is a lot of new insurance coming and going into the E&S market, whether that's newly established companies buying U.S. shells and then using those to enter the market, or other traditional players who may have scaled back while they were trying to figure out exactly what they want to do. How would you describe the intelligence of the competition out there right now is there.

Well- now.

It remains to be seen, but so far we think most of the entrants are experienced underwriters and are showing a good temperance to what we're doing, and I will tell you that there has been a fair amount of activity coming into that arena but don't forget there was a reasonable amount of activity exiting over the last two or three years, so that the capacity in ENS, I really don't think is particularly dramatically impacted. I don't think the new end trance really raise the capacity a great deal over where it's been the last two or three years of they're perhaps coming in and replacing some of the people who dropped out, names like Frontier and Reliance come to mind. So we still think, listen, our people are dedicated to producing underwriting profits regardless of competition and regardless of the state of the marketplace, and we think that the new end trance seem to be acting in spell gently and they're not impacting either our volume or profitability at this stage to any great extent.

Thank you very much.

Thank you. Our next question will be coming from J.F. Trembley of Credit Swiss First Boston.

Good morning. I have a question first on your asbestos reserve charge. As you went through two examples of cases you had been working, on I think he mention that the second one was somehow a surprise to you. Can you tell us to what extent the other surprises of the same I type are there and how actually the phenomenon came up to you and will you maybe elaborate on your description of it as a surprise.

I'll do my best. I'm not sure, you know, how to describe the surprise better. This particular circumstance, the insured had not presented us with any claims. We did not anticipate that that insured would and would be significantly involved in -- you know, we didn't expect to be brought in. They proceeded into a bankruptcy settlement very quickly, and found that there was some policy exposure for one of the Markel's subsidiaries, and we obviously had to respond and deal with it. Unfortunately, the nature of the asbestos litigation is that plaintiffs' attorneys are searching wider and wider for potentially responsible parties to drag into this asbestos litigation, and, you know, don't look over your shoulder. Maybe you'll get sued tomorrow.

Good. So then on the deferred note, I was looking at your press release, and as you report your results by segment, there is some other line, I assume that's in reference to what used to be the discontinued lines. Is that exact?

Yes.

So can you give us some insights into what to expect for that segment and where you are in your potential transaction?

I'm not sure I understand your question again.

I thought that Corey France was up for sale.

Corey France did not contribute to that loss.

Okay.

That loss is the allocation of the asbestos claims to the discontinued sector, so the Corey France operation continues to operate very, very well. It's small in size, virtually all of the earned premium in that segment is related to Corey France. And they're sort of earning or generating about $30 million, I think, in overall annual revenues and, you know, I think the underwriting environment is pretty positive. Shortly after acquiring Terra Nova in March of 2000 we announced that Corey France was available for sale. Because of the market environment, we were unable to find any buyers at a price that we thought was appropriate for the asset. And effectively discontinued that process of trying to sell the company. Currently we're not, you know, aggressively seeking buyers for Corey France and are very, very happy with this operation and fully expect it to make good profits in this market environment and hopefully this market environment will continue. So it's absolutely uncertain and no particular plans today to do anything differently.

Thank you. So their losses are not related to Corey France.

Absolutely not.. In fact, Corey France is operating at a profitable level currently.

Okay. And finally, can you comment on the market conditions, especially focusing on to what extent admitted carriers are developing more appetite for some of the risks that may have gone to the E&S market and now that environment is somehow improving, are you finding that some of the risks that ended up in the E&S market recently might be taken back by the admitted carriers?

My expectation is that the admitted carriers are sufficiently bruised with their entry into lines of business where they lack the talent to properly underwrite it, and at least for the next few years they will probably stay far away from it. At least as long as their memories last that some of their ill-fated entries were very unprofitable.

J.F. Trembley Thank you.

Thank you. Our next question will be coming from John Fox of Fennimore Asset Management.

Hi, good morning. I just want to confirm. The investors businesses, that charge was August in the E&S segment?

Correct.

And you still reported an underwriting profit of $1.5 million.

Correct.

John Fox For the quarter. Okay. And you wouldn't why that there are any unusual reserve releases or anything out of the ordinary?

Correct. I mean, there were reserve releases but not out of the ordinary.

Right. That was in the original press release. And do you happen to have what have been the payments for asbestos? You know, maybe year-to-date.

Not materially different than previously, and the U.S. number, I don't have the exact number. I've seen a number of them in different boxes. But not materially different.

I mean, from the annual it's been 15 or $20 million a year on an annual basis, so nothing much different than that in.

None.

Okay. Thank you.

Our next question will be coming from Stephen Putterson of Cochran Caronia Securities.

Good morning. I just want to revisit the investors issue again. Can you remind us, first of all, what kind of business was in there and how much of that was casualty versus property and is it strictly sort of a casualty problem or does the problem run deeper than that? And my second question is the press release indicated that some of the additions go back as far as the 1997 accident year, and I'm curious as to why some of 1997 and 98 wasn't r picked up in the '01 audit.

I'll do my best. The claims review and the fundamental problems that were identified have an impact across all lines of business at that business unit, but because of the nature of the business, the fact that property claims arise and get settled more quickly, the impact was I significantly less felt on property claims. The lines of business where the impact is the greatest is the general liability casualty book which includes general liability as well as products liability. We also write within that division and that group New York contractors in the period of time we are referring to, which was discontinued in 2001, probably at the end of 2000 we started winding out of New York contractors. But also California contractors, both residential contractors and commercial contractors. The major impact, though, is on the general liability and products subset of that book. The review and the issues that we dealt with several years ago with respect to New York contractors, while it's not totally immune to this problem, the reaction we had in 2001 for the most part dealt sufficiently with the New York contractors' portion of that program. But there was some impact on property and other lines, but not a disproportionate amount. The second half of your question is 97, 98 was sufficiently long ago. Why are we still having to deal with that. And, you know, unfortunately the nature of casualty claims is that it is -- they do, in fact, have a life cycle of five, ten, 15 years, and it's -- new information is developed and evolves and the nature of the claims settlement and litigation process is such that some of these issues do not get resolved more promptly. I think it's probably safe to say, though, that while '97 and '98 are impacted generally less than '99 and 2000 and 2001.

Stephen Putterson Okay. And one quick follow-up. The $50 million seems -- I guess the roundness of that $50 million charge is interesting to me. How much of that would you say is sort of a safety measure and how much of that is sort of direct, sort of case strengthening? And you've described the process as sort of ongoing. And so I'm just trying to get a feel for safety valve that you've created within that $50 million on a go forward basis.

You're 100% correct, the number is an estimate. We believe it to be a conservative estimate. If we could -- you know, if we knew a number that was into the single digit decimals, we would report it that way, but the nature of the beast is that these are subjective estimates. The problems that were developed with the peer review that we described led to a substantially more in-depth review, which is involving having staff from our other claims offices around the country literally review and audit every single file. That process is ongoing, as we previously disclosed, but in establishing the $50 million estimate, we tried to make sufficient provision and think we did, for the fact that that review is, in fact, ongoing and 100% of the information was not available to us last week when we had to draw a line on a piece of paper and make a decision about what the number was.

Okay. And one last question. In terms of completeness, would you say the review is 75% done, 80% done?

Again, I could guess that it would be something in that range or higher, but unfortunately, you know, at the end of the process, we'll know that that guess was wrong.

Okay. Terrific. Thank you very much.

Thank you. Our next question will be coming from Paula Searman of First Albany..

Thank you. I have two questions. Realizing that it is very early days, could you tell us what your exposure is to the fire storms in California and to the extent that you do have exposure, what your reinsurance program looks like. Secondly, if you could comment on what your accident year combined ratio looked like across your book, that would be very helpful. And thirdly, on the asbestos reserves, the A&E reserves, this is the third year in a row that you've reported increase in reserves. Could you kind of let us know, you know, how confident you are that this is the final reserve increase?

I'll do my best.

Steve, I've got some information on the California situation.

Okay.

Basically, what we understand, the loss has been pretty well kept to residential situations, and we do have some exposure on one book of business out there where we write a fair amount of residences under construction. I check as recently as this morning before the conference call. We have received one claim with a total limit on that policy of $400,000. Don't know what the claim will be. But we have some continuing exposure. If the thing continues to move and stay out of hand, but we don't think it's going to be particularly significant into the second part of that question was our catastrophe reinsurance. We reinsure all catastrophes over a $5 million retention, so our maximum net loss will would be $5 million. We don't think it's going to come anywhere close to that.

On the other questions, I guess, the next one was the accident year combined ratios and that data will be available in more detail in the 10-Ks and certainly in the year-end results, but at this point in time that level of detail is not available on the call today, but you should be able to get some additional clarification when you see our filings. And with respect to asbestos, you're correct that we've not -- did not get it right last year or the year before when we made increases, and unfortunately, we don't know exactly where this is headed. Based upon all the facts and information we have, we have tried to best forecast our exposure. We believe that we've been conservative. We believe that relative to other participants in the industry, we are conservative. Most importantly, we believe that almost regardless of what happens, it will follow have a disproportionate or material impact on our long-term results. And, in fact, because, again, this is effectively a tax of transferring money from one group of folks to another, we are in the position of passing on the cost on our clients, which is unfortunate but it is reality. And, you know, to a significant extent Markel is the beneficiary in its ability to spread a disproportionate smaller share of those problems across a larger base of current clients. We expect, though, that the asbestos problems will peak and begin to diminish and at that point in time hopefully we will have a much greater degree of comfort with what's going on.

Steve in, that regard I think you might refer back to Darrell's comments concerning the survival ratio of this -- that places on this latest increase which is clearly north, I think, in terms of survival ratios of most of the industry; is it not?

Yes, it is.

Thank you.

Our next question will be coming from Beth Malone of Advest.

Thank you. I have a couple of questions. Could you operate comment on what this current discussions are with S&P. I noticed they changed their rating, and what your comment on that. And on the book of investors business, how are the claims and underwriting people compensated or tracked for their performance and has this, the events of investors led you to change any of your positions with your other companies and as their reviews considered for some of the other companies as well.

I'll let Darrell deal with the S&P question and I'll pick up on the compen saying question, and Tony you might chime in after that am Darrell, do you want to start with S&P?

Obviously, we've had conversations with all rat agencies, S&Ps actually come forward and affirm the rating, and the change that they made was, their outlook was changed from positive to stable as it related to our senior debt. The other rating agencies, I think, are reacting in a similar way. The magnitude of the charge was, you know, probably substantial. I don't know that I would describe the asbestos charge as being a total surprise to any of the rating agencies in general terms because of what's going on in the marketplace. But the investors' issue was a surprise to us and them as well, and so we spent a fair amount of time on that, but I think we can speak to the rating agencies yourself, about it think most of them we have completed those conversations and we're looking forward there.

On the second question concerning compensation issues as it relates to the investors problem, I think there are a couple of , issues. First and foremost can our philosophy of having very significant compensation for our underwriting people based upon underwriting results is something we believe is the right thing to do and will continue to have those incentive compensation plans because it's very important, I think, to do so and it creates the right environment for people to do the right thing. Undoubtedly, there are always opportunities for people to gain the system, and potentially receive a short-term advantage, but it's always only a short-term advantage and it's clearly not a very smart or in the long run profitable strategy to try to gain the loss reserves to earn a bonus in one year that may not be deserved. Our systems are such that there are significant holdbacks and that the amounts that get forfeited end up being greater than the amounts that get cashed, and ultimately, you know, if you try to gain the system, you'll lose your job, which obviously is sort of the ultimate penalty. We believe that it's important to have people who have a great deal of ah ton any and a great deal of responsibility and believe that continuing to grant that responsibility and authority is an important part of the Markel style and we will continue to do that. Having said so, we obviously want to make sure our controls are adequate. We can clearly be second-guessed in this particular circumstance as to whether or not maybe we should have or could have reacted more quickly, but that we've reacted firmly, I think, is very apparent. So we're pretty comfortable with what we're doing on that realm, and I think we'll try to continue to do it the way we've been doing it and encourage, you know, good, honest people to work hard and share in the rewards of Markel. Tony, do you want to add anything?

Yes. You've covered most of it. Beth, the underwriting payout on this type of product, the (indiscernible) product of the investors is where the primary issue lays, is spread out over a five-year period, so, you know, we feel that -- and it's a rolling five, so we feel like that gives the company adequate protection to make sure that we don't artificially pay somebody for results that deteriorate down the road, and clearly I think it shields us from any type of manipulation, so we still feel very strongly, as Steve points out, that to pay underwriters for underwriting profit since that's our watch word, that's where the bucks ought to be, that's where the folk ought to be as it relates to controls. I mean, obviously I mentioned humility as a result of this thing. We're looking at that issue. Perhaps if we had had peer reviews more than every other year, we would have picked up on it sooner, but I would say in sort of elaborating on Steve's comment, I don't think we could have responded any quicker. We went in as soon as we saw it. We effectively started dealing with it. And it's been an ongoing project of major proportions, as he alluded to. We've got claims people from our other units that are actively auditing every file of the investors, and I really feel extremely proud about the way we mobilized once having found the problem. And we'll look at the frequency of our future audits and that type of thing.

Okay. I have two more quick questions. One is on the asbestos exposures and the issues there. Do you believe that some of the increased claims filings may be because there is pending legislation that would limit attorneys' fees if it were to be passed and they're trying to get the claims filed so that they will be grandfathered?

Steve Markel It's possible, Beth, but I certainly many not certain that that's the reason.

And then finally on the investment side of things, Tom, could you elaborate a little more on specifically where you're seeing opportunities in the equity markets in the current environment for the portfolio, what hears that you're going to focus on, and are you changing the mix of investments that -- in equities that you usually have in a portfolio?

No, we're not changing the discipline or the style. Really where you'll find us, finding our ideas. I just think that if you consider the financial services businesses and the sugar businesses that we've joked about in the past, Anheuser-Busch or companies that were known to be large holders, we continue to buy many more of the same names we've had, and I think a lot of them are pretty attractively priced, and so no change in the style or areas where we're buying things.

Has the size of the portfolio caused you to have to change some of your strategy as it continues to grow?

No. I think if I called August Bush personally he still would not return my phone call. Size does not affect it.

Okay. Thank you.

Thank you. Our next question will be coming from John Keefe of CFA Ferris Baker Watts..

I've got a couple of questions. First, a clarification with regard to operating earnings excluding the charge coming in at about $5.75 in the quarter with a sub90 combined ratio. Did I hear Darrell mention that that combined ratio is indeed sustainable?

I think, John, what we've said is that we will be targeting sort of across the board combined ratios in the low to mid-90s in this environment in order to compound 20% rate. Whether or not we can, in fact, do better than that target in the short run, you know, our guess is anybody's guess. But we clearly do want to see the numbers in the low 90s.

Well, given the trends, I guess it's reasonable to assume that all else being equal, which is a big assumption, combined ratios next year will be better than combined ratios this year.

Yes. Absolutely.

A second point, on growth, some of your EXS pierce peers are showing premium growth in casualty lines, 10% declines in property lines. Is that pretty consistent with what you're seeing and this is how we get to high single digit overall premium growth?

We're showing a slight erosion, John in, our property. I wouldn't say it's down 10%. Some of the competitors and some of the high profile property lines are in our estimation putting out major capacities without getting adequate limit charge for them, and candidly we're just not playing that game, so we are showing a slight erosion but not up to 10%. And you, know, across the board our casualty volume is increasing. In certain areas it is at 20 but more in the 10 to 15% range.

Tony, have you got a precise or even a ballpark number for in your E&S business what the split is between casualty lines and property lines?

Not really, John. Tony's comment I think was really more related to price than volume, and if you look at premium volume, your numbers were probably not far off. We are seeing growth in total premium volume in, certainly in the. UF, EUS lines for the casualty areas at 20% or greater, and premium volume declines in some of the property lines, particularly the larger areas of greater than 10%, so our overall result is similar to what you're seeing and hearing else where.

Understood. Very well. Thank you.

Thank you. Our next question will be coming from Jerry Hefenan of Lord Abbott.

I have a question regarding the numbers, the premium analysis numbers for the London Insurance Market. We're showing a minus 7% growth in the earned premiums. This is the first quarter that I can come up with where we have seen that negative compare, and I was wondering if you could help me understand what's going on there.

Darrell, I'll let you deal with that.

Yes. I think the prior year, the gross and the net and the earned, we did, in fact, incur some sort of unusual reinsurance charges in the quarter a year ago, and so the net premiums were probably a little arbitrarily or it looks, it's arbitrarily low due to that or it is unusually low due to that. In the earned premium, obviously earned premiums lag the activity and the growth of the gross line, and so I'm not sure that -- you know, I think that there's anything unusual necessarily about the earned premiums that are showing up this quarter. I think our expectation for the international business unit are still consistent with our original business plans of $700 million plus or minus in terms of gross volume and retention rates around the 80% range sore that volume will be earned in over the appropriate periods.

Okay. Just the '02 numbers seem rather odd, particularly when the earned premiums are greater than the gross written premiums.

There's a distortion in the '02 because of the reinsurance transaction that was processed last year.

Okay.

And the earnings, obviously, are coming in from business previously written, not necessarily in that quarter.

Okay. In the -- on the last conference call, in regards to the international business, we spoke a lot about personnel ads, chief marketing officer, a lot of changes in the structure and things, and I guess if we could just get a little bit more complete review of where we stand now in regards to personnel and the establishment of the platform.

Sure. We had three or four positions open of importance to us over there. You mentioned the Chief Marketing Officer, we've hired a very talented young lady who comes with a wealth of marketing experience. She's been aboard 35 or 40 days now and we're really starting to see the effects, and it's very much consistent with the outward look that they alluded to earlier and very much in time with our ability to now start really determining our stock market poke using issues, so she's aboard. We are actively recruiting for a chief claims Officer over there, which is a new position. Each of the units has its own dedicated claims team with specialists in those particular regimens. But we think that on its it's important to effectively create continuity of approach and consistency of analysis, and so we are actively recruiting for a chief claims officer. My understanding is that we've got some high quality candidates coming in from the headhunter and we should have that position filled by the end of the year. We have just recently made an offer to what appears to be a very high-quality individual to come in and run our reinsurance and accident division. We were looking for real leadership in that regard, and I think we have made a significant addition to staff, at least in the offer. Identify not heard. I have not heard, but I think that we will have a deal with that individual. So -- and with the addition of Jerry Albanese and Richy Whit at the top over there, they're within one or two positions of being fully staffed and ready to roll.

Okay. Great. Thank you. Thanks for that. In regards to the equity portion of the investment portfolio, it has moved up steadily. I think Tom outlined very much, very well his thoughts and reasons behind that. In the past you have indicated that there is probably an upward bound of where you're comfortable having the equity exposure at about 20%. Is that a -- am I recollecting that properly and is it fair to say you're at this time, given interest rates, fixed income alternatives, looking to move to that 20% level?

I think the low 20s rather than just at 20. I wouldn't think we'd stop right at 20. And, yes, gradually in an orderly and discipline fashion we've moved from 13 to 16 so far this year and would expect that to continue to be the path given the current investment environment.

Okay. And, Tom, additionally, if you do get August on the phone, I'd like to be part of the meeting.

I'll buy you a beer.

Yeah. Steve, in the past I certainly recall last year I was rather I guess uptight would be a good word when it came to the asbestos reserve increase then, and my thoughts were, can't we just bulk this thing up to one large number and just be done with it, and I guess over the year my sensitivity to this has been, well, it's just been beat down pretty poor , and I'm wondering do you guys really have control over, you know, where these reserves are going? In as much as not are you out of control in regards to setting it but just with the way the claims are progressing through courts, the way that you really -- the changes in claim amounts really don't have actuarial assumptions to put to them, you're really just at the whim of current events and there this is just going to be an ongoing thing until these things all pay off?

I think that's a good observation and it's one of the things that make the whole pro process frustrating. There are a lot of claims where we are in the driver's see seat, and can control our destiny, but when we are a party to litigation that literally involves hundreds of other insured's and insurance companies and claimants and our share is .0025%, there is really and truly not a lot that we can do to influence the outcome. We participate with attorneys representing those insurance companies that have 5 and 10 and 15 and 20% stakes, and because their interest in the claim is in the hundreds of millions of dollars where ours is in the hundreds of thousands and in some cases millions of dollars, you know, we are, in fact, very much a follower in a lot of claims. Having said that, we have what we think is the best legal representation possible. Our voice, and be we do participate in the meetings. We follow the trends and the procedures and where it's appropriate, we make sure that our voice is heard. But when it comes to being in a position to negotiate a settlement for the overall claim, we're very much at the tail end, but we monitor them and we reserve them as quickly as possible. We're certainly aware of them, and we're doing our very, very best. I think kind of the best way to sum it up is things that can't be, won't be, and this trend cannot continue indefinitely along the way it's headed and therefore it has to change.

Okay. Two last things, if I could beg your time for that. In the past we have talked about your targets for book value growth and for years it was 20%. You had started to bring that down to a 15%, given the current size of the company and the absolute difficulty in a large rate of return on a much larger corporate size; however, today you were back to talking as targeting 20% book value growth. Has there been an inflection point where you feel that we should be a 20% grower of book value here?

No, in fact, Jerry, we've always stuck to the 20% goal and never have wavered from it. Clearly, in the last several years we failed to achieve it.

Correct me if I'm wrong, you did make adjustments to the compensation plan for the executives, right?

Yes, yes.

which in essence brought the --

It changed the calibration or the scale but it didn't change the target. What happened previously is anything south of 15%, if my memory is correct, yielded a zero incentive compensation, and we thought that while 20 was the target, having a cleft at 14.99 was inappropriate, so the scale was recalibrated, but the corporate goals have never changed.

Okay. Very good. The last thing, reinsurance recoverables, they are down on a year-to-date basis. They actually picked up a little bit from June 30, '03. And reinsurance recoverables are something that are continuing to be under scrutiny and review and there's a lot of confusion around the whole topic. Can you just give us an idea of the management team there has discussed where you are with the current balance, if there's anything that you should do differently in regards to your reinsurance recoverables and perhaps why it may have stepped up a little bit here in the third quarter?

)) No particular reason for the third quarter change, and I don't believe that it was a very material amount, but we continue to monitor very closely and try to collect those balances that that are actually due very, very aggressively. A very significant component of the overall recoverables relates to estimates on claims that are not yet mature and therefore are not collectible, but those balances that are collectible are diligently followed and are reserves are I think very appropriate for the exposures that exist. So there is no particular developments that are a concern either in the quarter or in the year.

Okay. Have you noticed any change in your ability to collect? Have you been able to accelerate it? Has there been a pushback?

It's been pretty steady. And generally favorable. I mean, there have been a couple of circumstances that have been actually better than we originally estimated, but I don't think in a material way.

Okay. Very good. I have taken enough time. Thank you very much, guys.

Thank you. Our final question will be coming from Ju-ting Lee of Putnam Lovell.

I have a couple of questions p the first question regarding the cash position at the holding company level. I tried to understand how much cash is there at the holding company level and what are the short-term cash needs and any financing plans for the company? And my second question is related to the credit facility, and if you could give me some detail about the interest rates that you are paying on the credit facility and also any significant change in terms of governance for the yield, specifically compared with the old one, that would be very helpful. Thank you.

The cash at the holding company continues to be in excess of $100 million. Current cost of the new credit facility.

We'll be filing the entire facility with our 10-Q this quarter so all that informing will be available there.

Details of that will be in the Q for the entire credit facility will be filed.

Yes, generally pricing was more attractive and terms and conditions were no, sir attractive as well.

Overall we like all of the terms in the new that facility better than the old. What was your third question?

Actually, let me go back to the first question in terms of the cash position. What are the short-term needs for cash? .

Well, the most immediate need is we have some public debt maturing this week and we intend to access our credit facility to refinance that for the interim period, at least. Beyond that, there are no significant liquidity needs at the holding company level at all.

Any expected cash projection to international business or any of the operating subsidiaries in the short term.

Nothing out of the ordinary. Routinely we have to deal with funding requirements at Lloyds for the capacity charges for business going forward, those times are things are routine and order, but nothing out of the ordinary.

How much capital has been injected into the international business this year so far? Or if any.

I'm sorry. How much?

Ju-ting Lee How much capital has been injected into the international business, if any?

About $90 million earlier this year was put into the international affiliates.

Okay. Any short-term capital raising plan?

No.

If there will be any, would that be likely to be equity or debt financing?

Again, there are none, so it sort of moot. Neither I guess is the right answer to your question.

Okay. Thank you.

Thank you. Operator, were there any other questions?

Operator: We do have a follow-up question.

We do have one follow up question..

Okay

Coming from David Lewis.

Thanks. Just a couple of quick numbers if you have them. One, ...

Sorry. The line seems to be disconnected.

David. It sounds look we lost you, are you still there?

David, if you're line is still in queue, please press star 1 to enter the queue. Re-announcing David Lewis.

Hi, this is David can you hear me?

Yes.

Don't know what happened. Two numbers questions if you could help me out. One you have to preFAS book value at September 30 and two do you have available both on U.S. and international statutory capital levels and three given the rating agency action by S&P do you feel that there is any necessity to look

at boosting those capital levels?

Steve Markel Actually the answer to the first two questions is we don't have them available to share with you in this conference call, and I assume they will be available in the Q for that is going to be filed or available at year-end, one or the other. In terms of S&Ps action which was affirming our rating and I guess taking it off of cost without look to stable, we are not -- obviously, we prefer that that not happen but it's not an issue that calls for us to do anything other than concentrate on earnings more profits for the business and growing the business profitably in the future but does not call and we have no plans to raise additional capital in response to that, and I don't think S&Ps has any expectation that we do so in any event.

)) Well, on the book value question, can you give us what the unrealized gains were on the bond portfolio?

Yes. Just one moment. Actually, yes, all that will be included in the Q. The after-tax change from prior year-end, I think I mentioned earlier that the equities on a pre-tax basis increased $103 million for the year in unrealized, and the bonds decreased $12 million for the year on unrealized, a total of $91 million.

That's the year-over-year change, though, right?

That's the December 2002 to September 2003.

And you don't know what the absolute numbers are on that?

Well, you can go to the 12/31 balance sheet and do the calculation. I don't know, to be honest with you.

.

Thank you, David, and I thank all of the rest of those participating in the call today. Thank you for your support. We are dedicated to doing much better in the future, and we wish you all a very good day. Thank you.

Thank you very much, ladies and gentlemen. gentlemen, for your participation. That does conclude this morning's conference call. You may all disconnect your lines at this time and have a wonderful evening. Thank you.