Markel Group Inc (MKL) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Markel Corporation earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your phone key pad. As a remainder this conference is being recorded. It is now my pleasure to introduce your host, Mr. Steve Markel, Vice chairman of Markel Corporation. Thank you, sir. You may begin.

Thank you. I appreciate all of you who are attending the quarterly conference call for Markel Corporation. Before we begin this morning, I would like to call your attention to our Safe Harbor and cautionary statements set forth in our press release and forms 10-K, 8-K, 10-Q and 10-k. Our discussions today could be affected by the matters described in those statements. And we encourage you to read those statements carefully. As with our prior conference calls, after a few brief comments that I might make, Darrell Martin, our Chief Financial Officer will be reviewing the financial results, both for the quarter and year-to-date. Tony Markel will bring us up to date on operations and the current affairs on the markets both in the United States and in our London operations.

He'll turn the program over to Tom Gayner, our Chief Investment Officer who will discuss our investment activities and I'll wrap it up with a final comment and monitor the question and answer session. We hope you will ask all the questions you want to ask. As a brief overview, the second quarter of 2004 was very good quarter for Markel. We had great underwriting results. The businesses generated solid cash flows. Our investment returns were very solid and in the face of a rising interest rate market. Overall, we're in a great position with our current business and things were very favorable for our future. Without further ado, I'll turn it over to Darrell and he'll go over the details.

Thank you, Steve. Good morning. Before I get started, let me mention that our 10-Q with full MDNA will be available next Wednesday. So I encourage you to review that and review that in its entirety for probably more comprehensive discussion of some of the numbers that I'll be reviewing. As usual, I'll start with the underwriting results, hit some highlights on the investment side and Tony and Tom Gayner will follow up with commentary in both those areas as well. Consolidated gross premium for the 6 months was slightly under $1.3 billion, a 3% increase over the prior year. Running a little below our original expectations going into 2004. And I'm sure Tony will talk a little bit more about that, but offsetting the slightly less than anticipated growth in the top line, we are retaining more of that business for our own account. Our net retentions increased to a little over 81% year-to-date compared to a 75% retention rate for the first 6 months of 2003. So net written premiums increased about 11% year-to-date to over $1 billion. Earned premiums continue to increase as a result of the growth in prior periods and increased retentions.

Our earned premium for the first 6 months of the year is in excess of $1 billion, a 17% increase over the prior year -- the prior 6 months. The real story, as you've all heard us say before is not the top line, it's the bottom line. And our combined ratios for the first 6 months of 2004 was 93% compared to a 96% for the same time period a year ago. Included in the current 6-month period was the $30 million charge that we recorded in the first quarter and that accounts for about 3 points of our combined ratio for the first 6 months. We had improved operating results from the combined ratio perspective in each of our reporting segments in the current quarter and as Steve mentioned, had a very, very strong quarter and very pleased with the first 6 months and are extremely optimistic about the balance of the year. On the investment side, our portfolio grew to 5.5 billion compared to year-end. Approximately $136 million increase. The $136 million increase came primarily from increased cash flows. We allocated approximately $230 million of new cash into our portfolio during the first 6 months, and as I'll mention in a few minutes, that increase was somewhat offset by the unrealized loss in our portfolios through the first 6 months due to the rising interest rate environment.

I'll talk more about that in just a moment. Net investment income was 96.7 billion for the first 6 months of the year. As you've heard me say before, the larger portfolio, the impacts from the larger portfolios being offset by lower yields on the fixed income side of the house. But still 96.7 for the first 6 months of this year compared to 90.7 million a year ago. Net realized gains were pretty much flat for the quarter. And year-to-date was about $7.2 million compared to $43.2 million in the prior year. Timing of realization of gains is very volatile as we talked before, the timing is, you know when we see an opportunity, but we'll take gains but it is very volatile. The story in the current 6-month period is the change in the unrealized gains. I'm sure Tom's going to talk a little bit more about the interest rate environment today. We did rec -- have a reduction in the unrealized gains of our portfolio through the first 6 months of about $74 million. Our fixed portfolio declined about 80 million and the equity portfolio increased about 6 million. So the net is about a $74 million decline -- unrealized decline. Total return basis for the first 6 months is a little in excess of 1%. And net income for the 6-month period is $101.3 million compared to $95.3 million a year ago. Comprehensive income due to the change in unrealized gains and losses in the portfolio was 52.6 for the first 6 months of this year compared to 169.9 a year ago.

On a per share basis, our core operations, which you know we focus on is a measure of how we're doing in our core book of business, and it excludes realized gains and losses and amortization expense and any other nonrecurring type item. Core operations per share, earnings per share for the first 6 months was $9.81, a 39% increase over the same period a year ago. Realized gains added 47 cents a share in the current 6-month period compared to $2.85 a year ago. The net income per share for the first 6 months is $10.28 compared to $9.66. Offset by other comprehensive loss. So our comprehensive income per share is a little over $5 in the current 6-month period and book value per share increased from $140 a share at year-end to $145 at the end of June. A 4% increase for the first 6 months. So all in all, a very solid performance. We think the [inaudible] we're optimistic about the balance of the year. With that, I'll turn it over to Tony and [inaudible] for some operational commentary.

Thanks, Darrell. Checking in from Chicago, so I hope the weather's as good in Richmond as it is out here. As Darrell just summarized, the second quarter was really terrific by virtually every measurement. It reflects the continuing positive underwriting environment on both sides of the Atlantic and couples in continued improvement in Markel International, as well, as along with the constant maturity of our U.S. operations. You know, you mentioned all the gross premium volume was up marginally for both the quarter at 2% and 6 months at 3%, which you know, accurately reflects the softening of the marketplace. I think it's absolutely noteworthy that our written net premiums were up 9% for the quarter and 11% for the 6 months, which is very much continuing consistently with our confidence and our ability to produce underwriting profits and our push to retain more of our business. As you well know from past conversations, we are truly a net lined writer, an underwriting and take use reinsurance only when necessary so our nets will constantly be under scrutiny and continue to rise.

The combined ratios of 90% for the quarter and 93% of the 6 months reflect the cultural focus on the production of solid underwriting returns and continued improvement in our international results. In spite of the well herald pressure on rates primarily in the property, aviation and energy sectors, we still believe all of our rates are at levels that can produce our targeted combined ratios, however, these are being monitored closely and we won't hesitate to walk away from business if they drop below acceptable norms. As a matter of fact, in the aforementioned 6 month volume figures, it's about a 6% overall reduction in our property production, which really underscores our unwavering commitment to the rate adequacy and the fact that that particular line seems to be frankly, illogically, but seems to be the most of the white hot marketplaces right now.

During the second quarter, we took the opportunity to dramatically strengthen our human resources with several important significant additions to staff. Glen Curley, the new President and Chief Operating Officer at Investors came aboard a couple of months ago. This is an all important position and in Glen, who comes with a solid understanding of Markel and its culture, is a result of his past positions with some of our core reinsurers. We have an individual who will unquestionably lead this talented group to bigger and more profitable heights. The new President and Chief Operating Officer of the Essex Insurance Company, Brad Dickler, has been with Markel for over 20 years and as Executive VP of the Essex for the last 10 has overseen and been instrumental in its outstanding growth and profitability. In addition, as I reported last quarter when John Latham agreed to take over the responsibility for Corporate IT it created a void at the helm of our newest division, Markel Re. I'm pleased to announce that we have used the opportunity to add solid talent and maturity to our team with the hiring of Ruffin Branham as President and Chief Operating Officer of that division. Ruffin's a 35-year veteran of the industry, brings tremendous strength and experience most recently as a managing partner of risk management consulting at Palmer and Kay, a large southeastern brokerage operation.

I mentioned during the last quarter's teleconference that the slowdown from sort of the white hot continually growing hard marketplace that we'd experienced over the previous 3 or 4 years has enabled us to really have time to focus on some of the fundamentals and get back to the basics. Most notably marketing. A couple of examples of that is I think you will see a dramatically increased advertising presence in the U.S. under the sort of an internal label of brand sync where we are attempting to create a higher degree of visibility with both our retail and wholesale partners as it relates to our financial strength, our broad base of products, our willingness to solve problems and just trying, frankly, to create a higher name identification in the marketplace. In addition, about 9 months or a year ago, we hired a full-time and outstanding marketing director in London with 1 of the objectives being a conscious attempt to dramatically increase our profile in the London marketplace and anybody that's been in London in the last 6 months, I think, will clearly agree that we are much more visible in that marketplace. And both of these initiatives, we think, will help us provide a toe-hold as we face this softening market environment.

In summary, and I'll obviously be willing to answer questions when the Q & A comes about, but competition in the marketplace is unquestionably heated up, although, I really wouldn't characterize it as stupid yet. We've given up some rate ground, but right now, the rates still seem to be reasonably solid and as I indicated in my earlier remarks, we feel that all of our rates are still consistent with our targeted combined ratios. Needless to say, regardless of where it goes from here, you can rest assured that our focus remains steadfast on underwriting profits and we will not compromise in that regard. Obviously I'll answer any questions later on. With that, I'll turn it over to Tom Gayner to give you head's up on the investor side.

Thank you, Tony. Volatility is a word that we often cite when talking about investment returns and it's commonly talked about in the investment world usually when things are down rather than up, but this clearly was a quarter when there was volatility and it was a downward sort rather than the upward sort. The head winds were largely rising interest rates which directly affect the value of the bond portfolio and also create a bit of a challenging environment for equity. Year-to-date, the fixed income portfolio produced a positive return of .5% and the equity portfolio produced a positive return of 1.9%. Over the last 12 to 18 months, roughly, on the fixed income side, we have had a shorter duration in place. Right now it's right at about the 4-year level which is the shortest we would normally go. Keep it within the bandwidth of 4 to 5 years because the philosophy there as we're trying to match off roughly the duration that we expect our insurance liabilities to have.

And we try to temper that only by common sense or degrees of confiction about interest rates in general and clearly we've been concerned about the possibility of rising rates for sometime. So we're at the short end of our range. As Tony and Darrell alluded to, our book has been tilting towards the casualty side of the business. Normally to keep that matching in place that would cause us to lengthen durations of the fixed income portfolio. But again, we've kept it short despite the fact that our book is moving a little bit because we think that's the appropriate way to deal with a rising interest rate environment. We also maintain very high credit quality. We're not in the business of going out at the far end of the curve to try to take credit risks. On the fixed income side and we're also balanced relatively equally between muni's, governments and corporates. The emphasis again really going back over the last 12 to 18 months probably putting a little bit more in the municipal portfolio given the development of underwriting profitability. That's the area that makes the most sense for us.

Finally, on the fixed income side, also in keeping with our conservative philosophy, we do attempt to match the currencies as best as possible. Where we'll own foreign bonds in proportion to the extent we have foreign liabilities on our books. On the equity side, as always, we're maintaining our long-term value-based investment discipline which has been so successful for many years. To remind you it's a bottom up one-by-one process where we focus on profitable businesses run by honest and talented managements that have reinvestment opportunities or capital discipline and seek to buy those at a fair price and hold onto them. At this point, equities represent roughly 19% of the portfolio. That's up a percent from year-end and it's a continued gradual and I stress the word "gradual" increase in equity ratings. I think there's a reasonably good opportunity set out there to put money to work. Couple that with the growing profitability of the business and growing capital strength, we have a lot of room available to us to add additional equities should the target set get richer and we see more things that we wish to do more rapidly in terms of increasing net equity rating. With that, I'll be happy to answer any questions and turn it over to Steve.

Thank you, Tom. Make a few comments before we open the floor to questions and answers. As you all know, the key long-term driver to Markel's success is consistent underwriting profits and superior investment returns to build shareholder value by compounding book value at a high rate over a long period of time. Our underwriting margins today are at wonderful levels with a year-to-date 93% combined ratio. We believe they will continue to get better. We continue to have opportunities to improve the margins in our London operations and we'll continue to fight tooth and nail to hang on to the margins here in the States. Our investment leverage in June is 3.8 to 1 for every dollar of capital. We have $3.8 in the investment portfolio which is posed -- poised to earn great returns over the long-term. At the end of June our book value per share was $145.44. It's up a bit from year-end, down a bit from March. But with the combination of sound underwriting and superior investing, we're confident that we will compound this book value at a high rate over a long period of time. And with that, I'll open the floor to your questions.

Thank you. 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 star 1 on your telephone key pad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. Participants using speaker equipment, it may be necessary to pick up your hand set before pressing the star key. Our first question comes from Mr. Matthew Heimermann with Goldman Sachs. Please state your question.

Good morning, everybody. 3 quick questions. First, for Steve or Tony, I was wondering if you could just take a step back from the quarter for a second and talk a little bit more about Markel Re, which outside some of the management changes we haven't really heard a lot about as well as some of the ART efforts that you have under way to get us an idea of the some really success stories there. I also was hoping that Tony could talk about Lloyd's specifically and whether or not you felt like some of the changes that have been implemented there over the last couple of years are having an impact in terms of how that market adapts to, you know, some of the competitive changes and pricing changes. And then, finally, I was just hoping Darrell could let us know whether or not there were any changes to reserves favorable, prior year reserves positive or negative and also if you would characterize the property results in the quarter as benign or not?

Tony, why don't you take the first 2, Markel Re and Lloyd's and then Darrell will pick up on the lost reserves.

That'll be great. Thanks. Markel Re is an interesting play for us. It's really multi-faceted. We started off with the concept that Casualty Fac and Facultative, in general, had all of the components that we hold near and dear in terms of control of individual pricing and risk selection by our own underwriters and really is sort of a hybrid excess and surplus lines placement. We didn't expect it to be hundreds of millions of dollars and we went into it with our eyes wide open, but the fact of moderate -- moderate size. But that segment of Markel Re is going to be roughly $10 to $15 million of very profitable casualty premium this year. We've got some solid underwriters, and it has all of the sound precepts that we're looking for. So it was sort of a neat expansion for us.

It now embodies, Markel Re, now embodies about a $25 to $30 million sort of bread and butter umbrella book that is of smaller size and smaller risk that is generally not under attack when the larger umbrella business becomes more appealing to competitors, so it's pretty stable and is a very, very solid platform for Markel Re, but as you mentioned, probably, the platform that has the most potential at Markel Re is the alternative risk side. It's a large segment of the marketplace and continues to be regardless of whether the market is hard or soft. And Roger Greiner and his team who had most of his experience at General Re and a very lengthy tenure there we think we've got extremely talented individuals who understand the business. We are being very, very selective. Our objective is not to provide the ancillary services or anything of that nature, although obviously we put it with the entire package together. Our objective is to produce solid underwriting profits with the business that we retain on the accounts that we've written and right now, Roger and his people have written 4 or 5 accounts in, I guess, 15 months or so that they've been with us with a total volume to us in the neighborhood of, I'm talking off the top of my head, but $50 or $60 million. We think it's a great start. We're very selective. We don't have to produce a half a billion dollars in that to be meaningful. We really think there's some tremendous opportunities, particularly with our growing profile in that regard and Roger's experience. So those 3 components make up Markel Re. It's not a reinsurance plate per se. It will not get into treaty business. It is strictly consistent with sort of our individual risk pricing and selection, excess and surplus lines approach. So I hope that sort of gives you an overview of the Markel Re platform.

Lloyd's, I'm afraid I disappointed them when I was invited back to speak in March because I didn't have a heck of a lot of controversial to say. I am very, very gratified with what is taking place over there under Lloyd Levine and Nick Prettejohn. There is a lot of work to do, particularly on the business side with regard to continuity of wordings and getting policies out on time and, you know, joining the 21st century relative to service. But as it relates to the steps that they've already taken, to provide true business oversight and solid oversight on what the syndicates are doing to try to maintain profitability in the marketplace, and frankly, just staying those syndicates that would step out of bounds, I'm really gratified. You know, the proof is in the pudding. There's still a lot of work to be done, but I really do feel very strongly that their selection of Ralph Talla (ph), who I think is a very strong, committed individual is going to pay dividends in terms of overseeing the syndicates, keeping the syndicates from getting too far afield and all kinds of areas from overwriting to over-dependence on reinsurance, to pricing, risk selection, and we're really seeing the first vestiges, I think, of some strength coming out of that. As a matter of fact, they turned down applications for 2 or 3 new syndicates that they felt did not have fundamental platforms that would enable them to distinguish themselves from the marketplace enough to assure success. So in general, you know, the jury's still out. There's a lot of work left to be done but I am greatly encouraged by what I see coming out of the center with backing up what has always been sort of verbiage, but backing it up with actions in terms of wanting to assure a solid underwriting platform.

Perfect. Thank you.

Darrell, you want to -- I hope that answers your question, Matt.

That was great, Tony.

Darrell, you want to pick up the third one.

I will. I think your question was there any unusual reserve movements in the quarter. The short answer is no, there were not. You know, when we sit down and go through our quarterly reserve reviews, we're looking at it from the perspective of making sure our balance sheet is solid and the reserves are set at levels that are more likely redundant than deficient. The quality of the balance sheet is every bit as good today as it has been in the past, probably stronger. So as a result of that process, there were no unusual prior-year movements, you know, recognized in the quarter.

And then would you characterize the property experience you've had to date as benign, similar to what the rest of the market has kind of felt, just a lack of really any unusual large losses on the, you know --

You mean the catastrophe being benign?

Not only catastrophes but even just amongst --

Yeah, I mean property's -- property's been pretty good. Of all of the product lines out there and obviously we represent a broad span of diversity in that regard, I would tell you that much to my amazement because of the lack of any potential investment on that side, the property rates seem to be the most under the microscope and under attack.

Thank you very much, everybody.

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

Good morning. Tony, I'd like to keep you in the spotlight for a minute, if I could. Would you maybe spend some time comparing/contrasting the market environment in your E&S segment versus your Specialty segment. Rather flattish growth in E&S, but outstanding margins. It looks as though you are seeing much more opportunity to grow premium in the Specialty markets, Specially Admitted, although that's a relatively smaller segment of your overall book. I'm just wondering if there's something going on there, different competitors, just different opportunities, maybe distribution that may be sorting of accounting for that.

Well I think there is a contrast. Although both of them are obviously affected by the general state of the marketplace, but the contrast I would give you is that primarily, you know, the excess and surplus lines area clearly is, and always has been, a safety net for the standard markets taking opportunistic views of things that are being eschewed by the standard marketplace and to the extent that the market becomes more competitive in general, surplus lines obviously has impacted to the greater extent. When you look at our Specialty environment, even though rates are trending downward or at least flattening in virtually every area, and niches are so narrow in focus that they themselves don't necessarily invite competition. You know, we are, if you look at Markel Insurance Company, which is program rating and summer camps and day cares and schools and martial arts and everything, a lot of those segments, you know, I'm not suggesting we don't have our share of competitors there, either. But a lot of those sectors, let's take summer camps. It is a class of business that demands specialization and therefore I won't say it's totally insulated but I think it is somewhat more insulated from the vagaries of the marketplace than our broad-brushed excess and surplus lines categories. Does that sort of contrast -- I mean, does that answer your question?

Yeah. I mean, your experiences in both seem to mirror what people I call respected competitors. I'm just sort of -- it's just sort of interesting how the dynamics are slightly differently -- currently as we sort of --

And they really do play to 2 different constituencies. They are affected by the changing marketplace in different respects. When the market heats up and gets hard, clearly, the opportunities in the Surplus lines feel are far greater than they are in the Specialty Admitted area because it's much more steady.

Okay. Terrific. Just a quick question for Tom. You talked about sort of you've got some sort of a target set. Where we sit today in terms of the marketplace, are you sort of on the sideline right now in terms of equities and just sort of waiting for valuations to come back in to where you'd like to see them or are there opportunities that you are just sort of that you plan on acting on maybe in the next couple of quarters as cash kind of comes in the door?

The way I would categorize that is that last year I had my foot on the accelerator all the way down to the floor. We were putting a lot of money in the [inaudible]. I've taken it halfway back up. It's still on the accelerator, not on the brake. We did put $100 million roughly into the equity portfolio through the first 6 months and I continue to find the steady sort of things that I look for because again, we're not trying to make big market timing bets or valuation bets. We try to have common sense about that sort of thing, but the more important thing is to find companies that meet those categories, those characteristics that I laid out and to be able to buy them steadily and dollar cost average and sort of mathematically give yourself very high odds of having a pretty good average price in your holding over a long period of time. And I think the market being what it is and the profitability of this company in the growing capital strength being what it is, that does give us the opportunity to step on the accelerator a lot heavier if the -- if we were presented with that sort of environment. And whether we will or not is your guess as good as mine. But until further notice it's steady as she goes.

Most of the hundred million that you put to work in the last quarter, was most of that in names that you already had some position in?

Largely.

Terrific, thank you.

Got some new things to do as well.

Good. Good, good.

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

Good morning and congratulations on the quarter. I have a couple questions. Tony, in the past, obviously, a focus of these conference calls and the earnings volatility has been on London, and this time it seems like we haven't discussed London quite as much, I guess. Do you feel at this point that London is no longer a fixer-upper, but now you've got it stabilized and that that combined ratio of 100 really reflects your level of comfort and the business you've got on the books now and the reserve levels that you've established over there?

Yes. I mean, simple answer, Beth, we really feel good about the platform, the leadership we have over there with Gerry Albanese and Richy Whitt has just melded beautifully. The culture has been virtually 100% inculcated. The results, we just feel extremely good about the situation over there and the continued improvement reflects it.

Okay. And as you look out on, you say you are seeing some pricing competition. I mean, do you -- is there any indications that were -- you are going to envision a softer landing kind of cycle downturn that doesn't -- isn't similar to in the past and what factors are different today that might make the cycle change different for at least for the exposure that you --

Well, if there's a God in heaven, there'll be a softer landing. You know, let's face it. History would indicate that maybe that's not the case. I still have a high respect for the change in leadership in the industry, the consolidation in the industry over the last 10 or 15 years, I think, has taught us some lessons. Obviously, there's some financial scars out there and so forth. So as I look at the -- as I stand back and look at it, intellectually, I really believe that when people say we can't allow these returns to just drop out of sight again that I really believe them. The proof will be what happens, but I'm optimistic. But, you know, history would tell us that maybe my optimism is naive. We'll just have to wait and see.

One last question. In the past, when we've seen, you know, when the industry's gotten competitive, and you all have chosen as always to be disciplined, you are not writing as much on the top line, there tends to be some -- you build up your excess capital in the company and that creates an issue of what to do with it. And historically, you've been an acquirer when the cycle slowed down. Do you think that will be the strategy as the pricing cycle starts to come off and you right less on the top line?

I will turn it over to Steve in 2 seconds to sort of talk about the acquisition appetite, but I'll say that we've still got some solid drivers in spite of my remarks on cas -- on property. Casualty still seems to be showing relatively nice increases, certainly if not the numbers that we were posting in terms of double digit increases over the last 2 or 3 years. The question that Matt asked me earlier about the alternative risks. That's a brand new operation, so we've got nice growth potential there. Our professional liability lines are still showing decent increases and growth over prior years so we're not devoid of volume drivers but as you know, we're not going to force the equation and we will take what the market gives. My perspective, and I'll let Steve add to it, relative to opportunities that are not necessarily organic growth opportunities. With our visibility particularly in North America virtually no specialty market opportunity be it an agency that has a specialization or a company divesting itself of some sort of program or whatever, we're looking at a lot of that stuff, most of it unfortunately does not muster to our underwriting standards but we're getting a look-see at a lot of stuff. And, you know, I don't think we would be opposed to adding to our product mix or the existing product in terms of new products or obviously we're not or adding to what we're doing in any sort of form of reasonable acquisition. But Steve, you might address it from the balance sheet perspective. We clearly have the ability and the willingness and the capital and the people to take advantage of acquisition opportunities that might come down the road. I suspect that if the pricing environment does, in fact, continue to deteriorate, there will be more opportunities, not less. You know, our preference would be just to see the current pricing environment be stable and continue to get inflation plus rate increases. That's not an unrealistic scenario. I think it's fair to assume that anything that's on the market and is available for sale in our niche, we're probably already getting a look at. And we'll continue to. We have lots of different arrows in the quiver to manage the business going forward to continue to build book value and grow and develop the book and business and we'll take advantage of all of them.

Okay, thank you.

If there are any further questions at this time, please press star 1 on your telephone key pad. Please keep in mind if you are using speaker equipment, it may be necessary to pick up your hand set before pressing the star key. Our next question comes from Mr. John Keefe of Ferris, Baker. Sir, please state your question.

Hi, guys. Good morning.

Good morning, John.

I've got a question for Tony to the extent, Tony, the competition is heating up. Can you describe its source, that is would you say it's capital from Bermuda, maybe some of the new E&S start-ups or the standard markets?

Well, I don't think the standard -- the standard markets are defining their appetite. Obviously, you know, the merger of St. Paul Travelers and everything sort of changed that playing field. So as it relates to the competition that we're experiencing, I do think it's coming more from the -- from sort of the specialty side items I've characterized. It seems in our little corner of the world, it seems to be emanating amazingly to me with most intensity out of the property area and it's, as I was telling my associates yesterday, it seems to be a willingness of the marketplace to put out dramatic capacity individually, companies putting out tremendous property limits obviously supported by reinsurance blocks that I would characterize as getting far less premium for the risks than they were before when -- than it was before when there were layers necessary in order to achieve some of these property limits. That's probably the most noteworthy change right now, Johnny, is in the property area.

Tony, I guess you just described one of the bigger players in the market. What about some of the new entrants? The new capital? A lot of fingers have been pointed alternatively Bermuda or you know, some of the new players. Do you see pressure coming from there?

Well, they're a factor, no question about it. And our only hope is they don't get too carried away with this message of no legacy issues and everything else and drive rates for themselves and others down below reasonable. You know, they clearly the Bermuda start-ups are a major force in the marketplace and are not without their issues as this market continues to go forward.

I think, you know, it's safe to say no one place that we would point our finger has someone been particularly crazy and even if it were in this case, we probably wouldn't want to talk about it on a conference call. The easiest way to answer that question would be simply to dig into all of the press releases that are coming out this week and last week and next week and [ inaudible ] Ask the question why are they so lucky.

Yeah, right. Thank you. Kudos for walking away from underpriced business. Not chasing the market down.

Thanks.

Our next question comes from Mr. Dave West with Davenport. Please state your question.

Good morning. I guess 2 questions. One, Tony, I wonder if you comment a little about what you are see in pricing primary layers versus the reinsurance market. We're hearing maybe the reinsurance market seems to be reasonably disciplined thus far. Then maybe secondly, Darrell, some comments on the reinsurance recoverables, any substantial additions to reserve there? Just general comments about that asset. Thank you.

Dave, I think that's probably an accurate characterization. It's a little hard to generalize given the number of different categories we're in because of the vagaries of each, but I think in general, the slowdown in the price market or shall I say the increased competition in pricing is coming primarily from the nets of the issuing carriers as opposed to irrational behavior on the part of the supporting reinsurers. I think reinsurers, in general, are behaving pretty reasonably and pretty rationally. So to the extent that rates are being attacked with any vigor, I think primarily those reductions are coming out of the nets.

Okay.

Darrell, you want to talk about the --

Sure, Dave. The balance is both on paid and unpaid recoverables. You know, during the first 6 months of the year, we probably reduced those recoverables by about $75 million in the aggregate. We routinely go through and review our exposure to reinsurers both on a unit basis and on an aggregate basis across the corporation. And based on our exposure to those additives and based on the collateral that we hold to secure balances, we make determinations on the unsecured portion of the exposure, you know, a reasonable allowance or a judgmental allowance, if you would. You know, we do that routinely on a monthly and a quarterly basis. Nothing unusual happened in the quarter relative to our view of collectibility there at all. So it's sort of a quiet quarter relative to that.

Great. Thank you very much.

Our next question comes from Mr. Edward Barr with ESR and Company (ph) . Sir, please state your question.

Tom, I have a question concerning the fixed income portfolio. What percentage of the portfolio rolls off over the next 12 months and at what yield? And what yield are you getting on incremental purchases?

I don't have those kind of numbers in my fingertips. I would guess with a 4-year duration on the order of 20% or so, rough, rough, rough would be what would roll off. If you go back to rates in 2000, which are, you know, '98, 2000 or so the stuff that would be rolling off and compare those rates with today, I would suspect but I'm really just thinking out loud here that it's probably still a rolldown in the rates at this point.

Thank you.

Gentlemen, there are no further questions at this time.

Thank you very much. This is a closing comment. I'd like to thank all of you for your loyal support of Markel and your participation in today's conference call. If in the future you need any further information, do not hesitate to pick up the phone and give us a call. Again, we're very pleased with a solid quarter and look forward to many more in the future. Thank you very much.