Markel Group Inc (MKL) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Markel Corporation third-quarter 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. (OPERATOR INSTRUCTIONS). 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, Megan (ph), and thank all of you for joining the third-quarter Markel Corporation conference call.

Before we begin, I would like to call your attention to our Safe Harbor and cautionary statements set forth in our press release and Forms 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.

Yesterday afternoon, we released our third-quarter financial results and we are very pleased with the way things have unfolded in the third quarter. As we have previously announced, we established $80 million in pretax reserves for the four hurricane losses earlier in the quarter. Those estimates are holding very good and the numbers in the quarter are the same as we had previously forecasted.

During the quarter, we have also -- have a positive benefit in that our 2000 tax year rolled off an open status and to a closed status and on evaluating the reserves for taxes, it became apparent that we could release $22.5 million in tax reserves, which occurred in the third quarter, and we're pleased to have that benefit flow through and as is always the case, we try to be conservative in making estimates. There's another example of our doing so.

The core underwriting profits for the quarter were very strong. There were no real surprises in any of the areas, and we're very pleased with the way the quarter has unfolded. We completed our review of the asbestos and environmental reserves and while the environment for asbestos and environmental claims is certainly no better today than it was 3, 6 or 12 months ago, we are very pleased to report that our reserves are continuing to demonstrate that they are appropriate for the exposures that are outstanding.

Finally -- and Tony will talk about this more in a few minutes -- we are continuing to experience a softening of the marketplace in general terms. Our volume is slightly less than previously forecasted, but we will continue to maintain our underwriting discipline. As a result, we expect to hold on to good margins throughout this cycle.

With that, I would like to turn it over to Darrell Martin, who will review the financial numbers for the quarter. After he is through, he will pass it onto Tony and then Tom Gayner, our Chief Investment Officer, will speak. Darrell?

Thank you, Steve. Good morning.

Before I get started, let me just mention, again as usual, that our 10-Q will be filed next Wednesday and the full Q will be available with the MD&A, etc., at that time.

As usual, I'm going to focus primarily on the year-to-date results, making reference to items that might have occurred within the quarter but in the context of year-to-date total results.

First of all, let me start with the underwriting activities. The consolidated premium volume for the nine months ended September 30 was $1.9 billion, flat to the gross premiums written a year ago. The result of that flat result is a little different depending on which reporting segments you look at. The E&S segment is down very slightly, due to a decline in property volume as well as the re-underwriting activities that have taken place at our brokered E&S operations. Specialty Admitted is actually up year-to-date and they continue to benefit from pricing increases, etc., so their volume is up a little bit. (indiscernible) is pretty flat with their results in '03 as well. So, flat volume through the first nine months and obviously, for the year, we expect it to be flat or perhaps even slightly down for the 12 months ended in December.

On a net written basis, we retained more of the business that we did write. We retained approximately 1.6 billion of premium -- (technical difficulty) -- that's been a 7 percent increase compared to the prior year. Our retention ratio increased to about 82 percent from 76 percent a year ago. Again, that's a trend that we've talked about and identified in some prior quarters, and that's a result of both the mix of business as well as treaty changes and increasing retentions for (indiscernible) account.

On an earned basis, we have earned premiums of slightly over 1.5 billion, a 15 percent increase over the prior year. Again, earnings will lag volume growth and this is as a result of increasing premium volume in prior periods primarily.

The real story for us as usual is the combined ratio, the underwriting profitability. For the nine months, we reported a combined ratio of 97 percent, compared to 101 percent a year ago. As Steve mentioned in the number in the current quarter, we incurred approximately $80 million of net losses attributable to the hurricanes. That accounts for about a 15 percent impact in the quarter-combined ratio of 106 and year-to-date, it accounts for approximately a 5 percent impact on our combined ratio.

In addition, as you recall, in the first quarter, we had a $30 million charge in our international operations, so in total, embedded in our 97 percent combined ratio in the current nine months is about 7 points of hurricane and other adverse development losses. That compares to a 101 combined ratio a year ago, and again, a year ago, that number included approximately 105 million of charges that we took in the third quarter, and so on an apples-and-apples basis, we really have core book of businesses showing an improved combined ratio of about 3 points year-over-year -- very, very strong performance and we're very pleased with that.

On the investing side, our portfolio has grown to in excess of $5.9 billion at September 30, approximately a $600 million increase in the first nine months of the year. Most of that growth is coming from cash flow from operations, approximately $500 million of cash flow generated from our operations, primarily the balance of the increase in (indiscernible) from financing activities that occurred in the third quarter, so very, very strong portfolio growth and well within our expectations.

On the net investment income was approximately $148 million compared to 137 million a year ago. Again, the same story -- our portfolio growth is being mitigated to a certain extent by lower yields in the current period compared to prior periods.

Realized gains for the first nine months was (sic) $6.9 million compared to 35.8 a year ago. Again, the timing of realized gains is highly variable and timing is uncertain on those, so the 6.9 million in the current quarter. The year-to-date change in unrealized gains and losses was an improvement of 12.7 million in the current quarter -- or current nine months -- compared to year and primarily from bonds of about 10 million and equities of 2 to 3.

So our total return for the first nine months was about $168 million and as a percentage, it's about 4 percent on an annualized basis, on a (inaudible) basis. So that compares to 7.5 percent total return a year ago, and the biggest difference being the change in unrealized market value of the portfolio year-over-year.

Net income for the first nine months was $115 million. Steve mentioned that, during the third quarter, our 2000 tax year was closed and as a result of the review of our held tax liabilities, we determined that we thought that those liabilities were less than what we held by $22.5 million. Based on the nature of those differences, or provisions, $4 million roughly of that was a P&L benefit because it originated from P&L items that had been recognized in prior periods, but the majority of it -- 14.7 million -- was related to items tied in with the acquisition of Mint (ph) in 2000. As a result, that balance was used or offset or reduced to goodwill in the current quarter by $14.7 million. The balance, 3.7 million, related to options that pertained to option plans or programs that had expired in prior years and some tax benefits that the Company ultimately realized as a result of those option activities. GAAP requires that that benefit of 3.7 be reflected as a direct addition to additional paid in capital. So the P&L benefit was 4.1 million, goodwill was reduced by 14.7 and additional paid-in capital was increased by 3.7.

From an effective tax rate perspective, due to the lower income that we are anticipating from the hurricane losses for the entire year, our effective tax rate is judged to be approximately 29 percent for the entire year, so our effective tax rate in this quarter was adjusted to reflect that 29 percent, and that's what we are anticipating for the fourth quarter as well.

On an Earnings Per Share basis, you know that we focus on core operations as a key measure of how we're doing. Core operations is defined as earnings exclusive of realized gains or any other nonrecurring items. For the first nine months, we reported core operating earnings per share on a diluted basis of $10.80, compared to $5.90 a year ago, most of that increase originating from improved underwriting results, clearly. The nonrecurring item was the tax benefit that we recognized in the quarter; that was 42 cents, and realized gains added 46 cents, so our total net income for the nine months is $11.68 per share.

Book value per share, which is the focus that we have to meet our financial goal -- shareholders' equity increased in excess of $1.5 billion and on a per-share basis, approximately $153.00 per share, a 9 percent increase over the $140.00 a share at year-end. So again, we're very pleased with the results.

With that, I will turn it over to Tony to make -- add some commentary relative to the operating side of the house. Tony?

Thanks, Darrell.

Darrell has just given you the broad overview. Obviously, the third quarter was the epitome of a bad news/good news story. The bad news is the fact that we lost a projected $80 million on the four hurricanes in Florida, emasculating what could have been another outstanding quarter headed for a record-breaking year. The good news was the fact that we were able to digest that loss and still show core operating earnings of approximately $10 million. The resulting 6 percent underwriting loss for the quarter still only elevated our year-to-date combined ratio to 97 percent. Although the gross premium volume was down marginally for the quarter, compared to the third quarter last year and flat for the nine months, the net written premium for the nine months is up 7 percent, reflecting not only the leveling market but more importantly, our strategy of increased retentions and reduced dependence on reinsurance.

Markel has never been in a better position. Our culture has been totally embraced in London, leadership at all of our subsidiaries has experienced focus and is firmly in place, and in spite of the flattening rates, especially insurance sector, has never been more visible or important. In addition, as I had previously indicated, with the transition at Markel American now complete, we can focus on expansion of products, people and presence.

Although there's nothing to report at this time, we continue to get a look-see at individuals, teams and potential acquisitions that could ultimately broaden our base of offerings.

I can also report, consistent with our original game plan for Terra Nova as a platform for international expansion, Markel International is currently considering branches in a couple of European Union countries as well as Canada.

The general Property and Casualty marketplace continues virtually unchanged from our last report, still reflecting a somewhat softening in Property, aviation and D&O, along with moderate inflationary size increases on other Casualty lines.

The good news is that rates seem to have stabilized in that position over the last 90 days. The bad news is that I would have expected some more aggressive response to the 20 to $30 billion hit from the hurricanes, although admittedly it's still early and I'm optimistic that this wake-up call will be heard, particularly when you consider that it could have been a whole lot worse if the paths of the four storms had been different.

Speaking of the hurricanes, given the fact that there were four separate events of consequence, we feel that the $80 million loss that we sustained is testimony to our disciplined, conservative approach to CAT management, particularly when you consider that we had a broad base of exposures written on both sides of the Atlantic, including Caribbean properties, Florida and Gulf Coast properties, yachts, offshore rigs and some property reinsurance.

I can't close without commenting on the ongoing Spitzer investigation. Although limited, we still have an involvement in incentive commissions but suffice it to say that we are absolutely confident that we were in no way involved in any price-fixing, any bid-rigging, or any of the other illegal activities alleged in the Spitzer suit. In addition, the vast majority of our agreements were with underwriting managers and are driven and dependent on profitable underwriting results by these surrogates. We feel the agreements we have are appropriate for our business and in no way were disadvantageous to any of our insureds.

I told you I was going to be brief but in closing my remarks, we took a disappointing hit to what would have otherwise been a fabulous quarter, and I hope you can detect my enthusiasm for our position and potential profitability, going forward.

With that, I'm going to turn it over to Tom Gayner for the investment side and obviously we will be more than happy to answer any questions at the end of that. Tom?

Thank you, Tony. I will be brief in my comments as well.

Darrell gave you the quantitative numbers as to what went on in the investment portfolio, so I will speak from the qualitative side just a bit. I would qualify the year as basically a steady-as-she-goes for the year. We earned the coupon in the fixed-income portfolio. There was a nice recovery during the third quarter as interest rates -- which had gone up during the second quarter -- went back down during the third quarter. So, we are earning the coupon on the bond portfolio. It remains very high-quality with more than 92 percent of the portfolio being rated single-A or better. We're also keeping our duration a little bit on the short side, closer to four years, within the four to five years that we would normally operate, because I remain concerned that interest rates would likely be higher rather than lower, so we want to protect the balance sheet in that case.

Equities, a similar small single-digit return of about 2 percent year-to-date -- flat in the third quarter. Roughly 18 percent of the portfolio is in equities right now and 82 percent in fixed income. We continue to gradually, steadily and repeatedly invest into the equity portfolio and buy securities that meet the test of what we're looking for. I see plenty of opportunities to continue to do that.

So with that, I will turn it back over to Steve. Steady as she goes on the investment side.

Thank you, Tom.

Before I open up for questions, I would like to pick up on a point that Tony made in his comments when he said, Markel has never been in a better position. This is absolutely true but more importantly I think, we are not resting on our laurels. The remain committed to the Markel style and to building the strength of the organization. Our financial goals to earn consistent underwriting profits and superior investment results to build shareholder values continues to be at the heart of the Corporation and something we will continue to focus on.

We are very pleased that, at September 30, book value has grown to $153 a share, up 9 percent year-to-date. We continue to focus on building the value of (indiscernible).

Thank you very much for your support. At this point in time, Megan, I'll ask if you can open it up for questions.

Thank you, sir. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS). Matthew Heimermann from Goldman Sachs.

Good morning, everybody. I had three quick questions. I'll just -- (technical difficulty) -- for you all. First, for Darrell, in the press release that alluded that reserve development was better this quarter than prior quarters -- and I didn't know if you were suggesting that there was a lack of unfavorable development or that there was, in fact, some favorable development in the quarter as well.

Secondly, Tony, maybe could you talk about, specifically from a product standpoint, what -- you know, as you look forward, are there any products you'd like to add or any initiatives that you'd like to add, particularly in light of potentially on the international side, expanding the area in which you do business?

Then finally, I guess are there any ramifications for your distribution or changes to distribution from what's going on with the NYAG probe?

Tom, do you want to handle the first one?

I think the development numbers that are referred to will be detailed in the quarterly numbers, in the quarterly -- the 10-Qs. As Darrell mentioned, they were modestly favorable, compared to the prior period, but nothing unusual or material or out of the ordinary.

Tony, you might comment on the international question and then I will follow-up with a finalized with the AG's issue (sic).

Okay. Yes, you know, obviously, I'm very, very bullish about our ability to attract new people, teams of people, and take a look at expansion opportunities. It's the first time in quite a while that we haven't had a Terra Nova assimilation issue and that type of thing, so we are very bullish. Clearly, organic growth at this stage is difficult because the marketplace has settled down somewhat, but I think the way we are sort of looking at expansion differs between domestic and international.

On the international side, there's such a big arena that we're not really drawing from that I don't think you'll see us be particularly product-expansive. I think you'll see us be more geographic-expansive. I mentioned looking at some branches in the European market, along with Canada. Our view at this stage of the game is just to broaden our footprint with our existing products, particularly professional indemnity, which is a major franchise for us overseas and that type of thing.

In the States, even though we cover a lot of the waterfront from a specialty product standpoint, there are still some things that may have some intrigue, depending on the talent of the people. There are still some opportunities to bring new people in who can add to what we are already in -- those product lines that we are already in. Although we've got a major footprint, we still think that we can jump-start some topline growth without compromising underwriting integrity in that fashion. So, I would really contrast sort of our expansion look-sees internationally from domestic but both of them are getting a great deal of consideration at this stage of the game.

I think, with respect to your third question, which if I remember correctly, Matthew, is that do we expect any significant changes as a result of the Attorney General's suit and what's going on in the industry with regard to compensation, whether there will be any significant changes in our distribution systems or costs. The fairest answer of all is we don't really know but I think our best guess would be that insurance companies will continue to do their best to earn good returns and agents and brokers will figure out a way to earn decent returns on their capital as well. I think the increased transparency that occurs will be a good thing for everybody.

David Lewis of Suntrust Robinson Humphrey.

Thank you and good morning. Tony, just start back on the pricing. You said that you felt that pricing had stabilized. I guess what does that mean, relative to the year ago? Does that mean we're talking about flat year-over-year renewals, or is it still down 15, 20 percent on property and other areas?

David, you know, it's hard to generalize, but my impression at this stage of the game, having talked to our people recently in the third-quarter reviews and having just come away from the Property/Casualty insurer convention in Washington, is that, particularly with the overview of the storms or the impact of the storms and the financial 20 to 30 billion projected in that regard, I think basically that everything has sort of flattened out at this stage.

When I say that it's as it has been, I don't think property rates have gone down any further. There seems to be a little indication, albeit early days, that one of the responses to the storm losses is going to be maybe a reduction in some of the large capacities that some of these companies had been putting out, in my estimation, with justification. You know, we've sort of characterized the rate levels in virtually in almost all of the products as still reasonably adequate. My point is that, if they stay here, we feel pretty good. I think the next 60 or 90 days will tell more about the response to the big loss that the industry took in Florida than we've seen so far. So the jury is still out but right now, I'm sort of encouraged that maybe the market has gotten a dose of cold water to the face and we will see what happens.

Just make sure I'm clear, Tony, you used the word 'flat'. I guess what I'm trying to figure out is the rate flat versus three months ago or is it flat versus a year ago?

No, no, no, no. I think it's flat based on the last three months -- (multiple speakers) -- I still think some of the renewals might be a little under pressure, those that haven't come up for renewal yet on the Property side, that type of thing.

The good news is that our major concern was, given the history of the market -- was, the first vestiges of rate reductions would continue to exacerbate, and I think that has stopped right now.

That's good; that's what I thought. What would you think, kind of future changes from here, maybe the 82 percent retention levels? Are we kind of getting to a point that you're comfortable? Do you think --?

It's interesting. The thing that drives the majority of the 18 percent seeded out is obviously CAT protection. As you know, we are a large Property writer. But I will say I think there's still opportunities where some of our units have been perhaps a little bit more conservative in their net retentions and that type of thing. Because of the dependence on and the need for property CAT, we will never drive that thing up into the high 90s. I can't give you a target objective but clearly, I think you can see it go up marginally from this point forward.

John Keefe of Ferris Baker Watts.

I've got a couple of questions. The first is for Darrell. As I recall, Darrell, the original valuation allowance for Terra Nova was $45 million or so. So have you fully unwound the valuation allowance at this point?

No, we have not diminished that at all.

So was the tax benefit the result of being able -- a decision that profitability of the London operations is such that you can utilize those NOLs?

No. The benefit that was used to reduce goodwill related to tax positions that we took in prior years, in 2000, relative to the returns that were filed at that point, but it was basically purchase accounting-related items that were resolved or went away.

I see, okay, so I guess I am mistaken, then, in thinking that using purchase accounting, you put a certain amount of goodwill because of the uncertainty of the tax asset.

Correct. Well, yes. In essence, we reduced the net value of the Company, compared to the purchase price, because we booked a liability, a potential liability for a tax issue. As a result, goodwill was higher than it would have been had we not booked that tax liability. Once the exposure closed, we reduced the goodwill.

I see. So what drove this was not a determination of the future profitability of Markel International?

No, they are separate issues.

I understand. That $45 million valuation is still against -- the valuation allowance still exists?

Yes, that's correct.

Might that be reversed at some point in the future?

It certainly might. I certainly expect it to, to be honest with you. As they earn money and utilize the NOLs, that valuation allowance likewise will ultimately, as it reverses, go against goodwill as well.

Yes, that also would reduce goodwill and increase the deferred tax asset, right?

Correct.

My second question is for Tony. Tony, I calculate that the London operations had a combined ratio of about 103, ex-hurricane losses and the dispute resolution. Can you comment on when you think the international operations might break par? Secondly, can you also talk about what -- the $8 million dispute?

What was the last question, John?

The second part was can you comment on, or give us some color, on the nature of the $8 million dispute resolution?

I think Darrell will deal with that piece and then, Tony, you can talk about the -- (Multiple Speakers).

John, excuse me. I forgot. The $8 million dispute (indiscernible) -- what was your first question?

The first question was when do you -- (multiple speakers).

Let me say this -- we really feel good about our pricing in risk selection (ph) now. And we feel very, very good about our reserve issue. Candidly, we will see how it washes out but I would be more bullish at this stage of the game on our figures than we are indicating.

Darrell, do you want to deal with the other half?

Sure. Each quarter, we look at the open items list and we look at various accruals that we have provided to deal with, whether it be litigation costs or negotiated settlement issues, any number of things. In that process in this quarter at MET (ph), we decided to increase some reserves that we had for those types of items by $8 million. So than was an addition but it was more litigation, anticipated litigation defense costs than anything else.

Okay, very good. Thank you.

Paula Federman (ph) of First Albany.

I was wondering if you could help me out with your asbestos and environmental reserves. A number of other large companies in the industry have done roundup reserve studies and with a lot of to-do have published the results of those studies and going over them in a lot of detail. Could you help us compare how your asbestos and environmental studies compare to some of the other industry players? What are the similarities and differences?

Well, I probably can't speak to some of the comparable other companies. I can only tell you what we have done and where we are. You know, we look at the A&E (ph) exposures each quarter; we look at the underlying activity within those books of business. Generally, in the third quarter, we do very much of an in-depth review. This year, we did our in-depth review and based on the activity, if you go back and look of the charges and the reserve strengthenings or reserve increases that we've had in prior years, we've been pretty aggressive in terms of putting up reserves in prior periods. At the end of the study this year, the held reserves, the magnitude of IB&R, etc., we felt pretty good that the implied survival ratios, those types of things -- we felt that our held reserves were adequate.

I think, you know, in the press release, we commented that, while we believe our reserves are adequate, there is a lot of unknowns in the real world right now, in terms of legal processes, etc., that are still adverse to dealing with these items in a fast and proactive way. But we feel good about the old reserves at this point.

I think, just to add a couple of comments to Darrell's, we are very fortunate that, while we have meaningful exposure to Markel, as it relates to our involvement in the asbestos environmental matters industry-wide, the Markel Companies, at the time that the exposures came on the books, were very, very small players in the world of asbestos coverages. So our exposures are somewhat different from others in the industry, and I'm not sure it would be reasonable to try and compare what we've done to necessarily other folks. But I think we have been very, very consistent and we've tried to be very conservative and unfortunately, it's an area with still some uncertainty.

Beth Malone of Advest.

Thank you. Good morning, just a couple of questions. One for Tom -- could you talk about what your exposure is to Marsh Mac (ph) in the equity portfolio, and how you are positioning the equity portfolio, given some of the changes that have taken place and the valuations of some of these insurance holdings that you have?

Sure. In terms of our exposure to Marsh Mac (ph), it's less than it used to be! We did get there the hard way, though, I will candidly admit, but that's why we diversify. We had 95 percent of the equity portfolio in things other than Marsh Mac. In terms of total portfolio, it's 99 percent of the portfolio is other than Marsh Mac (ph). So while I, along with the rest of the market, was clearly surprised by the events that happened there, that is why we do diversify.

In terms of our other insurance holdings, that's a pretty short list and Berkshire Hathaway remains sort of probably about twice as big as any other holding. That's our largest holding and I continue to have confidence in their business and their operations and the way they run things.

In terms of the other opportunities, I think the marketplace is giving you and giving us opportunities. I don't think it's dramatic or drastic or anything that will cause you to see a big difference in the equity allocation or particular stocks. But the equity piece of the whole portfolio was 18 percent, which was unchanged, because there was a lot of money coming in, and the bond portfolio went up, but over the course of the next year or so, I would expect to see that 18 percent work its way gradually, steadily northward. We try not to ever be too dramatic and have too much confidence in our own crystal ball to do it at any one time but to just keep steadily doing it quarter after quarter after quarter.

One other question -- I think Darrell mentioned this. What's the total portfolio, total return through the nine months? (multiple speakers).

On a book basis, the total return is 4 percent.

4 percent, okay.

Is our average portfolio, yes.

For Tony, obviously you've talked about the fact that we are seeing some pricing pressure. Certainly maybe that's abated a little bit from the hurricanes, on some of the larger risks. But how would you characterize what you're seeing now, as relative to other cycle, beginning of down cycles you've seen in the past? Do you anticipate that we will see a prolonged pressure on pricing, due to some of the environmental issues that are out there, or whether -- is Bermuda going to become more aggressive, do you think, because of their potential overcapitalization?

That's a crystal ball that I don't have. You know obviously, if there's a sunny side to the Floridian storms, my feeling was, even beyond the property losses that were taken, that hopefully it acts as a wake-up call to what looked like it might have been a starting of a downward spiral. Clearly, I don't think there are any classical cycles any longer. The old two years or three years on and three years off is long since out the window, so predictability is really very difficult.

I'm optimistic that, given some of the consolidation in the industry, some of the things that have happened in the reinsurance market, all of which you are aware, the Florida storms and all of the things that have transpired even in the last three to six months, are going to at least get a solid hearing in the executive offices around the industry and at least stop or slow down what looked like it might have been a deceleration in the rates.

So as I indicated in my remarks, it is a look-see situation but I think there is reason to be optimistic that the market maybe will not give up a lot more rate ground down the road.

Okay. One last question for Steve -- on the acquisition front, historically when the markets have gotten to be more competitive, you all have turned to acquisitions as a way beyond organic growth. I know you mentioned that things are looking a little interesting. Do you see -- is there opportunities (sic) in the U.S. markets? Are you starting to see more companies come through? What you're seeing are the selling having a more reasonable expectation of what they can get? Are you getting at all enthusiastic about what's out there?

I think, if you measure it in terms of what's going on in the last 30, 50, 90 days, it's certainly not a lot of activity on the M&A front, industry-wide. It's been pretty quiet for awhile. But I think the fundamental question is, what is Life (ph) going to look like over the next 12 or 24 or 36 months? I think there's no doubt that, if the market continues to soften, that the opportunities for companies that cannot survive in that environment will look for other alternatives. So, I expect that the natural cycle that we've seen in the past, when markets are soft, we can grow through strategic acquisitions or acquiring books of business or people, and when the market is as heady (ph) as it was in the last couple, three years, organic growth takes over. So I think it's not something that turns on and off on a 30-day cycle but clearly, over longer periods of time, it will. I think that will continue. You don't have to look very far too see and make a list of the companies that have either failed or had to be reorganized in one form or another. Every one of those situations creates opportunities. In that type of environment, if prices or under pressure, we will see more of that, unfortunately -- or fortunately, depending on what side of the coin you want to look at.

One last question -- is there any type of business that you would not consider?

Yes! (LAUGHTER). Do have to tell you? If I tell you, I have to kill you! No, I'm teasing. The only (indiscernible) we have and they've been -- we've been pretty consistent, are workers compensation -- because of the unique talents necessary and the strong technical strength and sort of the volatile aspect of it, and so we have shied completely away from workers' compensation. As interestingly as it may be, because of our reach many, many years ago, long-haul trucking has not been appealing, just because the industry is a very, very difficult industry to make money in. Other than that, our people understand the underwriting profit hurdles and anything of a specialty nature where we can add value to a market and produce the types of returns we're looking for is still open for consideration.

Charles Gould (ph) of Scott and Stringfellow (ph).

I remember -- I guess I'm getting old. I remember when 80 million used to be a large number, and I appreciate the way you estimate or guesstimate the number that will likely be more redundant than deficient on the hurricanes. Could we go back in time three years? Right after 9/11, you put up such a number, $75 million, on 9/11. Do you have a figure on how that actually worked out now?

Do you want to do it, Darrell?

Well, I think the answer is it's still not totally resolved. You know, there's still claims that are out there that have not been settled. The crux of your question probably is do we still think 75 million is going to be adequate to deal with that? I think the short answer is yes, we do. (multiple speakers).

You stated my question better than I did! (LAUGHTER). It looks -- obviously we're going to continue to have events and you are going to continue to pay claims, but if you were going to do an over/under on the combined ratio next year, is 90 sort of in the ballpark of where we are hitting at these rate levels in the current experience you are having?

That's a good slag (ph).

J.F. Tremblay of Credit Suisse First Boston.

Good morning. First of all, can you give us an update on your conversations with the rating agencies, especially in light of the potential impact on lower valuations in your equity portfolio?

I don't think the rating agencies have any concern whatsoever about our equity portfolio.

Okay. Then Tony, you made a comment about seeing a reduction in large commercial capacity. Can you provide some additional color?

Well, basically one of the things that we saw as evidence of the softening property environment, which you know we really were just amazed at with the short-tail nature of that line and the inability to produce much of an investment property, it was sort of incredulous to us that property was one of the first things to start eroding. One of the things in the erosion was the fact that what took five companies at pretty adequate rates in terms of layering to maybe put out a $100 million limit or a $150 million limit, some of the insurers in that field were starting to individually put out 75, 100, $150 million limits. The aggregate pricing that they were getting was clearly not the equivalent of what the five carriers that had it previously took to attain those limits were getting.

So, when one of the things that we started to see a little bit of the first vestiges of -- and I don't know whether it's going to turn out to be prevalent or just an aberration -- is the fact that one or two of these carriers seem to have dropped their appetite to put out these significant capacities. I'm taking that as a positive sign, but it remains to be seen whether it ends up really being indicative of a change in the marketplace.

Thank you. That's very helpful.

John Fox (ph) of Fennimore Asset Management.

My question was on the asbestos reserves, which you answered. Thank you.

Stephan Peterson of Cochran, Caronia Securities.

Good morning. Tony, can I get you to talk a little bit about what you spoke to last quarter, which is the specialty admitted market? Obviously, that seems to be doing particularly well for you, both on a margin basis as well as a growth basis. I'm still curious as to why that hasn't attracted more competitive attention and maybe who you see in that market and kind of the attractiveness on sort of a go-forward basis? If I can pin you down, what might that look like a year from now?

Well, you know, our specialty admitted side is really coming off of two basic platforms, Stephan, that we've had a long time. One was the acquisition of the ruling (ph) agency that was a foundation of Markel Insurance Company, and their specialties, like camp and day-care and martial arts and the equine-related exposures, they are not the easiest things to enter with expertise. We have the luxury of really having been in it, if you even go back before the acquiring of the ruling agency, which was a foundation of it, some of those people have been in those classes for 20 or 25 years.

So I clearly think that the focus that we've got on a limited number of homogenaic (ph) segments of the market gives us a leg up and it's not the easiest thing to enter. The other side of the specialty admitted is in sort of the specialty personal lines, motorcycles, jet skis and yachts. We have equal talent there and a gain, maybe not to the extent of some of the commercial casualty that I just mentioned, but even that is a little bit more difficult to enter without solid data and expertise. Both of those operations that make up our specialty admitted side have going on 15 years under the Markel banner. So I think it really does give us a leg up and maybe discourages entry.

Okay. That 11 percent growth in the quarter -- can you maybe quantify a rate versus organic growth, just account growth?

I think it comes from -- and I don't have any figures in front of me, but we had some nice growth in sort of a risk solutions unit that was started at Markel Insurance Company that applies sort of a surplus lines approach with an admitted company. That was part of the growth.

In general, virtually everything else grew our motorcycle business -- because of some endorsements from some vendors and so forth has grown nicely. We have held our own in virtually every one of those areas, because those things tend not to be as driven by the hard and soft markets. We are a classical player in those markets as opposed to sort of a surplus lines safety valve. So when the market softens, as it has done just recently, those things would be less affected than some of our surplus lines carriers would.

Just another quick technical question for whomever -- a bit of a jump in operating cash flow in the quarter. Do we see that come back down in the fourth quarter in terms of the hurricane losses actually getting paid, or have most of the hurricane losses already kind of flown through that?

Very little of the hurricane losses had been paid as of quarter end. You know, I think our view is that the cash flow for the year is probably going to be in the 600 or $700 million range that we anticipated for the year. I don't really see anything dramatic that would cause that to be different.

Terrific. Thank you very much.

Ed (indiscernible) of (indiscernible) Asset Management.

Yes, thanks. My Marsh & Mac question has been answered. Thank you.

Gail Golightly of Wachovia Securities.

Thank you. Could you talk a little bit about what you're hearing as the Lloyds market is entering its capacity bidding and what kinds of things that you're seeing in getting a feel for that? Then to talk a little bit about what your expectations are about the European and Canadian expansion?

Okay, sure, Gail. I'm not quite sure what issues at Lloyds you're interested in. I mean, capacity -- given the softening environment as it appears to be, going into '05 -- pretty flat with last year. A number of the syndicates have indicated, either because they have a London company in their stable or because they are just being more cautious, have indicated reductions in capacity. But overall, I think it's likely to be flat or down a little bit. We as a company and me individually, I've been very, very outspoken with regard to our gratitude for some of the changes that have taken place over there. We view Lloyds as a much stronger platform, going forward, clearly than it was three years ago. You know, it seems to have, in all aspects, both at an operating level and an oversight level, fallen back on kind of a much more businesslike acumen, so we really feel good about that. I think Lloyds is in pretty good shape and certainly under very strong leadership right now.

As it relates to our European expansion, as I indicated earlier, we've got several products that we think really can be broadened in terms of geographic interest. Most of what we've done up to this point has been to wait for the business to come to London. So what we're doing right now is surveying the potential for particularly professional indemnity, which we've got really strong presence in London now, and we think it's transportable. We have been doing a lot of homework on the potential of that and as a result, have focused in yet to be determined but it looks like Germany may have some interest for us; Spain may have an interest for us as locations for branches. In North America, although it would be part of our international operation, the potential to transport some of the stuff we do in London as well as some of the stuff we do in the U.S. into a Toronto-based branch is also intriguing. So, we are excited about fulfilling sort of our vision when we bought Terra Nova, of using it as a platform for international expansion.

Okay, thank you.

Matthew Heimermann of Goldman Sachs.

Just one quick follow-up question regarding the convertible securities you have outstanding -- would you consider retiring those for cash or at this point, do you just consider them part of the permanent capital (indiscernible) medium-term capital structure and are just willing to let accounting rules be what they may?

Yes, we are (indiscernible) the term of that convert and I guess the answer is I wouldn't mind retiring them for cash and not have them be converted but we don't have any plans at this point in time to do anything with them.

Okay, thanks.

Our final question is coming from John Keefe of Ferris Baker Watts.

Hi. Could you talk about what the gross hurricane losses were? Also, with events of this kind of magnitude, when insurance companies realize commercial losses and there's a bunch of large per-risk type losses, are there generally any reinsurance recoverable disputes or any friction there, or is it pretty straightforward?

Our gross losses on the hurricane are estimated to be about 150 million, so about half of it should be recovered in reinsurance. We don't expect to have any disputes or problems whatsoever with respect to our coverages. I wouldn't try to speak for the entire industry in that regard, though, because I think there are a number of cases where reinsurance structures can get very, very complicated. With complications, you can have problems. Fortunately, I think the way we've structured our coverages are pretty simple and the players involved are strong and we are making money in the aggregate over a long period of time in our Property writing, so I am not terribly concerned about it.

Our nets on this are a much bigger piece generally John than they would be just because there were four events and there is very little reinsurance recoverable relatively.

The only thing that could be interesting is where storms hit the same -- two storms hit the same building is some definition and declaration, relative to what damage was caused with the first wave and what damage was caused with the second, but as Steve said, our contracts are very, very straightforward and not open to interpretation.

Okay, very good. Thank you, guys.

Gentlemen, we have no further questions in the queue at this time.

Thank you very much and I'd like to thank all of you participating today. If you do have further questions or comments, we would love to hear from you, but we appreciate your support. It's very important to us and we will continue our quest to build shareholder value. Thank you very much.

Thank you, ladies and gentlemen, for your participation in today's conference. You may disconnect your lines at this time and have a wonderful day.