Markel Group Inc (MKL) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Markel Corporation second quarter 2005 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 need operator assistance during the conference, please press *0. 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. Mr. Markel, you may begin.

Thank you. I would like to also welcome you all to the Markel second quarter conference call. Before we begin, I would like to call your attention to our Safe Harbor and cautionary statements set forth in our 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 very carefully.

Our program today will be very much like our prior conference calls. After I make a few introductory remarks, Richie Witt, our Chief Financial Officer, will review the financial statements. We’re very pleased to have Richie join us. As most of you know, Richie has been with Markel a long time, but, only recently, as Chief Financial Officer, and we welcome him to this conference call today. Tony Markel will follow Richie with a discussion of our operating results and Tom Gayner will discuss our investment results and then it will come back to me to moderate the question and answer period.

We’re very pleased with our results this quarter. We’re pleased with our business model and plan and in spite of changing challenges in the insurance market, we remain very optimistic about our ability to provide great shareholder returns, both near-term and long-term.

In a few minutes Tony will speak more specifically about the pricing and underwriting discipline inside Markel and why we are confident we will hold the line on our margins. However, it is becoming clear that, industry-wide, this may not still be true. Industry trade publications are now reporting that pricing is down three or four percent over last year. With business and risk expansion and claims cost inflation, this could relate to an even higher decline, industry-wide, in rate adequacy. Clearly, if this trend were to continue for one, two or three years, the industry would, again, find itself in serious trouble.

At Markel, we’ve seen this before. We’re very proud to be celebrating our 75th anniversary. Our culture, values and discipline are firmly in place to allow us, not only to survive, but to find ways to excel in this environment.

I’d now like to turn it over to Richie to discuss the first quarter results.

Thank you, Steve. I’m going to stick with the format that we’ve used for the past several years in terms of going through our operating results. I will start with a brief discussion of our underwriting results, then cover investing briefly, then bring it all together with net income, comprehensive income and book value per share. As usual, I will make my commentary mostly around year-to-date six-month result.

Starting with underwriting results, consolidated premium was down about 8 percent in the first six months of the year to $1.2 billion. This relates to two areas, the re-underwriting business at our investor’s brokerage excess and lines unit, as well as the sale of Corifrance in the first quarter of this year, actually January of this year. Those two items, taken together, represent virtually all of the decrease we see in consolidated premium volume in the six months. However, it is fair to say, we are seeing increased competition across all of our units. While we’re seeing some growth in some of the newer product lines and some of the newer units that we’ve started up, some of our older, more established units are seeing flat to declining premium volume, due to the increased competition.

Net written premiums were down 4 percent, to a little over $1 billion, and our net retention, i.e., the amount of business we retain for our account of the gross written, increased from 81 percent in the first six months of last year to 85 percent for the first six months of this year. We have, over a long period of time, worked to increase our net retentions of the business we write and we were able to do this again during the first six months of this year. Most of that retention increase was purchases of the leaser insurance in our excess and surplus lines units, as well as in Markel International.

Earned premium decreased in the first six months to a little under $1 billion, over a 3 percent decrease. That decline in earned premiums is lagging slightly behind the decline that we’re seeing in net written premiums as would be expected.

In terms of the combined ratio, our combined ratio improved to 91 percent for the first six months of this year, compared to 93 percent last year. Looking at it on a segment basis, our excess in surplus lines, the combined ratio increased there to 85 percent from 83 percent last year. That increase is a result of two items. The first being a decrease in earned premiums for the first six months of the year has led to an increase in the expense ratio. The second item is we have had some adverse loss reserve development at our investor’s brokered excess and surplus lines unit in the second quarter.

Our specialty admitted segment combined improved to 87 percent from 89 percent for the first six months of last year. We continue to see favorable development in the loss ratios in the specialty admitted segment. The hard market conditions and favorable underwriting environment that we’ve seen over the last several years continues to show up in terms of favorable loss ratios. A very nice development there.

The London insurance market combined ratio decreased to 103 percent from a 110 percent for the first six months of last year. You will recall, we had $30 million of reserve strengthening at the London insurance market segment last year, primarily related to lines of business which we no longer write. If you look at the combined ratio for Markel International, before that $30 million last year, it would have been right around 100 percent combined. The increase to 103 percent combined for the first six months of this year is entirely due to a higher expense ratio due to lower earned premiums as a result of lower written premiums over the last several quarters.

Moving to investing, I’ll start by saying operating cash flows for the first six months of the year were about $250 million. This is compared to $230 million for the first six months of last year, so, solid operating cash flow for the first six months of the year. That, combined with the operating cash flow produced over the last year plus, has led to an increase in our average invested assets in the portfolio to about $6.3 billion. This led to an increase in net investment income to $118 million for the first six months of the year, compared to $97 million last year, again, due to the increase in the portfolio and, for the first time in quite a while, we’re seeing the average yields on our portfolio start to move up. It is both larger portfolio and higher yields at this point.

Net realized gains were $19 million for the first six months, compared to $7 million last year. As we’ve said many times, the timing of realized gains and losses will be variable as we do invest with a long-term focus.

The change in our unrealized gains was a loss of $43 million for the first six months of this year, compared to a loss of $74 million for the first six months of last year. That is primarily in our equity portfolio, and Tom will talk more about that later. Our bond portfolio was, basically, flat, up slightly, in terms of unrealized gains.

Looking at an annual total return for the first six months of this year, compared to last year, is about 3 percent, compared to 1.1 percent last year.

If we bring our underwriting results and investing results together, we get Markel Corporation’s total results. Net income was $136 million for the first six months of this year, compared to $101 million last year. Comprehensive income was $97 million, compared to $53 million last year. The increase in our comprehensive income was primarily due to increase in net income for the first six months. On a per-diluted share basis, net income was $13.42 for the first six months, compared to $10.04 last year. Most importantly, shareholders equity has increased in the first six months to $1.75 billion from $1.66 billion at the end of the year. That’s about a 6 percent increase. On a per-share basis, that’s $177.98, compared to $168.22 at the end of the year.

Switching to the balance sheet for a moment, I just wanted to make one quick comment on the balance sheet. For those of you who reviewed our Q, which was filed last night, you will note, probably, the largest changes on our balance sheet are in the re-insurance recoverable for unpaid losses and paid losses lines and our loss reserve lines. Re-insurance recoverables are down about $237 million since year-end and our unpaid loss and loss adjustment reserves are down $181 million since year-end. The decrease in both lines is totally due to decrease in re-insurance recoveries.

There are a few items that make up that decrease in the re-insurance recoveries. The first item is we have completed a few significant commutations of re-insurance agreements in the second quarter of this year. We’re always looking at potential commutations and we have criteria that we look at in terms of what makes financial sense in terms of the commutation. It just happened that the ones that were completed this quarter were a bit larger than normal.

Also, our higher retentions over the past several years have led to a gradual decrease in our re-insurance recoveries. As we retain more of the business, there’s less re-insurance that we need to go and collect.

Finally, the run-off of the Legacy business, at Markel International we continue to have success in running that business off and, as we run that business off and collect the re-insurance associated with it, it, again, reduces the re-insurance that we need to collect on our balance sheet.

Those two items are down on our balance sheet, all for very favorable reasons.

With that, I’d like to turn it over to Tony, who will spend some time going through the operations side of Markel.

Thank you, Richie. Candidly, the second quarter was relatively uneventful from an operational standpoint, although, as he’s given you the quantification of it, it was an extremely solid operational quarter. Steve indicated, and rightly so, the marketplace continues to soften with added pressure on rates that will undoubtedly slim underwriting margins, but I hasten to add that we are still very comfortable with the resulting rate levels in virtually every sector as it relates to our 20 percent target return on equity. The combined ratios that Richie outlined in his remarks, clearly, evidence of our continued gratifying underwriting results. He also mentioned that our retention is in line with expectations and targets continue to move up, reaching the highest level yet at 85 percent, compared to 81 percent for the first six months of 2004.

In addition, and I’ve spent a lot of time in the last two quarters talking it, our marketing and sales initiatives in virtually every division are paying dividends and limiting volume erosion. Our geographic expansion, as previously discussed in the last couple of quarters, is already taking hold with the opening of branches in Toronto, Canada, Madrid, Spain, and Cambridge, England, and Bristol, England and Edinburgh, Scotland, set to open by the end of the third quarter.

We continue to look for accretive acquisitions because we have a real appetite and an ability to digest growth. But, I would say very candidly, nothing that we have looked at so far this year has exhibited the characteristics of specialty product leadership and sustainability of underwriting profits that we hold near and dear.

In summary, and we certainly look forward to flushing out this thing in the Q&A area, but in summary, we’re poised with the experience and talent necessary to combat this softening market and will not waiver from our long-term commitment to a 20 percent return on equity driven from an operational perspective by underwriting profits.

With that, let me turn it over to Tom to talk about the investment side for the quarter. Tom.

Thank you, Tony, I appreciate it. My comments will be relatively brief as well because, like Tony said on the operating side, it was uneventful, it was relatively uneventful on the investment side as well.

Getting the specific numbers, through the first half of the year, the total return on the equity portfolio was a slightly disappointing negative 1.8 percent. On the fixed-income side, it was a positive 2.8 percent, resulting in a total return of a positive .8 percent. More importantly, over a longer period of time, if you look at the five-year return on our equity portfolio, it’s slightly above 12 percent versus and S&P return of negative 2.4 percent over that time frame. On fixed-income side, over that five-year period, the returns have been about 5.9 percent.

On the fixed-income side, we’re maintaining a relatively short duration at about four years and that’s a little shorter than our liability profile. It’s defensive and what we think is necessary and prudent to protect the balance sheet and our capital. Fortunately, the good news is that, given the shape of the yield curve, the flat curve minimizes the opportunity cost of remaining defenses. Historically, if you had a flat or inverted yield curve that tempted investors into staying short, and that was a precursor to rates going down. With long rates at about four percent, instead of double-digit levels that they were the last time it happened, I think history is not a good teacher in this instance. Therefore, we will remain defensive and with this shorter duration and high quality in this environment.

On the equity side, it was relatively flat overall environment, so far, in 2005. What little excitement there has been in the market has largely been in the energy area or the technology sectors where we historically and continue to have minimal exposure. I think there are pretty powerful opportunities out there at the moment. Global businesses, big businesses, they’re on the new low list and it’s not just this year’s low, it’s going back five, six, seven years, 11, 12 times earnings, 3 or 4 percent dividend yields, companies repurchasing shares. As Richie mentioned, we have very good cash flow and we’ve been using that cash flow to continue to dollar cost average and buy companies like that. Currently, equities are 21 percent of the total portfolio and 77 percent of shareholder’s equity, so we continue to have run to add equities to the portfolio which, historically, have added value and helped comprehensive income.

With that, let me turn it over to Steve.

Thank you, Tom. A few final comments, then I’ll open the floor to questions. As everyone has said on the call, we’re very pleased with the progress of the Company, not only for the quarter, but over the long-term. As those of you who followed Markel for a long time know, we’re focused on building shareholder value through consistent underwriting profits and superior investment returns. Our model to compound book value at a high rate over long-term is based upon the fundamental principles of consistent underwriting profits and this quarter, as we’ve demonstrated in the past, we’re earning very solid underwriting returns, as well as investment leverage and strong investment performance. In June, our total investment portfolio and cash was $6.4 billion. The investment leverage to capital is about 3.7 to one, and, so, by earning solid returns on our investment portfolio and consistent underwriting profits, we believe we can continue to compound book value per share at a very, very healthy rate.

We’re pleased that, at the end of the quarter, book value reach $1.750 billion, or $178 per share, and we’re constantly focused on those numbers and look to see them continue to grow in the future.

With that, I’d like to open the floor to questions.

Ladies and gentlemen, at this time we will be conducting a question and answer session. (OPERATION INSTRUCTIONS) Your first question is from Matthew Heimermann with Goldman Sachs. Please state your question.

Good morning, everybody. Three questions. First, for Tony, could you talk a little bit about the composition of the expense ratio in International just so we can get an idea of what’s fixed and what’s variable just in terms of thinking about whether or not you can drive margins?

Let me first say from an overall perspective, that expense ratio really doesn’t bother us a lot. It’s a lot easier to fix an expense ratio, so if it creeps up marginally, as a result of continued vigilance on the underwriting pricing and risk selection side, it’s not a major deal. I suggest that we’ve done a terrific job overseas in the Markel International operation of bringing expenses down. Obviously, the resulting volume loss is as continued vigilance, but getting at, Richie failed to mention, that we also exited aviation over there. I think we can continue to produce solid, enviable expense ratios over there, but our focus continues to be on pricing and risk selection.

So, in your mind, the expense is controllable enough that you still think you can drive an underwriting profit in that business?

Without question.

Is some of that related to some of the new business offices you mentioned.

Absolutely. There is, obviously, expense in opening up five new offices and so that does have an impact on the expense ratio. One thing I just want to point out is over, probably, the last three years, the guys in London, the associates in London, have done a wonderful job of reducing the actual pounds of expenses that they have each year. The head count when we purchased Terranova, now Markel International, was about 750 people. Today it’s about 400. For the last three years, there’s been about a 15 percent decline each year in actual pounds spent in overhead. They’ve got the situation well in-hand and we’re making some investments for the future, so I think we feel good about it.

I’ll also add, as a relatively minor issue, cost is a high-priority at Lloyds right now and they are attempting to do everything they can to drive down the inherent cost of doing business at Lloyds. Our international volume has become more on the company side written through Markel International Insurance Company as opposed to Lloyds to the point where it’s about a 50/50 split. We find it cheaper, at this stage of the game, to use our insurance company as opposed to Lloyd’s platform. We’ve also got some potential economic synergies there.

Okay. Then, for Richie, can you just let us quantify what the net of the commutations, the favorable and unfavorable developmental, was in the quarter?

The commutations actually had a very small impact on earnings. It was $3 million or so, very, very immaterial.

Was it positive or negative?

It was a negative.

I guess this is more of a big picture question and it relates to the model, which is one of the natural outcomes of growing your equity is that it decreases your operating leverage, both on an invested asset to equity basis as well as underwriting to equity basis, and that’s, obviously, going to be impacted by what’s happening in the market. I guess my question is do you feel like - - what are you going to do to combat some of the natural erosion and leverage to ensure that you can continue to meet that 20 percent target?

It’s clearly an issue and the financial investment leverage has dropped from year-end at 3.9 to 3.7. It’s always nice to have the book value grow by $100 million and the portfolio grow about $400 million to keep that relationship is sometimes a bigger challenge, which is, I think, the point you’re making. Clearly, there are a number of options that we have. We’re, first and foremost, in the property and casualty insurance business and we want to have both enough capital to make absolutely confident that our clients are comfortable with the financial security they receive. Likewise, we want to keep a certain amount of powder dry to take advantage of future opportunities. In the past, as insurance cycles have weakened, as you know, Matthew, we’ve been aquisitors and that’s certainly possible again in the future, whether it’s buying books of business or buying companies or simply expanding through new ideas. There’s certainly nothing on the table at the moment and nothing that’s worthy of talking about, but over a long period of time, that’s certainly an option in growing our business. It’s certainly the first option that we would prefer. We’re quite prepared to reduce that capital and either pay dividends or buyback stock, whichever made sense, so that the model stayed intact so that we could earn higher returns on our capital. Again, I think we look at it over a long period of time and don’t try to adjust it quarter-to-quarter because that would be totally impractical.

Thank you very much.

Your next question comes from Beth Malone of Market Corporation. Please state your question.

Good morning. A couple of questions for Tony. Could you be a little bit more specific where you’re seeing the most pricing competition in the market? Is it broad-based or are there specific areas where it’s more difficult?

I think this is consistent with my remarks in the last couple of quarters, Beth, surprisingly, the area that still seems to be the most intense are the short-tail property lines, which, given the catastrophe losses last fall and everything else, it’s just a shock to me. Compared to casualty and E&O and D&O, property seems to be eroding far greater than the longer tail lines. There is some intensified softening pressure on both casualty and areas in omissions, but it is relatively moderately. I would suggest that products liability and D&O, because of their history, are holding relatively flat. As I said, the most unbelievable thing to me, is that the property sector seems to be the one under the most intense competition.

Do you have a flexibility to change your book of business to the extent that - - you say you exited the aviation market, are there other markets where you believe the competition is unrealistic, can you walk away from that business or do you always want to have some presence there to maintain that you stay in that business, albeit, in a lesser way?

Clearly, you’re speaking to what I think is one of our competitive advantages in the marketplace and that’s the fact that if you take our eight operating divisions, the seven U.S. subsidiaries and our international operation, being the eighth, and you lay out the product specialization niches that we’re in, you could characterize us as having 75, 80, 90 different products with not a single product bringing us more than 6 or 7 percent of our gross premiums. You know, we’ve always felt that, clearly, we’ll fight and claw and gouge to stay in any product we can at appropriate pricing and appropriate risk selection, but when it becomes apparent that it’s a losing battle and competition is unrealistic, we will, clearly, walk away from it. The ability to not be overly dependent on any one product or any one sector, I think, gives us a unique position to be relatively cavalier where we make those decisions.

I think, Beth, one other point on that is the aviation line was a product that was part of the old turn-over book of business and was much more of a commodity type, or our position in that market was very much like a commodity kind of player. When the pricing was adequate, we were happy to continue and while it was adequate we were searching for ways that we could distinguish ourselves and find a niche within that market where we could do something unique or special or distinguish ourselves. Unfortunately, we were not successful in doing that and, so, providing a fairly small line in a class of business where the insured’s are buying, literally, hundreds of millions of dollars worth of coverage, it’s not the type of product that really fits Markel’s model. I think aviation was probably a little different than the average product. I think it’s also fair to say that there are no sacred cows at Markel, every product that we have needs to make underwriting profits.

Let me reinforce Steve’s comment because it’s a very valid one. Clearly, I think we both made the point that we’d walk away and I think you know us well enough that we mean every word of that. When you look at the aviation line, it was an inherited line, a Legacy line, as a result of the acquisition, echoing Steve’s remarks. Frankly, we hung in because the market changed after September 11th and rates finally achieved a level of profitability, which they had not had before. Had that not happened, we probably would have exited sooner. Given the dependence on large limits and the history of the aviation market and the difficulty in becoming a leader without putting out crazy limits, it’s a line that candidly, we would never have gotten into because it doesn’t have consistent characteristics with what we stand for.

Okay. Can you also comment on who the commutations were with?

I don’t think so, Beth. There are several of them, though. There are three or four that were completed.

All right. We talked about the European competition, in the U.S. you dominate many of your core markets where, in the past, I thought it was pretty difficult for competitors to come in there and cause much trouble in terms of lowering their pricing. Has that changed, or did I misread your dominant position in some of your markets?

Beth, I think, if you look at the numbers, and I think both Tony and Richie pointed out, that the majority of the decline from this six-month period to a year ago relates to the sale of Corifrance, the discontinuance of aviation and significant re-underwriting at our investor’s unit. Barring those areas, our volume really is fairly flat. Same-store sale kind of comparison, it’s flat. I don’t believe that our position in the market is deteriorating at all. I think it’s pretty solid. Broadly, a lot of specialty business and E&S business that came out of the standard markets and came in the E&S market, is now heading back. Some of the standard markets that decided that the restaurants they use to write were bars and taverns, and we wrote them as bars and taverns, are now deciding that they’re restaurants again. So, that natural ebb and flow of business is going on and it will have a slightly more significant impact on the excess and surplus lines as that business flows back and forth.

Clearly, even in those areas, and there are a number of them in those niches where we are the dominate factor, we’re off with our competition. I would agree with Steve, I don’t think our position of preeminence in any of those areas has been negatively impacted, but the competition has stepped up and we will walk away from business that is not adequately priced.

Okay. Thank you. One last question for Tom, could you just comment on how, if interest rates were to remain unchanged, how would you view your ability to achieve the higher yields and returns than you have in the past? What interest rate scenario, I guess I’m looking for, would be a positive for your investment style and what would be a negative?

I think what we’re trying to do, on the fixed-income side, is to remain relatively defensive, which means that we’re a little bit short. Although it would be a relative gain if interest rates went up, we would look smarter rather than dumber. We think that the room for interest rates is more that they would move up than down, so we’ll stay defensive that way. The other thing that I think we’ll do differently, going forward, and it relates a little bit to Matthew’s question earlier in terms of maintaining the returns on capital, is that as investment leverage comes down, one of the other tools we have is to increase the equity allocation and richen up the overall expected total return that way. I think we’ve been doing that gradually and we would continue to expect to be gradualish unless there was some sort of sudden change in markets. In a gradual fashion, I think, you would most likely expect to see from us is just a continued step-by-step increased equity investments.

Thank you.

Your next question comes from Dryfas Nenane (ph) with “Morning Star”. Please state your question.

I’ve got two areas of questions. First, you said that some of the decreases from run off of Legacy business at International, are you able to quantify how much of the remaining recoverable is actually Legacy business there and what sort of duration it has?

Not off the top of my head, Dryfas. I would say, just in general terms, the reinsurance recoverables is about evenly split between the U.S. units and Markel International, but I don’t have that detail in front of me.

Okay. Switching back to the higher retention, I think when I spoke to Tom about a year ago he said that that could move as high as, maybe, 87 percent retention. Do you have a more updated feel for where retention could sit going forward and what that would mean for the level of the recoverable on the balance sheet in the future?

The recoverables should continue to decline as we retain more and more business and as we run off more and more of the Legacy business. In terms of the retentions, it’s probably more a function of mix of business than anything else. There are a number of lines where we retain 100 percent of the business we write. If we’re issuing $300,000 or $500,000 limits or less, or even $1 or $2 million limits, in many cases, we would be retaining 100 percent of that risk. Whereas, if we’re writing property business exposed to Florida wind or California earthquake, we, clearly, need to be buying a significant amount of catastrophe reinsurance. So, really, we’ll move back and forth a little bit based upon the markets in those different categories of business. Clearly, as our capital increases, and at the end of the quarter it’s $1,750 billion, our ability to retain a larger share of the risk is continuing to increase. Where we see it as economically rational, that’s exactly what we’ll do. It’s a long way of saying that we want to retain as much as we can. It’s more likely to increase than decrease, but it’s going to move around based upon the market and which lines of business are growing more rapidly than others.

All right. So, as a Rule of Thumb, though, your recoverable was about 100 percent of your equity at year-end and now it’s somewhat (inaudible). So it’s reasonable for us to expect that your recoverables will be less than the equity on the balance sheet going forward?

Yes. It should continue to decline.

Okay. Great. Thanks, guys.

Your next question is from David West with Davenport and Company. Please state your question.

Good morning. You had about a $5 million underwriting loss in the “Other” segment. Was that specifically related to your commutation activity?

David, that really is sort of the run-rate on the other discontinued area, just the cost of running off those lines of business. Nothing particular stands out in terms of the “Other” category this quarter or this six months.

Okay. So, it wasn’t particularly impacted by the quarter’s commutation activity?

It wasn’t.

Okay. Could you also comment a little bit - - you mentioned in your comments that you did have some adverse development at the investor’s unit, could you try to put a magnitude on that and could you also, maybe, comment where you saw some positive development in your book?

The magnitude of the investors development, frankly, was not particularly material, although a concern, because it was an extension of what we had incurred in the first quarter. Again, it is Legacy years and we still remain very, very comfortable with our current risk selection and pricing up there, Dave. Positive development in a number of sectors, Richie mentioned both the two specialty admitted sectors, Markel American and Markel Insurance Company, the latter of being one of the major contributors in the program business, continues to show positive development in any number of areas. Because of that reserve in philosophy, there is a lot of positive development across the board.

Okay. Great. In your Q, you mentioned that you’ve currently estimated your loss exposure from Dennis and Emily to be a little less than $10 million. I guess that just leads to the question of do you feel like, at this point in time, you have more, less or about the same general risk exposure to hurricane-type of debts as you did last year?

Yes. We bandaged their nets very, very carefully. As a matter of fact, we just completed the renewal of their catastrophe program effective August 1st. We have consolidated and simplified the approach, but the bottom line result is that our acceptable exposure from a major event, whether it’s an earthquake which, frankly, we look at from a one and two-fifty year perspective which is really at the conservative end of the chart, or whether it’s a hurricane, which we look at it from a one and 500 year event in terms of establishing our limits, the way the shapes out is our appetite for net retained loss in the event of a significant event on either one of those sides of the house is exactly the same as it has been the last couple of years, in spite of our growing financial wherewithal.

Great. Thanks very much.

We have another question coming from Beth Malone with Markel Corporation. Please state your question.

Just a follow-up on M&A activity, you mentioned you’re still looking for opportunities. Does this pricing environment change the - - do you think it changes whether you’re going to have more opportunities or less as pricing becomes more competitive?

Clearly, at this point in time, the impact of lower pricing isn’t causing any pain or suffering on people who are reducing their price levels. It’s too early for the pricing to be causing people too much in the way of problems. If it were to continue for some period of time, undoubtedly, it would cause some companies to experience some problems. I’m not expecting, necessarily, that this could happen that way and we, clearly, are looking for opportunities irrespective of that. I think that’s one issue that people should be aware of.

I don’t think the activity in that regard has been any less or more than it has historically been. Beth, as you know, as frustrating as it is at our end, because we would love to be able to add in that regard, our qualifications and our criteria are pretty demanding and we’re just not willing to compromise for the sake of growth. We continue to get a pretty good flow of activity.

Okay. Thank you.

Our next question is from David West with Davenport. Please state your question.

For Tony, you made the comment that you were most surprised by some of the pricing changes around the short tail cat lines, would you comment, relative to what you’ve seen versus the primary rates versus the reinsurance markets? Do you feel the latter is a little bit more disciplined?

Yes. I think, in the past and in certain of the softening environments, the reinsurers have been the ones that have effectively been driving some of the aggressive pricing, but that’s in my estimation. That’s not the case, David, now. I think, candidly, the issuing carriers are the ones who are the culprits.

Thank you.

As a reminder, ladies and gentlemen, if you would like to ask a question, please press *1 on your telephone keypad at this time.

It appears that we have no more questions, so I’ll wrap things up by simply saying thank you all for participating and, as always, the management team at Markel is here to answer your questions so don’t hesitate to give us a call directly. Again, thanks very much and have a very, very good day.

This concludes today’s teleconference. Thank you all for your participation.