Markel Group Inc (MKL) 2008 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Markel Corporation third-quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. A 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, Mr. Markel, you may begin.

Thank you and I will add my welcome to the Markel third-quarter earnings call. During our call today, we may make forward-looking statements. Additional information about factors that could cause actual results to differ materially from those projected in the forward-looking statements is described under the captions 'Risk Factors' and 'Safe Harbor and Cautionary Statement' in our most recent annual report on Form 10-K and quarterly report on Form 10-Q.

Our quarterly report on Form 10-Q, which is filed on our website at www.MarkelCorp.com, also provides a reconciliation to GAAP of certain non-GAAP financial measures which we may discuss in today's call.

Our program today will follow the same format as previous calls. I will make a few introductory comments; ask Richie Whitt, our Chief Financial Officer, to review the numbers. Paul Springman, the President, will follow-up with some operational and comments about the marketplace. Tom Gayner, our Chief Investment Officer, will share some commentary on our investment activities come. And then, finally, I will moderate the question-and-answer session.

2008 is proving to be a very challenging year on many fronts. At September 30, we are reporting our book value per share has declined 11% from year-end to $235.72 per share. Our speakers today will get into these results in some depth. However, I would like to start with a few comments about three important events during the quarter.

First, our underwriting results were adversely impacted by Hurricanes Gustav and Ike. We ensure wind exposed property in several of our operating businesses and manage our hurricane exposures both at our product line level and in total. The very nature of the insurance business is that we assume some volatility in our results.

The vast majority of our business units incurred losses from these hurricanes that were well within both our expectations and the level at which we can achieve very good returns on our capital. The exceptions are few and are very modest in size, and corrective action where necessary will be taken. With our nine-month combined ratio at 104%, we would hope with some luck that our year-end results still might show underwriting profitability.

The financial markets have also experienced a hurricane this year. Our total investment returns are at a loss of about 5% for the nine months. While these results are creating a bit of short-term pain, our financial position is extremely strong and we remain committed to our long-term investment strategy which includes allocating a meaningful part of our portfolio to high-quality equity securities, which we believe will generate additional returns for our shareholders over the long term.

As the year has progressed and as the financial markets have become more distressed, we have increasingly been generating cash and increasing our liquidity. At September 2008, cash and short-term investments totaled in excess of $900 million. We are not yet ready to commit these funds to our long-term portfolio, but we are very, very bullish on the long-term prospects of the United States and our economy.

The entire insurance industry is experiencing these very same events. However, I will not try to predict what everyone else might do. So let me be very clear about what is happening in Markel.

Our prices have been on a downward trend for several years and while they are certainly not at a dangerously low level, we have no longer any room to reduce them further. We are increasing our prices. The volatility of the capital markets clearly reminds us of the importance of capital and the necessity to earn healthy returns on that capital. We will continue to emphasize our underwriting standards and increase prices, and we will continue to build shareholder value.

With that, Richie, I will ask you to jump into specifics.

Thanks, Steve, and good morning, everybody. I'm going to stick with the format that I have used in past quarters. I will start by discussing our underwriting operations. I will follow that with a discussion of our investment results, and then I will bring the two together with a discussion of our total results for the nine months.

And again, I will focus primarily on year-to-date results, obviously, in question -- Q&A, we can get into any questions you have about quarter or year-to-date results.

Many of the trends we will be discussing are sort of repetitive from our first and second quarter calls. The two biggest issues obviously affecting our nine-month results, as Steve said, are the competitive insurance market and the unstable financial markets and their impact on our investment portfolio.

In addition, as Steve mentioned, we had $115 million of losses from Hurricanes Gustav and Ike in the third quarter of 2008.

So getting into it, let's talk about underwriting first. Due to increased competition through the first nine months in virtually all of our markets, gross premium volume decreased 6% to about $1.7 billion for the first nine months of the year. About one-third of the decrease was due to exiting certain programs previously written at Markel Re. The remainder was primarily the result of the increased competition.

Net written premiums were down about 4% to $1.5 billion, and premium retentions were actually up slightly to 88% from 87% in 2007. I can tell you that every reinsurance treaty that comes up for renewal, we look at and look for opportunities to increase our net retentions of the business that we write.

Earned premiums were down 5% to $1.5 billion for the first nine months compared to 2007. Our combined ratio was 104% for the nine months of 2008, compared to 88% in 2007. This increase was the result of the following.

We had $115 million, or eight points, of loss for Hurricanes Gustav and Ike. In addition, we had a higher current accident year loss ratio of 67% prior to considering the hurricanes, and this was due to prior -- this was due to price decreases during the year compared to 61% current accident year loss ratio in 2007.

As Paul is going to discuss shortly and as Steve mentioned, we are raising rates in many of our product lines at this point. The 2008 current accident year loss ratio was partially offset by favorable prior-year redundancies of about seven points on the combined ratio.

This compares to favorable prior-year redundancies of about eight points in 2007. The areas that these favorable redundancies came from were primarily in our Excess and Surplus Lines segment and our Markel Shand unit and our Markel Essex unit and in the London market segments.

Also in the third quarter of both years, we completed our annual review of asbestos and environmental exposures. As a result of that review, we did increase reserves for asbestos environmental by 25 million in the third quarter of 2008, and by 34 million in the third quarter of 2007.

The other portion of the increase in the combined ratio for the nine months was our expense ratio. Our experience expense ratio for the nine months increased to 36% from 35% in 2007. This was primarily due to the lower earned premiums as mentioned before, resulting from competition in the markets.

Turning to our investment results. Investment income decreased to $221 million from $235 million in 2007. This decrease was primarily due to an unrealized loss of approximately $12 million on a credit default swap. I know we have talked about this in previous quarters, but in the fourth quarter of 2007, Markel sold credit protection on the portfolio of fixed income securities.

The presence of this contract on our balance sheet and the associated accounting treatment will add volatility to our investment income results in future periods. There is quite a bit of disclosure in our 10-Q related to the credit default swap, and I would suggest you go there if you want additional detail around the credit default swap.

At this point, we have about $5 million of the additional exposure under the current default swap. At that point, volatility to our financial statements will probably be pretty much over with.

Realized losses were $200 million through the first nine months of the year. This was primarily comprised of $187 million of writedowns for other than temporary declines in the fair value of various equity and fixed maturity securities. The most significant writedowns for equity securities were $38 million for Citigroup, $32 million for GE, approximately $17 million each for Banc of America and International Game Technology.

The most significant writedowns for bonds were $18 million for Morgan Stanley and $11 million for Kaupthing Bank.

Unrealized gains also decreased $375 million before tax for the nine months. The decrease was roughly equal between fixed maturities and equities. Tom will obviously go into further detail in his comments. Again, I would point you to our Q where we have quite a bit of detail around the other than temporary impairment charges as well as just commentary on investment income and so forth.

Looking at our total results for the nine months of 2008, we reported a net loss of $26 million compared to $312 million of net income in 2007. Book value per share, as Steve mentioned, decreased 11% from December of 2007 to approximately $236 per share at the end of September.

I would like to turn to the balance sheet and cash flow statements and make a few comments. Regarding cash flow, operating cash flows were $329 million for the first nine months of 2008 compared to operating cash flow of $383 million in 2007. The decrease is primarily due to lower premium volume for the first nine months of the year.

I would also like to point out at September 30, while we are holding $742 million of cash and investments at our holding company giving us quite a bit of financial flexibility at the holding company level. And as Steve mentioned, on a consolidated basis, throughout the year we have been building liquidity and at the end of the third quarter held approximately $900 million of cash and short-term investments.

We are prepared, as Steve said, to take advantage of the opportunities we believe we will be seeing as a result of current market conditions. So at this point, I would like to turn it over to Paul to review our operations.

Thanks, Richie, and good morning to all of you. You have just heard Steve and Richie report on our numbers from the third quarter of this year and for the first nine months of 2008. In a few minutes, Tom Gayner will take us through our investment results.

Today I have an abbreviated report from our operational side, but do want to update you on three or four important items. First, our combined operating ratio of 124% for the quarter and 104% on a year-to-date basis obviously represent unacceptable results. It underscores the importance of increased pricing, a process of which was actually started prior to the beginning of the third quarter in a few of our select lines.

Over the last 30 to 45 days, we have met with each of our product line leaders and have reviewed our results and pricing targets for every one of our products and have implemented rate increases virtually across the board. We firmly believe that the combination of the adverse operating results being reported by the industry, as well as the turmoil in the financial markets, dictate that market pricing must rise in every sector of the business.

We have moved our pricing targets up significantly on our wind exposed business, as well as our overall property product lines. We set individual pricing targets on all of our 75-plus specialty products with an overall 20% return in mind. Given that uncertainty in the financial markets today, higher prices on all these products are a must for the future.

So, where does that leave us in regards to the rest of the market? Given the fact that most carriers price their business 30 to 60 days in advance, most of our competitors businesses reflect moderate price erosion in the 5% to 10% range for the majority of their businesses in the third quarter. We believe that fourth-quarter pricing will begin to level off and that we will see moderate to significant increases beginning in early 2009.

The second item I would like to discuss today is our Texas prototype office. During our August 5 second-quarter call, I briefly mentioned that we were in the process of staffing a new Markel office, which would be located in Plano, Texas, a northern Dallas suburb. We began assembling our team there in late July and into early August. We used the month of September to fine-tune our systems, processes, controls, and internal training of our staff.

I'm pleased to report that during the first week of October we flipped the switch and began offering all of our professional liability products to our Texas-based wholesale broker partners. Shortly thereafter, we added our Excess and Umbrella Line and later in the month began underwriting and quoting both [tax] and environmental coverages.

Just this week, we gathered our Contract Binding Authority business and have plans to add additional products between now and year end. We have 20-plus associates on the ground in Texas with 15 of them having previous Markel business unit experience. We have commitments from another 10-plus individuals from both inside and outside our company and should be fully staffed with 30-plus professionals by the end of this calendar year.

If early reports are any indication, our presence in Dallas has been an overwhelming success. The two most difficult tasks that we face each day are keeping up with the new business flow that is coming through the front door, as well as managing our broker partner expectations in terms of not quite being ready with the complete Markel product offerings for all of our lines.

These are absolutely fantastic problems to face, and we are delighted to address them as we begin to write business in Texas. Our congratulations and thanks go out not only to our team there, but the dozens of Markel associates that supported our efforts in getting this operation up and running ahead of schedule.

Given our early success with our Atlas initiative, which we have since renamed One Markel, and our prototype office, we made the decision late last month to significantly accelerate our transition to One Markel for our entire North American Excess and Surplus Lines business units. Our original target date for complete transition was January of 2010.

We will now begin transitioning our producer relationships during the first quarter of 2009 with a fully operational and implementation date no later than April 1, 2009. Our broker partners have been unbelievably supportive, and given these early positive reports in Texas, our clients are chomping at the bit to have more products available to them in closer geographical proximity to their existing offices and operations.

Now I would like to move across the Atlantic to our Markel International operations for just a minute. In the latter part of the summer, we announced that effective September 1, William Stovin would become President of Markel International, our intermediate holding company, and Jeremy Brazil would become President of Markel International Insurance Company.

Both of these gentlemen have been with Markel since we arrived on the scene in London in the early part of 2000. They will share executive and operational responsibilities for our London and international operation and leave us well positioned for future expansion and profitability. Concurrent with this change, Markel International's previous president, Gerry Albanese, has returned to the United States and will be joining our executive team here in Richmond.

As we further transition to a One Markel environment, Gerry will assume duties as Chief Underwriting Officer for the corporation and will be our primary point person for our product line pricing and product positioning for each of our lines. I would like to take just one moment to publicly thank Gerry for the five-plus years of outstanding contribution that he made as president during his stay in London.

Gerry and his team there put our business unit on the road to profitability and at the same time designed a plan for significant global expansion for our future. Under Gerry's watch, we have opened offices in Toronto, Madrid, Singapore, and Stockholm. His team has developed a model and a discipline that we will employ as we continue to look for other global opportunities.

In conclusion, the third quarter represented a mixed bag. While business quoted in the late second quarter and early part of the third had pricing levels that continued to erode moderately, we are beginning to see a number of positive indicators that the environment for market pricing and risk selection will definitely improve in the near future. We are much more optimistic today about 2009 and we were 90 days ago. We are committed to underwriting profits, determined to push our pricing levels upwards in all of our lines, and have the discipline to walk away from underpriced opportunities.

I look forward to your questions and comments when we get to the Q&A section in a few minutes.

Thank you, Paul. Good morning and thank you. As Richie noted in his opening remarks, total returns for the portfolio were a negative 5.1% for the first nine months in 2008. Equities declined 12% and fixed income declined 1.7%. Additionally, changes in foreign exchange subtracted 1.1%, which brought the total portfolio return to a negative 5.1%.

To begin to place those results in some contexts, our equity return of negative 12% compares with a negative 18.9% from the S&P 500. Our long-term record of solid equity returns remains intact. Over the last 15-plus years of data that we keep at our fingertips, our equity investments have provided excess returns both to the S&P 500 Index as well as its functional equivalent index in the bond world, at least as it has been known up until now, the Lehman Aggregate.

I would also that foreign exchange gains and losses should balance out economically from our account shareholders as we hold the foreign exchange denominated bonds to match against our foreign exchange to nominated liabilities embedded in the insurance reserves.

The investment gains and losses are reported explicitly. The roughly corresponding and offsetting gains and losses of our matching insurance liabilities are recorded as part of the reserve setting process and show up as part of the underwriting results. One accounting item that I will point out is that we recorded and other than temporary decline in our investment portfolios of roughly $95 million during the third quarter.

More than half of this amount stems from the lower market price of our holdings in equities such as GE, International Game Technology, Marriott, and other companies where we continue to be optimistic about their long-term prospects despite their recent price declines.

We do not own complicated or exotic securities. They are transparent and easily priced. While we may not like the price we see at the closing bell, we have always included all our market prices in our calculation to book value. We have also always emphasized book value and the comprehensive income that equates to the change in book value.

Current accounting practice is a one-way street where unrealized losses show up in net income when market prices decline in the way we have experienced in 2008. Any subsequent gains in the market prices of things like GE will not flow through to net income unless they are actually sold and the gain becomes realized. All gains and losses, however, realized and unrealized will continue to be reflected in our book value per share and remain focused on building that value to the best of our ability.

The last time Markel endured a year when investment returns were negative in both our fixed income and equity portfolio was 1994. In that year, book value per share declined from $27.83 to $25.71, a decline of 7.6% as a 97% combined ratio and underwriting profitability weren't enough to offset the difficult investment environment, largely rising interest rates, of that year.

I think it is worth pointing out, though, that in 1994, the book value declined 7.6% from $27.83 to $25.71. Our news today is that so far in 2008, book value is down 11.1% from $265.42 year end to $235.72 at the end of the third quarter. The book value per share is up nearly tenfold over that time frame. If I could sign up right now for another tenfold increase in the book value per share of Markel over the next 14 years, I would happily do so immediately.

By the way, while we are all certainly aware of the credit crisis environment we face today and the challenges of secure energy supplies, the last 14 years were not exactly trouble-free. Among the issues that came to my mind quickly as I considered the past 14 years were items like the Asian currency crisis of 1997, the Russian currency crisis of 1998, the collapse of long-term capital management when we should have all learned the lesson that Warren Buffett spoke recently about, i.e., beware as geeks carrying models.

The boom and bust of the dot-coms, Y2K issues with concerns ranging from getting stuck on an elevator all the way up to having planes fall out of the sky and major human catastrophes such as the 9/11 terrorist attacks, wars in Afghanistan and Iraq, terrible tsunamis in Malaysia, ongoing and seemingly attractable troubles in Africa and elsewhere and Hurricane Katrina, among others.

While some may look at that list to be afraid to get out of bed in the morning, I think one can also look at that list and think about the amazing resilience of the human spirit and our ability to overcome what seems like insurmountable problems. At some point in the not too distant future, I believe that we will look back on our current issues and think about them in the same way that we can now dispassionably revisit the litany of the last 14 years. They are indelible feature in human existence. Despite that list and the new troubles yet to come, progress continues its unrelenting upward path.

I think it is also worth noting that over those 14 years of book value growth at Markel, our fundamental investment approach and discipline did not change at all. Our fixed income department is charged with the responsibility of acting as fiduciaries. We hold fixed income investments to more than cover our liabilities to our policyholders and we match our duration and currency to earn a spread while we hold the funds.

We do our own credit analysis and we own a plain vanilla balanced portfolio of corporate municipal and government and agency bonds. While we experienced some losses in 2008 in this portfolio, even with our conservative approach, I remain confident in the basic soundness of our discipline.

We learned some lessons about hidden leverage and the necessity of clarity and transparency in financial statements. We will modify our fixed income approach somewhat to take advantage of the lessons we have learned. Our four-part equity investment approach of investing in profitable businesses with good returns on capital, honest and talented management, with reinvestment opportunities and capital discipline at fair prices, also remains unchanged in the 14 years since we had the last cluster of events such as we face today.

I would also add that I am increasingly optimistic about prospective equity returns. This decade so far has produced the lowest equity market results since the 1930s. Financial headlines are filled with forecasts of ongoing low or minimal returns from years to come. I respectfully disagree with that outlook for several reasons.

First, we are starting from meaningfully lower equity valuations than we have a decade ago. Second, our system is purging itself of excess debt each and every day. Third, as I observe my children going off to college, they and their friends are talking about things like alternative energy and alternative fuels rather than future careers as investment bankers.

Reasonable and non-heroic assumptions about earnings and dividends of high-quality global businesses should give equity investors sound reasons to look forward to better returns in the next decade than what we have seen in recent years. Additionally, the events in the property and casualty insurance world of natural catastrophes such as Hurricanes Ike and Gustav, and unnatural catastrophes such as subprime mortgages, CDOs, CDOs squared, derivatives gone wild, and so many other unsound pieces of financial engineering that continue to wreak havoc on the industry's capital base should produce firmer pricing and positive cash inflows from Markel.

While we are naturally disappointed with any negative results, we have protected the balance sheet of Markel to what I believe is a once in a generation storm of physical and financial catastrophes. Our company has greater liquidity than at any time in its history with cash and short-term investments of over $900 million at September 30. Our debt stands at a low of roughly 20% of total capital, and we have the financial strength and flexibility to respond to better insurance markets in a disciplined and profitable way.

Better insurance prices and a target rich investment environment could produce a cluster effect that should be the exact reverse of what we have experienced so far in 2008. I am optimistic about our chances to see just such circumstances and I look forward to your questions in the Q&A period.

With that, let me turn it over to Steve.

Thank you, Tom, and Richie and Paul. While the quarter and 2008 have been a challenge, we are very confident of our ability to earn consistent underwriting profits and superior returns on investments to build shareholder value. With that, I would like to open the floor to your questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions)

John Fox, Fenimore Asset Management.

Hi, good morning, everyone. A number of questions. First, you have been monitoring what is going on in the life insurance business, which you may or may not have. A lot of issues there with investment losses and product guarantees and that type of thing, which I know you don't have, but you certainly have an investment portfolio. The rating agencies seem to be changing the bar.

I am just curious how do you guys think about if we sustain further investment losses from this point what your capital position would be like? How would that allow you to take advantage of, I guess, a hardening market into '09? And how do you kind of handicap too that the rating agencies might change the bar? So if you can just kind of comment on that area.

John, I will take a shot at it. I think the economics and the dynamics between life businesses and P&C businesses are very different. I think a large part of the life problems are on the asset side. And again, we don't invest, I don't think, in any life companies and recently don't operate in any life businesses, so we are a few steps removed from that.

But our fixed income investment portfolio was never structured to be a 5% or 6% guaranteed yield in a life contract or an annuity or variable annuity, and so we didn't try to structure exotic assets to match off against them.

I think also -- this is a little outside of my area of expertise -- but I think historically, life companies have not been maybe as disciplined in marking those assets to appropriate valuations that the accountants would like. Because of the sort of level two and level three type assets that are in those portfolios, they are probably much greater stressed in trying to determine what is an appropriate valuation and whether or not there is an impairment, whether it's temporary or some otherwise.

In terms of Markel capital position, it's I don't think ever been any stronger. As we pointed out, we had this huge amount of liquidity today. Our premium volume has been flat for three or four years. If the rest of the market is not increasing prices, this could be down in certainly the next quarter or two as we increase prices, regardless of where others do. We continue to operate with underwriting profitability and have a very, very strong balance sheet, so I don't sense that we have any particular financial stresses whatsoever.

Yes, I guess my question was really about the rating agencies and whether -- are they changing how they are measuring you and if there is further investment losses in the system? And I agree, Markel looks very strong. Are you getting any noise from the rating agencies or anything of that nature?

I will be honest with you, John. I don't talk to you them at all, so I will let somebody else answer your question.

Okay, that's good.

John, this is Richie.

He does have to talk to the rating agencies.

The things I can say is obviously if things keep dropping, you know, if you drop another 30% or 40% from here, all bets are off in terms of the hold system. But realistically, we have very strong capital position, as Steve said. We have a lot of liquidity at the holding company and on a consolidated basis.

We were recently upgraded this year by S&P and Moody's to bring us to a BBB flat level senior debt ratings, so we are BBB flat now from all three of the rating agencies. So clearly we are -- we and everybody else will be having lots of discussions with the rating agencies because they have a heightened sense of awareness at this point because of what is going on in the markets.

But in terms of them being particularly concerned about Markel, absolutely not. If the markets were to go down a bit more, we have the capital to deal with that. If the system collapses, nobody has the wherewithal to deal with that.

Right. No, I understand that, obviously. Then, for Steve, I was interested in your opening comment about -- if I interpret this correct -- possibly writing it 100 for the year. I'm looking at the year-to-date underwriting loss with, obviously with the hurricanes and asbestos, et cetera, so could you just expand on that a little bit? It would obviously require a pretty good combined ratio here at the end of the year?

Yes, I think -- there are a couple. Richie pointed out some of the unusual events or the additional charges in the third quarter. In addition to the hurricane there was -- I think we did our asbestos and environmental review which added a few bucks and we had a little bit of bad news in one of the product lines that we had discontinued a year or two ago. So, I think with the normal quarter ex those kinds of events, it's not unrealistic that we could end the year at 99%.

We also -- I think, we are reasonably conservative on our hurricane estimates. There is no certainty of how that will evolve in the next couple of months. There is still a lot of work to be done to assess some of the damages, but early indications are that we may have a small bit of redundancy there as well. And so I think we are -- it's very realistic that -- I shouldn't say realistic, it's very possible that we will end the year at something less than 100.

The context I was trying to put it in was that in terms of defining Markel's ability to absorb a catastrophe, our standard has been that we want to have every year less than 100% combined ratio. The magnitude of Gustav and Ike are such that we pushed it to the limit and we may have gone over that limit modestly. But I don't think so yet, or I am not certain yet.

I'm sorry, which intended to sort of gauge the size of our ability and willingness to absorb a hurricane loss. Obviously in return for thinking that if people collect enough premiums in the years that they are not at loss to justify being in that activity. And on each product line, we do evaluate and measure that.

Okay, thank you.

Beth Malone, KeyBanc Capital Markets.

Okay, thank you. Good morning. You talked about pricing, putting in some pricing increases and being pretty disciplined through out your market. Should -- if the market itself in general, there is some very undisciplined competitors still out there in the marketplace that may not follow that pricing trend.

So should we -- what do you anticipate for the top line? If you raise rates that certainly should help the underwriting, but are we going to see a meaningful shrinking of the business as a consequence?

Yes, the message I want you to understand and certainly all of our associates to understand is that if we need to increase prices on a particular account 5% or 10% or 15%, we should do so because it's the right thing to do without respect to what any of our competitors do. In the last quarter, our total volume was off five points, I think.

It would not have bothered me one bit. In fact, I would have preferred it been off 10 points if the margins would have improved. And I will be thrilled to death if we get our price increases to reward and applaud those people that achieved that goal without regard to the volume.

Now my belief is that in good time the marketplace will also get more prices and we will see our volume increase. I also believe that our share of the market with some of the problems going on in the industry will increase. But it's unknowable and what we can control is the underwriting discipline on each and every account.

We can do our very, very best job to get out in front of our agents and our clients and sell Markel and provide the quality service and quality products that we offer our clients. There is no reason why this business shouldn't be able to grow very, very significantly. But the first step is to doing the right job underwriting and the right job of charging the right price, the rest will follow suit.

Okay. Could you comment on what you think is going on with the major competitor of AIG? Where -- do you think they are going to continue to be a major factor in the marketplace or do you see in the not too distant future them -- their competitive capabilities diminished?

I think there is -- the safest and smartest thing to do is not to throw any oil or gasoline on the fire. It's burning pretty good all by itself. It doesn't need any help from me.

Okay, fair enough. And for Tom, you mentioned that you were going to look at changing some of your strategy, potentially given market conditions. Is there an overall theme that you are going to focus on, or is there going to be a change in the kind of investments you make in the market or the kind of companies you invest with?

No, on the equity side I really don't anticipate any change at all. The comments that I made has been on the fixed income side, I think we learned some lessons. If I could recall my comments exactly about the necessity of transparency and clarity and financial statements and some of the additional things you think about when you are doing credit analysis work in the corporate bond area. So that is really the area that is under the microscope.

Okay, and I know you provided a lot of detail in your 10-Q on the credit default swap. But as you have always aspired to have very clear and simple investments that are easy to understand, does the credit default swaps fall into that category?

Yes, Beth, I will take the responsibility for that. At the fall of last year when the storm started coming, credits spreads and pricing went out a bunch. Now clearly, they have since gone out a lot more than what we had ever anticipated or thought or had seen before. We thought in the fall of last year that we were being paid appropriately for the risks that we were taking.

The credit default swap in and of itself consisted of credits that we had already had in our portfolio. We had already done credit analysis work. Everybody here involved in credit analysis looked at each of those credits and we vetted the list of names and we essentially made the decision that we thought those institutions were not going to go bankrupt.

Clearly, there is a long list of institutions that do not exist today that existed a year ago, and that explains 100% of the losses in the credit default swap. We didn't see it. We lost but fortunately we did one and then we stopped. And we have not done another one.

I would also add in the discussion on the pricing, sometimes in insurance lingo we use the word rate online. For a $50 million total notional exposure, we were paid $30 million cash right up front, so that is 60% rate online. Given our comfort with the underlying names in the portfolio, we thought that was a good risk/reward decision. It has proven to be incorrect. We have learned our lesson and we are moving on.

Okay, thank you.

Jay Cohen, Merrill Lynch.

Yes, thank you. Regarding the price increases, first of all, I was kind of encouraged to hear your fairly definitive statements. What we have been hearing from others is pricing should be moving up. But I haven't heard any one state it as simply and as directly as you that we are raising prices. And that is what I hope to hear from others, so I am encouraged to hear you guys talking about it. Not surprised given your history.

Have you started that process yet? And if so, what has been the reaction of your distribution partners when you go to them with a price increase when they had been expecting to hear about price decreases, let's just say?

I will let Paul deal with that. But the first insert is, yes, we have started already and, yes, we don't want there to be any ambiguity about what we intend to do. And that is true not only for communicating to you and our other shareholders, but we would also internally. Paul, do you want to --?

I am happy to comment on that, Jay. There were a couple of product lines even before the beginning of the third quarter that we started to move pricing up, our international whole business being one example and our domestic architects and engineers business being a second, for different reasons, some opportunistic and some just because the targets needed to be moved up.

But post the two storms and post a lot of the noise around the financial turmoil, we have sat down with each of our 23 or 24 product line leaders and really reviewed where we are from a results standpoint over the last several years. What we've done in terms of pricing, in particular, over the last 36 months with a goal in mind that each of our products over a peer code of time need to return 20% to the corporation. We have systematically put in place price increase targets for virtually every one of our product lines across the board and that is 65 to 75 of the specialty products.

As I commented in my remarks, where does this leave us in regards to the competition? Quite frankly, we are probably out of step with most of the rest of the market. It's taking a wait-and-see position. But candidly, this is one parade we don't mind being out in front. We think somebody has to be the pricing leader. Someone has to say that prices have to go up and we do have the discipline to walk away from business when we can't get our price and terms and conditions.

Early indication would be that in a lot of products where we may be targeting a 5% or 10% or 15% increase, previously the marketplace was doing a 5% or 10% or 20% decrease. Now maybe the marketplace has come up to at least flat. We believe before you start to be able to significantly sell increases, you got to at least stop the decreases.

So we are encouraged that the rest of the market is at least beginning to level off in pricing. And I firmly believe that come the first of the year and into the first quarter, you are going to see some increases in the vast majority of the lines and significant, significant increases in some of the products.

Another element, Jay, in our pricing models is that we do use an internal capital allocation model where each product has underwriting targets for their loss ratio or combined ratios. One of the elements that go into the model is interest rate assumptions, because while the underwriters don't directly participate in our investing returns, the model does take into consideration the float that the various products generate.

Clearly, our interest rate forecast for those internal capital allocation models is lower than it was a year ago. And that is also an important element that drives prices up.

Great, I appreciate those comments. I also hope your competition is listening to this call as well.

The second question, if you look at your combined ratio and you take out the favorable development and you take out the catastrophe effect, it looks like for the quarter it's about 106 combined ratio. You take out the development for the past two quarters, you were running more 101. And so, I know you mentioned there was several product lines where you had some issues beyond just cats, but it looks like about a five point increase.

First of all, is that -- are you guys seeing it the same way? And then secondly, what is behind that increase consecutively?

Jay, I'm not -- we would have to maybe -- we can call or talk after the call, but one thing I'm not sure if you are picking up or not is the asbestos charge, which is about $25 million. So I don't know if that is getting -- the way you are doing your math, I don't know if that is ending up in your current accident year or coming out.

I think I am taking it out. I am just taking -- you had 19 -- net/net 19 of favorable development that I am just taking out.

Yes. That sounds a little high to me, but we can look at it after the call. The one thing I can say is we are obviously continuing to establish margin of safety on the current accident year as we always have in the past. So clearly, that continues to be there. We have had a tick up in the expense ratio, so that will be some of it. That is about a 1% increase.

We did have a couple of lines of business that didn't behave quite the way we would like in the fourth -- in the third quarter. We had some areas of property other than catastrophe, just sort of normal property losses, that were bigger than we would like to see so that might be driving it a little bit.

But, I think we are still comfortable that we are pricing the business to make an underwriting profit. Obviously, you have to establish the margin of safety on top of that, and we have had some other things going on in the quarter as well.

But I think your point is very valid, Jay, in that the margins have shrunk with the declines in prices over time. While in the aggregate, we might be quibbling over whether our run rate is it 99 or 101. The more important thing is that our run rate needs to get down into the low 90s, not the high 90s. We need to earn the kinds of margins that justify putting capital in the insurance industry.

That does not exist today. We need to increase prices significantly to generate the kind of returns that we are entitled to earn. Capital is king today, and we have got to earn good returns on it. But let there be no mistake about it, the first thing that needs to happen is prices have to go up.

Sounds very rational. Thanks for those comments.

Meyer Shields, Stifel Nicolaus.

Thanks, morning. Let me start with the question for Tom, if I can. I think based on Steve's comments and your comments, it sounds like you are not quite ready to plunge into equities. I was hoping you could sort of explain what you are waiting for?

Meyer, what I would really like that both barrels in the shotgun lineup. The two barrels, in essence, are the investment ideas and opportunities that are out there, and I do think that they are out there.

Point number two is a firmer insurance market, because the nice dynamic that has happened at Markel over the years, and that I think is on the horizon, is when the insurance business is nice and profitable and hard and has a lot of money coming in. For that to happen at the same time when equity prices are very attractive, we would be deploying a lot of money into equity.

Meantime, as Steve said, capital is king. Preserving liquidity, preserving the fortress balance sheet that we have had as our mentality really for the last year and a half or so has been very important because it's the old joke from Mario Andretti was 'To finish first, you must first finish.' We have got the balance sheet in place. And we need to protect that first and foremost so that we can take advantage of both the insurance and the investment markets.

Okay, that helps. And if I can turn to Paul. I guess one of the characteristics of hard insurance markets is that business that is sort of marginally specialty like moves from the standard carriers to the specialty carriers. Is that -- should we expect that to happen if we see rates rise next year? Or is it sort of a different enough hard market that you are anticipating that that component of it is less likely?

Well, from my experience, Meyer, I would tell you that every hard market/soft market cycle has different characteristics. We have seen over the last 24 to 36 months a lot of gray area business excess -- exit the Excess and Surplus Lines marketplace and find its way back to the standard market. And that is just part of the normal ebb and flow in the cyclical nature of the business.

What we are beginning to see already right now, just over the last 60 days is that when you had carriers previously putting down $25 million and $50 million lines on large Excess and Umbrella placements or large property covers and things like that, the brokers and their clients are starting to say perhaps, perhaps we may be ought to have five carriers each putting down $10 million lines rather than two carriers putting down $25 million lines.

When you get back to layering such as that, in and of itself, the market pricing will push the average cost north, so we are encouraged by that. We haven't really seen any change other than a blip on the radar screen in the middle of September in terms of our new business offerings. Our new business submission counts have been up significantly all year, but usually that just means more people shopping not necessarily more people buying.

I think, Meyer, it is fair to say that the bars that we write for $5,000 are still being classified as restaurants in the standard market. And so we have not seen those come back yet. But you can't make an underwriting profit writing bars in the $1,000s in the standard market, so it's a matter of time.

Okay, that helps. And I guess last question, I know historically I think your preference has been to acquire companies that are sort of bruised. Are more than of them knocking on your doors yet?

There are plenty of bruises out there, and I think we have got our fair share look at most of them. I don't think there is any transactions that are ready for announcement today. I wouldn't want to imply or suggest that something is going to happen at any particular point in time. That is sort of a very opportunistic kind of circumstance.

My guess would be that the impact of what we have seen in the financial markets and the impact of what is going on in the underwriting markets that we will see some significant opportunities in the Property-Casualty business over the next several months or quarters.

As the operator said at the beginning of the call, we are in a listen-only mode.

Got it. Thank you very much.

Chuck Akre, Akre Capital Management.

Hi, thanks. Three or four quick questions. Thinking about this TARP program as it's moving past banks and financial institutions and maybe life insurance, have you all considered what would be -- what would likely be your position if they wanted to shove money into you or others in your space and putting you either advantaged or disadvantaged relative to other players? Or is it just a crazy idea?

Chuck, it's sort of interesting, because of our investment in a local bank Markel Corporation is in fact a bank holding company. And as a bank holding company under the definition as think I have seen it we are on the list of TARP eligible, I guess investees for the federal preferred stock. At this point in time, I don't think you would add much value to our balance sheet, so it's s not something that Markel Corp is currently pursuing.

But you haven't been exposed to the issue of you, you are going to take this?

No, right now have no intention to take it. We are on behalf of our or in conjunction with the community bank we own, are involved with the discussion about whether they should accept it. That decision has not been made yet.

Great. Quickly, you answered a question about AIG. Somebody had mentioned that -- maybe not on this call -- but had mentioned that they were being particularly fierce competitor in today's market in order to preserve brand and franchise. Do you see that as a consequence of the turmoil there and how it affects your ability to achieve price increases and so on in places that you would like to be?

Well, I think the comment I made before as we probably have -- it's probably not appropriate for us to throw oil or gas on that fire. But I don't think we are going to lose many Markel renewals where we have a good relationship with a client over a long period of time to a company like AIG being particularly competitive.

What I am hearing in the marketplace is their extreme aggressiveness really relates to hanging on to their renewals. The vast majority of their business is in product lines where they are putting out $500 million or $50 million or $25 million of limits, and those are not things that we particularly have a strong interest in.

When they get down into the smaller account area, we would love to compete with them. My guess is that they are spending all of their energy on their big accounts, and so I don't -- if we need 15% more and a client is looking at it for the long term, I am not particularly worried about competition with them.

Great. A couple quick last ones then. Your equity holdings today as a percentage of shareholders equity is what?

Rate about 60%.

And so that is about the lowest we have been in how long, Tom?

The lowest it ever got was right after the Markel International acquisition at 50%, 51%. And this would be the second lowest in the modern era.

I suppose with your sense of humor it's okay to pass on the Will Rogers notion about your investment -- about your changes in investment philosophy?

That does not change. We are more interested in the return of our money than the return on our money.

I was thinking about the one about only buy stocks that go up --

Let's talk about it off-line. There is no reason to share that information too widely, Chuck.

Then just real quickly, the last question was about deals in the marketplace. It seems to me that as it relates to what we call your gearing ratio, your 4-to-1 or now less than 3-to-1 structure. You can get it back to the 4-to-1 target area only through two things, either through deals or strong pricing environment.

And, if you are in fact -- if we are lucky enough that we are headed into a stronger pricing environment, I suppose that to some degree obviates the need to do deals or at least it lessens the size at which you might be tempted. Is that accurate or is that fuzzy thinking?

No, no, that is very, very accurate. We clearly would prefer to generate the growth internally, but we are still open for looking at opportunities. And particularly in today's environment, hiring teams of people; that is a very productive way. I think the Markel doors are wide open to smart folks with good ideas who can bring business ideas, underwriting profit ideas for Markel. So we are a good place that people want to build a career; we are looking for hiring good people.

Thanks so much.

(Operator Instructions) John Fox, Fenimore Asset Management.

Hi, I had a question for Tom. Tom, I wonder if you could just describe the tone of the fixed income markets? Obviously, I know October was horrible. Just maybe through the quarter and into a little bit early here in November, do you see things getting better, staying the same? If you could just comment on what you are seeing in fixed income?

Well, I think you have answered your own question. It's pretty ugly out there.

Do you see any improvement or kind of all the same?

What I would say is that the rate of decline certainly seems to have stopped and just the frozen nature where nobody -- the old joke was after NCNB bought the bank down in Texas a long time ago, NCNB stood for 'No cash for nobody.' And the markets were indeed frozen up like that episode for a while.

We are starting to see a little bit of a thaw and the ability to transact business. And that would be the first step towards returning towards normality.

Okay, thank you.

Meyer Shields, Stifel Nicolaus.

Thanks, just a follow-up for Paul if I can. Is the business being written in the Plano office, is that all basically local Texas business?

At this point it is, Meyer. We have roughly five dozen wholesale producer relationships in Texas and our concentration, the first 90 days will be on those broker partner relationships that were already in place. As we get closer to the end of the year, we will expand to the surrounding states like Louisiana, Oklahoma, and ultimately the mid-South office will have roughly 10 to 12 states that they will be responsible for. In the meantime, we will continue to prospect for new relationships and try to work on better penetration through the existing ones.

Okay, but this is all new business? There is no risk of the Plano office cannibalizing other product lines?

It's not all new business. They have inherited roughly $75 million to $85 million of existing business with existing Markel relationships that is being transferred under their watch to Plano. And in addition to that, they are charged with responsibilities of producing new.

Okay, thanks for the clarification.

The idea of the One Markel organization that we have been talking about is to create regional offices that provide all Markel products, all Markel wholesale products through those regional office distribution systems. So the Texas regional office will provide all Markel products to all of the wholesale relationships in that region ultimately. Currently it's just Texas, but that will be expanding as well.

Okay, that is great. Thank you.

Ladies and gentlemen, we appreciate you participating today. We appreciate your long-term support as shareholders of Markel. We wish you a very good day. If you have any further questions or comments, don't hesitate to give us a call.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.