Markel Group Inc (MKL) 2008 Q4 法說會逐字稿

Greetings, and welcome to the Markel Corporation fourth-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 for Markel Corporation. Thank you, Mr. Markel. You may begin.

Thank you, operator. 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 caption Risk Factors, and Safe Harbor and cautionary statement in our most recently filed annual report on Form 10-K and quarterly report on Form 10-Q, and in the Safe Harbor statement beginning on page 5 of the press release dated February 2nd.

Today, we will follow our same format as in prior quarterly calls. After a few introductory comments, Richie Whitt will review our financials; Paul Springman, the insurance operations; Tom Gayner will follow with a discussion of the investment landscape; and I will moderate questions and answers.

The quarter had very good underwriting results in the fourth quarter, and we closed the year with a 99% comp combined ratio as a result of the hurricanes recorded in the third quarter. Investment returns continue to be challenging, as I'm sure all of you know, and book value per common share ended the year at $222, a decline of about 16% from the prior year. Over the past five years, we've compounded book value at a 10% rate, which, as you all know, is significantly under our long-term target.

We remain very committed to our long-term philosophy and policy and belief that a combination of solid investment results and solid underwriting results will build shareholder value. We believe in spite of the current environment that that model will work for Markel in the long term, and we have continued commitment to implementing that model.

With that, I will ask Richie Whitt to review the quarter and year results, and turn it over to the other speakers. Richie?

Thanks, Steve, and good morning, everyone. I'm going to follow the similar format to past quarters, and I will focus my comments primarily on our year-to-date results. Start by discussing our underwriting operations. I'll then follow that with a brief discussion of our investment results. And then bring the two together with a discussion of total results for the year.

Many of the trends discussed in our quarterly calls continued for the full year. The two biggest issues obviously affecting our 2008 results are the competitive insurance market and the volatile financial markets and their impact on our investment portfolio. In addition, as you know, we had losses from Hurricane Gustav and Ike in the third quarter of 2008.

So first, let's kick off with underwriting results. Due to increased competition in all of our markets during 2008, gross premium volume decreased 6% to about $2.2 billion. About one-quarter of this decrease was due to exiting certain programs previously written at our Markel Re unit, our former Markel Re unit. Net written premiums decreased 4% and premium retentions were up to 89% from 87% in 2007. We continue to peck away and increase our retentions in our various lines of business, and are pleased to have gotten that up to 89% this year. Earned premiums decreased 4% to approximately $2 billion compared to about $2.1 billion in 2007.

Our combined ratio was 99% for 2008 compared to 88% in 2007. We have produced underwriting profits in five of the past six years. Our only miss was in 2007, with 101% combined ratio as a result of Hurricane Katrina. The increase in our combined ratio for 2008 was the result of $95 million or 5 points of loss from Hurricane Gustav and Ike. I want to point out that this represents approximately a $20 million reduction in our storm estimates from the third quarter, a higher current accident year loss ratio of 66%, before considering the storms, due to price decreases compared to a 61% current accident year loss ratio in 2007. As Paul will discuss shortly, we have implemented rate increases in many of our product lines.

The 2008 current accident year loss ratio was partially offset by prior year's favorable redundancies of 8 points. This compares to 9 points in 2007. This favorable redundancies came primarily in our Excess and Surplus Lines segment, at our Markel Shand and Markel Essex units, and also from our London Markets segment. The 8 points represents about $34 million less favorable redundancy than we experienced in 2007.

Our expense ratio was relatively flat at 36% in 2008. It was impacted, obviously, by our lower earned premiums and One Markel project cost. So that pretty much wraps up the combined ratio for the year -- again, 99% compared to 88% last year.

Turning to our investment results, investment income decreased to $284 million from $306 million in 2007. The decrease was due to lower rates on our portfolio and our increased allocation to short-term investments in cash, which obviously rates are extremely low right now. 2008 also included a mark-to-market a loss of $13.7 million on a credit default swap. At this point, there is only an additional $3.1 million of potential loss on this contract.

Realized losses for 2008 were $408 million. This primarily was comprised of $339 million of write-downs for other than temporary declines on the fair value of various equity and fixed maturity securities. The most significant write-downs for equities were $65 million for GE, $38 million for Citigroup, $23 million for Bank of America and $22 million for International Game Technology. We have also realized bond losses during 2008, the most significant being $41 million from Lehman and $32 million from WaMu.

Unrealized gains also decreased during the year. The decrease was $507 million pretax. Obviously, Tom will go into much further detail in his comments a little later in our presentation today.

Looking at our total results for 2008, we reported a net loss of $59 million. This is compared to $406 million of net income in 2007. Book value per share, as Steve said, decreased 16% from December 31, 2007 to $222 per share at the end of 2008. Also as Steve pointed out, we have increased book value per share at a 10% compound annual rate over the past five years.

I want to make a couple comments related to cash flow and the balance sheet. Regarding cash flow, operating cash flows are estimated to be slightly less than $400 million in 2008. This compares to operating cash flows of approximately $500 million in 2007. At December 31, 2008, we were holding $650 million of cash and investments at our holding company. Also, on a consolidated basis, we have been building liquidity throughout the year, and we held approximately $1.1 billion of cash and short-term investments at the end of the year.

At this point, I would like to turn it over to Paul to review our operations. Thank you.

Thank you, Richie, and good morning, everyone. You have just heard Steve's opening remarks and Ritchie's report on our numbers from the fourth quarter of the year and for the entire 2008 year. And in just a few minutes, Tom will take us through our investment results.

Today, it is my pleasure to give you a report from the operational side of the business and to update you on two or three important fronts. First, our combined operating ratio for the year is 99%, which produces a nominal underwriting profit. We vow to improve this number significantly during 2009.

Last quarter in my remarks, I highlighted the need for increased pricing virtually across the board in all product lines. I am pleased to report that although it has cost us some business during the fourth quarter, prices at Markel have leveled in all areas and have begun to move up in most.

Before I get into the specifics on that point, I would like to talk about our individual segment results from 2008. Our Excess and Surplus Lines segment produced a combined operating ratio of 92% for the year, representing 8 solid points of underwriting profit. While not quite the banner year that we had in 2007, still a very admirable result, especially in these difficult market conditions that we continue to face.

Premium volume in this segment was off approximately 10%. This was due to three factors. First, our decision at the end of 2007 to close the SMART division of Markel Re. This particular unit had failed to meet our expectations and there were little prospects for improvements in the following year.

Second, there continued to be much more competition than we originally anticipated for new business opportunities that lasted virtually throughout the entire year. And lastly, we incurred heavy competition through most of the calendar year with our renewal businesses resulting in some lower prices. But all in all, a pretty good result in today's world.

Our Specialty Admitted segment produced an underwriting loss of approximately 6 points. This was due to higher-than-expected losses from Hurricanes Gustav and Ike, especially in our Markel Global Marine and Energy division. This division also had unusually high frequency and severity with onshore property losses, as well as those offshore wind-related claims.

We made the decision this past quarter to discontinue the vast majority of this business. One small remaining segment, our Hull and Cargo portfolio, will be rolled into existing Markel regional offices as we move forward in 2009.

Our London insurance market operations also produced a loss of approximately 4 underwriting points. Here again, higher-than-expected losses from the hurricanes, as well as an unacceptable loss result within our Professional and Financial Risk division on a segment of Italian medical malpractice did not meet our expectations. Overall premium volume in all segments combined was down approximately 6% from year-end 2007, due principally to the combination of the pricing factors I've just articulated.

Now on to some good news. Over the last 60 days, we have noticed increased pricing in several market segments. In our US Professional Liability offerings, previously known as Markel Shand, Architects and Engineers pricing has begun to improve. Although building starts are stagnant and new construction values are down, market losses are up, and two of the market leaders in this segment are rethinking their respective strategies. We have been successful in selling moderate price increases here, and believe that there will be continued price firming as we get further into 2009.

Lawyers Professional Errors and Omissions has also seen market pricing improve. Any firms involved in mergers and acquisition work or offering financial advice of any kind have begun to see increased claims frequency, which has led to higher pricing.

In the Employment Practices Liability arena, rates need to go up and to go up quickly. As unemployment rates zoom skyward in virtually every state, EPL pricing needs to keep pace. Miscellaneous Professional Liability pricing has also begun to head northward, especially on firms involved in any financially related businesses, such as banks, accounting firms, appraisers, E&O, etc.

On the Properties side of the ledger, most property catastrophe exposed risks received moderate to medium sized rate increases, ranging from 10% to 30% during the recent renewal season. Those accounts that had produced losses from the last storm season received a disproportionate amount, but overall pricing has certainly bottomed and has begun to head in a healthy direction.

We are involved in the property catastrophe reinsurance business through Markel International, and we were very pleased that our January 1 renewal pricing met or exceeded our expectations in virtually all cases.

Also on the positive side is increased pricing and a restriction of capacity in many of the Marine and Energy product lines. In addition to Ike and Gustav, this market segment in the US was hit with two losses of $100 million each -- in excess of $100 million each in 2008. One was an oil refinery near Dallas, and a second was a sugar refinery near Savannah, Georgia. These losses are still rippling through the Worldwide Marine and Energy marketplace.

On the international front there were numerous Australian coal mine losses after early 2008 flooding, and everyone has read or heard what the pirate activity off the coast of Somalia in the vicinity of the Horn of Africa has done to cargo pricing.

All in all, the pricing front represents a mixed bag. If you are a Main Street business located in middle America, not exposed to wind or the tumultuous times in the financial world, you may well be successful today in negotiating a flat price renewal. However, if you are a coastal property or have had any exposure to financial loss or are involved in any of the classes of segments I just mentioned previously, those clients need to be prepared for a different marketplace than the ones that they faced not just 12 months ago, but as recently as six months ago.

The other operational item that I would like to touch on today is our progress as we move towards One Markel. We have discussed this strategy in each of our last two quarterly calls. During the latter part of the third quarter, we opened a Texas prototype office in Plano, and have been testing our multiproduct offering approach to clients through this network of regional offices. During our most recent senior strategy sessions held here in Richmond this past week, we unanimously agreed that the prototype had been an early success and that we need to move as rapidly as we can and transition the remaining Excess and Surplus Lines businesses from our previous business model to this new regional concept. Major milestones have been established for the middle of this upcoming month, as well as for the latter part of March, with a full go-live implementation date no later than the 1st of April.

This new concept will afford Markel's customers closer geographical proximity to our underwriters and more access to the majority of our product offerings. As most of our competitors begin to retrench, retool and regroup from what we anticipate will be horrific underwriting results from 2008, we've made this bold step to plan for Markel's next generation. Ultimately, we believe that this will significantly enhance our profitable growth, streamline our back room and result in operational efficiencies as we get further down the road.

While the marketplace continues to deal with increasing losses from 2008 storms and trying to right their houses from other underwriting losses, Markel is clearly focused on our future. This future, I can assure you, will produce both growth and sustained profitability.

I look forward to your questions during our Q&A, which follows after Tom's comments.

Thank you, Paul. As Ritchie reported to you a few moments ago, our investment results were disappointing in 2008. First, the facts. In equities, we were down 34%. In fixed income, we were up 0.2%. In total, we were down 6.9% in local currencies. After adjusting for FX effects, which are essentially neutral to our book value, since the decline in the reported value of our FX-denominated investment assets are offset by the decline in our FX-denominated insurance reserve liabilities, the total investment portfolio declined 9.6% in 2008. These investment results drove the decline in our book value from $265 to $222 per share in 2008.

Those are clearly very disappointing results and the worst investment results we have ever experienced at Markel. While I know that all of you share the same unhappiness as we do in those results, I would like to spend just a few moments covering three topics.

First, I will attempt to put our results into some context of what is happening in worldwide investment markets. Second, I will describe some of the actions we took in managing the portfolio throughout this extraordinary period. And third, I will make some comments on our circumstances and expectations for the future. I also look forward to your specific questions on our investments.

First, the context. This is the first decline in book value per share at Markel since 1999. In the upward but jagged path of growth in our book value per share, we also experienced annual declines in 1990 and 1994. While we are never pleased to report this kind of result and we are never satisfied or complacent when the news is good, ups and downs are inevitable in business and life, and it is important to keep an even keel in all environments.

As all of us know, 2008 was the worst year for equity returns since 1937 and the era of the Great Depression. The S&P 500 Index was down 36.5% for the year. Our performance -- and I'll use the performance word performance loosely here -- of down 34% was 250 basis points better than the Index. If I could sign up for 250 basis points of outperformance for the rest of my life, I would happily do so right now.

In reality, I am not Dr. Faustus, and Daniel Webster is no longer practicing law. So that option is unavailable. It is important, though, and accurate to note that we navigated through 2008 in a reasonable way, given the circumstances we faced.

While I am limiting my context discussion to the S&P 500 for the sake of brevity, it directionally describes just about every investment market in the world last year. As Woody Allen once observed, more than at any time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness; the other to total extinction. Let us pray we have the wisdom to choose correctly.

Woody had it just about right last year. US markets, European markets, Asian markets, emerging markets, small caps, large caps, commodities, oil, gas, private equity, alternatives, and just about anything you can think of, other than cash or government bonds, all correlated in one direction -- down. More importantly, as widely reported, the S&P 500 produced a negative return of 0.9% per year for the last 10 years. This is the first negative return decade since the 1930s.

While there remains ongoing speculation about whether our economy faces a return to depression-like conditions, the stock market isn't waiting to find out. The stock market assumes it has already happened. That's an important fact to keep in mind, since the low expectations and low valuations of equity prices might make for a pleasant surprise over the next decade.

By contrast to the negative return of 0.9% per year for the equity market over the last 10 years, we earned a positive return of 3.6% per year over this decade. This is an outperformance of 450 basis points over a long period of time. Again, I would be more than happy to earn that sort of excess return for the rest of my career if it was offered to me.

I would also note that the book value per share of Markel, which comes from the combined efforts of our underwriting and investment activities, grew from $77 per share to $225 per share over this 10-year time frame of overall negative returns.

In our fixed income activities, we earned a deposit return of 0.2% for the year. Over the decade, we earned 5% per year. While we are glad to have positive results to report, we were disappointed to experience an unusual number of credit losses in 2008. To remind you, we consistently maintain a fixed income portfolio with at least 90% of the securities rated A or better. In 2008, we owned some senior debt securities that were A rated and met this test at happy hour on Friday afternoon, and were broke when we came into work on Sunday.

We've implemented some fundamental changes in our approach to fixed income management to take advantage of what we learned in 2008. We look forward to better results from those activities in future years.

The last statement I will make about context comes from the recent reports we've seen from the Toyota Motor Company. We've all heard so much about black swans, economic tsunamis, headwinds, perfect storms and so on and so on, that those phrases have become clichƒÂ©s and lost their power to make an impact. Consider, though, that Toyota recently announced it would report its first loss in history in 2008.

Toyota was founded in Japan in 1937. That means they managed to make money every year since then, including 1945, when not one, but two, atomic bombs were dropped on the only country where they did business at the time. To me, the fact that Toyota was able to make money in 1945 but not 2008 speaks volumes about the current financial market conditions.

Second, the actions we took over the last two years. Over the last two years, we steadily reduced our exposure to equity securities. Whenever we sold something, we reinvested fewer dollars, and we did not invest our cash flow into equities in the way we normally and historically would have done. During this time frame, we also began to shift our fixed income exposure away from corporate securities towards government and municipal bonds. We've also built our cash balance through this time.

To put some numbers on that statement, at December of '06, we invested 77% of our capital in equities. By December of '08, we had 49% of our capital invested in equities. The percentage of our fixed income portfolio in corporate bonds declined from over 40% to approximately 33% today, and cash grew from roughly $700 million to $1.1 billion during this time frame. All of these decisions were directionally correct, and in combination with a reduction of our debt by over $100 million and strong insurance reserving, it gives us the strongest balance sheet we've ever enjoyed at Markel.

While we were somewhat nervous about valuations and financial conditions beginning in 2007, we were not nervous enough. With perfect hindsight, we would have retreated from equities and corporate bonds faster than what we did. Also during this time, we relentlessly upgraded the quality of our investments. While ratings and our own credit analysis work did not protect us completely, they did help us to make better decisions than what we see at so many other institutions these days.

Our investment portfolio is transparent. We may not like or agree with the market price, but at 4 P.M. every day, we know what it is. We did not invest in complicated structures, alternatives or other categories which are literally destroying some other institutions. Our investments could be described as delightfully unsophisticated. That is a good thing.

During 2008, we remained faithful to our investment discipline and described by the catechism of investing in high-quality fixed income securities and equities selected using our judgment that they represent ownership of profitable businesses, run by honest and talented managements, with reinvestment opportunities and capital discipline and fair prices. That has been a long-term recipe for success, and we continue to expect that to be the case.

I am not a Pittsburgh Steelers fan, but they deserve congratulations for their league-leading sixth Super Bowl victory this past weekend. Many of the stories about the Steelers salute their continuity of ownership, their culture and long-term mentality with which that club is run. We share the idea of the importance of a long-term view, a consistent corporate culture and continuity at Markel. Like Pittsburgh, we don't win every year. Like Pittsburgh, though, we have won a lot and over a long period of time.

Third, our outlook. Fortunately, our balance sheet is a fortress. It is the most liquid, least levered and conservatively invested as it has been in the history of Markel. It is impossible to overstate how important this is given the financial and economic circumstances we operate in today.

As such, that balance sheet strength allows us to seize opportunities that are and will continue to develop in the insurance and investment markets. As Paul and Steve and Richie mentioned earlier, our insurance operations earned underwriting profits in 2008, and we fully expect to continue to do so in the future. We are hopeful that we will be able to write more premium volume in a more favorable market environment as time goes by and the remaking of the insurance market landscape continues.

On the investment side, this week, for the first time in the last 18 months, we actually began to modestly buy some equities. While in no way do I wish to make a market forecast or call a bottom, I am encouraged by the valuations I see in the equity market. In many cases, blue chip, financially solid firms pay a higher dividend than what reasonable fixed income alternatives provide. In a measured and steady way, we are and will continue to purchase stocks in these types of firms. Should the insurance market begin to show more signs of hardening and higher prices, we will accelerate our allocation of cash flow into equities at current prices.

We are also continuing to shift our fixed income allocation towards munis. They offer higher yields than Treasuries, and I remain confident that despite the well advertised troubles of many states and cities, their general obligations remain money good. While doing so, we will forego higher current yields and keep our duration on the short side to make sure that we protect ourselves against higher interest rates and inflation that seem likely given the unprecedented fiscal and monetary stimulus actions of governments all around the world.

To close, in 2008, we navigated reasonably well in the most difficult financial market in generations. While we are not happy with the negative economic return of 6.9%, we protected 93.1% of the capital of this Company and assured our ability to soundly operate in 2009 and beyond. Many other companies and institutions failed to accomplish this singularly important goal.

You can make your own mental list of firms that for all intents and purposes are now bankrupt. We, by contrast, enter 2009 with a transparent, liquid and fortressed balance sheet. It will see us through whatever remains of the current financial panic and allow us to build on our long-term record of compounded capital at Markel on behalf of our shareholders, associates and policyholders.

Thank you for all your support and suggestions. I look forward to answering your questions during the Q&A period. And with that, let me turn it back to Steve.

Thank you, Tom. We are very pleased to see 2008 go, and we welcome 2009. I would like to summarize a few key points before we open the floor for your questions.

On the underwriting side, prices at Markel are going up, and we will continue to maintain underwriting discipline. Our underwriting margins will improve and continue to help build shareholder value.

On the investment side, we do not pretend to know how low equity markets might go or when they might recover. But we do continue to believe strongly that the long term is extremely positive for quality businesses run by talented and honest managers.

On the financial side, our financial strength is as strong as it has ever been, and our balance sheet is rock solid, and we are well prepared to take advantage of opportunities that we see in the specialty insurance marketplace.

Finally, our One Markel reorganization plan is progressing extremely well. And related to this, I would like to share with you that several of our senior managers are now taking on new roles and responsibilities in the organization. Last year, you know we promoted Paul Springman to President and Chief Operating Officer. During 2009, Paul will focus primarily on the transition of One Markel's wholesale unit to the One Markel regional model. Our five regional presidents will report directly to Paul. While he will continue to be involved in major decisions affecting the operation, it is our intent to allow him to be able to devote the majority of his time and attention to the success of One Markel.

Gerry Albanese has also recently been promoted to Chief Underwriting Officer and will oversee all of Markel's underwriting through the newly-formed product line groups. Gerry is fresh off a five-year assignment as President of Markel International. He has been with Markel for 24 years and is one of our most talented underwriters and administrators. We are delighted that Gerry has taken this crucial role and believe that he will ensure our underwriting standards are maintained and enhanced through the new model.

With Gerry's return to the United States, we are also pleased to report that William Stovin has been named President of Markel International. William will partner with Jeremy Brazil to further develop our international platform, which is doing extremely well.

Britt Glisson has recently been named our Chief Administrative Officer and will have responsibility for the Shared Services units that are being created to support our regional underwriting offices. Britt has been with Markel since 1990, and since '96, he has been the President of Markel Insurance Company. During Britt's Markel career, he has played an integral role in a number of initiatives that have helped Markel grow its business and streamline efficiencies. He has also had leadership experience in both the wholesale and the retail side of our Company.

Finally, we are very pleased to welcome a new face to the Marvel team, Mike Crowley, who is joining Markel as President of our Specialty Program Division. In this role, Mike will oversee our Specialty business, including Markel Insurance Company and Markel American Insurance Company. Mike has more than 30 years of extensive retail experience and is looking forward to joining Markel on the company side of the business. With his experience, Mike can bring an innovative perspective to Markel. He has worked for HRH since 2004 and has a variety of leadership positions, including President and Chief Operating Officer.

As you can see, we have an extremely experienced and talented team ready to pursue the many opportunities we face in 2009 and beyond. We thank you all for your support, and we welcome any comments and suggestions you might have.

And at this point in time, operator, I would like to open the floor to questions so that we can provide the answers.

(Operator Instructions) Mark Hughes, SunTrust Banks.

Thank you very much. How much might the slower economy offset the better pricing you were describing?

It is hard, Mark, to be precise. In terms of premium dollars, we are sort of less concerned with where the premium dollars go. If a business's revenues drop 50%, but the rate that we charge them increases 25%, we might still see a reduction in the gross premium, but we have a much higher rate relative to the exposure. Because generally insurance exposures will track the volume of business they are doing. So there could be some contraction in the total premiums people pay as their businesses contract.

But what we are really interested is the rate per unit of exposure that we're assuming. And we fully expect to see those increase. And as a result, obviously, we expect to see our underwriting margins improve.

Right. One other question. Any way to quantify the benefits of the One Markel initiative? Or maybe asked another way, how much outperformance did you get from that prototype Texas office?

The jury is still out in trying to measure actual performance in terms of the Texas prototype. And in 2009 and 2008, the net effect is additional cost. We are investing in the One Markel platform, and will throughout 2009. Ritchie, in a second, maybe can share with you some of the numbers.

But the real outperformance will be selling more product to more agents and getting better relations -- improving our relationships and distributions with those agents. The cost saves on the operational side will be certainly several years in the future, and mostly measured in the ability to do more business with the same resources. But Ritchie, you might share some specifics on the economics.

Yes. During 2008, I think we ultimately ended up at about $18 million of costs related to the One Markel project. For 2009, we are forecasting approximately $50 million of cost for the project, and that -- while it won't be exactly evenly spread throughout the year, it is in the realm of being equally spread throughout the year.

Paul might want to just speak for a second about the Dallas prototype, and just some of the encouraging signs we've seen.

Mark, happy to take the question. I would tell you probably from the operational perspective the number one issue that we've had is holding our producer expectations down. We have been overwhelmed with new business opportunities since we opened our doors in the middle part of September. And we opened the office with roughly 20 associates, 16 of which had prior Markel experience. We are now up somewhere north of 30. And ultimately, I think we will probably be in the 40 to 45 range in the next quarter or two.

But we are seeing opportunities in product areas from existing clients that previously did not have access to those products. And we haven't even really begun to scratch the surface in terms of prospecting for new clients and new broker relationships. But just by being closer to the brokers in the Plano, Texas office, we have been given opportunities in areas that previously we never saw before.

So we are very, very pleased with the initial response that we will be rolling out this model during the first quarter to all of the regions here inside the Company.

Thank you.

Joshua Shanker, Citigroup.

I would like to take your pulse on the accident year loss picks. Given the back (inaudible), how long do you think before the industry stabilizes in terms of increasing loss picks?

I'm not real sure I understand your question. As it relates to Markel, we consistently try to pick the current years fairly conservatively. And as the data becomes more clear, obviously refine the estimates and achieve a margin of safety, and therefore see the loss reserves run down over time.

The industry as a whole is something I'd probably better not try to comment on. But my sense is that whatever margins were created four or five years ago are largely depleted in the overall industry numbers. But it would vary dramatically from company to company, based upon the management philosophy.

If the rates generally prevailing in the marketplace were to be stable here in 2009, not yet rising, would your loss picks be essentially stable through the year we're in right now?

You're talking about at Markel?

At Markel.

We would expect our -- our picks are going to be based upon what we achieve in pricing and what we see in the marketplace in terms of claims development. Our forecast would be that with improving pricing, we will have improving margins.

And at stable pricing, stable margins.

And we don't expect to have stable prices at Markel, but, yes, that would be correct.

Okay. And then the second question --.

Well, no. If the pricing were stable, we would expect losses to increase with inflation. We expect losses to increase in a recession, as -- I mean, claims generally go up in a recessionary environment. When times are rosy, people are less likely to file claims. They tend to be settled less expensively. There is certainly fewer fraud and (inaudible) claims in good environments. So the claims environment in a recession will be worse industrywide. There is no doubt about that.

Well, then --

And I'm talking about the overall environment.

Right. In the press release, you pointed out that the increased loss picks are related to pricing having year-over-year compounded down significantly. Not so much about the anticipation of the recession bringing increased loss. But do you think those increased losses are reflecting both expected rise in losses due to recessionary factors, plus declining year-over-year pricing?

The loss picks at December 2008 would not include events that are forecasted to occur in the future.

When the losses from 4Q '08 eventually start rolling through your P&L, because there is a reporting lag obviously, they're going to include the impact of recessionary economy, of course.

Losses that occur in 2009 will affect that, yes.

And also 4Q '08, for example. We were certainly -- I don't know -- do you expect 4Q '08 to be accelerated in terms of losses. The recession certainly has been happening for not this year; it is obviously last year as well.

Well, we believe our picks at 2008 include margins of safety that are quite adequate.

Okay, very good. And the second question involves comments made at the last annual meeting about there is a lot of bargains out there in the equity market, but we would rather invest in simple or easier-to-understand ideas, a.k.a. non-financials versus hard-to-understand ideas. I'm just wondering if we can also take a pulse on the easier-to-understand versus hard-to-understand thesis and where we stand in terms of maybe how we -- what is an attractive stock at this point.

I'll let Tom pick up on that, but I think it is fair to say that we have learned a lot about what is easier to understand and what is harder to understand. And maybe there were some things that we thought were easy to understand two years ago that are more difficult to understand today. But Tom, do you want to pick up on that point?

I would echo your comment, and we are continuing to lean on the spectrum of easier and more straightforward rather than complex.

And do you expect, along those lines, that we will see continued rotation in the equity portfolio?

In the same way that we go to work every day and look at everything and think about everything and sort everything compared to everything else. But that is a natural process that shouldn't be any different in 2009 than it was last year and the year before.

Thank you very much, and good luck.

[Sam Hoffman, Lincoln Square Capital].

Good morning. Can you comment on how much excess capital you think you have at the holding company, as well as the insurance companies? And do you think the rating agencies agree with your assessment? And then how do you plan to use your excess capital -- if you're thinking about buybacks, acquisitions or organic growth.

Richie, I will let you deal with the dollar amounts, both at the holding company and insurance companies and after you are through, I will pick up on how we are going to spend it.

Okay. Well, we have about -- as I said, we have $650 million of cash and investments at the holding company. We have about $1 billion of statutory capital in the US. And we have roughly -- Anne, can you help me out in the UK -- about $500 million capital in the UK.

Obviously, with the equity markets -- well, and the bond markets having a tough year, to say we have large amounts of excess capital in the insurance companies, I don't know that we can say that. We certainly have enough capital in the insurance companies, and we will also be taking some dividends out of the insurance companies this year. But I don't think I can say today we have 30% excess or something like that. There is more than enough capital to execute our 2009 business plan in the insurance companies, and we will be taking some dividends.

At the holding company level, we would like to have -- myself and my treasurer, Anne, we like to have something like $200 million at all times. So I look at that and say, there is about $450 million at the holding company that we can do other things with. Steve, I will leave the rest of it up to you.

Okay. Thank you, Richie. So I think the summary is that we have more than enough capital in the insurance companies and the regulated companies to meet our operating plan and our expectation. We are fairly bullish about our expectations, that we will achieve pricing increases and see opportunities for additional premium growth and develop new product lines in the insurance business. So we have enough capital to take advantage of those opportunities as they come along.

We also have, as Tom pointed out earlier, a high amount of liquidity, which is a little bit different from capital per se. But because we have a high degree of liquidity, we are -- and I think Tom referenced this as well -- starting to move from some of the shorter term investments into sort of more permanent portfolio positions. And so we will do that gradually, because we don't know exactly when we might be at the bottom or whether we are already there. And so we will gradually start reinvesting some of that excessive liquidity at the insurance companies.

The excess capital at the holding company is dry powder for future opportunities. We believe we will see them. We are quite willing to make a decision when we see them. But so far it hasn't happened -- or it certainly hasn't happened this year or doesn't seem on the immediate horizon. But we fully expect to find some opportunities and get the money invested in our principal insurance business.

Were sufficient time to go by that that did not happen or our view that it might not happen occur, we certainly would be more than willing to use excess capital to repurchase shares. But today, I think we are still very, very bullish about the specialty property-casualty insurance industry, and fully believe we are going to have an opportunity to invest it in our business.

Okay. Just two other quick questions. Can you comment on the One Markel initiative in terms of whether this ultimately will result in the reduction in the expense ratio, or will ultimately you plan to reinvest the savings into new initiatives of growth?

We do expect it over time will allow us to operate more efficiently, and therefore, part of that will translate into a lower expense ratio. Probably not in 2009, but certainly as we go into 2010 and in the future, we believe our systems and operations and our efficiency and all of those things will be more efficient and effective. So we would expect a better combined ratio.

I am not sure how that interrelates with the second half of your question. I think in terms of growth and acquisitions, we will try to do that irrespective of the One Markel.

Okay. And the last thing is what percentage of your equity portfolios and financials and what types of financial investments are you thinking about making these days or have made already?

Tom, I will let you pick that one up.

Yes, the total number that would be in the category of finance would be roughly 30%. Half of that is Berkshire Hathaway, which some people call the financial, some people call it a conglomerate. You can make your own conclusion about that. And about 1% or less is in the banking area, which is the area that most people are the most concerned about.

Thank you.

John Fox, Fenimore Asset Management.

Good morning, everyone. I have a number of questions. First, for Richie, do you have the breakdown fixed income versus equities versus short-term, etc.?

We do.

Well, I know that you do.

Of course, John. You know that. Hold on. We are just looking around for paper. We've got plenty of it. Just need the right piece.

Fixed income at the end of the year, $4.6 billion; equity securities, $1.1 billion; short-term, $500 million; investments and affiliates, $93 million; cash and cash equivalents, $600 million.

Okay. Thank you. And I guess also for Richie, I know investment income seasonally goes down in the fourth quarter. Also, I think I picked up there was a little bit of the credit default swap running through there. But can you just talk about the amount and what a good run rate for 2009 might be in investment income? Because it did look a little bit low to me.

I guess you tell me what rates are going to do, John, when we reinvest the $1.1 billion, and we will tell you what investment income will look like. It's kind of tough right now.

John, I would also add that, as I mentioned, because we are going to make the conscious decision to keep our duration shorter than what would naturally be the case, I'm willing to accept the opportunity cost of lower run rate investment income for the next quarter or two, because I want to have the opportunity to invest and be on the offense when the market changes or hit any inflection points in inflation or statistics like that.

Okay. That's fine. I do want to confirm there was maybe $3 million of credit default swap run through there in the quarter. Is that --?

Wait a second. $2 million in the quarter, John.

$2 million, okay. And Tom -- or somebody mentioned I guess you took an OTTI on GE. I'm curious, did you sell that or you just felt the price was down so much that it warranted the write-down?

No, we did that because of the price decline. We have not sold it. At this point, I almost describe that and a couple other things as leaps. They are long-term equity option positions, that in five years -- five, 10 years from now, GE is probably either a distant and painful memory or a $100 stock. So at this point, we will keep the leap in place, given the percentage that it represents to the portfolio.

Okay, that's fine. And two for Paul. Paul, you mentioned -- I if I got your words correct -- higher than expected hurricane losses. And certainly, after all of us lived through '04/'05, I kind of expect hurricane losses every year. But did you mean to say that you lost more than you thought you would, given the size of the storms, or could you just clarify that, please?

I think certainly much higher in 2008 than what we had in either 2006, 2007. I don't have the number right handy, but I think it is -- the combination of the two is right at $100 million (multiple speakers) -- $95 million. In '06 and '07, we virtually skated through loss free. So they were higher relative to prior years, and I was trying to explain the difference in the results from 2008 from the prior two.

Okay, so it wasn't that they were higher than you expected, given the type of storm we had. It was just versus last year.

Yes.

Now John, I think $95 million, if the number stays around that range, I think given how big Ike was, I think we feel like that is about right. I wouldn't say we got it perfect, and we are still doing work in terms of our management of catastrophe exposure. But that doesn't seem outsized for what we experienced this year.

Okay. And then the last one, Paul mentioned the 99 combined and you vow to significantly improve it this year. And I'm just curious, how do you get there? Obviously, there are rate increases that it sounds like you're starting to put through. You may have prior reserve releases. But maybe just talk about the formula, so to speak.

Sure. We don't focus a lot on prior reserve releases. That is sort of the frosting on the cake, if you will. But we clearly are focused on the front-end pricing of our business and we think the pricing environment has improved significantly in the last 30 to 60 days, and we hope to lead the charge in the marketplace to take advantage of that wherever we can.

We also think we have some issues that we've dealt with in the past that will not be recurring again in 2009. I commented briefly on some of our issues with the SMART division at Markel Re. We believe we have those loss reserves at not only adequate, but with a margin of safety to deal with any issues there. We dealt with our issues with the Italian medical malpractice problems that we incurred in the middle of 2008. And we've dealt with an unprofitable segment of our business at Markel Global Marine and Energy.

We think all three of those issues are firmly behind us, and when you overlay that with the improvement in the pricing environment, we think the stage is set for a pretty good year as we begin to look forward.

Okay. Thank you.

Meyer Shields, Stifel Nicolaus.

Good morning, everyone. I guess another question for Paul, if I can. Over the past couple of quarters, the Excess and Surplus Lines have had the largest drop in gross written premiums. Is any of that a manifestation of moving to One Markel, and should we expect that to turn around sometime in 2009?

I think the pricing environment that we faced throughout the year, Meyer, was what resulted in the vast majority of the premium decreases. We were off in that segment about 10%, 2008 versus 2007. The competition was extremely, extremely difficult, especially for larger accounts. Anything that is six figures or more, there were lots and lots of competitors that were eager and hungry through most of last year. And it takes just a whole bunch of new business at $4,000 and $5,000 a pop to make up when you lose one at $400,000 or $500,000.

The One Markel strategy clearly is a long-term growth strategy. The loss in premium volume doesn't have anything to do in '08, and in fact, we think if early signs are as we believe they are in Plano, we will see a nice uptick. We know the activity will be there; it's just whether or not the marketplace will sustain our pricing levels.

Okay. That's helpful. Can you talk a little bit about the pop in Specialty Admitted gross written premium in the quarter? Is there anything underlying that?

We've got some program business, Meyer, that renews in bulk in the fourth quarter. So there is going to be a little more seasonality to their numbers going forward, as long as we write those programs. But they tend to -- they renew in the fourth quarter, so it is a bump right in the fourth quarter with those programs.

Okay, so that is not something we are likely to see continue steadily over 2009?

Well, as long as we write those programs, they will be renewing in the fourth quarter every year. Yes, you will see that flatten out next year when they renew, when you compare year-to-year.

Okay. That's helpful. And last, I guess, maybe a good question. The net-to-gross ratio in the London market was 97% in the quarter. Anything going on there?

That is a reduction in reinstatement premium. Since we reduced our hurricane reserves, we also reduced reinstatement premiums to our reinsurers as we seeded less loss to them. Hence, that bumps up the retention ratio in the quarter.

Can you say how much that was in dollars?

$4 million.

4?

Yes, 4.

Okay, great. Thanks so much.

Jay Cohen, Bank of America.

It's actually Bank of America Merrill Lynch, to be fair. Holding on to some old brand names there. Can you talk about your exposure on the liability side to financial institutions? I don't think you have too much, but are you seeing kind of a spike-up in claims there?

The largest single area would be commercial D&O business in the US to financial institutions, and we have none in that arena whatsoever. We write some commercial D&O business through our Markel International operations in London, the vast majority of which is located either in the UK or on the European continent. But in terms of exposure to financial institutions per se on the underwriting side here in the US, it is negligible.

To be fair, Jay, we have seen a little bit of activity. We do write financial institutions outside the US, and obviously, some of those institutions dabble in the US market. So there has been a little bit of sort of second order effect where we are seeing a little activity. It is still to be seen whether those claims are covered under the policy, but we are seeing some activity there -- not significant.

Great. And then, Steve, you had mentioned that in a weak economy you tend to see claims go up. We are having trouble finding data on that, but I don't doubt what you are saying. Obviously, you've seen weak economic conditions in the past.

In 2008, clearly the economy got worse as the year progressed. Did you in fact see, as the year progressed, an increased frequency in claims? Because I am not hearing it from others, frankly.

No, I don't think we have specific evidence on our portfolio in 2008 either. But I don't have any trouble believing that when times are tough, insurance claims are higher.

Okay. So we will obviously stay tuned, and I guess you would rather start off being conservative as you think about loss frequency, anyway.

Absolutely. And it is probably worse in personal lines areas than some of the commercial. But even commercial, the number of -- one of the key underwriting elements in any insurance contract is underwriting the moral hazard. And the moral hazard is much worse in times of financial distress. Almost universally, you want to know the financial status of your insured, and as that financial status gets worse, the claims experience is likely to get worse. Businesses that start not paying as much attention to safety or something like that is another example of the way that unfolds.

So I can't point to -- and I haven't tried to run detailed statistics on it, but we are being cautious, and we believe it is going to happen and we are building it into our rating models.

Great. And then last question, I think Paul may have mentioned -- someone mentioned that the costs for the One Markel in '09 would be roughly $50 million -- maybe Richie did -- versus $18 million in '08. And that is roughly, I guess, 1.5 points, or actually a little bit less than that, on the expense ratio. Is there an offset that will allow the expense ratio to maybe be flat in '09?

Jay, we are obviously, like all businesses, looking very, very hard at our expenses. But there is no way we will be able to overcome all of that. So you are right, it is probably an additional 1.5 points over the 18 we had this year.

2009 is sort of the big build year in terms of the system parts of it and so forth, and moving our associates around to different locations. I mean, this is the big spend year. But we will overcome some of it, but not all of it.

Got it, got it. Great. Thanks for the answers.

Thank you, Jay.

Beth Malone, Wunderlich Securities.

Thank you. Could you just clarify a little bit -- I wasn't sure I understood the tax impact on the investment losses, that it was a much higher tax rate than the 35%.

Yes, Beth, I'll do my best. We had a pretax net loss for the year, and the statutory rate is 35%, correct? There are items in our pretax book loss, such as municipal investment income, that are not taxed, not subject to tax. So the pretax taxable loss is larger than our book loss. And when you apply the federal rate to that, it actually takes your 35% rate up. And so we had a 64% rate. The majority of the difference is the benefit of not being taxed on that municipal income. In other words, our taxable loss -- pretax loss is bigger. Does that make any sense? I tried.

Well, that's helpful, yes. Thank you. And about the Markel One strategy, obviously, so far it sounds like it was better than expected. And I'm just curious, what were the decisions or what were the factors that drove you to make a decision to start that process now, as opposed if it is so great, why didn't you do it two years ago?

The planning process, Beth, started every bit of two years ago, and probably longer than that that we've been sort of looking at the organization and thinking about how to best structure things. And the planning process was well underway.

The timing in part was driven by a sense that the time was right with our own organizational structure and staff, the time was right with our agency force. And likewise, the time was right in the marketplace. We felt that launching this sort of initiative in the worst part of a soft market was the best time to do it. And so, spending a large part of 2009 gearing up for this thing and going into 2010 when the market was fairly soft anyway, we thought was a timely thing to do.

But it's just a question of building consensus and moving forward. And these things unfortunately do take a long time because there is a meaningful amount of systems work associated with it and a whole lot of moving people around, which has been going on throughout the year.

Also was this driven by the size Markel today compared to, say, five years ago?

Certainly size and complexity had a lot to do with it. But there were literally hundreds of factors. One of the important factors, you may recall, Beth, I think it is now three years ago, we did a survey of all of our associates and asked our associates what they liked best and what they would like to see improved at Markel. And while we feel like we got extremely high ratings among the associates in many, many categories, the one thing that people seemed to be most concerned about was lack of ability to see a progression through the organization.

And in the silos that we were organized in before, it was very complicated for an employee to move from one area to another area, or from one company to another company. And one of the key elements of the One Markel structure is it creates a much more transparent opportunity for employees to move back and forth from marketing and sales to product line management or from one product to another product, or to focus on selling multiple products and creating opportunities for associates to move from one region to another region. And we think that one of the key advantages of this is going to be to create a whole lot of new opportunities for employee growth and development.

Okay. And then does this have an impact on the kinds of merger and acquisition opportunities that you look at?

Undoubtedly it might, but at this point in time, I really don't know how that might impact things. Clearly, with Specialty-product focused marketing and through our five regions, I think in many respects we may be in a better position to look at some acquisitions. But to be real honest, Beth, I haven't given that a huge amount of thought at this point.

I think it probably would depend a lot on what type of acquisition it was. There would probably be some that will be a lot easier and would fit in more easily with our new Markel structure, and then maybe others that it would become more complicated.

In terms of M&A, do you see -- are sellers having more reasonable approach to the pricing they are thinking about, or what do you see in the activity --?

There haven't been too many transactions to look at, so I'm not sure that has happened yet. But clearly, prices have come down. My sense is that sellers probably are still -- they probably are reluctant, unless they have to sell or unless they have to raise additional capital, and there is certainly some of those around. And I expect after the fourth quarter is announced, there will be a whole lot more of those around.

But sellers who are in good financial position and don't have to sell probably are of the mind that they would wait for better times. But I think we will see a whole lot more distressed circumstances in the marketplace. And I guess you could describe the transactions that have occurred in the last several months as being distressed in one form or another.

Are you all looking at any of the AIG businesses?

We really haven't at this point in time.

Okay, all right. Well, thank you.

Scott Heleniak, RBC Capital.

Good morning. A question on the decision to shut down the Global Marine and Energy unit. I'm just wondering -- was that strictly based on higher loss activity, or do you want to reduce catastrophe exposure, or don't want to buy the reinsurance coverage? Or is it just a combination of all those or something else? I just wonder if you could talk about that.

I'll make a quick comment, Paul, and I'll let you pick up on it. But I think the major factor is in that particular product line, it was important, because of the size of the limits that the insurers require, that we build a fairly significant critical mass. And we found that it was tough for us in the pricing environment to achieve that critical mass, because we are not going to write the business at inadequate prices. Paul, do you want to pick up on that?

I think -- in my initial comment, I said that our losses were somewhat larger than expected, both onshore and offshore, from that unit relative to its size and writings. But Steve is exactly right. As the marketplace began to change in 2006 and 2007, it became pretty apparent to us that we had to have significantly higher limits than what we were offering in most of the three or four products there.

And even with reinsurance pricing being what it was, we just didn't feel comfortable putting out those sorts of gross limits on those products. It was one of those things when we looked at what the opportunities were for improvement for this year, we didn't see a whole lot. And combine that with, at least on some of the products, we were seeing some of the business either through our international operations, where we have an established Marine and Energy division, or through some of our Hull and Cargo operations already through our existing regions. So that is what led us to the decision.

Okay, makes sense. Just one last question, too. This is the first time I guess in several quarters you haven't mentioned admitted market carriers. I know they are still out there. But can you comment on what you are seeing there? Any change in behavior there, or do you think it is still too early for admitted market carriers to go back to writing embedded business?

I think there is no doubt. In one of the earlier questions about the decline in premium volume in the E&S sector for Markel is the admitted carriers are continuing to be fairly aggressive in the non-admitted market and writing specialty business, and sort of redefining the landscape. And that's a constant ebb and flow of where the line between admitted and non-admitted, between standard and Excess and Surplus lies. And clearly, the pendulum has been moving E&S business into the standard markets for the last several years, and I have not seen that pendulum start to swing in the other direction yet.

But undoubtedly, as the admitted markets see their losses creep up, not only will they increase prices, which is half of the equation, but the other half is they need to tighten underwriting terms and decide that bars and taverns are no longer restaurants.

Interesting to see what happens after fourth-quarter results are reported --.

And I think that is going to be an important element. I just think the size and bureaucracy of some of the larger admitted carriers, it just takes a little bit longer for the message to filter down and the numbers to be discussed and disclosed.

Thanks.

[Jim Agow], Millennium Partners.

This is Craig Rothman. Can you just go on back to the loss trends and your thoughts on the economic impact. Are you talking about more on property lines or casualty lines too?

Well, clearly it shows up first and probably easier to identify on property lines, but I am sure the same thing applies on casualty lines. People are simply just more likely to make claims and be unhappy in bad economic environments. And so the expectation is that they will look for deep pockets and insurance companies are deep pockets.

So what kind of loss trend assumptions are you pricing in?

It is a very subjective kind of thing, and it varies by product lines. Paul mentioned employment practices liability. If someone is unhappy in their job and there are 15 jobs available for them, and they leave and get another job, it is very unlikely that they go make a claim that their employers didn't treat them fairly, whether it is an age discrimination or sex discrimination or whatever the underlying complaint might be.

If, on the other hand, someone leaves their job and there is no other job, the possibility of them making a claim increases. It is just sort of common sense kind of stuff that you just have to factor it in. There is not enough data to tell you that it is 3.6% when the unemployment rate goes from 5% to 8%. But there is some number, and you just have to make a judgment, and you need to do it both from underwriting standards as well as from pricing.

I think what you're saying makes a lot of sense, but it doesn't seem like other companies are anticipating this. So I am wondering -- your competition, are they pricing this in?

Probably not, and the question really more relevantly should be asked of them, why not.

So do you think that the pricing -- the improved pricing that you are talking about is enough to more than offset the potential loss trend increase?

From our perspective, that is our intent in setting our prices. Whether we are going to be successful or not, well, you can read our forward-looking statement Safe Harbor stuff. We don't know. But we sure as heck are going to do our best to charge the right amount, because underwriting profits are the absolute key to making the model work. There is no point in being in the property casualty insurance business and losing money. That is not what we are here for.

And then what are some of the conversations like where maybe you are starting to charge like a 5%, 10% higher price on a client that has seen the profits of their business drop 50%, and they are really struggling? Are you having success in passing through that price increase, or is that going to be a problem with the weak economic environment?

It is going to be a challenge. There is no doubt about that. So far, the early signs are positive, and Paul gave a fairly significant number of examples of that. And we will do our very best and we will -- our insureds understand -- I mean, nobody likes price increases. It's simple.

But an insurance policy is no more than a promise to pay in the future, and if we are not making money, our promise isn't very useful. And I think most intelligent insurers want a long-term relationship with a financially solvent carrier -- at the insurers that we see do. And it is not only a recession causing higher claims. It is also the impact of having price reductions for the last several years that have been occurring. It is a low interest rate environment, where there is very little opportunity to invest the float in high rates today. The interest rate yields that we can expect to get on our bond portfolios are fairly modest. And it's a combination of all of those things.

And we have -- we're putting capital at risk and we are entitled to earn a decent return on that capital. And we -- as long as our insureds understand that we are being honest and straight with them -- clearly they can look for the best deal. But if they want a long-term relationship, we will win that discussion.

Okay. And sorry if I missed this before, but did you talk about your reinsurance costs of pricing there?

We continue to buy less reinsurance, because our overall goal is to retain as much of the business as possible. And so the impact of increasing reinsurance costs is fairly modest on our model. Clearly, it has an effect, but not a huge effect. And we don't -- our reinsurance renewals are sort of scattered around the year. So this doesn't typically have a major impact at one point in time.

Paul, you are probably closer to some of the reinsurance pricing issues. We haven't had any -- what sort of increases have you seen in our most recent renewals?

Most of our international reinsurance treaties renewed on the first of the year, and for the most part, they were flat to moderately up. By moderately, I mean maybe 5% to 7%. Most of our domestic treaties -- and as Steve said, with few exceptions, such as property catastrophe, we are holding most of our domestic business net these days. So we haven't had anything significant at this point renew in 2009.

Okay. Thanks a lot, guys.

Amit Kumar, Fox-Pitt Kelton.

I (inaudible) on the discussion on pricing. In terms of the discipline, apart from issues, you know, at AIG and some of the other larger carriers, do you still see the discipline in your peer group? Or do you see when you are going out and talking about the price increases, there are some carriers who are in fact trying to undercut you?

Unfortunately, I think there are more people swimming in a different direction than we are at this point in time. But I am very comfortable that we are doing the right thing and that the rest of the market will catch up with us in due time.

I guess my fear is are there several carriers out there who might just end up derailing the change we have been talking about?

They can derail it in the short run, but at the end of the day, we get to choose whether we write a piece of business. And not writing it is better than writing it at a loss. If our volume -- we do not expect it to happen -- but if our volume were to drop from $2.2 billion, which we wrote this year, to some other number much less, that is not a problem. I would rather write $2 billion worth of profitable business than hang on to $2.2 billion and have an underwriting loss. It makes absolutely no sense to write business that you don't make a decent margin on. And the rest of the world, sooner or later, will understand the same thing.

That's helpful. I guess if you sort of flip the situation and the markets continue to harden and all else being equal, the competition is disciplined. Is there some sort of a ceiling in your mind as to how far can you go in terms of premium to equity ratios?

How far down or how far up?

No, up, up.

We would be thrilled to -- I don't think we would have -- if we were writing $3 billion instead of $2.2 billion, I don't think we would have any trouble figuring out how to finance that.

Maybe Richie, you are blanching at that comment, but --.

We look forward to that problem.

If the prices -- just think about it -- if you are writing business at a 99% combined ratio and you need $1 billion worth of capital, and you could write the same business at a 20% higher rate, how much more capital should you put in the business? I accept the fact that for rating agencies and for regulatory things, those ratios matter. But in the real world, if you can write the same business at 20% more, you don't need any more capital.

Got it. That's very helpful. Thanks.

That is sort of a mindset. We will find a way to make sure the numbers -- we have the right capital and we allocate it in the right places.

Okay. Thanks so much.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you very much, operator, and I would like to thank all of our participants today for joining us, and I would like to thank you for your support and encouragement over the years. And should you have any further questions or comments, we would absolutely love to hear from you.

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