Markel Group Inc (MKL) 2009 Q1 法說會逐字稿

Greetings, and welcome to the Markel first-quarter 2009 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Steve Markel. Vice [President] of Markel.

I would like to start today with our Safe Harbor statement. 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 forward-looking statements as described under the caption, risk factors and Safe Harbor and cautionary statements in our most recent annual report on Form 10-K and quarterly report on Forms 10-Q.

Our quarterly report on 10-Q, which is filed on our website, www.markelcorp.com, also provides a reconciliation to GAAP of certain non-GAAP financial measures, which may be discussed on our call today.

Our program will be much, as in prior periods, after a few comments that I make, Richie Whitt will go through the financial results. Paul Springman will discuss our insurance operations. Tom Gayner, the investment results for the quarter. I may make a few closing comments, and somebody will supervise the question-and-answer period. And we are certainly available to answer any of your questions today.

We are very pleased to have you join us today and pleased to see our first-quarter 2009 financial results. First quarter highlights include a very tough economic environment, a strong stand on price increases, a very optimistic view about our progress on many fronts and our long-term future.

The results in the first quarter include a 95% combined ratio, a decline in our gross written premiums, a very challenging investment environment. And book value is flat at the end of the fourth quarter with the end of the year at $222 per share. These results are far short of Markel's long-term goals, but are certainly very, very respectable in light of our current economic environment.

With that, I will turn the program over to Richie Whitt.

Good morning everyone. I am going to follow the same format as I have for past quarters. I will start discussing our underwriting operations, follow that with a brief discussion of investment results, and then bring the two together with a discussion of our total results for the quarter.

As Steve said, current economic conditions and the continued turmoil in the financial markets impacted our first-quarter 2009 results. Diving into the underwriting, our gross premium volume decreased 15% to $487 million in the first quarter of 2009. This was partially due to the US dollar strengthening against other currencies over the past year. Excluding the impact of foreign currency movements on our London market business, Markel's gross written premiums were down approximately 10% in the first quarter of 2009, and this was due to three factors primarily.

First, reduced business activity as a result of the recession has led to lower policy premiums for new and renewal business. Most of our product premiums are calculated on revenues, property values or payrolls of the businesses. All of these rating basis have tended to decrease during the recession.

Second, Markel made the decision to hold rates, and in many lines increase rates during the fourth quarter. Many of our competitors are still willing to be more aggressive on pricing, and as a result, we have lost some business to competition. Markel's rates were basically flat in the first quarter of 2009.

The third thing, we successfully converted to our One Markel regional structure at the end of the first quarter, and Paul will be speaking more about that. However, the transition to One Markel necessarily required us to divert some of our focus on marketing efforts and to build up to our go live date.

Net written premiums decreased 14% to $438 million; however, retentions were higher at 90% in the first quarter of 2009 compared to 89% last year. Earned premiums decreased 9% to $457 million compared to first quarter 2008. Excluding the impact of foreign currency movements again in our London market business, the decrease would have been 4%.

Our combined ratio for the quarter was 95% compared to 92% in 2008. Our 2009 current accident year loss ratio was 68% compared to 65% in 2008. This increase was primarily due to softening rates over the past few years.

The increase in the 2009 current accident year loss ratio was partially offset by greater favorable redundancies on prior year loss reserves. This was primarily again in our Excess & Surplus Lines segment on our professional and product liability programs.

During the quarter we had $57 million or 12 points of favorable development, compared to $47 million or 9 points of favorable development in the same period of 2008.

Our expense ratio increased to 40% from 36% in the first quarter of 2009. The 2 points of the increase relates to cost of implementing our One Markel business model and the related systems. We currently expect a 2 to 3 point impact to our expense ratio during the rest of 2009 related to the cost of One Markel. The remainder of the increase in expense ratio was primarily related to lower earned premiums during the quarter.

Turning to our investment results, investment income decreased to $69 million from $76 million in 2008. The decrease was due to lower interest rates, lower dividend payments on many of our equity holdings, and an increased allocation to cash and short-term investments in our portfolio.

Realized losses were $55 million, which related to write-downs for other than temporary declines in the fair value of equity and fixed securities. The most significant write-downs in the first quarter of 2009 were $21 million on General Electric and $9.5 million on UPS. Both of those were equity holdings.

Unrealized gains also decreased $30 million in the first quarter of 2009 before tax, primarily due to declines in our equity portfolio. Tom will be going into further detail on the investment side of the house shortly in his comments.

Looking at our total results for the first quarter, bringing underwriting and investment together, we reported net income of $16 million compared to $34 million in 2008. As Steve said, book value per share was basically flat at $222 per share at March 31, 2009 compared to year end.

I will make just a couple of comments on cash flow in our balance sheet. Regarding cash flow, operating cash flows were $10 million in the first quarter of 2009 compared to operating cash flows of $49 million in 2008. The decrease is primarily related to lower premium volume. And historically our first quarter is our lowest cash generation quarter.

Regarding the balance sheet, we held $708 million of cash and investments at our holding company at March 31, 2009. With this, I will turn it over to Paul to talk further about our operations.

Good morning everyone. You have just heard Steve's opening remarks and Richie's report on our numbers from the first quarter, and in a few minutes Tom Gayner will take us through the investment results. But today (technical difficulty) give you a report from the operational side of our business, and to update you on two or three important products.

The results from the first quarter clearly represent a mixed bag. Our combined operating ratio for the quarter is 95%. While this represents 5 solid points of underwriting profit, it is still a few points short of our overall return on equity goals established for this calendar year.

We will do everything in our control to improve this number as we progress through the year. Nonetheless, it is an underwriting profit, and in this environment a fairly respectable start to the year.

We are, however, disappointed in the 15% shortfall on the gross premium volume side of the ledger as compared to the first quarter of 2008. And Richie just shared with you the primary drivers. We expect this gap to narrow as market conditions will be more favorable later in the year, and the effects of our new Excess & Surplus Lines business model, that we refer to as One Markel, will have an added benefit to our topline.

Let me elaborate on just a few of those points. Many of the so-called experts in today's insurance world are referring to the current pricing environment as the invisible hard market. Just what exactly does that mean? Well, let me give you a real-life example.

It is not unreasonable for Markel to ensure a small to medium-sized architectural firm with say $2 million annually in gross fees. If the going rate for that particular account is 2.5%, the resulting annual premium would be $50,000. If we were successful in increasing our pricing, say by as much as 20%, taking that rate to 3%, the resulting premium normally would be $60,000. However, due to current economic conditions, it is not unlikely for that firm to present its gross fees and billings to us of just $1 million this year.

So even though we may achieve a 20% technical rate increase, at the end of the day we end up with $30,000 in premium rather than $50,000, or perhaps the $60,000 that we had hoped for. As Richie mentioned, a significant portion of our business has rating basis that are determined by gross sales, fees, payrolls and other means of income.

The GNP in the US for the first quarter sits at a negative 6% versus a positive 1.5% for the same period in 2008. This represents a 7.5% negative swing from where we were just 12 months ago.

While our gross premium writings might be off 15% at Markel, certainly a significant portion of this can be attributed to the current economic slowdown. While we haven't done any scientific analysis to date, it is not unfeasible to think that our gross premiums would be off about the same percentage as the GNP.

We also continue to face a fairly competitive marketplace in the vast majority of our products, and there remain numerous competitors in almost all of our product areas.

In addition to the normal competition that we face from our Excess & Surplus Lines and Specialty Admitted underwriting brethren, the standard market remains highly competitive, and continues to erode Excess & Surplus Lines market share.

Numerous London syndicates are expanding their footprint on this side of the Atlantic, and a significant amount of Bermuda capital is hunting for US onshore opportunities to deploy their dollars.

In spite of all this, I am absolutely delighted to report that we have achieved pricing increases in at least six of our core lines. Those include architects and engineers, lawyers professional liability, large Excess & Surplus casualty, umbrella liability, environmental coverages, and in our marine and energy product areas. While none of these quite approach double-digit levels at this point, they are solidly in the plus column. And for that we are grateful and encouraged.

The rest of the product portfolio is concerned, general property and casualty pricing has begun to stabilize over the last couple of quarters, although many of our professional liability lines continue to be under high competitive pressures.

Now for just a second, let me speak to our three individual business segments at Markel. We are happy to report that Markel International has solid underwriting profits for the first quarter, and is slightly above our expectations from a gross premium volume standpoint.

The London and international marketplaces are at least one quarter, and perhaps two quarters, ahead of where we are in the US. Our marine and energy underwriters in particular have been successful in selling pricing increases.

While our primary focus at Markel International will be to enhance our profitability through the year, we will not lose sight of our long-term expansion plans. We are currently reviewing opportunities in China, Eastern Europe, and in South America. While we may not do anything of significance during calendar year 2009, each of those regions represent significant opportunity areas for Markel in the long term.

On the Specialty Admitted front it was a relatively quiet, sort of more of the same type of quarter. Business remained competitive, and we continue to look for ways to differentiate ourselves from those competitors through safety, loss control and engineering services, ease of shopping via the Internet, and providing outstanding customer service.

Our big news during the first quarter from the operational side is the rollout of phase one of what I referred to previously, One Markel. On Monday, March 23, we flipped the switch and began offering the vast majority of Markel's products in all five of our regions to the vast majority of our broker client relationships.

Before March of this year, if one of our brokers would place say a piece of products liability business with one Markel business unit, he would have to contact a second Markel unit for an excess and umbrella cover, most likely a third for property insurance, and perhaps even a fourth unit for the automobile companion coverages. Now under One Markel virtually all of those covers and many, many more can be purchased through a one-stop shopping approach.

In our quarterly calls yesterday to our regional offices, one of our regional presidents said it best, he said, the vast majority of the brokers in his region were most impressed with the simplicity of contact. There is only one telephone number to remember, one e-mail address, one point of contact, i.e., the customer relationship manager. And best of all, more than 75% of our broker clients are now located in the same time zone as our five regional offices.

We are encouraged that our new business submission counts continue at all-time record highs, and our policy counts are in line with those of both 2007 and 2008. Our underwriters continue to enhance the Markel shopping experience by being in front of our brokers on a regular basis each month.

For most of 2008 we braced for a pricing storm that we knew was inevitable, but it appears that the worst of that storm has passed. While we may remain in somewhat choppy waters, we are treading comfortably, and clearly have our sights on the goal of long-term profitability and growth for Markel.

While we can't do anything to impact the current economic environment, we will be masters of our own destiny and continue to seek the right price on each and every account, while being creative, flexible and providing first-class solutions for our clients and their customers.

I look forward to your questions and comments during our Q&A session.

Good morning. I know that I'm not telling you anything you don't already know, when I report that investment markets remained difficult during the first quarter of 2009. It was the sixth consecutive quarter of decline in the S&P 500, and the biggest percentage decline using that measuring rod since 1939.

At Markel the total return on our investment portfolio for the first quarter was actually a tiny, but positive 0.1% when measured in local currencies. We made money in US dollars, and other currencies such as British pounds, euros, Canadian dollars and Australian dollars. When you translate the totals of these results into our reporting currency of US dollars, the relative strength of the US dollar reduced our reported investment result by 0.3%. After that adjustment, the investment return for the quarter becomes a negative 0.2%.

As always, we do our best to run a matched book of investments to our foreign exchange denominated insurance liabilities. The foreign exchange adjustments always show up explicitly in the investment results, but those translation effects are offset by a matching decrease in the foreign exchange denominated liability. The net effect to the book value approximates zero. We do not try to predict currency moves, just try to match our assets and liabilities to the best of our ability.

Within the overall flattish returns, I'm encouraged by several developments. First, the overall fixed income portfolio had a positive return of 2.1% for the quarter. On the fixed income side we continue to pursue the same path that we have over the last two years. We are building up short-term cash and liquidity. We are lowering our exposure to corporate bonds. And we are increasing the weight of high-quality municipals.

On the equity side, we were down 11.2% for the quarter as compared with a decline of 11% for the S&P. We remain focused on the highest quality companies that are, and in my opinion, will continue to be the leaders after we get through this current difficult period in the financial markets.

Over the last two years we have steadily reduced the allocation to equities from 76% of our shareholders capital to 43% today. That reduction came from the combination of the hard way of declines in market prices, buying less than selling, and allocating day-to-day cash flows to the cash buildup rather than long-term equity investments.

I'm pleased to report that those actions were directionally correct when we started pursuing them in 2006, and that they are yielding positive results. In retrospect, had we known then what we know now, we would have pushed the accelerator harder to move along this path faster. I am pleased though to report that the direction of our approach has been correct and helpful to investment returns.

The very good news from this approach is that we built up a fortress balance sheet position at a time when balance sheet strength is more important than ever. We have the capital and resources in place to support our underwriters as they see opportunities in the insurance market. As they do so, and underwriting profits and volumes increase, we will be ready, willing and able to invest for higher total returns in the equity market.

Safety first remains the path at Markel. While we are not emerging from this time completely unscathed, the amount of scathing we took leaves us able to pursue business opportunities in both the insurance and investment markets. That is not a universally true statement across the insurance or financial landscape.

We can be proud of the fact that we faced the toughest financial environment any of us have ever witnessed, and are on solid position to make forward progress.

One other attribute of safety that is paramount to me is to protect us from the risk of higher inflation in coming years. The experience of the last few years reminds me that the overall environment has an unpredictable, but huge effect on investment results. In multiyear periods of time investment returns are often dominated by whatever is happening in the larger world and factors way beyond the control of individual companies or security specific analysis.

As I survey the stimulus efforts and monetary policies being pursued by the US government and many other governments around the world, I am concerned that we are sowing the seeds of an inflationary problem in the future. Consequently, we are keeping our fixed income investments in more short-term instruments than we would naturally choose.

We are also keeping a weather eye to our equity investments to do our best to make sure that the companies we own will have pricing power and the ability to withstand a higher inflation environment.

Our governmental authorities clearly are concerned with the very real problems caused by deflation in housing prices, asset values, declining business activity, inventory destocking, wage pressures, and collapsing consumer and business confidence. As a consequence, they are pursuing choices which they hope will create a little inflation.

I remain concerned though that a little inflation is like being a little pregnant. It usually doesn't stop there. As a result, I believe it is very important to protect us against the risk of a higher inflationary environment, and that is what we are doing.

Currently this position causes us to incur opportunity costs. We could increase current income by lengthening the maturities of the fixed income portfolio. I believe that this is an unwise risk to take, and we are therefore choosing to protect our balance sheet, rather than run the risk of seeing long-term bond prices decline precipitously.

Stay tuned for further developments. Safety first. The investment actions at Markel preserved and protected our capital. In 2008 we held on to roughly 93% of our investment capital, despite the generational bear market. So far in 2009 we are roughly even through the first quarter. And if current trends continue, we should report investment gains in 2009. We can be proud of that record, and know that we have done our job well when we look around us and see many other companies and institutions that will likely never regain their previous financial positions.

Bad investments often camouflage in the garb of sophistication, and complexity are what derails it. By sticking to high-quality, straightforward investment activities we continue to get through this period bent, but not broken.

I look forward to the day when I will be able to report unalloyed good news to you. I also remain committed to keeping our fortress balance sheet in place until we get to that time. I welcome your questions and comments. And with that, I will turn it over to Steve.

Thank all of you for participating today. The only closing comment I would like to make is to remind all of you that on Monday at 4.30 in the afternoon at the Jefferson Hotel in Richmond is the Markel annual shareholders meeting. It is an event where shareholders have an opportunity to meet Markel associates from across the country, from each of our branch offices, our divisions, our international operations. All of our productlines are represented. And it is a wonderful opportunity to learn more about Markel, our business, how we're doing, as well is to enjoy a brief cocktail hour.

With that, I would encourage you to come. We are trying always to maintain open and direct communication with our shareholders, and this is a wonderful opportunity to do that. With that, I would like to open the floor to your questions.

(Operator Instructions). Mark Hughes, SunTrust.

(technical difficulty).

We might ought to roll to the next one. And Mark, maybe you can press the mute button on your phone.

Doug Mewhirter, RBC Capital Markets.

(technical difficulty).

Operator, it sounds like we have technical difficulties here. We lost the operator too.

John Fox, Fenimore Asset Mgmt.

Number one, maybe, Tom, I will start with you. Could you -- you mentioned obviously you are still putting money into cash. At what point do you feel like you have enough and might embark on a different strategy on the bond side?

I would say we have more than enough. We are way overinvested in cash. And really what we are looking for to change gears there is for premium volumes to start picking up -- the evidence of the harder market to deploy some of that.

Great. Richie, I know the debt was up from the end of the year. So if you can comment on that.

Yes. We borrowed a little more in the first quarter. And really when that happened was in February when the markets were really looking pretty bleak. We -- kind of to Tom's comment of safety first, we were looking at liquidity first at the holding company. At this point if things continue to improve, or if they just sort of stabilize, we will be paying that back when that matures.

Terrific. Then you took the write-down or whatever on GE, but I think I saw you haven't sold any. Is that correct?

That is correct. They are realized for income statement purposes through the OTTI process, so we are still owners of those securities.

At least through last night the stock is up 35% or 40%, so that will just come through unrealized depreciation at this point?

I remind Steve of that daily.

Did you just -- Tom mentioned the currencies -- but could you guys maybe just go through a bit more detail, maybe by size or something, what your currency exposure is? That surprised me in the quarter. Maybe it shouldn't have, but it did. And is that primarily in London, but just give us a little more information on that so we can stay on top of it.

Our primary currency exposures are going to be sterling and euro. Sterling being the largest. Probably -- and I don't have the number right in front of me -- I'm trying to think how much business we would be writing in currencies other than dollar. We can get back to you on that, and give you a sense of that.

But the issue is, and as Tom mentioned, it doesn't have -- we manage the currencies, we match the assets and the liabilities so it has little impact on shareholders equity, but obviously there is a gross up effect on the various line items on the balance sheet and the P&L. But we do manage the currency very closely, and as a result there is very little net impact when you get to the book value line.

Right. Okay, thank you.

Meyer Shields, Stifel Nicolaus.

One quick question for Paul. How long will the marketing slowdown associated with the One Markel rollout last? Is that done now or does it last through 2009?

That is a great question, and I appreciate you asking it. The way -- I guess the short answer would be for most of the fourth quarter, and virtually the entire first quarter, we kept our underwriters in-house as we crosstrained them in multiple productlines. We relocated, or are in the process of relocating, 52 underwriting associates to different Markel regions. And in every region inside the Company we stacked the entire underwriting teams to better align the teams with product expertise and the needs of our clients.

It really wasn't until the last couple of weeks that we have unleashed these underwriters to hit the road again. And I think in a short period of time you will see the power and the value of the Markel relationships. And I anticipate what we saw in the fourth quarter in 2008 in our Dallas prototype office, that our new business submission counts just went off the charts.

So our underwriters are out there beating the bushes for all sorts of opportunities right now. And in spite of the fact that we had the vast majority of them inside and in training and crosstraining and relocation issues during the first quarter, our submission counts remained at the same historically high levels that they were last year. So I think that bodes extremely well for us for the remainder of 2009.

With regard to pricing, are you incorporating that 2% expense ratio delta in pricing?

The key motivation for pushing pricing is not so much the Markel One expense charges, which we view as more of a temporary pickup that we will sort of have to absorb in the next 12 to 18 months, but the general decline in pricing that has occurred over the last two or three years plus, and this is an important plus and it picks up on a point Tom made in the investment side, is we are pretty firm believers that we are going to be dealing with an inflationary environment, and we need to build some factors of inflation into our future pricing. So we will be relentless about pushing on pricing to make sure we earn appropriate underwriting margins going forward.

And we really are pleased that in the first quarter our overall pricing is at a higher level than our price levels were in the fourth quarter of last year. As Paul highlighted, there are five or six areas where we are getting meaningful pricing increases. But all the rest, we have truly arrested declines where it is appropriate. And we certainly have some business where we don't need as much as others, but they are very few and far between. And overall we will continue to aggressively make sure that our underwriting standards are not compromised. We would rather have more dry powder than less and we will continue on that track.

But covering the overhead of Markel One we think is a very, very temporary problem. And in fact, when we come out the other side we would expect that our cost structure will be actually more beneficial than it is currently.

That's helpful. One last question if I can. In light of the I guess the general conservatism that Markel uses for reserving, how should we think about the accident period results?

Clearly the accident year results are at numbers north of 100%. And it is a function that from a loss reserving perspective we are sort of more pessimistic about the magnitude of prior period rate reductions. More concerned about inflation. More concerned about increasing claims activity as a result of a recession. Very conscious of trying to maintain our margin of safety so that the reserves at March 31 are as conservatively, if not more conservatively, stated than they were at December 31.

Our goal is to maintain that margin of safety. And while we enjoyed redundancies for prior periods, we are hopeful that we reinvest at substantially the same number to maintain the margin going forward.

But again, we would rather be cautious and hopeful that the final outcome of the accident year will show some improvement, but we would rather err on the side of conservatism.

Okay. Thanks. I will hop off here.

Mark Hughes, SunTrust.

It is actually Jack in for Mark. A couple questions this morning. Just regarding pricing and the pricing environment, in terms of relative to the last quarter are you still one of the few that you're seeing out there trying to push through price increases, or have other companies also joined the herd?

Go ahead, Paul.

There is good news and bad news. I think that we are one of the minorities, but the good news is that there are more that are leaning in our direction and starting to come our way.

I will tell you when we started to push prices significantly during the fourth quarter, we were perhaps one or two of the lone wolves in the forest. But there are several responsible underwriters that are now moving in the same direction. And that rising tide will help all of us.

Just on the Markel One spending, will that all be gone in 2010?

I think the majority of it will be done by 2010. The added spend is in 2009 and probably the first half of 2010.

Did you say an extra 2 to 3 points or $2 million to $3 million for the rest of '09?

2 to 3 points on the expense ratio.

Just one final question on -- what is the average duration of your fixed income portfolio right now relative to last quarter?

I don't have the number in front of me, but it has ticked down to about 4.

Perfect. Thank you very much.

Doug Mewhirter, RBC Capital Markets.

Paul, if you could go into the nature of the expenses for the One Markel -- or I guess the nature of the incremental expenses for the One Markel initiative? Is that more of a systems, or is it the cost of relocating all these underwriters or -- I guess, if you could just give me a little more detail on that.

It is really more in the creation or building of the systems. In terms of going to the business model, and going to the regional setup, certainly there were some expenses to that, but they were fairly modest compared to the cost of the systems that we are building to better support the model as we go forward.

All my other questions have been answered. Thanks.

Josh Shanker, Citi.

My question relates to One Markel. I am wondering if there are any permanent increases in expense ratio over time related to it?

Actually, over time we would expect efficiencies from it. Obviously, we've got to invest in it today and through probably 2010 in terms of getting the systems built. And then there will be some depreciation from that point onward. But we would truly hope to reduce the expense ratio as we move forward by becoming more efficient and more automated.

There is no risk that you have to duplicate processes in various offices as you expand?

Right we're in the process -- and that was one of the points of One Markel is we are trying to standardize processes right now in all of the offices. And that will help us better take advantage of the technology that we are building to support the various regions.

So we have also created shared services as supposed to we have a lot of our services dispersed among the various units in the past. All those things we think are going to help us be more efficient as we go forward. So the purpose of the new systems initiative behind One Markel was really to drive efficiencies on the expense ratio.

I will pick up on that a little bit. In the prior model each of our business units had their own agency management system. We now have a common agency management system for all seven or eight of those divisions that have been consolidated in One Markel.

In the prior system we had multiple claims operating systems, and each of those business units had their uniquely designed claims operating systems. And under the new model we will have rolling out one common IT system to manage Markel claims throughout the organization.

So we believe that having a common system will actually create those efficiencies that Richie is talking about. We were duplicating more in the prior model then we will be in the going forward model.

Thank you. I am also going to ask a question that might probably be rhetorical, because I already know the answer is no, but I just want to hear it again. Given future equity market return assumptions there is no difference in how you price your business?

Correct.

Okay. Good to hear.

(Operator Instructions). Michael Nannizzi, Oppenheimer.

Can you just talk a little bit about what happened in the Specialty line in terms of, if I'm not mistaken, there is some unfavorable development there. Was that something related to specific items or is that something that you expect to see going forward?

It was related to, if you will recall, we discontinued our Markel Global marine and energy operation in Houston in the fourth quarter. And a chunk of the 110 in the Specialty Admitted was development and the increasing of PIKs on that discontinued business.

While we certainly can't promise that it won't go forward, I would be disappointed if we have that sort of drag as we go forward. And of course earned premium is running off from that discontinued business fairly quickly.

But that being said, it is fair to point out, the Specialty Admitted business tends to run on a slightly tighter margins than our Excess & Surplus Lines business. And with the expense ratio pressures, it depends heavily on quite honestly prior-year redundancies. So that line of business of the Specialty Admitted business is right around 100 right now in terms of profitability.

Got it. Great. Thanks, Richie. And I just wanted to ask a question about One Markel. Just a larger picture question, and maybe this is a simplistic question. But when I think of bundling, I think standard lines bundling intuitively make sense to me. With really specialty coverages, can you just talk about what the opportunities are, maybe an example of where very niche specialty coverages are conducive to bundling, and why that make sense for Markel's customer base?

I am going to start with the comment, and I will let Paul pick up on it. But under the One Markel model, we continue to have 20 odd -- I think 22 productline specialists and productline leaders. And at the productline level, we are not consolidating and bundling product.

What we are doing is changing the distribution channel by having a regional approach, and through five regional offices having productline experts in the region marketing to the agents in the region. And we are trying to get agents to think of Markel for multiple products.

That is not necessarily to have one insured buy 16 products, because it probably doesn't make sense for one insured to buy 16 products from Markel. But to have that agent think of us for all of his specialty needs. I will let Paul pick up on that in further detail.

I'm happy to comment on that. Probably the most logical cross sell opportunity for us is to sell umbrella liability on top of our primary liability, and on top of some of our professional liability coverages, as well as our products liability offerings.

Those were all being offered in different business units in the past. And as I mentioned in the example, the underwriter was never really charged with the responsibility of saying, where is the umbrella going on this particular account? Can I help you on your property insurance? By the way, let me give you a proposal on employment practices liability to go along with that.

Now that our underwriters are designated by relationship they have a vested interest in making certain that those relationships grow and that they grow profitably. And they have a vested interest in trying to sell as many of the Markel products as they possibly can. Where before in the past those underwriters were, for the most part, single productline focused, now they're multi-productline focused, responsible for relationships, working hand-in-hand with those productlines specialists that we have that set the pricing parameters and review the underwriting guidelines. And help us position our products in the right place on the shelves of those stores.

I see. So it is not necessarily the -- it is not necessarily geared towards a policyholder, as Steve was saying, picking up several products, but maybe more geared towards allowing agents a larger arsenal of products to meet their own customer needs.

Absolutely.

If I could, just one last question. On the competition site, are you seeing more competition from encroaching standard lines carriers, or is it other specialty carriers that are providing the lion's share of competition in your lines? Thank you very much for answering my questions, by the way.

There hasn't been a lot of change in the last couple of quarters. The standard markets have really become more competitive towards the end of '06 and continued in '07, and heated up somewhat in '08. We have seen a little bit more pressure from some of the London syndicates that are looking to expand here in the US, and from some of the Bermuda capital that is hunting very diligently for opportunities onshore. But the E&S competition I think for the most part remains pretty level with where it has been the last couple of years, but we are being attacked on all fronts.

Meyer Shields, Stifel Nicolaus.

Can we get a breakdown of the accident years whose reserves were released? How far back does that go?

I wouldn't have that in front of me, but it is going to be primarily '05, '06 and '07, I would say. And we will check that and get back to you. But I can say fairly -- with fairly good certainty it is going to be '05, '06, '07 is where the majority comes from.

Okay. A question for Tom, if your preferred approach in terms of anticipating inflation on the investment side focused on equity? I'm sorry, (inaudible) commodities.

No, and that gets to be a complicated subject. To the extent we have commodities -- and that is often times the first thing that people would look at when they are worried about inflation -- I think the inherent problem in that approach is that if you sell a barrel of oil or a ton of bauxite or whatever, you have to replace that oil and you have to replace that bauxite.

And in point of fact, in a rising inflationary environment, it tends to be that you have to spend more to get that next barrel of oil than what you sold the last one for, or the next ton of bauxite, or fill in your example.

What I really am looking for are examples of intellectual capital. And that may be companies that help commodity producers that would sort of be a gross royalty override on those businesses getting better, or brands or things like that, where whatever the costs are, the companies have the ability to charge more than that to the next customer. And they are not faced with reinvestment requirements that would eat up all the cash they would get from rising prices.

One last question for Paul. Was new product development offset at all by One Markel?

I'm sorry, could you repeat please?

I just wanted to know whether there has been made any slowdown in sort of the product pipeline?

Slowdown in the product pipeline?

Right.

We have concentrated primarily on training the underwriters and relocating almost 15% of the underwriting staff. The next primary responsibility is going to be to focus on the relationships. I think as we get out into the field and start to spend more face time with our broker clients, there will be some new product opportunities that come our way.

We are working on a couple of productline enhancements. Last quarter we talked about our data breach and our IT E&O products that are just now starting to take off. We are looking at some areas of opportunities cautiously with our Outbreak Extra Expense Coverage, with what is going on in the environment these days.

So there are some opportunities that are out there, but our primary focus, at least for the immediate future, is going to be on the relationship side.

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

Thank you very, very much, operator. And thank all of you for participating in the call today. Again, we look forward to seeing you in Richmond on Monday. And have a wonderful weekend. And if you have any further questions or comments, don't hesitate to give us a call. Thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.