Markel Group Inc (MKL) 2009 Q3 法說會逐字稿

Greetings, and welcome to the Markel Corporation third quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions.) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Markel, Vice Chairman for Markel. Thank you. Mr. Markel, you may begin.

And thank you, Operator. And also, welcome to all of you who are participating in our call today. During this call, we may make forward-looking statements. Additional information about factors that could cause actual results to differ materially from those projected in the forward-looking statements is described under the captions Risk Factors and Safe Harbor and Cautionary Statements in our most recent annual report on Form 10-K and quarterly report on Form 10-Q. Our quarterly report on Form 10-Q, which is filed on our website at www.markelcorp.com, also provides a reconciliation to GAAP of certain non-GAAP financial measures we may discuss on the call today.

Again, welcome. I appreciate you all joining us today. We've released our third quarter, which I'm sure all of you have had the opportunity to review. We're very pleased with the progress in the third quarter. The underwriting results are strong. The investment results are even stronger. And book value has grown very nicely in the third quarter.

The marketplace continues to be very, very competitive. And I hope and trust and believe that at Markel we're continuing to be very, very disciplined in maintaining our underwriting standards. And while we're pleased to have achieved some level of rate increases, we're certainly not getting the rate increases that either we would like to have or that we believe we need to have. So that -- it's a tough marketplace. And we'll continue to work hard in that regard.

Also, a few weeks ago we announced that Paul Springman had announced he is taking a leave of absence. Paul has been a strong and wonderful leader at Markel for 25 years. We certainly miss having Paul around. Unfortunately, because his request to take a leave of absence really relates to personal reasons, we're not in a position to really discuss this any more than that, other than to say we certainly wish Paul well. And he has done a great job at Markel.

And I think what's more important at Markel, we're in a good position to carry forward. We have a number of great leaders in the Company. And so, I think we will move forward without missing a beat.

Joining us in today's call is Tony Markel, who has become more engaged and re-engaged in the business. And Tony will be spending some time chatting about our One Markel Initiative and some other things going on in the insurance marketplace.

With that, I'd like to turn the call over to Richie Whitt, who will review our financial results for the quarter.

Thanks, Steve. And good morning, everyone. I'll follow my typical format as in past quarters, and I'll focus my comments primarily on year-to-date results. I'll start by discussing our underwriting operations, follow that with a discussion of our investment results and then bring the two together with a discussion of our total results for the nine months.

Teams from the first half of the year carried into the third quarter. Through the first nine months of 2009, economic conditions and strong competition continued to negatively impact our gross written premium volume. Financial markets rebounded significantly during the second, and in particular during the third quarter. And as a result, our investment results were very positive for the nine months.

Moving to underwriting gross premium -- gross premium volume decreased 15% to $1.5 billion for the first nine months 2009. This was partially due to the US dollar strengthening against other currencies over the past year, excluding the impact of the foreign currency movements on our London market business.

Markel's gross written premiums were down approximately 12% due to three factors. First, a reduction in business activity as a result of the recession has led to lower policy premiums.

Second, continued strong competition in most of our market segments. Markel has worked hard to maintain our underwriting integrity during 2009. And our rates were basically flat for the first nine months of the year.

Third, we successfully converted to the One Markel Regional Structure at the end of the first quarter. However, the transition to One Markel did require us to divert some focus from marketing efforts in the buildup to our go-live date. After six months in the model, we are seeing encouraging signs from the transition, which Tony will talk about shortly in his presentation.

Net written premiums decreased 14% to $1.3 billion in the nine months of 2009. However, retention did increase to 90% in 2009, compared to 88% in 2008.

Earned premiums year to date decreased to $1.4 billion. That's a 10% decrease compared to 2008.

Our combined ratio was 97% for the nine months of 2009, compared to a 104% in 2008. Two thousand eight did include 8 points of losses from Hurricanes Ike and Gustav.

The current accident-year loss ratio was 69% for the nine months of 2009, compared to 67% excluding the effect of storms in 2008. This increase was due to price decreases over the last several years, as well as some adverse trends in the current economic environment, most notably in our architects and engineers book of business.

The 2009 current accident-year loss ratio was partially offset by prior-year redundancies of $156 million, or 11 points on the combined ratio, primarily in our excess and surplus lines segment, on our professional and product liability programs and in our London insurance market segment. This compared to $99 million, or 7 points of redundancies in 2008.

Our expense ratio for the nine months increased to 40% from 36% in 2008. The cost of implementing our One Markel business model and the related systems represents about 2 points on our expense ratio. We currently estimate this 2-point impact to our expense ratio will continue for the remainder of 2009. Lower earned premiums also adversely impacted the expense ratio. These factors were partially offset by lower profit-sharing expenses compared to 2008.

Turning to our investment results, investment income decreased to $201 million from $221 million in 2008. The decrease was due to lower yields on the investment portfolio and our increased allocation to relatively low-yielding cash and short-term investments. Investment income in 2008 included a $12 million mark-to-market loss on our credit default swap, compared to a $3 million gain year to date in 2009.

Realized losses for the first nine months were $100 million, primarily comprised of $86 million of write-downs for other-than-temporary declines in the fair value of investments.

Unrealized gains increased $564 million before tax during the nine months. Tom will be going into further detail in his comments shortly.

Looking at our total results for the nine months of 2009, we reported net income of $108 million, compared to a loss of $26 million in 2008. Net income for 2009 includes a $25 million tax benefit related to the change -- to a change in the UK tax laws that became effective in the third quarter.

Value per share has increased 23% in the first nine months of this year to $274 per share at September 30th. This represents an all-time high book value-per-share amount for Markel Corporation.

Turning to the cash flow and the balance sheet, I'd like to make just a few additional comments. Regarding cash flow, operating cash flow was $217 million in 2009, compared to operating cash flow of $347 million in 2008. The decrease is primarily related to our lower premium volume.

Regarding the balance sheet, we held approximately $1 billion of cash and investments in our holding company at September 30, 2009. And during the third quarter, we issued $350 million of 7.125% 10-year senior debt and repaid $150 million outstanding under our revolving credit facility.

At this point, I'd like to turn it over to Tony to further discuss operations.

Thanks, Richie. I'm calling in from Dallas on a transcontinental trek to all of our offices. And it's really energizing to be back. I appreciate the opportunity to get in front of you today. And I've got a lot of positive news to report now that I've sort of parachuted back into operations.

It's energizing to be back and really see the emerging fruits of the hard and extraordinary work that has been done over the last year or two in every sector of the Company.

Richie's given you the quantitative facts of operations, which include a 97% combined ratio for nine months and a 15% reduction in gross premium volume over the same period of time. They're obviously the numbers that reflect where we've been. But I'd far prefer to discuss where we are and where we're going.

I'd love to report optimism relative to the potential change in the market. Unfortunately, I think 2010 is going to bring us more of the same highly competitive, shark-frenzy environment. So we're unlikely to get any artificial help from the marketplace.

That said, there are a number of things going on in our operations that give rise to a great deal of optimism regarding profitable growth in 2010.

Markel International continues to perform well. And the addition of Elliott Special Risk in Canada, a very well-known MGA up there, is expected to add another $75 billion to $100 billion of gross premium and solid business, and one that we've been patiently participating on in the last 15 years at a 15% quota share on most of their business.

William Stovin and Jeremy Brazil and their team continue to build a solid franchise and to look for further branch and acquisition opportunities abroad.

The specialty admitted division is already responding to the sales and marketing initiatives that have been instituted by Mike Crowley since his arrival less than a year ago. And they are also being the beneficiary of an expansion with the addition of Julian Bowen-Rees and his team of bloodstock experts to expand on our equine division measurably.

But the biggest news corporately is the progress on the wholesale side of the One Markel Initiative, which totally changed the excess and surplus lines segment structure from four separate silo profit centers to a regional platform that gets us closer to our wholesale partners and avails them -- our wholesale partners -- to window into our entire 20-plus product offerings. Heretofore, each of the subsidiaries were doing business on a nationwide basis, with the result that our wholesale clients were geographically distant from our operations. And because of the independence of each of the four, very few wholesalers had access to all of the Markel product offerings.

In spite of the soft environment, we think that this broadened, strengthened franchise value is going to enable us to grow organically with the wholesale agents that already represent it -- represent us.

Most of the heavy lifting in this Herculean transformation has been done. And we can get on with the fun part, which is looking outward with the sell business, instead of being so justifiably focused on internal restructuring.

On another front, as evidenced by the recent acquisition of Elliott in Canada, we're still actively looking for accretive purchases. And we think that the continuing economic downturn coupled with the continued soft insurance marketplace is going to produce a robust pipeline of acquisition opportunities.

I'm in the fourth week of a five-week planned road show that started with visits to our new Canadian offices in Toronto and Montreal, and will end next week on the West Coast in Scottsdale, Arizona, and L.A. By the end of this trip, I will have seen virtually all of our North American associates, with the exception -- the major exception of Milwaukee, Wisconsin. But I can assure you, I'll get there before January. Because I'm not going to Wisconsin in the winter. And by the end of this trip, I will have seen well over 200 of our wholesale partners.

Our people and our customers are enthused and excited about One Markel, and so am I. Although it's been expensive, distracting, stressful and demanding of extraordinary effort, it was clearly the right thing to do, the right time to do it -- if there is such a right time to turn an organizational structure upside down and rebuild -- and the benefits will be obvious and long-lasting.

As I said earlier, I'm thrilled to be re-engaged at a time that no doubt will prove to be a watershed event in the history of our Company. And in closing, you've got to admit that my timing was impeccable. I didn't have to do any of the heavy lifting.

So with that, I'll turn it over to Tom. And I obviously will be more than happy to answer any questions during the Q&A.

Thank you, Tony. Good morning. Last quarter I mentioned specifically that it sure was more fun to be bringing you some good news on the investment front after what seemed like a couple of dog years of tough sledding. Today, I'm happy to report to you that good news continued in the third quarter, and at an increasing rate.

We also had some positive developments in our affiliated investment activities. And I'll comment briefly on those as well.

As to the 2009 year-to-date numbers, through September 30th we were up 11.9% for the portfolio as a whole. Equities were up 20%, matching the year-to-date return of the S&P 500. Fixed income was up 10.4% in local currency terms. And foreign exchange effects added 1.5% to our results. The blended average of those factors produced a total return of 11.9%.

Those results, coupled with the investment leverage inherent in our business and continued underwriting profitability, produced comprehensive income of just over $500 million and a gain in book value per share of 23% since December 31 to its current all-time high level of $274.33.

I'd like to add a bit of perspective that comes from a slightly longer time horizon than we've all become accustomed to in our fast-paced world. At Markel we cannot control what the stock market thinks of us and what value or multiple the market assigns to our balance sheet and future prospects. All we can control is our effort to do our best in building the book value per share of the Markel Corporation.

When measured over reasonable periods of time, I think we've done that pretty well. For instance, five years ago on September 30, 2004, our book value per share was at $152.93. Today it is at a new all-time high of $274.33, a compound annual growth rate of 12.4% over that time.

In September 2004, we didn't know that we were in for the most profound financial crisis we've faced in generations. We didn't perceive $4-a-gallon gasoline, the subprime mortgage debacle, the housing crisis, the Madoff Ponzi scheme, any of the other Ponzi schemes or any of the other hugely important macroeconomic events that subsequently occurred. We also did not know that at Markel we would restructure our insurance operations and face the government tax entity as our largest competitor.

If someone had told us that these things were going to happen, and we knew it with 100% certainty that their forecast was correct, we probably would have hunkered down, become very defensive and ultra-conservative in our dealings, and made very little money during the last five years.

As it turns out, without that foreknowledge, we instead methodically kept going to work every day and trying to make the best of each day's opportunities. As a result, this Company, through our daily activities of disciplined underwriting and investing, produced $121 of book value per share. This equals comprehensive income for our shareholders of over $1 billion during that time frame. Even with a weaker dollar, that's still a lot of money.

I respectfully submit that given all of those external factors we faced, these results represent excellent stewardship of your capital through one heck of a storm.

They also speak to the value of working hard on the tasks in front of you each day, continuing to put one foot in front of the other, and not letting negative forecasts or macroeconomic factors create fearfulness and to paralyze you into inaction or negativity.

Looking forward, I am profoundly optimistic about our prospects. My colleagues spoke about the current state of the insurance markets and our specific efforts to produce good results, despite the conditions.

Conditions remain challenging, and are likely to do so for the immediately foreseeable future. Conditions change, though. We all know what is wrong with the world right now and the challenges we face. When conditions change for the better, and I believe they will, it will surprise us just as much as it did when they changed for the worse. I am confident that we at Markel will adjust and adapt as needed to make the best of whatever environment we face.

On the investment side, we have something of what I would describe in insurance terms as a hard market right now. And as Martha Stewart might say, that is a good thing.

As a broad generalization, the largest, most historically successful and financially strongest global firms on the planet are selling at the lowest valuation in decades. Our equity portfolio is filled with shares of those companies. And I'm optimistic about our future returns from current prices. Compared to a 10-year government bond on which we would earn slightly less than 3.5%, the earnings yield on these types of companies at 6% or 7% are better. The current dividend yield often equals or exceeds what we could earn by buying bonds. And I believe that investment in the common shares of these firms offers inflation-protected growth as well. Additionally, at some future point in market history, these firms will probably sell for premium valuations. And that should create something of a double whammy when it comes time to measure our investment results.

I'm also pleased that we are matching the S&P 500 so far this year. Two thousand and nine's rally has been led by rebounds of the firms that had near-death experiences. The most dramatic stock price increases occurred where companies were thought to be at death's door earlier in the year.

We tried to stick to higher-quality investments in recent years, to the best of our ability. And I'm pleased that we are keeping pace with the overall market, even with what I would characterize as a higher-quality and more durable portfolio. From my vantage point, we are getting better companies at lower prices than the market as a whole. And we are matching the market returns. If our companies indeed prove to be better than average and higher quality, they will produce better-than-market returns over time. Over time, that has indeed been the case for our investments at Markel.

We continue to invest regularly and methodically in equities. Our current equity allocation is roughly 48% of total shareholders equity. And that leaves us with plenty of ammunition to continue to regularly invest in equities. We will remain modest and conservative in doing so while the insurance markets remain hypercompetitive. And we would look to increase our flow of funds into equities as insurance premium volumes grow.

In the fixed income arena, we've enjoyed a total return of 9.3% this year. And we've benefited from improvements in the perception of credit quality and lower interest rates. We will continue to increase the quality in the fixed income portfolio. The duration of the portfolio remains on the sort side at just over four years. We will continue to run a short duration and high credit quality portfolio for the foreseeable future.

Also, subsequent to quarter end, we announced the acquisition of Panel Systems, Incorporated of Temple, Texas. We purchased 100% of the equity of the firm. PSI manufactures panel furniture products. College dorm rooms represent roughly 50% of their revenues. And hospital and health care markets are the next biggest sector.

PSI was founded 20 years ago and has produced outstanding financial results. They also groomed the next generation of leaders who will remain at the firm and run the business going forward.

PSI operates with the Markel style, and has for two decades. In addition to their excellent financial results, one of the ways you can discern this is that the first and second employees ever hired by the Company are still with the firm.

This transaction continues down the path we first laid out in the 2005 annual report. At that time, we talked about what a dislocation in the financial markets might do to the world of private equity and highly leveraged firms. In 2005, we purchased AMS, which was our first controlling interest in a private company. During 2006 and 2007, we did not purchase any of these types of investments as we faced prices that were simply too high and that did not represent good investment vale. During 2008, we started Parkland Ventures in a de novo transaction. And now in 2009, we are adding PSI to our roster of affiliated holdings.

We're very pleased with the results from AMS and Parkland. Both firms as well as PSI are solidly profitable. And the total revenue base of the group should now exceed $100 million.

Given the dramatic dislocation in the world of private equity and alternative investment, the opportunity to acquire additional holdings at attractive prices has now presented itself. We've patiently waited for this time with discipline. And now we are seeing the opportunities we were looking for. We view only 80% to 100% of these firms in the same way we consider every other equity investment we've looked at for decades. We look for profitable, cash-generating businesses run by management teams with equal measures of talent and integrity, with reinvestment opportunities and/or capital discipline at fair prices.

Additionally, with these affiliated investments, we have the opportunity to make the capital allocation decisions at these firms, as well as to set executive compensation levels. These are exactly the two points where a lot of value gets dissipated at public companies. With control over these decisions and the opportunities now available in the marketplace, I am excited about our ability to add meaningful value to Markel shareholders from these activities in the years to come.

Markel has a demonstrated track record of extremely shareholder-friendly executive compensation practices and capital allocation discipline. I'm excited that we will have the opportunity to extend the realm in which we can continue to do this for our shareholders. And I look forward to answering your questions and reporting on this realm to you in the future.

Now as my friend and mentor Chuck Akre would say, [sparrow] optima. And with that, I'm happy to turn the call over to Steve.

Thanks, Tom. As you all know, Markel's long-term goal is to compound book value per share at a higher rate and over the long term. The financial crises of 2008 along with the hurricanes caused Markel's book value per share to drop to about $222 per share. Clearly, declining book value will not enable us to achieve our long-term goals.

But we're very, very happy that with book value in September growing to $274 per share, or an increase of 23% from the level that -- at year end, that we have fully recovered the magnitude of the prior decline. I think it's important to also point out that this is the highest book value per share we've had since the year end 2007 when book value was at about $265 a share.

With that, we're very optimistic that we'll continue to be able to achieve our primary financial goal of compounding book value. As all of you know, Markel's greatest strength is our continued focus on the long term. While, it looks like we might continue to have a very competitive market in 2010, Markel will continue to work for long-term success.

And with that, I'd like to open the program to your questions. Operator, if we can, we can start the Q&A session.

Yes, thank you. We will now be conducting a question-and-answer session. (Operator Instructions.) One moment, please, while we hold for questions. Our first question comes from Beth Malone with Wunderlich Securities. Please proceed with your question.

Thank you. Good morning. A couple of questions -- first, what -- are you thinking differently about splitting the stock now that Mr. Buffet is considering doing that?

The answer would be no. We'll leave it where it is and, hopefully, see it grow.

I might add if it gets to $100,000 and some a share, we'll revisit the issue.

Ha. Okay. All right, the other question -- on acquisition opportunities, does it -- does it really -- how much does this pricing environment affect your thought process in making acquisitions? If pricing is this low, obviously there might be more opportunities to acquire. But do you really want to acquire when pricing is like this?

Yeah. I think, Beth, that's a good point, because it -- the low pricing environment puts stress on other companies, especially those that try to take the price. So it usually results in an increased number of opportunities. It's a whole lot easier in buying a company to buy one that is -- has been distressed, and where it's very clear that you need to increase prices and fix the underwriting problem. And it's been our style in the past that we'll see more opportunities.

And the good news is that as the companies get recycled, the market will change. A great example of that is when we bought Terra Nova in March 2000. It was less than a year after that that the market started to change very, very dramatically. And the wind, rather than being our face, was at our back. And oftentimes that will happen.

And so I think we don't know when the market will turn. But it'd certainly be better to buy a company when prices are going down and getting worse and the forecast and the futures are most dismal, because surely that will change. We don't know when. But surely that will change. And so, I'd rather catch it on the upswing than buy it at its peak and watch it go down. So I think it's the best time to be (inaudible). And sellers are more realistic about the price at that time as well.

So it's just a combination of factors just makes it very, very nice. And in fact, we are starting to see an increased flow of potential opportunities.

Okay. And then, also, on the acquisition front, does the change -- the Markel One and going to a regional -- does that have any effect on the potential targets or the willingness of companies to consolidate with Markel?

I don't think directly that that will impact us a whole lot in terms of acquisition opportunities. It's -- certainly, there are probably some companies that would maybe be less attractive to us after we complete the reorganization to One Markel. But there'd be just as many maybe that would become more attractive as a result of our restructuring. And so, I don't know that there's one answer or another.

Okay. And then, finally, on Markel One -- it -- the change sounds like it was really motivated by an effort to get closer to your wholesale agents to make your Company more easy to do business with, I guess more attractive to the agent. Is there real expense saves anticipated long term from a change? Or is it really just a -- in terms of expenses, it's just a wash, it's a different way of doing business?

No. No, we expect very, very material expense saves when we're finished. We'll have one common claims system across the Company, rather than having six or seven or eight. We'll have one core underwriting system. We'll have one customer relationship marketing system. And so, the integration of the back office is hugely important to this process.

It's, unfortunately, very expensive, as Richie's pointed out, getting from point A to point B. But they should be very, very significant improvements in both the cost structure within Markel, but also the quality of the data. And that's a very, very important element of all this, is that if we can improve on our data collection capabilities, it should improve both our underwriting discipline as well as our sales and marketing efforts.

Okay. All right. Well, thank you very much.

Our next question comes from Mark Hughes with SunTrust. Please proceed with your question.

Thank you very much. Along those same lines, the expense ratio up pretty meaningfully this quarter, I think you in the queue alluded to the profit-sharing accruals that boosted those expenses. How should we look at that going forward? Will that drop down a bit in the fourth quarter? When will some of the benefits you've just discussed with the One Markel start to kick in?

In terms of the profit-sharing, we were sort of re-establishing some bonus accruals that we had taken down earlier in the year. So yeah, the impact on the quarter is more than I would've -- I would expect in the fourth quarter. I think it'll be more normalized in the fourth quarter.

In terms of if you're talking about some of the expense savings from One Markel, we're probably -- it's probably 2011 before we really start seeing meaningful expense savings from the systems efforts behind One Markel, although I will say we've already done a lot of the reorganization of the people. Obviously, we did it out in the regions and with our product line groups. We've also done it with our service areas. And we've created shared service areas. Just as a result of bringing our people together in shared service areas, we are starting to see some efficiency. We're not going to see the full effect, though, until we get the systems really to support our people, though.

But we're already pleased with what we're seeing working, and for example, one claims organization, one finance and accounting organization. So we're definitely on the right path.

Got you. Can you talk about how conservative you may be on current year loss ticks being in the high 60s, plus the expense ratio high 30s or low 40s. You're talking about the meaningful combined on a current-year basis. Is there a lot of -- are you intentionally being conservative? Because I'm looking at that relative to your commentary about your outlook for pricing to continue to be pretty competitive in 2010. It just seems like your outlook for the combined would argue the other way. Is it -- at this stage pricing ought to be stabilizing or going up.

I think the answer is yes and yes, in some respects. In terms of our quality of our loss reserves and our conservatism in setting loss reserves, our standard is, we hope, consistent and the same as prior periods, in which case we're continuing to apply both the Markel style and the Markel standard to be more likely redundant than deficient and create a margin of safety in the loss reserves across every single product. We continue to be concerned about the impact of a recession on increasing claims frequency. We continue to be concerned about the potential of the monetary stimulus that's going on causing future inflation. So we're trying to be cautious and conservative in loss reserving on the second half, in spite of the fact that we believe we've built in a margin of safety for 2009.

And we are reporting on an accident-year basis a combined ratio of greater than 100%. We think that that -- that in reality the industry is operating today at combined ratios of greater than 100% and that without price increases, it makes no sense to write business in the property casualty and insurance market today. If you look at the yield that you can reasonably and conservatively earn on the investment portfolio and a normal need to earn a healthy return on capital deployed without getting combined ratios down into the low 90s, an insurance company today cannot earn a decent return on capital.

And so, I would argue that across the industry returns on capital are virtually non-existent today in the property and casualty insurance industry. And I personally don't think that will last forever. Sooner or later, the capital will go away, either through companies having losses or investors choosing to take the money out. And that balance will be re-established, prices will go up and you'll have an opportunity to make money again. But it's a normal cycle. And we just happen to be in an unpleasant part of the cycle.

I think looking at the long term, the property and casualty industry continues to be a great place to invest for the long term. We happen to be in a cycle where it's less attractive.

Thank you.

Our next question comes from Michael Phillips with Stifel Nicolaus. Please proceed with your question.

Thanks. Good morning. It sounds like then, on that last question, one of your earlier comments was that -- I think Richie said you're still seeing -- I just want to confirm this -- you're still seeing some of that higher frequency from your professional liability lines -- architects, engineers, things like that -- that you talked about the second quarter that's still continuing in the third quarter. Any kind of change there, though, from what you saw in the second quarter?

Well, we've taken corrective action. I mean, we've taken quite a bit of corrective action in those areas where we did see some additional frequency. So I think what we're really just telling you is as that premium earns out, it's going to earn out at a higher loss ratio. The -- we -- as soon as we saw it, which was probably earlier -- early part of the year, we took some pretty quick action in terms of pricing, in terms of various classes within the class, as well as various states where we saw problems, and corrected the underwriting on a go-forward basis. But the business that was written is going to earn out. And we definitely hope and expect that the actions we took will rectify that problem.

I guess kind of a related question, then, is no one's optimistic on rates then. And as Tony said, not even in 2010. It's pretty competitive out there still, and maybe even worse than what we saw earlier in recent quarters. Your rates, I think Richie said, are flat year to date, yet your retentions are improving. Can you talk about that and what's sticking with you and how that's being done in such a competitive environment?

Well, our volume's down 15%. So, unfortunately, there's some business -- there's a lot of business out there we'd love to keep, but somebody else's taken it at a lower price. But what we have been able to keep, the 85% that we are keeping, we're keeping it at rates that we believe are at least adequate. But as Steve says, we don't think they're going to help us generate high rates of return for the shareholders at this point. So we, as well as the rest of the industry, need to see rates go the -- start to go up to generate the kinds of returns that investors want to see.

Okay, thanks. I appreciate it.

Our next question comes from the line of Chuck Akre with Akre Capital Management. Please proceed with your question.

Good morning. My view has been for at least a year that the whole -- the whole process of changing to One Markel was critical to the Company's overall success. And it was a very big -- it's been a very big undertaking, still in process. And now you have a change in the way it's being managed in terms of the personnel. Without getting into the reasons for that change, can you talk about how that's likely to affect your thinking about the timing and the outcome of that migration to One Markel?

Chuck, I don't think it's going to impact the timing at all. The process was tested a little over a year ago for three to six months. We implemented it Company-wide in sort of March, April of this year.

And we should start -- we've already received some sort of deliverables, both on the system side and, as Tony's just described, on some of the branch operation side. And clearly, the roughest patches in the field with the regions we think are behind us, as Tony pointed out relative to his tour.

Markel has always operated with a strong and large and very deep team of people. And the fundamental strength has been everybody focusing on the Markel style, which involves working together, trying to keep the large egos as best we can out of the way, focusing on client service and giving our customers quality products and doing the basic blocking and tackling that's necessary to run a business.

With the Markel One, clearly things were disrupted during a period of time. But they really are starting to settle down. And it's not the result of any one individual, but the result of 2,000 people across the Company pulling the oars in the same direction and having a shared value system to earn good returns on shareholders equity and to compound book value per share over the long term.

The most challenging aspect of it all is not really One Markel, but going to work every day and trying to sell rate increases when everybody else is cutting the heart out of their prices. And it's just a challenging and difficult and not much fun environment when crazy competitors are taking business at prices that just don't make sense to compete with.

Steve, if I can add a little -- a personal note, having been on the road the last three or four weeks and talked to our people and talked to our clients, the thing is really firming up. It's coming to fruition. We've still got a few things that we need to do in order to refine some service standards and some other things, as you would imagine in a transformation of this consequence.

But I would echo Steve's point -- our people are solidly behind it. They are enthused about it. Our producers are really beginning to understand the strengthened franchise value that it brings. And leadership really is at the grass roots at the branch level and at the product line leadership level and the new claims organization and everything.

And specifically with regard to -- the question was with regard to Paul. I joined the -- joined Paul in an extraordinary effort to sort of bring the last mile home on this transformation to One Markel. And we had planned this trip and so forth. And candidly, without any relationship whatsoever, Paul asked for the leave of absence, so my role clearly has changed from one of being contributory to stepping into his stead. And, depending on what plays out in his situation, I am perfectly fine with his responsibilities and will continue to perform them indefinitely as long as I add value.

Thanks.

Our next question comes from David West with Davenport & Company. Please proceed with your question.

Good morning. I know the focus on One Markel has obviously been in the E&S product lines. Is there any thought to trying to extend it to the specialty admitted areas?

David, I think that's a great question. I'm glad you brought it up. Because a significant part of what we intend to do with Markel's long-term strategic plan is to grow our specialty admitted business and do a much, much better job of creating products and marketing products through the retail channel as opposed to having so many of our eggs invested in the wholesale channel. Now, in implementing that, we do not want to cannibalize our wholesale business in any shape or form or manner.

But clearly, there are huge opportunities in the specialty admitted business where Markel has not focused as much in the past as maybe we could or should have, and where there's a huge opportunity to build and develop our business. And so, we are very, very focused on doing that. Mike Crowley, who joined us at the beginning of the year, is focused on it. We're having a lot of conversations with a lot of agents about a lot of different products. And that is an area that I would expect to see meaningful growth in the next several years.

Very good. And I guess changing gears, Richie, I'll toss one to you on the tax rate, obviously a lot of volatility there this year. And I think in your discussion you mentioned exclusive of the UK tax benefit, you thought the underlying rate was about 20%. Is that a number you would suggest to use for modeling purposes?

I tell you what, Dave, as much as has been happening in taxes lately, I've given up trying to model a tax rate. No, actually, if you think about our sort of normal run rates, you start with your 35 statutory rate and the biggest adjustment you make to that is our municipal income, which we have been adding to throughout the year. And somewhere in the mid to low 20s probably makes sense.

I know we've had a lot of things we've thrown at you this year that have bounced it all around. But given the amount of municipal income that we've added and the fact that sort of pretax is down because of smaller underwriting profits, and so much of the investment portfolio in the lower yielding end of things right now, it amplifies the impact of that tax-exempt income. So I would say mid to low 20s is a pretty good guess for the fourth quarter.

Thanks very much on that. And, Tom, you gave some great color on some of the affiliate investments you've made. I did note in your discussion of the OTTI charges there was a portion of that relative to the affiliate investments. And I wonder if you could add some color to that?

That would relate to First Market Bank becoming part of Union Bankshares. We made the investment as an initial amount, carried it on the balance sheet, essentially equity-method accounting. So you add their net income, you subtract the dividends and that's the balance sheet value. This transaction, given the prices that are out there in the world of bank stocks these days, is lower than what the carrying value on the balance sheet was. So we recognized that as soon as clarity came into view on what the pricing would be, to be as conservative as possible on our balance sheet presentation.

I would also suggest to you that there's an equal and opposite phenomenon going on in that as we continue down this path, we (inaudible) these things on an equity accounting-type method. Over time, they would tend to be worth more than what would show up on the books using that method of accounting. So it's inherent conservative that you build on the balance sheet over time by using that method of accounting.

Very good. Thanks so much.

(Operator Instructions.) Our next question comes from Mark Dwelle with RBC Capital Markets. Please proceed with your question.

Yeah, good morning. A lot of my questions have already been covered. But one topic we haven't touched on as much was the overall London market business. Is the rate erosion and the pressure on pricing there commensurate with what we're seeing in the US? The overall decline in premiums hasn't been great -- as great there. But I was wondering if there was the same dynamics that were--?

We would suggest that the London market is slightly better than the US market. We're seeing some price increases in some of the more CAT-exposed business areas such as marine and energy, and some of the property areas. Certainly, property reinsurance, we're seeing -- we saw some increases this year. And we're starting to see low single-digit increases in a lot of the other areas. So unlike the US, where it still seems to be all over the board, there is fairly consistent price increases in the UK. But some of them are rather small, to be honest.

So, hopefully -- it's kind of interesting. Usually it seems like the London market trails the US. This time it appears maybe they're leading. So we hope that means good things for the US markets during 2010 or whenever it happens.

Mark, I'd like to add an observation. You remember the Sherlock Holmes story about the dog that didn't bark? I think your point about the fact that people weren't asking questions about London today speaks to something very important that's happened.

For the initial years after that deal, when we knew it was a turnaround situation and everybody from top to bottom in this organization was full-tilt at the task of fixing things, there were questions after questions after questions about that deal. That has truly turned into a crown jewel of the Markel Corporation. And it's thanks to the effort, again that Steve spoke of, of 2,000 people from top to bottom.

And when you don't ask questions about it, usually that's because people are pretty happy with the way things are going on. And everybody connected with that effort deserves kudos for the work they put in to make that the reality.

I agree with that. Unfortunately, I guess the dog didn't entirely avoid barking. I still let it bark a little. But in any event, very good job there.

One other question I had was, you've been disclosing for a few quarters now this contingency situation related to the Guaranty Bank. And it seems like that's evolving a little bit more rapidly now. And I was wondering if -- and I realize it's within the context of lawsuits, and there's only so much you can say -- but if there's a little bit more understanding you can lend to that situation in terms of both how that situation evolved and what the time lines might look like in terms of the ultimate resolution?

Well, I'll take a shot at it. We've got a pretty wholesome disclosure in the 10-Q. But it's -- it came out of a program that I think we talked about in the past, the universal program, which is a program that has been discontinued. Guaranty Bank was the biggest policy holder within that program, basically probably representing two-thirds of the exposure in the program. Guaranty Bank is a -- I'll call it a large community bank in Wisconsin that decided to start doing second mortgage loans in places like Florida. So they got a little far afield from what is their core competency. So their portfolio has performed rather poorly.

As the portfolio continued to deteriorate, our policy allows for the prices to be increased that we charge. Guaranty took exception with that. And they filed a lawsuit, basically I think suggesting that the policy was not allowed under Wisconsin law.

Whatever the answer to that question is, the reality is that there's -- we believe the only rights they have under the contract is you rescind it or you keep going with the contract. They suggested a rather unique theory that you unwind half of the contract. We don't think that's possible or a likely outcome. And we reserved what we think are the two potential likely outcomes.

So other than that, I don't know what else to really say. And it is fairly well laid out, I think, in the footnotes.

Any further questions?

No. I appreciate the added color on it. It's just -- it's obviously a situation that's been evolving. And I just wanted to hear your thoughts related to it.

Yeah, and it'll continue to evolve during 2010. So watch this space.

Okay. That's all of my questions.

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 much. I'd like to -- I appreciate everybody's participation in the call today. Should you have any further questions or comments, we're always available here in Richmond. So don't hesitate to call and let us hear from you. And in the meantime, have a wonderful day and a wonderful weekend.

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