Markel Group Inc (MKL) 2010 Q3 法說會逐字稿

Greetings, and welcome to the Markel third-quarter 2010 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 Mr. Tom Gayner, President and Chief Investment Officer. Thank you, Mr. Gayner. You may now begin.

Good morning. I'm Tom Gayner. It's my privilege to welcome you to the third-quarter conference call for the Markel Corporation. Let me begin by reminding you that the comments we make today are covered by the Safe Harbor provisions you all know and love. Specifically, during our call today we may make forward-looking statements. Additional information about factors that could cause actual results to differ materially from those projected in the forward-looking statements is described under the captions "Risk Factors" and "Safe Harbor and Cautionary Statement" in our most recent annual report on Form 10K and quarterly report on Form 10-Q.

Our quarterly report on Form 10-Q, which was filed on our website at www.markelcorp.com, also provides reconciliation to GAAP of certain non-GAAP financial measures we may discuss in the call today. This morning, Anne Waleski will review our year-to-date numbers, Mike Crowley and Richie Whitt will comment on our current operations and our insurance operations, and then I will discuss our investment and non-insurance operations. Following our comments, we will open the floor for a question-and-answer period. Steve Markel is here with us as well, and will be available for the Q&A. With that, Anne?

Thank you, Tom, and good morning, everyone. I will follow the same format as in past quarters. As Tom mentioned, I will focus my comments primarily on year-to-date results. I will start by discussing our underwriting operations, followed by a brief discussion of our investment results, and bring the two together with a discussion of our total results for the nine months. Moving right into the underwriting results, gross premium was up 3% at $1.5 billion for the first nine months of 2010. Higher gross premium volume in the London insurance market segment, which was due in part to our acquisition of Elliott Special Risks in late 2009, was partially offset by continued competition across many of our product lines, particularly within the excess and surplus lines segment.

For the quarter and nine months of 2010, gross written premium included approximately $19 million related to our settlement with Guaranty Bank. Net written premium was up 3% to the prior year, at $1.4 billion. Retentions were flat at 90% in both periods. Earned premiums decreased 7% compared to 2009, due to lower gross and net written premiums over the past several quarters. This decrease was partially offset by earned premium of approximately $19 million, related to our settlement with Guaranty Bank. Our combined ratio was 99% for the first nine months of 2010, compared to 97% in 2009. The increase was due to a higher current accident year loss ratio and a higher expense ratio, partially offset by more favorable development of prior years loss reserves, compared to the same period of 2009.

The combined ratios for the first nine months of 2010 include approximately $72 million, or six points of underwriting loss, for two programs that were exposed to losses associated with the adverse conditions in the residential mortgage market in recent years, as compared to approximately $26 million or two points of underwriting loss, in the same period in 2009. The combined ratio also includes $33 million, or three points of underwriting loss, from the Chilean earthquake and the Deepwater Horizon drilling rig explosion, which occurred in February 2010 and April 2010, respectively.

The 2010 current accident year loss ratio was 73%, compared to 69% in 2009. The 2010 current accident year loss ratio includes approximately four points of underwriting loss for two programs that were exposed to losses associated with the adverse conditions in the residential mortgage market in recent years, as compared to approximately one point of underwriting loss in the same period in 2009. Favorable redundancies on prior years losses increased to $181 million, or 14 points of favorable development, compared to $156 million, or 11 points of favorable development, in 2009. The increase was primarily due to more favorable development of prior years losses in the E&S segment.

Our 2010 expense ratio increased approximately one point, to 41%. The increase in the expense ratio is partially the result of lower earned premiums, compared to the same period last year. Costs related to our One Markel system project, also referred to as Atlas, represent approximately three points on the combined ratio for the nine months in 2010. During the third quarter of 2010, we decided to defer the implementation of certain aspects of the Atlas initiative, and expense $7.7 million of previously capitalized costs, which are included in the expense ratio for this year.

Turning to our investment results. Investment income was up slightly to 2009 at $201 million, primarily due to having higher invested assets, compared to the same period in 2009, although market yields do continue to trend downward. Realized gains were $22 million for the first nine months of 2010, as compared to realized losses of $100 million in 2009. The majority of the 2009 losses related to write-downs for other than temporary declines in the fair value of equity and fixed securities.

Unrealized gains increased $327 million before tax in 2010, due to increases in the fixed income in equity securities. Tom will go into further details on investments in his comments. Looking at our total results for the first nine months of 2010, we reported net income to shareholders of $127 million, compared to $108 million in 2009. Book value per share increased 11%, to approximately $315 per share, at September 30, 2010.

Turning to cash flow and the balance sheet, I will make a few comments. Regarding cash flow, operating cash flow was $173 million in 2010, compared to operating cash flow of $219 million in 2009. In 2009, net cash provided by operating activities included the receipt of $34 million related to our 2008 federal income tax refund.

Investments in cash held at the holding company were approximately $900 million at September 30, as compared to a little more than $1 billion at December 31, 2009. The decrease from year-end is primarily due to the holding company funding stock repurchases and interest payments on debt. At this point, I would like to turn it over to Mike to further discuss operations.

Thanks, Anne. Good morning. The third quarter of North America, for both wholesale and specialty divisions, continued to present the same challenges that we have experienced in the preceding two quarters with regards to rates and economic effect on exposure basis. However, from a loss and expense perspective, the third quarter saw significant improvement.

In reviewing the two business segments, I would like to highlight a few key points in both the wholesale and specialty operations. First, in the wholesale operation, we made several key appointments in the quarter. John Latham was appointed to President of the Wholesale division. John has 37 years of industry experience and has been with Markel for over eight years. Steve [Gerrard] was appointed Executive Vice President of the Southeast region and will lead that operation going forward. Steve has 25 years' experience in the industry. Sarah [Gallup] was appointed Executive Vice President of the Northeast region and will lead that operation. Sarah has over 20 years' experience in the industry.

Now that Sarah and Steve have assumed the leadership positions in the Northeast and the Southeast, we feel we have terrific leadership in all five of our wholesale regions, positioning Markel for strong growth now and in 2011. In addition, Wendy Houser was appointed head of the wholesale division's newly formed Marketing Department, which will complement our regional marketing capabilities. Wendy was formerly Director of Marketing for our Midsouth region.

During the quarter, we hosted special events for key agents in each region of the country, launched initial programs for new transportation and management liability products, and conducted follow-up meetings with our binding agents. We are receiving positive feedback from these agents regarding our structure, our service, and their broader access to our products. We are now well-staffed, with an appropriate level of expertise in each region for every product line.

These and other actions resulted in an increase in submission activity in all regions, ranging from 13% to 30%. However, converting these submissions to new business remains a challenge due to market conditions. But the flow of submissions is extremely encouraging. We continue to believe that we are benefiting from the One Markel strategy, and our agents are confirming that. We are being much more proactive in soliciting business, and we believe our broad product offerings in the E&S segment can be further leveraged in our new structure to gain market share. Finally, we are continually reviewing our agency appointments, and are replacing dormant relationships with new ones that involve commitments to certain levels of production.

In our specialty division, we also added new talent. We hired a team and our Accident and Health Division to create a stoploss in excess medical reinsurance facility. Steve Donnelly, Paul Skrtich, Lynn Stoner, and [Stuart Reilly] joined in the third quarter, bringing years of underwriting and sales skills to Markel. This team includes experienced actuarial underwriting and business development talent. We also filled the position of Marketing Director at Markel American Insurance Company. Ted Winchell joined Markel with 20 years' experience in marketing and brand management.

A very significant development is the acquisition of Aspen FirstComp. This acquisition closed after the end of the quarter, but is worth discussing because of the talent, technology, and leadership that is now part of Markel. Aspen FirstComp is a workers' compensation underwriting company for smaller, carefully selected risks. Our initial focus with Aspen FirstComp is to provide the support for them to continue growing their business. But clearly, down the road we see great cross-selling opportunities.

In addition, during the quarter we announced the acquisition of an American livestock book of business, and closed that acquisition on October 1. Keeping pace with new methods of distribution, we also took Markel motorcycle and Markel boat products live on Facebook. Throughout the specialty division, we continue to emphasize the importance of being front and center with our agents. Our business development specialists have made over 600 face-to-face visits with our agents year-to-date. Our senior executives in the specialty division continue their efforts with larger regional and national brokers to develop meaningful relationships for our specialty products, focusing on those agents with significant revenues that meet our criteria.

During the quarter, policy retention and submission [indiscernible] were up at our carrier alliance operation. At Markel Insurance Company, policy retention was down slightly, premium retention was up slightly, and submissions were up 21%. At Markel American Insurance Company, policy retention was up, written premium was down in the marine and recreational vehicle segments, which is understandable in this economy. Gross written premium for the specialty segment was up 8.4% due primarily to the addition of the carrier alliance operation in Cambridge to the Specialty Division, and the Agri-Risk acquisition completed last year. Without those items, same-store volume would have been flat.

,Finally, our product line group headed by Gerry Albanese, contributed to our optimism for the future by adding significant new talent as well. Diane Borden joined Markel as Managing Director of Crisis Management after 17 years with American International Group. Christopher Clark joined as Senior Underwriter, Public Entity, and Mike Graham joined as Director, Excess Auto.

The PLL group launched three high-[indiscernible] product lines. I have already mentioned the management liability and transportation product launches in the wholesale report. In addition, the PLL group launched an enhanced property offering during the quarter. In summary, while we continue to face the same daunting challenges of the soft market and exposure-based reductions due to the economy, we are confident that the initiatives we have taken to strengthen the wholesale specialty and product line leadership divisions will position us for continued success in the future. I'll now turn the call over to Richie Whitt, President and Co-Chief Operating Officer. Richie?

Thanks, Mike, and good morning, everyone. I'm going to keep my comments brief today. International operations continued to have a good year, despite the difficult operating conditions that Mike mentioned. There is no need in going back through that, it is pretty much the same around the world.

Premium volume was up about 13% for the first nine months. That was primarily due to our 2009 acquisition of Elliott Special Risks, and that is continuing to come online. It was also due to conditions in the marine energy and liability market, post the Deepwater Horizon loss earlier this year. At Elliott Special Risks, [Maria Sousa] and the team have done a wonderful job transitioning from an NGA to the insurance company environment. Business retention has been very good, and we are focused on ways to continue to grow our franchise and the Canadian market.

Just as an aside, we are holding receptions in Toronto and Montreal this week to celebrate with our associates and business partners the one-year anniversary of the acquisition. Things are going just fantastic there right now. On the Marine Division, the energy and liability market has firmed considerably post the Deepwater Horizon loss earlier in the year, and [arrivings] have increased approximately $12 million, largely as a result. This may be the only hardening portion of the property casualty market at the moment. The nature of the loss has to some extent changed the way people are thinking about these types of risks. Organizations are purchasing additional limits, and underwriters are reconsidering their evaluation of these types of exposures.

Our branch offices in Spain, Singapore, and Sweden continue to grow, and we will be opening a Barcelona office before the end of the year. In addition, our trade credit team, our equine team, and our accident and health team, all of which are relatively new to some extent or another, continue to progress nicely. All of our underwriting divisions continue to work extremely hard to grow their business profitably, but as Mike was saying, it's an extremely tough market, and all of our underwriters know that our first priority is always going to be underwriting profitability.

Mike mentioned the many talented people who have stepped up or have joined Markel in our US operations. We are doing the same things on the international side. One, and possibly the only good thing about a competitive insurance market in a tough economy, is that it is a great time to invest in talented people. We always try to take a long-term view at Markel, and we continue to add individuals and teams that can help move our franchise forward. We have recently added several strong individuals in our open market and delegated property division, and have added a talented individual in Hong Kong to represent us in that region.

Despite the difficult market conditions, we are having a good year, and continue to build our product portfolio and bench strength on the international side. At this point, I will turn it over to Tom to discuss investments in the non-insurance operations.

Thank you, Richie. As my colleagues have said earlier, we've got some pretty good news to report for Markel these days, with a new record high book value per share, up $314 plus. While we look forward to this quarterly ritual of sharing our recent results with you, quarters are not what we focus on at Markel. This is a Company that has been built by generations, and looks forward to generations to come. We are focused on long-term results rather than quarter-by-quarter fluctuations.

One reasonable shorter-term measurement we track is our performance over rolling five-year periods. Over the last five years, the compound growth in our book value stands at over 12.5%. That number fully includes the effects of the financial market implosion of recent years, a relentlessly soft insurance market, recessionary economic conditions, and the distracting unnecessary reorganization of our business and systems to the One Markel structure.

Going forward, while the change -- and by change I mean increase -- in book value will continue to be important and directionally correct. The growth in our non-insurance operations should allow us to increase the intrinsic value of the Company at a greater rate than the reported change in book value. During 2010 so far, I am glad to report that our investment operations contributed to our outstanding financial results. In the first nine months of 2010, the total investment return was 7.7% in local currency and 7.5% after foreign exchange effects. We were up 11.5% in our equity portfolio, and 7% in our fixed-income portfolio. I am pleased with those results, and I hope you are as well.

On the fixed-income side, we remain, as we have for some time, a little short on our duration, with that statistic at roughly 3.5 years. We remain concerned about the possibility of a meaningfully higher interest rate environment, and we will stay short until those fears subside or we have higher interest rate long-term securities in which to invest. This creates an opportunity cost today, where we are giving up some current income. I believe it is the right thing to do to protect our balance sheet against a rise in interest rates, and we will continue to maintain this posture.

We also continue to own the highest credit quality securities that we can find. On the equity side, we earned 11.5% on our equity portfolio during the first nine months. Here, too, the message over the last several years has been consistent. We own a portfolio of high-quality global leaders with great balance sheets and financial performance. One of the great advantages of pursuing this strategy for the last several years is that the market didn't seem to care about the quality of individual securities, and we have been able to accumulate these shares at low valuations. While they are beginning to appreciate, we think there is a long way to go.

Quality, global powerhouses remain fundamentally attractive to us, and we continue to steadily add these to the portfolio. So far this year, the percentage of our shareholders equity invested in equity has increased from 48% to 52%. We continue to modestly and steadily increase our equity weightings. We will continue to increase this percentage as we see investment opportunities, coupled with increases in premium volumes.

Finally, this segueways to my last topic. We continue to allocate capital and grow our Markel venture subsidiaries. On the income statement, you can see that other revenues totaled $125 million in the first nine months, as compared to $58 million in the first nine months of 2009. Other expenses were $109 million, as compared to $52 million. We continue to expand our equity investment activities to include purchasing controlling interests in various companies. The companies are all on track to produce double-digit cash flow margins and double-digit returns on the capital we invested. We are pleased with the results so far, and we continue to actively pursue opportunities in this area.

Looking back 20-plus years ago, Markel largely was in a position where we could allocate our capital to insurance opportunities within the US. Around ten years ago, we increased the scope of our operations to invest in insurance opportunities around the world. Now, we can allocate capital and invest in any industry anywhere in the world. That's a big runway and an exciting pass for this Company. Through all of those errors and changes, the shareholders of this Company have earned outstanding returns, as the value of Markel continue to compound at attractive rates. We are all excited about the opportunity to continue to do this. And we now look forward to your questions. Operator, would you be so kind as to open the floor for questions? Jackie?

Thank you. Ladies and gentlemen,--.

Thank you.

We will be conducting a question-and-answer session. (Operator Instructions) One moment, please, while we poll for questions. Thank you. Our first question is coming from Beth Malone of Wunderlich Securities.

Hey, good morning, thank you. Congratulations on the quarter. Couple of questions. On the medical stoploss team that you acquired, where did they come from?

They were independent. They had been affiliated with several other companies, and they were out on their own at that point.

So they were like an NGA or --?

Yes.

or broker? Okay.

That's right, Beth.

Okay, thank you. And then, on the two programs that you all saw adverse development -- the cost of $76 million, I think I understood it. Could you give us a little more color on what that was? Was it banks or thrifts, or -- what were the losses, exactly?

Beth, this is Richie. Two programs, really. One was a program where we provided a -- I guess you would call it portfolio coverage for loans to banks and credit unions. And so, the -- covered potential credit losses in those portfolios. The policies were retrospectively rated, so I mean, the rates changed as the performance changed. And that was the Guaranty Bank situation that we resolved this quarter. That was in that program. The other program was basically an errors and omissions program for companies that provided services to mortgage -- to the -- to mortgage brokers or other people in the origination of mortgage loans. So, it was an errors and omissions program.

Okay. Was it at all affiliated with this latest thing about mortgages -- the foreclosed properties being improperly --

No, it has nothing to do with that. This sort of predates all that mess, where they're having difficulty figuring out -- with the paperwork, it sounds like it's rather messy -- and who owns the properties, and so forth, and difficulties in foreclosing. This has nothing to do with that.

Okay. And then, I'll ask one more question and get back in queue. But I have to know, what did you mean by Facebook, marketing on Facebook?

Well, our Markel American people are testing different methods of distribution to see what kind of responses we got. We market products at Markel American on a direct basis, to the consumer now, Beth. And so, they've opened up access to Markel American on Facebook. Just to see what kind of response we might get from the public, to develop an opportunity to market that way, in addition to the way we market now directly, through the Internet. We're just testing the distribution.

Okay. All right, thank you. I will get back in queue.

Thank you. Our next question is coming from Jack Sherck of SunTrust.

Thank you very much. The $18.8 million in revenue recognized on the gross line for the Guaranty Bank, is that all this quarter?

Yes, that was all in the quarter.

Okay. And I don't know if you have it, but do you have any idea how much Elliott Special Risks contributed to gross in the quarter?

We have that. There will be shuffling of paper for a moment.

$18 million in the quarter.

$18 million?

$18 million. One eight.

Okay. And then, just shifting gears to Aspen, what's your outlook there for pricing for workers' comp next year? And just kind of your thoughts there on recent loss trends, because some of the other workers' comp carriers have been reporting more per accident year loss, and those things like that.--

Jack, the market there makes it dependent like all property casualty lines, and we're looking at that now. Aspen is in the process of developing their business plan for 2011, and in doing so, they'll be working with the Markel actuaries as well as their own, to determine what approach we'll take to pricing. We haven't finalized that yet.

It is -- Jack, I will just add to that, it's safe to say at Markel we try to be more likely redundant than deficient. And so, we understand what the workers' comp market looks like, and it looks a lot like our other markets. And we're going to use an abundance of caution on both reserving and pricing to make sure we get it as right as we can.

Right. Got you. Alright, thanks very much.

Thank you, Jack.

Thank you. Our next question is coming from John Fox of Fenimore Asset Management.

Yes, hi, good morning, everyone. I have a couple of questions. Number one, I -- following up on Aspen, you've disclosed, kind of a $300 million in premium. Do you have a sense at this point how much of that you guys might write next year, in 2011?

We really don't yet, John. Obviously, we're making filings around the country to transition some of that business to Markel paper. It's hard to say at this point.

Okay, and I think in your comments you mentioned an acquisition that closed October 1, which I think I missed. Can you repeat that, please?

It was a small book of mortality business that we acquired from American Live Stock.

Okay. But it was pretty small in terms of written premium?

Yes, in the range of $7 million, $8 million.

Okay. And then for Anne, you mentioned the expenses that had been capitalized and then recognized this quarter. So, should we think about the run rate of expenses excluding that, or what's the right way to think about expenses going forward?

I think that you should think about the run rate of expenses excluding that going forward. We'll make determinations on the deferred work streams as time passes, but right now our intention is to achieve the objectives that we originally intended, just over a longer period of time.

Okay, and for Tom Gayner. If a bond matures today, Tom, what are you doing with new money in the fixed-income portfolio, given your strategy of staying short?

Well, the first thing it does is gives us the cash, and we won't automatically push it out without some sort of conscious thought as to whether we have an attractive investment idea or not.

Okay.

The biggest single change categorically, over the last couple of years, really has been the growth in the muni portfolio.

Right.

That would sort of be the most likely destination.

Okay, thank you.

Thank you. Our next question is coming from Meyer Shields of Stifel Nicolaus.

Thanks. Let me start with one technical question. The $13 million of losses associated with the mortgage servicing companies, was that accident year 2010?

I'm struggling with the number you came up with.

Yes, $13 million I'm having a hard time with too.

The problem you're going to have a little bit, Meyer, is it is not all current -- it's split between current and prior accident years. It would be a lot cleaner if it were in one or the other, but it is split between the two. And in Anne's comments, what we tried to do is give you how much was current accident year, and Anne, can you just kind of go back to that?

Yes. Current accident year has four points relative to one point in the prior period.

Okay --.

So,--.

I'm sorry go ahead.

And what I was going to say is, somewhere in the document I think we give you what the total amounts were for the programs, and you can back into it that four points of it is in the current accident year.

Okay, and that one point for prior year, is -- that's the number from a year ago, that's not the current estimation of accident year '09, is that correct?

Yes.

That's correct.

Yes.

Okay, second question. I think a lot of the reserve releases we saw in excess and surplus lines segment reflected lower severity. Are you seeing anything on the frequency trends, I guess stemming from litigation, anything changing there?

You know, and I don't have our chief actuary here with us, but no, I don't think we are seeing significant changes in frequency. But what we are seeing is clearly, in our triangles, the decrease in pricing is showing up. I mean, there's no question that the business that's going on the books in 2010 isn't quite as good as the business in '09. And that's just primarily the fact that the pricing isn't as good. Frequency is -- no terrible differences. We were concerned about what an impact of a recessionary economy would have on the frequency of losses. There may be some, but it's not as bad as we were fearing, certainly,

Okay. And last, if I can. Given the election results from last week, should we expect the Neal Bill to basically be dead for the foreseeable future?

I'm Sorry?

I'm sorry, the what?

The Neal bill.

I'm sorry, Meyer. I didn't understand what you said.

Oh, I'm sorry. The Neal Bill, with regard to affiliate reinsurance and the taxes.

We really don't know.

They did not have that specific question on the ballot in Henrico County, Virginia.

No, no. With the change in Congress, who the heck knows what's going to happen?

Fair enough. Thanks a lot, guys.

Thank you.

Thank you.

Thank you. Our next question comes from Amit Kumar of Macquarie.

Good morning and thanks. Two questions. First of all, just going back to Beth's question. In terms of these programs that you had on financial institutions and other E&O cover, are there any similar programs which are still in the book? Or is all of this in runoff? I guess what I'm trying to ask is, is there any future potential exposure from these issues?

Amit, these are really the only programs of any magnitude. I mean, as an example, we wrote some real estate brokers E&O, but we've wrote very little of it. So that could be considered, sort of in the neighborhood of these things, but these are really the big ones on the books. Both of them are in runoff. In terms of universal program, which is where the Guaranty Bank settlement emanated from, that program is towards the end, I believe.

The other program, the errors and omissions program, we only canceled that earlier this year. And so, if -- I would have to say there's still potential there. We clearly are putting up the best reserve we can, but we're still gathering information, we're still getting in claims, and we still have to evaluate it.

Okay, and what portion of policy limits have these been reserved up to?

Well, policy limits could be in the hundreds of millions. I mean, that's not how these things work. We're getting in the claims. We're -- the claims are coming in from the '07 and '08 year. You would think you are starting to see the majority of the claims at this point. So. I think we are getting through seeing the claims in. Then it's a matter of assessing the exposure on each of the claims, and coming up to settlements with the policyholders. So, I don't think you can look at it as what percent of policy limits, that could be a gigantic number, but I also don't believe that is a measure of the potential on this.

But net-net, so what you are saying is that even if there is future adverse development, based on the information you have today, it is not going to be a meaningful amount. Is that fair?

Meaningful, material -- those are delicate words. You know, this thing could still move out. There's no question. But we don't think it's an end of the world scenario. I think that is the best I can say today. There's still potential -- I mean, the mortgage crisis sort of issues, are in the paper every day, and so it's at the forefront of people's minds. But we're handling the claims on it. We're doing our due diligence on it, just like we do any other program. And we feel as good as we can with the knowledge we have today about our reserves.

That's very helpful. And just one other quick question. On Aspen deal, in your 10-Q, there is a sentence which mentions that based on current expectations, you don't expect any contingent consideration to be paid. And prior to that, it mentions that was based on the development of Aspen's loss reserves. And I'm just wondering, was there a detailed analysis which was done recently, or did something change on Aspen's loss reserves?

Nothing really changed. It's just really, the contingent feature was a way to bridge price expectations between the sellers and us as the buyers. And the biggest thing that drove the difference in terms of that price expectation was their optimism in terms of where the reserves would ultimately end up, and our conservatism on where those reserves would ultimately end up. And we just simply believe that our conservative posture on those reserves is the more likely answer. And if that is the -- where they ultimately end up, it will not be additional purchase price paid.

And then, did your conservatism cancel out their optimism?

Well, I'm just saying, they pegged those reserves at a different place than we did. We -- our position would suggest the reserves from December of last year-end, which is the point this is calculated off of, will develop unfavorably. Their position is they will develop favorably. We hope they are right, but just given what we know, given what actuaries have looked at, we believe there's the potential that those reserves develop slightly unfavorably from that position a year ago.

Got it. Okay, these -- this was very helpful. Thanks.

Thank you. Our next question is coming from Mark Dwelle of RBC Capital Markets.

Yes, good morning. I guess while we're on the topic of FirstComp, I want to ask a couple other questions along those lines. Will the amount of -- will the net-to-gross premium retention for that business be significantly different? You guys have normally retained 90% plus. I appreciate there's probably some contracts that would need to roll over first, but how will that look in the near term and then further out?

Well, as Mike was saying earlier, we haven't really finished the plan for next year. The one thing I can tell you is, I think FirstComp was keeping $130 million, $140 million of the $300 million. So, we clearly will have -- well, assuming that the book stays about the same size, $300 million, we'd have $140 million on Markel next year. Obviously, we're looking at whether we can take more of that business and that's where the filing issues and all come into play, Mark. But obviously we will try to move that along and take more of that business. I would say, just based on what we have seen so far, a reinsurance spend of 10% is a reasonable assumption and maybe is a little bit high, and so 90% or so retention on the business going forward appears reasonable.

So, in the short run, though, I mean until you make those determinations, whatever amount gets written, it's going to be a fairly low retention rate?

Well, keep in mind, some of this -- well, the business that is NGA business never goes through our gross written. And so, that number is kind of off to the side at the moment. Once we start writing it on Markel paper, either in FirstComp or one of our other insurance companies, then it will become gross written. So really, we are talking about turning some of that $160 million or $170 million of NGA business today into risk-retained business as we go through the next year or so.

Okay, I understand. So of the -- again, just using the raw numbers, of the $130 million, you would be retaining most of that premium -- Correct. on a net basis. The question that evolves or that will be discovered is what portion of the NGA business comes on, and when it comes on, it will come on at a relatively high retention rate. Good paraphrase of your comments?

Yes, probably a very similar retention rate.

Okay, that's helpful. A question for Tom, related to the assets that you're inheriting from FirstComp. Is this the sort of stuff that you normally like to invest in, or is that a portfolio that you'll need to kind of turn over and reposition?

Well yes, we have experience with both types. So, in the turnover deal, we turned that portfolio over almost instantaneously. The great thing about Aspen is there's a wonderful cultural fit on the investment side as well as the insurance side. It happened to be headquartered in Omaha, Nebraska, where one has a very good role model for how you should invest.

Okay. I'll take that as a not much change necessary comment. Finally, related to -- there were some remarks in the queue related to the charge-off you took of capitalized work on One Markel and some program changes that you're contemplating there. Should we take from those comments that heading into 2011, we won't be seeing, kind of the two- to three-point reduction in expense ratio that might have otherwise been anticipated?

This is Richie again. The changes we made in terms of the Atlas project, we really looked hard at it, and we did them, sort of, to mitigate risk. Obviously, wanted to be mindful of the cost and obviously pushing as hard as we were on so many fronts has a big impact on our organization. So, we looked at all that, and we said we would be better off spending our time in some very focused areas over the next year or 18 months. And so, we're focusing on two to three areas very hard right now in terms of our initiatives -- I'll call them IT initiatives, but they're business, business process IT initiatives. Next year's spend, while we haven't finished the budget, it probably is going to look somewhat similar to this year.

But I urge -- I just want to make sure you know we have not finished up budgets at this point. But just looking at the two to three items that we are really focused on right now, the spend on those could be very similar to what we've looked at this year, before considering that writeoff. The writeoff really represented the fact, some of the things that we are deferring and we're going to make decisions on later, depending on how long you wait, you have to question whether you need to go ahead and expense those. And so, I think the better answer was go ahead and expense those items in the quarter.

Sure. It comes through the P&L one way or another, sooner or later.

definitely. Yes. Sooner is usually better.

Okay. That's all my questions, thanks.

Thank you. Our next question comes from Beth Malone of Wunderlich Securities.

Just a follow-up or two. On the equity performance, what was it in just the third quarter? I know you gave it to us for the nine months.

I don't remember, but it was good.

Okay, so you don't calculate it quarterly.

In keeping with our culture, we do the math, but we just don't focus on it.

Okay, I see. All right, so you don't provide it. And then, just another question on the reserve development, the favorable reserve development in 2010 on the London business. The international -- that's where a majority of it was recorded. And I'm wondering, is this, as a consequence of when you first -- you know, in the first part of this decade, when you had first acquired that business and were restructuring it and the loss and combined ratios were higher on average than they are today. Was that where this reserve development is coming from?

Beth, Richie again. In a sense, yes. But in a sense that, until we knew where those early years were really going to end up, we were being also very conservative in some of what you might refer to as the hard market years. The '05, '06, '07, '08 sort of years. And that's really where most of this came from, and it was because we were probably a little snakepit, if you will, from the years that preceded that. And we were probably a little bit heavy-handed in terms of how we looked at those years until we really knew where things were going to end up. And so, we've been -- now we're starting to see the other side of that, that those years have turned out very well, and we're taking those numbers down.

Okay, and then, one last question on the expense ratio. As you mentioned, it was a little elevated in each of the divisions, and part of that was due to the top line is less. But, is part of it still part of the restructuring of the -- I know you mentioned the Atlas contributed, but how important is the Atlas to that number? Is it elevated by 100 basis points or 200 basis points? And should we anticipate that if the top line doesn't change, should we anticipate that the expense ratio should come down in future quarters?

I guess in the quarter, we had the writeoff, which was --

$7.7 million.

$7.7 million. So, that's, sort of, a little above run rate, I guess you would say, the $7.7 million. But the other was sort of normal spending on the projects that we had in motion, right now.

Okay. All right. So, it should come down, because you don't have the $7.7 million

Yes, I think it's in the two-point range. And once we get through our budgets, we'll have a better sense of what that looks like next year. I don't think it's more than that next year, but I also am not particularly comfortable saying it is a whole lot less.

Correct.

Also, could it remain somewhat elevated compared to historic, just because you're adding so many underwriting teams and recruiting talent in this opportunistic time frame?

Beth, this is Mike. We are adding talent and we are recruiting teams. But at the same time, on the other end, we are really exercising a very high level of scrutiny on headcount, both open and replacement positions. And so I wouldn't necessarily conclude that because we've added this talent, that we're greatly increasing our headcount.

Okay. All right, thank you.

Thank you. Our next question comes from John Fox of Fenimore Asset Management

Yes, hi, most of my follow ups were answered. But for Tom Gayner, could you just talk about the environment for acquisitions? Not public equities, but private companies. And what your activity level, what is the mode of the sellers, and just give us a general update there? Thanks.

Yes. The general update would be that we are continuing to work pretty intensely in that arena. So, the flow is pretty good, our phone rings, we see a lot of things, and I would be optimistic that we would continue to add some companies to the Markel ventures fold.

Okay, thank you.

Thank you. Our next question is coming from Jack Sherck of SunTrust.

Thank you very much. Just a quick follow up. You mentioned that at Markel Insurance Company, submissions during the quarter were up 21%. Do have what the number was for 2Q?

No, it was submissions, not commissions.

No -- like I said, submissions.

I don't have it in front of me right now. But they've been up all year.

Do you have a gut feel or feeling if that 21% was better than what you saw in 2Q?

It might have been slightly better, yes.

Okay, thank you.

Thank you. Our next question comes from Gail Golightly of Wells Fargo.

Thank you. When we look at this &32.9 loss, was any of that previously reserved?

What is the 32.9, Gail?

The two losses in the E&O -- the Guaranty Bank and the mortgage services.

Yes, that was the increase in those programs in the quarter. Obviously, we were holding reserves previous to that. The settlement required us to increase reserves, but we had, had some numbers on that previously. And the errors and omissions program, as we learn more and as the claims come in and we assess them, we get better information, we're better able to refine our estimate. So, yes, there were reserves on the books, and these were increases to those.

Okay. So none of the release in the E&S segment was related to these programs. That was the incremental loss.

Right. Releases were in our other programs, and they were in the areas that we've talked about, boy, for the last several years. Primarily, the professional liability book of business has been very, very good, and we've had a lot of nice releases out of it.

Okay. Just one other question. What's liquidity like at the holding company?

Anne?

Liquidity at the holding company -- cash and investments at the holding company at the end of the third quarter was about $900 million, down from about $1 billion at the end of the year, mostly related to share repurchases and interest payment.

Okay, thank you.

Thank you. Our next question is coming from Matt Rohrmann of KBW.

Hi guys, good morning. Just one quick question. Mike, I think you'd mentioned you were reviewing your agency force over the course of the year. How many -- I guess, year-to-date, how many agents have you added and how many have you cut?

I don't have that number in front of me right now. But what we're doing, is we're clearly looking at our agency plan, and where we have agents that have been nonperforming, where we have appointments but we've had little or no upside growth and very little business on the books, we are going back to them and either culling them and replacing them with stronger performing opportunities, or putting them on probation that -- subject to volume increases, they could be terminated. But I don't have the numbers in front of me

So is it net down for the year, would you guess?

I wouldn't necessarily say that, no.

Okay. All right, thank you, guys.

Thank you. Our next question is coming from Peter Seuss of Surveyor Capital.

Yes, hey guys, just wanted to touch on the revenue that's not in the soft market right now, which is the other revenue line item. I noticed it grew $12 million sequentially. And I guess, if you could just give some color as to what drove that. I think you did an acquisition in the second quarter, but are those businesses growing organically as well?

That would be just them coming into the stream of our revenues. I don't recall a meaningful acquisition during the second quarter. We added a little -- Solbern, which is part of AMS.

I think there was a manufacturer of food-processing equipment?

Right. That would be the Solbern Company, which is a -- .

Okay.

small division -- part of AMS. The margin on that just represents the ramp-up of those companies and their ownership by Markel through that time.

Is $49 million, kind of a reasonable run rate going forward? And just generally speaking, how much are these businesses growing on an organic basis?

I would say that the $49 million is a reasonable run rate for what they are doing and the companies that we own right now. These are businesses that don't have massive organic growth rates, modest growth rates, but neither do they require any capital to grow the way they are. So, they're cash-generating businesses, which give us options to either reinvest in those businesses or use that cash elsewhere. And then, the margins for these businesses in the quarter expanded about 5% to 15%. Is that -- was there anything unique in the quarter that caused that? Not really. There is some modest seasonality at one of the small subsidiaries, but no, I wouldn't draw too much to that.

But is that a new run rate as well?

No, no.

It is not. Okay.

Correct.

And then, finally, just the non-consolidated investments, I guess I don't have any numbers in front of me, but if you could just give some color as to how much those investments are adding to book value on a year-to-date basis? Because they don't run through the income statement, correct?

Right. I think that would be captured in the change in unrealized, is that what you're talking about?

Those flow through AOCI, okay. All right. And how much have they added on a year-to-date basis?

I'm not sure that I'm exactly answering the questions. Perhaps you could call me after the call and make sure that I'm answering exactly the questions that you are asking

Okay, sounds good. Thank you.

Thank you.

Thank you. Our next question comes from David West of Davenport and Company.

Good morning. I guess a question for Tom, kind of a follow-up, there on Markel ventures. ParkLand Ventures has been something you pretty steadily expanded. I think it's probably the largest of the venture operations currently. Could you talk a little bit about its recent results and the prospects for expansion there?

We don't really talk about any of the businesses individually. It would not be the largest by revenues. It's one of the larger by balance sheet, because you have more capital committed to that business. ParkLand has doubled the number of parks in its operations this year, and they do have a lot of opportunity. So, I would expect a continued pretty healthy gross at ParkLand for the indefinite future.

Thank you.

Thank you. (Operator Instructions) Our next question is coming from Raymond Iardella of Oppenheimer.

Thanks, good morning. Just wondering if you guys could give, maybe a quick update on the Italian, then now, in Australian construction books. Was there any movement in the reserves in the quarter?

There was no movement in the reserves in the quarter.

Yes, no movement in those. Both of those programs are discontinued. It's a lot like the two mortgage-related programs. They're not -- you can't say they're done and gone, because you still are seeing claims come in and you still have to assess what their potential is, but both are end-run ops today, and we continue to look at them and we always try to put the best number we can on them.

Okay thanks that's very helpful. And then, I guess, on Aspen, I was wondering -- did you guys mention the amount of goodwill you guys anticipate booking with that transaction?

We have not. No -- yes, that is true. We are still -- we have to do valuations and all that, and then it has to be allocated to the various categories, so that's not done yet.

Okay.

You'll see it in the fourth-quarter, though, obviously

Any rough idea, or is that -- did you guys do an updated study on -- do an updated book value calculation for Aspen?

I'd prefer to wait until we get our final numbers.

Okay. And then, I guess, lastly, on the share repurchases in the quarter, did that have more to do, I guess just with the options granted in the Aspen transaction, or is there something different about your thoughts on repurchases during the quarter?

Yes, no that's not connected to the Aspen options at all. That's our independent view of the value of Markel stock, and liquidity and cash around here.

Okay. All right, thanks.

Thank you. There no further questions at this time. I'd like to hand the floor back over to Management for any closing comments.

Thank you very much for joining us, and we look forward to seeing you and speaking with you again soon. Thanks so much.

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