Markel Group Inc (MKL) 2016 Q3 法說會逐字稿

Good morning and welcome to the Markel Corporation Third Quarter 2016 Conference Call. (Operator Instructions)

During the call today we may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They are based on current assumptions and opinions concerning a variety of known and unknown risks. Actual results may differ materially from those contained in or suggested by such forward-looking statements.

Additional information about factors that could cause actual results to differ materially from those projected in the forward-looking statements is included under the captions Risk Factors and Safe Harbor and Cautionary Statement in our most recent annual report on Form 10-K and quarterly report on Form 10-Q.

We may also discuss certain non-GAAP financial measures in the call today. You may find a reconciliation to GAAP of these measures in the Form 10-Q which can be found on our website at www.MarkelCorp.com in the Investor Information section.

Please note this event is being recorded.

I would now like to turn the conference over to Tom Gayner, Co-Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning. This is Tom Gayner and it's my pleasure to welcome you this morning to our third quarter 2016 conference call. I'm pleased to report to you that we made solid economic progress during the ongoing extremely competitive conditions that describe the first 9 months of 2016. Markel is a diversified enterprise with three engines that drive our economic progress. Namely, insurance underwriting, investments, and Markel Ventures. As is always the case with a diversified portfolio of businesses, some areas perform better than others.

That said, for the first nine months, the aggregate result of comprehensive income of $697 million and book value per share growth of 9% is a result we're proud to share with you. As is always the case with Markel, we're quick to share challenges and bad news with you and we're slow to talk about good news. This quarter is no exception to that pattern. We acknowledge to you and more importantly to ourselves where we need to change and adapt and improve. That is what we always do and that mission of continuous improvement and learning are what has and will continue to drive the excellent long-term results we've enjoyed over the years at Markel.

Joining me in the room this morning are Anne Waleski, our Chief Financial Officer, Richie Whitt, my Co-CEO, and Mike Crowley, our Vice Chairman. Anne will review the numbers in some detail. Richie will cover all of the insurance underwriting operations, then I will cover investments and Markel Ventures. All of us will then be available for your questions.

With that, I'd like to turn things over to Anne.

Thank you, Tom. Good morning, everyone. I'm happy to report that our financial performance through the first three quarters of 2016 continues to be strong across our underwriting, investing, and Markel Ventures operations. While our underwriting results for the quarter were adversely impacted by unfavorable development on our medical malpractice and specified medical product line, our year to date results are inline with our expectations. Growth in book value was driven by strong performance in our investment portfolio and Markel Ventures continues to add significant value through organic growth and the inclusion of CapTech in 2016.

Now let's talk about our results for the first nine months of 2016. Total operating revenues grew 6% to approximately $4.2 billion in 2016 from $3.9 billion in 2015. The increase is driven by roughly 15% increase in revenue from Markel Ventures which is primarily due to our acquisition of CapTech in the fourth quarter of 2015 and higher sales volume from one of our transportation related businesses.

Taking a look at our underwriting results, gross premium volume for the nine months ended September 30, 2016 increased 3% compared to the same period of 2015. The increase is attributable to the US insurance segment and reinsurance segment, partially offset by lower gross premium volumes in our international insurance segment. As we discussing in previous calls, the increased volume in the US insurance segment is due in part to closing our underwriting systems one week later in 2016 as compared to the same period a year ago. Excluding the impact of this timing difference, we've also seen higher volume in 2016 as compared to 2015 within our personal and general liability lines of business.

The increase in the reinsurance segment was due to new business and to the favorable timing of renewals of multi-year policies in our general liability and property lines in 2016. The decrease in volume for the international insurance segment was due to unfavorable movement in foreign currency rates of exchange as well as lower premium volume within our marine and energy and credit and surety product lines. Market conditions remain very competitive, consistent with our historical practices, we will not rate business when we believe prevailing market rates will not support our underwriting profit targets.

Net written premiums for the first nine months of 2016 were $3.2 billion, up 5% from the prior year due to increases in gross volumes as just discussed as well as an increase in net retention to 83% in 2016 compared to 82% last year. The increase in net retention for the nine months ended September 30, 2016 was driven by higher retention within the US insurance segment and the reinsurance segment, largely due to changes in mix of business. Earned premiums were flat for the first nine months of 2016 as compared to the same period of 2015.

Our consolidated combined ratio for the nine months ended September 30, 2016 was at 93% compared to 89% last year. The increase in the combined ratio was driven by less favorable development on prior year loss reserves partially offset by a lower current accident year loss ratio in 2016 compared to 2015.

For the first nine months of 2016, prior year redundancies were $339 million compared to $450 million for the same period a year ago. Redundancies on prior year loss reserves during 2016 were net of $71 million or 2 points of adverse development on our medical malpractice and specified medical product line.

Additionally, redundancies on prior year loss reserves in the first nine months of 2015 included $36 million or 1 point of favorable of development attributable to a decrease in the estimated volatility of our consolidated net reserves for unpaid losses and loss adjustment expenses as a result of feeding a significant portion of our asbestos and environmental exposures to a third-party in the first quarter of last year.

The 2016 current accident year loss ratio includes $26 million for approximately 1 point on the consolidated combined ratio of underwriting loss related to the Canadian wildfires that occurred in the second quarter. These losses were more than offset by lower loss ratios in 2016 as compared to 2015 across a number of products in all three of our underwriting segments.

In our US insurance segment, prior year redundancies for 2016 were $126 million compared to $211 million a year ago. This segment was impacted in 2016 by adverse development on our medical malpractice and specified medical product line. The adverse development on both of these books was driven by an increase in the proportion of business written on classes with higher claim frequencies over the last several years including correctional facilities and contract physician staffing.

Beginning in late 2015 we saw an increase in claims frequency on these classes which continued into the third quarter of 2016. We've also began to see increases in claim payments on these classes of business. While not consistent with our historical trends in these classes, we are now giving more credibility to this new trend and have increased loss reserves accordingly. We are also taking corrective actions for business written in the effected classes.

As a reminder, for the first nine months of 2015, the US insurance segment included $19 million or 1 point of redundancies related to the decrease and reserve volatility that I just mentioned.

In our international insurance segment, favorable development on prior year reserves was $111 million down from $178 million last year. This decrease in loss reserve redundancies was driven by less favorable development on our marine and energy product lines in 2016. Additionally, the first nine months of 2015 including $17 million of redundancies related to the decrease in reserve volatility.

In our reinsurance segment we recognized $90 million of prior year redundancies for the first nine months of 2016, compared to $66 million for the first nine months of 2015. More favorable development on prior year reserves in 2016 was across various product lines but the most significant year over year improvements were seen in our workers' comp and property product lines.

Now, on to the results of Markel Ventures. Revenues for Markel Ventures for the first nine months of 2016 increased to $906 million compared to $784 million for the comparable period in 2015. The increase in revenues was primarily due to the inclusion of CapTech in 2016's results and to higher sales volumes from one of our transportation related businesses.

We also saw increases in Markel Ventures' net income to shareholders and EBITDA for the first nine months of 2016 compared to the same period a year ago, primarily due to higher sales volume in one of our transportation related businesses, improved results across our non-manufacturing businesses, and the contribution of earnings from CapTech which were largely offset by the impact of a $10 million contingent consideration adjustment related to CapTech which we recognized during the third quarter of 2016.

Moving into our investment results, investment income increased 3% from $271 million for the first nine months of 2015 to $279 million this year. Net realized investment gains for the first nine months of 2016 were $66 million, compared to a net realized investment loss of $3 million a year ago. Given our long-term focus, variability, and the timing of realized and unrealized gains and loss is to be expected.

Our effective tax rate was 27% for the first nine months of 2016 compared to 21% for the comparable period in 2015. The increase in the effective tax rate in 2016 compared to 2015 was primarily due to the 2015 impact of foreign tax credits and a decrease in estimated annual earnings attributable to foreign operations that were taxed at a lower rate in 2016 as compared to 2015.

As you may recall, in 2015 we recognized non-recurring foreign tax credits of approximately 8% of pre-tax income. Foreign tax credits of the magnitude recognized in 2015 are not expected in future periods.

We reported net income to shareholders of $323 million in the first nine months of 2016 compared to $385 million a year ago. Comprehensive income for the period, as Tom mentioned, was $696 million compared to $98 million a year ago. And as a result, book value per share at the end of September 2016 was approximately $609, an increase of 9% since the end of 2015.

Finally, I'll make a couple comments on cash flows and the balance sheet. Net cash provided by operating activities was $324 million for the first nine months of 2016 compared to $550 million for the same period of 2015. operating cash flows for 2016 included higher claims payments primarily in the US insurance segment and higher payments for employee profit sharing and income taxes as compared to the same period of 2015.

Our holding company has $2 billion in investment assets as of September 30, 2016 as compared to $1.6 billion at the end of December 2015. This increase was primarily the result of net proceeds from the issuance of long-term debt during the second quarter of 2016 and repayment of an intercompany note during the third quarter of 2016.

With that I'll turn it over to Richie to talk about underwriting results.

Thanks, Anne. Good morning, everybody. Today my comments will focus on our three underwriting segments, covering the US insurance, international insurance, and reinsurance segments. I'll also provide some brief commentary on our Markel CATCo operations.

First, let's start with the US insurance segment. Gross written premiums for this segment were up 4% for the quarter and 6% for the first nine months compared to the same period in 2015. For both the quarter and the first nine months, this increase continues to be driven by growth in personal lines, primarily our classic car program and property lines as well as in our general liability lines, namely excess and umbrella and brokerage contractors business.

The combined ratio for the third quarter of 2016 was 101% compared to 90% for the same period a year ago. For the nine months, the combined ratio was 95% compared to 89% in 2015. The increase in our combined ratio for both period of 2016 is driven by the adverse development in our medical product lines as Anne just discussed. Our combined ratio for the third quarter of 2016 includes $50 million or 9 points on the segment combined ratio of losses resulting from our actions taken during the third quarter in response to the claims trends seen in these product lines.

Our product line leaders, underwriters, actuaries, and claims professionals have been working hard taking a look at these books and corrective actions are in place for all classes of business within these product lines. Of this $50 million of development in the quarter, $37 million or 7 points was on prior accident years. For the first nine months, prior year development on medical lines was $71 million or 4 points on the segment combined ratio.

In addition to this adverse development, we also experienced lower take downs in our property lines in both the quarter and nine month results. The current accident year loss ratio increased slightly in the quarter but it was flat for the year due to lower loss ratios across a number of product lines, partially offset by higher attritional loss ratios in our medical lines.

Next I'll discuss the international insurance segment. Gross written premiums for this segment are down 5% for the quarter and 4% for the first nine months due in part to the continued strengthening of the US dollar in 2016. Additionally, we continue to experience tough market conditions, especially within our marine and energy, professional liability, and credit surety lines of business.

The third quarter combined ratio was 91% compared to 87% for this same period a year ago. The combined ratio for the first nine months was 95% compared to 87% in 2015. The increase in the segment combined ratio for both the quarter and nine months is mainly driven by lower prior year redundancies in 2016. Most notably in our marine and energy and property lines.

As Anne mentioned, the segment also had a one-time benefit in the first quarter of 2015 related to the decrease in estimated volatility of our net reserves which contributed $17 million or 3 points of prior year redundancies last year.

Our current accident year loss ratio was up slightly for the quarter due to an increase in our marine and energy product line. This was attributable to the Jubilee Tullow energy loss. This was partially offset by a decrease in management's best estimate of ultimate loss ratios on various product lines, which is also the driver for decreasing the current accident year loss ratio in the first nine months of 2016.

The expense ratio for the quarter decreased 3 points compared to the third quarter of 2015. This was mainly due to lower profit sharing expenses as well as the reallocation of some expenses between the international and reinsurance segments in 2016. These favorable items were partially offset by an increase in broker commissions due to mix of business and a decline in net earned premiums.

Last I'll discuss the results of the reinsurance segment. For the third quarter, gross written premiums for this segment are down $42 million or 18% compared to the third quarter of 2015. For the first nine months, writings are up $44 million or 5% compared to last year. For the quarter, the decline is almost entirely due to the renewal of a large multi-year mortgage deal booked in the third quarter of 2015. We also saw some smaller declines in our workers comp, general liability, and auto lines which were more than offset by modest growth in our property due to both new and renewal increases.

As I've discussed the last couple of quarters, the growth in premium this year is driven by a few large quarter share reinsurance treaties within our property and general liability products as well as the timing and impact of multiyear deals year over year. The combined ratio for the reinsurance segment was 94% for the third quarter of '16 as compared to 86% for the same period a year ago. The combined ratio for the nine months was 87% compared to 92% in 2015.

Favorable development on prior years loss reserves in 2016 was $5 million lower in the quarter but $24 million higher for the nine months. In the quarter, the decrease is primarily due to some adverse development on professional liability lines. For the nine months we experienced higher loss reserve take downs on our property, agriculture, workers compensation product lines.

The current accident year loss ratio was relatively flat on both a quarter to date and year to date basis due to lower attritional loss ratios in 2016 as well as lower ultimate loss picks across multiple product lines in 2016. And I think Anne previously discussed this.

In the first nine months, lower attritional losses were partially offset by the impact of the Canadian wildfires that occurred in the second quarter of 2016. The current year accident year loss ratio for the reinsurance segment includes $21 million or approximately 3 points of underwriting losses related to the Canadian wildfires.

Finally, the expense ratio for the reinsurance segment increased for the quarter and the first nine months primarily due to higher profit sharing expenses this year as well as the reallocation of expenses between our international and reinsurance segment that I previously mentioned.

A few other things to comment on. There's very little add from last quarter regarding pricing and competition. Our markets remain competitive with little change from what we reported to you last quarter. Our view is that Hurricane Matthew is unlikely to change Florida property insurance or reinsurance pricing or overall property pricing in any meaningful way. Our own Matthew estimated loss range is necessarily wide as there are very few reported losses at this point. By the time we release our fourth quarter results we'll have a much better handle on the actual impact from the storm. We are mercifully nearing the end of insurance conference season. We attended Reinsurance Rendezvous, NAPSLO, CIAB, PCI, and many, many more. Despite the competitive markets that we've talked about many times, we came away from these meetings with many fantastic opportunities to judiciously grow our business.

Finally, I'll make a few comments about our market Markel CATCo operations. Assets under management increased to $3.6 billion at September 2016 from $2.6 billion at the end of '15. Markel continues to invest $200 million in the Markel CATCo funds. Markel CATCo recently reported a 3.5% reduction to net asset value related to reserves for the Jubilee Tullow energy loss. You may recall in the second quarter of 2016 Markel CATCo reported a 1% reduction in net asset value related to the reserves for the Canadian wildfires. As of this point we are currently monitoring the impact of Hurricane Matthew on Markel CATCo's 2016 performance.

That is it for me. Now I would like to turn it over to Tom.

Thank you, Richie.

Well, we've got some good news to report on the investment side and I'd like to add a bit of color to the numbers that Anne shared with you a few moments ago.

First, I'm pleased with the equity return of 8.1% through the first nine months of the year. This number exceeds the 7.8% return on the S&P 500 and continues our long-term trend of outperformance. As headline after headline proclaims these days, active management has a tough time outperforming passive approaches like indexing. Our three decades of outperformance stands in ongoing contrast to those headlines though.

Additionally, our costs are so low that we really wouldn't pick up any cost savings by switching to indexing. Also, indexes are not as passive as you think. Turnover within an index causes taxes to be incurred. While we also regularly realize gains over the years in our equity holdings. At September 30 we had an unrealized gain on our equity holdings of roughly $2.1 billion from holding on to our successful investments.

To extend some simple math, at a 35% corporate tax rate, that means that we have a little over $700 million in the portfolio that we otherwise would not if we realized gains more frequently. That $700 million-ish times our 8.1% return means that we made almost $60 million pre-tax income during the first nine months due to our internal control of investments. We don't farm out our investment thinking. We do it in-house at extraordinarily low management and tax costs and that approach continues to contribute mightily to the economic returns at Markel.

Secondly, we continue to similarly think for ourselves and act somewhat unconventionally in the world of fixed income. Through the first nine months we earned a return of 5.1% on our fixed income holdings which includes the weight of nearly immeasurable returns from our cash and short-term holdings. We maintain pristine credit quality to the best of our ability and we match the duration of our portfolio to our insurance liabilities. Foreign exchange changes netted out to zero so far in 2016.

Our equity holdings moved up from 52% to 53% of our shareholder equity so far in 2016. While we continue to make additional equity investments in a steady and disciplined fashion, the good news is that our large fixed income portfolio appreciated due to lower interest rates. As a result, increasing the percentage of the portfolio allocated to equities involved chasing a moving target. And that target moved in the right direction. I'm happy to be engaged in that sort of race. When interest rates increase, that math will change and the process of increasing the percentage of the portfolio allocated to equities will change as well.

On the Markel Ventures front, in a word, the first nine months of 2016 were fantastic. Operating revenues grew 15% from $784 million to $906 million. EBITDA grew 75% from $76.2 million to $133.8 million. In short, our cyclical businesses enjoyed strong revenues in earnings as the management teams did a great job of making hay while the sun shines.

Our Steady Eddie businesses continued to earn their reputation for steadiness and it is no small thing to be able to reliable delight your customers and produce dependable earnings from doing so. That's exactly what those companies continue to do. Finally, we enjoyed improved results in some of the units that experienced weak results in prior periods and I'm proud of the management teams that made appropriate changes and adaptations to improve their performance.

We continue to look for additional opportunities to grow our Markel Ventures operations but it remains a seller's market out there and we remain disciplined in the prices we're willing to pay for acquisitions. Our reputation at Markel Ventures continues to grow along with our success. And we're seeing interesting opportunities that we would've never seen in prior years. We're hard at work meeting people and reviewing opportunities and I have every confidence that we will find appropriate opportunities to continue to build value as time goes by.

Finally, we also learned something each and every day as we look at new opportunities, oversee the businesses we currently own, and as we look at insurance-based risks and publically traded investments. In doing so, we gather information and intelligence across the breadth of Markel. The network-based intelligence is more robust than it was in the past and we continue to work to increase the value we obtain from being immersed in our diverse operations and capital allocation activity. Those activities

have been fruitful for our customers, our associates, and our shareholders. And they've also been fun.

We thank you for your ongoing support in allowing us to build this company on your behalf and we now look forward to your questions. Thank you.

(Operator Instructions) Jeff Schmidt, William Blair.

Hi. Good morning, everyone. Looking at the US insurance business, it looks like the accident year ratio was up a bit. Not a lot but maybe 60 basis points. I think you'd mentioned you saw an uptick in frequency and severity in a couple lines. Is that correct?

That's correct.

Are you seeing any changes on the litigation front that may be driving that? Is there an increased litigation or settlement sizes or anything you're seeing there?

No. I think it really -- one of the strengths of our business, one of the beauties of our business is that we have over 100 lines of business at Markel and certainly in some we've seen some frequency or severity, i.e. the medical lines. But it's not across the board.

On the medical lines you're saying you're seeing severity increase there in terms of -- what? Just the cost of underlying surgery and stuff?

Sure. Why don't we talk about that for a minute. In the medical lines, that's an area we've written for decades. One of the things that has been very interesting about medical over the years is it tends to move quickly. It can go from being really good to really bad fairly quickly. It can go from being really bad to really good fairly quickly. So, it's a line of business that you have to stay on top of.

On top of that, there's been tremendous change, I think, as everybody's aware, in just how healthcare is being delivered. The smaller practices, the two, three, four doctors, they've been forming bigger practices, have been joining hospital groups. So, the landscape has changed. We have definitely seen some change in frequency in the medical lines as well as some uptick in severity. That's really what we have been reacting to, particularly in the third quarter, trying to make sure we're on top of those trends that are going on in medical.

Okay. And on the competitive environment, you spoke on it a little bit. Are you seeing any change in terms and conditions? Are they eroding here?

I think like I said in my comments, things are, I would say, flat-ish right now. It's a competitive market. Last year and years before that you were seeing bigger decreases. Now I think things are relatively flat but still very competitive. I don't think people are drastically opening up coverage at this point. We seem like we've hit -- I don't know if it's an equilibrium point but we've certainly gotten close to it, it feels like.

Okay. Thank you.

(Operator Instructions) Mark Dwelle, RBC Capital Markets.

I just want to build a little bit more -- you talked a little bit about the reserve addition in the medical lines. I guess what's surprising to me here, having followed for a long time, it doesn't normally take you guys two or three bites at the apple in order to get on top of these. What's been different about this that has made it so difficult to get in front of the trends?

Sure, Mark. I think part of the issue has been our actuaries, you have your triangles and you can often see in the triangles things starting to change. As I sort of alluded to with the first question, this was a very abrupt change. There wasn't a great deal of warning. All of a sudden the development factors, the frequency, the severity just picked up. And that's I guess in some ways been the experience in medical. It tends to move quickly when it moves. So, we weren't able to see that in our triangles. And one of the questions we've asked ourselves is what other tools do we need to make sure we have at our disposal such that we're not just relying -- not that we just rely on the triangles, but what can we glean from the claims data? What can we see in terms of the mix of business? Make sure we're using all the tools at our disposal? Because believe me, we never put a number out in the quarter that we think is wrong. We always try to put out the best number we possibly can and quite honestly, it's taken us three quarters to get here, in terms of getting the numbers where we hopefully believe are correct. That's not the way we like to do things.

One further question on that if I may, you suggested in the comments that you've taken some underwriting actions, particularly with respect to a couple particular lines you highlighted. Is that a matter of just raising prices or not writing those lines? Maybe just a little bit more detail about how you've adapted to try to seal off the issue?

It's really both. There's been some problematic parts of the business that we've identified where we've raised prices significantly. And in some cases, in one of those areas, we've written one account since we've put those actions in place. So, while we're still in that business, it would have to meet our pricing target. It's a bit of both. It's tightening up the underwriting standards around parts of the book. It's increasing pricing and it's deemphasizing and remixing the book. So, it's a little bit of everything and as I said, the entire team is involved in it. We've got the product line leaders, the actuaries, our information management people, as well as our claims folks all working together to make sure we're putting the best plan in place that we can.

Okay. That's enough on that then. Let me jump over to Tom. I saw that you had, I guess, the high class problem of a contingent payout related to CapTech. I recall last time when we had the same thing with Cottrell, there was kind of a couple iterations of that. Are there additional future contingent payouts that they could possibly earn or is this the only one that's I'll say reasonably foreseeable.

The CapTech accrual that we've put up for the contingent payment is at its upper limit. So, we should not see any additional increases to that in the next quarter.

She's correct.

Okay. Would they be eligible for an additional one next year?

Yes. (inaudible) (laughter)

It's definitely a high class problem to have to pay more.

And they do have compensation structures in place, should they continue to put numbers on the books. They get paid for that, just like everybody else, Mark.

We hope. Anne, on the tax rate, the tax rate in the quarter was a little bit elevated. Is that just because there was a little bit higher blend of capital gains this quarter? Or was there anything else driving that?

No. I think it's mostly coming from the foreign tax -- sorry, foreign operations having less projected earnings in a lower tax environment than in the prior period last year.

I guess I was thinking more in terms of on an absolute basis. So, it was 30% in the quarter, not relative to last year. Your longer-term trend is normally kind of 25% or 26%. I guess I was thinking about it more from that perspective than a year over year.

I still think even in the quarter, it's mixed. Slightly different outcome but same sort of rationale.

Okay. I guess, one other -- a couple other questions. One, were there any notable catastrophe losses in the quarter? I didn't see any mention of it but maybe there were some?

No.

As far as the Matthew losses, Richie, you had suggested some range. That's not a range you're prepared to share at this stage?

No. It's in the Q. We put $40 million to $100 million net. The problem we have and everyone else is we have very few reports at this point. If you look at the ranges on the various models, it's a pretty wide range. So, we're probably relying much more heavily at this point on the models than on actual information from insured. We've put a pretty wide range out there. We've tried to be conservative and we certainly would hope to be towards the lower end of it. But it's early days. We'll know a heck of a lot more when we release fourth quarter.

Would the losses there be most likely on the US book or perhaps on the reinsurance book?

It's going to be a fairly wide spread. The US market and Florida in particular is the biggest property market in the world. So, both our US insurance business will pick it up, our reinsurance business will pick it up, Markel in London, so it will be spread around nicely in our divisions.

That's a less high class problem. Okay. That's it for me. Thanks for the call.

David West, Davenport & Company.

Good morning. It sounded like one area of good news on the redundancy side was workers comp. Could you talk a little bit more about that line of business and particularly what you're seeing in current pricing trends?

Sure. Workers comp, I think we've said it a few times in past quarters, it's been a bright spot for the past few years. Things have been competitive across the insurance market but workers comp has been done very well. There's always the other side of the coin. Because workers comp has been done very well, the states have been reducing the loss cost numbers and thus prices are decreasing some at the moment. So, it continues to be a good area but because of those good results, the base loss costs have decreased and so we're seeing some decrease in the pricing in the various states. But you're absolutely right, Dave. It's been a nice place to be for the last several years.

Switching product lines, it sounds like a similar thing with Hagerty and the antique car lines of business?

Hagerty continues to do just a fabulous job. They are the undisputed leader in the classic car market by a wide margin and the results continue to be excellent.

Very good. Tom, if sounds like as far as your approach to equities, that this company's continuing that gradual systemic investment in equities. Are you finding more new names in this market or are you predominantly adding to existing portfolio names?

It's a mix. There's probably a few more new names in the course of 2015. That hadn't been the case in the past but it's the steady drip, drip, drip, drip. We're just trying to wear the opposition down.

Very good. Thanks so much.

Charles Gold, Scott & Stringfellow.

Thank you and good morning. I had one question and one comment. The question was to ask about Matthew and, Richie, I thought I heard you saw $40 million to $100 million net and the Q talks about $40 million to $100 million before taxes, before taxable income.

Sorry, Charles. I've got to be clear about my language. Net of reinsurance, pre-tax.

Okay. Thank you. And then the comment is I can't help but recall quarter after quarter after quarter, all the questioners were wringing their hands about Markel Ventures but took for granted that you guys knew how to underwrite at a combined ratio in the low 90s and here we have the opposite going on, it looks like Markel Ventures is starting to become a beautiful flower, blooming after years of hibernation, and everybody's decided that maybe you don't know how to underwrite anymore. I haven't given up on the underwriting side. I just wanted to make that comment.

Neither have we. (laughter) Thank you, Charles. You know, this quarter, it provides some lessons. Like I said, we have over 100 product lines out there and the reality is when you have that many product lines across the specialty insurance spectrum, they're not all going to be hitting on all cylinders at the same time. We have had the food fortune over, I would say, about the last 18 months or so where pretty much they were all hitting on all cylinders. And this is a reminder that things don't always move in one direction. Med-mal has given us some problems this year. I think we're very confident we're on top of it. But it is a reminder to us that you have to stay ever vigilant about these products. They are specialty products for a reason.

Thank you.

Jeff Schmidt, William Blair.

Thanks. Sorry, I had one more question. Regarding Markel Ventures, could you speak on the deal pipeline right now?

Yes. Just to expand on that, on the comments, we see some fascinating stuff, just like we have a diverse and eclectic set of insurance risks that we underwrite. We have a diverse and eclectic set of businesses that are part of Markel Ventures. And the very, very, very good news is now that we have a decade long track record of buying and integrating and successfully partnering with people who run these businesses, word gets out and -- you know the old Breck shampoo commercial used to say -- they told friends, they told two friends, and they told two friends. So, we see some cool stuff. At the moment it's a seller's market.

So, the prices are out of our range and the beautiful thing about Markel is just as we are disciplined on underwriting, we're disciplined on buying stock, buying bonds, buying a Markel Ventures business so we can build up capital, we can look at our own shares. We have a 360 degree view of where and how to allocate capital. And let me emphasize the fact that while it's out of style these days and it's the most contrarian thing you could do, when Anne says we have $2 billion of liquidity at the holding company, there may come a day when that would really come in handy. Who knows where that will be? But we will stand in a small crowd when that day comes. Periodically, we've done that from time to time and that is a core component of the way we think.

That's great. Thank you.

(Operator Instructions) Mark Hughes, SunTrust.

Thank you. Good morning. On the favorable development front, anything you've seen in the last couple of quarters as a development in 3Q that would color your outlook for future quarters? You've always had a very consistent, attractive track record on that front. Anything about when you look at the pricing development in the recent past, kind of how things have been emerging? Any reason we should look differently at your prospects in coming periods?

Mark, it's Richie. I don't think so. We've obviously talked a lot about medical. We believe we're on top of that. Just as a backdrop, keep in mind, pricing has been coming off for the last few years. And as a result I would suggest there's not as much margin in the business we're putting on the books today as it was a few years ago. We all have to remain mindful of that. And we're talking to our underwriters about those sorts of things. But other than what we saw in medical this year, no. The trends seem pretty consistent.

On the medical, I think you had addressed the legal environment more broadly and said you weren't seeing meaningful changes. When I think about correctional facilities, for instance, I wouldn't think of that as a very volatile market in terms of how many prisoners are suing or I'm not sure who initiates the actions in those cases. Was there some sort of precedent that was set that spurred more activity? Or this is just something that -- ?

Well, yeah. Two things happened. That has always been a high frequency class, the correctional medical, in that you saw a lot of claims but they tended to settle at no cost or at low cost. And what changed is it appears the plaintiff's bar has sort of recognized that as an opportunity. We've seen some increase in the frequency. But we've seen a decent upon of increase in severity. So, a previous person asked are we seeing that happen across our various specialty lines. The answer is no. We're not seeing it happen across specialty lines but we did specifically see that happen in correctional medicine.

And then the other thing that happened, we talked about how the landscape has been changing in healthcare. One of the things that happened is we saw correctional medicine become a bigger part of our medical book. And we're paying attention to that. It was a bad time for it to be a bigger part of our medical book. So, those are really the two things that happened there.

Thanks for the detail.

(Operator Instructions) I'm showing no additional questions at this time. I would like to hand the conference back to Tom Gayner for his closing remarks.

Thank you very much for your support and we look forward to catching up with you along the way and we'll talk to you next quarter. Thanks.

Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.