Markel Corporation (MKL) Q2 2008 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, and welcome to the Markel Corporation Second Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode and 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. Steve Markel, Vice Chairman for Markel Corporation. Thank you. Mr. Markel, you may now begin.

Thanks very much and welcome to our second quarter conference call. During our call today, we may make forward-looking statements. Additional information about factors that could cause actual results to differ materially from those projected in forward-looking statements is described under the caption Risk Factors and Safe Harbor and Cautionary Statements in our most recent annual report on Form 10-K and quarterly report on 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, which we may discuss in our call today. We are pleased to share with you our second quarter results. As you all know, both the insurance and the investment worlds are in somewhat of a turmoil and are facing a number of headwinds in a number of different areas. But we are pleased with the way we are sailing through this environment. The second quarter was challenging, but I think we are very much on track to have solid financial results and we are clearly positioned well to take advantage of the future opportunities that are certainly going to present themselves. Our procedure and process today will be similar to our other calls. Richie Whitt will lead off with a review of the quarter and six month results, Paul Springman will discuss our insurance operations, Tom Gayner our investment operations. I'll conclude with a few comments and coordinate the question and answer session. Without further ado, Richie, you want to run us through the financial results?

Thanks Steve and good morning everybody. I'll follow the same format that I have in past quarters and I'll focus my comments primarily on year-to-date results, starting by discussing our underwriting operations, then follow it with a discussion of investment results and then I'll bring the two together with a discussion of our total results for the six months. Many of the trends we discussed in our first quarter call obviously continued through the six months. And as Steve said, the two big issues that we're facing are obviously the competitive insurance market and the turbulent financial market and its impact on our investment portfolio. So I'll start with underwriting. Due to increased competition in virtually all of our markets, gross premium volume decreased 6% to about 1.2 billion in the first half of 2008. About one-third of this decrease was due to existing certain programs previously written at our Markel Re subsidiary. Net written premiums also decreased about 5% to a little over $1 billion and retentions were relatively flat compared to 2007. Earned premiums decreased about 6% to 1 billion compared to 2007. Our combined ratio for the six months was 93% compared to 88% in 2007. The increase was primarily a result of higher current accident year loss ratio of 65% due to price decreases compared to a 60% current accident year loss ratio in 2007. The 2008 current accident year loss ratio was partially offset by favorable prior year redundancies of 8%. These were primarily in our Excess and Surplus Lines segment, at our Markel Shand and Markel Essex unit and in our London Market segment. Our expense ratio for the first six months was relatively flat at 36% compared to 2007. Turning to our investment results. Investment income decreased to $153 million from $155 million in 2007. The decrease was primarily due to an unrealized loss of $4.1 million on a credit default swap. You may recall in the fourth quarter of 2007, we sold credit protection on a portfolio of fixed income securities. The presence of this contract on our balance sheet and the associated accounting treatment will add volatility to our investment income results in future periods. Realized losses for the six months were $32 million. This was primarily comprised of $93 million of write-downs for other than temporary declines in the fair value of various fixed and equity securities. Approximately two-thirds of the write-downs were for securities in a loss position that we no longer have the intent to hold until recovery. We hadn't done [ph] reducing these positions to allocate to other investments. The other one-third of the write-downs represent securities that had a fair values of less than 80% of cost for more than 180 days. The most significant write-downs were $37.6 million for our investment in Citigroup and $17 million for our investment in Bank of America. Unrealized gains also decreased in the first half of the year $355 million before tax. Approximately two-thirds of that decrease was from equities with the rest coming from fixed maturities. Tom will be going into further detail in his comments in a few minutes. Looking at our total results for the six months. Putting together our underwriting results and investing, we reported a net income of $116 million compared to $220 million in 2007. Book value per share decreased 5% from December 31, 2007 to $252 a share at June 30, 2008. Turning to cash flow and the balance sheet, I just have a couple of comments. Regarding cash flow, operating cash flow was about $234 million for the first half of 2008. This compares favorably to operating cash flow of about by $237 million in 2007. One comment regarding the balance sheet. We did retire some senior notes in May of this year, retired about $93 million of senior debt net. That's really about it. At this point, I will turn it over to Paul to review our operations.

Thank you, Richie, and good morning everyone. You have just heard Steve and Richie report our numbers from the first half of 2008. And in a few minutes, Tom Gayner will take us through our investment results. It's now my pleasure to bring you up to date from the operational side of our business. Our combined operating ratio through the first half of 2008 is 93%, which represents 7 solid points of underwriting profit. This is in line with our expectations, but somewhat indicative of the increasingly competitive marketplace and the softening pricing environment that we face in the vast majority of our product lines. While our new business omissions counts are up in every one of our units through the first half of the year and our policy counts are up in virtually all of our businesses, overall premium volumes are 6% lower than they were through the first half of 2007. This is the result of a competitive marketplace with somewhat lower average premiums and larger accounts increasingly able to find solutions in either the standard market or through other avenues. While this seemingly suicidal race to the bottom of the pricing yardstick consumes most of our competitors' time and energies, we simply won't compromise on our underwriting integrity and Markel's long-term profit objectives. This certainly isn't to imply that we are sitting idly by on the sidelines and watching business opportunities pass us up. Quite the contrary. Let me give you a brief flavor for what we are doing. At Markel Essex, we have broadened several of our policy forms and are reviewing additional coverages. We've reduced deductibles on some of our more preferred classes of business on our contract binding authority segment and we have significantly expanded our risk appetite in our brokerage arenas. Markel Underwriting Managers, we have expanded with some of our less volatile classes of business such as taxi, have begun to offer increased limits on environmental coverages and, on a select basis, have increased commissions to our broker partners to attract businesses that we find the most desirable. At Markel Shand and at Markel Southwest, we continue to leverage technology, freeing our underwriters time to concentrate on larger and more complex accounts while giving other underwriters more opportunities for face time in the field with our broker clients. Now let's move across the Atlantic for just a minute or two. We are particularly proud to report another quarter of underwriting profits from Markel International. While our premium volume in the U.S. is down approximately 9% over the comparable period in 2007, we are relatively flat with last year's mark on an international basis. On the international front, our competition is slightly less feverish than most of the competition we face here domestically. We're also beginning to see some of the initial benefits of some new business production from both our Singapore and Swedish offices that were launched in the fourth quarter of last year and became fully operational early in 2008. Markel International Insurance Company has also derived an added benefit with our increased rating to A, leading to select additional new business opportunities that previously were not available to us. These are principally in the reinsurance area. But my overall message today is very similar to the one that you heard 90 days ago. We are combating this marketplace with improved customers service, additional emphasis on new product development, utilizing technology to streamline process and spending as much time as we possibly can with our clients in the field. While general pricing levels do contain to drift south, we are seeing some pockets of firming in our professional liability products, principally lawyers, errors and omissions coverages and with some of our international marine and energy offerings, mostly from the hull coverage line. If there is a silver lining to where we stand today relative to the market, says six months ago, it appears from our vantage point that while prices continue to drop, they are doing so at a somewhat slower pace than they were 180 days ago. We anticipate that market conditions will remain competitive throughout the remainder of this year, but our underwriters remain opportunistic and very enthusiastic that their underwriting selections and pricing decisions that we make today will ultimately result in underwriting profits for Markel. One final item. Last quarter, I gave you an extended report on our Atlas initiative. Just to rehash for a second, Atlas is Markel's long-term growth strategy, predicated around the premise of better customer service and more product offerings on a closer geographical basis to our clients will result in increased business and increased profitability for Markel long term. While I am not going to go into the same level of detail today that I did last quarter, I am pleased to update you that the first phase of our initiatives are on track and on schedule. Our Markel mid south prototype office is currently being staffed and Markel associates are in the process of being relocated this month to Dallas. Our new physical quarters will be located in Plano, Texas in a beautiful suburban office park. We will use the month of September for training and orientation and open our doors in early October for new and renewal business with January 1, 2009 effective dates than [ph] beyond. We anticipate that the office will open with roughly 25 employees, the vast majority of which are currently Markel associates who have raised their hands to participate on this ground floor opportunity. Nothing replaces the keen understanding of the Markel style and our long-term focus on underwriting profits. I wish to publicly thank those associates from Markel Essex, Markel Shand, Markel Underwriting Managers, Markel Southwest and Markel Insurance Company that have all agreed to be part of this new and exciting venture that will be launched during this next quarter. I look forward to visiting with you on this and other topics that you care to raise during the question and answer section of the call this morning. And with that, I will turn it over to Tom Gayner.

Thank you, Paul. Good morning. Our total investment returns for the year-to-date were negative 2.3%. This was comprised of fixed income returns of 0.9% [ph] and equity returns of a negative 14.6%. On the fixed income side, I am satisfied with our results. As we have continuously stated for years, we invest in high quality fixed income securities to earn a positive spread on the reserves we expect to pay out to policyholders over time. We view our role not just as investors, but as fiduciary and I am proud of the way our fixed income team has fulfilled this responsibility. A lot of headlines about the troubles in the financial sector come from companies forgetting this responsibility who are stretching in this arena. The results Markel produced during the course of this credit crisis speak volumes about our steadfast commitment to high quality fixed income investments. We do our own thinking and credit analysis. While we pay attention to credit ratings, we do not exclusively rely on external rating agencies to make our judgments. We did not chase small incremental bits of yield by buying complicated structured investments, and that is paying off for us now, especially compared to what happened in many financial institutions. Our equity returns of negative 14.6% are clearly disappointing so far in 2008. To put them in some context, the S&P 500 index declined 11.8%, the NASDAQ was down 13.1% and the Dow Jones was down 13.3% year-to-date. Just as in the case in fixed income, we are committed to high quality investments and we make sure to do our own thinking in addition to the investment research we read and set. While we were clearly wrong in our assessment of the long-term quality and durability in a few of our investments, I remain confident that we are in the right sort of businesses and the right sort of companies to produce solid returns over time. The substantial increases in oil prices have created a bifurcated market where certain, but by no means all, energy, commodity and material stocks performed well in 2008 and pretty much everything else declined. A shorthand way of describing the first and six months of 2008 would be that if you were involved in pulling oil, minerals or crops out of the ground, you've been doing fine. If you were buying oil, minerals or crops, you were being squeezed. A far greater percentage of the worlds buys these basic products as opposed to selling them. Our portfolio reflects those circumstances and our equity results reflect that reality. While this is a painful period to endure, it will not continue to be the case indefinitely. The predator cannot grow to be larger than the beast. Rising raw material prices will work their way into supply and demand decisions over time. Supplies increase and demand decreases until a balance and equilibrium is found that jives with a sound and productive economy. I also believe that our financial system will heal. Today's panic follows historical precedence. Credit cycles begin prudence and end in excess. The excesses create credit losses which create prudence, which create profits, which creates excesses and so on and so on. Today, we are in the process of shifting from an environment of excesses and credit losses to one of prudence. We remain committed to a portfolio of companies with intellectual capital that will benefit and profit from a normal and growing economy. That is the case in most periods of our economic history in the U.S., and I believe it is increasingly true worldwide. The world and the United States will grow, enjoy higher standards of living and have bigger and more product economies as time goes by. Our focus on high quality companies provides assurance that we will be there to benefit as conditions return to normal. In 2008, some of the firms we own among our top holdings are actually benefiting from the difficult economic circumstances. Wal-Mart as an example is up 18% this year as the low-cost position becomes more important to increasingly value-oriented consumers. Also, Berkshire Hathaway continues to use its fortress balance sheet to make attractive acquisitions and build the long-term earnings power of the company. Despite Berkshire's clear advantages in this market, the stock itself is down 15% in the first half. As an example of a high quality company which is suffering in 2008 that I believe remains an attractive holding for us, consider the case of UPS. The company buys a lot of fuel to keep its network running and those higher costs are proving difficult to pass through to its customers at a time when business in general is slowing. During the first half of 2008, the stock is down 13% as the short-term difficulties obscure the long-term economics behind this company. UPS has very few competitors and no new ones appearing on the horizon. Over time, their rates will rise to reflect the cost of doing business and economic activities will pick up the pace enough to both increase package volumes and make rate increases stick. That sort of phenomena has ramped throughout our portfolio and it is what gives me confidence that we are investing properly. We should enjoy a double whammy of increasing earnings and higher valuations as the economy returns to its normal pattern of growth and fear recedes. For the most part, we own world class, low-cost, global powerhouses with great brands at historically reasonable valuations with meaningful and growing streams of dividend income. The businesses we own are largely transparent and describable in two minutes by any reasonably knowledgeable observer of business and commerce. Despite these clear advantages, the share prices of 12 of our top 20 holdings declined by double-digit percentages in the first month... first six months of 2008. In my opinion, those stock price declines exceed the business realities underlying these firms. I have never experienced this high quality approach as out of favor as it is right now, especially since valuations were historically reasonable for these firms as we entered the year. I remain confident this is the right strategic approach to take over time. It should remain a durable, low-cost and tax efficient way for us to produce good investment results at Markel as it has in the past. Additionally, another advantage we enjoy right now is that our own balance sheet is in the most liquid and conservative position it has been in years. This provides us with safety and assurance in the current environment and the ability to increase our equity exposures as opportunities and business conditions present a chance to do so. We have dry powder to deploy at the appropriate time and we have built a strong margin of safety at the company to weather what has proven to be some of the most difficult financial positions experienced in decades. Over the course of the last two and a half years, we've been driving without foot on the brakes when it comes to allocating money to equities. At December 31, 2005, our equity exposure as a percentage of our shareholders' equity was 80%. At December 31, '06, it was 77%. By the end of '07, it was 70% and in the first quarter of 2008, it was 66%. Currently, it stands at 58%. This is the second lowest allocation of equities at Markel since 1990. Our bond portfolio is high quality and short duration and we are maintaining excess liquidity in cash and short-term fixed income investments, which creates a powerful combination of margin of safety and future opportunities. As has been the case for the last year, during the unfolding of the subprime crisis, which turned into a credit crisis and energy crisis and a growing inflation problem, we will be patient and prudent stewards in deploying your capital into attractive investment opportunities. We have had a few successes in doing so during the past year as well as some disappointments. But I am confident and optimistic that we will enjoy productive returns over the next several years from our activity on the investment side. With that, let me turn it over to Steve and I look forward to any questions you might have during the Q&A period.

Thank you, Tom. While the insurance and financial markets are continually changing, at Markel, our mission, philosophy, values and financial goals remain the same. They have and will continue to prove their value over the long term. Again, our financial goal is to earn consistent underwriting profits and superior investment returns to build shareholder value. A key metric that we look at in defining growth in shareholders value is to look at book value per share. In the first six months, as Rich had pointed out, we are disappointed that book value per share declined about 5% to $252 per share. However, as Tom points out, our financial position is the strongest it's ever been and we're looking forward to the future with a great deal of enthusiasm. With that, I will open the floor to your questions. Question And Answer

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. [Operator Instructions]. Thank you. Our first question is coming from John Fox with Fenimore Asset Management.

Hi, good morning everyone. I have a couple of questions. First for Tom. You talked a lot about equities; obviously, what's going on. But I am curious, earlier in the year, there were some unusual opportunities in fixed income. For example, in Omaha, you talked about auction rate securities. Are there any unusual opportunities in fixed income today?

There somewhat plenty of unusual things going on in every aspect of the investment world. We did participate in some of the sale of auction rate security transactions. By and large, that has pretty much dried up.

Right.

And that market has normalized. We have not taken any swing at sort of lower quality fixed income stuff just because the spreads don't seem that wide enough on a relative basis. And on an absolute basis, if you're in a low sort of interest rate environment, which I would say we are, people get excited about paying something that's 400 over the treasuries or 500 over the treasury. Well that gets you to 8 or 9%.

Right.

And that's taking an equity risk to get a single-digit return, and we just don't do that. We have opportunistically done that from time to time in the past, but our... the phrase we use when we do those, we call those things SIDs, which is an acronym that stands for stock in drag. So we want an equity-like return when we take an equity-like risk in the fixed income market. And I don't see that out there right now.

Okay. And then the SMART [Specialized Markel Alternative Risk Transfer] division, we have some reserve take ups. First of all, I just want to confirm, that's in the E&S business line?

Yes, it is.

Okay. And can you talk about, do you feel you have that taken care off? Is there potential for more reserve actions there? Can you just expand on that a little bit?

John, this is Richie. Obviously, we certainly hope we have it taken care of. But there is always the potential that it could develop further. The business... the underlying business that's causing the issue is a habitational business in New York. We cancelled the program back in December of 2007, so... excuse me, 2006. So it's been about 18 months since we cancelled the program. But it does have a pretty good tail to it. We feel like we have got a pretty solid reserve on it at this point, but you can never say never.

Sure. Okay, thank you.

Thank you. Our next question is coming from Beth Malone of KeyBanc Capital Markets.

Thank you. Good morning. Just one thing... just the usual question about acquisitions and what do you see in the market with the conditions that we are experiencing right now. Is that going to be picking up at, do you think?

Beth, it's hard to know. There has clearly been some transactions fairly recently. And with insurance pricing under pressure, more and more companies are getting stressed with the capital markets in somewhat of a disarray. Access to capital is a little more challenging today for companies that are distressed than they might have been a year ago. So my sense is that as this market continues... as the insurance market continues to being more and more challenging, the profitability is that we will see more opportunities. There are a number out there that are circling around today and we were looking at those. But who knows when anything could happen. Our discipline and the need for a fit with our specialty model continues to be important. Our return on equity standard will not be compromised, our underwriting standards will not be comprised. So you won't see us stretching for something that doesn't make sense or that doesn't fit. But we are very, very much attuned to looking for something. And I would believe that in the next few years, that will in fact happen. There have been a number of more modest books of business that we've added in the last several years. And that type of transaction I think will continue and the pace of that will continue as well. So I am pretty optimistic that we will see some opportunities to grow through picking up other books of business.

Do you think there was a premium that was paid for fully consolidated kind of skews the market perception of potential sellers?

I have no idea of what that transaction is all about. I am... it doesn't register very well with me. So I don't... I am not smart enough to comment on it.

Okay. And then on pricing, as you mentioned, it is under pressure. I get often asked, have I seen markets like this in the past? And do you... as you look at the market competition, does this pretty much mirror what we've seen in past cycles or are there elements of it that make it more severe or potentially ending soon because of the pain it's causing now?

I don't think this has gotten as bad as some prior cycles yet.

Okay.

I think we have had... in the last 30 years [ph], we have had at least two cycles that were worse.

Okay. All right, well, thank you.

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

Thanks. Good morning everyone. Within the insurance operations, I guess a lot of companies have noted that the weather in the second quarter caused a higher level than normal of property losses. And I was wondering if you had any idea whether that was the case in your book.

We had... I'm certain we had a few cat losses, Meyer, but nothing of any significance.

Okay. And for Tom, you talked about Bank of America and Citigroup. Would there be any other adjustments we would need to make through your last filing to sort of estimate what the book value changes have been so far in the third quarter?

Meyer, the turnover [ph] has been just a smidge higher than it normally would have been. Our next filing will be out on the 15th [ph]. And I would suggest you, for instance, on the Bank of America and the way this OKPI [ph] mechanism works, we wrote that down without selling it. And the OKPI decision is made independent of a sales decision. And I think that we are probably on the conservative side of the way people are handling OKPI. And Bank of America was not one that wasn't sort of discussed and talked about because it really meet some of... even our own internal bright line tests. We are just trying [ph] to be extra conservative. At the end of June 30, I see that Bank of America was $23.87, which was down and sort of the order... the magnitude which it was down drove the accounting decision. As we walked into the room to start the conference call, I glanced to see what Bank of America was selling for today, and I think its 32, 33, something like that, which in percentage terms is a rather dramatic increase in five weeks time since June 30th. And it's just reflective of the volatility that's out here in the financial markets. Bank of America is an institution that I continue to have a lot of confidence in and think that they will be fine given the base at present they have in so many basic financial, consumer and in retail markets.

I think it's important to remind everybody that one of our basic financial metrics that we judge ourselves on is growth in book value per share. And our portfolio is mark to market for the book value per share calculation. And so we are rather indifferent as to whether we run the temporary impairment through the P&L or not, because it doesn't change the fundamental economic value of book value per share, which is our core metric. So whether we were running them through the P&L or not is sort of very different because our metric is to look at book value per share, which, we are just marking these things to market in all cases, so. Because our focus has always been on comprehensive income in any event, we have been very conservative and willingly complying with any suggestions to the audio community to take other than temporary impairments. I am not sure what the difference between permanent and other than temporary, temporary, partial, what the timeframe is, whether it's three months or six months or at one year. Our view is to hold the securities for many, many years. And our view would be that if we are holding them, we would expect that the values which will grow over the long term. But rather than argue with accountants, it's simpler if we are marking them to market for the comprehensive income and for our measurement internally on growth in book value per share. And so we are absolutely indifferent as to what line on the P&L they appear on.

Okay, that's very helpful. Thank you.

Thank you. Our next question is coming from Jay Cohen of Merrill Lynch & Company.

Thank you and good morning. Just a couple of questions. On the international premiums in the quarter, any sense of how currency impacted the growth rate?

It was pretty small, Jay. The rate of exchange hasn't moved much between the two... six months this year and six months last year.

Okay. And then on the Atlas initiative, what kind of... it seems like you are doing it at a pretty measured way. But are there any extra expenses we would expect to see in the next several quarters that will inflate the expense ratio at least a little bit?

Yes, we are still putting our implantation plans together and still sort of working on the budget around Atlas. But we're probably in the third quarter going to be making some more disclosures around the cost impact of Atlas. So... but it is fair to say, we're probably over the next two years going to run costs related to Atlas that will impact the expense ratio.

Okay. I think it will be relatively modest given the size of the initiative, but we'll keep that in mind. Thank you.

Well, keep in mind we are doing some pretty heavy system implementations to support the Atlas model. I mean we haven't done a system refresh at Markel of any magnitude in a number of years. So that... it may be a bit larger than you think. Like I say, I don't have numbers today that I'm prepared to share, but I think we'll probably be disclosing a little bit more in the third quarter.

Great. A quick question. Exposure to Fannie and Freddie preferreds.

De minimus.

That's good news.

Yes. And that was the case even before they started going down too.

Okay, perfect. And then I guess maybe a question for Paul. You had mentioned... I won't call it stabilization of pricing, but some areas where there isn't stabilization, other areas where the prices are going down, but not at a faster pace. In some past cycles, and you've lived through a couple yourself, is this... should we look at this as a sign and say hey, this is a good thing and we should draw a line, or could it just rip [ph] the other way the next quarter? What's your impression of what's happening?

Well I guess in a marketplace like we are facing today, Jay, any sort of silver lining is good news. But you really don't know from one day to the next. The number of competitors that we face today is a lot different than, say, it was ten years ago and clearly, a lot more than maybe twenty years ago. And I talked a little bit about this last quarter with not only the emergence of the standard marketplace as part of the normal ebb and flow coming back and nipping on the fringes of some of our business. But you've got increased competition from the Bermuda market place that's now onshore in the U.S. on both a primary and excess basis in addition their reinsurance forte. And then you have, I think now at last count, six or seven different London syndicates that have physical presence on this side of the Atlantic, which were not there, clearly, five to seven years ago. So for every competitor, and I think we've lost three on the lawyers professional side in the last quarter, we end up having a new competitor that thinks that they can do property catastrophe business either smarter than us or cheaper than us or maybe just get luckier than the rest of the market. So it's really pockets and I would tell the one thing that really is in our favor in that regard is that when you have 85 to 95 different specialty products, we don't have so many eggs in any one basket at any one time. So we can take the high road when it comes to pricing.

Got it. One other question, maybe for Steve I guess. Maybe it's a two-part question, sorry. When you look at your... when you evaluate yourself, obviously, you are looking at book value per share, which is a great measure over time, obviously, you've developed a lot of excess capital in the company it appears to me. And obviously is harder to grow a bigger balance sheet and I know you're being very patient and looking for opportunities, you're doing a little bit of share repurchase but maybe the two questions are one: as the market come down does your repurchase more of a factor for you? And then secondly, when you buyback above of value obviously that there which you booked type share, you guys adjust for that in your conversation mechanism?

Second question first. The incentive compensation, which is based on the value of [ph] growth in book value per share does adjust for capital transaction both ways [ph]. If we were repurchasing shares, we'd taken an adjustment and wouldn't penalize and associates Markel for the decision to repurchase shares at greater than book value. And likewise, if we issue shares at a premium to book value, we will not reward associates for the growth in book value per share for the share issuance. So we do make that adjustment, and so that is neutral as it relates to employee compensation and bonuses. Your point is right that we are very sensitive to price when we think about share repurchases. And your point is also right, we do have a substantial amount of excess capital. Today, our debt to total equity I think is now 120%, around 19% lowest it's been in my memory. Of course, my memory isn't as good as some others. But we clearly, have less debt than we normally would normally operate with. We have said this in many kinds over many years that sort of the 1 million debt to equity position for Markel is now one-third debt and two-thirds equity. So we are significantly underweighted and underleveraged in that department. The premium volume, as you know, is somewhat of a flat line slightly, declining. And against our capital base, our premium to surplus ratios are very low compared to what they could be. We currently have over $700 million at the holding company in liquid assets that could be redeployed. They are not wasting away; they are fully invested in stocks and bonds. But they clearly are holding company assets that could be used in the insurance business in a more effective way. And likewise, we have substantial dividend capacity from our subs to support growth in acquisitions. We continue to think about share repurchases. And as you pointed out in the first half of the year, we bought back some stock. Our overall view, though, I think is that we are still pretty optimistic that we will see an opportunity in the insurance marketplace to put resources to work. And likewise, as Tom pointed out, we substantially reduced our equity component of our portfolio. Normally, in this environment, we would... the insurance market would be soft, we would be increasing our allocation to equities. But because of the turbulence out there and some of the uncertainty, we have actually raised cash out of our equity portfolio. And quite,frankly if we saw the right equity investments, we wouldn't hesitate to move more aggressively back to the equity markets. But we're comfortable with our equity position and I think we are thrilled to have excess capacity.

Jay, I might add from where I sit and sort of living in financial markets. I like being accused of having excess capital. That's not the accusation that a lot of people are facing these days, and it creates a high class set of problems rather than awful problems. I'll make the high class problems.

Thanks for those really thoughtful answers. I appreciate it.

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

Hey, good morning. Jay actually covered most of the ground I hoped to cover. But I had one other question furthered out [ph]. On the credit default swap derivative that you had, can you walk me through... I see the disclosure on page 14 and I had thought that all of the changes in market value on that were going to go flow through the income statement. It looks like only a portion of that does.

No, all the change flow through the income statement. The reality was it didn't... the mark to market didn't move much on it in the second quarter, so the number is... it's virtually the exact number that we had in the first quarter.

Okay. And maybe the coincidence of numbers is probably what confused me.

Yes, I thinks that probably is because I had to double check my numbers a couple of times too when I realized that. The mark on it virtually did not move in the second quarter.

Okay, that's really all my questions. Thank you.

Thank you. Our next question is coming from David West of Davenport & Company.

Hey, good morning. First, a question for Tom. You had about just under 25 million of net realized gains in the quarter. And I guess that number surprised me a little bit in wake of the general environment. Was that due to the disposition of some securities that you had marked down as of March 31st?

No, David, this float's [ph] for you.

Okay, very good, that answers that quickly enough. And I guess just a second one would be... I'll throw away out probably for Steve and Paul, and maybe a general follow up on some of Beth's questioning. In this cycle, do you feel like it's different this time around, either access to capital in the industry, the global nature of the markets? Is your sense that this is... we are just into another typical cycle this one feels different in any way?

I'll let Paul go first.

Well I would say that every day of every cycle is different, David. And it just depends what product line and what area are you in. I mean if you are a medium-sized to larger law firm that's involved in SEC work right now, it is very, very difficult to find the necessary limits that you want to buy on your lawyers' professional liability. But if you are a coastal property in Miami, even in the middle of hurricane season, you are going to be able to get prices much more competitively today than you are 24... 12 months ago and 24 months ago for seemingly no reason whatsoever. So it just really depends on what sort of cover you are looking to buy and what your experience has been in the marketplace. And I would tell you that everybody out there wants to write the standalone apartment building that's located in Des Moines, Iowa because today, that's considered the preferred of the preferred accounts. But short of that, it's just one of the reasons that Baskin-Robbins has 30 some different flavors of ice cream and they change the special of the day every day.

I don't have a whole lot to add, David. I think clearly, the global nature of the insurance industry has an impact. And the answer to your financial markets with cat bonds and the like are changing some dynamics of some parts of the insurance industry. But I think more broadly, the influences of the total capital in the industry relative to the premium volume is driving the market. And today, you can add up the capital in the property casualty insurance industry, and it's relative to the industry wide premium volumes. We have the lowest premium to capital ratio in our memory of the industry as a whole. And likewise, you have the psychological impact as people extrapolate on yesterday's results more than they do over the last nine of ten years. And being somewhat catastrophe free for the last couple of years, the insurance industry has recorded very, very well good financial returns and people are willing to write business assuming that if that's going to continue irrespective of the pricing level then that's just irrational. Prices are coming down and so combined ratios have to go up.

Thanks very much.

Thank you. Our next question is coming from Mark Hughes of SunTrust Robinson Humphrey.

Thank you very much. I am not sure if you touched on this, but in the excess and surplus segment, the current year losses were up year-over-year, but actually a little lower in the second quarter than what we have seen in the last few quarters. Is that mix issue seeing any kind of improvement there?

Mark, it doesn't ring a bell with anything specific. I am just trying to look here real quick. The first quarter, we did have some, not unusual, but we had some property losses as clean around [ph], they tend to be a little tougher in terms of property losses. And obviously, that affects the current year. So it could be a little bit of that. But I am not aware of anything unusual that would be driving that.

Got you. And then I think you had suggested the policy count was up. Can you quantify that?

Well, it depends with eight different units, Mark. But in general, we are up 5 to 10% a policy count basis and I think if you look at the bottom line our overall premium is down 6%.

The key element in this is true with virtually soft cycle, competitive cycle. The standard companies in the market gets most competitive with the largest premium accounts. And so anything that has a six-figure premium account today is going to be shopped [ph] very, very aggressively and more than likely get the largest rate productions. And so from Markel's perspective, it's actually one of our strengths and that vast majority of our business is in the smaller account segments. But if we lose a $100,000 account to a competitor who writes it for 50 or 60 or $70,000, we have to write a whole lot of $5000 accounts to get even. And that is fundamentally what tends to happen in the cycle; the biggest premium accounts disappear the fastest.

That's helpful. Thank you.

Thank you. Your next question is coming from Meyer Shields with Stifel Nicolaus & Company.

Thanks. Two quick follow ups, and hopefully they are not too repetitive. Is the claim review that's located with the insourcing of the general labiality program, has that review finished?

Sorry, are you talking about the SMART program there, Meyer?

Yes.

Yes, we got about 80 plus percent of those claims in-house at this point. And we started with gold [ph] this year's first. So we're handling the biggest and the hairiest of the claim at this point and we feel good about the reserves we put on them. And that's why, and I can't remember if it was your question or somebody else's, while I can't give absolutely promises, I think we feel reasonably good about the number we've got on the SMART PBC program at this point.

Okay, that's good. And is the... I guess turmoil at Excel [ph] and AID, is that making more underwriting talents available for you to look at?

We've received a few inquiries from mid to senior level people at most of the firms. And yes, I mean, whenever there is turmoil, it's always good for Markel. I think we have a reputation in the marketplace to being a wonderful home for underwriters. Because of you're a true underwriter regardless of where you are at in the cycles, we always focus on long-term profitability. And I don't want to particularly comment on those two companies, but not all companies have the same objectives that Markel does. And we'd like to think that we empower our people on the line to say no, we want them to say no professionally and quickly, and at the same time ask for the next opportunity. But it's part of their responsibility as a Markel underwriter to say no from time to time and that's not necessarily in the case of some other firms.

Okay, thanks so much.

[Operator Instructions] Our next question is coming from Beth Malone of KeyBanc Capital Markets.

Hi, I just have a couple of follow-ups. On the... with the pricing in reinsurance becoming, I guess, cheaper, more attractive, would you be planning to use more reinsurance in the future? Is that a factors that you look at to determine whether you are going to act as a reinsurance market?

Yes, Beth, no, number one, I think there are some segments of the market where reinsurance pricing is coming down. But generally seeking, I'm not sure that's a valid assumption. And in any of that, from Markel's perspective, our view has always been and very consistently that we want our reinsurance partners to have an opportunity to make a fair rate return on their exposure. We want to write our business so that we're charging our premiums so that we can make a fair profit and our reinsurance partners can make a fair profit. We have never been and do not want to get into businesses that are dependent upon leveraging cheap our reinsurance to the enable us to sell coverage more competitively because in the long run, brining in [ph] reinsurance partners is a recipe for disaster. And our view has always been we wanted to use our capital to write and retain as much business as possible. And so, it's sort of our... it's sort of a far moral [ph] and philosophical ground that we've set and we will continue to set. We are indifferent as to the reinsurance pricing as long as they can make a fair return [indiscernible] pipelines will be coming in.

Okay, thanks. And then one last question on the top line, it seem like the premiums, I know they were down quite a bit and a number of factors, but they didn't seem as bad as I anticipated. Is the use... the development of new products and new markets, how important is that in you ability to maintain your top line? Are you... or this is the market where you are not really trying to introduce a lot of new products because of pricing?

We try to introduce new products all the time, regardless of what it is. There is probably a little bit more underwriter time and senior management time available on this particular markets to development new things, but I would say we've probably seen more benefits in the first half of the year from revision and policy forms, redefining risk appetite, taking a look at some pockets of opportunity or classes of business where previously we said no or perhaps we sharpened our pencil a little bit. But there isn't one big silver bullet or large new products idea that's impacted premium for the first new year. It's really a whole collage of smaller ones.

Okay, alright. Thank you.

Thank you. Our last question is coming from Josh Shanker of Citi.

This is kind of repeat of a previous question, but I just wanted to clarify, you look at every deal that's for sale out there, I am sure. And I want to know if you've seen deals come around again and whether the prices are coming down for what the Board of Directors or managements are looking to sell their businesses at?

I'm not sure, Josh, that I can answer that very well. I don't know, but I see all of the transactions, and as long as I see, the... all of the final prices that they are [indiscernible] public transaction. My discovery [ph] action would have been based upon the few of the headline transactions that the prices are so higher than what seems to be rational to me as a buyer at least. For the seller, I think the prices were pretty good. But as a buyer, from what I have seen, I don't think it's quite got into this stretch [ph] levels yet. And again, I'm not saying necessarily all of the transactions. So I don't know.

And are you seeing things sharp around the second time?

The things get pulled off the market, I think, have been discovers and not yet ready to accept reality and they are saying, well, let's give it another six months, let's wait for the markets to turn, let's try to clean out... I mean, if they have a problem, they just might clean up the problem before they sell it. They will just rather hold on to it and surf [ph] through the market a little bit longer.

I appreciate the candor, thank you

I appreciate everybody's participation today. As always, the management team here is ready, willing, and able to respond to any of your questions. We particularly want to thank our long-term shareholders for their loyal support and we continue to promise to do our very best to continue to develop and deliver strong financial returns from your investment in long scale. Have a great day and thank you very, very much.

Ladies and gentlemen, this does conclude today's call conference. You may disconnect your lines at this time. Thank you for your participation.