Good morning and welcome to the Markel Corporation Third Quarter 2015 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. 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 10-Q, which can be found on our website at www.markelcorp.com in the Investor Information section. The presenters today from Markel Corporation will be in the following order: Mr. Tom Gayner, President and Chief Investment Officer; Ms. Anne Waleski, Executive Vice President and Chief Financial Officer; Mr. Mike Crowley, President and Co-Chief Operating Officer; and Mr. Richie Whitt, President and Co-Chief Operating Officer. I would now like to turn the conference over to your host, Mr. Tom Gayner. Please go ahead, sir.

Thank you, Denise and good early morning. We understand that we will use rounding of maybe as many as tens of people on the call and we welcome you to our third quarter conference call for Markel. My name is Tom Gayner. I am joined as usual by my colleagues Anne Waleski, Mike Crowley, and Richie Whitt. Anne will brief you on the financial results. Mike and Richie will discuss our insurance internal operations. And then, I will return with comments on our investment results and Markel Ventures. As always, we thank you for your interest and support of Markel and we look forward to answering your questions. With that, Anne?

Thank you, Tom and a good early morning to everyone on the call. I am happy to report that our year-to-date underwriting results are outstanding, contributing just under $300 million to pre-tax profits for the first nine months of 2015. All three ongoing insurance segments contributed to this result by producing a lower combined ratio compared to a year ago. While underwriting results have made a significant contribution to shareholder value, the favorable impact from underwriting was muted by our investment results for the first nine months, which were adversely affected by volatility in the equity markets. Our total operating revenues grew 4% to $3.9 billion in 2015 from $3.8 billion in 2014. The increase is driven by higher revenues from Markel Ventures. Other revenues, which include revenues from Markel Ventures, were up 30% to $817 million from $630 million last year primarily due to our acquisition of Cottrell in July 2014. Going back to the underwriting results, gross written premiums were $3.7 billion for the first nine months of 2015 compared to $3.8 billion in 2014, a decrease of 3% driven by a decline within our reinsurance segment. During 2014, we ceased writing auto reinsurance in the UK and we also decreased our nonstandard U.S. auto reinsurance business. Foreign currency exchange rates also had an unfavorable impact on the year-over-year change in gross written premiums. However, even at a constant rate of exchange, gross written premium volume declined 1%. Market conditions continue to be very competitive, especially within the property and marine and energy product lines. Consistent with our historical practices, we will not write business when we believe prevailing market rates will not support our underwriting profit targets. Net written premiums for the first nine months of 2015, were $3 billion, down 3% from the prior year and…

Thanks, Anne, good morning. As we have mentioned earlier, the U.S. Insurance segment comprises all direct business written on our U.S. insurance companies and it includes all of the underwriting results for wholesale and specialty divisions as well as certain products written by our Global Insurance team. Gross written premiums for the U.S. segment were $1.9 billion for the first nine months of 2015, an increase of 1% over prior year. This increase was due to continued growth in our wholesale division casualty lines, as well as our Hagerty classic car program and our workers comp product lines, both within our specialty division. Probably offsetting this favorability are declines in our wholesale property, excess and umbrella and environmental ads. As mentioned in previous calls, we have also exited certain lines of business. We maintained our underwriting discipline throughout the year. The U.S. Insurance segment combined ratio for the third quarter of 2015 was 90% compared to 95% for the same period a year ago. The combined ratio for the year was 89% compared to 97% for the nine months ended September 30, 2014. The decrease in the combined ratio for the year is driven by more favorable development of prior year – prior accident year’s loss reserves, as well as lower current accident year loss ratio and a lower expense ratio. Prior year losses were favorable by two points driven by favorable development in our Global Insurance division in 2015, primarily our Inland Marine product line compared to adverse developments in 2014. The current accident year loss ratio benefited from lower attritional losses across each of our divisions. And finally, the decrease in our expense ratio was primarily due to higher earned premiums in our specialty division, driven by the premium growth I mentioned earlier as well as lower general…

Thanks Mike and good early morning to everybody. I am just going to say if we keep this early start time I am going to try to do next quarter’s call from our London offices. Today, I am going to focus my comments on our underwriting results for the first nine months of 2015 for both the International Insurance and Reinsurance segments. Both segments continue to produce outstanding underwriting results through the third quarter of this year. First, I will start with International Insurance segment which includes business written by our Markel International division as well as certain products written by our Global Insurance division. For the year, gross written premiums declined just over 1% to $912 million. The year-to-date combined ratio was 87% compared to 95% in the prior year. The decrease in premium writings is primarily due to the continued impact of the strong U.S. dollar. Excluding currency impacts, gross written premium volumes actually increased 4% for the year due to continued growth in our Professional Liability product lines in both divisions, as well as growth across multiple product lines in the Markel International division. The lower segment combined ratio was driven by more favorable prior year takedowns, partially offset by a higher expense ratio. Prior year losses were favorably – favorable by 12 points, driven by higher redundancies in the Markel International division across multiple product lines. We also experienced stable development in our Global Insurance division which had slight adverse development through nine months in 2014. The expense ratio has increased nearly four points due to higher profit sharing cost, higher general expenses and lower earned premium this year. Next, I will discuss the results in the Reinsurance segment, which includes three new reinsurance programs written by our Global Reinsurance division as well as that written…

Thank you, Richie. The good news at Markel is that we enjoy a set of what I would call structural advantages as we continue to build the long-term value of this company. And they are as follows. First, we operate a successful insurance business with a long-term record of underwriting profitability. Second, we operate a high-quality and low cost investment operation that amplifies the returns generated from the insurance business. And third, we have a diverse set of majority-owned industrial and service businesses in the form of Markel Ventures that increasingly contributes to our overall results. Prospectively, we can and we will allocate capital among those opportunities in search of the best long-term results. It’s always the most fun when we can discuss each of those components when all of its cylinders are firing. The reality though is that’s not always the case and that is the circumstance so far in 2015. The good news is that even without all cylinders firing, we made modest, but forward economic progress. The cylinder that didn’t fire in the first nine months was our investment operation. Our overall investment returns for the first nine months were a negative 0.3% in local currency terms and a negative 1.2% after the foreign exchange effects. Equities were down 5.3% and fixed income earned a positive return of 1.3%. If I have only one word to describe all of our investment operations, it would be quality. In fixed income, that’s relatively easy to quantify and describe. 97% of our holdings are rated A or better. We also do our own credit work in addition to that of the rating agencies. And I am happy to report to you that our quality is as high as we know how to make it. In our equity operations, we maintain…

Thank you, Mr. Gayner. We will now begin the question-and-answer session. [Operator Instructions] Your first question this morning will come from Jeff Schmidt of William Blair. Please go ahead.

Hi, good morning everyone.

Good morning,

With the CATCo acquisition closing, I guess at the end of the year here, is there still an appetite for M&A in ‘16 or what are your thoughts on that?

I will attempt that one and you guys kick in anytime. Jeff, we have been inquisitive over the years. And Tom was talking about the current environment right now there is certainly companies out there that we think would be nice strategic fits with the Markel. But the problem seems to be right now, a lot of other people seem to think those companies would be great strategic fits as well. So the things we would look for when we – when we are doing acquisitions is that culture has to be a fit, it’s number one. It needs to be a great strategic fit, good reason for it. And then obviously, it’s got be at a fair price and that’s probably the one we are having the most trouble with right now.

I will let – I completely concur with Richie’s comments. And we are hunting all the time. And sometimes frankly, we get surprised by the opportunity we would come across just as much as you are. So we know about it a little bit before you do, but we will keep hunting them, we will keep you posted.

Okay. And then on the pricing front, with pricing remaining pretty difficult here, are you seeing any of the standard writers move-in in some of the E&S lines more than usual or…?

Yes. Jeff, this is Mike. I have been in this business for – this is now my fifth decade. And whenever you have the pricing situation we have today, you are going to have the standard carriers moving into the E&S space. And I think the advantage that we have is that we have not one insurance divisions, not just an insurance division, but we have our U.S. specialty business, we have our global business and we have the international business. So market conditions are competitive, but as I have mentioned in my comments come on the smaller U.S. based business, we are still getting modest rate increases, but certainly, in this type of environment, we are going to see the standard carriers move in, but they will also move out as they have in the past.

Jeff if I could one editorial comment to that. Obviously, the investment side was the toughest part of the house for us. But we breathe the same air as everybody else. The investment operation – environment we are operating in is the same that every insurance company is. So while everything is competitive, I don’t think anybody is under the delusion that they can operate on a sloppy fashion on the underwriting side and make it up on investments. So the nature and tone of competition and where that bar is set in terms of underwriting profitability is lower this time around than what it would have been in previous cycles, so that’s somewhat good news. It’s hard to get the volumes and we have to compete for every piece of business that we have. But I think everybody is competing in a more disciplined fashion than they were in previous cycles. And that’s a function of both lower level of investment returns and better underwriting data and technology that gives people better insights into what the costs or what they are writing are.

Okay, that’s helpful. Thank you.

The next question will come from Mark Dwelle of RBC Capital Markets. Please go ahead.

Hi, good morning. Just a few questions, let me start with CATCo, Richie maybe if – it seems like that’s a little bit less typical of a normal Markel acquisition, maybe you can just talk a little bit about how that fits in, what some of the ambitions you might have for it. And then I guess the other question I have related to CATCo is that going to be folded into the international unit or is it going to be picked up as one of the other segments?

Sure. Well, first I will take the easy one first. Markel-CATCo, as it will be called when going forward, we are going to set that – since it is a little bit different as you recognize Mark, it’s going to sit alongside our reinsurance division. And we expect Tony Belisle who is going to be running CATCo for us and Jed Rhoads who runs our reinsurance division, those two teams are going to be working very closely together, because we think there is a lot of synergies, a lot of opportunities to collaborate across those two platforms. So they will sit beside each other in that array of product set we hope to make available to our ceded clients. You did mention it’s a little bit different than what we have done before. And the reality is the insurance market is a little bit different than what it was 5 years or 10 years ago. Insurance-linked security business, alternative capital those people called it initially, it’s just simply capital now has been coming into our market over the last 5 years, 10 years. And that trend is going to continue, quite honestly. And it’s going to continue to become more and more meaningful. We have got a small taste of that, with our purchase of Alterra with their New Point facility that they have had for quite a long time before the acquisition. And Jed Rhoads and myself we talked about the fact we felt like we needed to be more meaningful in that ILS space going forward. And CATCo provided us that opportunity. And like I said, we really view that as kind of extending our product set across the reinsurance base both traditional and ILS. And then, going forward, we hope to develop new products and that could potentially mean moving into different areas of insurance as opposed to just reinsurance.

And Mark, I will add one editorial comment here too. And while you correctly categorized this as being different than what we have been doing to-date. Frankly, that’s typical of almost every deal we have ever done. Part to do the reason to do the acquisitions we have done over our 30-year history as a public company is to learn, to expand, to recognize that the world keeps changing and we pick up people and skills and talents and opportunities that we didn’t have internally. And I think that is an absolutely typical and recurring feature of Markel’s and will continue to be.

Just a follow-up on the some of that, to characterize CATCo, is the skill set here, is this an underwriting skill set or is this more of a brokerage and asset management or placement type of skill set. I guess I am trying to be clear on which bit of the house you are bringing to bear in making this ultimately successful?

Well, there is really two skill sets. The one that in my mind is the preeminent skill set is the underwriting and that’s where we spend a tremendous amount of time was understanding and getting comfortable with the underwriting that CATCo does. And we believe they do a fantastic job of underwriting the business. So it’s a skill set we are very familiar with. We are underwriters at heart at Markel. The ILS combines two skill sets. It brings that underwriting skill set to the table along with raising funds. It’s a fund manager. So the other skill set and the one that Tony and his team possesses is the ability to go out and explain the story that CATCo has and the skill set that they have to investors such that they are willing to invest in the funds. So it is a bit of a hybrid and it’s a model quite honestly, that we are going to see more and more in our industry.

Okay, that’s helpful on that. Let me ask the second question, changing gears to the tax rate, you have documented throughout the year kind of the pluses and minuses on that. I guess this quarter, this was primarily a true-up to get to now that you can have some better visibility of full year results to kind of true your full year provision into that 21% odd full year rate?

That’s right.

The rate is now...

It’s just a mechanic to get there.

Right. So all else equal, would it make sense that the fourth quarter number would be somewhere in that same ballpark?

Should be, I think...

But then, still – go ahead.

Sorry. Go ahead, Mark.

Well, I was just going to say then, but still no view yet on next year as to whether there is any likelihood that this credit will carry forward into ‘16 outlook?

So I don’t believe today that the credit will carry forward, but it’s hard to know for sure. We would likely think next year would be more typical in the mid to high-20s from a tax rate. The real story on the tax rate this year is higher pretax income than we projected, which is a good news story that results in tax rate sort of bouncing around.

Okay. And then a third question I had related to the new asbestos environmental retro that you did, to the extent that ultimately produces any gains or losses, I think you mentioned there was a $10 million odd gain or loss rather in – on the initial transaction before any re-visitation of reserve setting, is that going to show up in the other segment or is that going to be in one of the North American segments?

It should show up in the other segment.

Got it. That’s all my questions. Thanks.

Alright.

Thanks Mark.

[Operator Instructions] Your next question will come from James Davis of Silver Point Capital. Please go ahead.

Hi guys. Thanks for taking my question and congrats on a long track record of great performance.

Thank you.

The 15% compound book value growth track record is what caused us to take a look at the company. And as we have been doing our diligence, we have noticed some changes in the company that suggests that book value growth is likely to be meaningfully lower in the future, but we wanted to get your thoughts to make sure we are thinking about this the right way? The two big changes that seem to have taken place at the company are, first, investment leverage has declined meaningfully. 10 to 20 years ago, investments were about four times your book value, but today this is only about half that, 2.1 times your book value. And second, investment yields have declined meaningfully. 10 to 20 years ago, portfolio yields were in the 5% range versus to 2.2% today. So, our math suggests these two factors combine to create a pre-tax ROE drag of about 15% relative to previous periods, making it tough to get that double-digit ROE without a significant rally in the equity market? And we seem to be seeing this play out this year as a relatively minor hiccup in the equity markets has resulted in flat book value growth for the year. Are we missing something or have these changes made historical returns very tough to meet going forward?

Yes, this is Tom. I will try to take those. Compared to 10 or 20 years ago, I think you are correct. I mean, the amount of premium leverage we can get relative to our equity capital is lower. Now, specifically what we can do in the face of that is that we can increase the allocation to higher total returns theories, because the reason we would have the fixed income portfolio is predominantly to over-collateralize the insurance liabilities and the claim spends that we expect to make. So, if we have less leverage and we are writing less business, what that means is we can allocate a higher percentage of the portfolio to equities, where we would expect to pickup higher return. The second pool you mentioned is the lower overall investment yields. I would agree with that. I would also suggest that that the higher yields occurred during a period of higher inflation. So nominal yields are lower, but real yields have not decreased as much. So nominally, it’s a lower return environment, that’s correct. But in a real sense, if we make high single-digit, low double-digit returns in a zero interest rate world, both the nominal yields and the inflation circumstance that we faced that will be a spectacular economic outcome. And we are optimistic about our ability to do so.

Okay, got it. Got it. That makes sense. And then with the equities, as you mentioned previously on the call, you are currently at kind of 54% of book value versus the historical range of 50% to 80%. So, in terms of the opportunity to increase to higher return assets, we are not necessarily seeing that right now. Is there an intention to increase that allocation to try to makeup for that difference is the first question? Then I guess on the second question, makes perfect sense, lower inflation, lower nominal yields. I guess, are we right to think that, that just translates into lower nominal ROEs as well, going forward relative to what we have seen in the past?

Yes. I mean, that’s the math of lower nominal ROEs. But in real terms, as I said, we are going to try and do the best we can. And in real terms we have generated excellent returns for a long time and hope we have the formula in place to continue to do so. In terms of the additional allocations to the equity portfolio, whisper some good ideas to me after the call and we will put it to work. But just like the acquisition question, we work all day everyday looking for things. At the moment, we are driving down the road tapping the brakes a little bit just as a function of being picky about what we buy. But as we see things and we hunt for them everyday, we do have the capital to put money into the equity portfolio and we would love to do so when we see it.

It makes perfect sense. And so did I hear correctly that in the current environment the view is the kind of high single moving into the low double-digit would be a great outcome?

Yes. We don’t make forward-looking forecasts or any expectations of that sort, but when you penciled out the math that you did, I don’t think you are doing that incorrectly.

Got it. And then just final question, we have always admired the discipline at the company. And like you said, there is a lot of headwinds in the market right now, the investment leverage and rates, which we talked about. But like you pointed out, pricing is weakening, equity markets are a little more difficult trading in elevated multiples on above trend margins. The private acquisitions are certainly tougher, given the prices out there today. And in terms of your core business, like you said, accretive acquisitions are tougher, as it seems like there’s an M&A premium kind of built into everything that’s trading out there. Is the right way to think about Markel right now that it’s a tough environment, you have reduced leverage, you are kind of retrenching and will have a period of lower returns, but as the market changed, there will be the ability to play more offense and move to higher returns at some point in the future?

Well, let me split that. And I think Richie alluded to this a bit in his discussion of CATCo. It’s always tough. Markets are always competitive. So I don’t think there’s anything new about that than what has been the case during all of the time that the record you speak so kindly of looks great, it’s always tough. But break capital into two forms. There is financial capital and there’s intellectual capital. Financial capital is what a lot of people have a lot of. I mean, there’s a lot of money flashing around everything, and that leads to the comments about it turns into too pricey an acquisition pricing, things of that nature. But intellectual capital, that’s scarce and that’s where the returns really can be generated. So just like Richie was talking about the creativity behind the folks at CATCo and what they are doing, a good portion of the returns they generate is because they thought of stuff. They were creative and they applied intellectual capital. That is similarly the case in the Markel Ventures operations. We are looking at businesses that have the markets they have and have the customers they have because they creatively have found a way to take care of their customers. And they tend to operate in markets that are not distorted by big gobs of financial capital. Similarly, you look at the historical set of businesses that Markel underwrites in our insurance world, we need expertise. We need creativity. We need people who know what they are doing in different and unique lines of business. And there is really nothing about that that changes. And I think creativity intellectual capital will always be able to earn a return.

The other opportunity that we have and that’s been proven out in the past with acquisitions like Com-Co and FirstComp and others is that there are a number of private industries out there that would fit with Markel, and the principles of those industries don’t necessarily sell to the highest price. We were successful in some of those acquisitions because the principles were looking for a long-term place and a good fit for their employees and for themselves and for patient capital for the long term to continue doing what they were doing rather than be gobbled up and chopped up and stripped and flipped and whatever. So I think those opportunities still exist and will present themselves to us over the next few years as well. We weren’t the highest price in some of those deals.

Got it. That’s a huge advantage. And we compete against the same gobs of capital, so we understand exactly what you are going through. Appreciate your answering the questions. I guess our last thought is just when we look at the current valuation of the stock, it seems like the market is expecting the same future returns as what they have seen in the past in terms of the stock trading at 1.5 times book value. And that’s kind of the root of the questions. We think the franchise is very valuable. The opportunity is very valuable. We are just trying to figure out right now kind of what price makes sense? Thanks so much.

And we don’t comment on valuation, but we interest in your questions. Thank you.

Thank you.

The next question will come from David West of Davenport & Company. Please go ahead.

Mike, a question for you. I guess my grasp on time is not real good, but you have been in the workers’ comp business now at least three or four years. And could you talk, give a little more color about pricing trends in workers’ comp? And also are you making underwriting profits in that line of business now?

The answer is yes, that’s been a tremendous success story. When we acquired FirstComp, I guess it was 2010 there was work to be done there. And the environment was tough. Their geographical mix of business, some of the other mix of business was not what we thought was the right path for the future. And Matt Parker, who now heads our Specialty Division and Chad Bertucci, who is now running FirstComp and the entire team there have absolutely executed on a plan that has been perfect in terms of the restructuring of the business geographically, product line, pricing wise. The pressure on the pricing there is not as significant as it is in other lines right now. And yes, they are making underwriting profits. They have their expense ratio well under control as well as anybody in our business. And we couldn’t be more pleased with the plan that they executed over a span of two or three years and where they are today.

Okay, great. Thank you for that. I think in Anne’s comments when you talked about the impairments taken this quarter, it was I think mostly on the equity side of things. Could you provide some color on that? Was that a mechanical process or did one or two securities particularly warrant the impairment charge?

Yes, there is a mechanical process that triggers the reviews. That is consistent. We have been doing it that way for quite some time. Half of that came from energy securities. And I don’t have to tell you what went on in the energy markets and oil prices. To hearken back to the earlier comment I made about quality, Exxon is our largest position, Schlumberger is our second largest in the energy world. Those our last men standing in that entire food chain that exists. And in point of fact, and you already see it happening with Schlumberger, I mean, they have the balance sheet to be able to acquire things during a very tough market. So, we make sure that we invest with people that we think make it to the other side, and not only make it to the other side, but are better off by the time you get there. So, we don’t have what I would consider speculative energy positions. Exxon and Schlumberger would account for, I don’t know, 80% or 90% of the total amount we have in energy. So, I will fight with those guys.

Very good. Thank you. And lastly on the Cottrell incremental compensation does that agreement – is that accrual just through the end of this year? Does it carry on into 2016 at all?

No. No, done in 2015.

Very good. Thanks so much.

At this time, we will conclude the question-and-answer session. I would like to turn the conference back over to Tom Gayner for his closing remarks.

Thank you very much. We will chat with you next quarter. Take care.