Earnings Call: Q3 2016

Nov 2, 2016

Quarterly report

Good morning, and welcome to the Martell Corporation Third Quarter 2016 Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask 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 ks 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. Martellcorp.com in the Investor Information section. Please note this event is being recorded. I would now like to turn the conference over to Tom Gaynor, Co Chief Executive Officer. Please go ahead, sir. Thank you. Good morning. This is Tom Gaynor, and it's my pleasure to welcome this morning to our Q3 2015 conference call. I'm pleased to report to you that we made solid economic progress during the ongoing extremely competitive conditions that described the 1st 9 months of 2016. Markel is a diversified enterprise with 3 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 performed better than others. That said, for the 1st 9 months, the aggregate result of comprehensive income of $697,000,000 and book value per share growth of 9% is a result we're proud to share with you. As is always the case at 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 Ann Wilevsky, our Chief Financial Officer Richie Witt, our Co CEO and Mike Crowley, our Vice Chairman. Ann will review the numbers in some detail. Richie will cover all of the insurance underwriting operations, and I will cover investments in Market 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, and good morning, everyone. I'm happy to report that our financial performance through the 1st 3 quarters of 16 continues to be strong across our underwriting, investing and Marketo Ventures operations. While our underwriting results for the quarter were adversely impacted by unfavorable on our medical malpractice and specified medical product line, our year to date results are in line with our expectations. Growth in book value was driven by strong performance in our investment portfolio and Markel Ventures continued to add significant value through organic growth and the inclusion of CapTech in 2016. Now let's talk about our results for the 1st 9 months of 2016. Total operating revenues grew 6% to approximately $4,200,000,000 in 2016 from $3,900,000,000 in 2016. The increase is driven by a roughly 15% increase in revenue from Markel Ventures, which is primarily due to our acquisition of CapTech in the Q4 of 2015 and higher sales volume from 1 of our transportation related businesses. Taking a look at our underwriting results, gross premium volume for the 9 months ended September 30, 2016 increased 3% compared to the same period of 2015. The increase was attributable to the U. S. Insurance segment and reinsurance segment, partially offset by lower gross premium volume in our International Insurance segment. As we discussed in previous calls, the increased volume in the U. S. Insurance segment is due in part to closing our underwriting system 1 week later in 2016 as compared to the same period a year ago. Excluding the impact of this timing difference, we have also seen higher volume in 2016 as compared to 2016 within our personal and general liability lines of business. The increase in the Reinsurance segment was due to new business and 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 movements in foreign currency and Pacific change as well as lower premium volume within our marine and energy and credit and surety products. The 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 1st 9 months of 2016 were $3,200,000,000 up 5% from the prior year due to increases in gross volume 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 9 months ended September 30, 2016 was driven by higher retention within the U. S. Insurance segment and the Reinsurance segment, largely due to changes in mix of business. Earned premiums were flat for the 9 months of 2016 as compared to the same period of 2015. Our consolidated combined ratio for the 9 months ended September 30, 2016 was 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 1st 9 months of 2016, prior year redundancies were $339,000,000 compared to $459,000,000 for the same period a year ago. Redundancies on prior year loss reserves during 2016 net of $71,000,000 or 2 points of adverse development on our medical malpractice and specified medical product line. Additionally, redundancies on prior year loss reserves in the 1st 9 months of 2015 included $36,000,000 or one point of favorable 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 ceding a significant portion of our asbestos environmental exposures to a third party in the Q1 of last year. The 2016 current accident year loss ratio includes $26,000,000 or approximately 1 point on a consolidated combined ratio of underwriting loss related to the Canadian loss hires that occurred in the Q2. 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 U. S. Insurance segment, prior year redundancies for 2016 were $126,000,000 compared to $211,000,000 a year ago. This segment was impacted in 2016 by adverse development on our medical malpractice and specified medical product launch. 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 Q3 of 2016. We've also begun to see increases in claims 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 affected classes. As a reminder, for the 1st 9 months of 2015, the U. S. Insurance segment included $19,000,000 or 1 point of redundancies related to the deep return reserve volatility that I just mentioned. In our International Insurance segment, favorable development on prior year reserves was $111,000,000 down from $178,000,000 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 1st 9 months of 2015 included $17,000,000 of redundancies related to the decrease in reserve volatility. In our Reinsurance segment, we have recognized $90,000,000 of prior year redundancies for the 1st 9 months of 2016 compared to $66,000,000 for the 1st 9 months of 2015. More favorable growth from prior year reserves in 2016 was across various product lines with the most significant year over year improvements we're seeing in our workers' comp and property product line. Now on to the results of Markel Ventures. Revenues from Markel Ventures for the 1st 9 months of 20 16 increased to $906,000,000 compared to $784,000,000 for the comparable period in 2015. The increase in revenues was primarily due to the inclusion of Tap Tech in 20 sixteen results and to higher sales volume from 1 of our transportation related businesses. We also saw increases in Markel Ventures net income to shareholders and EBITDA for the 1st 9 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 CapEx, which were largely offset by the impact of a $10,000,000 contingent consideration adjustment related to CapEx, which was recognized during the Q3 of 2016. Moving into our investment results. Investment income increased 3% from $271,000,000 for the 1st 9 months of 2015 to $279,000,000 this year. Net realized investment gains for the 1st 9 months of 2016 were $66,000,000 compared to a net realized investment loss of $3,000,000 a year ago. Given our long term focus, variability in the timing of realized and unrealized gains and losses is to be expected. Our effective tax rate was 27% for the 1st 9 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 are 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 pretax income. Foreign tax credits of the magnitude recognized in 2015 were not expected in future periods. We reported net income to shareholders of $323,000,000 in the 1st 9 months of 2016 compared to $385,000,000 a year ago. Comprehensive income for the period, as Tom mentioned, was $696,000,000 compared to $98,000,000 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. If I may now make a couple of comments on cash flows and the balance sheet. Net cash provided for operating activities was $324,000,000 for the 1st 9 months of 2016 compared to $550,000,000 for the same period of 2015. Operating cash flows for 2016 included higher claims payments, primarily in the U. S. Insurance segment and higher payments for employee profit sharing and income taxes as compared to the same period of 2015. Our holding company had $2,000,000,000 of invested assets at September 30, 2016 compared to $1,600,000,000 at the end of December 2015. This increase was primarily the result of net proceeds from the issuance of long term debt during the Q2 of 2016 and repayment of an intercompany note during the Q3 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 3 underwriting segments covering the U. S. Insurance, International Insurance and Reinsurance segments. I'll also provide some brief commentary on our Markel CATCo operations. First, let's start with U. S. Insurance segment. Gross written premiums for the segment were up 4% for the quarter and 6% for the 1st 9 months compared to the same period in 2015. For both the quarter and 1st 9 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, mainly excess and umbrella and brokerage contractors business. The combined ratio for the Q3 of 2016 was 101% compared to 90% of the same period a year ago. For the 9 months, the combined ratio was 95% compared to 89% in 2015. The increase in our combined ratio for both periods of 2016 is driven by the adverse development in our medical product lines, as Anne just discussed. The combined ratio for the Q3 of 2016 includes $50,000,000 or 9 points from the segment combined ratio of losses resulting from our actions taken during the Q3 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 $50,000,000 of development in the quarter, dollars 37,000,000 or 7 points was on prior accident years. For the 1st 9 months, prior year's development on medical lines was 71,000,000 dollars or 4 points of the segment combined ratio. In addition to this adverse development, we also experienced lower takedowns in our property lines in both the quarter 9 month results. The current accident year loss ratio increased slightly in the quarter, but it's 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. Parts written premiums for this segment are down 5% for the quarter and 4% for the 1st 9 months due in part to the continued strengthening of the U. S. 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 3rd quarter combined ratio was 91% compared to 87% for the same period a year ago. The combined ratio for the 1st 9 months was 95% compared to 87% in 2015. The increase in the segment combined ratio for both the quarter 9 months was mainly driven by lower prior year redundancies in 2016, most notably in our Marine and Energy and Property lines. As Dan mentioned, the segment also had a onetime benefit in the Q1 of 15 related to the decrease in estimated volatility of our net reserves, which contributed $17,000,000 or 3 points of prior year redundancies last year. Our current accident year loss ratio was up slightly for the quarter due to the 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 ultimate loss ratios on Verus product lines, which is also the driver for a decrease in the current accident year loss ratio in the 1st 9 months of 2016. Expense ratio for the quarter decreased 3 points compared to the Q3 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 first excuse me, for the Q3, gross written premiums for the segment are down $42,000,000 or 18% compared to the Q3 of 2015. For the 1st 9 months, writings are up $44,000,000 or 5% compared to last year. For the quarter, the decline is almost entirely due to the renewal of a large multiyear mortgage deal booked in the Q3 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 for the last couple of quarters, the growth in premium this year is driven by a few large quota 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 Q3 of 'sixteen as compared to 86% for the same period a year ago. Combined ratio for the 9 months was 87% compared to 92% in 2015. Favorable development on prior year's loss reserves in 2016 was $5,000,000 lower in the quarter but $24,000,000 higher for the 9 months. In the quarter, the decrease is primarily due to some adverse development on professional liability lines. For the 9 months, we experienced higher loss reserve takedowns 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 this, I think Anne previously discussed this. In the 1st 9 months, lower attritional losses were partially offset by the impact of the Canadian wildfires that occurred in the Q2 of 2016. The current accident year loss ratio for the Reinsurance segment includes $21,000,000 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 1st 9 months primarily due to higher profit sharing expenses this year as well as the reallocation of expenses between our international and Reinsurance segments that I previously mentioned. A few other things to comment on. There's very little to add from last quarter regarding pricing and competition. All 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 property 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 4th 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, NIAT, Bauden Bauden, 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 CATCo operations. Assets under management increased to $3,600,000,000 at September 2016 from $2,600,000,000 at the end of 'fifteen. Markel continues to invest $200,000,000 in the Markel CATCo funds. Markel CATCo recently reported a 3.5 percent reduction to net asset value related to reserves for the Jubilee TELO Energy loss. You may recall in the Q2 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. And now I'd like to turn it over to Tom. Thank you, Rishi. 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 Ann shared with you a few moments ago. First, I'm pleased with the equity return of 8.1% in the 1st 9 months of the year. This number exceeds the 7.8% return of the S and 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 3 decades of outperformance stands in ongoing contrast to those deadlines 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 $2,100,000,000 from holding onto our successful investments. To extend some simple math, at a 35% corporate tax rate, that means that we have a little over $700,000,000 in the portfolio that we otherwise would not if we realize change more frequently. That $700 ish million times our 8.1% return means that we made almost $60,000,000 of net income during the 1st 9 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 cost, and that approach continues to contribute mightily to the economic returns of market. Secondly, we continue to similarly think for ourselves and act somewhat unintentionally in the world of fixed income. For the 1st 9 months, we earned a return of 5.1% on 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 0 so far in 2016. Our equity holdings moved up from 52% to 53% of our shareholders' 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 1st 9 months of 2016 were fantastic. Operating revenues grew 15% from $784,000,000 to $906,000,000 EBITDA grew 75% from $76,200,000 to $133,800,000 In short, our cyclical businesses enjoyed strong revenues and earnings as the management team did a great job of making hay while the sun shines. Our steady Eddie businesses continue to earn their reputation for steadiness, and it is no small thing to reliably 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 are willing to pay for acquisitions. Our reputation at Markel Ventures continues to grow along with our success, and we are seeing interesting opportunities that we would have 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 learn 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 publicly traded investments. In doing so, we gather information and intelligence across the breadth of Markel. This network based intelligence is more robust than it was in the past, and we continue to work to increase the value we obtained 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 and allowing us to build this company on your behalf, and we now look forward to your questions. Thank you. Thank you, Mr. Gaynor. We will now begin the question and answer session. And your first question this morning will be from Jeff Schmitt of William Blair. Please go ahead. Hi, good morning everyone. Looking at the U. S. 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 of lines. Is that correct? That's correct. Are you seeing any changes on the litigation front that may be driving that? I mean, is there increased litigation or settlement sizes or anything you're seeing there? No. I think it really we 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 things like that? Yes. Sure. Yes. Why don't we talk that for a minute? In the medical lines, I mean, that's an area we've written for decades. And 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 sort of how healthcare is being delivered. The smaller practices, the 2, 3, 4 doctors, they've been forming bigger practices, 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, and that's really what we have been reacting to, particularly in the Q3, trying to make sure we were on top of those trends that are going on in medical. Okay. And then on the competitive environment, you spoke on it a little bit. Are you seeing any change in terms and conditions? I mean, are they eroding here? I think like I said in my comments, things are, I would say, flattish right now. It's a competitive market. Last year and years before that, we 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 feel to we seem like we've hit sort of a, I don't know if it's an equilibrium point, but we've certainly gotten close to it, it feels like. Okay. Thank you. Welcome. Thank you. The next question will come from Mark Dwelle of RBC Capital Markets. Please go ahead. I just want to talk a little bit more. You talked a little bit about the reserve attrition in the medical lines. I guess it's surprising to me here, I mean, having followed for a long time, it doesn't normally take you guys 2 or 3 months at the apple in order to get on top of these. What's been different about this that has made it so difficult to kind of get in front of the trends? Yes, 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 ticked up. And that's, I guess, in some ways, the experience in medical. It tends to move quickly when it moves. So we weren't able to sort of 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 a 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 3 quarters to get here in terms of putting getting the numbers where we hopefully believe are correct. And that's not the way we like to do things. Okay. One further question on that, if I may. You suggested in the comments that you took some underwriting actions, particularly with respect to a couple of points you highlighted. Is that a matter of just raising prices or not raising those lines? Or what maybe just a little more detail about how you've adapted to try to seal off the issue? Yes. It's really both. There's been some problematic parts of the business 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 put those actions in place. So, I mean, while we're still in that business, it has to meet our pricing targets. So, yes, 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've put in the best plan in place that we can. Okay. That's enough on that then. Let me jump over to Tom. I saw you had the, I guess, the high class problem of a contingent payout related to Capitec. 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 might could possibly earn? Or is this the only one that's, also reasonably foreseeable? The CapEx accrual that we've put up for that contingent payment is at its upper limit. So we should not see any additional increases to that in the next quarter. Okay. Correct. Would that be eligible for sorry, I overtook a few. Go ahead. I'm sorry, Grant. Well, I was just saying, would they be eligible for an additional one next year? Yes. Okay. It's definitely a high class problem to have to pay more. And they do have kind of competition structures in place that should they continue to the numbers on the books, they get paid for that, just like everybody else, Mark. We hope. And on the tax rate, the tax rate in the quarter was a little bit elevated. Is that just because there were a little bit higher blend of capital gains this quarter? Or is 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 of 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%. And I guess I was thinking more from that perspective than a year over year? Yes. So I still think, Stephen, in the quarter, it's mix, slightly different outcome, but same sort of rationale. Okay. I guess one other 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. 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, we it's in the queue. We put oh, that's okay. We put $40,000,000 to 100,000,000 dollars net. The problem we have and everyone else is we have very few reports at this point. And if you look at the ranges on the various models, there 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. So 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 4th quarter. Would the losses there be most likely on the U. S. Book or perhaps in the reinsurance book? It's going to be a fairly widespread. The U. S. Market and Florida, in particular, is the biggest buy biggest property market in the world. So our U. S. Insurance business will pick it up. Our reinsurance business will pick it up, both Markel Re and in London. So it will be spread around nicely in our division. Less high class problem. Yes. Thanks for the call. Thank you. The next question will be from David West of Davenport and Company. Please go ahead. Good morning. Good morning, David. It sounded like one area of good news on the redundancy side was workers' comp. Could you talk a little bit more about the 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 last few years. Things have been competitive across the insurance market, but workers' comp has been very done very well. There's always the other side of the coin because workers' comp has 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 pricing in the various states. But you're absolutely right, Dave. It's been a nice place to be for the last several years. And it's switching product lines, but it sounds like similar things on Hagerty and the anti car lines of business? Yes. 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. And Tom, it sounds like as far as your approach to equities, the company is continuing that gradual systematic investment in equities? Are you finding more new names in this market? 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 than had been the case in the past, but it's the steady drip, drip, drip, drip, drip. I'm just trying to wear the opposition down. Okay, very good. All right, thanks so much. Our next question will come from Charles Gold of Scott and Stryfellow. Please go ahead. Thank you and good morning. I had a question one question and one comment. The question was asked about Matthew and Richie, I thought I heard you say $40,000,000 to $100,000,000 net and the Qs talks about $40,000,000 to $100,000,000 before taxes, before taxable income. Sorry, Charles. That's you got to be clear about my language. Net of reinsurance pretax. Okay. Thank you. And then the comment is I can't help but recall quarter after quarter after quarter, all the questioners were ringing 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. So I haven't given up on the underwriting side. I just wanted to make that comment. Neither have we. Thank you, Charles. This quarter, I mean, it provides some lessons. I mean, 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 good 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. That now has given us some problems this year. I think we are 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're specialty products for a reason. The next question will be a follow-up from Jeff Schmitt of 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 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 that now that we have a decade long track record of buying and integrating and successfully partnering with people who run these businesses, work gets out. And the old brush shampoo commercial used to say, they told 2 friends and they told 2 friends and they told 2 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 a stock, buying a bond, buying a Markel Venture business, so we can build up capital. We can look at our own shares. We have a 3 60 degree view of where and how to allocate capital. And let me emphasize the fact that out of style these days and it's the most contrarian thing you can do. When Andy says we have $2,000,000,000 of liquidity at the holding company, there may come a day when that would really come in handy. And 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. Right. Okay. That's great. Thank you. And we do have a question from Mark Hughes of SunTrust. Please go ahead. Yes. Thank you. Good morning. Hey, Mark. Good morning. On the favorable development front, anything that you've seen in the last couple of quarters, this 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 kind of pricing development in the recent past, kind of how things have been emerging? Any reason we should look differently at your prospect in coming periods? Mark, it's Richie. I don't think so. We've obviously talked a lot about medical and we believe we're on top of that. The but just as a backdrop, keep in mind, pricing has been coming off for the last few years. And as a result, that 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. So we all have to remain mindful of that, and we're talking to our underwriters about those sorts of things. But just other than what we saw in medical this year, no, the trends seem pretty consistent. And on the medical, you had, I think, addressed the legal environment more broadly, you said you weren't seeing meaningful changes. When you 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 sent and that spurred more activity or this is something? Yes, 2 things happened. That has always been a high frequency class, the directional 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 that the plaintiff's bar has sort of recognized that as an opportunity. So we've seen some increase in the frequency, but we've seen a decent amount of increase in severity. So a previous person asked, are we seeing that happening 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 health care. One of the things that happened is we saw correctional medicine become a bigger part of our medical book. And we were paying attention to that, but it was a bad time for it to be a bigger part of our medical book. So those were really the two things that happened there. Thanks for the detail. And 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. 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.