California where some folks are still looking at some of the tort reform that’s been in place there. The question is out as to whether or not that tort reform will hold over the long term given some of the activity in California workers compensation and the certain plaintiff’s bars getting involved and finding some of the loopholes there to get around some of the benefits of tort reform.
So in terms of what these folks have said I would agree with everything that’s been said thus far. Pricing in the marketplace is going to continue to come under pressure. I think at the end of the day all of us would probably agree that capital has to be taken out of the market for this market to behave differently. That’s the way the cycles have been forever. We have to experience the pain in order to take corrective actions. Unfortunately I don’t think anyone is experiencing the pain yet. The question is whether or not the fourth quarter or maybe through the first quarter of ’09, whether or not any issues regarding further financial fallout and its effects on insurance companies’ balance sheets, whether or not that’s going to have an effect on pricing. Because now it takes capital out of the market which includes Bermuda players as well.
Financial Stability
McDONALD: Let’s stick with Dan to start the next question, which is the topic of financial stability. I’ve heard the phrase – if I hear it again we’re all going to have to get a tattoo – but it’s ‘perfect storm.’ You’ve got the credit crisis, now the stock market meltdown and of course very heavy catastrophe year. So what do you see for the coming year in terms of financial stability of the industry and particularly players in the specialized market? Are we going to see some possible end to this five-year streak of so far defying mortality?

RYAN: That’s quite possible. Right now the health of the industry in general is very strong, even with some of the takeout with respect to the capital losses, unrealized in the investment market. But they’re still very helpful. Liquidity is an issue for many companies. Liquidity because no one, banks included, banks in particular I should say, are lending money these days. So the capital markets are frozen. So companies that are looking or are interested in raising additional capital, we haven’t seen a whole lot of activity recently. In fact folks that have share repurchase programs have actually shut those doors down over the interim, simply taking a wait and see approach.
So certainly the perfect storm with the catastrophe. Catastrophes are always one of the main culprits for failure in the industry. So the perfect storm could be a catastrophe and further deterioration in the financial markets. We also have the fair market value of securities that insurance companies hold on their balance sheets that could be affected, depending on conclusions at the NAIC who have been looking at this over the course of the year to determine how they want to handle any OTTI impairments at the insurance company level on a statutory basis.
This market, this industry is probably even more fluid than it’s been in the past. That’s another thing that could lead to some questionable financial security. So again it’s more of a wait and see. But I think there will be a lot more clarity at some point during the first quarter of ’09, year-end ’08.
McDONALD: Tony, what’s your take on financial stability? That’s always a prime concern with producers. Do you see what’s going on now having an impact?

MARKEL: Clearly. I still think that our sector of the market relating to, in contrast to standard carriers and so forth, in general has balance sheets, much more conservative management. So the point that Dan raised earlier about the relative strength of these specialty surplus lines market, I still think is very much intact. But overall the P&C industry I think there will be some real financial stress. The combined ratios that are being posted right now frankly I don’t know whether Dan would agree with me, I think have more to do with the reduction of reserve cushions and redundancies from the earlier part of this decade than they do anything to be proud of in terms of their current price levels.
That coupled with the investment portfolios and the damage that’s been done there, I think clearly we’re going to see some financial stress I would think as I said earlier. Although I would reiterate that I think our sector will shine again in relative comparison.
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