Markel Group Inc (MKL) 2003 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Markel Corporation 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. And as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Steve Markel, Vice Chairman of Markel Corporation. Thank you Mr. Markel, you may begin.

Thank you, and welcome to all of you to the Markel conference call. We appreciate your support and your attendance to this call. Before we begin, I would like to call your attention to our Safe Harbor and cautionary statements set forth in our press release in Forms 8-K, 10-Q, and 10-K. Our discussions today could be affected by matters described in those statements, and we encourage you to read those statements carefully. Our program today is to be very similar to what we've done in the past; after a few introductory comments and an overview for the year-end results, Darrell Martin will review the quarter and year-to-date numbers in more detail. Tony Markel will discuss our operations, here in the United States, in London, and talk a little bit about what we see in the future. And finally, Tom Gayner will review our investment activities for the past quarter and year, and give you some insight into our thinking about our investment opportunities that we look forward. I'll wrap things up and moderate the question and answer period.

Overall, the fourth quarter and year 2003 was very good for Markel. In spite of a few disappointments, the overall results were very, very good. Net income in the fourth quarter was $45m, and year-to-date net income amounted to $124m. Our underwriting results do include adverse loss development for prior year losses, and the aggregate of about $180m. There were $90m of charges throughout the year for our underwriting with the investors group which we described in quite a bit of detail in the third quarter, primarily related to the 1997 to 2001 casualty business. We had a $55m charge also in the third quarter for asbestos and environmental reserve. And in the fourth quarter, we had a $35m charge for men operations, both discontinued and also the 97- 2001 casualty year. In spite of these legacy issues. We did enjoy some redundancies in other segments of our business and extremely good underwriting results on virtually all of our current lines of business. The net result was that we report a 99% combined ratio for the year, representing our first annual underwriting profits since acquiring Griffin and Markel International several years ago.

Our access in surplus segments, enjoyed a 90% combined ratio for the year. Our Specialty Admitted segments enjoyed a 90% combined ratio for the year. In Markel international, our London market operations were at 104 not quite were liked them to be, but we are very confident that they are moving in the right direction and will share one day in the underwriting profit margins as the rest of the organizations. Gross premium, gross in the fourth quarter was 11%, 16% for the year very much on track with our expectations. And our investment returns were absolutely marvelous. Overall, our total tax equipment returns on the portfolio were 11% for the year. Our equity returns were 31% for the year. And our fixed income returns were about 4.5%. Like to mention a few balance sheet and cash flow items. Very importantly, our investment portfolio grew by $1b in the year as the year-ended with $5.3b. We enjoyed approximately $630m of operating cash flow. Book value per share increased 19% to $140.38 and the five-year compound growth rate in our book value has been 13%. All numbers, they were very proud of. As we look into the future, at year-end our overall investment portfolio of $5.3b is 3.9 times as large as our equity base of $1.4b. So, we have the financial leverage and the underwriting markets today are very attractive as a result we are very hopeful that we will be able continue to earn very high rates of return on book value per share over a long period of time. With that I would turn it over to Darrell and he will give you more details.

Thank you very much Steve. Good morning. Before I get started, I usually give you heads up in terms of when to expect our 10-Q's, this time it will be our 10-K's and obviously that has to be in the public stance by, the 15th of March we are going to try real hard to beat that. You can be looking for that sometime in the first week or two of March for the full annual report and 10-K. As usual, I'm going to focus on the year and the year-to-date results and beginning with the underwriting operations as Steve mentioned earlier, Our gross premium volume on a consolidated basis was just slightly under $2.6b for the year, up 16% over the prior year. Very much in line with the expectation that I think we have been talking about previously of approximately 15% growth rate was our business plan, we came on -- pretty much right on top of that. Looking-forward to '04, Tony may talk a little bit more about this in his review, but the planning purposes we are looking at a 5-10% growth rate in gross premium going into 2004. On a net basis, we retained approximately 77% of the gross volume that we wrote compared to 73% a year-ago that equates to approximately $2b of net premium written and that increase again is due to the trends we've talked about in previous quarters, both in terms of mixed business, but also in terms of changes in underlying treaties and retentions at various lines of business are maintaining.

On an earned basis, our earned premium was up 20% compared to a year ago to slightly less than $1.9b. The real story for us has always been the profitability of the business and as Steve mentioned, for the year we are reporting a 99% combined ratio, the first time since 1998 or 1999, that we've reported an underwriting profit on a consolidated basis. Likewise embedded in that 99%, we held our expense ratio constant at about 31% this year compared to last year, and the loss ratio improved from 72% a year ago to 68% in the current year 2003, and embedded in both periods, there were some charges, some unusual charges, approximately $44m in the prior year reserve strengthening in 2002 compared to $180m reserve strengthening as Steve mentioned in 2003. In 2003, that's the equivalent of approximately nine points on our loss ratio and combined ratio. So, to generate an underwriting profit it's s obvious that the other core operations and prior year developments on loss reserves have been very, very strong. On the investing side, as Steve mentioned, our portfolio grew to $5.3b, up approximately $1b from the prior year, that growth emanated primarily from cash flow from operations of approximately $630m. We realized or benefited from the change in unrealized gains on that portfolio of approximately $140m. Financing transactions that occurred during the year added roughly $120m, and the balance is comprised of realized gains and foreign exchange gains, et cetera comprised the balance of the $1b. It is interesting to note that our total assets on our balance sheet this year to last year increased from $7.4b to $8.5b in total assets. So, $1b, that $1.1b got added to our investment portfolio which were really income producing assets. So, very very strong growth rate there. Net investment income for the year was $182m compared to $170m a year ago. Again, the increase in the portfolio size was offset by the reduced portfolio yields. So, while investment income is up, it's not keeping pace with the growth in the assets due to the yield side of the equation.

Net realized gains were about $45m for the year, again the realization of gains is highly variable, but that's not an unusual number compared to $50m a year ago. The real story and will talk more about this, is $140m or $141m, change in unrealized gains for the year that is on a net basis. The equity portfolio actually increased approximately $186m, and the bond portfolio is offsetting that gain to the tune is about $45m, so the net increase is $141m. Steve mentioned that the total return on a tax equivalent basis was approximately 11% for the year. The total return on a book basis was just slightly less than 8%, 7.7% for the year. So, extremely strong results and very, very pleased with those. And some of those activities through the P&L side generated net income of $123m or $9.82 a share in core operations or $12.52 on net income for the year. Again, very strong compared to the prior year net income of $7.65. Comprehensive income, however, due to the change primarily in the unrealized gains items that I mentioned added another $10 to net income to generate comprehensive income of - in excess of $22 a share, $22.52. Some of those items drove book value to almost $1.4b, it is $140.38 a share compared to a $117.89 a share a year ago or a 19% increase for the year. Again, very, very strong and very close to achieving our long-term goal of 20% growth in book value per share over the long-term. Steve also mentioned a five-year compound growth rate, was 13%, again back on track to generate the type of returns that we want to generate over the long-term. So, with that I will turn it over to Anthony, and let him add some color to the operational side.

Thanks, Darrell. Overall, I am very pleased with the quarter from an operational perspective. In spite of the fact that we increased reserves in few areas primarily relating to discontinued programs and that resulted in book volume and underwriting profits. It reflects the strength of our position in the market and the continuing positive nature of the marketplace in general. Let me briefly discuss some of the specifics. As you know, in our organization everything begins and ends with underwriting profits, so let us start there. As Darrell indicated, we posted a solid 96% overall combined ratio for the fourth quarter, resulting in a 99% combined for the year. In spite of reserve increases that we are talking in the investor subsidiary and in additional strengthening in all asbestos issues, bulk of which were posted and discussed in significant detail last quarter. Other than the fabulous results in our US operations, probably the only issue worthy of note as it relates to the underwriting side of the house was the creepback to 110% combined ratio for the quarter in London which interrupted a steady progressive improvement quarter-to-quarter over the last couple of years. Although we are not excited about that creep recognized in the fourth quarter, the deterioration was probably posted in the continuing ops column. But the adverse development doesn't shake our confidence in the profitability of the businesses being put on the books in the last two years over there.

Turning to investors, the audit of some 5000 individual casualty environmental claims filed at investors is complete, and is sort of a good news, bad news story. The bad news is that the audit confirmed the problems and inadequacies that we suspected and discussed in detail last quarter. The good news is that the reserve increase that we posted last quarter seems to be holding up under this comprehensive interest packaging. As I alluded to earlier, the market continues to provide a reasonable platform for growth and underwriting profit. Handling all layers with the exception of property and aviation seemed to be holding on to their rating high ground, and even in those two aforementioned lines, rates for the appropriate risk selection appear to be adequate, although you can be rest assured they were monitoring the situation on a daily basis and will not follow anything below that which we feel is appropriate and adequate to produce that type of returns we are looking for. As predicted, our gross volume increased 16% for the year, the 11% increase in the fourth quarter reflects the continuation of the positive marketplace and least of the 2004 projection of 5% to 10% growth barring any unusual circumstances.

The slow down in sort of the rate increase is albeit still gratifying, give us the opportunity candidly to stand back and concentrate on some organic sales and marketing issues, the tackling and recognition of some synergies between our US and London operations, all of which we think will lead to very gratifying growth down the road in our long-term in terms of answering the slowdown and sort of the artificiality of some of the rate increases that we've enjoyed in the last couple or three years. Beyond the numbers, the fourth quarter has been relatively unidentical with the exception of a couple of noteworthy items. Paul Springman and A from Shane continue to oversee the investors operation and its claims to corporate respectively until we can find the right individuals to put in there. Our recruiting efforts have been intense and progress has been made. Given their personal commitment and the sacrifice that they are making, we have the luxury of not being forced into compromising premature decision. Gary Albanese and Richie Reid have totally settled into their positions in London with universal acceptance and enthusiasm from our entire international staff. And last but not least, we announced earlier this week, John Latham who rejoined us about a year-and-a-half ago, has agreed to accept the all-important position of Senior VP at Markel Corporation responsible as Chief Information Officer for all of our IT operations worldwide. This is an area that is critical to our future success and John brings a unique capability of business and IT experience to the equation. So, in summary, in spite of a couple of unexpected hiccups, 2003 was an excellent year and the prospect for 2004 is equally gratifying. With that let me turn it over to Tom and needless to say when we get to the Q&A, I will be more than happy to answer the questions that you might have.

Thank you, Tony. Good morning. As Tony said Markel begins and ends with underwriting. Fortunately, we have invested here in the middle and we've got some pretty good news to report and share with you this morning. As Steve mentioned on the equity side, the total return to portfolio was 31% and on the fixed income side was 4.5%. In the equity portfolio, we had a steady increase in allocation during the year as we put cash flow to good use. The equity percentage increased from 13% to 18% over the course of the year from both additional net purchases of roughly $240m and an increase in unrealized depreciation of about $186m. Some points I would like to make. The $186m of unrealized depreciation is tax deferred. Our portfolio turnover rate in 2003 was about 5%. Overtime, the lower the turnover, the less the economic difference between our pretax and after-tax returns. I think this is hugely important and relative with unique feature at Markel. Additional benefits from our approach are low transaction costs, both exports and implicit, also fewer decision errors. Good things compound overtime and bad things become mathematically insignificant. The total investment management cost of our operation fully allocated is a single digit basis point number. We have a lower cost and an index going and we do try and think about and positively decide what we own.

Focused thinking, I think produces, but that's long-term results because it allows you to knock it, to strike it by short-term market fluctuations. All of these things combined to give us a meaningful edge overtime. For the one-year return, we were at 31% versus the S&P of 28.4%. More importantly, when you start to look at it over a ten-year period of time, our return has been 14.1% versus an S&P of 10.6%. I think we have demonstrated long-term records of adding value in our equity investment activity, both in the returns we earn and our asset allocation decision which emphasize equities in the early to mid-90's, pull back a bit in the late-90's and increase again starting in 2000 and going through today. On the fixed income side of the house, I have a very high quality portfolio. It's greater than 90% of it being investment grade. We are relatively balanced between units, governments and the corporate sectors. We have a short duration of approximately four yeas, that's between our normal four and five-year range to protect the balance sheet against rising interest rates. The seem on the fixed income side of the house, put a word to it, . Not doing anything exotic, we are defensive. We are able and willing to seek and take advantage of opportunities that usually develop periodically. We are reasonably well prepared for rising rate environment with a short duration and high credit quality. We've got dry powder, which will allow us the flexibility to move in whatever direction we chose. With that, let met turn it over to Steve.

Thank you. I'd like to wrap things up sort of going back to basics a little bit. As all of you know Markel's model for profit is focused on consisting under-writing profits with superior investment returns to deal shareholder value over the long-term. Our goal is to compound book value per share at a 20% rate, and we are in this for the long-term, and with that's all I'd like to share with you our results over the past ten years. Back in 1993, Markel's total revenues were approximately $230m. The year just ended has increased at a compound annual growth rate of 24% to slightly over $2b. As you know, we are not really focused on revenue growth but under-writing profit and in the year just ended, we are pleased to return the under-writing profitability. In the investment component of the business, our portfolio back in 1993 was just over $600m, and the year just ended, it's $5.3b. By the way that amounts to $543 per share of Markel's stock and the ten-year annual compound growth rate again is 24%.

Net income has gone from $23m to $124m, an 18% compound annual growth rate, and most importantly we compounded book value per share from $27.83 back in 1993 to $140.38 the year just ended. Ten-year compound annual growth rate of about 18%. And as we mentioned over the last five years, we compounded book value at 13% rate. We are real pleased with these results and we also and more importantly have a high degree of confidence that over the next 5, 10, and 15 years will be able to deliver very similar results. 2003 was a good year. With the current under-writing results and investment returns it could have been really great year, and we are looking for 2004 and years beyond to be really great years, and with that I'd like to open the floor to questions.

Certainly. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you would like to post a question, please press star one on your telephone keypad at this time. A confirmation tone will indicate your line has been placed in the question queue, and you may press star two if you would like to remove your question from the queue. Participants using speaker equipment, it maybe necessary to pick up your handset before pressing the star keys. Thank you. Our first question for today will be coming from Matt Heimermann of Goldman Sachs.

Hi, good morning everybody. I had three questions, and why don't I just ask them one at a time. But the first question I had was, what's really happening, and this is probably for Tony, in terms of the supply demand picture particularly in the US E&S business, but as well as in London? And are you seeing new capacities ready to change their attractiveness of the business in terms of underwriting margins or impacting the growth prospects at all?

No Matt, I think it is still very very positive. The only thing that seems to -- have been just eroded in my estimation -- it is eluded to early of the property in aviation sectors, But, if you take the underlying marketplace in the US, it is still in a state of flux, most recently the Traveler/St. Paul merger creates an additional platform to change and the demand on the E&S side, we don't see slowing down at all. Rate increases have moderated, which obviously they justify and we should once you achieve certain levels, but our people are on submission activity as every bid is strong, as it has been. There is no region, I mean there has been a couple of entries into the E&S side from the Bermuda marketplace with new capital seeking additional platforms for growth, but even those have not necessarily negatively impacted the activity and we view the E&S specialty marketplace in terms of opportunity as every bid is strong going into '04 as it has been in the last couple of years. In London, the same thing is basically true, obviously it has its niches, but the changes in the marine sector and continued strong results in the professional and sector gives us the same type of confidence that we got over there. It just continues to be a very gratifying environment and I would say that, perhaps 10% we projected borrowing and even in the same circumstances in terms of growth is indicative of that continued confidence, because we don't think there is going to be a hell a lot of artificiality in terms of rates this year, it is going to be more continued opportunity and organic type growth.

Okay, that's fair. It is fair to kind of thing about that five to ten is purely organic and also in the context of given that your investment and operating leverages now are roughly four to one and a little bit better than one to one I think. The 20% compounding model works as long as you can protect the margins?

Yes.

Okay. And then just a numbers question, can you quantify any of the favorable reserve development for both the fourth quarter and the year?

The details of that, Matt, will be in the 10-K that will be out shortly, but the adverse development that we highlighted amounts to about $180m and the favorable development was about a third of that.

Okay. Was that spread throughout the year or mostly fourth quarter?

No, it was spread throughout.

Okay, perfect. Thank you guys.

Thank you. Next question will come from David Lewis of SunTrust Robinson Humphrey.

Thank you. Just a follow-up on one last question to make sure I understand it, 5% to 10% assumes basically flat pricing or are you assuming some consolidated price improvement in that?

I think some modest price improvement.

What would you think, low single-digits?

That's as good as any.

And can you give us any guidance on what you're now anticipating assuming no major reserve developments both in the domestic and international operations from a loss ratio perspective?

You know, similar to that current run rates, we expect it to make a lot of underwriting profit in '04.

So, if we look at a full year, we use domestically an 85% loss ratio, is that unrealistic?

I have a hard time putting an eight on the first digit, but certainly it's possible. And I think low 90s over the long term is an appropriate kind of number for our financial business too, but in the short run it could be better.

And as we look at the London business, what would you anticipate on loss ratio there, do we get into, you know, kind of mid to upper 90s for 2004?

Well, that's clearly -- our goal is to have the same kind of results there too. We just -- until we put the numbers on the book, I hate to stop bragging about them.

And finally, on the London business, you took $35m hit in the fourth quarter, what kind of confidence level would you have based on the current trends that you're adequately reserved and we won't continue to have that as we move forward quarter-to-quarter through 2004?

We continue to believe our reserves are more likely redundant and efficient, and we feel better about them because the list of problems continues to get smaller and smaller and smaller, but I sure would like to have two to three years worth of redundancies to talk about, but I have a higher degree of confidence. We are doing the best we can. I think we've got our hands around it, but -- coming off of an adverse quarter, it's hard to forecast.

I understand. Just a numbers questions. Do you know what the 3115 book value is as of year-end and statutory capital for both domestic and international ops?

For those, we'll have to wait for the queue.

Okay. Thanks very much.

Thank you. Our next question will come from Blair Sanford of Burlingame Asset Management.

Hi everybody. Two questions. I've got one on retention ratio. I believe, Darrell, you might have said that it was 77% retained for the year?

Correct.

I don't like that. Do you expect that to change going forward?

We are always trying to retain more of the business that we write with gross line underwrite and obviously we would like keep as much as that we can. As we grow larger, our appetite increases for risk retentions. So, I would expect that will go up overtime and solely increase overtime.

Okay. Then, sort of a -- then a general question. There is a question on effect capital, I want to get the numbers for a while, but what kind of room do you sort of have in your mind from a premium to surplus level in terms of being able to write more premium with current capital levels?

Our capital, I think with forecast, it's 5% to 10% growth rate. We are clearly earning it faster than we are using it in the underwriting side of the business today.

I got it.

I think that will continue until, you know, unless we see some unique growth opportunities, the development opportunities, we are clearly, you know, also out there looking for new synergies and new opportunities and you know, ways to expand insurance business and you know, we expect that will happen overtime, but right now, the 5% to 10% sort of growth rate we see in the market is you know, less than what we expect the capital that deep we are going at .

Okay. Fair enough. Last question is on a little bit more detail on the adverse development for the fourth quarter. Was there any favorable development in there that would kind of gross up the adverse development numbers. You know, net $35m in adverse development , but was there any favorable in any other lines, besides the 97 2001 casualty?

Steve, I am not sure I am following your question exact with layer, but the $35m that we have is all adverse development. Throughout the year, we have had favorable developments, primarily in the US spread across the four quarters.

Okay. Was there any significant favorable development in Q4?

Again, the trouble now is, it is spread pretty evenly across the four quarters.

Okay. All right. Fair enough. Thank you very much.

Thank you. Your next question will come from JF of Credit Suisse First Boston.

Thanks. Just two questions. First, could you get back to your comment about the impact of the Symptom and merger on market. You referred to it as a platform for change, but how do you think you it's going to play out?

You know, it's unknowable at this point in time, but I think anytime too large organizations consolidate, there is going to be a certain amount of change in disruption and you know, new attitudes towards the business and I think that's the type of environment that it just creates opportunities for specialty product lines.

Yeah. I mean that's simply, we don't know anything. That's certainly just going to emanate this opportunities for us specifically out of that merger, but in general, when you get two organizations that are groping for the type of returns they are groping for, one and one is likely to end up being less than two and the remainder will end up moving over that market into the specialty marketplace and that I just used as an example of sort of a continuing turmoil and resulting opportunity particularly in the US side.

It's interesting. Now, I'd like to refer to your press release. You mentioned that you could perform your annual goodwill impairment test. Can you remind us what this test is and to what extent we can feel comfortable throughout 2004 that goodwill should be holding out and if you could highlight some of the risk factors, it would be helpful?

Well, the goodwill impairment test is essentially a discount of cash flow process that we go through. There's a number of variables that go into that as you would expect, the underwriting profitability of the business, the anticipated returns on your investable assets, et cetera. And we look at that every year in the fourth quarter and again, we saw no indication of impairment of carrying value of goodwill. So, I would expect, given the marketplace, given the conditions, given our expectations for '04 and beyond, I don't see that being an issue going forward either. We will have to do that test every single year.

I think from a big picture perspective, the majority of the goodwill would be subject to potential impairment, and I don't think it's likely to happen. It's related to the Markel international acquisition, and fundamentally I think if we earn underwriting profits and see a growing investment portfolio, it's safe to assume that the business is growing in value, not diminishing in value. At year-end, the investment portfolio is approximately $2b coming from international operation and is growing from somewhere around $1.4b, $1.5b, when we acquired the company a couple of years ago. We believe the current business is right at an underwriting profit and certainly expect to see through, to generate underwriting profits and the combination of those two items, will clearly make Markel International an extremely valuable asset in ongoing business for the overall organization.

Thank you.

Thank you. Our next question is coming from Elizabeth Malone of Advest, Inc.

Okay, thank you. Good morning. A couple of questions. What do you think, now that you've kind of gotten into better under-writing results overall, about additional merger and acquisition opportunities especially in the North American market, where the fundamental seemed to be strong?

Nothing Beth, to report on at this point in time. The market continue to be strong and we are growing and seeing -- making lots of underwriting margins, and our eyes and ears are always open, but I think in the near term, we'll continue to just enjoy the intrinsic

growth that the business is giving us, we will look for new opportunities in terms of product and programs and people. But I don't see, in the immediate future, growth from acquisition. I think, undoubtedly, we will next 10 or 15 years experience another cycle where prices are heading south and people are having problems and that is an environment that's more likely acquisition opportunities. But at least in the short term, I think we are pretty comfortable with the pieces we have in place right now.

Okay. On the reserving that you took in the international operation that seems to be a little different than some of the other things you have taken usually it's primarily than in the discontinued business, where we kind of knew that that business had deteriorated and that's why you have discontinued, but this is also in your London operation, could you go in a little bit more detail with this -- does it looks like recent business that is written that wasn't priced appropriately for what turned out to be the risk or maybe explain a little bit more about how those reserves had to be adjusted?

It is gray and a little complicated. The entire reserve increase in the fourth quarter related to Markel International is related to old business and in many respects, a business that we would consider to be legacy business. Now having said that, what we try to do when we defined discontinued lines was to identify very specific programs that we've totally withdrawn from or litigation or issues that's clearly do not relate to the current business units that are on the ground and in place. So, when we have a legacy issue come up, if it has come from a business that's, you know, an underwriting department, if you will, that's still operating, because it is still operating in there, they are doing things today although somewhat different than in the past, we would not want to -- for all the bad news in discontinued and pretend like there was nothing happened with the current business units. An example, as we continued to have a reinsurance division in Markel International, but for the most part withdrawn from reinsuring US casualty business. Part of the adverse development was related to some reinsurance of US casualty business and again it is a line we are not actively involved in a meaningful way, I mean, we still have a few accounts on the books, but it is part of a continuing business rather than called that discontinued, we refer to that in the continuing.

I underscore that, I think, Beth, the best way make is relation of that in terms of characterizing where it came from is a fact that none of these increases have given us cause or concern or relative to our existing pricing and focus over there. So, as Steve said, we drew a line and some things fell on the discontinued side and some things go on the continuing side and we have remained true to that definition when lot of these increases are clearly not things that impact what we are currently doing or want to be considered concerning as it relates to our current rating structure or selection process over there.

Okay, one more question on that. Interestingly when you all went into London, one of the things that have with the target was to get the reserve to allow all that little more comparable to the level of reserving that you would like to establish in the US, which has proven to be redundant historically. Are you now in London, had that level that you had and wanting to attain in terms of equivalent to North America in terms of the conservatism?

Beth, I think it's fair to say that's still a working process. But in large part because we continue to have issues that we haven't put that in London. But I think it continues to be a goal and it continues to be something that we expect to achieve. And in the aggregate I think it's important to point out we think the overall confidence in the overall Markel Corporation reserves are very strong and also consistently strong over the long period of time.

Okay. And then one other final question on investments, Tom, could you give us a sense of the interest rates apparently or there is an expectation in interest rates raising higher in 2004 from the current levels they are, what kind of sensitivity do you see that having on your investment income generation or factors like that?

Well, clearly -- keeping the duration of the short end of what we would almost ever have because if we were to move the duration shorter than that would be in the business that's speculating on interest rate and that's not what we are doing. We are continuing to try to match off the duration liabilities versus the duration of the asset. It's a mix bag and it integrates throughout, you do have cash flow while on the one hand, we have a deterioration in the mark-to-market somewhat basis, on the other hand you put new money to work at higher rates. The only thing I know how to do in response to rising rate environment is to make sure we don't lose any money because we are in bad credit and we keep the duration short because that that gives as much drive power to navigate wherever where we want to find ourselves in as the year goes by.

Okay thanks.

Thank you. Our next question will come from David West of Davenport & Company.

Good morning. Wondered if we could talk a little bit about your thoughts for the tax rate for 2004, since you stand optimistic that the international average should get more profitable with that average tendency to lower your tax rate next year?

Yes, I think at the current year we are at 33 and I think that probably for '04 I don't see that shifting dramatically, might float up a point or so, but not a dramatic change.

You think the rate could drift upwards?

Potentially.

Okay. I would think that you got more profitable in the international operation that would allow you to do some of the recapture or some of your carry forwards?

That's correct.

Okay. Just also kind of somewhat related question on cash flows, what would be your outlook for potentially paying down the debt, would you just prefer the cash flow going into -- earlier at this point and keep your debt structure pretty constant?

Our debt reduction is in the for 2004 David.

Okay. Any degree you want to mention as this possible magnitude or that kind of change?

At this point, I don't think we have a specific target and I guess important light related to what other things are going on. I think over the long term an important issue that we do believe in and that is we would like to see continued improvement and significant improvement in the rating agency's assessment of our credit rating and I think well reducing the debt is obviously one component of that and the improved results in the current year of 2003 and also going into 2004 will obviously be another positive factor.

Merely the passage of time was probably the biggest single issue in having consistent underwriting results, but we'd like to see much higher credit ratings and because of the cash flow we likely would be reducing the debt.

Very good. I know in the other segment most of your current writings mostly relate to . Given the magnitude of underwriting losses there, could you comment a little bit about results and prospects?

The results are good. It's modest, but the results are good. The international reinsurance markets are very favorable and have been for a couple of years, and so while they are included in that category, they are profitable in making money and I expect that will continue in their markets. The international reinsurance markets continue to be pretty good right now. Although cyclical, I think 2004 is also looking like a pretty good year for them.

I would take it there is no major plans in terms of any possible disposition in that unit on the immediate horizon?

Yes, certainly nothing to report today.

Okay, very good. And then lastly, sequentially on the net investment income, that declined a little bit on a sequential basis, was that just a function of interest rates on what was maturing out of the fixed income portfolio?

Yes.

Okay, very good. Thanks so much.

Thank you. Our next question will come from David Grandmeier of World Capital Management.

Good morning. A follow-up on the retention ratio. I was wondering if you could break that up by segment?

That will be in the 10-K, I think. You probably would get that in the 10-K.

And then also with reinsurance, is there any additions to your allowance for unrecoverable reinsurance?

We, as you probably know, look at reinsurance recoverables every single quarter by every reinsured by all our business units individually and then the aggregate, and every quarter we do make adjustments to get the valuation allowance on those accounts, and I don't think there was anything unusual that occurred in the fourth quarter compared to the third quarter there.

Okay. Thank you.

Thank you. Our next question will come from Stephan Petersen of Cochran, Caronia.

Good afternoon. Most of my questions have been answered. A real quick question in terms of the marketplace, what are the brokers telling you about new opportunities and new competition entering the market? In particular, how active have you seen some of the new Bermuda money being in the domestic ENS market, obviously with 82% combined ratios in your ENS unit? I worry a bit that competition will be heating up, not necessarily from maybe some of your established competition but from some new players?

Well, Steven, I think I can characterize the marketplace as still pretty gratifying and buoyant. You know, clearly some of the Bermuda players that I mentioned earlier have started direct writing or insurance writing companies and taking a presence in the ENS specialty marketplace, but for the most part, their appetite lies in the large risk. And if you look at our book of business, most of our business and most of our thrust has always been sort of a moderate intermediate stuff that's really under the radar screen of some of the big boys. So, even if they get particularly active, I think that their presence will somewhat be deflected and, as I alluded to earlier, the market is not related to opportunities. The opportunities moving over to the specialty ENS side continue to move up exponentially and there is no lack of opportunities, either admitted or non-admitted, and we just don't see a lot of entry in the marketplace being particularly concerned.

Following up on Tony's comment I think it's important to remember that the most important capital to write the small E&S business where we're focused is not the money kind of capital, but the people kind of capital, and human capital is what distinguishes us from others in the ability to provide to great service and understanding the risk and dealing with it and you can't do that from Bermuda with a handful of people. You need trained sources that are closer to the clients and local talent. And so, you can't throw enough money in Bermuda to do that.

Okay terrific, thank you very much.

Thank you, our next question will come from John Keefe, of Ferris, Baker Watts.

Hi guys, good morning. Pardon me if you've already addressed this but can you give us an update on the new Markel reoperations on new operation?

Yes John, off to a very gratifying start and if you remember, it's really broken down into three categories. There is a old book of relatively small innocuous umbrella in excess that we moved over to John and they had nice growth and what looks like extremely good profitability in '03, obviously it's a long tale book. So, we'll reserve judgment but that was gratifying. We started a casualty back operation that frankly took a little bit longer to get off the ground because of approvals and some of the seeding companies and that type of thing. It's headed up by a couple of really experienced guys and we're starting to get some head of steam there and then most noteworthy and the last addition to the Markel reoperation was the entry into the alternative risk side or would be high, I mean an experienced individual to give us a presence there and that really has -- we've written about four large accounts since the entry of that into the equation and they continue to get opportunities well beyond their expectation. So, it really is an exciting prospect. We are not pushing him for a dramatic road. We want to make sure what we do is solid, clearly and I didn't mention this, with John movement over to the IP side, which we really think is a great deployment of resources. We will be looking for a new leadership at Markel Re, the business is controlled by solid business unit managers in all three of the subsidiary operations of Markel Re and John will be there to shepherd it in the transition. So, we think it's a -- we're really meeting our expectations and a tremendous thing for the future although we don't have a major growth projected for '04, just wanting to be as conservative as we can.

Okay, thanks for the update Tony.

Once again ladies and gentlemen, to raise or pose a question to the speakers, please press star one at this time. Our next question will come from Steven Webb of Randy and McAllen.

Couple of questions, one, forgive me if you already gave this, what was the total aggregate after-tax returns on the investment portfolio for the entire year?

11% -- 10.5%.

Okay, what would be the after-tax?

Probably, the tax factor is statutory rate, I will ask him to do that.

And final question is, at what point do you think we will have seen or maybe we just saw, at what point do you think that the embedded yields on your investment portfolio only repays most of the -- the yield on the investment portfolio, at what point do you think will stop seeing a decline? When will new money yield and cash flow and so forth yield and aggregate improvement in your investment yield, so to speak?

Yes, I wouldn't even have a guess of when that would take place. It is a function of the cash coming in the door and the new money rates?

As Tom mentioned one of those things that we were allocating awful lot of cash to the equity portfolio, and the yields on those are obvious less, I mean it is a lot of dynamics going on.

Okay, but -- I guess I was just saying, assuming that interest rates in the market place were to stay where they are which might be a bad assumption, at what point does your embedded yield match the current yield available.

I have never been wanting to make that assumption, so I have never done the math.

Okay, all right thank you very much.

Thank you. Our next question will come from Charles Gold of Scott & Stringfellow.

Steve, I assume when you are answering, David -- I think it was David Lewis' question, I think his loss ratio that you were answering combined ratio?

That's possibly true.

Okay, and my question is for Tony. I hate to ask a question when I don't already know the answer, but --?

That's better than asking a question that I don't know.

Well, this is going to be easy because you get to make up an answer.

It's okay.

The London operation, starting January 1, 2004, do you view as operating in a 110, 104 or a 100? Where do you think our base is going into '04?

If you focus on -- I alluded to maybe not as specifically as I should earlier, if you look at the '02, '03 business that we put on, we feel highly confident in the profitability of that. Not just breakeven, and obviously, Steve has addressed the reserves over there, and Steve and Darrel have addressed the reserves, but I am very, very bullish about our risk selection and pricing in London, particularly since in '02, '03 and moving into '04 in that environment. So, candidly I am going to be also disappointed if we don't post profitable months.

So, barring a surprise, you wouldn't be surprised if the first quarter had a 9 in front of it for a combined ratio for London?

I guess very true.

Thank you.

Thank you. Our next question will come from Beth Malone of Advest.

Hi, this is a follow-up. Anthony, could you take a minute and generally you are going to update us on where is in the London market and I would like to hear where you think that all stands right now in, how it will affect your London market?

Beth I'm not sure I heard the full -

Just, what we think about Aquatos?

Yeah, could you just update us on what's going on in the London market and in Aquatos at this point in time and how that may affect your London business?

Yeah, you know this, not of whole lot of new news around Aquatos. Their results I think for the six months period were released a few months ago, when they had obviously speculated that this could be further asbestos deterioration. But I think when Aquatos was formed back in early 90s, the legal liabilities were very well segregated from the current London operation and I think, at least my understanding is that the vast majority of Aquatos liability were due to US asbestos climate and I guess, my sense is that Aquatos has already paid more than it's fair share to those folks. They probably have another $5b or $10b left within the bank and undoubtedly that will be spent on future asbestos climates, but my guess is, when the money is gone, the money is gone and we need a different solution to, the terrible situation is going on in terms of a lottery to try to grab asbestos claims money and maybe Congress will deal that. But I don't see it having much impact on in the future, one way or the other. I think, and that time and distance has gone by and I find this, it's unlikely that uninjured asbestos climates are going to be a very sympathetic pool of people who are trying to collect any further money.

Beth, I might just elaborate beyond Aquatos, which obviously ring test the liabilities in the early 90s and prior, we are talking about the current marketplace, I mean, clearly I won't say that I'm seeing some astonishing things continue to happen over there, some incredulous things, but I think they are fewer than they used to be. The environment is I think a lot more well grounded, corporate capital continues to increase as a percentage of what's going on with the obvious outgrowth of that being demands or returns or I think there's pressure with all those underwriters over there, they've never experienced before, I don't remember the number, but I think corporate capital is in the mid-80s now as a percentage of the total capacity. So that's providing a solid platform and as I've been pretty vocal about. I've been real gratified with some of the controls and discipline that this franchise performance group has started in terms of process and overseeing what's happening at the syndicate level. So we think the environment is pretty solid over there and moving in the right direction in a lot of areas. So I'm bullish about it.

Okay, thank you.

Thank you, and our follow-up question for today will be a follow-up from JF Chamberlain of Credit Suisse First Boston.

Hi, Tom I was wondering if you could comment on your outlook for the equity market in 2004? And you are to current levels?

Yes, I don't really have much of a top down outlook for the equity market in this year, not ever. We pick stocks one at a time on the bottom updated and that depends on whether I could find things to do or not, and I still can't find things to do, last year we put in 240m bucks in equity purchases, this year I would say that at the moment the number will probably be a little bit less than that, but not dramatically so. And that's contingent on ideas and finalizing one at a time that work for them to the equity portfolio.

Thank you.

I appreciate everybody's participation today. We wish you to have a great day, and look forward to seeing you in the future. Thank you very much.

Ladies and gentlemen, thank you very much for your participation in today's teleconference. This just concludes the conference of the day. You may now disconnect your lines at this time and have a wonderful day. Thank you.