Markel Group Inc (MKL) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Markel Corporation's earnings conference call. (OPERATOR INSTRUCTIONS). 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 all of you to the Markel Corporation first-quarter conference call. Before we begin, I would like to call your attention to our Safe Harbor and cautionary statement set forth in our press release in Forms 8-K, 10-Q and 10-K. Our discussion today could be affected by the matters described in those statements, and we encourage you to read those statements carefully.

We are going to follow today our normal protocols where I will make a few introductory remarks. Darrell Martin, our Chief Financial Officer, will review the financial results of the quarter. Tony Markel will review some operating issues and talk about what is happening in the insurance marketplace. Tom Gayner will review the investment activities in the quarter, and I will wrap it up with a few concluding comments prior to moderating the question-and-answering session.

The headlines for today's quarter I think are quite exciting. We had a 96 percent combined ratio for the quarter. We had absolutely great investment performance. Comprehensive income for the quarter was $94 million, which increased book value to $1,474,000,000. That is $149.70 per share, an increase of 6.6 percent for the quarter.

Unfortunately it is not all good news. We continue to have losses resulting from some London Legacy issues, and we will review all of these throughout the conference call.

With that, I would like to turn the program over to Darrell Martin.

Thank you, Steve. Good morning. Before I get started, let me mention that our 10-Q will be available next Wednesday, May the 5th, and obviously it will contain a detailed discussion and analysis of the quarterly results.

As usual, I am going to break my commentary down between the underwriting activities and the investing activities. Tony Markel and Tom Gayner will probably add some color to those comments in their commentary.

But first on the underwriting side. Gross premium written in the first quarter was just under $665 million, a 3 percent increase over the prior year and slightly behind our expected 5 to 10 percent gross premium growth for the year. The 3 percent increase was comprised of volume reductions in some of our product lines, property, products, some of the investor brokerage E&S business that we intentionally reunderwrote as a result of 2003 adverse development. Those reductions were more than offset by increases in casualty books of business and new programs that we have in place. So gross premium did increase 3 percent.

On a net written basis, we retained approximately $539 million worth of that business or 81 percent was our retention ratio in the first quarter compared to a 74 percent retention ratio a year ago. Most of that improvement is due to the mix of business embedded in the books. There are some treaty changes, but primarily it is a reduction of the mix of business, property for example, that we do have higher seating portions. On as that book of business is reduced, it blends up on the balance of the books. So very much in line with our expectations at 81 percent.

Earned premiums were slightly over $505 million, a 17 percent increase over the prior year, and as usual the real story in our view is the profitability of the business. Our combined ratio this quarter was 96 percent compared to 96 percent a year ago. Included in the 96 percent for 2004, as Steve mentioned, are six points related to charges -- a $30 million charge in our London operation -- due to the Legacy issues. In the London market segment, its 119 percent reported combined ratio also includes 19 percent related to that $30 million charge.

So they were very much on target with the ongoing book of business over there, so we are real pleased with that. But we did have to take a charge in the quarter as Steve mentioned.

On the investing side, our investment portfolio grew to $5.5 billion, up approximately 140 million from year-end. The growth comprised of two major factors. One is cash flow of about $55 million, and then the change in unrealized value of our portfolio increased $81 million in the quarter, a very strong performance. I am sure Tom will talk more about that in a moment.

Net investment income increased to 48.7 million in the quarter compared to 45 million a year ago. The same story that we have talked about during 2003 is the larger portfolio is being offset, the earnings power of that is being offset by lower yields, and that continues into the first quarter.

Realized gains were 7.4 million in the current quarter compared to 6.5 a year ago. Primarily those gains were generated by bond transactions in the current quarter. And as I mentioned, the change in unrealized gains in the quarter was almost $82 million, $81.6 million, spread pretty equally between the bond and equity portfolio. So our total return for the quarter on an annualized basis was 10 percent in the current quarter. Very very strong investment results, and I am very very pleased with that.

Net income for the quarter was 42.3 million. Core operations, core earnings per share was $3.80 a share compared to $3.44 a share a year ago. Realized gains added 49 cents for a total net income of $4.29 a share in the current quarter. I will point out that the first quarter of 2003 also contained 17 cents of amortization expense that we will no longer recognize going forward as those assets have been fully amortized as of June of last year.

Total comprehensive income, as Steve mentioned, was quite substantial at $94.3 million in the quarter, and book value per share increased 7 percent in the first quarter, again very very strong performance in the first three months of the year.

So with that, I will turn it over to Tony Markel for some additional commentary on the operation side.

As Darrell just indicated, this is a gratifying relatively uneventful quarter, so I am going to be pretty brief this morning. Volume growth as predicted has slowed down, but the fact that net premium written was up 13 percent over the same quarter in '03 and 8 percent over last quarter, that is indicative of our continuing push to judiciously move our retentions up and reduce our dependence on reinsurance. The 96 percent combined ratio represents another solid quarter of profitable underwriting results.

Am I disappointed that some Legacy reserve movement in Markel International moderately emasculated what would otherwise have been an operational grand slam? Of course. But it in no way dampens my enthusiasm for and confidence in the expected results of recent years from our London operation. And it clearly represents another step in our quest to achieve the same level of competence in our international reserves as we currently have in the U.S..

Am I concerned about the expected slowdown in revenue growth? Well, needless to say, I would rather have the double-digit growth we have enjoyed over the last couple of years, but our focus as you well know is on underwriting profits and not premium volume. That said, the cooling off of the white hot market that we have enjoyed the last couple of years clearly gives us the opportunity to refocus on marketing and sales of existing products, new product development, synergistic cross-fertilization of products between our U.S. and London operations, and as previously referenced where appropriate, increasing our net retentions.

Although the market has cooled off, and as indicated in our earnings release rates have started to actually decline in certain sectors, specifically large direct and reinsurance property, aviation, energy and marine war accounts, sanity has not let the market yet. All other categories of risks seem to have settled down and are still producing at least inflationary increases. In the aforementioned areas where rate reductions have taken place, on balance we don't think they are necessarily unreasonable given the rating high ground that was previously achieved in those products.

We are extremely optimistic that the market will level off and not exacerbate into a further downward spiral, but our underwriters clearly know they have management support in allowing business to go if our rating tolerances are pierced. We fully expect to continue to produce the underwriting results necessary to achieve our lofty objectives from a return on equity standpoint, and now people are ready for any challenge in that regard.

And with that, I will turn it over to Tom relative to the investments and be willing to ask any questions during the Q&A.

Thank you, Tony. My comments will be relatively short as well. In short, I am very pleased with the investment results from the first quarter. Equities were up 4.2 percent, the fixed-income portfolio was up 2.6 percent, and the overall total portfolio was up 2.9 percent, which includes a positive FX foreign exchange effect of .3 percent.

On the equity side, we made roughly $50 million of new net purchases in the portfolio, and I would expect a roughly similar pace for the rest the year. Equities now comprise 19 percent of the total portfolio, up from 18 percent at year-end and up from roughly 12 percent at the March of 2000 low point. Equities are approximately 1.1 billion or 75 percent of shareholders equity, so we continue to have room to invest.

On the fixed-income side, my continuing concern as it has been for several quarters is increasing inflation, dollar weakness and the inevitable increase in interest rates that I see under those conditions. Consequently we continue to keep the portfolio at the short end of our normal four to five-year duration band.

Economically this continues to shorten things relative to our book of business since casualty is growing faster than property right now, and all other things being equal, we would lengthen duration rather than let it come in given that casualty business is normally longer tailed than property business. Also, credit spreads remained very tight, and as a consequence, we continue to concentrate on government and munis with very high credit ratings as opposed to doing much in the corporate world.

Overall my sense of things is I think this is not an obvious market that lends itself to easy and broad sweeping statements about future direction. But I do continue to find ideas and values one by one that I am continuing to invest in.

I look forward to answering your questions, and with that, let me turn it back over to Steve.

Thank you, Tom. As most of our long-term shareholders certainly know, Markel's financial goal in our business model is to earn consistent underwriting profits, coupled with superior investment returns, to build shareholder value. We measure our success in building shareholder value by looking for book value growth on a per-share basis at a high rate over a long period of time.

Today with our current book of business and a still very favorable specialty property and casualty insurance marketplace, we are very confident in the opportunities afforded in our underwriting business. Our $5.5 billion investment portfolio is well-positioned for continued growth and good returns. We believe that the combination will generate a very nice book value growth over the long-term.

We would like to remind everyone that on Tuesday, May 11th is our annual shareholders meeting. This year it is in Richmond, Virginia at the Jefferson Hotel as in previous years at 4:30 in the afternoon, and we certainly would invite all of you to come to Richmond and enjoy the meeting and have an opportunity to meet our key operating people, all of whom were there and ready and willing to answer your questions.

With that, I would like to open the floor up to any of your questions today.

(OPERATOR INSTRUCTIONS). Matt Heimermann, Goldman Sachs.

I have got a couple of questions, so maybe I will just go one at time. The first one is on the numbers side, which is can you guys quantify the favorable development you mentioned in the U.S. E&S operation?

The detail of that will be in the 10-K.

Order of magnitude versus London, was it much smaller?

Smaller but not much smaller. Halfish.

In terms of the competition, Tony, you said sanity has not left the market. I guess the real question is how long do you think it will stay before the market is no longer sane? I guess along those lines, you mentioned increased competition. I wonder if you can talk about whether that is coming from some of the traditional E&S markets or some of the new entrants?

Well, Matt, my fondness hope is that the market will recognize that it cannot go beyond a certain point. Clearly there is some fat available, and I think some of the early moderate reductions that we have seen do not really concern me a lot. History has shown that maybe the industry is its own worst enemy. So I am not necessarily assuming anything. But at this stage of the game, we are not making the assumption that it is going to go into a tailspin.

We are keeping our eyes on -- the longtail productline still seems to be holding up relatively nicely with inflationary increases on top of certainly adequate increases over the last couple of years. So on balance, we feel like the market is still very solid, although we are not enjoying obviously the double-digit growth that we have enjoyed. We are just monitoring it day to day, and it is hard to generalize because there are so many specific segments, and we have identified three or four of them in the press release where we are starting to see some rate erosion, albeit not of any real alarm at this stage of the game.

Competition, you know it is across the board where we see it. The U.S. companies, the Bermuda companies are because of the fact that they have very few Legacy issues are effectively becoming a little bit more competitive in some of the E&S lines. I have been a little bit critical of the London market force, perhaps leading the charge in even the moderate rate reductions. In some of the areas where they are clearly a leading market like in some of the marine classes in aviation, it seems to me a little bit early to be giving up rating ground even though it might have a little bit of cushion in it. But I don't think we can single out any real sector where the competition is coming from. So far it is moderate, and I think we can weather it at this stage.

Has there been much of a change on the submission activity, you know vis-a-vis some of changes in the competitive --?

The good news in that regard the speciality. The standard markets have not necessarily broaden their appetite, and therefore, the activity and the need for the safety valve specialty market continues to be extremely high and very valuable.

And then one last question for Tom, which is if it looks like interest rates -- you're doing all the right things on the portfolio side. But I am just wondering what you think the lag will be before higher reinvestment yield would offset the immediate mark-to-market on the assets in dollars?

I would not have any way to quantify that because there are several moving parts. One, how sure do we let the portfolio get, and what kind of rates are we looking at, and when would be make a licensing decision? So rather than try to forecast that, I will just do the best I can to react to the circumstances that are out there.

Stephan Petersen, Cochran, Caronia.

A quick question for Tony. With the London charge, did that 30 million come out of anything in particular, a first-quarter review or a follow-up work to the charge charge in the fourth quarter?

No, there was no specific review or follow-up work. It is described in the press release primarily casualty-related businesses, U.S. reinsurance casualty, financial institution risks and professional liability exposures.

There were not any particular losses that fell through the cracks or any unusual surprises operationally?

No. Unfortunately a number of small issues.

Terrific and a quick question for Tom. It sounded like last year you were looking to put 100 million a quarter into equities. This year you are pulling back to 50 million. Could you help me a little bit in terms of whether or not your view is changing in terms of the marketplace, or is it primarily because you are getting close to where you want to be in terms of the equity proportion in the overall portfolio?

A mix of all those. Clearly the prices are higher, and a lot of things that I had been buying this time a year ago are higher than they were then. So back my foot off the accelerator a little bit and cash flow is not as heavy this year as what it was last year. So it is just a combination of those factors.

Again, you have always been pretty fond of financial services, other insurance companies in particular. Is your view changing as we head into a higher interest rate environment, and as you well know, the rate increases that we have seen in the past couple of years moderating -- in terms of the overall portfolio, do you foresee any changes in terms of your top holding?

Clearly financial services stocks tend to not do too well in a rising interest rate environment. In the short run, that has historically been true and may, indeed, be the case as we go through a transition into higher rate. In the long run, the reason I own so many of those kinds of businesses is I have concluded they make very good returns on capital and very good returns on equity, and I really don't see that changing. Moreover, I think it would be a mistake to try to shift towards commodity-based things or energy-based things in the short run to capture a trading move because the intrinsic economics still seem to be pretty good to me in a lot of financial businesses. So I would continue to expect that that would be the largest single area that we own in the equity portfolio.

Then one last quick follow-up. I heard two different things in terms of the retention ratio on a go-forward basis. Darrell seemed to think that it was primarily this quarter a bit of a businessman exchange, and then I heard Tony say that there might have been some proactive increasing retentions in particular lines. As we look out over the course of the next three or four quarters, would that 81 percent retention ratio be about an appropriate run-rate as you see the year unfolding, or will we expect a smidgen of volatility in the retention ratio this year?

First, both Darrell and Tony were correct. The actual arithmetic in the first quarter, as Darrell pointed out, was impacted with the retention ratio increasing, primarily because of reductions in lines of business that we more heavily buy reinsurance, primarily the property catastrophe related business and some of the casualty lines that investors were reductions in premiums relative to prior periods. So those lines happen to have lower retention rates, and because we reduced the business there, the overall mix was safely impacted.

Tony is correct in that as we see this marketplace begin to slow down, our appetite to increase our retentions as treaties come up for renewal is growing. Likewise, our capital base is growing. So we have the financial ability to increase retentions, and so the impact of those decisions will be felt over a longer period of time. And while some of those decisions were taken in the first quarter, they did not show any impact on the bottom line in the first quarter. But they should over a period of time in the future.

In answer to your other question, I think the 81 percent is probably a pretty good guess as we look throughout the year and potentially improving, assuming, of course, that our mix of business continues to evolve the way it seems to be. But I think that is a pretty safe assumption.

David Lewis, SunTrust Robinson-Humphrey.

First, just to clarify the 5 to 10 percent gross premium goal that you have had, do you still believe that is achievable given what you saw in the first quarter?

David, we have not changed our forecast on our estimate, and clearly the first quarter growth was only 3 percent. So if you were to ask me to revise it, maybe I would say the new forecast is 3 to 10 instead of 5 to 10. But I don't think it is unrealistic.

Can you talk about some of the new product introductions and initiatives that you are taking to try to grow that? You mentioned some areas you are moving into to try to keep the topline moving?

Obviously the last couple of years we have all we could say grace to to stay abreast of the activity and, as I described it, the white hot market. But with that slowing down, we are getting back to some fundamentals, and new product development is clearly one of home.

I can say a couple of examples within the last year, and I think we have actually discussed this in previous conference calls, but it has taken on a real substance over the last two or three quarters. We introduced a new division that specializes in alternative risk transfer, a large risk with self-insured retentions, associations, affinity groups and self-insured retentions that we previously did not have the talent or technical strength to do. It is a solid field that has already produced some very attractive accounts.

I will site another example of some cross-fertilization. Within the last year, the employment practices product, which has been so successful for us in Shand, started from scratch in the mid '90s and growing into the $40 or $50 million category over the last seven or eight or nine years, was introduced in England. And there it is sort of the position that our market was seven or eight years ago where judicial climate and everything is starting to heat up relative to wrongful determinations and discrimination issues and so forth. So we think that is a tremendous new product to sell in the UK and one that we bring a tremendous amount of experience on. Those are just two examples of using the opportunity to really get back to the basics having had our tongue dragging in the last couple of years because of the tremendous activity.

Tony, you've also taken advantage of the strong prices in the medical malpractice area. Are you continuing to grow that business? Are you in a place where you are starting to slow down? Also, if you could comment on the reserve levels on that malpractice book and whether you have taken any adjustments or are very comfortable there?

Clearly we are comfortable with the reserves. It is a higher profile product, so it gets a lot of scrutiny. I would say the malpractice side has leveled off.

You know the whole bedpan (ph) mutual situation has sort of settled down a little bit, and those opportunities have come from the turmoil in that industry. But where we are seeing some continued gratifying growth is in the miscellaneous medical, the clinics and the labs and those type of things that are continuing as society changes and new products and new needs arise. There are a lot of medical spinoff opportunities.

So I think the pure malpractice, doctor malpractice play is level right now. But we have had some tremendous results in what we call specified or miscellaneous medical, and that is continuing to grow very healthily.

And finally, Darrell, if you look at the FAS 115 impact on book value, do you know what that adjustment would be?

I did not do that calculation. Stand-alone. I think the other comprehensive income component was about $52 million.

52 million after-tax?

Correct.

And that is positive, correct?

That is correct.

John Keefe, Ferris, Baker, Watts.

I've got a couple of questions. First for Tony on volume. Kudos for walking away from existing underpriced business and property and some of the other overheated lines. But, Tony, with so much dislocation going on in the market or so we hear, is there a concern that you may be missing some new opportunities to exploit this dislocation in the domestic E&S marketplace?

John, obviously with the way things -- we always -- I mean we cannot take advantage of every opportunity out there. So in any state of the marketplace, I am sure there are things we could have gotten in opportunistically and made money. But we stick to our knitting, stick to the basics.

Generally you know our lot in life has always been the middle market smaller premium type stuff rather than the high-profile one-off real opportunistic play that some of our competitors have gotten into. I guess on balance we think we are pretty in tune with what is going on, and I think in general we look at most of the things that fit our MO. But the final bottom line is I would rather miss two or three opportunities than end up taking a real volatile flier. So I am very comfortable with the way we are handling new business opportunities. In retrospect, when we see somebody make a fortune in a short-term play that we were not in, God bless them.

On the London reserve charge, would you say that this charge seals the tomb on any future type charges, or was the size of the magnitude of this charge small enough such that from time to time it could come up again?

I think your point is well taken. It is a $30 million charge, and that is a substantial charge in terms of the P&L charge. There are net losses are probably $1.7 billion, and every time you go through our IBNR process or our reserve review process, we do the best we can to establish reserves that are needed at that point in time. When new information comes along, we are either -- that pick is either validated or we need to change it. So we will continue to look at it.

There is no way to know that it is done. There is no way to know. All I can tell you at this point is that we had we have dealt with everything that we are aware of.

John, on the question you asked Tony, I would be curious if there is a missed opportunity and what it might be? But more importantly, if you hear of some opportunities, we are always open to hear about it from you.

Yes, John, my number is --

Well, we look at Berkley (ph) for example, pretty similar profile of domestic business. It seems to be accelerating growth. (multiple speakers) Just put that in context.

As I have just indicated, we have got a loan marketing and sales things on the drawing board, and clearly we are not going to hide behind this softening market and accept the lack of growth without a grudging attempt to grow and still maintain underwriting integrity.

But I think -- don't forget, if you look at our profile, it really is not dependent upon large risks and large limits, and we stay pretty fundamentally in a less than volatile environment. And I think we look at most of the opportunities that come down that pipe.

To follow up on Darrell's answer as to reserves, $30 million is a relatively small amount given the total gross reserves. Looking at the London operations from a combined ratio perspective, I believe in the past you had said that we could expect a combined ratio of 100 or better in 2004. Does that include any attritional or incremental reserve adjustments?

No. I think the number would have been right at that level or very close without this charge. So that forecast would assume if we had no further charges.

So the expectation of a combined of 100 or better for the balance of this year for London is still a working assumption?

Excluding prior period Legacy issues, yes.

How should we model prior periods Legacy issues? Is that (multiple speakers)

We don't expect any, but we have said that so many times and it is still true. But all of the Legacy exposures are not eliminated, and hopefully they are much much smaller today than they were in the past. But it is not zero.

Okay. Thank you.

Gary Johnson, Alliance.

I have three questions having to do with Markel International. First, the 30 million charge, was that related to Terra Nova or acquired business?

My second question has to do with any contingent liability or capital call through the Lloyd's syndicate, and my third question has to do with generally what are your expectations for the London market?

I guess I will try to deal with the first one and then -- the charge was related to the international operation, all of which was the result of the turnover acquisition. It all relates to business written between '97 and I think 2001. We acquired Terra Nova in March of 2000, and so it overlaps Markel's ownership.

Subsequent to our acquisition, the business entities have been renamed. So Terra Nova is a generic term related to the Company we acquired, but I hope that explains it. I will let Darrell deal -- I think your question was a capital call at Lloyd's and will we have to fund any more money at Lloyd's? Is that correct?

That is right.

I am not aware of any. Then the last question was our expectations for the London market?

Guess.

Our goal is to earn underwriting profits. We expect the London market will enable us to do that. When we allocate capital, we don't have any lower hurdle rates for those allocations within the U.S., and we clearly expect the London operations to generate the same sorts of return on capital that we have seen in the U.S.. I will let Tony handle --

Simply put, a really short look backwards. As I have already indicated, we have a high degree of confidence in our '02, '03 and now building '04 books of business in London, having jumped in there in early 2000 when we bought it and changing that environment over there. We have a tremendous amount of confidence in the staff that we now have there, and they are understanding of our underwriting culture and our style of doing business. You are aware that the two heads of our London operation are transplanted Markel lights from the U.S., who obviously have continued and really added to the transition to our culture.

I would say that we have taken a lot of gratification, although early days with the controls of Lloyd's that are being exercised and implemented by the franchise performance group headed up by Rolf Talia (ph), which really seems to be flexing its muscles in terms of putting discipline into the marketplace and insisting on discipline that we have been pretty focal about before that we did not find when we first landed in London. So we think the combination of the growing strength at Lloyd's in terms of oversight, coupled with an organization that we are very proud of right now in London, is going to give us a tremendous platform for profitable growth.

Thank you.

Charles Gold (ph), Scott & Stringfellow.

A question for Tom. Tom, back to one of the earlier questions about the rise in interest rates that you and the world are looking for and extending the portfolio and the marking to market issues, might this not create an opportunity to shelter some gains on the equity side? I know you have talked in the past calls about the four things you look at when you buy a company. But sometimes you get to a point where you like the company, the price is a little high, and the thing that causes you not to sell it is paying that capital gains tax. And might not a rise in rates afford you the ability to book a loss on the fixed-income side, get out of that position while raising the yield obviously on the bond portfolio with the reinvestment of the proceeds?

My first and foremost preference is to not have losses. I don't want them on equities; I don't want them on bonds. Tax losses discussions always give me a headache because I know that they make sense, but I would rather not have them in the first-place.

So my first priority is to let the bond portfolio shorten relatively naturally and keep it from being exposed to creating big capital losses. That being said, if we have capital losses, we are always thoughtful about the trade-offs that are involved between taking gains or not, and we will just try to continue to be thoughtful to it.

I think the other point relative to this is, and we have in the past taken advantage of this, realizing taxable losses in the bond portfolio also shelters taxable income on the underwriting side. And so where we would trade bonds to generate taxable losses, which we have done in the past and which makes a lot of sense because it is very easy to swap Bond A for Bond B and have the same attributes and take advantage of that tax loss. We have been able to use those losses offsetting our taxes somewhere else. So we don't necessarily need to correlate them to something in the investment portfolio.

Paula Federman (ph), First Albany.

A couple of questions. First of all, on the investment portfolio, could you define the tolerance levels that you have for the mix between fixed-income securities and equities a little bit further? I know you are up to 19 percent now, but how much higher could that level go?

And then secondly, I just wanted to check back with you with respect to your outlook on your Moody's rating, which continues to be negative and to see to what extent you feel like you're addressing their concerns, which I guess to my understanding revolve around adverse reserve developments, financial leverage and holding company liquidity issues?

I will let Tom deal with investment question, and I will ask Darrell to pick up the rating issues with Moody's.

On the investment side, assuming that we had four to one type of leverage of investment assets to shareholders equity, and assuming confidence in our reserve levels, we think that the equity portfolio could get to be about 25 percent of the total or almost 100 percent of shareholders equity.

As a practical matter, we try to leave margin of error, margin of safety, margin of conservatism that keeps it from getting to that theoretical maxim. But that is what the theoretical maxim would be under those terms and conditions.

As it relates to rating agencies in general, whether it is Moody's specifically or not, as you now, they sort of operate independently and reach their own views and the timeline that they think is appropriate. We continue to have conversations and provide information and respond to all the rating agencies, and we are working real hard to get all the rating agencies comfortable with --.

Our goal corporately is to get our ratings at a solid investment grade and keep it there. We are doing everything we can to convince them that we are well along the track, so those conversations are ongoing. That is our goal to be a solid investment grade credit risk.

Is there anything specific that you can tell us that you are addressing with respect to for instance your holding company liquidity or your financial leverage?

I don't think -- I think the principal questions that most of the rating agencies are looking out is operational results, primarily as it relates to (inaudible) and the integration risks that they have talked about for a couple, three years, and simply putting solid operating results on the books. That is a lengthy conversation.

I don't take those two specific issues -- liquidity at the holding company or operating leverage -- have ever been a meaningfully problematic issue for Markel relative to our ratings. When the ratings were impacted, it was always a question of confidence in the underwriting results in our London operation I believe.

The balance sheet and the growth in book value per share and virtually no growth in the debt levels are significantly improved and well above the levels. If those were the major issues, we would have higher ratings already.

Hu Ping Li (ph), Putnam Lovell.

I was just wondering what is the cash balance at the holding company level as of March?

We don't have that number in front of us right now, but it will be available I guess when we release -- we have separate holding (multiple speakers).

What was the number as of December?

Holding company cash?

Yes.

I have got an annual report here, and I know it is in there. So hang on just a second.

It was maybe 100, 110 at year-end. 110 million.

Had that changed over the quarter?

Probably so. We have taken some dividends from some of our insurance company subsidiaries and so that -- (multiple speakers)

Did that increase?

I am sorry. I could not hear you.

Has that number increased?

Increased, yes.

Over the quarter.

Right.

Can you actually give me a little bit more detail on the reserve that you have taken in the London Insurance market? Just what type of business that result in such a reserve?

Really other than what we have got in the press release describing it as developments from the '97 to 2001 year on U.S. casualty, reinsurance, financial institution risk, and professional liability exposures, that is as specific as we want to be on that.

Okay. I guess my last question is about the investment portfolio. I know you mentioned in your equity portfolio the largest sector holding is financial services.

That is correct.

In April I think the model of financial service (inaudible) was down in April. I was just wondering if you can give me some update on that sector performance as of today and what you are (multiple speakers) going forward?

Financial services stocks are off a little bit in April, and our experience is consistent with that.

What is your second largest sector holding?

I am sorry? (multiple speakers).

Second largest position.

I believe it is Anheuser-Busch.

Sorry. What did you say?

The second largest individual security holding he said was Anheuser-Busch.

Beth Malone, Advest.

I just have one simple question, and that is, are we to assume the $30 million charge that you took in London, if I tax effect that and divide it by the shares outstanding, would that be about $2.00?

Yes.

So had you not had that reserve, earnings would have been $5.80 for the quarter?

Your arithmetic is correct.

The results in the first quarter if you ignore the London reserve, which I guess you can't, but let us pretend we do, are --

We would like to.

Is it appropriate for me to assume that that is the kind of run-rate we can anticipate in the rest of 2004, or was this unusually especially strong in certain sectors that reported in the quarter?

No. There was nothing unusual that I am aware of. So we would hope to be able to do a whole lot better in quarters two, three and four than we did in quarter one.

This has probably been beaten to death by this point, but just on the reserve -- I know Tony talked about it a little bit -- it appears that this is stuff coming from the old Terra Nova or the acquired business, and I guess there is no way for you to ascertain -- I mean every time you take one of these charges, do you believe when you have done that that this is it? There is no more going forward. Is it a surprise because of changing market conditions that you have to review and realize that that is not it, and you have to assess another charge for something else that has developed?

I am trying to get a sense of how you look at these -- how you have to look at these reserves that you have outstanding and how you determine -- I assume you determine through actuarial studies they are right every time -- and then there is always -- I mean it is the old business deteriorating more because of current market conditions, or was it stuff you just didn't -- were not aware that you guys have exposure in?

I think first and most importantly whenever we get information about claims coming in the door, which is really the driver of all of this stuff, we try to deal with it as quickly as possible, and we don't ever look at a claim and say, well, this one should be booked tomorrow instead of today. So we try to be on top of every single issue and item that is coming in the door and are not saying, well, here is a chart, let's take a fourth of it this quarter and take another piece the next quarter. We absolutely do not do that.

I think the second sort of big picture question or point is that -- and I think all of you are aware of this -- but we have consistently attempted to build and establish loss reserves on a basis that our aggregate reserves across the entire company are more likely redundant than deficient. We have been able to build an appropriate margin of safety between the actuarial best estimates and what we have put on our books as something to be slightly higher than those best estimates. And because the business has been consistent for a long period of time in our U.S. operations, we have been very successful in being able to build that margin of safety, and it has been very effective.

In the London operations, we have attempted to do exactly the same thing. But what we are finding is that problems keep creeping up, and we have not been able to build the same margin of safety that we would like to have. In the aggregate, we believe certainly the reserves in London are at least adequate and maybe slightly better than that. But in the U.S., we do have a more meaningful margin of safety, and in the aggregate, we have a margin of safety.

So our goal is to be very confident in all the reserves, and the only reason we are not there in London is the business is not as mature under Markel's watch, and the lines of business and classes of business that Terra Nova previously wrote are things that have a longer tail. In many cases, it is assumed reinsurance where you are dependent upon the other reinsurance company to report losses, and that particularly was an area that affected this quarter. And their lines of business simply were not as well underwritten or as well-controlled. So the claims coming in from some of those prior periods are things that we did not expect to see, and when we see them, we deal with them.

I think that is on a corporate -- you know nothing surprises us. So surprises, that is a word in the insurance industry that you can bet we are not bleeding into recognitions of reserves. Once we feel we need to take them, we take them. We think that is it, and I alluded to in my remarks that we think the recognition of this actually takes us one step closer to building up that confidence level in that margin of safety in London because we recognize it in its fullest without effectively saying, hey, maybe we will borrow from some of the confidence level we have got in the most recent years, which are relatively immature.

David West, Davenport & Co..

Darrell, I guess a question for you. The effective tax rate this quarter was 32 percent. For modeling purposes, do you think that is a good run-rate for the rest of the year?

That is a rate that we are projecting the year to end up at. So that is a good number at this point in time.

Very good. Lastly, I guess for Tom. The net investment income line on a sequential basis really had some very nice growth, better than what I was expecting. The only thing I have heard during the call that might suggest I should not get too optimistic year with additional growth would be the fact that you are shortening your fixed-income securities a little bit. Could you opine on the sequential direction of net investment income?

Yes, I can and I will. My opinion it is more important today to predict the balance sheet than the income statement. So I am willing to forego a little bit of investment income today to keep our duration short and appropriate for an environment of higher interest rates. That opinion is subject to change as the market conditions evolve, and we make a decision to extend that at some point or change the basic asset allocation.

Brian Mosslioni (ph), Citigroup.

It is actually Dave McGowen here at Citi. One quick one on the holding company debt picture. I jumped off, so I don't think you addressed this. But just in case, you have a convert with a put date coming up. What are your expectations for that?

We are willing and happy to retire that with cash in June when it is available for being put. My understanding, and I have not seen the numbers in the last few days, but I believe the security is trading at a price in excess of the put price. So unfortunately my guess is that nobody will put those bonds to us. But if they do we will be very excited to redeem them for cash.

Okay. Related to holding company liquidity that you have been asked about, is it still your philosophy, your practice to attempt to keep a couple of years of holding company requirements up at the holding company?

Absolutely.

Okay. Then the last question, I think this has sort of been dealt with a number of different ways. But let me ask the question this way related to these Legacy issues. Going back three quarters now, we have seen reserves that have been a bit of a surprise. In third quarter, I think it was the brokerage surplus business, and then international a couple of quarters in a row.

I understand that it is your philosophy to try and build in redundancy into the reserves, and of course, with international, it takes awhile to impart the culture. But is it fair to ask the question that maybe you have not been able to throw all the resources to claims or some other part of the whole reserving process that you might need to?

We have not held back on resources to get our hands around the issues. In fact, we have recently strengthen the claims operation in London. But we have been as proactive in having independent audits and reviews as we possibly can. We have a very significant number of people working on the Legacy issues. So it has not been without a very very serious attempt to get our hands around it much much more quickly.

I think it is quite possibly we have not done as good job as we could have. But I think more importantly the nature of some of these Legacy issues have just taken longer to funnel through the system than we expected or thought was the case a couple, three years ago.

I guess it would be your position then it is more a function of when you got in there combined with the nature of the business itself?

Yes. Thank you and we will take one more question, operator. But unfortunately we are going to have to break here in Richmond in a few minutes.

Jerry Hafernen (ph), Lord Abbett.

To follow-up I guess on Beth's questioning in regards to the reserves, I would just like to ask if there have been claim developments that have caused you to go back and re-evaluate the reserve status? Is this reserve increase an increase of case reserves or IBNR?

It would be a combination of both.

Okay. So you are finding out some information on a specific case and then you're taking that information and running it back through the entire book. That would be then in the IBNR?

Right. We do that every quarter on every line of business, including all of these Legacy programs.

Okay. So to the extent that one might be concerned that there were more problems in there, certainly to the extent that you have found new information on a particular claim, you are adjusting that whole book, not just taking care of that claim?

Absolutely. The quality of the process is not any less at the end of the first quarter than it was at the end of the year-end.

Absolutely. Thank you very much.

Thank you, Jerry, and thank all of you for participating in today's conference call. We certainly hope to see you in Richmond at our shareholders meeting on Tuesday, May 11th. Thank you very much.

Thank you. Ladies and gentlemen, thank you very much for your participation in today's audio conference. That does conclude today's audio conference, and you may disconnect your lines at this time and have a wonderful day. Thank you.