Markel Group Inc (MKL) 2004 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. 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.

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 thank all of you for joining us this morning. Before I begin, I would like to call 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 the matters described in those statements and we encourage you to read those statements very carefully.

Our format today will be very much the same as in previous conference calls. After I make just a few introductory remarks, Darrell Martin, our Chief Financial Officer will review the financial results for the quarter and for the calendar year 2004. Tony Markel, our Chief Operating Officer and President will make comments about the insurance business and our various business segments and how the business is progressing.

Thomas Gayner, Chief Investment Officer will review our investment performance over the past few years and then after a few closing comments I'll moderate the question and answer period. Those of you who have had a chance to read the press release will no doubtedly know that 2004 was a very, very good year for Markel.

Not perfect, we surely had our challenges that we had to overcome throughout the year, but in spite of these various issues, the year was really excellent. We increased book value to $1.6 billion, a 20% gain over the prior year. And shareholders equity on a per share basis at year end is $168.22. As you all know, our long-term goals are to compound book value at a higher rate and over a long-period of time and we're very, very pleased that over the past year, we've also compounded book value at a 20% rate. And over the past 10 years at a 21% rate.

So clearly the business, while not yet firing on all cylinders is doing extremely well and we're very, very optimistic about the future and pleased with the current situation. 2005 will be and is Markel's 75th anniversary. While Markel has been public only since 1986, our history, culture and values go back to Sam Markel's founding of Markel 75 years ago.

So throughout the year, we're looking forward to celebrating our 75th anniversary and we really do look forward to continued excellent financial results, not only in 2005 but also in the years ahead. With that, I'll turn the program over to Darrell Martin.

Thank you, Steve, good morning. As Steve mentioned, 2004 was a record year in several ways. I'll discuss those in a moment. I usually inform you that our 10-Q will be filed in probably the next week. Obviously at year end, filing our 10-K is going to take a little bit longer, it's probably going to be available in probably the next 30 to 35 days or so, that's our goal at least. And it should be available to you at that point in time.

As usual, I'm going to focus primarily on the year to date numbers, this time will be the 12 months ended December 31, 2004. And my focus will be on underwriting results and then I'll talk briefly about the investment results and others with some summary commentary as well.

On the underwriting side, for the year ended December 31, 2004, our gross premium written was about $2.5 billion. It was down slightly, about 2% from the same period of 2003. The slight decrease was due to increased competition in many of our product lines, reunderwriting several of our books of business that we've talked about previously. And while we're not happy with the decline in premium volume at all, as always, our focus is on underwriting profitability. And I'm sure Tony will talk a little bit more in a few minutes about the current conditions in the marketplace, et cetera.

On a net basis, our net retention increased to 81% to slightly over $2.1 billion compared to 77% a year ago. This is a trend that we talked about over the past three quarters. It's due both to mix as well as change in the underlying reinsurance treaties that we purchased. And it's important to note that the 4% increase in retention equates to about $100 million of increase in net written premiums.

So that's very substantial to our strategy going forward. Retaining more of the profitable business that we write. Earned premiums for the year, slightly under $2.1 billion, a 10% increase over the prior year. Again, that's a lagging result due to the increased volume over the past couple years and increased retentions that I talked about earlier.

The real measuring point that we always look at on the underwriting side is the underwriting result, the combined ratio. For the 12 months ended 2004, our combined ratio we're reporting a 96 combined compared to a 99 combined for '03. Included in the 96 combined ratio this year are three items that I'll highlight.

First, is in the first quarter of the year, we reported a $30 million reserve adjustment, primarily related to the Markel International business unit reserve strengthening. Likewise, in the third quarter, we suffered approximately $80 million hurricane losses. And in the fourth quarter of this year, we also incurred an additional charge of $25 million.

The $25 million charge in the fourth quarter is associated with our investors' business unit. As you'll recall in 2003, we also had a charge related to the investors' unit and primarily that was related, or a large portion of that charge was related to California contractors' books of business.

You'll recall in 2003 we exited the commercial contractor business in California but we did retain the residential contractors' book. During the fourth quarter, we detected or determined that we think the development patterns are going to be worse than expected on both those books of business and therefore we did increase IB&R reserves $25 million in the fourth quarter to deal with those issues.

And at this point in time, we have exited all California contractors' business. So that was an issue that we're not happy about but despite that, the 96 combined ratio, we feel very, very good about that result for the year.

On investment side of the house, our total portfolio grew to $6.3 billion compared to $5.3 billion at the end of last year. That growth is primarily due to three factors. First and foremost is cash flow from operations, that's slightly under $700 million. Change in unrealized gains, the market value of our portfolio increased approximately $165 million year over year. And that's a tremendous result. Much of that growth occurred in the fourth quarter.

In addition (audio gap)

You're reconnected into the conference, sir.

I apologize for the technical difficulties. I was discussing the growth in the investment portfolio, approximately a $1 billion increase year over year. That was generated primarily from cash flow from operations of about $600 million during the year. In addition, the change in the underlying market value of the securities during the year added approximately $165 million to that change.

And finally the third sort of significant component is the financing activity that we initiated in the third quarter of this year. Added about $85 million net into our investment portfolio as well. So we're very pleased with the portfolio performance and the growth there.

In terms of the net investment income that we're reporting for the year. For the year it's slightly more than $204 million compared to $183 million a year ago. As we had mentioned before, the growth portfolio is being offset somewhat by lower yields that we had seen in prior years.

I'll note that in the fourth quarter, the growth in the portfolio obviously was still there but also for the first time, we're starting to see the yield sort of flatten off to turn up, perhaps. So we may have bottomed out in terms of the yield impact on our future portfolio performance.

Net realized gains year to date were slightly more than $4 million compared to a $45 million number a year ago. As we have mentioned many times the recognition of gains is highly variable, period to period. And again, the real story is the change in our unrealized gains number for the 12 month period. It was $163 million increase in unrealized gains and likewise in '03 we had $141 million increase in unrealized gains. So both years were very, very strong.

On a total return basis, on a book basis, our total return was about 6.5% for the current year. And again, I'm sure Tom will talk a little bit about that when I turn it over to him in a moment. But again, outstanding investment results for our portfolio this year.

The sum of the underwriting and the investing and adjusting for interest costs and tax expense, we reported net income of $165 million for the current year compared to $123 million a year ago. Again, that's a record result for Markel corporation. Comprehensive income likewise was $273 million compared to $222 million a year ago, again, a record for the current year.

On a per share basis, I probably ought to spend just a moment talking about the adoption of the new accounting principle in the current year. The Financial Accounting Standards Board emerging issues task force issued new guidance in connection with contingently convertible securities and our lines are contingently convertible and we adopted the provisions of that new statement in the fourth quarter and have restated all prior periods as well.

But the impact of that accounting principle was to add approximately 335,000 shares, of notional shares outstanding. When we look at our fully diluted earnings per share calculation, the result of that is approximately a 2% dilution in the earnings that we report for all periods. Net income for 2004 was $16.41 compared to $12.31 a year ago.

Comprehensive income on a per share basis was slightly under $27 compared to $22 a year ago. Again, very, very strong results. Steve mentioned earlier that our shareholders' equity or book value had increased to in excess of $1.6 billion or $168 a share. Again, 20% growth in the current year and 20% growth over a five year period as well.

So all those results, we're very, very pleased with and obviously it's good to meet our target of about 20% growth rate over the long-term. So with that, I will, Tony, I think we dropped Tony Markel, he was on a long distance...

No, I'm back on Darrell.

OK, Tony, well, I'll turn it over to you then.

Good, the power went out for a minute. Darrell has covered a lot of the waterfront so I'm going to be relatively brief and hope to either get Paul (ph) get an opportunity to flush out and answer any questions you might have. As Darrell has indicated, we had a rather terrific quarter to close a record year.

I'd really like to specifically comment on the two or three key operational highlights that obviously are foremost in our mind. First and foremost are the combined ration. As you're well aware, the single focus of our insurance company operations is underwriting profit. And to close the year at a 96 combined in spite of digesting an $80 million hurricane loss is testimony to the technical strength of our troops and their unwavering commitment to our message.

Regardless of the state of the marketplace, as you are all aware, people are dedicated to the production of underwriting profit. And speaking of the marketplace, you'll notice that our gross written premium, as Darrell indicated was down approximately 2% for the year while our net written premiums were up approximately 4%.

This appropriately reflects the continuing erosion of rates in many products and our exit from a couple of sectors, most notably the international aviation book. Also on the positive side is, I think went Darrell went into some details by our quest to judiciously increase net returns, reducing our dependence on reinsurance.

Although (off mic) are generally still adequate. There's no doubt that the market is softening, rates are, the good news on that however is, in my estimation is that growing premium volume is really our most concerning issue going into '05 and I think that that's the issue that we've got to grapple with. It says volumes about how well positioned our organization currently is.

Rest assured that we will not sacrifice underwriting integrity to maintain a growth premium volume. That said, you know Markel well enough, we want our cake and eat it too, so we've instituted a multi-faceted strategy to combat this softening environment which includes things like a dramatically stepped up program of agency contacts in every one of our divisions.

Our continuous and stepped up program of periodical advertising to increase our brand awareness. The establishment of a proactive public relations effort across our organization to increase the visibility of our organization, its people and its products. A continued focus on opportunities to increase our retention once again. And where advisable and judicious.

Continuing search for new products to broaden our already diverse base, for example, Essex Insurance Company, just in the last month or so has established a railroad liability program to go along with it's already highly profitable railroad property venture. We also have some branch expansion planned for increase geographic presence.

We're opening a branch in our international operations in Madrid, Spain. Toronto, Canada is under serious consideration and during the course of '05, we plan to open at least two or three additional branches in our retail sector in the international operation in the U.K. and in Scotland.

Last but not least, clearly a willingness to consider acquisitions of niche oriented organizations to add new product, bolster and add to existing product offerings and we've looked at a couple of things recently that didn't muster, but clearly we're interested in broadening our product base and adding on to the existing franchises that we have.

In summary, in spite of sort of the mushy marketplace that we're dealing with, we're exciting and energized by prospects for another outstanding year in '05 and as I indicated, Paul and I will be glad to answer any questions on the operational side during the Q&A section. And with that, Tom I'll turn it over to you to go into detail on the investments.

Thank you, Tony. I just want to start off, fortunately 2004 was a solid year in investments. In equities we earned a 14.9% rate of return versus a S&P return of 10.9%. More importantly, over a five year period of time, we earned about a similar 14.9% return versus actually a negative return on the S&P of 2.3% over that time.

We have a long-term record of our performance over many years and they tend to be most dramatic during down years. We tend to underperform wild bull markets and outperform tough markets. I think that's OK and I think that's actually quite appropriate for protecting, preserving and growing which are the three priorities, in that order, for the capital of an insurance company and reflects the value orientation of discipline of the way we go about making equity investments.

On the fixed income side, the total return was 4.8%. By comparison, although it's not directly a comparable index, the Lehman Aggregate was 4.3% so we outperformed that. In total, the portfolio which includes the foreign exchange effect was up about 7.8% and I'll remind you that we do have foreign denominated bond portfolio of some size to match up against the foreign denominated business that we write on the insurance side.

In terms of total size, the total portfolio as Darrell mentioned grew to $6.3 billion versus $5.3 billion a year ago. The equity component of that was $1.3 billion versus $968 million and there was roughly a 50/50 split in that increase in the equity portfolio between net cash inflows and the increase in unrealized gains.

The unrealized gains after tax at the end of the year were up to $377 million versus approximately $270 million a year ago. And I remind you, that is our favorite kind of gain because of the tax efficiency, but it's unrealized and we continue to compound the money.

Given our investment leverage, the underwriting leverage and the underwriting profitability, those investment results work wonderfully in support of our goals for compounding the book value at higher rates. One year ago, probably two years ago as well I was concerned about rising rates and as a consequence, we were keeping our bond portfolio short and very high quality.

It was also selective in the equity investments and we were finding things to do one by one as stock vendors, not by the push or pull in an undervalued market. And I would repeat those comments today, those are still the same things that I'm worried about or concerned about in the environment that I think we're working in today.

So we're concerned about rising rates. We're keeping the bond portfolio there for relatively short and very high quality. The flattening of the yield curve actually helps a little bit when we're in that position because it lowers the opportunity cost of taking that kind of position.

In the equity world, we're still picking them one by one because it's not an overall undervalued market but there are still things that we think make sense to do. For '04, the word I would use to describe our results would be normal, and by that I mean that the share price has moved roughly in line with the underlying earnings growth and economics of the businesses that we own. In the last five years, the 15 percent return roughly that we earn, again, is largely in line with the economics of the underlying businesses as well.

Going forward, my expectations are the markets are not usually normal, especially in the short run. And for any given quarter, year, two or three year period, normally the market is moving up or down at significantly different rates than the underlying earnings, but returns get normal the longer a timeframe you're talking about, and almost always so when you use a five-year or greater kind of timeframe.

So given the long-term focus that we have at Markel, our equity allocation, which is now up to 21 percent of the portfolio, and roughly 79 percent of shareholders equity, is the sort of thing that I would expect to see the equity allocation continue to grow modestly over the next couple of years. And that's because when I look at prospective returns over the next three to five years, when I look at the fixed income markets, I think something on the order of four or five, 6 percent as a reasonable expectation from fixed income, whereas equities I would think 10 to 12 percent or better, perhaps is a normal rate of return to expect over a longer timeframe. So we will continue the methodical step-by-step plus the occasional opportunistic allocation to equity investments. With that, I'll turn it over to Steve and be happy to answer questions in the Q&A.

Thank you Tom. Just a couple of comments to wrap things up. As you all know, our financial goals are to earn consistent underwriting profits and couple that with superior investment performance so that we can deliver good growing shareholder value, which we are looking to compound book value per share at a higher rate over a long period of time.

On the underwriting side, our margins or underwriting profits are strong and we expect to maintain these margins. In the short run premium growth will be especially challenging, but we're here to deliver book value growth and that's what we intend to do. On the investing side, as Tom just mentioned in 2004, the portfolio grew $1 billion from 5.3 billion to 6.3 billion, and don't forget this is a year where our premium growth was significantly less.

We expect in 2005 and years ahead for the portfolio to continue to grow. Our equity allocation has continued to increase, and even more importantly, we're very pleased with the opportunities we see to invest profitably for the long-term. In short, we remain confident that we can continue to deliver increasing shareholder's growth in book value per share. With that, I'd like to open the floor to questions.

Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask a question please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary that you pick up your handset before pressing the star key. Our first question comes from Mr. Matthew Heimermann of Goldman Sachs.

I had I think three questions. The first question is related to your expenses. Given that premium volume is slowing down in some of the new spending initiatives you have, you know, what's your expectation in terms of the composition of the combined ratio in terms of expenses? And is it possible that we may see that in chop (ph) if premium volume is stagnating here, and more specifically in the international side, do you think that the expense ratio may become a challenge to get into a sub 100 combined ratio, based on what happened in the fourth quarter?

Then secondly, I guess I'm a little curious as to how high you think you can bring retention on a go forward basis, because it's certainly as high as it's ever been today. And what lines of business do you think give you the flexibility to do that? I'm assuming it's not so much on the property side anymore. And then finally for Tom, can you just talk about was it all cash flow that helped drive the increase in investment income this quarter or did you move into more taxables or was there something else that went on?

Matt, would you repeat the last question?

Oh, it had to do with the investment income growth sequentially in the fourth quarter, and was that just all a function of the new cash from, you know, debt offering and operations or was there also some investment mix shift?

OK, I think we've got that. Let me -- I'll try to deal with the first two and either Darrel or Tom will pick up on the third one. In terms of the expenses, part of the fourth quarter and part of the impact on the increase in expense ratio this past year was foreign currency effects in Markel International, in that our fixed expenses in London are primarily Sterling denominated, whereas a lot of the revenue is dollar-denominated, and so there's a bit of a foreign exchange issue there.

But with respect to the bigger question about the long-term, we, you know, will need to continue to manage expenses more aggressively as premium volume becomes more challenging, and there is no doubt that, as with our business and any other insurance business, in a slower growth world it requires more and more discipline to make sure that the expenses are in line, and we will continue to do that.

Our focus however is first and foremost on the underwriting profit margin, and we would rather have a few extra points of expense ratio if we could get a few lower points of underwriting margin or loss cost in any event. And none of our business lines are based on being sort of a low-cost provider. In all of our specialty lines of business, we're value added.

We have very intelligent underwriters with our hands on the policies and doing detailed diligent underwriting and you know it's not the kind of business that is going to be driven by driving the expense ratio, you know, down to small numbers. It's specialty lines and so forth. But we're focused on underwriting margins and I don't think you know the mix between expense ratio and loss ratio is of too much concern, although we need to figure out (AUDIO GAP).

In terms of retention, in the past year we moved the needle a little bit from the high 70s to the low 80s. We believe we can continue to move that needle. Currently, in terms of percentages, the largest line of business where we're spending dollars on reinsurance are our catastrophe exposed property businesses, and since that part of the property business is fairly competitive today, if that becomes a smaller part of the total mix the overall percentage will improve, and so it's really much more a mix issue than anything else there.

There are a lot of lines of business, where Markel today can retain 100 percent of the lines and limits we write. Markel is -- you know, our strength really is writing a lot of small premiums, small limit type of business, and in those lines, we're currently retaining 100 percent in many, many cases, and so that can continue and, you know, in theory, if a larger and larger percent of our book was in those classes of business, the percent could increase a whole lot, but it's really more a function of mix of business than anything else.

And finally, in terms of the investment increases between last year and this year I know the growth in the portfolio is the biggest single driver of the portfolio, not only increased $1 billion from December of 03 to December of 04, but the average portfolio increased by $1 billion of average outstanding this year versus average outstanding last year's. And so larger portfolio offset declining yields. Is there anything else, Darrel, in terms of -- or Tom, that you think would respond to ...

No, I think that explains the vast majority of it. If anything, the mix is actually working a little bit against us, in that as we increase the equity allocation, we give up a little current investment income and we're also increasing the allocation to Munis which would work slightly against us at the gross line, but of course work in our favor in the after-tax line.

Those are great answers. Could I just make one request of Darrel?

Sure.

I get -- on the contingent convertibles, it looks like you guys chose the if converted methodology. Is that correct?

Correct.

Could you -- I know it's a small number, we can back into it, but can you just put a -- either in tax or in a one-liner just what the amortization of the interest expense is you're backing out on a per-share basis?

Well, certainly, it'll be in the annual report and the K will detail that. So ...

OK. On a go forward basis, will you break it out too?

Yes, we can try to do that.

OK. With 10 million shares the mass is easy, so no big deal. All right, thanks much.

Yes.

Ladies and gentlemen our next question comes from Rob Bobman, of Capital Returns. Go ahead with your question, Mr. Bobman.

Are you with us? We must have lost him.

Ladies and gentlemen, our next question comes from Stephan Peterson (ph).

Good morning I guess. A couple of quick questions. The size of the aviation books that you exited in the fourth quarter on an annual basis, and then also some indication as to how large the construction California contractor's book was.

Both of them of are approximately $30 million.

OK. And those are annual numbers?

Yes.

OK. And second of all...

Steve, I might add on that. On the aviation book, when you talk about retensions, you know, a great percentage of that premium was going to reinsurance, so there's a typical example where our retention percentage is actually going to be positively affected by the exiting there.

Yes, the gross book number on both of those was 30. The net on the aviation business was probably 10.

OK. Terrific. And my second question has to do with the Corifrance sale to Fairfax. I was wondering if you might be able to kind of remind us exactly what's in there, and kind of a thinking on sort of both sides of the transaction in terms of this sale as well as the investment in Fairfax, and whether or not you consider them linked or are they really two sort of separate things?

Yes. Yes, I'd be happy to deal with that. First, Corifrance for those of you -- just to refresh everybody's memory, back in March of 2000, when we acquired Terra Nova, which subsequently has become Markel International, one of the assets of the acquisition was a fairly small French-based reinsurance company that was called Corifrance. In rough order of magnitude, the capital at Corifrance I think when we acquired the company was around $25 or $30 million and the premium volume was roughly in the same order of magnitude. Very small, very well-run, and except for 2001, historically it's been a fairly profitable reinsurance company, but with such a small capital base, it was very limited in its scope of operations.

Shortly after our acquisition of Terra Nova we looked into the possibility of a sale of the reinsurance company, and found that there was very little appetite in the marketplace for anyone to buy it, and at that point in time reinsurance prices were accelerating very, very dramatically and we felt the management team in Paris was very, very good and we felt it was an opportunity for Markel to hold onto the company and enjoy what was certainly a profitable run in the market segment for at least a short period of time. So we decided not to sell it and to continue to operate and own the company and enjoy a profitable few years as the market for reinsurance increased.

At that point in time our intention was that as soon as the reinsurance market softened we would again look to dispose of this asset. And, as you know, in January of this year we completed the sale of the company. It's been put into liquidation, and basically our sales price is roughly a book value transaction and a subsidiary of Fairfax is the buyer, and will manage one of their runoff subsidiaries which is very skilled at running off businesses. We'll take over the runoff operations. We're providing, while the sale is a book value, we are indemnifying the purchaser of the company with respect to the development of the loss reserves. We'll account for the sale in the first quarter and on our books it will not be material one way or the other.

In terms of the relationships with Fairfax, as you mention, Markel and Fairfax have a relationship that goes back many years, although our business relationships, insurance relationships, have really been nonexistent since the early 1990s. We certainly know the number know the company well and respect its management team, and in the fourth quarter, we made an investment in Fairfax's common stock in a private placement that they completed, and the discussions with their running off Corifrance really preceded our discussions with Fairfax about buying equity in their company, and there was no link between the two transactions.

OK, and in the Corifrance book, what was generally in there?

It's a worldwide book, it's almost -- it'd be 90 percent property. A lot of very very small lines, very little U.S. business, but it's worldwide, but again, most of their clients are fairly small insurance companies in all parts of the world.

OK, and the indemnification that goes along with the sale, that's not capped in any way, is that correct or ...

I believe there is a cap on it.

OK.

But again, the exposure is very short tail, it's virtually all property business. It is not a huge -- I think there's a time limit as well. I think you know in two or three years we'll settle that indemnification. But again, it's almost all property business and the tail is not that long.

OK, terrific. Thank you.

Ladies and gentlemen, our next question comes from Rob Bobman of Capital Returns.

Thanks, try this again. I had two questions. On the Fairfax investment, I was wondering what level of due diligence you did. Where you basically just relying upon publicly available information or was there sort of an added level of due diligence and information that was provided to you, particularly in the area of loss reserves and reinsurance recoverables. And then I had a question on contingent commissions.

The due diligence was primarily the publicly available information. In addition to that though, we had conversations with a number of key executives within the Fairfax organization, but likewise, we've been in the business a long period of time and we're familiar with the nature of the operations and the nature of a lot of those exposures, but certainly primarily it would be publicly available information.

OK, thanks. And then on the contingent commissions, other question, how you're handling -- and I assume it's split between those production relationships with the program managers as opposed to independent agents, but I was wondering how you're handling the contingent agreements that you may have in place and your willingness to entertain you know contingence on a going forward basis in the wake of the whole, you know, Spitzer investigation, sort of appreciate your thoughts. Thanks a lot, good day.

Yes, the agreements with the larger brokers have all been terminated, and I think at their request back in the fall, and so those agreements are not continuing at all. The nature of our wholesale operations where we delegate limited underwriting authority, we continue to have the contingent relationships that we've always had, and I quite frankly do not expect that they will change.

Clearly, the Spitzer investigation is continuing. I think everybody is sort of keeping their eyes and ears open, and my guess is there will be changes in the nature of compensation in our industry and we will adopt to those changes as they come. I'm not sure what else I can add that would make a whole lot of sense.

A follow-up question I'd ask is it seems like you would not necessarily be averse for example to continue a contingent commission agreement with a small broker or independent agent, or even consider entering into a new one, presumably if you're satisfied with the disclosure being provided to that person's client, I guess.

Right. I guess each circumstance will need to be looked at and its individual circumstances. Clearly, you know, as an insurance company we're a few steps removed in many cases from the ultimate client, but you know, fundamentally whether the agent or a broker, whoever he is, his duty of loyalty to his client needs to be clear and where his obligation is first and foremost his ultimate client, you know, it's probably not a not appropriate for that person to be sharing in underwriting profits for example. But you know each circumstance and each relationship is going to be different based upon those facts and circumstances, and so I would hate to make any broad generalizations other than that.

OK, thanks. Continued good luck.

Thanks.

Ladies and gentlemen, our next question comes from Scott Cavanaugh (ph) of Merrill Lynch.

Hello. My question today is about asbestos. I wonder if you could give us an update. I know you finished your study in the third quarter, but in the sense of all of 2004 and how reserves are developing and any trends you might be seeing going forward.

Yes, you're correct. In the third quarter, we completed the review and found no need for adjustment. The issues continue to evolve. We have the very, very, very good fortune of being a very, very, very small player in this entire scene. But we do have exposures and our eyes and ears are open and we are involved in a number of the cases. I think, personally, my view would be that I'm more of an optimist than a pessimist and that the activity I'm seeing at state court levels, where state courts are getting better about the way the cases are filed and being heard.

And likewise, at the federal level, I'm optimistic that there will be a bill coming out of the Congress with regards to asbestos litigation that will be useful. And I think both of those things could be very, very useful to the industry and to the American economy going forward. Clearly, there are people that are injured as a result of asbestos and need to be compensated. And likewise, it's very, very, very clear that there are lots and lots of people who are making claims who probably are not entitled to compensation at all.

And lots and lots of attorneys that are participating in a grab bag of the money that are not entitled to compensation either. And so, we need figure out the best way to level the playing field and make those people that are truly injured and whose injure is directly the result of an identifiable party is properly compensated.

Thank you. One second question for you. As far as your kind of M&A activity going forward, could you just refresh me with what your strategy is going forward into 2005 and beyond?

We're very opportunistic. We're looking for any businesses that could add to the specialty nature of Markel's property and casualty business and that's on a worldwide level. We're very disciplined in both the quality and price of a book of business or a business that we would acquire. And fundamentally, we would look for that acquisition to be able to continue our objectives, which is to compound book value at a high rate over a long period of time. And operate a business with underwriting profitability. And so, virtually anything that fell into sort of specialty lines that we felt we could earn consistent underwriting profits on that would generate the kinds of returns we want to earn would be fair game for Markel.

Thank you very much. That's all the questions I have.

Thanks, Scott.

Ladies and gentlemen, our next question comes from Beth Malone of Advest.

Okay. Thank you. Good morning. Congratulations on the book value growth. I have a couple questions. First, it's just a housekeeping question. Do you have the realized gains after tax for the fourth quarter?

I do not have that.

Okay. Maybe I'll just call you later, Darrell, to get that.

Okay.

Okay. Onto the comments in the press release, you - it was mentioned that those in specialty admitted in London that there were - that the results were improved because of favorable losses in the quarter. Is that the equivalent of a reserve release?

That is correct, probably in connection with the specialty admitted segment in London. I think it's probably as a result of fewer developments of prior years.

Okay. Is that quantifiable? I mean, do you have like a dollar amount that reflected that improvement?

No, again, it will show up in our 10-K when we file that, but (inaudible) will be discussed in a fair amount of detail there.

Okay. On - looking out in the marketplace - I guess this is for Tony - you all have already pulled out of aviation and a couple other markets. Are there other markets that you see right now that may be vulnerable, where pricing competition is coming in? And as you look across the spectrum of the business in the marketplace, are we - would you now define the group in a down cycle or are we moving sideways in terms of pricing?

Beth, with the broadness of our product lines, which are - if you put them side by side, I've often said we've probably got 70 or 80 different niches. It's very, very difficult to generalize because each of them has its own unique characteristics and its own particular state in the marketplace. But in general, clearly, rates have peaked. There are moderate increases for poor loss experience or long-tail casualty lines are still taking some moderate rate increases. Property seems to have peaked and is under some pressure.

I would say, at this stage of the game, given the levels of rates that were achieved when the market started hard, maybe exacerbated or accelerated by 11 (ph), that the rates still seem to be, as I mentioned in my comments, adequate in virtually every line and we're comfortable with where they are now. We're vigilant with regard to potential moves, continued moves downward. But right now, in virtually every line that we're in, we feel very good about the rates, although moving sideways clearly increases our lot continuing. And we're watching every one of our product lines to make sure that - and to make sure that we understand where they're moving and are able to effectively evaluate it.

So, we feel good about the - we're disappointed that they're not continuing to go up, but we still feel even a sideways movement as long as our people pay attention to what they're doing and we expect that to continue that we're going to continue to produce extremely good results. It's pressure on growth. But we've, as I mentioned in my remarks, we're attacking it from a number of standpoints that we think will enable us to continue to move forward without compromising underwriting integrity.

Okay. On the California contractors, now I think it was last year that - or maybe the year before, where you had some issues with contractors in New York City. And is it appropriate to assume that any contractor business is going to be something you'll look at or do you have - do you think there's risk in other geographic markets with contractors liability, given what's happened in California and earlier with New York?

Most of our remaining contract business is artisans. Small things that we've done very, very profitably over a long period of time in that surplus markets. And this pretty well wraps up any serious involvement in GCs and larger contractors.

Okay. So you don't, at this point, there's no expectation of further adjustments of material size.

Clearly.

Okay. Okay. And as you mentioned, there's - do you see, as pricing, as it levels off and your property levels off, is - will we see, historically, and increase in acquisitions, possibly, by Markel and others? Because if you're not going to be applying your capital to grow the top line, then it kind of begs for what are you going to do with the money kind of thing. Although ...

What you and I have discussed and I mentioned it and Steve reiterated it, I mean, clearly, we are interested in looking at anything that is niche focus oriented. As you know, we really - we really don't want to be a generalist. We want each of our products to effectively be market leaders and have the ability to create uniqueness and solve problems within those markets.

We need to effectively have a price that will enable us to continue to compel book value to 20% and the business needs to be sustainable. With those characteristics and Steve appropriately used the term discipline, with those characteristics and the discipline with which we look at acquisitions, we're open to anything. As I mentioned, we looked at couple of things early on this year and at the end of last year that, frankly, didn't muster in one respect or another, so they're no longer under consideration.

But I would clearly expect, given the state of the marketplace, the fact the Terra Nova acquisition is really settled down and things are going well in London, that we would definitely be looking at anything that comes along that meets the criteria that we've outlined.

Okay. And just one last question on Lloyd's in London. I mean, from time to time, that becomes a controversial situation. And there's been a little bit more visibility on that in the media recently. What's your outlook or level of comfort with what's going on at Lloyd's right now and do you see that shaping up as still a positive developing situation?

I still do. I mean, I think the leadership at Lloyd's right now is solid. They understand the need for discipline and oversight, if that's going to continue to be a viable long-term international market and to continue to have the reputation that it's enjoyed. And I'm - I mean, there's a lot of work left to do. There needs to be more streamlining in the processes, the procedures.

But in terms of some of the basic things that we complained about early on, upon arriving in London in, with the acquisition of Terra Nova in 2000, they really made a lot of strides. I think the franchise performance group that Ralph Tally (ph) heads up reporting to Nick Pratjohn (ph) and Lord Levine (ph) is one that really understands the necessity of managing these businesses and making sure that they're run like businesses. And I think on ballots (ph), we feel very good about the platform in London.

Okay. Well, thank you very much.

Ladies and gentlemen, our next question comes from Gail Golightly of Wachovia Securities.

Thank you. When you exited the commercial contractors business, can you either tell us sort of how much of that is left at this stage or how we should think about the overhang of that. And sort of roll that forward to how we should think about the roll off of the residential contractors and the aviation books.

I think, Gail, in both cases, the contractors and the aviation business, we feel very, very comfortable that our reserves are appropriate and that the roll off on both of those lends should not have material adverse impact on our financial results.

I mean, is this sort of - a couple years, a 10-year?

In the aviation side, it's much faster than that because a large percent of the business renews January 1. And so, by exiting the market, well, as of today, a large majority of that is no longer in force. In terms of the California contractors, we are still - have a fair amount of in-force business. And so, that will evolve over the course of the next 12 months. But it ought not - I mean, we are hopeful and we believe that we've got our hand around the outstanding loss reserves. And the pricing that we had, in fact, put in place in the last couple of years was increasing significantly over the last 2 or 3 years. And while we don't see a large enough margin to stay in the business, we're not sure or don't believe that we have losses evolving that we don't know about.

Okay. And one ...

Steve, I think that probably begs a little bit of underscoring in that, in '03 and '04, we felt the pricing and still feel the pricing in those arenas we more than adequate. Frankly, the development in the older years didn't - that we've recognized didn't shake our confidence in that. It was more the volatility of the class that led us to this decision as opposed to being concerned about incurring losses this year or last year. So, we don't think the overhang is going to be a real problem.

I think, Gail, the prices in the marketplace are heading south and our - because we see this as a very volatile line of business, we would want to make a larger-than-normal underwriting profit. So, for us, the right contractors, even though it's a fairly long-tail business, we would not be happy to write contractors at a 95 or a 97 or a 99% combined ratio. Because it's as volatile as it is and because there's some terms and conditions in the nature of the coverage that create that volatility.

Our standard in this line of business would be to write it maybe in the low 90s or even the high 80s combined ratio level. And others are really willing to write it at margins that make us not competitive.

And I sort of have a strange question. I saw that there has been a central fund issue at Lloyd's where there's been an arbitration panel that's tried to disallow reinsurance. And does that ever sort of translate into an assessment to you guys?

Yes, I'll try to answer it and I'm not an expert on all of the Lloyd's issues. But years ago, Lloyd's bought, effectively, some credit insurance. And the insurers on that credit insurance claimed that the terms of their policy don't require them to pay the claims and Lloyd's and the insurers have been in dispute over that for a number of years. And there was an article recently about a ruling, with respect to one part of the case - it's a fairly complicated case that undoubtedly will go on for a number of years.

Lloyd's, I think, has made an announcement and I think AM Best, as well, has sort of reaffirmed Lloyd's status and while it's not a small number, I don't think it will impact the financial security of Lloyd's at all. And ultimately, Lloyd's can and will assess its members to maintain that financial security. But I don't believe that this event, by itself, will drive any meaningful assessments. And certainly as it relates to Markel's position in Lloyd's, it would not have a material impact on our business.

Great. Thank you.

Ladies and gentlemen, our next question comes from Charles Gold of Scott & Stringfellow.

Steve, this Fairfax transaction was sort of out of - out of character is the wrong way to put it - but it was a step out from what we've seen in the past - on a private market, negotiated transaction for an investment. And so far we're up roughly 44 points in 44 days on 800,000 shares. So, it's obviously working beautifully so far. Should we be less surprised to see private negotiated transactions a la Berkshire going forward because of your size?

I mean, I think it's a good point. In fact, we made a fairly material private investment in Mid-Ocean, which was a new venture formed in Bermuda back in '92 or '93 or '91, maybe - right around the time of Hurricane Andrew, which subsequently was acquired by EXEL. And we did that as a private transaction. It's proved - we continued on in those shares all of this time. I think, subsequently, we were a private investor in one of the White Mountains financing and real pleased that that worked out and we continue to hold those shares.

Private investments for Markel are something we've done before and something we'd be thrilled to death to continue to do. And again, they just need to meet our investment criteria. And Tom has many times explained very, very clearly how we think about investing and we're, I think, a very good - in a very good position to be a good buyer because of our long-term horizon and our desire to make money over a long period of time in a real sense and not worry so much about the accounting sense. So, I think your point is probably valid.

That the frequency might increase over time?

Again, it's a function of opportunities. We've got our eyes and ears open, but it's hard to know when the opportunities will come to our - come to us.

Well, if you find another one like that, we would encourage you to jump on it.

Thank you very much. Appreciate your support.

Thank you. Ladies and gentlemen, our next question comes from Stephan Peterson of Cochran Caronia Securities.

I just had a quick follow-up for Tony. It looks like there's sort of a sequential slowdown in premium growth for the specialty admitted segment. Was there anything unusual going on there, other than just general market competition? Any new entrants?

No, not really. Just the general market. Rates have slowed down and there's increased competition in certain of the sectors, Stephan. There's nothing really noteworthy there.

Okay. Terrific. Thank you.

Operator, I think we have time for one more.

Okay. Our final question comes from Eric Saxon (ph) of SunTrust Robinson Humphrey.

Good morning. I'm calling in for David (ph) who had to get off the call a couple minutes ago to take on a meeting. I just wanted to ask you, outside of the excellent complementary railroad coverages, the branch expansions in Europe and Canada, the acquisitions, are there any other new products or initiatives that you all are targeting for '05, '06?

I don't think there's anything specific enough that's worth of noting. Anything that I would talk about that's sort of on our drawing board, in the short-term, would not have a financial impact in any event. Because we would tend to start slow and it would take a couple years to evolve. But what I think is important is that we've got a lot of smart people who are very, very creative and we're constantly out there looking for new opportunities. If you look at our history as a public company, back to 1986, the vast majority of those years were years where the insurance market was a whole lot more difficult, a whole lot more competitive, a whole lot less fun than the market we're enjoying today.

There's a brief move today sideways. And so, the environment today, relative to the last 18 years for us as a public company, but as compared to the last 75 years that Markel's been in business, we're in amongst the best of times. And so, we're going to continue to enjoy them. The margins are great and we'll take advantage of all the opportunities that come our way.

Okay.

I want to thank you all for participating today. If any of you do have further questions or need to talk to us, we're always available. And so, don't hesitate to pick up the phone and call us. But our time is running out for this particular call and I do thank you very, very much for your support. And I wish all of you a very healthy and happy and prosperous 2005.

This concludes today's teleconference. Thank you for your participation.