Markel Group Inc (MKL) 2005 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Markel Corporation fourth-quarter 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. (OPERATOR INSTRUCTIONS) 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 very much, and I'd like to welcome all of you to Markel's fourth-quarter and 2005 year-end conference call. Before we begin, I would like to call your attention to our Safe Harbor and cautionary statements set forth in our 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.

Our program today will follow the same format we have used in the past. After I make a few introductory comments, Richie Whitt will review the financial results for the 2005 year. Tony Markel will speak about our operations and what is going on in the insurance marketplace. Tom Gayner will make some comments about our investment activities, and I will make a few wrapup comments and supervise the question-and-answer session.

For 2005, the insurance news was clearly dominated by Hurricanes Katrina, Rita, and Wilma. While these events clearly impacted Markel, our business is very strong and we're pleased to share with you our results today. Because the impact of the hurricanes was so significant to our financial results, in several cases throughout this call today, we will be referring to our results both before and after or with and without the hurricane losses. Let us assure you that this is to help you better understand the business and what is happening at Markel.

It is in no way an attempt to excuse or imply that the events didn't really happen. We know all too well that they really did occur, and more importantly, that we can expect similar events in the future. We hold ourselves accountable for everything that happens at Markel, and clearly we are accountable for our results here today.

The fourth quarter was great, both as our non-cat businesses performed excellently, but also we recognized some redundancy in our initial estimates that we made at the end of the third quarter for Katrina and Rita. These redundancies offset the cost of Wilma, which in itself was a very, very significant event for the industry and Markel. And we closed the year with a combined ratio of 101, which given the magnitude of the storms is really not too bad at all.

Our business continues to perform very strongly and we enter 2006 with a great deal of optimism. I would like to now turn the program over to Richie Whitt.

Thank you, Steve. Good morning, everyone. First I just want to let everyone know we plan on filing our Form 10-K right around March 1st this year, so be looking for that the beginning of March. As in the past, I'm going to focus my comments on our year-to-date results. I will start with our underwriting operations, then move to our investing operations, and then bring it all together with our earnings per share and other calculations.

Starting with underwriting and starting with our consolidated premium volume, consolidated premium volume decreased 5% in 2005 to approximately 2.4 billion from 2.5 billion in 2004. This decrease can be attributed to primarily three areas. First, competition across most of our lines of business increased during 2005, and I know Tony will talk more to that in his commentary later. Secondly, we had the sale of Corifrance in January of this year, a small French reinsurance company that we had owned. That organization had generated approximately 45 million in premium volume in 2004 and, of course, zero in 2005.

The third area that leads to the decrease is we have exited certain lines of business where we were unable to meet our underwriting profitability goals. The largest example of that was our exit late in 2004 of the aviation line of business in our London operations. That accounted for about 25 million of volume in 2004 and, of course, none in 2005. Also at our investors operations, we exited contractors business in certain states, and that probably led to somewhere between 10 and 20 million of decrease in volume. So those are the three areas that really contribute to that 5% decrease in our consolidated premium volume.

Net written premiums were down about 4% to $2.0 billion from 2.1 billion in 2004. Net retentions, however, were up to 82% from 81% in the prior year. Our retentions were impacted as well as our net written premiums were impacted by about 58 million of reinsurance reinstatement premiums related to the 2005 hurricanes. Before considering those reinstatement premiums, our net retentions of the gross written premium increased to 85% from 81% in the prior year. This is consistent with our long stated goal of increasing our retentions where appropriate across our very profitable lines of business. Most of this retention increase occurred in our Excess and Surplus Lines market segment.

Earned premiums decreased to 1.9 billion from 2.1 billion in 2004. Again, the 6% increase pretty much is a result of the commentary that we just discussed on consolidated premium volume and our net written premiums. When you put it all together, our combined ratio as Steve said was 101 for 2005, compared to 96 for 2004. Our 2005 results included 246 million of hurricane losses or about 13 points in our combined ratio, compared to 80 million of hurricane losses in 2004 or about 3 points in our combined ratio.

The underlying 5 points of improvement in our combined ratios before considering the hurricanes can really be attributed to about three factors. First, we continue to see favorable development in our Shand professional product liabilities division. This is primarily in the '02, '03, '04 accident years, where we experienced very favorable pricing conditions as well as form and rate. As a result, we continue to see favorable prior-year developments emerging from the Shand division.

Continuing that trend, we continue to see favorable development from our Markel specialty programs division, again from the more recent accident years where price and conditions were very favorable. The third area that led to this improvement was the fact that we are seeing less prior-year adverse development in our London Insurance market segment. In the prior year, we experienced about 30 million of prior-year deficiencies related to lines of business that primarily we no longer write. This year that number was considerably less. So those three areas really add up to the about 5 points’ improvement we're seeing in the underlying combined ratio before considering hurricane impacts.

Turning our attention to the investment side of the house, average invested assets increased to about 6.4 billion in 2005 from 5.7 billion in 2004. We ended the year with 6.6 billion of investments compared to 6.3 billion in the prior year. The increase is primarily attributed to 550 million of operating cash flows versus about 691 million of operating cash flows in 2004. The decrease in operating cash flows in '05 can be attributed to hurricane payments, both the '04 and '05 -- from both the '04 and '05 hurricanes, as well as the decline in premium volume I previously mentioned.

The 550 million of operating cash flows was partially offset by a decline in the unrealized gains in our portfolio, leading to the approximately 300 million increase in our portfolio in the year.

Net investment income increased 19% to 242 million from 204 million in the prior year. This is primarily the result of the larger investment portfolio as well as higher yields as interest rates increased throughout 2005. Net realized gains for 2005 were approximately 20 million, compared to 4 in the prior year. The realized gains in 2005 are primarily contained through our equity portfolio.

The change in unrealized gains on our portfolio was a decrease of 115 million in 2005, compared to a favorable increase of 163 million in 2004. This was approximately evenly split between our equity portfolio and our fixed-income portfolio, and I'm sure Tom will speak more to this in his comments momentarily. Our total return on an annualized accounting basis for the portfolio was 2.3% in 2005, compared to 6.5% in 2004.

When you sum up the results of our underwriting and investing operations, you get to our total results. Net income for the year was 148 million compared to 165 million in the prior year. I will comment that our effective tax rate decreased to 20% from 26% in the prior year. This was primarily the result of our allocation of the portfolio to tax-exempt securities, and we did increase that allocation throughout 2005. So again, net income of 148 million versus 165 million last year, comprehensive income decreased to 64 million compared to 273 million last year. That decrease, again, was primarily due to the large increase in the unrealized gains on our portfolio last year compared to $115 million decrease this year.

Diluted earnings per share for 2005 were $14.80 compared to $16.41 in 2004, and book value per share increased 3% to $174.04 a share compared to $168.22 a share in 2004.

At this point, I would like to turn over to Tony Markel, who will go through the operations.

Thanks, Richie. Richie has given you the numbers, so I won't bore you by rehashing them. Suffice it to say that we really had a very gratifying fourth quarter and an interesting, if not totally financially rewarding, year.

The quarter was highlighted by growth in our gross premium volume, which was really exciting, and obviously, Richie has already mentioned our increase in net retentions, which would make the growth in net premiums in the fourth quarter even that much better that the fourth quarter of '04.

In addition, if you look back at '04, it was a strong reaffirmation of our conservative reserving principles, as evidenced by a reduction in Katrina and Rita estimates that resulted in our ability to digest the losses from Wilma, the third-largest windstorm in history, and still post [sustaining] underwriting results for the quarter.

The year, although financially marred by the hurricanes, underscored the resilience created by our product diversity and underwriting focus. As a result of our solid balance between property and casualty, we can't totally eliminate vulnerability to property cats, but to be able to digest almost $250 million in windstorm related losses and almost break even from an underwriting standpoint is clearly testimony to the strength of our product, distribution, and geographic diversity.

Although I mentioned that posthurricane response in fair detail at the end of the third quarter, I think now that the dust has settled -- or should I say the wind has stopped blowing -- a postmortem is in order. First of all, we have always had a disciplined cat management structure in place. But unfortunately, in retrospect, we relied too heavily on cat modeling software, albeit with a conservative approach. In addition, 2005 produced, as you are all aware, three out of the worst seven windstorms in history, by far surpassing the previous record for catastrophe-related losses in any one year.

I think the important thing to note is that we continue to focus on limiting our cat losses from any one event to reasonable proportions, and we have added additional stress tests to complement the continued use of cat models. In addition, we dramatically increased our prices and reduced limits in cat-prone areas as a result of increased catastrophe treaty costs, and probably even more to important to note, the expectation of more 2004 and 2005-like storm activity in the future. I won't go so far as to characterize 2005 as a cheap lesson in meteorology, but a lesson well learned nevertheless.

Given the numbers from our London operation, as you break down our various component parts, I really have a need to switch gears for a minute and comment briefly in order to diffuse any potential concerns about London. We are very proud of what we've built in London, and the people and the products truly operate in the Markel style.

Their sheer numbers this year obviously reflect the negative impact of the storms, given their products, which include direct U.S. property, offshore energy, and property reinsurance, and represent some 22 points of their combined ratio, as reflected in the press release, as well as our continuing effort to build margins of safety in our reserves over there.

The bottom line is don't let the London numbers deceive you. We've built a franchise that our shareholders should be proud of and one that will produce Markel-like results.

Our product and geographic expansion continues to take hold. The previously announced branches in Toronto, Madrid, and the three new UK offices are up, running, and producing. The premium growth in the fourth quarter is reflective of continued growth in initiatives started in '03 and '04 like SMART, our alternative risk division at Markel Re, and MRS, the risk solution division of Markel Insurance Company.

In addition, the new subsidiary announced last quarter, Markel Global Marine and Energy, is building staff and working on systems with an expectation of opening their doors for business by midyear.

The market is, as predicted. still very spotty. Capacity is clearly contracted and rates for offshore energy have gone up dramatically, as well as have those rates for areas directly affected by the hurricanes. On the other hand, fire rates are up only moderately. Earthquake rates, albeit spotty, don't seem to be moving quite as aggressively as we would have hoped and expected, given the specter of cat modeling issues and increased catastrophe treaty costs. And casualty rates, although still reasonably adequate, continue to be under pressure.

We've dealt with these issues before and, as always, continue to be committed to underwriting profits. The terrific results in the fourth quarter reflect our enthusiasm and optimism for '06, and give us a real head of steam going into the year.

And be glad to answer any questions. With that, I'll turn it over to Tom to talk about the investing side.

Thank you, Tony. As Tony mentioned, Richie covered the numbers, so I'll limit my comments to just the qualitative side of things.

2005 was clearly a year of very modest results on the investment side. On the fixed-income portfolio, we're still relatively short in our duration -- nearer to four years than five -- and our four- to five-year normal bandwidth of what the duration would be remains very high in credit quality and relatively balanced between municipal, government, and corporate securities. I think we are well prepared for a rising interest rate environment and, perhaps just a bit like our personalities, we are bit defenseless. That is our stand on the fixed-income side.

On the equity side of the house, the returns were essentially flat for the year versus a modest mid-single digit return for the S&P 500. Over the longer-term five-year period, we've actually earned about 10% a year for the last five years versus a -1.1% for the S&P. That is a significant outperformance and one we are very happy with.

The way I would characterize the year and our status right now is we are encouraged and optimistic. The underlying earnings of most of the companies we own went up; the stocks just didn't seem to notice. Over the longer-term though, stocks are driven by underlying earnings and economics, so we are confident that the market will indeed figure it out.

We continue to expect double-digit returns from our equity investments and we expect to continue our normal allocation of roughly 80% of shareholders' equity into equity markets.

So with that, I will be happy to answer any questions during the Q&A time, and I'll turn it over to Steve.

Thank you, Tom. I have just a few wrapup comments before we start the question answers, but I would like to make a couple comments. As we close 2005, our investment portfolio is now at $6.6 billion. Shareholders' equity is at $1.7 billion, or $174 a share. Our growth in book value per share, one of the key measures that we look at, was only 3% for the year, which is far short of our normal expectations. Over the last five years, the number's approximately 11%, somewhat better but still less than we would hope. But nevertheless, the business is strong. Our financial position is strong. And we are very, very optimistic about our prospects for 2006.

I would like to take this opportunity to thank our 1900 associates for the wonderful job that they have done in not only 2005 but for many, many years, and we really do look forward to an exciting and profitable 2006 (technical difficulty).

With that, I would like to open the floor to your questions.

(OPERATOR INSTRUCTIONS) David Lewis, SunTrust Robinson Humphrey.

A couple of questions. First, Richie, can you give us the more detail on the reserve relations, both for the fourth quarter and the full year? If it's 5 percentage points -- I just did a rough calculation -- does that mean in the fourth quarter alone, that would have impacted pretax earnings 97 million? Is that correct?

Dave, I think it's probably best to wait until the 10-K is put out to give you those numbers. Those -- I think you know how our 10-K looks -- those will all be there pretty clearly.

Well, that's almost 1.5 months away, or a little over a month. Did you not mention that there was an impact of 5 percentage points on the combined ratio due to redundant reserve releases?

Yes, if you look at the number before hurricanes for the year, 2004 would be a 93. 2005 would be about an 88.

That's consolidated or just [north]?

That's consolidated. And that 5 points of improvement is primarily -- it is not entirely -- but it is primarily due to prior year releases. If you look back at last year's annual report, we actually would have had prior year development last year. And this year we're going to have on the order of 50 million of prior year improvement on a consolidated basis.

So that is where the majority of it is coming from. We also have the fact that in some of our businesses, the current year loss ratio is slightly lower because of the favorable trends we've seen in the last few years in terms of price and coverage. But I would say it is primarily that prior-year piece that is driving it.

To make sure I understand, the roughly 50 million prior year improved development, is that netting the negative last year or that just an absolute number?

That is absolute improvement during the year of about 50 million. And I don't have the number in front of me, but if you went back and looked at our annual report for last year, the prior year number would've been development or unfavorable.

So to get the impact in the period, I would have to add the negative development in 2004 to the 50 million, correct?

To get to the difference between the two years, yes.

That's great. I just would note that if there is any way in the future you guys could break out kind of the quarterlies in addition to the year-to-date, that would probably be helpful for us. Because one thing we don't have is kind of the fully diluted share count. Do you have that available just for the fourth quarter?

Fully diluted share count is 10,143,000 shares.

Do you by chance have a pre FAS-115 book value?

(indiscernible)

Just trying to break that out. Then lastly, can you talk to anything about what you're hearing on the reinsurance treaties out there?

This is Tony. It's pretty spotty, being indicative of what we're seeing in terms of [reflects] in the market. Clearly, reinsurers have been extremely aggressive, justifiably so, in the areas that were affected by the storms, both in '04 and '05. I think to some measure they've been not quite as aggressive as I expected them to be in some of the areas that were not affected. I think they have been a little bit more moderate in their approach than I expected them to be. So there's sort of a take-no-prisoners approach where they have been hurt, but disappointingly, a little bit more moderate in some of those other areas than I expected it to be.

Tony, one last question. As you talk to the rating agencies, are they still viewing that you may have to have a 50% increase in capital to support any catastrophe-prone type exposures, or what is your latest on that?

Talking about the market in general?

Yes, I think AFS came out and said, given the models didn't work, we're going to probably require companies to hold greater capital levels.

We haven't had any of those conversations with rating agencies, and our mix of businesses is such that it really would affect the primary -- the monoline companies or the reinsurance companies. Because our business is so mixed and balanced, we haven't had any specific conversations yet on that subject. I don't expect it will have any impact on us at all.

Thank you very much.

Tom Cholnoky, Goldman Sachs.

I have a couple of numbers questions. Can you allocate for us what your ultimate cat losses were for each of the storms, Katrina, Rita, and Wilma?

Yes, we can. These numbers have been rounded, so they might be off 1 or 2 when you add them all up. But Hurricanes Katrina and Rita in total were about 182 million. Katrina, about 139 million of that 182. Hurricane Wilma is about 65 million.

Number two, on the tax rate, you indicated that one of the things you benefited from was more munis. What is kind of a run rate tax rate we should be assuming for you now? Is that 19% kind of what you're telling us is the run rate?

Hopefully, we'll have big underwriting profits next year and they'll be fully taxed.

So you mean back to kind of -- if you have a normal year -- I understand that, but if you have an underwriting profit and you still put it into munis, are you going to have a lower tax rate?

Pretax, we're hoping is going to grow quicker than how much we can allocate to the munis. I would think 28 to 30, something in that range, would be a reasonable expectation to start the year out with.

Okay. And then do you have a number on your Corifrance gain? I don't know if (indiscernible) disclose that prior to --.

It was about 5.5 million.

5.5 million, okay. And then I guess the last point is that how should we think about your net to gross going out into '06? You were running, I guess, at close to 85% in the fourth quarter. Once again, I just want echo the prior thing -- it would be great if we could get releases that actually show fourth-quarter numbers and not just annuals -- so I am assuming this is correct. Is that likely to rise in '06, the 85% net to gross?

Where we are in the fourth quarter before the negative impact of the reinstatement cat costs that drove the net down to what -- 82, or something like that -- that fourth quarter number's probably indicative of what we will be in '06.

We continue to look for opportunities. As you know, we want to retain every bit of premium that we can for our own account and we continue to look for opportunities to increase our nets. But there's not a lot of low-hanging fruit out there yet to be harvested. So I would expect the number before the impact of the increased cat costs in the fourth quarter to be pretty indicative of our expectations in '06.

Okay, that's great. I will come back if I have anything else. Thanks.

Doug Mewhirter, Ferris, Baker Watts.

I had just two or three smaller questions. The first one is concerning your energy and marine business. Do you have any goals or ideas of how much premium you want to write in that business? Also, if you could quantify things you're hearing anecdotally about pricing, just to corroborate some of the things that we are hearing about fairly massive price increases.

As you know, we never -- we budget numbers, but we never effectively set up premium volume targets. We think that sends a mixed message that would emasculate the concentration on underwriting profits. So our charge to every one of our existing divisions -- and I'm not blowing smoke here -- as well as our new Markel Global Marine and Energy is once you're up and running, to write every piece of business that we think we can produce an underwriting profit on and walk away from anything, and at the end of the day, we will add them up.

So we don't expect MGME, as we lovingly call it now -- MGME, to be particularly contributory in '06, given the fact that we're probably not going to get up and running until midyear, and the volume will end up being what the volume is.

Long-term, we think it has a tremendous position in the marketplace. We're really developing a high-quality staff of experienced and talented individuals, and we have some long-term enthusiasm. But to quantify it would be really foolish at this stage and I will underscore that we don't expect it to be much of an effect on '06.

As far as the rates are concerned, the Marine side particularly the offshore energy and cargo areas have been probably the platform of most aggressive response post-hurricanes. We are seeing numbers three to four times rates on offshore energy, depending on the risk and it how was impacted by the hurricanes. And the entire Marine and Energy business, based on our '05 volume and '06 expectations, is probably net-net the most positively impacted in the post-hurricane environment.

Okay, thank you for that. Could you give any specific cost impact of your Company's renewals in January, if your rates went up across the board 10% or 20% or they are flat? I know you probably have a bunch of different contracts you had to renew.

You're talking about our reinsurance rates?

Yes.

First of all, obviously, we endure what the market endures. And I have already eluded to what I thought the reinsurers did. They've taken a very aggressive approach in general in the marketplace on catastrophe exposed stuff and maybe a very moderate position on all other.

Candidly, our property cat treaty doesn't come up until later in the year, so we did not have to queue up 1/1 with everybody else, and we'll see what happens. But I can assure you that or budgeted numbers anticipate what we see as an unfolding response from the marketplace. And I think I have already eluded to what we saw in the 1/1 renewal season.

Okay, thank you very much.

[Michael Phillips], Stifel Nicolaus.

I'd like to turn to your Specialty Admitted segment for a second -- I think you had pretty strong growth in this quarter. I was wondering if you could comment on where you're seeing that coming from (multiple speakers).

Which sections of the Specialty Admitted? The (multiple speakers)?

Yes, exactly.

I'll tell you, our program business, which is the summer camps, day cares, all the program stuff, has really continued to be strong and has proven to be -- [continually] built up solid reserve redundancies that Richie eluded to. We have been able to take historically some solid underwriting profits and continues.

I mentioned earlier the division Markel Risk Solutions, which is part of Markel Insurance Company, which is part of the Specialty Admitted sector, has shown gratifying growth and starting to realize our expectations there. So it has been a very strong sector for us.

In the past, you've talked about favorable development in that segment as coming from the A&H and Casualty. I assume this year is kind of the same two places?

Absolutely. That's what they're dependent upon. They have very little property in those divisions. It's almost all relatively main street, bread and butter casualty and related accident and health products.

Okay, good. If I could turn real quickly to the London market. I know you have done a lot of work with reunderwriting what you took on over there. And this quarter it looks like, if I could break out the combined ratio for that market, close to [130], which I know includes hurricanes and probably some reserve development.

I wonder if you could comment on the core profitability of that segment.

Well, I mentioned it specifically in my earlier remarks, because of the sheer numbers and perhaps some concern that would come out of looking at the numbers. Obviously, I think the press release indicated like 22 points of the combined ratio was hurricane-related. We continue to look for margins of safety and to build margins of safety in our reserves.

And I meant every word I said in my earlier remarks -- we think our London operation is producing Markel-like results now, sans hurricanes. And we are very, very proud of the transition and the transformation that we've created as a result of the Terra Nova acquisition over there.

Okay, great. Thanks.

Jay Cohen, Merrill Lynch.

Good morning. I guess two main questions. First one is a tough one. I guess it has to do with the loss ratio. And obviously, what we're trying to do is forecast that loss ratio going out. And in the quarter, I think your loss ratio we talked about is something like 44%, which is obviously phenomenally good and one we would not think would be sustained. But you'd think going forward there is a lot of different moving parts. You could have further reserve releases. Obviously, you have your own accident year loss ratio pick.

So maybe to start the question, from an accident year loss ratio standpoint, what kind of picks would you expect -- given the market conditions and given your reserve development, what kind of picks would you expect to be making in '06 versus '05?

I think, Jay, the year-to-date number for Markel was 58% for the current accident year. It is reasonable for us and with the interest rate environment we are currently in, we would be looking for (indiscernible) low 90 combined ratio kinds of numbers. And if we continue to enjoy reserve releases, the number could be slightly less than that.

But to make the growth in book value per share in the current environment, in the aggregate we're looking at the low 90 combineds.

That's actually really helpful. Thank you.

You talked a bit about the market conditions in some of the London businesses. Are you seeing any impact in your U.S. specialty business? Walk us line by line what kind of impact you're seeing from some of the storms from last year and any changes in the market.

Well, consistent with my (technical difficulty), because obviously the issuing carriers have to mirror their reinsurance costs to a certain extent. The story is yet to be told, because it took a long time for the reinsurance market to react, and coupled with coming right on top of the 1/1 season, I used the term spotty in my remarks, because there is still a little bit of gray area as to how the market is going to shake out.

But early indications are that there will be substantial rate increases that we'll be able to sell, and justifiably so, and digest it, on those areas that were directly affected by the hurricanes. I think there will be moderate increases on the catastrophe exposed, but unaffected areas because it only hit the Gulf Coast in Florida.

We expect earthquake rates to go up at least moderately. That is still a work in progress. We're not exactly sure. As I indicated, the offshore energy rates, which given the limited size of that market and the magnitude of the Katrina and Rita losses, are going up exponentially.

And on the other side of the coin, with the exception of pockets, casualty rates are still remaining reasonably under pressure. There are no substantial rate increases that we see in the casualty areas except on accounts that obviously have proven unworthy of their current rate structure. But they are moderate increases to flat on the casualty side.

I am not sure if that is what you're getting at, but that would be my sort of thumbnail sketch of where the market is right now.

That's helpful. Just remind us -- what percent of your business, as you look at it, is property versus casualty, if you can give us a rough number.

I would have to add up all the components -- on a gross basis. But don't forget the net would be less as a percentage because of the impact of the catastrophe treaty. I would say that our property business is somewhere in the neighborhood of 40% of our total volume, which we think is terrific. We think it is a great balance and, obviously, are still very much wed to the property business in spite of the impact of the two last year storm seasons.

And one of the measures that I've used and I mentioned it earlier is that our pricing mechanism going forward anticipates the continuation of sort of the storm-related activity in '04 and '05, and we expect our pricing to be able to digest some reasonable activity, expected activity in that regard.

I will also hasten to emphasize that most of our property is clearly not coastal or earthquake. We have a solid piece of catastrophe-exposed property business in those property numbers, but a lot of it -- most of it is not catastrophe-exposed.

Thanks for that answer, Tony. In a year like this, where the underlying numbers were really quite good but you had some pretty crazy weather, I know you guys get paid basically on growth in book value. In a year like this, how do you guys get paid?

Not as well.

I can tell you right now, I have already told my wife not to expect a bonus this year.

It's five years growth in book value per share for our bonus system, and that number (indiscernible) around 11%. And so the executive team will not cash big bonus checks this year. However, because of the strength of the business everywhere else, we're really excited that the total bonuses that we will be paying for underwriting profits in other areas of the Company probably will exceed what was paid last year. And I tell you that creates a great deal of enthusiasm around the Company. And we are not all embarrassed that there will be several dozen people around the organization making more money than the folks in the executive management team.

That is a great opportunity for me also to underscore the way we do focus on performance-based compensation. In addition to the executive team, which rises and falls on the aggregate book value per share over time, clearly we think our bonus structure for our underwriting departments and our operating units is right on point relative to results.

And unfortunately, those divisions who have done very, very well because of standing property-related results in the past recognize that their incentive comp is going to be dramatically impacted this year. They have no control over the way Mother Nature reacts. They have done very well when Mother Nature was friendly and they will not do as well when Mother Nature shows her teeth.

So we think our bonus structure is really focusing right on where the rubber meets the road in underwriting profitability.

And as Steve said, those casualty divisions -- I don't want to drag this out -- but those casualty divisions that had fabulous years will benefit fabulously from our incentive comp program, in spite of the disappointing overall results that we showed.

I think shareholders appreciate the structure from the management's standpoint. That's all I have. Thanks, guys.

Kenneth Billingsley, BB&T Capital Markets.

My question starts, I want to earnings -- peak earnings. Would you imagine that peak pricing in the marketplace occurred between '03 and '04, and that even with the significant increase recently in certain lines, that we may not have exceeded peak pricing?

I would generally agree that prices have been more down than up in the last couple of years. So I don't have a problem with that.

Following along those lines, I understand retentions for you guys will be up. But would we expect gross premiums written to (multiple speakers)?

Let me make it real clear that the numbers that we just referred to were broad marketplace numbers. I am pretty confident that certainly we have held the line on prices in the aggregate. There are a few spots where we've met the market where we thought we might have the capacity to do so. But I think in the aggregate, we would believe that we have a net price increase in our book of business. But the market is definitely not in the same pattern, which is why our volume has not gone anywhere in the last couple years.

I would also add that I think contrary to the last 15 or 20 years, that market swings and peaks and valleys in the market that you used to be able to generalize, it's not as easy to generalize as it has been in the past. I think the market is much more segmented now and not as overly dependent one section on the other. So you'll see rises in some sections and decreases in others. It is not as easy to generalize about the state of the market rates the last couple or three years as it was the previous 10 or 15 years, where it was deemed to be sort of a peak and valley type thing overall.

So our expectations from a top-line basis is not expect a decline in growth down to maybe 2002 levels. Would that incorrect to assume that?

Sorry, in pricing or volume?

The gross premiums written that you may write going forward should stay above 2002 levels then?

Our sense is that the volume will be very similar in '06 to '05.

Okay. Moving on to just my last question on the hurricanes themselves. Initially, when you said you had about 200 -- 250 some odd -- [$54] million for Katrina and Rita, you had said at the time there was problems with the models and such and concerns from an underwriting standpoint. Yet three months later you release approximately $72 million of reserves from that. Could you at first maybe speak to that?

And then second question going on that is regarding the Wilma estimates. Do those already assume essentially the positive expectation? Is that baked into that 64 million or is there potential that there could be some release out of that as well?

Yes. Basically, when Katrina hit and we all saw the devastation in New Orleans, it was very obvious very quickly that the models that everybody used to forecast the magnitude events were not going to work. The models were wrong. That is just the way it turned out. The models underestimated the size of the loss.

Because of the magnitude of the damages, early on, it was very difficult to get data and information about what the status of things were. And if you recall, we were very slow in releasing data and making an estimate about Katrina because we really didn't know. We were having difficulty in getting information.

Clearly, when we did release, which I think was concurrent with our quarterly release or very close, I think we released the Katrina and Rita numbers maybe a week before our quarterly release -- but it was almost on top of it. At that point in time, we took a fairly pessimistic view of what the losses might be because, as we historically do, we don't want to have to come back and increase the number. We would rather be conservative and have the future news be good news.

But we did not expect that it would go down from there. We were just, as it turns out in hindsight, too conservative about the losses. And the area that we were too conservative was primarily in the subsegments of our business where we are writing excess property lines. And we would participate in an excess property line where we might have been writing on a large schedule of many, many different properties, 10 million, part of 50 million, excess of 100 million, or something like that. And you knew that the insured had lots of losses, but whether it exceeded the 100 million or not was unknowable. And rather than say, well, maybe half of it is gone, we said let's assume it's all gone, and just took a fairly conservative outlook.

So it turns out in the fourth quarter, obviously, there's a great deal more information at this point in time. We feel like we have a very, very good handle not only on the Katrina and Rita losses, but the Wilma losses as well.

I would not expect further takedowns, however. I think the number we have now is good and reasonable. Still uncertainty about it and I don't expect it will get worse either. I think it's pretty close. But it is not going to be perfect. It will move one way or the other, hopefully not much.

Did the Wilma losses in aggregate surprise you? Again, in the same vein as the way Katrina did, the way the model worked?

That Wilma was as huge an event in the fourth quarter surprised us -- and Wilma was a huge event. But the numbers in relationship to the models were just as wrong on Wilma as they were on the other ones. So from that perspective, maybe the answer is yes. But in terms of having looked at it, adjusted it, I don't think so.

Interesting to note Wilma, which compared to Katrina, looks like a piece of cake, is the third-largest insurance-related hurricane in the history behind Katrina and Andrew back in 1992. So in retrospect or relative to Katrina, you sort of think of it as a stepchild.

But coming across the West Coast and doing all that damage on the East Coast of Florida, it really ranks as the third-largest hurricane in the history. And we feel great about having digested that loss in the fourth quarter and been able to post the numbers that we did in the fourth quarter.

And I'd just like to add on to other comments made earlier. If possible next year, if you had the fourth-quarter results in the release it would be great. I'd appreciate that as well. Thank you.

David West, Davenport & Co.

Good morning. To attack, I guess, the outlook for the current year in another way, everything I'm hearing, it seems reasonable to expect that the 2006 gross premiums written are likely to go up, given you don't have the sale of the unit, you have expanded -- it sound like you're pretty optimistic about some of your expansion in international territory, and you are getting, obviously, some good pricing gains in certain lines of business. Do you feel like that is a reasonable assumption?

David, we certainly are optimistic that that will be the case, and we are certainly going to be aggressively pushing prices up where we believe it is appropriate in some of the cat-exposed areas. I think it is still very much unknowable whether the market will also be pushing up prices to the same extent that we are. And so it would not totally surprise me if there is some subsets of our cat-exposed business our pricing is more aggressive than others and we don't achieve the volume because we don't write that business.

But broadly, I think the real answer in this business is margins, not volume. And we will expect to have a meaningful underwriting profit; whether the volume is up 50 million or 100 million or down 50 million or 100 million will have only a modest impact on our expectation of margins. That is where our focus is and if we can't write volume because our prices aren't right, as you know, that is not the worst thing in the world.

Fair enough. Lastly, the only other thing I had my list was wondering if you could comment regarding cash flow expectations. Have the storms and the payments associated with those likely to limit portfolio growth in the first half of the year? Or do you feel like most of that is largely behind you?

It is not largely behind us in terms of what we pay as part of the storm losses. But I think our cash flow next year we would expect to increase over the 550 million that we had this year, and I think last year's was six hundred and something, 650 or so.

Dave, I think probably somewhere between the 550 and the 691 would be a good guess at this point in time.

Okay, very good. That's helpful. Thank you.

[Gary Johnson], Alliance.

I had a question and about the debt issue at Markel, Markel Capital Trust -- that [long] date (indiscernible) coupon issue callable in early 2007. What is your current thinking on that [actional] call?

We really have obviously -- we would've announced it if we had made a decision at this point in time and we have not. But we will be looking at that between now and that date, and it is an option that we have and it is not the cheapest piece of paper out there. I think we could replace it at a much, much lower interest rate. And from our perspective, the trust preferred features of that piece of paper are not particularly attractive to Markel, certainly not as attractive to Markel today as they were when we issued it several years ago. So it's certainly something we're thinking about and when the time arrives, we will make a judgment.

Thank you.

Amanda (indiscernible), Goldman Sachs.

Most of my questions have been answered, but just one cleanup question. Is there any sort of update you can give us in the wake of the SEC subpoena you received last October?

We've heard nothing further. We responded. The response that we had no finite or nontraditional reinsurance covers and that we had had a purchase of securities of Fairfax that had been publicly announced and disclosed sometime previously. And we have heard nothing further.

I believe we have gone back and asked if there is anything that they would tell us about the process, and they basically -- I think basically decided they didn't want to tell us anything. Our sense is that they really haven't looked at it, but we don't know that.

Thank you.

Stephen (indiscernible).

Thank you. I am wondering if we can get a little further color on your approach to reserving for the catastrophe losses. Clearly, Katrina not only blew all the models away, it just blew physical ability to get proper claims information and data and such. And I am just wondering if you could describe for us the process you went through in the fourth quarter to take down your Katrina and Rita estimates, and how much of those estimates are based on actual cases versus IBNR at this point?

The vast majority of it at this point is based on actual cases. And one thing that the models do a fairly good job of is identifying policies that exist in the past. And so I think we feel very, very comfortable that we have been able to pull and research personally every policy we have that is exposed to any of these events, and at this point in time, we have heard from all those people who have been affected and had a lot of process, and I think reasonably establishing the appropriate reserve. So I think it is not all done at this point in time, but the vast, vast majority of it is. And while we are still carrying a meaningful amount of IBNR type reserves, I think our reserves are pretty realistic.

I might just add one thing there. In terms of amounts that we brought down in the fourth quarter, I am not aware of anything that was brought down, unless we have an adjustor's report telling us what the damage was and how that related to where our policy's attached, so we had that information available whenever we did these things.

And also, some of them were after claims has closed, quite honestly, either with payment or without payment. And at that point, it was clear we needed to make an adjustment to the reserves. So we didn't take any leaps, I would say, in terms of bringing down numbers. It was based on information from field adjustors or actual settlement or closing those claims.

That's very helpful color. Thank you, gentlemen.

Ron Bobman, Capital Returns.

I had a couple of questions regarding the storm losses and then the cat reinsurance impact, and one numbers question. Have you provided us or will you provide us the gross losses for the three storms of '05?

Gross losses -- and again, these are pretty round numbers so they could be off one or two in total -- 477 million for Hurricane Katrina, 104 million for Hurricane Rita, 176 million for Hurricane Wilma.

Okay, thanks. My reinsurance questions -- I know Tony -- I think it was Tony -- said that your cat property program does not renew until sometime mid this year. The consensus from industry players, reinsurers and insurers alike, is that that market might further tighten beyond what was seen on the 1/1 renewals. With that -- A, I'm wondering if you believe that, and with that prospect in mind, do you think about going into the market early as a result, A?

Then, do you have any concerns -- are you going to have a different view towards the amount of certain reinsurers' participations on your program or participation at all of certain reinsurers again that were maybe on your program last year or would have otherwise been eligible to be on your program in prior years?

I am not really concerned about waiting until normal expiration. I'll tell you, our catastrophe property reserves (technical difficulty) have been terrific. In spite of the impact of '04 and '05, if you look at our -- actually at our last seven years, which are consequential, property cat reinsurers have come close to breaking even, to be very candid, on our book in spite of obviously the negative impact in '04 and '05.

So we think going in discussing a very, very positive picture, a gain in spite of the last couple of years, and I am not particularly concerned, given the attractiveness of our account overall, about the evaporation of capacity between now and our expiration. I am not inclined to speed up the discussion.

That said, we are clearly realistic, I think, in our '06 projections relative to the impact of what we see coming out of the catastrophe treaty business. We think that clearly our pricing, which is always done with an eye towards the gross loss ratios and the profitability for both of us, will digest those anticipated increased costs. And we don't look particularly with trepidation at the unfolding property cat market this year.

How about participations?

We always manage those. I would put our management of our reinsurance partners, their financial capability of paying, more importantly or as importantly as their willingness to pay. The resulting lines that we give them and consistent with their financial strength, we're not going to change one iota. We're going to do business in proportions that we think the financial statement and the track record of these reinsurers justify.

We have an approved list that, frankly, only includes those reinsurers that we are comfortable with. It defines the exposure that we are willing to take from them. And the change in the environment because of the hurricanes is not going to dissuade our focus and concentration in that fashion.

Thanks. It does look like your reinsurance buyer, whoever that staff or team is, does deserve a bonus. But 101 sure is (multiple speakers).

I'm sorry you said that publicly because I've got to go to negotiations -- but thanks.

Mark Dwelle, Ferris, Baker Watts.

Just building on a couple of prior questions. Last quarter when you reported results, maybe in the depth of your pessimism, you talked about a number of changes to your underwriting approach, lowering limits, rebuilding new models, changes to concentrations and so forth. In light of how things have all developed, are all those initiatives still planned or did you kind of take a deep breath and say, well, maybe we didn't do so badly after all?

I think your comment is probably dead-on about depth of pessimism. But no, I think the releases and the benefits and the new information about the third quarter storms does not change at all our view of needing to add to the models, establish new models, reduce limits, significantly increase prices. We've looked at virtually every single productline that has cat exposures. The standards today, as they always have been, is that each product has to stand on its own two feet.

What we're finding with the adjusted numbers, though, is that more of the products, in fact, have performed very well over the prior five-year periods of time, and so the magnitude of some of the adjustments may not be quite as significant.

But where we have property exposed on Gulf Coast and throughout Florida, clearly substantial rate increases are warranted in order to earn the sorts of returns that we expect. We expect significantly lower limits on -- and significantly lower aggregate exposures. And I think broadly, we would prefer to establish a model in our property writings where we retain a much larger share of the catastrophe risk and get paid for it and reinsure less of that risk.

As Tony pointed out, our reinsurers turned a pretty good dollar on our cat business over time, and we could do the job as well, I think, by retaining much more of the business. But Tony many will --.

As I tried to mention in my remarks, we had a disciplined approach. I certainly don't feel guilty or inadequate with regard to the way we were monitoring. I do absolutely accept the mea culpa with regard to perhaps the naivety of being overdependent on the so-called sophisticated catastrophe models. And the lessons, regardless of fact that the losses have diminished -- and that is more indicative candidly of reserving conservativism than anything else -- regardless of the fact that we have had improvement in those reserves, we are not dissuaded from the lessons -- as I indicated, not necessarily cheap lessons -- in '04 and '05 and modifying our approach, which frankly means more stress testing to the models, some meta models, some additional rudimentary challenges, for more conservatives in our approach -- reduced lines.

I think we were good. I think we were outstanding property cat writers and over time we've done very well, but we're going to be better as a result of what we learned in '04 and '05.

That's very helpful. That's my only question.

Jay Cohen, Merrill Lynch.

I didn't want Tom Gayner to get off without having to say anything else, so --.

I told Steve he should cut off the questions a minute ago, and now you're going to ask me a question.

Tom, I just want to get your views of the equity markets now. I don't how much detail you can get into, but kind of how you're positioning the portfolio.

In broad brush strokes, what I would say is that we are kind of buying big battleships right now. Last year -- and this is public -- we bought Wal-Mart and Citicorp. This year, we're starting to buy a couple other names that would be in the same sort of category. I look at those companies and look at the historical financial performance, I look at the valuation, I look at their dividend yields. And the old joke on the New York Times and how negative they can be about the world in general -- if you read that, you want to kill yourself, but if you get out and you actually talk to those companies and visit them and see what's going on, business is actually pretty good. There's pretty good valuation and pretty good dividend yields while you wait.

So as I said, the underlying earnings and economics seem pretty reasonable to me. I think the stock prices will catch up -- it will either happen in '06 or it will happen later. But as long as the underlying earnings are there, depending on reasonable valuation, I am pretty comfortable with our equity allocation and would look to use some of the cash flow coming in to keep the foot on the gas pedal.

Have you done much in the energy sector?

No. And it has obviously been a topic of a lot of discussion and a lot of debate. Historically, we have not had much in the way of energy. In the long run -- and we do have the luxury of long run thinking around here -- historically, energy prices over time go down, and it's a commodity business. And commodity businesses have periods of time where they make wonderful returns and everybody wishes they owned them. But if you have a long-term buy and hold forever, which is what we try to do as best we can, these have not been the best businesses in the world.

So we are much more comfortable sticking with the heavy dose of financial businesses that we own, consumer brands, distribution companies, things of that nature where there is a great deal of intellectual capital as opposed to physical capital. And we (technical difficulty) in years like we have just gone through, but over the long run, that has worked out very well for us. And we will continue with that.

Thanks, Tom.

Gentleman, there are further questions at this time.

Thank you very much. I appreciate everybody's participation and your loyal support and we look forward to meeting with you in the future. Thanks a lot.

Ladies and gentlemen, this concludes today's teleconference. We thank you for your participation and you may disconnect your lines at this time.