Markel Group Inc (MKL) 2006 Q4 法說會逐字稿

Greetings ladies and gentlemen and welcome to the Markel Corporation's Fourth Quarter 2006 Earnings Conference Call. [OPERATOR INSTRUCTIONS] It is now my pleasure to introduce your host, Mr. Steve Markel, Vice Chairman of Markel Corporation. Thank you, Mr. Markel. You may begin.

Thank you and I'd like to welcome all of you to our conference call this morning. Most of you, I hope, have seen our earnings release. We're very, very pleased and excited about the way 2006 turned out. 32% growth in book value per share with book value at just under $230 a share is a pretty fantastic result. Obviously we're more focused on the long-term and over the last 5 and 10 and 20 years we've also turned in very, very good performance and we're very, very pleased about that.

All Markel associates made a wonderful contribution in this past year both in virtually every underwriting area of our business and certainly our investment results, as well. So the business was operating on full cylinders throughout the year and we're certainly blessed that there were no hurricanes as well that made the numbers look even better. So we'll accept whatever good luck we can get, as well.

During our call today we may make forward-looking statements. Additional information about factors that could cause actual results to differ materially from those projected in forward-looking statements is described in our press release issued yesterday and under the captions "Risk Factors of Safe Harbor and Cautionary Statements" and our most recent Annual Report on Form 10K and Quarterly Reports on Form 10Q.

The process we'll follow in the call today will be very much like all prior calls. Richie Whitt will lead off with a discussion of the financial results focusing primarily on the year-end numbers. Tony Markel will review our operations in the marketplace and I'm sure make some comments about our outlook for 2007 and Tom Gayner will make comments about the investment activities of the Company. When they are through I'll conduct the question and answer session and then maybe make a few final comments. Thank you very, very much, again, for participating and Richie would you lead us off?

Thank you, Steve, and good morning everyone. Just start with a bit of housekeeping. We plan on filing our 10K on March 1st of this year so you'll have the full 10K on March 1st. This year we have added some supplemental schedules to the press release to give you some numbers to work with until the full 10K is available.

As Steve said, I will primarily focus my comments today on year-to-date numbers. I'll begin with our underwriting operations followed by a discussion of the investment results and then bring the two together with a discussion of our total results for the year. Many of the themes for the year are very similar to those that we've discussed at the end of last quarter and, quite honestly, throughout the year. It's been a very consistent year.

Gross premium volume increased 6% to 2.5 billion for 2006. This was primarily due to growth in new products, areas such as Markel Re and our specialized alternative risk programs, our lumber program and Markel Internat -- Markel Insurance Company and increased rates in cat-exposed businesses, obviously our cat-prone property business as well as the marine and energy lines. Higher rates in those areas led to higher gross written premiums.

In the fourth quarter of 2006, gross written premium declined 5% due to competition in our U.S. and international professional liability and casualty lines. This was partially offset by new product growth in some of the areas I just mentioned. Tony will speak to market conditions in his comments shortly.

Net written premium increased 11% to 2.2 billion. Keep in mind that the 2005 year was impacted by 57.6 million of hurricane reinsurance reinstatement premiums. However, growth was also due to higher gross written premium volume and higher retentions. Our retention rate was about 87% for 2006 compared with 85% in 2005 before the hurricane reinstatement premiums. We will continue to work to increase our retention rates where appropriate as we move into 2007. Earned premiums increased 13% to 2.2 billion. This, of course, was a result of higher gross and net written premiums in 2006 and, again, please keep in mind that 2005 was affected by the reinstatement premiums on the three hurricanes.

Most importantly, our combined ratio was 87% for 2006 compared to 101% combined ration in 2005. Our 2006 combined ratio included 3 points or approximately 55 million of hurricane -- of 2005 Hurricane impact. The 2005 results included 13 points, or approximately 246 million of hurricane losses. The 2006 prior year's development on hurricanes was more than offset by favorable prior year's redundancies in other areas. Again, this quarter and for the year the largest area of prior year favorable redundancies was in our Excess and Surplus Lines segments specifically within our Professional and Products Liability unit.

I'd also like to point out that Markel International began producing underwriter profits in the second quarter of 2006 and in all subsequent quarters in 2006 and ended the year with 100% combined ratio. This 100% combined included 7 points or approximately 41 million of development on the 2005 Hurricanes. We're very pleased with the results in Markel International for 2006.

Our expense ratio increased to 35% from 34% in 2005. This was partially due to lower reinsurance seeding commissions as we've kept increasing our net retentions and higher bonus accruals due to record profitability in 2006.

Turning to our investment results, the end of 2006 investment portfolio balance was $7.5 billion. This was a $1 billion increase since 2005. Investment income increased 12% to $271 million. Realized gains were $64 million and this was primarily comprised of equity sales. Our unrealized gains had a very good year with an increase before tax of $246 million. Again, this was due to equity appreciation and Tom, of course, will talk in more detail in a few moments.

Looking at our total results for 2006 we reported record net income of $393 million. The previous record was $165 million in 2004. We reported record comprehensive income of $526 million due both to net income and the unrealized depreciation of our portfolio and, as Steve said, book value per share increased 32% during the year to slightly less than $230 per share.

Turning to cash flow and to the balance sheet, I wanted to make a few other comments. Regarding cash flow, operating cash flow was $512 million for 2006 compared to $551 million last year. This decrease was a result of two factors - the 2005 Hurricane payments throughout 2006 and additional Federal tax payments given profitability in 2006. Both of these led to lower operating cash flow. I will point out that the effect of the 2005 Hurricanes continued to decrease -- the effect of the Hurricanes on cash flow continued to decrease as we moved throughout the year.

Regarding the balance sheet, I'd like to point out that our reinsurance recoverables have decreased by over $550 million since the end of 2005. This, of course, was due to hurricane payments and our related collections on those payments, reinsurance collections. We also had several successful commutation of reinsurance balances related to legacy reinsurers; all this combined to reduce reinsurance recoverables by $550 million. We also converted our remaining convertible notes or lines to 332,000 shares, common shares, in December of 2006 of this year and shortly after year-end on January 2nd we retired our junior subordinated debentures.

At this point I'd like to turn it over to Tony to discuss operations.

Thanks, Richie. I'm going to be relatively brief rather than anticipate the issues you want to talk about and hopefully we pick up the issues in the Q&A because Richie's done a terrific job of hitting the highlights on the operational side. But basically what can you say? The numbers that we produced are extremely easy to talk about and most enjoyable. The gross written premium was up 6% for the year to 2.536 billion, net written premium was up 11% to 2.195 billion, as Richie indicated, reflecting our continuing efforts to judiciously retain more of the premium, reducing dependence on reinsurance; and the combined ratio for the year was a solid 87%, producing over $300 million in pre-tax underwriting income.

Obviously as he also pointed out, we were aided by the lack of catastrophes and the increased rates in catastrophe exposed inland and offshore property risks; but I think it's clear that in addition this is truly indicative of the continuing maturity, consistency and discipline exhibited by our staff.

As we look forward into '07 the good news is that the January 1 property reinsurance treaty rates held pretty strong which would indicate to us a probable continuation of the justifiably higher rate levels achieved on cat-exposed properties following the horrendous '05 and '05 wind seasons. Tempering that, however, I am concerned about the pressure on rates in other sectors. We are seeing casualty rates continue to moderately erode as well as property rates in non-cat prone areas. In addition, the standard markets primarily led by the regional carriers are recapturing some of the business that moved over to the surplus line sector over the last two or three years. That said, the bottom is certainly not falling out of the market and suffice it to say that we've been there before. It just demands patience and discipline coupled with a step up in marketing, sales and new product development.

In that regard we recently announced a promotion of John Latham to Senior VP Operations to assist Paul Springman and myself in the oversight of our worldwide underwriting subsidiaries, focus on growing our business regardless of the state of the marketplace and, I hasten to add, without compromising underwriting integrity will be one of John's principal responsibilities; and toward that end we've recently announced the formation of an Office of Business Development staffed by three of our most experienced and talented people - Letha Heaton, Jeff Lamb and Brenda Phillips - who are dedicated to work with him across divisional lines to assure achievement of that objective. We are clearly convinced that we can continue to grow and produce Markel-like underwriting results and are dedicating the resources toward that end.

Speaking of future productions we are extremely excited about the December acquisition of the Prairie States Agency in Chicago from AEON Corporation. This agency was created in partnership with State Farm to development and sell specialty products that are outside of State Farm's underwriting appetite and expertise through their A-plan which numbers some 30,000 agents today. The cooperation from State Farm has been fabulous and, although the inherited current volume is modest, we're both in agreement that the long-term potential for this operation is very, very promising.

In summary, needless to say we are extremely proud of our '06 results and enter '07 energized to continue to produce the underwriting results necessary to produce at targets and returns on equity. And with that I'll turn it over to Tom for the investment side.

Thank you, Tony. I'm delighted to report to you that during the fourth quarter our investments had a good year. For all of 2006 was about two good years. Specifically, in 2006 we are 25.9% on our equity portfolio versus 15.6% on the S&P 500. More importantly, over the last five years we've earned 13.9% versus 5.9%, an out-performance of 800 basis points per year. Over ten years we've earned 14.3% versus 8.2% and out-performance of over 600 basis points per year for over ten years.

Our fixed-income portfolio earned 5.2% last year, a wonderful result given our ongoing posture of relatively short duration and very high credit quality. Just like in the equity portfolio, we've got the option of lengthening duration if interest rates increase or buying more corporate bonds if credit spreads widen out. Meanwhile, we are earning good returns and protecting the balance sheet.

Over the years, our allocation decision to equities which penalizes our reported GAAP returns on equity and our investment returns over long period of times have added a lot of value to Markel shareholders. One of my good friends, Chad Rowe, made a comment to me a number of years ago which I think about almost daily. He said that, "Generally speaking, smart people don't become stupid; and stupid people don't become smart." Over the ten year period of outstanding investment results that we are reporting today, there were several years of substantial under performance specifically during the run-away bull markets of the late 1990's. At that time we were probably not as stupid as we looked. Sadly, today, we're not as smart as we look. Over a period as long as a decade, though, I think it is appropriate to place an investor in one category or the other. I hope our record helps you to agree with our own hopeful and admittedly biased self-assessment.

Looking forward to the next decade, I think it is highly likely that we will endure periods of meaningful under performance just as we did during the last ten years. Our discipline almost requires painful periods of withdrawal and isolation during times of manic Wild West markets. Over long time frames, though, I think our investment discipline and philosophy has proven itself to be sound.

Today, Markel enjoys a very strong balance sheet, profitable underwriting and investing operations and good cash flows. I also continue to be optimistic about the values available in the investment world from the large, global, blue-chip companies we've been buying for the better part of the last two years as well as our on-going opportunities in the direct ownership of non-publicly traded securities. In short, we've got a lot of options to continue to deploy today's capital and tomorrow's flow of capital into attractive investment opportunities. I'm optimistic about our circumstances and our opportunities and I look forward to your questions.

With that, let me turn it over to Steve.

Thank you, Tom. I think it's important to note that in both our underwriting and investment operations we continue to seek -- to follow intelligent, good judgment throughout both sides of the business and both sides are run with very much the same mind thought. As a result, our underwriting results and our investing results have turned out to be very, very good over long periods of time. We're very pleased with the way 2006 turned out and we're very, very optimistic about 2007 and the many, many years we have ahead of us and with that I'd like to open the floor to your questions.

Operator, can we begin the question session?

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from David Lewis with SunTrust Robinson Humphrey.

Thank you. Good morning. Congratulations on a fabulous year. Couple questions, probably starting first with Tony. RLI yesterday indicated that they were seeing a little bit of an increase in competition in the cat-property area. Sounds like you did not see that with kind of the favorable rates that you got on January 1; maybe you can comment to that first.

Two, Tony, I know you put a number of new products out there in 2006 to kind of drive the production trends that you saw. Is that where a lot of the benefit is going to continue in 2007 or are you planning for some additional products?

And lastly, are you anticipating gross written premium growth in 2007 versus '06?

David, thanks for your questions. I didn't mean to imply that there wasn't some moderate competition in the property cat marketplace. Obviously the formation of some new Bermuda operations dedicated to taking advantage of the property cat market post '04 and '05 has had its impact. But what I was implying - and we weren't in the marketplace January 1 so I was just sort of giving an overview of our view of what happened to those people that had their treaty renewals 1/1 - the rates really did not come down measurably. There was a moderate -- maybe a moderate downward movement but very, very moderate which indicates to us - and we think it's justifiable when you go back and look at the last 3, 4, 5 years in the aggregate - that property cat rates, in general, will hold solid rate levels even though there was a moderate reduction at 1/1.

As a matter of fact, elaborating a little bit further on that, the moderate reduction in some cases -- there were increases in some 1/1 rates that were laid out to match the more aggressive terms that were put out for the July 1, '06 renewals. The rates that had been put out at 1/1/06 were actually increased July 1, '06 and so the July -- the January 1, '07 rates actually went up in some cases consistent with what had been thrown out in July. But we think those rates are going to stay up pretty attractively and with justification if you look at the impact that '04 and '05 had on the aggregate numbers. Clearly '06 was a great year but a five year track record does still not overcome the significant losses from Katrina at all.

We don't go in setting any growth targets talking about new products and so forth. We are constantly -- we basically are doing everything we can to increase deal flow, to increase submission flow. My comments concerning the acquisition of Prairie States in December and the formation of the Office of Business Development in December looking forward to '07 and beyond are obviously steps that we are taking in order to assure growth. But we don't force growth. We try to increase deal flow, price every one of them the way we think it should be priced to achieve our underwriting results and at the end of the day add them up and you have it.

That said, we are constantly looking for new products. When you are as broadly diverse as we are - and I mean that as a strength - you always have products in one segment of maturity or another and it is incumbent upon us to continue to fill the pipeline with new products because there are always mature products that are diminishing in importance and size at the other end. So that's an ongoing process. We're no less focused on it than we have been in the past and, frankly, we've got some interesting things that are in one stage of discussion or another. That coupled with some of the steps that we're making and the resources that we're putting into marketing the things that I mentioned - increased resources into the marketing departments of our various subsidiaries - we all think will in addition pay dividends in terms of enabling us to continue to grow organically on the existing products as well.

That's helpful. Do you also think you'll see an underwriting profit internationally in '07 or is any --?

Absolutely. I can't guarantee it, stuff happens. But as Richie pointed out in his remarks, the last three quarters the only reason we posted 100% combined at [inaudible] for the year was the development in the first quarter of '06 on the '05 Hurricane losses just because of the expected general lag in reporting that's incumbent with the distribution system in London and hurricanes, themselves; but second, third and fourth quarter results from an underwriting standpoint in international were very gratifying.

That's helpful. Thank you very much.

Our next question is from Tom Cholnoky with Goldman Sachs.

Hi. I've just got a couple of questions. Tony, maybe just a follow-up on your last couple of comments. I guess if I look at your premium volume growth on a quarterly basis you've gone from - on a gross basis - 12, 11, 4 and now down minus 5. Can we talk -- focus a little bit more on what's going on in the fourth quarter and why this trend of down premium volume shouldn't continue into '07? Or is the fourth quarter something odd there because that's not a very promising trend.

Well, Tom, obviously we want to grow but our primary focus is on producing underwriting profits consistent with our ROE objectives. I will have to, obviously, acknowledge and we've talked about it in our last two or three quarters that competition in the non-catastrophe areas has impacted our volume. That said, we think some of the strides that we have taken, of which I have just mentioned, and others that I have not mentioned during this conversation are going to enable us to continue to grow. But to be very frank, we'll see what happens. But you're right, the competition in the third and fourth quarters heated up a little bit and then the result was a moderate reduction in volume for the quarter.

I think it's fair, Tom, to say that in terms of our forecast of 2007, we would expect it to be probably less than what we experienced in the first and second quarters. But maybe better than what we experienced in the third quarter.

Okay. I have two more questions. The second question is on a sequential basis investment income actually declined, I think, about $4 million or $3.5 million and I was wondering what drove that?

There's some tax credit partnership amounts running through in the fourth quarter that have sort of knocked the fourth quarter down off that trend. Honestly, I think the trend is probably pretty steady in terms of the investment portfolio but there was some timing in terms of when some transactions were posted into investment income.

So what would have been kind of a normalized run rate, then, for the fourth quarter?

I might have to get back to you on that one, Tom.

Okay. And then I guess, sorry, two more parts to my last question. Tony, you obviously mentioned the very good improvements in international but the fourth quarter looked like it benefited a lot from reserve releases because the combined fell by 10 points on a sequential basis. And it looked as though you significantly increased your favorable reserve development to about $110 million as compared with about 40 and 47 in the second quarter and third quarter quarters. Can you give us a little bit more color as to really what's going on there and then, sorry, one other follow-up which is it looks as though when you strip out reserve development that you're posting some pretty low accident year ratios, actually lower than you did, once again, in the first, second and third quarters, and I'm a little surprised by that given your comments on pricing.

Let me deal with the reserve question first, Tom, and I'll let maybe Richie talk about the accident year numbers as they compare to the prior quarters but I think the most important thing about the loss reserve development, obviously, we're pleased with the opportunity and ability to report redundancy so I think, as you know, redundancies are a hell of a lot better than deficiencies.

Oh, I agree.

We really like to have redundancies. Our standard is to seek to establish reserves at levels more likely redundant than deficient. As you know, when we originally acquired Markel International, the former Terra Nova, there were several challenging issues that we had to confront and for several years we sought to build a margin of safety in our international reserve and for the first several years as hard as we tried to correct redundancies, the issues and problems that we had to overcome offset those items.

Clearly, we believe at least that we've now been successful in achieving adequate margins of safety in our international reserves and the result in 2006 reflect the fact that we are very, very comfortable now that the margins of safety are as good in our international business as they are in our North American business system. We are thrilled and excited that we think we've reached that plateau.

The more important point, though, is that we will continue to try to create and maintain appropriate margins of safety and we strongly believe that the reserves at December of 2006 are just as strong and have very similar margins of safety as they did a year ago. And so in an ideal world, for Markel we will be releasing a margin of safety on prior periods in the form of redundancies roughly equal to or equivalent to the margin that we're setting up on the current business. And so in an ideal world there should be a consistent flow of those numbers.

Richie, you might comment on the accident year numbers.

Current accident year. First thing, Tom, going back to your question on investment income, in the fourth quarter the impact of the tax credit partnerships and booking the K1 losses into the year was about $6 million in the fourth quarter.

Okay.

That's what is driving down the investment income.

Great.

Offsetting that, though, is a benefit in our tax line where we obviously take the tax credit.

Oh, okay. That would explain the lower tax rate. Yes.

Yes. Yes. Exactly. So it's sort of a flip between the two lines, if you will.

Okay.

In terms of the current accident year, the biggest thing driving the lower loss ratio in the current accident year is the benign catastrophe year. Obviously we grew our catastrophe premium quite a bit during 2006 especially in London without corresponding increases in exposure with premium volume going up, prices going up so much. As those earnings came on line they obviously came on line at very low loss ratios and that mix is really what's driving the current year [inaudible].

Got you. And I assume that showed up a lot in international.

Absolutely.

And our nets on the property cat are greater than they were prior year, Tom.

Yes. That's a good point. Not only did we increase the growth volume but our nets are much higher as well; that net earned coming in at much [inaudible].

Right. Got it. Sorry to monopolize the time. Thank you.

Our next question is from Beth Malone with KeyBanc.

Thank you. Good morning and congratulations on the quarter. I have a couple questions. Tony, could you comment on what's going on in Florida with the cat cover and does that have any impact on your exposures in the state or are you concerned about the implications of that?

Beth, I don't know all the particulars. Coincidentally I guess it was yesterday or the day before I asked our legal department to do research on the details of the legislation that is apparently being proposed and I guess has been passed now. My impression on a cursory look is that it primarily, if not exclusively, deals with homeowners and clearly we don't really write any personal line property in the State of Florida. So if in fact it is limited to homeowners, it won't have any impact on us whatsoever.

And even if it's in small commercial my understanding - and again I haven't gotten the details from our legal department - is that the State of Florida is setting up cheaper reinsurance for the issuing carriers to enable them to reduce rates. Well, if we have the access to cheaper reinsurance on the small commercial stuff, the only people that I think would be impacted from a competitor standpoint are those people in the private reinsurance sector who would have to compete with this publicly supported reduced reinsurance. But I could be way off. I haven't had a chance to study it. I will know more in the next day or two.

Thanks. I have a question for Tom. On the investment portfolio you mention that you take some money off the table when we're in a Wild West type of market. How would you describe the market that you're looking at for '07?

Well, I think it's very bifurcated. I think in terms of the global blue chips that we've talked about I guess that's the calm East as opposed to the Wild West. There's nothing too dramatic or outsized about the valuations there. When you talk about sort of what's going on in the private equity world, that is a little bit more Wild West-ish out there which is why we've proceeded very slowly, very cautiously and directly at a crawl-walk-run fashion and the aftermath of Wild West markets typically present some really good opportunities for us. So the aftermath of the late 90's and publicly traded securities hitting the beach has allowed us to earn very good returns for the last six or seven years. So there is a market that is pretty frothy out there that, I think, the aftermath will create some real opportunities for Markel. We're not there yet.

Thanks. And one other question on the portfolio, could you just articulate what were the biggest contributors to that 26% improvement in the portfolio?

Well, you can see the list off Bloomberg of our largest holdings but I think our three largest holdings if my memory works were Berkshire and CarMax and Fairfax all of which had pretty good years.

Thank you.

Our next question comes from Meyer Shields with Stifel Nicolaus

Thanks. Good morning all. Within the London market the net to gross retention in the quarter seemed to spike up and I'm wondering whether that or the third quarter year-to-date numbers are more representative of what we should expect in 2007?

Meyer, the retention in the fourth quarter could you - I don't have that right in front of me - what was the number?

Oh, I'm sorry. We estimate a little bit above 93%.

It's probably spiking up -- that's probably a little high of a run rate. The fourth quarter is when some reinsurance would not renew last year and so we're getting a little bit of a benefit off that in the quarter. Kind of what run rate we would probably expect to be 90-91, you know, that kind of low 90 range going into 2006, sorry, 2007 given the current reinsurance program.

Okay. Great. Could I get your thoughts on contingent commissions and whether you foresee the recent changes by St. Paul and Travelers as having any impact in how you operate?

Meyer, I don't see it having a great deal of impact. You know the majority of our business is produced with wholesalers. They are clearly our agents. It is not the -- the entire contingency issue has really not affected our relationship or compensation of those agencies and I don't see a great deal of impact on specialty carriers such as ourselves.

Fantastic. And lastly can you compare the competitive environments in the U.S. against Canada, Spain and the U.K.?

In terms of rates and underwrite?

Yes.

That's a little bit hard to do. We've got a - I would say at this stage of the game you understand what our view is of the U.S. marketplace. We have a fairly strong position in the U.K. marketplace, itself. I'm talking about writing U.K. insured's so I'm pretty conversant with that marketplace and over there, as well, there is some pressure on casualty, professional liability and so forth. I would say very much consistent with what we are seeing here in the U.S. And our involvement in Canada is on a much lesser scale. Although we opened a new Toronto branch last year, it's in its early stages; but typically the Canadian marketplace has always mirrored to some degree the U.S. marketplace so I'm not as conversant but I would be surprised if it doesn't hold similar characteristics to what we're seeing in the U.S. marketplace.

Thanks. That's perfect.

Our next question is from David West with Davenport and Company.

Good morning. We keep kind of turning back to the tax line. The tax credit you mentioned earlier, is that kind of a reoccurring thing or annual event and also wondering how increased profitability from Markel International may favorably help the tax rate in '07?

Yes. That will be a reoccurring thing, Dave. We have been adding to those tax credit partnership deals. We've been sort of slowly adding those to our portfolio mix over the years so it could be a bit of a -- it could increase, I guess, over time is what I'm saying in terms of the effect and it is a little bit lumpy because we have to wait for K1's to come in to be able to book things so it could be a little bit lumpy going forward. But, yes, we would expect that to continue and potentially increase modestly.

On your second item in terms of how Markel International and profitability would affect the tax rate, the main driver of our tax rate is municipal income which is tax exempt. We continue to allocate where we can to the municipal portfolio and so what really drives is our ability to find municipal investments versus what pre-tax income is. So in the U.K. we don't invest in municipal securities so earnings there only increases the top line. It actually could drive the tax rate up slightly as we become more profitable in the U.K. But the big driver, I guess I'll just repeat, is muni securities in the U.S.

Very good. And I guess all this is leading -- would you venture a range of maybe the expected tax rate in '07?

I think we were a little bit low, lower than normal this year at 29 or so. I mean, low 30's is probably pretty reasonable which is where we've been for the past few years. When you take out sort of the odd items that are in international.

Okay. Very good. You mentioned some commutation activity on an annual basis. Were there any commutations in Q4?

There were but nothing of a material nature.

Okay. And then lastly I know the fourth quarter expense ratio was a good bit higher than trend and you mention in your comments bonus accruals. Was that the primary reason for the Q4 distortion?

Yes. That's exactly what it was. Just everybody makes the best estimates they can throughout the year but obviously you have real hard numbers when you get to the end of the year. People take a really hard look at the bonus accruals.

Very good. Great year. Thank you.

Thank you.

Our next question is from Daniel Baransky with Fox-Pitt Kelton.

Do you have the actual reserve release number in the quarter and for the full year?

I don't think we've put that in the queue. That will be available with the 10K.

Okay. And I'm not quite sure why you can't give it out now but I guess I'll wait for a 10K. I guess how do you feel about your capital position at this point in time? It seems to me looking at the simplistic premium [inaudible] ratio that year fairly under leveraged from that metric and kind of what are your thoughts on your capital deployment moving forward?

Yes. I think that's a fair statement. We've probably got the strongest balance sheet and the least amount of financial leverage than we've had in many, many years and we're accumulating liquid resources throughout the Company and at the holding companies in particular. So we have a lot of draw power to take advantage of any opportunities that might come our way.

Immediately following the acquisition of Terra Nova back in 2000-2001 we were slightly more leveraged than we would normally like to be so it sort of feels good to be slightly less leveraged today and so we're not feeling any rush or pressure to spend money irresponsibly; but clearly we will make sure that we put our capital to the best use. In the short run you can see a slight increase in our allocation to our equity portfolio which has proven to be a very smart place to put money. And in the short run I think you could expect that to continue; actually, maybe even in the long run you could expect that to continue and that's something we're very, very comfortable with. But we will look for opportunities to expand the insurance business either through intrinsic growth as those opportunities come or hiring people with specialties that fit the Markel style and have interests that are similar to ours and making underwriting profits and providing great service to our clients. And likewise, if the market gets silly and other companies become distressed we're certainly available to take a look at any acquisitions that are reasonably priced and fall into the specialty market where we think we can make earning profits. So it's a great position to be in.

We believe that the current underwriting environment, even though it's slightly more difficult with the pricing side and the volume side, combined with the investment opportunities and the leverage, although somewhat lighter in terms of our position than in the past, will enable us to earn high rates of return on our capital certainly for the foreseeable future.

Our next question is from Dennis Ingram, a private investor.

Good morning, gentleman. I'm a fairly new investor to Markel and I've been extremely happy with my investment. I appreciate all you're doing. I have a couple of questions, the first to Tony. How much focus is going into the international segment of Markel as a percentage of assets and how much exposure do you anticipate Markel to go after internationally in the next five years?

Dennis, that's -- obviously the Terra Nova acquisition clearly brought the international scene into major play for us. And at the time that we bought it we obviously made the statement that once we got it turned around and created a platform that was consistent with the way we operated things, that we would use our London operation as a window into the international community. I would tell you that I think - crystal balling - that the growth in the Far East and some areas like India and so forth are taking on such potentially dramatic proportions that I think we are extremely well positioned and uniquely positioned and qualified to use London as that window and create some international expansion.

I'll give you a small example. Right now Lloyd's just set up a trading platform, an underwriting room if you would, in Singapore within the last year and we are looking hard at setting up a branch of Markel International in Singapore to take advantage of that trading room which would just be a small step into that water front. But I don't think that we're overly dependent on international but I am very, very comfortable with our position as it relates to a growing international insurance presence out there.

Then, I think, in terms of sort of looking for a number probably the best proxy for a number of what percentage of our capital resources are deployed internationally would be looking at our premium volume and roughly one-third of the premiums are coming from my international business and so from a capital model we're effectively allocating roughly one-third of our capital to support that business. Because it's relatively - it's smaller - it does have currently a higher growth rate. I think [inaudible] a couple years than our U.S. business and that's likely to continue in the near term. But you should also remember that the international platform is writing business worldwide which includes the United States and so to some extent we're writing U.S. business out of our London office and I'm not sure whether you call that international business or U.S. business. It falls in our model as far as our Markel International platform because that's where we underwrite it but in terms of the ultimate exposure and risk a fair amount of international business is U.S. related business that's written in that marketplace.

Right. I just see a lot of opportunities right now internationally that I'm hoping, especially with the strength of your balance sheet right now, I'm hoping that Markel is looking for every opportunity to explore along those lines.

Exactly. And as a new investor, I'm not sure you are aware - we've discussed it in previous conference calls - but we opened up three additional branches in the U.K. last year. We opened up a Madrid, Spain branch as well as the Toronto, Canada branch; I just mentioned the potential Singapore initiative. So we are very, very sensitive to our broadening worldwide presence and the opportunity that it probably presents.

That's terrific. Mr. Gayner, appreciate all you're doing on the investment side as to book value. Obviously you had a huge year. Your investments were terrific. Where do you expect to see book value this time next year based on your expectations? You had said that you expect profitability to not be as good as the last two quarters but better -- not as good as the first two quarters but better than the last two quarters. With the investments that you have right now, where would you expect an investor to see book value this time next year?

I hope higher. We'll do the best we can.

I think that's a given but I didn't know if you had any --

I wish it were a given. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question is from Jay Cohen with Merrill Lynch.

Hey, good morning, everyone. Just a couple of questions - some numbers questions. First is the bonus accruals in the fourth quarter that inflated the expense ratio, can you quantify what that did to the expense ratio?

It's about four points.

That's what I assumed. Good. Second thing is, do you have either a number or an estimate for what your statutory surplus is at the end of the year?

I have to say, Jay, if we probably have some draft numbers but I don't have them in front of me.

That's okay. No problem. I can get that later. And then lastly, any early sense of what kind of exposure you would have to this European storm - Carol?

Jay, I really don't have anything. I think the fact that I've heard nothing from our people in that regard would indicate that it's moderate or small but I'm really not up to speed on that.

I can add a little bit to that. I think we believe it's relatively modest. We actually had been reducing our European book of property business and actually a couple of the headline losses that you may have seen go across the news in the last few days related to that we were not on those so -- initial indications are relatively modest.

Great. Thanks a lot.

Gentlemen, I'm showing no further questions in queue at this time.

Thank you very much. I'd like to thank all of our shareholders for their support over the past year and years. I'd like to thank you for participating in today's conference call. We at Markel will continue to do our very best to deliver the same kind of returns in the future that we have in the past. We're obviously thrilled with the way 2006 turned out. We really do appreciate the efforts of all of the Markel associates and wish you all a very healthy and prosperous 2007. Thank you very, very much.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.