Markel Group Inc (MKL) 2007 Q4 法說會逐字稿

Greetings ladies and gentlemen and welcome to the Markel Corporation fourth-quarter 2007 earnings conference call. At this time all participants are in a listen-only mode and a brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded. It is now my pleasure to introduce to your host, Mr. Steve Markel, Vice Chairman for Markel Corporation. Thank you, Mr. Markel, you may now begin.

Thank you and welcome to all of you to this quarter's and our year-end conference call. We very much appreciate your interest and your attendance today. Before we get started, I'll go through our Safe Harbor Statement.

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 the forward-looking statements is described under the caption risk factors and Safe Harbor and cautionary statements in our most recent annual report on Form 10-K and quarterly report on Form 10-Q and in the Safe Harbor Statement in our press release dated January 24 2008.

Today our program will be similar to every other quarter. Richie Whitt will lead off with a brief review with our financial results focusing primarily on the year-end numbers. Today Paul Springman, our Executive Vice President, is substituting for Paul Springman, who was unavailable today due to family illness. And then finally Tom Gaynor will share with you his views on the investment world and how Markel is reacting and what is going on in our investment portfolio. Following that we will do the question-and-answer and I will make some final comments as well. Richie, why don't you lead us off?

Okay thanks, Steve, and good morning everyone. I'm going to follow the same format as in prior quarters and comment primarily on our year-to-date results. I'm going to start by discussing our underwriting operations followed by a discussion of our investments results and then bring the two together with a discussion of total results for the year.

As we have noted in prior quarters, the market continues to soften. However, despite this we have produced very solid 2007 results. Starting with underwriting, gross written premium volume declined about 7% in 2007 to $2.4 billion. This was primarily due to competition in our US and international professional liability and casualty lines as well as certain other property lines very similar to the story we've been talking about for the first nine months.

Net written premiums also decreased by 7% to $2.0 billion. Retentions were basically flat in 2007. We continue to look for opportunities to reduce our reinsurance purchases and we would expect to increase retentions in 2008.

Earned premiums were down about 3% compared to 2006. Again this was due to lower gross written premiums. Our combined ratio for the year was 88 combined for 2007 compared to 87 combined last year. Our 2007 combined ratio includes nine points or $197 million of prior year redundancies. This included $34 million of development on asbestos claims in 2007.

Our 2006 combined ratio included three points or approximately $61 million of 2005 hurricane development and $17 million of strengthening on asbestos reserves. (inaudible) these items were more than offset by prior year redundancies in other areas.

Markel's 2007 current accident year loss ratio was 61%. This compared to 58% in 2006. This increase in the current year loss ratio was offset by more favorable development on prior year losses in 2007. Largest areas of prior year loss redundancies was again in our excess surplus line segment specifically at Markel Shan which is our professional products liability unit and on our casualty programs at Markel Essex. Markel International reported its first full year of underwriting profitability. They reported a 93 combine for 2007 and contributed $46 million of underwriting profits for the year; an outstanding year for our London-based operation.

Our expense ratio increased to 36% in 2007 compared to 35% last year. This was primarily due to the 3% decrease in earned premiums and higher compensation costs in 2007.

Looking at the investment side of the house average invested assets increased 11% in 2007 to $7.6 billion. Investment income increased approximately 13% to $306 million. Realized gains were approximately 59 million. They were primarily comprised of equity sales. As we have always said the timing of realized gains and losses will vary. We're focused on the long-term total returns and so realized gains and losses in any period can vary.

Unrealized gains decreased approximately $114 million before tax. This was primarily due to unrealized declines in our equity portfolio and equity sales during the year. Tom will go into further detail on the investment side of the house in his comments in just a moment.

Looking at our total results for the year putting together the operations and investments we reported record net income of $406 million compared to $393 million net income last year. Book value per share increased 15% for the year to approximately $265 per share. More importantly, our five-year compound average growth in book value was 18%; very strong.

I'll make a few comments regarding cash flow and the balance sheet. Regarding cash flow operating cash flows were very similar to last year at $508 million. Last year we came in at about $518 million. In terms of the balance sheet, a few comments there. Our reinsurance recoverables continues to decrease and they're approximately 44% of shareholders equity at the end of the year. Also debt to total capital continues to decrease and was 21% at the end of the year.

Finally I would just like and by saying that I believe our balance sheet is the strongest that I have seen it in my 17 years at Markel and that we are well positioned to take advantage of both operational and investment opportunities in 2008. With that, I would like to turn it over to Paul to discuss operations.

Thanks, Richie. You have just heard Richie report the fantastic numbers for 2007 and in a few minutes Tom Gaynor will take us through our investment results for the year. Right now it's my pleasure to share with you the underwriting highlights from these past twelve months.

Our underwriting profits totaled $264 million for the year which was a result of our combined operating ratio of 88%. Twelve solid points of underwriting profit is a major accomplishment in any marketplace and we're extremely proud of that achievement.

We're particularly pleased with our progress at Markel International which as Richie mentioned produced a combined ratio of 93% and has now reported underwriting profits for seven consecutive quarters. Equally remarkable is our results at Markel Shan which led the way in underwriting profitability for us by producing approximately $136 million of those $264 million of underwriting profits.

Markel Essex although negatively impacted by the competitive market pressures which resulted in a significant drop in premium, produced underwriting profits of almost $80 million. And our two smallest units Markel Southwest Underwriters and Markel American also made significant contributions with combines in the low 80s. We have introduced new products at Markel Global Marine and Energy and re-established our credibility as well as return to profitability at Markel Underwriting Managers. Markel Insurance Company and our specialty admitted segment continued to meet or exceed our strenuous profitability goals; all in all, a very very satisfying year for us.

Our enthusiasm in 2007 however is tempered by two items. First, our adverse loss experience at Markel Re within our alternative risk transfer division. After nonrenewing the majority of these programs in 2007, a decision was recently made to combine the few remaining businesses into two of our existing operating units.

We're also disappointed by the 7% decrease in gross written premium volume that Richie also referenced. We continue to face a very competitive marketplace characterized by the return of many of the larger standard stock carriers that have begun to nibble on the fringes of the NS business. There's new capacity in the market principally from Bermuda and in some corners unfounded confidence due to the lack of natural catastrophes for these past 24 months.

In spite of all of this, we remain optimistic and enthusiastic for 2008. We will battle these competitive pressures with increased emphasis on more effective marketing the continued introduction of product enhancements and new products to the marketplace and we will significantly step up our efforts on the global expansion front.

We simply will not sacrifice our underwriting profitability and the underwriting discipline for which we are known for any topline growth. We look forward to your comments and questions during the question-and-answer session which follows Tom's report and Steve's concluding remarks.

Thank you, Paul, and good morning. For the full year of 2007 the investment portfolio produced a weighted average return of 4.8%. That consists of a 5.6% return on our fixed-income investments and a 0.9% negative return on our equity portfolio. I will start with fixed income as I am particularly proud of our fixed-income team and the results they produced last year.

As we have stated before and as we have consistently behaved for decades we have a high quality plain vanilla approach to fixed income investing. The first and foremost responsibility of the fixed-income department is to invest the policyholder funds in high-quality securities with minimal credit risk and roughly balanced allocations between government and agency securities, high-quality corporate securities and municipals.

We have match the duration of the portfolio to the expected duration of our insurance liabilities to minimize interest rate risk and we match the currencies of the fixed income holdings to the currencies of the insurance liabilities to minimize the currency risk. In a year that ended as 2007 did and as 2008 has begun, this approach served us extraordinarily well and we will continue to follow this approach just as we have for decades.

On the equity side we were down 0.9% in 2007 obviously a result we were unhappy with. Simply put in 2007 we owned a variety of financial stocks as we normally do and we owned very little in the way of energy or commodities as is consistent with our long-term approach. Those relative weightings cost us both in absolute and relative senses.

Over the last five and ten-year periods, we earned annualized returns of 11.8% and 10.7% respectively. We think those returns are conservative compared with the underlying increases in intrinsic values in the companies we own and very realistic expectations for equity investing in the next five to ten-year period.

Despite our conservative and thoughtful consistent four-part investment philosophy of investing in profitable businesses with good returns on capital, with honest and talented management, with capital discipline and reinvestment opportunities at fair prices, we have had years where market volatility made us unable to show a positive annual return. Specifically that was the case in 1994, 1999, 2002 and 2005. Despite those unsatisfying years our overall allocation to equities has produced significant returns over our well-run fixed income portfolio and the S&P 500 index.

Turning to asset allocation, our current allocation to equities totaled 70% of shareholders' equity at year-end. Our normal allocation to equities would be 80% and the current 70% level is the lowest it has been at year-end at anytime in the last five years.

As we have stated previously, we're not market timers and our equity allocation is driven by what we see in opportunities. We clearly have to be cautious and somewhat picky as reflected by the below-average equity allocation and we will continue to be that way as our first and foremost goal at all times is to protect the balance sheet and make sure that we have the capital in place for our underwriters to respond to insurance opportunities as well as any corporate actions.

I would also add that as of December 31 the gross equity investment figure of $1.85 billion includes over $500 million of unrealized gains on that portfolio. Given that those gains are tax effected on our financial statements, our capital position and balance sheet is cushioned against declines by the same tax rate on the way down as we apply on the way up. Our buy-and-hold approach for long-term quality investing is what put those gains there in the first place and is a meaningful advantage as compared to equity exposure that does not have this embedded gain in place.

Finally, I would like to clear up the understanding on one statement I made during last quarter's call in response to a question from Jake Cohen regarding our ongoing investment in financial stocks and evaluations in that sector. I responded that I was indeed purchasing some financial stocks at the time and believe the valuations were attractive. Some analysts' comments suggested that meant we were buying the financial guarantee companies.

Let me be clear. We did not purchase any financial guarantee companies during the fourth quarter or in 2007 at all. We wrote down much of the value of our small holdings in this sector during the fourth quarter and we currently have zero exposure to the monoline financial guarantee companies.

All of the names and numbers I'm about to discuss will of course be visible in our 13-F filings that will be out in mid-February. But just to communicate fully of our total net equity purchases during the quarter of approximately $60 million we did buy roughly $9 million of Banc of America which represents 90% of the dollars we put in the banking sector, nearly $40 million in the title insurance business in Land America and Fidelity National Financial with the remaining investment of $11 million being additions to our existing holdings in leading companies selected with our conservative, consistent and successful investment approach.

To conclude we're steady as she goes on the investment side. We remain committed to our long-standing and well-tested approach to both fixed income and equity investing and I am optimistic that we will continue to produce appropriate and pleasant returns for both sides of our investment operations. Thank you and I look forward to any questions you may have during the Q&A period and with that let me turn it over to Steve.

Thank you very much. I would like to make just a few comments before we roll into questions and answers. 2007 as you have heard was a very, very good year for Markel. In fact it's a record.

More interestingly, I think is we truly believe that we can continue and actually do even better in the future. As you look at our year-end that we just completed I think there are sort of three highlights that I would like to emphasize that are important I think take away points.

First, while it's maybe not always the most popular thing to do at Markel we will continue to focus on long-term total returns. Over the past five years our growth in gross written premiums have been anemic at best. But during that same period of time we have successfully compounded book value per share at an 18% rate and I think that demonstrates very very clearly the importance in building shareholder value lies not so much in the top line but clearly in the bottom line and that's where our focus is.

We do want and expect to grow in the future. We'll look for opportunities to expand our business but we will not do so at the expense of profitable margins. So our long-term focus continues to be an important hallmark of the way we manage the Company. And while it's not always popular we think it certainly will be the most profitable for our long-term success.

Secondly, I think it's useful to trumpet a major success this year that Richie highlighted. Markel International after many years of hard work by lots and lots of people is clearly now demonstrated that it's firmly in the black (inaudible) 93% combined ratio for the year, $46 million in underwriting profits. In fact Markel International paid a dividend to the Markel Corporation this year so the cash is actually flowing in the proper direction and that is a good thing.

But more importantly throughout the organization and our international business we have a staff in place that lives and breathes the Markel style and we're looking to build in the future. We have expanded in the past couple of (inaudible) and we have an international platform that will become more and more important to Markel Corporation in the future. And finally at Markel international (inaudible) I'll say a little bit more about this in a few minutes but the balance sheet in our international business is very very strong and certainly on par with the US.

And the third point I think I'd like to raise and Tom mentioned this as well, but the conservative nature of Markel continues and has been an important part of the way we think about the business in terms of our always trying to focus on margin of safety whether it be in our approach to underwriting to make sure that we're disciplined and do the right things or our approach to investments and an example of having not invested any of our fixed income money in some of the toxic waste that you have all been reading about.

Additionally in our lost reserving process, we continued last year to enjoy very nice favorable development from prior year reserves. We're continuing to establish current reserves at levels that we think provide a margin of safety and create a standard where our reserves are at levels that are somewhat more likely to prove to be redundant and efficient.

And today in our Markel International operations our reserves are as conservative as they are in United States. In 2007, the reserve redundancies recognized in our international business were significant and meaningful and the first time in addition to making underwriting profits during the year, the first time we've had releases in reserves from our international business.

As all of you will remember it's been a process over several years of building the reserve strength in our international business and that we believe we have now accomplished. Only time will tell as to what our real successes but we're clearly focused on it and pointed in the right direction.

With all of those things we look forward to 2008 with a great deal of optimism. The insurance marketplace will be tough. The insurance marketplace will be competitive. We have a team in place focused on building continued success at Markel, focused on the Markel style in doing things the way we have been doing them and we're highly confident we can continue to compound book value per share at a high rate certainly for the foreseeable future.

We appreciate our strong shareholder support. Thank you for being with us and with that I will open the floor to questions. Operator (inaudible) we are ready.

(OPERATOR INSTRUCTIONS) Mark Hughes, Suntrust.

Good quarter. We saw a little depth in the net written premium in the London insurance segment. Any particular issues there and what might we expect in the coming quarters?

Basically in the fourth quarter we had -- some of our reinsurance out there has reinstatement premiums and so timing of losses and payment of those reinstatement premiums affected the retentions a little bit in the fourth quarter. So I think it was just sort of a few transactions in the fourth quarter that affected that.

I think we would expect in 2008 we will continue to march our retentions up. We're looking at treaties as they come up for renewal -- reinsurance treaties as they come up for renewal and in almost all cases we're looking to take more net on those treaties.

Do you have any target you can share for retention on the point or two or --?

I think a point or two is reasonable to expect in 2008.

And then you had mentioned product enhancements in '08. How's the pace of development this year compared to prior years and what do those enhancements or new developments usually contribute in a given year?

Well in any given year they're probably not material and it's an ongoing process. I will tell you with the marketplace being what it is we actually have a little bit more time on our hands to look internal and to actually solicit feedback from our customers from the outside as well.

We introduced a number of new things at Markel Global Marine and Energy in terms of new products, a number of enhancements at Markel Insurance Company with some of our accident and health offerings and some extensions of coverage at Markel Shand with some of our professional liability products.

And each and every one of those I will tell you has a different development timetable. Some it's as easy as flipping a switch and changing a form and adding some extension. And others quite frankly take a lot of market research and we're pretty deliberate on how we do that. In any given year they're probably not material and just like the way we approach our underwriting and our reserving and our investing we're conservative and we're doing it for the long-term. So it's not necessarily in response to market, it's really to answer customer needs and to solve problems.

Beth Malone, KeyBanc.

Thank you, good morning. A couple of questions. One, you talked about the expansion, the global expansion of the business given the success you have had in the international division over the last couple of years. Does that take the role of just expanding on your existing infrastructure or does that suggest there might be acquisitions on an international basis?

Beth, you followed this a long time. If you think back to 2000 when we made the acquisition for Terra Nova one of the strategies behind it was to use the London platform for true global expansion and it took us a couple of years to get the right team in place and a couple of years to get the prior liabilities behind us. But [Jerry Albany] and his team these past 24 months have really done a fantastic job.

Just in the last quarter we've opened new offices in Stockholm, Sweden and in Singapore and we looked for both of those offices to add some premium to the bottom line this year in addition to the offices that we opened a couple of years ago in Madrid and Toronto and Edinburgh, Scotland and the expansion of our retail network in the UK.

We have found that our model is best when either we take our own people or attract a group of talented people on the ground in one of those distant locales as opposed to making an acquisition. Although we're not opposed to doing that it just seems to be easier for us to instill the Markel style and to have a little bit closer tie with the people on the ground in some of those remote locations when we build slowly with a handful of people as opposed to inheriting a large group of people.

Okay and then domestically as far as acquisitions what is the acquisition environment looking like? Does it look like sellers are coming closer to what buyers are willing to pay or what do you think?

Beth it's hard to know exactly day-to-day. There have clearly been a couple of transactions towards the end of last year that buyers seem to be pretty enthusiastic about the prices they were willing to pay. And I guess time will tell whether those properties justified those prices.

We clearly would be very happy to be in the acquisition mode and that is true both domestically and internationally for the right property. We're quite willing to take on the challenge of making another company into the mold of Markel although it does take a lot of time and energy and effort. But we are willing to do that but at the right price. I'm not sure the right price -- the sellers are not at our price (inaudible) today in general terms. And so while we look at whatever is being offered, I think our pricing metrics are probably out of sync with what someone else may be looking at.

My sense is that in the next year or so particularly if the market continues -- pricing continues to get weak, companies that chase those prices are likely to get in trouble. There has been a healthy margin in the industry over the last couple of years but you can't give up 10 or 15 points two or three or four years in a row and not believe that that margin is going away. Our premium volume I think is as good an indicator of our sense of the marketplace as any.

We certainly quote a hell of a lot more business than we write and we would be willing to write everything we quoted. If we wrote everything we quoted I guess our premium price would be double or triple what is today; maybe even more than that, I never thought about that before. But so clearly we are -- the fact that our volume is anemic is a function of someone being more aggressive with their underwriting pen; not to say they're always wrong but clearly we tend to be a little bit more conservative than maybe some others.

Okay thanks and then just one last question for Tom. You were pretty clear that you don't have investments in the financial guarantors at this time. But given what happened to the stock valuations and everything what's your thoughts about potentially adding to that position?

Well I was clear that our position is zero. There's the likelihood of adding to a position to make it something more than zero. In the financial guarantee companies it is zero. There is too broad a case of dispersions and risk and reward and things that can happen that are way beyond just what you can analyze with numbers. I mean there's political issues involved that are well beyond our circle of competence. That is a battle we're going to sidestep.

Okay, thank you.

John Fox, Fenimore Asset Management, Inc.

Good morning everyone. I had a few investment questions. I guess maybe first for Richie, the investment income was down from the run rate of the previous quarter this year. Is there anything unusual in that investment income item?

John, we got a little bit of seasonality in our investment income quarter to quarter. Given the types of companies that Tom invests in we tend to have a pretty high dividend yield on our equity portfolio and it's fairly seasonal as to when companies declare dividends and some of those can stack up more in one quarter rather than others. So that's a portion of it.

We also had some -- we invest in some tax credit type deals and we have some adjustments [of basis] in those deals in the fourth quarter that tends to be offset in our tax rate during the year. So we've had a few unusual items if you will in terms of either seasonality or unusual items hit the fourth quarter. I think the run rate you saw in the first three quarters is a pretty good rate as we go forward.

Okay great and maybe -- do you have the bonds at cost value at the end of the quarter?

I don't have that number under my fingers. I think that it's fairly close. There is not a big unrealized gain or loss on the bonds at the moment.

Could you give us maybe a little more (technical difficulty) you had an unrealized loss in the quarter -- $20 million -- was that really predominantly in the equity portfolio?

Yes.

You mentioned earlier your old one-third, one-third, one-third in the bond you mentioned one-third munis of course. Can you talk about what's going on with the financial guarantors, what is happening in 2008 prices in municipal bonds and spreads on insured versus uninsured? And just give us a little to color of what's going on in that world right now.

Sure, I think the rough dollar amount we have in the munis is about 1 billion 9. Of that 1 billion 9 about 55% of it has some sort of insurance stamp on it whether it's MBA, Ambac or some of the other companies that are out there.

Through 2007 as all the noise and concerns about the muni bond insurers grew, spreads actually widened out a bit so the market certainly didn't wait for one day to have a dramatic step function change in spread. It has sort of been widening out all year long.

Now in keeping with again the Markel style on every front of this business, every single muni bond we have ever bought has always been brought with the notion that that's a money-good bond whether it had an insurance stamp on it or not. And for instance I looked at the list in preparation for this call just to see some of the things that we insured and among the kind of muni bonds that we have that have an insurance stamp on it was a dorm and housing authority from Virginia Tech. Now I may be a UVA guy but I'm pretty sure my colleague Mr. Whitt here from Virginia Tech is money-good on those kinds of bonds.

So there's stuff like that in there, there's Commonwealth of Illinois, there's State of California. It's a vanilla-vanilla portfolio. So whatever kind of market spread widening went on I think in terms of marked to market we have already seen it and I certainly have no concerns about the underlying credit quality of the portfolio.

Well in terms of spreads the base rate continues to go down. Are prices pretty much held in here?

Yes, it hasn't moved a lot directionally. The percentage of the treasury yield that you can get investing in a muni is more today than what it was a year ago.

Right, sure. Okay, thank you.

John Lazarow, Zirkin-Cutler Investments, Inc.

Could you guys discuss your stance on share buybacks? Have you done them in the past? Are there any under consideration now and would you do them in the future?

Surely, the answer is yes we have bought stock back from time to time. We tried generally to make sure that on an annual basis we're repurchasing (technical difficulty) to those that are issued in some of our employment agreements and restricted stock plans where he have stock being issued. In the past we have issued small amounts of stock for acquisitions and in the past we have also tried to buyback an equivalent amount of stock so that we are not increasing the outstanding shares significantly.

Our previously stated view and it continues today is that if the stock is significantly undervalued and we have significant excess capital, we would be more than happy to buy back stock to put those two things in balance. Likewise in our model for profit it is based upon continuing to manage the business with a certain amount of financial leverage so that we would want to continue to buy back stock if our business wasn't growing at a sufficient rate to justify the capital we had. And then finally I think if we ever felt we couldn't earn high returns on shareholders' equity, we would want to look for ways to return that excess capital to shareholders because if they can do better than we can with the money, we certainly don't want to slow that process down.

In the short run though, we do not want to be a significant market participant to try to influence the short term price movements. We've seen what the price is though and we're [tempted] from time to time. So we're certainly not adverse from buying stock from time to time.

Currently, I think it's fair to say we continue to have a high degree of optimism for the insurance business and our opportunities to make investments in the future. And so, I don't feel like we have a strong need to be a major -- go through major repurchase program.

Meyer Shields, Stifel Nicolaus.

Thanks, good morning everybody. Paul, when you were going through the results you said that the accident year loss ratio in 2007 was 61 compared to 58 for 2006. Was that 58% the loss tag at the end of 2006 or the end of 2007?

That would've been at the end of last calendar year. So just looking at the current accident year we are booking that if you will recording that at 61% this year versus 58% last year. The largest portion of that difference of three point increase is our recognition that as the market softens we're giving back some price increases that we've taken over the last few years and that has to impact the loss ratio.

Do you have any sense as to what that 58 moved to over the course of 2007?

I'm sorry could you say that again there?

Yes, if you looked back at 2006 now where it seems that you've already identified some reserve redundancies I would assume that that 58% would decrease. I'm just trying to get a (multiple speakers).

Yes, the 58 decreased. To be fair I cannot say how much for the 2006 accident year how much that decreased today. But it is fair to say that has decreased some from the 58.

Okay and turning really quickly just to your plans for net premium retention in 2008 I guess you have got two issues going on at the same time. You have got a stronger bigger balance sheet and reinsurance pricing going down. I was wondering if you could talk a little bit about how significant each of those factors is.

Our goal in dealing with and selecting reinsurers is not to try to leverage cheap pricing per se. We want and expect our reinsurance partners to earn a profit at the end of the day so that they can pay claims so that they will want to do business with Markel in the future. We want to write the business on a profitable basis at a gross level and we want our reinsurer partners to be able to make a buck by participating with us in the reinsurance.

So, to the extent that any of our reinsurers may have received excess profits in the past, we would certainly want to negotiate lower prices and we always maybe have a more optimistic view about their results than our own. But we want to retain as much as of the good business as we possibly can all of the time and we want to prudently use reinsurance and make sure they make money when that is appropriate as well.

So we're not trying to arbitrage reinsurance markets. My guess is that there will be some modest benefit from reinsurance pricing pressures next year but it won't drive that decision process.

The reality is I think most of our retention increase that we hope to achieve in 2008 will just be simply buying less. So for example if we kept the first $1 million on a program as an example maybe we keep the first $2 million next year.

That's very helpful thank you. (technical difficulty)

David West, Davenport & Co.

Good morning. First, Richie, maybe just a clarification of -- it sounds like from the response to one of John's questions that this quarter is somewhat abnormally low (inaudible) patch rate was due to tax credits that you received through the investment process.

I think it was about 29% this quarter. Is that right (multiple speakers)

For the year was about 29, for the quarter it was about 21.

Okay, you got to keep in mind how you come up with your tax rate. You're estimating your tax rate for the year throughout the year and so there's going to be some catch-ups in the fourth quarter and things of that sort.

We also had a favorable tax impact when we brought up the distribution for Markel International. So there are a couple of oddball things if you will in the fourth quarter. I think the 29 to 30 sort of runrate -- I mean that's where we would sort of see ourselves going forward and the biggest difference between a 35% statutory rate and a 29% rate is going to be our muni portfolio.

Very good, okay thank you that's very helpful. Lastly you've done a wonderful job of bringing down the reinsurance recoverable line item the last couple of years. But in this environment and the concern about counterparty risk could you kind of review with us your feelings about the overall quality of your counterparty risk collateral reserves you have in that area?

Well, you know, I think I sort of said it generally about the balance sheet but specifically in regard to our reinsurance I think it's the best it has ever been. We have long had a collateral policy with our reinsurers and so not only have we reduced the balances due from them, we hold quite a bit of collateral from them. And over the years we have reduced the number of reinsurers we work with and it's the cream of the crop. It's the best of the best in terms of the reinsurers. We are very, very pleased with quality of the reinsurance recoverables.

Mark Dwelle, Ferris Baker Watts.

Morning, a couple of questions. You commented in your press release specially admitted had 17 million of reserve releases. Were all of those in the fourth quarter?

Most of it was in the fourth quarter; absolutely you're correct.

Which segments were beneficiaries?

I'm sorry, I was looking at the wrong numbers. About 7 million of that was in the fourth quarter. Sorry I picked up the wrong number.

Which segment in particular?

Markel American -- someone is helping me with the answer there. A large portion of that was at Markel American which is our direct and personal specialty lines business unit.

A question for Paul perhaps related to Shand. There's been a lot of speculation in the market in terms of impacts from D&O covers and so forth. Do you have any particular exposure to financial companies or potentially risk companies in that business segment?

We appreciate the question. By far we think the largest exposure to the industry is commercial directors and officers liability cover. And Markel does not write any US-based commercial D&O business at all, zero. So we've no exposure to the largest segment as we sort of analyze it.

We are looking at our book of business for maybe some ancillary exposures that might develop from say, real estate professional liability or property appraisers or real estate appraisers; maybe mortgage brokers or something like that. We've not seen any activity in the US to date but we are on the lookout for that. And when you aggregate those three or four sort of lines or covers they're not a big portion of what we do at either Markel Shand or anyplace else around Markel.

Thank you and in that same vein then, given that other people no doubt have some of those exposures, is there any early inklings that pricing will begin to firm in that segment? It's been under pressure for quite a while.

I think if you were a commercial bank and you were in the marketplace today for D&O cover it would be -- you would pay more than what you paid twelve months ago. But that probably represents 10 to 15% of the commercial D&O marketplace and the market information that we have is that the rest of the marketplace is continuing to enjoy price reductions which quite frankly is one of the reasons we haven't found that marketplace very attractive to Markel.

Thanks very much. That's helpful response.

Amit Kumar, Fox-Pitt Kelton.

Good morning. I guess just going back to the cycle, one of your peers recently in their conference call suggested that prices should stabilize -- stop stabilizing in 2008. What are you seeing out there? Is this the bottom or there is still a lot of declines we should expect going forward? That's my first question.

I think I would agree with the statement that prices should stabilize. The fact of the matter though is cycles tend to go longer than they should go in both directions and today the capital and the insurance industry is larger than ever. There's certainly more capital in the industry than is necessary for the premium volumes that the industry is currently writing. And so I would bet against them stabilizing. But I would absolutely agree that they should stabilize.

Got it. I guess going back to your opening remarks regarding Bermudians permuting coming back, could you perhaps just give some our color best to what classes are they looking at?

I will let Paul talk about the specifics.

I think most of the Bermuda players historically entered the marketplace as property catastrophe underwriters and providers of property capacity to the marketplace. But what we have seen over the last 24 months is they're unable to satisfy those appetites and that may be personal or may be investor driven I'm not sure. It probably doesn't matter. A lot of them come onshore and begin to offer primary covers and specialty arenas and primary covers and personal lines business and they look to expand their network in a number of different ways. Sometimes as they expand into some of those other classes and types of businesses we bump heads against them.

Ken Billingsley, Signal Hill.

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Yes, most of my questions have been answered except for one. Could you just run through on the reserve redundancies in addition to how you're calculating that, is it 197 for '07, is that net of $10 million from the hurricanes as well as $34 million (inaudible)?

Yes, yes so they would be netting against that number.

And could you give the fourth quarter numbers?

Sure, excess and surplus lines, prior year redundancy was $34.5 million; specialty admitted prior year redundancy $7.2 million; London insurance market $16.9 million redundancy and other was $1 million redundancy; total of $59.6 million prior year redundancies in the fourth quarter.

Where there any additions in the fourth quarter?

Down in all four segments.

Down in all four segments, great. Thank you.

Beth Malone, KeyBanc.

Hi just a couple follow-ups. Could you talk a little bit about what went on with SMART? I see you comment on it every quarter kind of about the progress there. Are there other types of alternative risks transfer programs that you are involved in other than this one?

I think you need to look at the larger picture first. There were four very distinct businesses inside of Markel Re and I think it's important to point out that three of our four businesses met or exceeded our profit expectations. But our largest single area within Markel Re was the alternative risk transfer business and that failed to meet our expectations. And we have nonrenewed probably 75 to 85% of that business through 2006 and 2007. And there is a handful of accounts that remain on the books that will be transferred over to one of our existing businesses.

I think a combination of a number of things -- we went back -- led us to go back and sort of test and kick the tires of our original business model. And when we took a look at that original business model in view of today's market conditions, there simply wasn't enough critical mass in terms of Markel's appetite that would satisfy our profit expectations to go forward. So what we did is we took those four businesses and we split them and put them into existing Markel business units.

Okay that's fine. The other question I had was on the -- what are the goals for compound growth rate of the book value for the bonus program at Markel at this time?

Clearly we want to do the best that we possibly can. The executive bonus program is unchanged. There is a schedule that has been published in the annual report for a few years and the proxy and that is unchanged. And I think it is scale it starts at 11% goes on up to 25 or something before becomes discretionary.

And so it's modest at the 11, 12, 13% and it gets reasonably healthy as we get to 17, 18, 19%. In the long run, we've talked a lot over the past about our model can target earning with the appropriate financial leverage and the appropriate underwriting results as much as a 20% return over a long period of time. And that's clearly something we would aspire to achieve. Having said that we are not terribly disappointed at the 18% number over the last five years and I think the executive team will be reasonably well rewarded for those numbers.

Throughout the organization the underwriting margins, the largest bulk of our bonus system is based upon our underwriting profit margins in individual business units. And we have an internal capital allocation model which is also driven on a similar formula that is based upon the attributes of that product line of the local underwriting profit necessary to deliver high returns on shareholders' capital. And it has a similar sliding scale where if we were the equivalent of 10, 11, 12% there would be potentially some bonus and the target would be certainly closer to the high teens or early 20's based upon on those models.

Meyer Shields, Stifel Nicolaus.

Thanks I was just hoping you could talk a little bit about the pricing trends we're seeing in the international markets particularly where you are ramping up (inaudible).

I would be happy to comment on that. I think in general the pricing is competitive in the international marketplace but it is not as competitive as what we're facing here in the US.

I think the advantages that we have is that when we go into a place like Spain we don't have any business -- everything that we write is new and we try to lever relationships, we try to provide outstanding customer service and we try to solve problems which are the basics behind the Markel success formula for years and years.

But we see in most places like Singapore we're seeing opportunities that are coming to us from the Far East that would never make it to the US, would seldom make it to the London marketplace. So it's really opening more new doors for us and getting more swings at the plate and I think in the long run that will (inaudible) to our benefit and you'll start to see some positive numbers on the bottom line in years to come.

I'd like to thank all of you for your participation today. I thank all of you for supporting Markel. We will continue to do the very best we can and look forward to chatting with you in the future. If you have any further questions don't hesitate to give us a call here in Richmond and we look forward to seeing you in the near future. Thank you very, very much and have a great day.

Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.