Markel Group Inc (MKL) 2009 Q4 法說會逐字稿

Greetings. Welcome to the Markel Corporation fourth quarter, 2009 earnings conference call. (Operator Instructions). It is now my pleasure to introduce your host, Steve Markel, Vice Chairman for Markel. Thank you, Mr. Markel. You may begin.

Thank you very much. And I would like to welcome all of you to the Markel fourth quarter conference call. As I think you all know, we released our year-end results yesterday afternoon. And for the next hour or so, we will be happy to chat about them. Before I get started, I will read our normal 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 than those projected in the forward-looking statements is described under the captions, risk factors and Safe Harbor and cautionary statement on the most recent annual report on Form 10-K, and quarterly report on Form 10-Q, and in the Safe Harbor Act in the press release dated February 3, 2010.

Our press release which may be found at our website at www.markelcorp.com also provides a reconciliation to GAAP of certain non-GAAP financial measures which we may be discussing during today's call. Our procedure today will be very similar to prior periods, after a couple introductory remarks on my part, Richie Whitt will walk us through the financial results. Tony Markel will talk about the insurance marketplace, and some of the operating issues we that are facing today. Tom Gayner will chat about our investment results, and what we are doing on the investment side of our business. And it will come back to me, and I will moderate our question-and-answer session.

As I think you all know, 2009 provided us all with a very challenging economic environment. And that, coupled with a very, very competitive, very price competitive insurance marketplace, resulted in Markel gross written premiums declining 14% to $1.9 billion. While the top line is important, and we are doing everything we reasonably can to write business, and provide quality service and excellent products to our customers, our primary focus continues to remain on profitability. In spite of this environment, our 2009 results are very good. The headlines, net income is $20.53, and combined ratio was 95%. Gross and book value for the year was 27%, and at year-end reached $282.55. And most importantly, the five year gross and book value per share was 11%. While 11% doesn't sound very exciting in real terms, it is a very, very strong result when you consider the environment we have been in for the last five years. Most importantly, Markel looks forward to a very, very profitable future. And we foresee continued growth and hopefully at better rate in the our book value per share. With that, I am going to turn the floor over to Richie Whitt, and he can walk you through the numbers. Richie?

Thanks, Steve. Good morning everyone. I am going to follow my usual format. And I am going to focus my comments primarily on year-to-date results. I will start by discussing underwriting operations, and follow-up that with investment results, and then of course, bring the two together with the discussion of our total results for the year. Steve really touched on it, the themes for the first nine months of the year largely carried through to the end of the year. The economic conditions, and strong competition continue to negatively impact our gross written premium volume. The financial markets rebounded significantly, and we ended the year on a strong note from the investment side of the house.

So, let's move right into underwriting. Gross premium volume decreased 14% to $1.9 billion in 2009, compared to 2008. This was partially due to some currency movements over the past year. Excluding the impact of these foreign currency movements on our London market business, Markel gross written premium volume was down approximately 12%,p due to three factors. First, reduced business activity as a result of the recession has clearly led to lower premiums. Second, continued strong competition in most of our market segments. We have worked hard to maintain underwriting integrity in 2009, and results were basically flat for the year. Third, we successfully converted to our One Markel regional structure at the end of the first quarter.

However the transition to One Markel necessarily required us to divert some of our focus from our marketing and sales efforts, and our build up to the Go Live. The bumps from One Markel are starting to smooth out nicely, and we are seeing very encouraging signs from the transition. I am sure Tony will be talking about these shortly. Net written premiums decreased 13% in 2009 to $1.7 billion. However, we were able to increase our retentions to about 90% of what we write, compared to 89% last year. Earned premiums decreased 10% to $1.8 billion compared to 2008. Looking at the combined ratio, our combined ratio was 95% for 2009, compared to 99% in 2008.

We would like to point out that we have produced underwriting profits in six of the last seven years. The only miss was in 2005, when we had a 10 combined ratio as a result of hurricanes Katrina, Rita and Wilma. The 2008 combined ratio included 5 points of losses from hurricanes Ike and Gustav. The 2009 current accident year loss ratio was 68%, compared to 66% in 2008, and that excluded the affects of the 2008 storms. This increase was due to price decreases over the past several years, as well as some adverse trends in the current economic environment. We mostly noted this in our architects and engineers book of business. The loss ratio was partially offset by prior year redundancies of $235 million, or 13 points primarily in the Excess and Surplus Lines segment, and that was in our professional -- and that was in our professional and product liabilities programs primarily. And also, in our London insurance market segment.

This compared to 163 million or 8 points of redundancy in 2008. Our expense ratio for 2009 increased to 40%, from 36% in 2008. First, the cost of implementing our One Markel business model and related systems, that represents about 2 points on the 2009 expense ratio. There -- it was about -- 1 point in 2008. For 2010, we would estimate that our One Markel systems project will be about 3 points on the combined ratio. 2010 should be about the high point of spending on the systems for our One Markel initiative. Lower earned premiums also adversely impacted our expense ratio in 2009. These factors were partially offset by lower profit sharing expenses in 2009 compared to 2008.

Turning to the investment results, investment income decreased to $260 million from $282 million in 2008. This decrease was due to lower yields on the investment portfolio. And in addition, we increased allocations to relatively low yielding cash and short term investments. In the fourth quarter of this year, and continuing into the first quarter of 2010, we began to reallocate cash and short term investments to our long term portfolio. Investment income in 2009 included a $3 million mark-to-market gain on our credit default swap. And this compared to a $14 million loss in 2008. Realized losses were $96 million in 2009, primarily comprised of $90 million of write downs on other than temporary declines in the fair value of investments. This compared to $408 million of realized losses last year. Unrealized gains consisted of $567 million pre-tax during loss time. Tom will obviously go into much further detail in his comments shortly.

Pulling our underwriting and investment results together, looking at total results for 2009 , we reported net income of $202 million compared to a loss of $59 million in 2008. As Steve said, book value per share, increased 27% during the year, to almost $283 per share as of December 31, 2009. And this does represent an all time high book value per share for Markel. Turning to cash flow and the balance sheet, I have few comments to make. Regarding cash flow, operating cash flow was approximately $280 million in 2009, compared to operating cash flow of just under $400 million in 2008. The decrease was primarily related to lower premium volume in 2009.

Regarding the balance sheet, we held about a $1 billion dollars of cash and investments at our holding company as of December 31, 2009. Also, I am sure everybody is aware and has seen in the releases, we made three acquisitions during the fourth quarter of 2009. First, was Elliott Special Risks, and MGA in Canada, that was purchased by our Markel International, our international segment. Markel Ventures made two purchases during the fourth quarter. Panel Specialists, Inc. and Ellicott Dredge Enterprises. Total consideration for the three purchases was approximately $150 million.

I also should point out that we are consolidating the operations of all these entities. And have included their results in other revenues and expenses on the statement of operations. Those are new captions on the statement of operations. In addition, to be more consistent and have more transparency, we previously did not consolidate AMF, due to immateriality. Going forward, this quarter forward, AMF is also being consolidated into our operations. At this point, I would like to turn it over to Tony to discuss insurance operations. Thank

Thanks, Richie. The fourth quarter was a very active one on many operational fronts, but candidly, on the surface and in numbers, the progress is not immediately measurably evident. Everybody is aware of the economy, which really has not shown any substantive rebound, and the property and casualty insurance sector continue to be overcrowded, overcapitalized, overcompetitive, overly buoyant and under-reserved. As I stated, unfortunately in the last quarter, we are really not expecting either one of these environmental encumbrances to change in the near term. Although there is no question in my mind that they will eventually turn around and improve. That said, we have been hard at work, and made significant strides in the various initiatives to reinitiate growth in our top line, without compromising our steadfast commitment to underwriting profit.

Allow me to elaborate on each of the three operational divisions, the Excess and Surplus Lines, the Admitted Specialty Arena and the London Insurance Market. Most of the focus, as you have gathered from the last two or three quarters, has been in the ENS segment, our wholesale channel sector, where we have aggressively continued the progress of transition to the One Markel platform, which you are all aware, I am sure, was a complete makeover from four separate operating profit centers to six regional offices, recognizing that we have two offices in the western region. With the ultimate objective of making Markel easier to do business with, and offering our entire and growing array of products to all of our customers, through all of our appointed wholesale partners. In this regard, there has been a great deal of activity.

Our recruiting efforts to bring in top talent in both the regional offices, and the supporting underwriting product line leadership has been white hot, resulting in a number of additional new outstanding associates, and putting us another step closer to full staffing. In addition, now that the underwriting platforms in each of our 20 plus products have been laid out, the product line leadership has begun to concentrate on training and mentoring their emissaries, the line underwriters in the regions. Our goal here is to have the requisite experience and expertise in the region, to be able to quote 95% of what is submitted by wholesale partners at the regional level, without having referred to the product line leadership, and we're gaining on that objective.

In addition, one of the strengths in our organization has also been able to continue to broaden and update our product offerings. We have been extremely active on both fronts. In terms of additional products, we added a new product leader by the name of Sal Pollaro, who will be writing mid segment D&O in the United States, with a kickoff expected some time around mid year. And we added Nick Bayliss, as a new transportation product leader who will broaden our current limited offerings in automobile. In addition, on virtually every one of the legacy products, we challenged terms, conditions, authority levels, all with an eye toward identifying and eliminating any artificial encumbrances to writing more profitable business.

The Atlas initiative, which is the technology platform that will service a newly amalgamated Excess and Surplus Lines division, One Markel enabling us to eliminate the foreign inherited legacy systems, and provide state-of-the-art info our people and wholesale partners continues to make great strides in the development. There is real excitement, excuse me, on the part of both our people and our wholesale partners as we have been able to start looking outward to sales and marketing, as opposed to the inward structural focus that we, by necessity, had over the last nine months or so since we pulled the switch in conversion to One Markel. Over at the Speciality Admitted segment, production initiatives instituted over the past year are starting to pay dividends on our legacy products, while we continue to look to for new products and enhancements to our existing offerings.

And in London, they are not just basking in their recent underwriting successes. Richie described the amalgamation of Elliott Special Risk, the acquisition that we announced last quarter continues with enthusiasm on both sides, and the continuity of our team, which is now in its close to ten years of development is continuing to pay dividends. Worldwide, the pipeline for acquisition continue to be pretty robust, although in our minds there still remains a naivety in regards to evaluation. We expect this cavalier attitude to diminish as this soft, stressful marketplace continues. And would expect, as I indicated last quarter, that acquisitions will play a major role in our future growth.

On a closing note, we just completed four days of meetings with 30 of our wholesale producers in an effort to continue to cement the relationship with them, to further flesh out our vision for One Markel, and the strong franchise that that represents. And more important than either one of those factors, get a frank, constructive report card on how we are doing in this transition. I am happy to report that to a person, they have all acknowledged tremendous strides on virtually all fronts in the transition. Not unexpectedly, however -- and I guess this creates some sort of job security -- we still have a lot of work to do. But our agents get it. They know how valuable a One Markel appointment is going to be and is growing at this time, and they are working closely with us to realize the full vision of this ambitious undertaking. So, with that, I would be glad to answer any questions during the Q&A, but will turn it over to Tom Gayner for the investment discussion.

Thank you, Tony. Good morning. I am delighted to report several pieces of good news for you from the investment front. To start, our investment result in 2009 were delightful. The total return for the portfolio was 13.2% for the year. That return, coupled with our underwriting profits produced comprehensive income to the shareholders of nearly $600 million, or 27% on equity. Our book value per share reached a new all time high of $282, and we have good momentum on very important fronts. 2009 shows the power of combining disciplined underwriting and thoughtful investing. And it stands as a wonderful rebound from the single digit decline in book value, that we experienced during the financial asteroid storm of 2008. Over longer and more meaningful periods of time, the five year annual compound growth and book value growth now equals 11%. We are pleased with these results given the challenges in the financial markets. We hope you are as well.

In the equity portfolio, we earned 24.9% last year, modestly less than the S&P return of 26.5%. Personally, I am pleased with this result, both in an absolute and relative sense. In 2009 , the market rally was led by companies that were rebounding from near-death experiences. Companies with highly leveraged balance sheets and shakier credit circumstances often times went up many-fold, and those sorts of firms posted sizzling one year results. By contrast, we own a portfolio consisting largely of steady-Eddie, blue chip, durable, low leverage and high quality businesses. For us to have nearly matched the S&P return with our higher quality portfolio is a wonderful outcome. We earned an excellent return, while taking a lot less risk. That approach has, and should continue to pay out over time, by avoiding wipe outs for which it is nearly impossible to recover.

For the more important, five and ten year periods with our conservative approach, we exceeded the S&P returns by 110 and 490 basis points, respectively. The longer the time frame, the more meaningful the results, and I would be delighted to sign up for these kinds of relative returns for the rest of my career if possible. And our fixed income investments, we earned a total return of 9.8% for the year. We enjoyed the triple play of earning the underlying coupon with only de minimus credit losses, rising prices of our existing holdings from lower rates, and rising prices on corporate credit security as credit spreads tightened inward. Going forward, we recognized that this multi-part stream of fixed income returns is unsustainable. In the long run, the most that can be earned from investing in fixed income markets, as opposed to engaging in the less than than zero sum game of trying to out trade your competitors, is the coupon.

In fact, we would not be surprised to see pinched returns from fixed operation income operations in general, as we believe interest rates have a lot more room to go up, than to go down. Consequently, we will continue to maintain a shorter than normal duration. We will also look to take our risks in the equity markets, rather than credit markets, since we believe that perspective returns are better, and the risks are lower. Additionally, as is usually the case, foreign exchange effects our investment returns in a equal and opposite way from it's effects on underwriting. In 2009, the investment line shows an increase of 1.5% from foreign exchange. As always, that gain shows up explicitly in investment results.

Implicitly, it came out of underwriting results, since we tried to maintain a matched book of investment assets against insurance liabilities. The net result to Markel shareholders is as close to zero, as we can possibly make it. I take my hat off and salute my colleagues in our treasury departments in their efforts here. With a decades of activity now behind us, the cumulative translation account on our balance sheet shows a balance of only $3.8 million, on a total balance sheet of over $10 billion. When you think about the volatility of currency exchange rates over the last decade, that level of skill approaches the precision it take to land airplanes on the top of a moving aircraft carrier in a rolling sea. I am please today be able to show you that piece of evidence to demonstrate that we really do run a matched book.

Finally, during the fourth quarter, we completed two acquisitions in Markel ventures, Panel Specialists in Temple,Texas, known as PSI, and the Ellicot Dredge in Baltimore, Maryland. I spoke about PSI in the third quarter call, and described their skills at logistics and manufacturing in serving the higher education, health care and other institutional furniture markets. Ellicot is a leading worldwide manufacturer of dredges. Ellicot Dredges dredged the Panama canal, and the company has a 125 year history of market leadership. Ellicott did business in 22 countries last year, and it's brand and service capabilities are unmatched in the world of dredging. While dredging may not excite the average person on the street, I couldn't be happier than to own a company whose products work 24 hours a day, seven days a week on a constantly new pile of inventory that mother nature provides on the same schedule.

These two acquisitions double the roster of companies on the Markel Venture group, which includes the AMF Bakery Equipment Company and Parkland ventures. Given the size and material of the group, we will be reporting on the combined results as a separate line of business going forward. If you are interested, you can find more information about these companies and their products and services on the Markel corporation website under the Markel Ventures link. For decades, we've selected investments in the publicly traded securities by using the four-part test of seeking profitable businesses with good returns on capital, run by honest and talented managers, with reinvestment opportunities and capital discipline at fair prices. PSI and Ellicott meet these requirements in spades, and we are delighted to add them to our group of earning assets at Markel.

As I mentioned in the third quarter call the ability to be a controlled investor, rather than a passive shareholder puts Markel in a position to direct the capital allocation, and executive compensation decisions, that either compound or detract from shareholder returns. Markel offers a unique and wonderful home for great businesses, with managers who love their businesses and care about it's long term future. As compared to private equity structures where firms must resell themselves for liquidity purposes in a few short years, we represent permanent capital and long term homes for great businesses. I am delight we had the businesses and managers that have joined us so far. And I ask you all as committed shareholders to get the word out about our efforts. If you, or someone you know, have a great business that they love and care about, and would like to find a permanent home, contact me, and we will follow-up.

In total, to give you some sense of the dimension of this activity so far, we expect revenues in excess of $150 million from this group in 2010, an attractive double-digit profitability on our initial investments. We will opportunistically look to grow this activity over time. Importantly, these activities also produce cash flow at the holding level for Markel, that is separate and distinct from that produced at the insurance company level. This provides us with additional option to aggressively deploy capital, without the fetters normally seen at other insurance companies. We expect the advantages of this structure to manifest themselves, and grow over time.

2009 stands as a fantastic year for the investment operations. We had wonderful results in the traditional activities of the insurance companies normal investment operations. We steadily purchased high quality and attractively priced equity securities throughout the year. We increased the credit quality of our fixed income holdings. We maintained a fortress balance sheet with excess liquidity. We continue to maintain a duration, and balance sheet which will protect us from what we believe is an inevitable spike in interest rates. We productively deployed capital, and kept a meaningful amount in reserve to be deployed when we see the combination of attractive investment opportunities and firmer insurance markets. We also took the next steps in the crawl-walk-run process of adding majority owned holdings into the company. I could not be more excited about the options and opportunities that the actions and decisions create for the Markel corporation and it's shareholders. I look forward to your questions and anticipation going forward. With that, I will turn it back over to

Thank you, Tom. 2009 is now history. And we are fully engaged, as always, in building the value of Markel for the future. Pricing in the current insurance market continue to be challenging and we do not know when it will improve, but Markel's strength is our strong culture and long term view, and the future is bright for your Company. With that, we will open the floor to your questions.

(Operator Instructions). Our first question is from the line of Beth Malone, with Wunderlich Securities. Please go ahead with your questions.

I have several questions, and I don't want to take up everybody's time, so I am just going to ask a few and then get back into queue. First off, on the reserve development that was experienced in the London operations, that was significantly greater than a year ago. And I just want to make sure, is there something unique about a change in the mix of business, or something that would have resulted in that significant reserve development this year?

Basically, the biggest factor, I think in the Markel International reserve development is the fact that the first several years after our acquisition, we were building our margins of safety. And with the passage of time, we have those margins built, and we are enjoying the benefits of our conservative. I will let Richie comment on anything more specific he is aware of.

Beth. Yes, Steve is absolutely right. I think also a piece of what is happening -- and I think we tried to talk about it a little bit -- is we did have some favorable redundancies coming out sort of a 2001 and prior areas, which, of course, when we first got to Markel international were problematic. We worked hard to get the reserves right. And now we are actually seeing some favorable developments out of those reserve years. So, that is a piece of it. And then of course, we are starting to release the 2003 to 2006 redundancies that may appear to be there. We do have longer term - tail business there, so it is appropriate now, after the amount of development we have seen, to start releasing the reserves in that 2003 to 2006 period.

Okay. Just one clarification. When you mentioned where the reserve development came from, you said financial risk division. I am curious, is that like directors and officers liability?

It is primarily Professional Liability, D&O, accountants, lawyers, all sorts of professions, as well as miscellaneous errors and omissions.

Okay. And just a quick question, I know this doesn't contribute to watch the results, the excessive development that you add to every year. Is there any -- I mean this stuff has to be pretty old by now. Does this go on forever?

Well, I can talk a little about what we did. Well, it goes on for quite a while. That is clear, Beth. We are getting to the point now where the reserves where he holding are very situation specific. We are down to the larger sorts of situations you read about in the paper, where we have relatively small participations on them. Nowadays when we are moving reserves on asbestos, something has typically happened on some of those the larger cases that are out there.

Okay. And for Tom, I guess, you did kind of touch on this, but, the yield on the portfolio in total, has been lower than historic, primarily because you have a significant amount of cash and short term in the portfolio relative to historic. Where are you putting new money, and do you anticipate that that proportion of short term cash is going to decline throughout 2010? Or do you think it is too early to commit more capital right now?

Yes. Beth. The fact of the matter is, obviously across the curve, interest rates are lower than what they were a year, or two or three ago. And, we are shorter in our duration than we historically have been and normally would be. And that is because I remain concerned, -- I don't understand why interest rates are at the level they are right now. So I will incur opportunity costs for Markel, and will continue to have a higher than normal balance at the front end of that curve, and lower our investment income. Because it would be a really bad day when interest rates go up a lot, and I want to have dry powder when I see it coming, when I see it happen.

Obviously, you don't have any kind of crystal ball to suggest that we will see higher interest rates any time this year, or what?

I have a crystal ball, but I have learned over being in the investment business over 30 years, it is a bad idea to look at it. I use a magic 8 ball instead.

Okay. I have a couple of -- these are more administrative kind of issues. Like, with the other income and other expense information that is now being provided, are you all going to provide us with -- it looks like it changed 2008. You restated 2008 to reflect the way it is being recorded now. And so, I guess pro formas. Are you we going to get that information for the three quarters of 2009? Or will we only see it will you guys report the three quarters of 2010?

Beth, this is Richie. Yes, we will go back and make the numbers in the prior year reports consistent with the presentation, that we are giving you now in the fourth quarter. And, I noticed in some of the reports that were out late last night and this morning, people were saying how can I roll from third quarter to fourth quarter, well, you can't. Because third quarter we did not do -- well, of course, three of the entities had not been purchased. And because of immateriality, we had not used consolidation accounting on AMF and Parkland. So people having that difficulty will have in our tables, in our quarterly tables in the annual report, we'll have those things reformatted for consistency, so that will all be in the annual reported.

Okay. One other thing about that. There were 60,000 more shares outstanding according to the year-end 2008 calculation, compared to what was reported previously. Is that also part of that adjustment?

That does not ring a bell, Beth.

I don't want to take up the time in a conference call.

Let us -- because we have been buying back shares. We can talk about that. Maybe we will look at it and give you a call.

Yes. The other thing I need a call on, is just the breakdown of loss expense by division, which isn't -- which is only provided in the 10Q's and 10K's, and it will be a while.

Okay.

Other than that. Thank you and I will get back in queue.

Thank you. Our next question is from the line of Mark Hughes, with Suntrust. Please go ahead with your question, sir.

The reserve development in the other category for the full year, what was that number?

Richie, do you want to pick up on that?

Yes. It was roughly $10 million for asbestos. I think everything else was pretty much flat for the year.

Okay, that was the $10 million. And then talking about the London reserve development. You say you are starting to release reserve in the 2003 to 2006 accident years. Is that right? Starting to release reserves?

No. We have been releasing in the 2003 to 2006, but I think that is primarily where the releases in the fourth quarter came from. And, in addition, as I said, 2001and prior, we saw some favorable come out of those years as well, which obviously, because of the volatility back in those years, we held those reserves a pretty good while to see how things were going to settle out. So, those are the two areas -- we have been releasing 2003 to 2006 for awhile now.

Yes. Is there a way to say more broadly how you feel about the reserve position now compared to where we were a year ago? Obviously favorable development has been nice?

Mark. The philosophy of the company has been unchanged for quite a few years. Our goal is to set reserves at a level that we think is more likely redundant than deficient. We look at every division, or every piece of business on a product line basis. We worry about all the bad things that can happen. And at the end of the day, we try to select a number where we create a margin of safety that is appropriate to the exposure that we are facing, because none of us really know exactly what is going to happen in the future, and the nature of the business. Things are constantly changing.

On a quarterly and annual basis, we want to be very, very consistent. And we do not want reserve releases to distort the annual profit and loss statements. So, the thought process is that in the aggregate, while the individual product lines might be bouncing around, in the aggregate we want the margin of safety to be very consistent year after year after year. So, we believe very strongly, that at each reporting period, the reserves are as strong, as they were in the prior periods. And so, the margins that we are creating on business we are writing today, are similar to the margins that are being released for all of the prior periods, such that that creates the consistency that we think is appropriate for our business.

Today, on new business, we are scared to death that this could be inflation in the next, two, or three or five years. And so we are constantly thinking about what that will do to the loss reserves. We know there is a tremendous amount of price pressure. While we think we are holding the line as best as we can on most product lines, if our prices are wrong, they are more likely to be too low, than too high in the current environment. So, we are conscious of that potential exposure in setting loss reserves. And so we are continually trying to make sure we have appropriate margin of safety in our loss reserves and it is very, very consistent, because we are not trying to manage the reserves or manage the P&L at all. We are trying to manage the quality to have balance sheet, and make sure it is consistent.

Thanks for that perspective.

Thank you. Our next question is from the line of John Fox, of Fenimore Asset Management.. Please go ahead with your question, sir.

Thank you. Good morning, everyone. I have a question on the other line, of what is in there, what isn't. So, if you could just go through which of the Markel Venture investments are included in there at this point?

Richie, you want to pick up on that?

Yes. Other revenues, other expenses, John, is going to be the four that Tom mentioned, and I will go through them. Panel Specialists, Ellicott Dredges -- well, Ellicott, we only purchased that on November 1st, and we will report numbers on a one-month lag, so Ellicott, there is nothing in there for Ellicott in the year-end numbers, but going forward it will be there. AMF and Parkland Ventures.

You also bought Elliott Special Risk, and you have a investment in a bank in the Richmond area? Where are those included?

Yes, hold on just one second. ESR, Elliott Special Risk is also other revenues and other expenses.

Okay.

First Market Bank, just recently, the transaction I believe closed this week.

Right.

First Market Bank has historically been an investment affiliate. Now the that the transaction is closed, First Market Bank is just going to be a public equity security, like any other public equity security, and will in our equity line, equity security line.

That makes sense. And do you have to break out of public and private equities at 12/31 on a securities sheet?

I don't have that in front of me, John.

And I noticed the written premium in the London in the other quarter, which is different than other segments and different from other recent time periods. So what is going on there? Is that sustainable? Are opportunities better in the London overseas market? Could you address that?

You have to be a little careful because of the currency affect. I think London was sort of flattish in the fourth quarter, and they were flat for the year. So, they have had -- and I think we talked about it throughout the year. For whatever reason, London has been slightly stronger a market than what the US market seem to be right now. But, they were relatively flat for the year.

Okay. And for 2010, what is a normal tax rate, given your mix of muni's and other things you have going on?

Well, and this is -- I know there was a lot of interest in the tax line in some of the reports last night. It's going to be more volatile going forward because of the international operations and the fact they are pretty profitable now, and becoming a bigger part of our profit as we go forward. So there will be a decent amount of volatility, just because of the way taxes work on foreign operations. But we are going to be -- we would think, all things being equal, we are going to be in the high 20's to low 30's, in terms of a tax rate next year.

That is this year, Richie.

I thought you were asking about 2010.

Oh, yes.

Hey, you have to remember, we are finance, we are still in last year, 2009.

Okay. I hope the other guys are moving ahead.

Yes. We are. (Laughter.)

Alright. Thank you very much.

Our next question is from the line of David West, of Davenport & Company. Please go ahead with your question, sir.

Good morning. Just as a clarification, I thought the Elliott Special Risk was part of the international operations. The prior response indicated that 's included with the other venture investments.

Yes. It is with other revenues and other expenses, and the reason for that, it is primarily commission income to us today. Because Elliott writes something like $90 million of business, and until we put all of that business on Markel paper, they are basically an MGA operation. And so, we felt it was more appropriate to put it in other revenue, other expense. As we go throughout 2010, we are going to be converting Elliott's business to our own paper. And so, it will basically come out of those lines, those other revenue, other expense lines, and into Markel's International underwriting results as premium at that point.

Very good. I appreciate that clarification. You also reported this time a noncontrolling interest or as I still refer to it, the minority interest. Since Ellicott is not fully in the numbers this time, what does that figure represent? What minority ownership does that represent?

David, we own a little over 80% of Ellicott. So, the way -- the way the accounting works, when you have minority interest, we will consolidate 100% of their balance sheet, 100% of their revenues and expenses, and then recognize a minority interest in our equity section. And at the bottom of the P&L for the minority interest, the 20% minority interest. So that is how the accounting will work for any of Markel Ventures, acquisitions where management or prior shareholders retain some portion of the ownership.

Very good. As right now that is only the Ellicott dredging?

It is actually also AMF. I think we are about 80% on AMF. A little over 80% on Ellicott. We are 100% of PSI, and we're about 80% on Parkland Ventures. Also, just one more point of clarification. I know this is the first quarter, and I just want want to make sure everybody has it straight in their mind. While we are including DSR, Elliott Special Risk and Parkland in other income, other expense, it is not part of Markel Ventures. It as I said, it is going to become part of Markel international, as that business is written on Markel international's paper.

Very good. And lastly, in these transactions in some of the Markel ventures, knowing the Company's attitude toward granting stocks, options and so forth, do you use the Markel stock as an incentive in these minority interests?

I will answer that. David, the answer is no.

Very good. Thanks so much.

Our next question is from the line of Meyer Shields, of Stifel Nicolaus. Please go ahead with your question.

Thanks, good morning, everybody. Richie, can I get the tax credit in the quarter that you referred to in the press release?

Meyer, I know there was confusion around that. And we probably should have done more education around our number in the third quarter relate to tax. So let me just kind of step back for a second if I could, and try to answer it this way. In the third quarter, and for the nine months, you will remember us talking about a change in the UK. tax law resulting in a pretty significant benefit for Markel Corporation. The way you do your tax provisions, you are forecasting the tax rate -- the effective tax it, for the full-year.

Okay? So, when we came up with the tax rate last quarter, and I believe it was negative 4%, or a benefit of 4%, that was the best estimate of the rate for the full-year, including that tax benefit from the UK tax law change. If you roll forward to year-end, the tax benefit for the full-year is about a -2%. So pretty closely in line with what we estimated at the end of the third quarter. So, there is nothing really too crazy going on in the fourth quarter. It's really the mechanics of how you come up with the effective rate for the year. And we probably should have talked about that a little more at third quarter, so you guys would know what to expect when we released the fourth quarter results.

Okay. I think that is helpful. With regard to the various underwriting segments. When we look at accident year combined ratios, I think we can calculate that on a quarterly base, for Excess and Surplus and the London market, it's has been hovering about 110%. Can you talk a little about how comfortable you are with that, and maybe some -- how much is that a problem and how much is reserve conservatism.

Clearly it is part of both. As we do in the accident year as I described earlier, make sure, try to make sure that we have a margin of safety, and that our numbers are more likely redundant than deficient. And we do have, as I mentioned, concerns about increased claims activity in a recessionary environment and future inflation. So, all that is part of the process, but, the truth is, the prices are not as strong as they need to be. I think, across the industry, you will see that most insurance companies today on an accident-year basis are not making underwriting profit margins that are appropriate for this business. And that needs to change.

Okay. One last question if I can on the other revenues and expenses. Is the margin, at least on the fourth quarter, at all a good basis for forecasting?

I am sorry, Meyer. Could you say that again?

We calculated about a 12% margin on Markel Ventures and other line. Is that a good run rate or --

No, I would say not, because Ellicott really isn't in there yet, because as I said, we purchased them, well, this was November 30th. I think I misstated that earlier. I think I said November first, but it was November 30th. And we will report their results on a one-month lag, so there is nothing for Ellicott right now. Tom, you might want to talk about what you are expecting in returns on investments. We will let that develop as the year goes by, but $150 million of revenue, and a double-digit sort of profitability would be a rough swag way to get started. And we will report on that as the quarters roll back.

Perfect. Thanks so much.

Our next question is from the line of John Neff with Acre Capital Management. Please proceed with your question, sir.

Thank you. Just one question, and that would be, given the expectation 3 -- of 3 percentage points of additional cost pressure from the One Markel initiative in 2010, I assume you are still planning on underwriting profitably this year. So I want to get a sense, does that additional 3-point hurdle, with that in the mix, should we necessarily expect there to be downward pressure in terms of the written premium -- in terms of the volume?

We are optimistic the benefits of One Markel are also going start in terms of providing more products to more agents. While we don't see a huge improvement, I think we are hopeful that the top line certainly doesn't decline, and starts moving in a proper direction. I really couldn't be more specific than our hopes and desires at this point in time.

John, I might just add, and I want to make sure you were clear on what I said. It was about two points on the combined this year. We think it will be about three points on the combined next year. So it is an incremental 1 point on the combined.

And clearly we are not impervious to the reduction in margins that the pricing pressure has created hell over the last four years. But I have a lot of confidence in our people, that we are still producing underwriting profits. And one of the exciting things about One Markel, the realization of the old adage of selling new products through old customers. The amalgamation of all those four operating subsidiaries into this one platform, gives us the opportunity to spread the production into a lot of old, very loyal, large supporters of ours, who really had not taken advantage of our entire product offering.

So, we think that, frankly, by selling the entire spectrum, or suite of products we have through the wholesalers, as a result of the One Markel initiative, that we can get it done without increasing further pressure on the rates. That is why I am optimistic that, in spite of the fact that the market is not going to, in my estimation, not going to give us much of an artificial, if any artificial wind at our back this year, that there is a good chance we will show some gratifying growth, as a result of just spreading our tentacles further into our existing channel partner operations.

Perfect. Thank you very much.

Our next question is from the line of Mark Dwelle, of RBC Capital Markets. Please go ahead with your question.

Good morning. Most of these horses have been pretty thoroughly beat, but I would like to catch them one last time. I just want to make sure I understand the mechanics on the tax rate. So, the thought for next year, for 2010, is a, I will say a more traditional looking tax rate for the year, which is to say, as you said high 20's to low 30's, so that means the benefits of the credit or tax law change those were isolated to the 2009 year. They will not carry through into the 2010 year?

Yes, Mark, you are absolutely right. Those are isolated to this year. There is no kind of repeat of those things next year unless the UK government decides to hand some more gifts, which I don't see that happening. So, next year, like I said, I mean high 20's, low 30's, but I have to stress, now that Markel International is solidly profitable, and actually a larger percentage of our profit given their strong results in a tough US market, we are going to have more volatility, and what those tax rates could look like, just because of the way the foreign tax code works, how overseas operations are treated for US tax. So, that is our best estimate today, but is subject to some volatility just given those caveats.

Okay. And my second question relates to -- you commented in terms of the three combined ratio points related to One Markel. This year it was two points, and going through quarter by quarter, usually the amount was somewhere between $9 million and $10 million. Are you saying the actual amount of cost on a quarterly basis is going to accelerate from that level? Or are you saying because of the numerator that we are using for the year is likely to be lower than the average numerator for last year, and that is why the costs are going up?

The costs are going to accelerate in 2010, Mark. This is the build year. We are heading into build mode on a lot of systems, and that is where you spend the big part of the money. So the cost is going up. Obviously, with volume having been down, that is a big of an issue as well. But, yes, costs will be up in 2010. I think this is the high water year for cost.

Okay. Thanks. That is all my questions.

Thank you. Our next question is from the line of Jay Cohen, Bank of America. Please go ahead.

Thank you. Just a follow-up on the last question. The cost from One Markel. I had assumed that 2009 would be the peak. I am not sure why I thought that. Is this a change in your expectations the fact that the incremental is expected go up in 2010?

Jay, I am trying to think back. But I think we always said this was the big year. Yes, well, somebody just mentioned maybe there was a little confusion, we did implement the business model in 2009 , and obviously there were certain costs surrounding that. The piece we really talking about now, is the technology initiative that will support the business model going forward. We sometimes refer to it as Atlas, as when we go back and forth between Atlas and One Markel. That piece has always been -- the thought has always been that 2010 was sort of the peak year in terms of

Okay, that makes sense. And the second question. It looks like the expense ratio did pick up in the second half of 2009. I am assuming some of that is a bigger bonus accrual, just because of the book value growth? Is that accurate?

Jay, that is exactly correct. Starting out in the year, we were actually taking bonus accruals down, because we were concerned about what results might look like for the year. That year progressed, as the world became better, and as our results looked better, we started putting up heavier bonus accrual to catch up. So the third quarter and fourth quarter were hit disproportionately with bonus accruals.

Okay. That is great. Thanks a lot.

Thank you. Our final question is a follow-up question from the line of Beth Malone, of Wunderlich Securities. Please go ahead with the question.

I have two follow-ups. What was the tangible book value at year-end, 2009?

Beth, tangible book value per share, $231 a share.

Thank you. Then to follow-up on comments Stephen made about inflation. It sounds like that is something of greater concern. And I am wondering is, is there any positioning of strategizing you can do in anticipation of inflation, either in your pricing or how you are reserving? Do you assume inflation is going up when you are setting aside these reserves?

We clearly include a concern about it. If you have to pick a number between X and Y, you had something to the probability that there is more inflation in the future than we've had in the past. So, yes, we are including something in the current text to try to compensate for that. Whether it is enough, I mean, we don't know what inflation will be five years from now. We don't know that we are picking the right number, but picking something greater than zero makes sense, and so we are doing, so and probably more so than other in the business. I can't quantify it for you, Beth. It is part of the overall subjective adjustment, and part of what our actuaries are trying to deal with.

Thank you.

Ladies and gentlemen, I want to thank you all for participating in Markel's fourth quarter conference call. We will be available if you have any further questions. Don't hesitate to let us know, and we certainly do thank you for your continued support. I wish everybody a good day, and we will talk to you next quarter.

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