February 15, 2014

RE: 2013 YEAR-END REVIEW

The stock market had one of the strongest years in its history in 2013 continuing its strong performance since the equity markets hit bottom in March 2009. A breakout of the performance for the past two years of the S&P 500 and Dow Jones Industrial Average, both with dividends reinvested, is given below Stock Market Index S&P 500 Dow Jones Industrial Average Performance of Key Holdings Below is the breakout of the performance of our largest holdings in 2013, which followed a strong performance in 2012. Company % Change for 2013 64.6% 50.4 50.1 47.6 43.6 39.5 38.8 36.0 32.8 32.2 29.2 26.5 25.3 24.7 23.3 21.2 6.0 5.5 4.8 Company Mohawk Lowes Companies Thor Industries TJX Companies Bank of New York Martin Marietta Wells Fargo & Co. US Bancorp Berkshire Hathaway Abbot Laboratories Brown & Brown Progressive UnitedHealth Group Pepsico, Inc. Lab Corp Washington Post Bed, Bath & Beyond Mercury General % Change in 2012 51.2% 40.0 36.5 31.1 29.1 25.0 24.0 18.1 17.6 16.5 12.5 8.2 7.0 3.1 0.8 -3.1 -3.6 -13.0 2013 Performance 32.4% 29.6 2012 Performance 16.0% 10.1

Mohawk AbbVie Inc. TJX Companies Thor Industries Bed Bath & Beyond Lowes Companies UnitedHealth Group Bank of New York Co. Wells Fargo & Co. Berkshire Hathaway B Progressive Corp. US Bancorp Mercury General Abbott Laboratories Brown & Brown Pepsico, Inc. Martin Marietta Materials Lab Corp. World Fuel Services

_________________________________________ 60 COMMERCE DRIVE WYOMISSING, PA 19610 610.375.2585 FAX: 610.375.3324

Our 2013 year-end review is longer than usual because we felt it was important to discuss Berkshire Hathaway at length when Warren E. Buffett is no longer leading the company followed by our thoughts on several topics raised by our clients and we close by discussing our portfolio of holdings. We feel it is important for our clients to better understand our thinking and we try to include the information that we would want if our roles were reversed. Our letter consists of several parts. First, while we have shared our views on Berkshire Hathaway many times over the years, we have never gone into detail about Berkshire Hathaways future when Warren E. Buffett is no longer leading the company. Given that Berkshire Hathaway is our largest holding, we feel it is appropriate to share our views in some detail. Second, we discuss some of our concerns regarding the stock market including segments on: overall stock market valuation levels, valuation levels for smaller companies, corporate profit margins, margin debt levels and the commoditization of businesses. Third, is our discussion of several positive factors that bode well for long-term investors in stocks, despite current elevated market levels. These segments include: fewer companies listed on U.S. exchanges, pension funds, and the overall stock allocation of endowments. Fourth, we discuss our views on several issues raised by our clients including the domestic energy revolution, housing, inflation/deflation and income and wealth inequality. Finally, we discuss our portfolio activity including sections on preferred stocks, municipal bonds and stocks. THE FUTURE OF BERKSHIRE HATHAWAY WITHOUT WARREN E. BUFFETT Berkshire Hathaway remains our firms largest holding and, while we have discussed the company in the past, several clients have asked the question, What is the future of Berkshire Hathaway should Mr. Buffett no longer be the CEO for a variety of reasons? In response, we would like to share our thoughts on this unique enterprise and the irreplaceable and extraordinary Warren Buffett who created and continues to guide the firm. As many of our clients may know, I have followed Mr. Buffett and Berkshire Hathaway for over four decades, though with more insight over the past three decades. It has been an enormous privilege and pleasure watching him and Berkshire Hathaway evolve and grow in so many ways through the years. Today, Berkshire Hathaway represents the largest holding in our client portfolios, and we have never sold a share. As such a large holder on behalf of our clients, I have tried to think deeply about Berkshire Hathaway both in its current structure, but even more importantly, to when Mr. Buffett is no longer the CEO, for whatever reason. I have tried to summarize some of my key thoughts below without going into great detail, as to some of my concerns regarding Berkshire Hathaway without Mr. Buffett. Despite these concerns which I discuss, I strongly believe Berkshire Hathaway is well positioned overall for a future without him.

While I hope Mr. Buffett finds the Methuselah gene, which he has often referred to as it would provide him another 885.5 years to live, and, if I find it, I will split the years with him equally extending each of our lives for 484.5 years. Based upon actuarial tables he will likely live into his early to mid-90s. I certainly hope it is even longer. I also believe a greater risk to Berkshire Hathaway than Mr. Buffetts absence, would be a deterioration of his capabilities, rather than his passing. However, he has given the Board approval to take away the keys if he begins to lose his mental sharpness. In Mr. Buffett there is embedded a broad and deep multi-dimensional set of skills that are simply not found in any other single individual. As the founder, builder and controlling shareholder of Berkshire Hathaway, his values and vision have been deeply integrated throughout the organization. Furthermore, his unique, set of multi-dimensional skills, along with his history with the firm, provide him with an unparalleled capability to evaluate and assess the many subsidiaries, management teams and acquisitions. There are some deals, from the purchase of entire companies, as well as one-off deals such as during the financial crisis, that come to Berkshire Hathaway exclusively because of Mr. Buffetts integrity, track record, reputation and so on, that will be irreplaceable. Berkshire Hathaway remains an extraordinary company, with a Rock of Gibraltar balance sheet, a collection of many world class businesses, stable and growing cash flows from diverse sources, and an outstanding team of managers leading many of its businesses. However, when Mr. Buffett (who is irreplaceable) is no longer the CEO, what will that mean for the future of Berkshire Hathaway? In assessing the future, I have tried to consider the historical evolution of both Mr. Buffett and Berkshire Hathaway to gain some insights as to how best to prepare for that future without him. In Ralph Waldo Emersons words, Every institution is the lengthened shadow of one man. No organization better exemplifies that quote than Berkshire Hathaway. However , Mr. Buffett has done an outstanding job, fundamentally transforming the company over the years so that today the company is far less dependent upon him than ever before in preparation for when he is gone. There are four areas of focus in my thoughts: corporate governance, leadership, operating structure, and valuation, each of which I will address. Under Mr. Buffetts leadership, corporate governance has been exemplary on every count as measured by evaluating the following four areas: 1. 2. 3. 4. Rights and equitable treatment of shareholders and all stakeholders; Role and responsibilities of the Board of Directors; Integrity and ethical behavior; Disclosure and transparency.

Given Mr. Buffetts demonstrated track record of excellence in each of these areas, Berkshire Hathaways corporate governance, while non-traditional, has been relatively unchanged. Given BRKs current corporate governance, it will be more difficult to prevent changes in the future under new leadership due to government regulators and external forces that will not be as forgiving as they have been under Mr. Buffett. For example, Berkshire Hathaways disclosure and transparency based upon the firms SEC filings, and annual reports actually offer very little information relative to the enormity of the organization.

Mr. Buffett has often indicated that his role will be broken into two separate functions: a CEO (management) and a CIO (investment). The Chief Investment Officer team will include Todd Combs and Ted Weschler, both recruited over the past few years. Todd and Ted have demonstrated outstanding investment skills combined with the personal characteristics that Berkshire Hathaway seeks. Tracy Britt Cool joined the firm a few years ago and has helped oversee several of the smaller companies in the Berkshire family. I believe that the investment segment should consist of both an investment team (Ted, Todd, perhaps a 3rd investor) and an operating team (Tracy Britt Cool and another individual) that work closely together but have distinct roles as required by Berkshire Hathaway. The investment team would focus on investing Berkshire Hathaways prodigious cash flows into equities, debt securities, the purchase of entire companies, both public and private, and assisting the subsidiaries in making bolt-on acquisitions. The operating team will be more internally focused on working closely with the top management teams of many subsidiaries. The investment and operating teams will work collaboratively to enhance the collective knowledge and improve Berkshire Hathaways investment and operating performance. Furthermore, working together they may find new ways to enhance Berkshire Hathaways future cash flows and management depth. Having both a talented investment team (externally focused) and operating team (internally focused) with some overlap will provide Berkshire Hathaway with a fuller complement of skills to better serve the company in various ways. The new leadership of Berkshire Hathaway and the many operating companies will present challenges going forward that cannot be understated. The new CEO will simply not have the historical background, extraordinary set of skills, and broad freedom that Mr. Buffett has appropriately gained from a multitude of experiences and constituencies over the years. However, with the collective synergies of a very talented group of leaders working together, Berkshire Hathaway can be expected to prosper and grow. The operating structure of Berkshire Hathaway should be more formalized, while maintaining the unique corporate culture, decentralized operating subsidiaries and centralized corporate resources and cash allocation (above defined levels). Finally, Berkshire Hathaways valuation remains below its intrinsic value as measured in a variety of different ways: float based model, two column approach, multiple of book value, or combinations of these valuation methods. On September 26, 2011 Mr. Buffett instituted the first repurchase program in the companys history to buy back stock when it trades for a 10% or lower premium to stated book value. On December 12, 2012 this price limit was increased to 1.2x book value and the company repurchased $1.2 billion of stock in one transaction. This has effectively placed a floor on Berkshire Hathaways stock price which we believe remains far below intrinsic value. While I have mentioned several approaches above, my preferred approach would be to value the float and then value each individual company within the Berkshire Hathaway family based on their individual financials, and the qualitative characteristics of each to determine their likely value to a rational private buyer. The result would be a much higher price for Berkshire Hathaway than the current price or any of the values generated from the earlier methods discussed above or in the example illustrated below. A sum of the parts valuation done by Keefe, Bruyette & Woods which utilizes a valuation for the float and combines it with a valuation for the various operating companies using price earnings multiples follows.

With regard to Berkshire Hathaways valuation, we believe the company is clearly worth significantly more than its 1.3x stated book value or the valuation above. Both understate the value of many of Berkshires outstanding businesses as they are lumped together in segments. Furthermore, should acquiring companies be either strategic or private equity, the valuations could be much higher given cost cutting and other synergies that could be achieved leading to higher individual company valuations. Accordingly, we believe that Berkshire Hathaways valuation is significantly greater than the current stock price. Lets assume that Mr. Buffett is no longer the CEO. Several changes will be made over the ensuing year or so, with some immediately and others taking longer, but which will inevitably take place. First, a new CEO will be appointed. I believe that will be Ajit Jain with two backup candidates. Second, the Board of Directors will be reconfigured over time. Third, several of the CEOs of subsidiaries will retire. Fourth, new CEOs and leaders will need to be chosen to replace the departing CEOs. Fifth, a dividend will most likely be instituted to reduce the need to invest the prodigious cash flow coming into headquarters. Sixth, while historically, divisions were managed to generate excess free cash flow to send back to Omaha, going forward some of that free cash flow will be redirected toward building the enterprise via bolt-on acquisitions and internal growth. Seventh, the stock price will probably decline 10-20% or more, which, in my view, will present an extraordinary buying opportunity. The new CEO will be managing more with a dividend focus and improving operations internally within Berkshire while also focused upon buying entire companies along with Todd and Ted. Mr. Buffett often states that his job is to allocate capital and determine the compensation of the top management teams at the subsidiary level. I believe the new CEO will also do both but in a more collaborative way with Todd, Ted and even other executives.

Structurally, while currently many of the CEOs report directly to Mr. Buffett, the new CEO will need a more formalized structure to facilitate his (her?) ability to lead Berkshire. The large subsidiaries such as BNSF, Iscar, Lubrizol, Marmon, Mid-American and Geico will continue to report directly to the new CEO. I have outlined a structure at the end of this letter as to how this might appear. The remaining companies need to be segregated and placed under a separate group president. Segregated areas might be housing related companies, manufacturing and service firms, and retail operations, to name three. Some of this is already being implemented by Tracy Britt Cool, but going forward I believe this would help the new CEO in dealing with the managers that oversee many of those businesses, rather than as with the current structure where they all report to Mr. Buffett. The role of each group president will be having several subsidiaries reporting to them, creating very little bureaucracy, yet still providing the subsidiaries with a thoughtful executive from the outside to bounce ideas off of and to enhance their leadership. Each group president would have several of the 60 operating subsidiaries reporting to them and they will in turn report to the new Berkshire Hathaway CEO. This will enable Ajit, or whomever, to remain focused on the insurance operations, by simplifying his responsibilities with a minimal number of direct reports-the fewer the better. My biggest concern relates to the new generation of operating subsidiary management teams and keeping them in place. Many of the original managers that sold their companies to Berkshire Hathaway were in unique positions, very different from those the next generation of leaders will face. These original managers sold their firms to Berkshire Hathaway for many reasons: avoid going public, avoid private equity which would need a liquidity event in the years ahead (going public or sale), liquefying their wealth from the firm for cash to diversify and for estate tax planning purposes, maintaining autonomy, finding a permanent home, and being knighted by Mr. Buffett an enormous honor. These original managers love Mr. Buffett for these as well as other reasons. However, the new generation of managers will likely not feel the same loyalty or, frankly, love for the new CEO that their predecessors felt for Mr. Buffett. We are concerned as to whether the new management teams will remain as loyal to the new Berkshire Hathaway as the prior leadership. Despite Mr. Buffett being unquestionably the greatest investor who has ever lived and given his excellent track record in choosing people, I believe that Todd and Ted were excellent choices and will do a terrific job allocating capital in the years ahead. Certainly, they cannot replicate Mr. Buffetts success given the anchor of size and the unlikely probability that, while they may be outstanding, they will not be as extraordinary as Mr. Buffett. I also think their role should include visiting potential Berkshire-like companies that fit into the Berkshire Hathaway profile to learn about the respective businesses and also to build relationships with management teams/owners of both public and private firms keeping their names at the top of the list should that company decide to sell. Berkshire Hathaway is unique in many ways, including its financial strength and quasi-permanent capital, providing the company with the capacity to do deals of enormous size while still providing a unique blessing available to few investors -- the great option of doing nothing unless potential investments meet all of their parameters. Todd and Ted along with the new CEO will work together on large acquisitions for Berkshire Hathaway of both private and public companies, while also assisting in searching for appropriate subsidiary bolt-on acquisitions. Historically, Berkshire Hathaway typically acquired 100% ownership of companies. A few exceptions were Mid-American, Iscar and Fechheimer, where a portion of the equity was left in the business to incentivize management teams going forward. I believe that it will be more common in the future without Mr. Buffett and I believe it will be prudent for BRK to structure more deals this way so great leaders and management teams can financially participate in what they are helping to build beyond just earning a salary, albeit a very generous one. I believe that the investment team would benefit from traveling to

meet companies both public and private to learn more about their businesses and to meet management teams always building relationships in the process, which could yield solid acquisition opportunities over time. There is nothing like meeting people in person to build upon relationships and to learn about businesses, and Berkshire Hathaway should place a greater emphasis on this kind of ongoing focus. Major banks and brokers structurally define such activities as an important means of staying in touch and generating new prospects. BRK could and should implement some sort of similar ongoing program. Historically, many of the Berkshire subsidiaries were managed to maximize free cash flow to send to headquarters. Going forward they will be more focused upon using that free cash flow to invest in internal capital projects and bolt-on acquisitions before sending excess free cash to headquarters. This represents a meaningful change for many of the management teams requiring a broader set of skills in building and growing an enterprise rather than just managing for free cash flow to send to Omaha. Can the new leadership at Berkshire Hathaway continue to maintain the delicate balance of decentralized operations at the subsidiary level and yet have companies work together in certain areas where there are mutual benefits? For example, will the furniture companies work together to gain advantages by leveraging their collective buying power in advertising, or buying products-Jordan in the northeast, Nebraska Furniture Mart in the mid-west, RC Willey in the west? Will they discuss operating capabilities that they can share in the form of best practices with their sister companies? For example, say a Berkshire company has installed SAP software which has resulted in better inventory control, expense management, and other strengths. Sees Candies has developed unique knowledge on handling part-time work forces. Is this being shared with other sister companies? Will the various companies within Berkshire benefit from these best practices and utilize those to enhance each of their own operations? However, this is a very delicate balance that needs a few unique individuals to assure that the decentralized culture is not adversely impacted in any way, being that this has been an important aspect to sustaining the magical Berkshire Hathaway culture. My sense is there are many areas, where money could be saved if companies shared best practices and leveraged their buying power in certain areas, which would result in the creation of significantly increased excess cash flows. Surely there will be important benefits from a greater emphasis on cross company collaboration. I also believe that many of Berkshires strengths are not fully utilized by the operating subsidiaries as much as they could be, leveraging Berkshire Hathaways competitive advantages to the benefit of subsidiaries could present opportunities on several fronts from its balance sheet to issues raised above with sister companies learning and helping one another to improve in various areas. What are the true benefits of being part of the Berkshire Hathaway family, and how will these be more fully utilized? I remember interviewing Ed Schollmaier, the former CEO of Alcon Laboratories. In that interview Ed repeatedly mentioned the enormous benefits of being owned by Nestle, whose deep pockets provided Alcon with the luxury of a long-term horizon, enabling the firm, to grow and build its businesses without the short-term requirements of dealing with Wall Street. Today, Alcon is the dominant player in the eye care industry and leads in virtually every area in that field. Ed attributes their success to many factors, but among the most important has been the many benefits of Nestles ownership. How can Berkshire better exploit these types of benefits for its own subsidiaries? Certainly a great deal of this may already be in place, but I am sure it could always be enhanced and improved. I should mention Bill Gates as a member of the Board being one of the only individuals in the world with the global stature, reputation and intellect likely to play a key role as a potential

chairman of Berkshire Hathaway working along with the non-executive chairman Howard Buffett. I expect Bill Gates will continue to play such a role in the BRK hierarchy given his age, love for Mr. Buffett and his desire to sustain Mr. Buffetts long term goals for the company helping to assure that Berkshire remains well managed, and presumably reflect a continuing escalation in the stock price. The higher the BRK stock price the greater the value of charitable contributions of Berkshire Hathaway stock donated to the Bill and Melinda Gates Foundation which, in turn, will lead to positively impacting many more lives around the world. Berkshire will announce the payment of a dividend after Mr. Buffett is gone, with an immediate and meaningful rise in the stock price given that many large institutional investors and other investors that have mandates forbidding the purchase of non-dividend paying stocks will then be able to purchase the most solid dividend payer in the world. BRKs diverse set of revenue streams and Rock of Gibraltar balance sheet promise continued ability to sustain a major dividend flow. Berkshire Hathaways unique culture is unlike any other business that I can recall over the past 50 years. It remains to be seen if this incredible institution built by Mr. Buffett can survive him, and if so for how long, given that few if any past conglomerates have survived, including Teledyne, Gulf & Western, ITT and several others. While Berkshire is far different and unlike any of these earlier conglomerates, there are many forces both internal and primarily external that could lead to the potential possibility of a total or partial break-up of the company. While the probability remains low in the short term after Mr. Buffetts passing, the possibility rises years later for various primarily external reasons such as losing the controlling shareholder and many other large current stockholders that have remained very loyal in the past. A new and large short-term focused shareholder could be one example that could potentially present future challenges to Berkshire Hathaway, particularly if the firm is not performing as expected. In the chart below, I briefly list a simple possible breakout of segments reporting directly to Ajit Jain. This certainly has many variations for example the smaller companies area is currently or could be run by Tracy Britt Cool while the other three larger groupings could be combined into two rather than three. Nevertheless, I think the operating structure needs to be simplified for the new CEO as no individual can operate Berkshire Hathaway as Mr. Buffett has.

In conclusion, BRK remains, in our view, perhaps the most compelling and deserving holding in almost any long-term portfolio, with or without the extraordinary leadership it has enjoyed throughout the reign of Warren E. Buffett. Stock Market Valuation Over the past 16 years, since 1997, the U.S. equity markets have fluctuated a great deal with significant volatility, as illustrated in the table below.
S&P 500 Index at Inflection Points

As the table above illustrates, there were three distinct periods, beginning in 1997 and ending in 2013 with stock market values rising 106%, 101% and 173%, respectively, with declines of 49% and 57% in between. We are not market prognosticators and we are not predicting another precipitous decline. However the above table illustrates this volatility, which has been common in the stock market over the past 16 years. One must remain mindful of that going forward. Several stock market valuation measures for the S&P 500 index and how they compare over multi-year periods is given below.

Overall, the stock markets recent rise since the bottom in March 2009 has been broad and deep, as illustrated in the following table.
Returns and Valuation by Sector

As the market has continued its rise, we continuously evaluate the growth in company earnings and dividends, as well as the price earnings multiples applied to those earnings. We always become more concerned when the multiples expand faster than the growth in earnings, and that has begun to take place over the past couple of years. As the tables below show, stock market multiples have accounted for the majority of the increase in stock market valuations both domestically and abroad, far more than the increase in company earnings. This situation is unsustainable for long periods of time. Going forward earnings need to rise to continue to justify valuation levels.
Sources of Total Returns

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Finally, with regard to stock market valuation, we like to consider Mr. Buffetts preferred method for evaluating total stock market valuation as a percentage of Gross Domestic Product (GDP). The following two tables reflect the stock market capitalization to GDP, as of December 2013, and also compare the stock market valuation as measured by the Wilshire 5000 and US GNP for the years 2009 through 2013.

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Mr. Buffett prefers that the ratio of stock market capitalization to GDP be in the 70-80% range, or lower. Historically, this condition has yielded outstanding long-term returns. Today, this measure is 109%, significantly above his preferred target range of 70-80%. Valuation Levels of Smaller Companies Our preference is to go wherever values are most attractive regardless of company size. That said, we do prefer smaller companies for several reasons. 1. Companies with market capitalizations between $1 - $10 billion, are typically our sweet spot and represent the largest percentage of companies we own in our client portfolios. The reason for this preference is that these companies are small enough to have significant growth potential for years to come, while at the same time having broad and deep management teams, product diversity, geographic diversity, and solid balance sheets. Often times much smaller companies lack many of those components and much larger companies simply lack the outstanding long-term growth prospects. 2. It has been very difficult over the past few years to find smaller capitalization companies that meet our valuation parameters. The tables below illustrate that small capitalization companies are currently significantly more expensive than larger cap companies.

Nevertheless, while larger capitalization companies are more attractive on a valuation basis, we will remain diligent in our search for high quality smaller companies patiently waiting for them to come into our price range.

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Corporate Profit Margins The two tables below illustrate that corporate profit margins are at all-time highs, having risen significantly throughout the recent economic recovery. The first table shows corporate profit margins for the S&P 500 companies and the second table depicts after-tax corporate profits in the third quarter of 2013 which topped 11% of GDP for the first time since records were being kept in 1947.

Two primary factors that have accounted for the large increase in corporate profitability are a significant reduction in net interest payments and a reduction in corporate income taxes, both as a percentage of sales, as illustrated in the table below.

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Finally, based upon earnings before interest and taxes (EBIT) of GDP, the current 15.3% is slightly below peak levels achieved in 1984 (16.7%) and 2006 (16.4%), as shown below.

Margin Debt Levels New York Stock Exchange margin debt (borrowing to purchase stocks) is once again approaching $450 billion, close to the peak it achieved in mid-2007. That was before the financial crisis hit and above the margin debt levels achieved during the 1999-2000 bull market. The table below illustrates the most recent margin debt levels as of year-end 2013.

While we are not making any predictions, we wanted to point this out as we remain concerned that investors are borrowing heavily to purchase securities, and the prior two peaks in margin debt levels, did not bode well for future stock market returns.

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Commoditization of Businesses I stated in a letter several years ago that businesses are becoming increasingly competitive and barriers to entry are declining as technology, among other factors is leveling the playing field enabling smaller companies to effectively compete against larger firms. Recently, Rupert Murdoch stated, The world is changing very fast. Big will not beat small any more. It will be the fast beating the slow. I think his quote perfectly captures what is occurring in a broad range of industries around the globe, including cable television, broadcast television, retailing, banking and many other industries. It is becoming increasingly difficult to evaluate businesses and the industries in which they compete to gain confidence in the future, given the speed of change going on around us and the magnitude of that change. To illustrate in the retail industry the United States has 31 sq. ft. per capita of retail space compared to the United Kingdom with ten, Japan with seven, and Germany with two.

Given the pressure being placed on retailers by online marketing companies, such as Amazon, retailers are finding it increasingly difficult to compete. Competition is further intensified by Amazons aggressive pricing resulting in low to non-existent profit margins for the firm. The result could be a decline in the massive over supply of retail floor space in this country as more and more consumers purchase products using the Internet benefiting Amazon and other online companies that lack the more expensive distribution model utilized by traditional brick and mortar retailers. An even greater challenge going forward is that technology is changing consumer behavior and, when behaviors change, the results can be catastrophic for industries. Furthermore, these changes are happening more rapidly and with far greater magnitude. Each of the industries I have mentioned above -- retailing, banking, cable, and broadcasting -- are fundamentally being transformed and it is very difficult to clearly see their futures. This has made our job, as investors on behalf of our clients, more difficult requiring more qualitative work to gain differential insights in order to see around corners and better assess the future. Valuation will always remain our focus by purchasing securities with a solid, margin of safety.

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Below is a table that also illustrates the excess retail space we have in the United States relative to the rest of the world.

Sears recently announced the closing of its flagship downtown Chicago store. Other store closing announcements include Macys and JC Penneys, as well as a reduction of employees at Targets headquarters in Minneapolis. Retail square footage may be reduced by one-third to one-half over the next decade. These retailers will have to transform themselves from solid brick and mortar operations to become adept on the Internet as an additional way to better serve all their customers. I recently read that no indoor mall has been built in this country since 2006 and I dont know if that is accurate. Regardless, indoor malls are the ones facing the greatest challenges; even more so than stand-alone stores, strip malls, and outlet centers. As Mr. Buffett so eloquently described in his 1999 Fortune article, The key to successful investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors. Fewer Companies Listed on U.S. Exchanges Interestingly, over the last 20 years, the number of companies listed on the U.S. stock market exchanges has declined significantly, as shown in the following table.

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The number of companies peaked in 1997/1998 at just under 9,000 and has fallen to 4,916 towards the end of 2013. This supply/demand issue has had implications and perhaps contributed to rising stock prices. In describing the significant decline in the number of companies listed on U.S. exchanges, the majority of the decline has come from mergers and acquisitions as shown in the following table.

Pension Funds Over the past several years, many corporate defined benefit pension plans went from being fully funded to 20-30% under-funded, resulting from the 2008 financial crisis. Fortunately, 2013 was a strong year for corporate defined benefit pension plans, as strong investment performance combined with higher discount rates has helped shrink the pension obligation and increased the value of plan assets. This has resulted in a significant improvement in pension plan funded status, as shown in the table below.

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It is estimated that the funded status of pension plans of the 267 companies in the S&P 500 that provide detailed pension disclosure, rose by $328 billion to $94 billion underfunded (94% funded) at the end of 2013 from $422 billion underfunded (77% funded) at the end of 2012. We believe that stronger more fully funded pension plans will enable companies to generate higher accounting earnings due to lower pension costs, positively impacting earnings on the income statement, and reflecting lower pension liabilities on balance sheets. All these factors are positive for corporate America going forward into 2014 and beyond. This will result in more free cash flow for companies to buy back stock, pay dividends, pay down additional debt, make acquisitions or re-invest internally when attractive opportunities present themselves. Furthermore, investing in stocks remains a very attractive option for pension funds going forward. Stock Allocations There has been a large reversal in the asset allocation of endowments over the past 10 years, as illustrated below.

We believe this shift of endowment assets from equities to alternatives including private equity, hedge funds, timber, and other investments can present significant challenges. While alternatives can be an attractive asset class for those institutions that have the time horizon and the balance sheets to deal with illiquid investments for many, many years. Liquidity, which is often taken for granted, vanished during the financial crisis at which point many endowments were forced to sell at bargain basement prices. Combined with their high fees, lack of transparency, and long-term commitment of 5 10 years, as well as the illiquidity described earlier, many challenges remain in these alternative asset classes. We believe the decline in equity allocations will reverse in the years ahead resulting in rising allocations to stocks, with positive long-term implications for stock market investors.

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U.S. Energy Revolution Daniel Yergin, the outstanding writer who wrote: The Prize; The Epic Quest for Oil, Money, and Power, for which he won the Pulitzer Prize, recently discussed how gas and oil coming from Americas shale is fundamentally changing the global energy markets. This has a broad range of implications for countries around the globe. Not only is it impacting cost structures in many industries, but also has a profound impact on global politics, such as Americas role in the Middle East to name one. U.S. gas prices today are a third of those in Europe and one-fifth of the price paid in Asia resulting in significant competitive advantages for our country. Tight oil, which comes from shale, utilizing the same technology as shale gas, has raised U.S. oil production 56% from just 5 years ago and is larger than the output of two-thirds of OPEC countries. It is estimated that the United Sates will overtake Saudi Arabia and Russia in the years ahead and become the worlds largest oil producer. Furthermore, our need to import less oil has had a profound impact on our budget deficits. In fact, as the table below illustrates, federal deficits have declined from almost 10% of GDP in 2009 to 4% in 2013 helped by a number of factors, including a slowly improving U.S. economy, as well as a large reduction in oil imports. Hopefully, that will continue to benefit the U.S. on many fronts.

I stated in my semi-annual letter that despite the many challenges we face the United States remains the best house in a much challenged global block. I particularly focused on innovation in our country and how our unique ability to create and innovate has historically positioned us well throughout the world. The shale energy revolution is another shining example of American creativity and innovation, which is profoundly impacting global economic and political power much to our benefit. Housing Despite weak sales of new homes in the month of December, the Census Bureau reported that annual sales of new homes for the full-year 2013 were up 16.4% from 2012. Thus, annual new home sales in 2013 of 428,000 were the highest level since 2008, as the following table illustrates.

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Annual New Home Sales Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sales (000s) 1,203 1,283 1,051 776 485 375 323 306 368 428 Change in Sales 10.8% 6.7% -18.1% -26.2% -37.5% -22.7% -13.9% -5.3% 20.3% 16.4%

Despite a solid 16.4% increase from 2012, the table above illustrates the significant fall off in annual new home sales from the peak in 2005 of almost 1.3 million to the bottom of only 306,000 in 2011. Like the rest of the economy, housing continues to slowly improve, but like employment is still well below the peak levels achieved several years ago. Despite the sharp increase in new home sales over the last couple of years from the low in 2011, 2013 is still the sixth worst year for new home sales since 1963, as shown in the table below.
Worst Years for New Home Sales since 1963 Rank 1 2 3 4 5 6 7 8 9 10 11 Year 2011 2010 2012 2009 1982 2013 1981 1969 1966 1970 2008 New Home Sales (000s) 306 323 368 375 412 428 436 448 461 485 485

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Given the high levels of unemployment, as well as significant school debt owed by recent college graduates, the level of household formations remains below historic levels of 800,000 to 1 million per year and, therefore, as the economy continues to improve, new home sales will continue to rise in the next several years, albeit slowly, to a more normalized level of 700,000 to 1 million per year. Housing remains an important barometer for the well being of our economy and employs many people both directly and indirectly. For the housing market to continue to improve employment needs to rise and household formations need to increase with more college graduates moving out of their parents homes into new homes. As the housing story continues to brighten, and it will, more first time homebuyers need to come into the market to represent a larger percentage of the purchases replacing investment firms and investors purchasing with cash. It is the latter that have represented a significant portion of buyers throughout the country particularly in those markets that experienced the largest declines, Florida, Arizona, Nevada and California. Existing home sales were also adversely impacted by the financial crisis, as were new home sales, as the following table illustrates. Current real estate sales in all of these markets have shown encouraging increases in recent months.

Looking forward to 2014, we believe housing will continue to improve and the shift towards renting, rather than buying homes will also continue in 2014, as it has over the past few years. In a typical healthy real estate market, home buyers with mortgages comprise 80-90% of the market, with cash buyers less than 10%. In the past few years, mortgage buyers have represented 60-70%, while cash buyers have represented as much as a third or more, depending upon the market. Another bright spot for future homeowners is low mortgage rates. While they have increased over 100 basis points for 30-year fixed-rate mortgages to 4.5% from 3.5% -- they still remain attractively low by historic standards, resulting in a low median of housing payments compared to income over the past several years as the chart on the following page illustrates.

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Home prices across the United States at the end of the third quarter of 2013 were at the same level that they had reached by the end of the second quarter of 2005, more than 8 years ago. Only now are they rebounding to more normal historic levels. It is estimated that the number of shared households, as a percentage of total households (that rose to 24 million in 2011) has declined to 23.5 million and will continue to decline as the unemployment rate for 25 34 year olds also comes down, as shown in this chart.

The Blackstone Group, a leading private equity firm, has spent almost $7.5 billion acquiring 40,000 homes in the past 2 years, creating the largest single family rental business in the U.S. Blackstone has begun issuing bonds backed by lease payments generated from these lease rentals. It is estimated that Blackstone, along with hedge funds and other private equity firms and real estate investment trusts, have raised over $20 billion to purchase as many as 200,000 homes to rent over the past few years after prices plunged from the 2005 2006 peak. Demand for rentals has grown steadily, fueled by many that went through the foreclosure process, leaving large numbers that are unable to qualify for a mortgage, or those who simply are not ready to settle in.

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The homeownership rate, which peaked at over 69% in June 2004, has declined to 65% today. It is anticipated to stabilize in the 62-63% range over the next few years, resulting in more than 2 million households becoming renters. Wall Street continues with its innovative ways to create products, as securitizing rental cash flow is the newest Wall Street twist since the financial crisis in 2008. It appears there will be solid demand for these rental bonds given their payment of higher yields than government backed mortgages and other fixed-income instruments. As with all securitizations, there are concerns with rental securitizations including liquidity risk and operating risk. This new Wall Street phenomenon has been named the institutional buy-to-rent industry, which today approximates just under $20 billion in size and is estimated to reach over $100 billion within the next several years. Inflation or Deflation While we make no predictions regarding potential inflation or deflation and certainly do not make investments based on our macro views of inflation or deflation, we do seek out businesses that have the capability to raise prices in an inflationary environment, which applies to only a few great businesses. Recently in looking at personal consumption expenditures (PCE) which is the Feds preferred inflation measure, the PCE price index had grown less than 1% in 2013, the lowest growth on a quarterly basis in inflation since 2009. In fact, many economists refer to the current situation based on this measure of PCE as disinflationary, as shown in the following chart.

The result is very tame inflation, even collectively below the 2% Fed target. Europe is also experiencing deflationary challenges. Again, while we do not make any predictions, we remain concerned because deflation can lead to long-term downward spirals, as prices of goods and services continue to decline with consumers waiting to buy at ever lower prices. This can be very devastating for a country and, frankly, the entire world. In a recent article from Morgan Stanleys former Asia-Pacific economist Andy Xie, he discussed in detail issues related to deflation, specifically stating that while demand is local, supply is global, and that has had a profound impact on how economies work around the world, including our own U.S. economy.

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While demand is and always has been local, the supply side has become genuinely global, as both manufacturing based blue collar jobs and many white collar jobs can be placed anywhere in the world. W ith todays information technology, companies can employ people throughout the world in research and development, marketing, accounting and finance, as well as management, resulting in declining prices for most goods and services on a global scale. Income and Wealth Inequality Over the last couple of years there has been a great deal of discussion regarding a twotiered economy, one for those well-educated and benefiting from the technological changes occurring in our economy and around the world and the challenges faced by more traditional areas such as manufacturing and blue collar jobs. Two tables below illustrate the inequality in our society. The first compares the share of income owned by the top 10% in the U.S., as well as several other countries, and the second compares the share of wealth owned by the top 10% in the U.S. and several other countries.

The tables above illustrate that the top 10% of income earners in the United States earn 48% of our countrys income, while the top 10% in the U.S. control 74% of all wealth. This disparity has been growing since 1970. In addition to the large disparity in wealth, real median household income in the United States has declined from $56,000 in the late 1990s to $51,000 today, which is equivalent to the same real median household income achieved in 1989 as shown on the chart on the following page.

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Portfolio Activity Fixed-Income and Equities During the year, we sold our long held Washington Post position and Westamerica Bancorp. Westamerica Bancorp is one of the finest banks in the country. However, the stock was selling for 3.5x tangible book value and 19x earnings, both representing excessive valuation levels. Furthermore, the net interest margin continued to decline from 5.11% over a year ago to under 4% today. Finally, with no growth in loan volumes and limited opportunities in the investment portfolio, we felt it was time to sell at a gain of over 40% including dividends. I discussed our sale of the Washington Post in detail in our last letter. Other sales were very light trims of our Bed, Bath & Beyond, Brown & Brown, Mohawk, UnitedHealth Group and Wells Fargo holdings. We purchased U.S. Bancorp and Wells Fargo after they had declined in mid-2013, as well as purchasing World Fuel Services and three bank preferred stocks that we believe present an attractive risk reward for our clients, which I discuss in greater detail below. Portfolio Activity - Preferred Stocks We have purchased the preferred stocks of three outstanding banks with the specifics illustrated below.
Company US Bancorp PNC Wells Fargo Original Coupon 6.5% 6.125% 6.625% Current Yield 6% 6% 6.3% Adjustable Rate/Date (if not called) 1/15/2022 3-month LIBOR + spread 4.468% 4/30/2022 3-month LIBOR + spread 4.0675% 3/15/2024 3-month LIBOR + spread 3.69%

Historically, preferred stocks have dated back to 16th Century England and they were issued in the United States in the 1850s, later becoming a major financing tool in the 1980s used by utilities. Over the past several years, financial institutions have been the biggest issuers. What drove our purchase decision were several factors beginning with the excellent credit quality of the banks. We have followed each of these three banks for over 20 years and have significant stock ownership in both US Bancorp and Wells Fargo; two of the finest banks in the world while PNC is also an excellent bank.

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We purchased these preferred stocks below, at, or slightly above par over the past year. The dividend payments on each of these at purchase were yielding approximately 400 basis points above 10-year treasury obligations and also significant tax benefits. They also begin as fixed rate securities and convert to an adjustable rate if they are not called by the respective banking institutions. This rare adjustable rate feature reduces both interest rate risk and the securitys duration. The key risks we identified here are: 1) they are perpetual securities with no maturity or mandatory redemption date, 2) credit risk, as they are junior to most securities other than common stock, 3) regulatory risk, as Dodd-Frank and other regulations may change, resulting in the banks redeeming these securities early at par and, 4) tax law changes that may impact the qualified dividend treatment for these issues. An important benefit for our clients with taxable accounts is that these dividends represent qualified dividend income, or QDI, and are considered dividend income for federal tax purposes, which is taxed at favorable capital gains tax rates. For most of our clients that will be either 15% or 20%, which now includes an additional 3.8% tax from the healthcare bills medical surtax, resulting in rates of 18.8% to 23.8%. These rates are still well below the ordinary income tax rates exceeding 42%. While historically most preferred stocks did not qualify for our purchase, we believe these three satisfy our rigid criteria and we have purchased them for accounts in which we feel we can hold them until they are either called several years from now or adjust to the 3-month LIBOR rate and the very favorable interest rates added to that. Furthermore, we have locked in very solid cash flows for our clients going forward for several years at rates much higher than available from 10-year or 30-year treasuries with only minimally more credit risk. While each of these preferred stocks is currently selling at a 4-12% premium over our purchase price. Should interest rates rise meaningfully over the next several years, they may trade at a discount to par or our purchase price, but we do not anticipate selling them then either. We simply focused on locking in solid cash flows until they are either called or adjust to the very favorable adjustable rates mentioned. Fixed-Income / Municipal Bond Purchases The fixed-income markets remain challenging. After over 30 years of declining interest rates, virtually all fixed-income investments are yielding historically low yields including; Treasury Bills, Notes and Bonds, Municipals, Corporates, Agency and Mortgage Backed Securities, Bank Loans and High Yield Securities. Our primary focus in our fixed-income investments remains capital preservation and income secondarily. While rates of return remain at historically low levels, we are unwilling to either lower our standards in credit quality or take undue interest rate risk by purchasing long dated maturities. As a result, during the year we purchased a number of high quality municipal bonds. The maturities of all our municipal bond purchases were typically less than 5-7 years and the majority of our purchases carried call options which give the issuer the ability to buy back the bonds earlier than their maturity dates. This call option feature sacrifices some yield in order to gain greater interest rate protection. The majority of our purchases of short duration municipal bonds are generating yields to maturity of as much as 2.5%, however, if interest rates rise significantly and the municipal bonds are not called away early, the yield to maturity rises to over 4% resulting in taxable equivalent yields for many of our clients of over 6%. With rare exceptions, we always hold our fixed-income securities to maturity.

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Equity Holdings ABBOTT LABORATORIES (ABT) is a leading diversified healthcare company operating in the following areas: pharmaceuticals, diagnostics, nutritionals and medical products. On January 1, 2013, Abbott consummated the separation of its research based pharmaceuticals business and distributed 100% of the outstanding shares of common stock of AbbVie to the holders of record of Abbott common shares that were issued and outstanding on December 12, 2012. Each Abbot shareholder received one share of AbbVie common stock for every share of Abbot common stock held. The Abbott shareholder also received cash in lieu of any fractional share of AbbVie common stock resulting from the distribution. Abbott common shares now trade under ticker symbol ABT and shares of AbbVie common stock trade under ticker symbol ABBV. The new Abbott is a diversified global healthcare company with several leading franchises. In 2012, the company generated sales of $21.5 billion from these four diverse business units: nutritionals 30%, medical products 25%, established pharmaceuticals 24% and diagnostics 20%. Abbott has leading market share positions in several businesses including the number one market share in: 1. 2. 3. 4. Worldwide Adult Nutrition and U.S. Pediatric Nutrition Amino Acid Immunoassay Diagnostics and Blood Screening Drug Eluting Stents and for Lasik

Furthermore, Abbott, in addition to a broad portfolio of products and services, is geographically diverse with 29% of sales in the U.S., 30% in other developed markets and 40% in the more rapidly growing emerging markets. The current Chairman and CEO, Miles D. White, will continue in these positions for the new Abbott, focused upon several initiatives including expanding the companys products into new geographic markets, developing new technologies and focusing on accelerating margin expansion and improving free cash flow. The new Abbott generated 2013 revenue through its four segments of $21.9 billion with earnings per share of $2.01. We continue to hold the new Abbott and believe its product and geographic diversity, combined with its leadership positions in several areas, will enable the company to continue to grow and prosper. ABBVIE (ABBV), spun off from Abbott, represents their research-based proprietary pharmaceutical business and is led by its highly profitable Humira franchise. Humira makes up approximately 50% of revenues and over 70% of profits. While AbbVie is focused on growing its pipeline, the reality is Humira, the leading rheumatoid arthritis drug, will continue to drive the revenue and profit growth for AbbVie until some of the experimental drugs they are working on such as its Hepatitis C virus drug gains FDA approval and enters the market. As a result, we are reviewing our holding of AbbVie at this time given its enormous concentration on one drug. While it continues to lead in many areas and it continues to grow around the world, it remains a concern for us. AbbVies revenues in 2013 exceeded $18.8 billion with operating earnings of $5.7 billion.

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BANK OF NEW YORK MELLON (BK) is a leading trust bank with assets under custody and management exceeding $27 trillion. They are a global leader in several segments in which it operates. Few competitors have their global reach and scale. Approximately 80% of its revenues are reoccurring and fee-based focused on institutional services with less reliance on the higher credit risk from lending. In 2013, BK generated operating revenue of $14.9 billion and pre-tax income of $3.7 billion. The banks results were helped by their continued efficiency initiatives which generated over $650 million in annual savings. Low interest rates continue to negatively impact results as they have over the past few years. The bank continues to work diligently on its initiatives to cut expenses and selectively raise prices on many of its products. We believe the bank can earn $2.45 in 2014 representing a multiple of just over 13x earnings, while paying a 3% dividend yield. BED BATH & BEYOND (BBBY) is the leading home furnishing retailer with just under 1,200 stores. For fiscal year 2014, which ends February 28th, BBBY should generate revenue of just under $11 billion and earnings per share of $4.80. While the stock price has declined from its high, we still believe the companys solid balance sheet, excellent merchandising capabilities, improved focus on electronic commerce to better compete with the Amazon threat, will enable the company to continue to prosper as the leading home furnishing retailer in the country. The company should generate in excess of $900 million in free cash flow and, with no long-term debt on the balance sheet and $5/share in cash, we believe the company remains well positioned to continue its leadership position in the home furnishing industry. BROWN & BROWN (BRO) is a leading insurance broker with an outstanding corporate culture that helps generate the highest margins in its industry. Net income for the 4 th quarter of 2013 was $47.2 million, or $0.32 per share, which was a 10% increase from 2012. Total 2013 revenue was $1.4 billion, a 13.6% increase from 2012, while earnings rose 18% to $1.48 per share. After several years showing sparse growth, Brown & Brown has begun to grow organically while continuing to maintain the highest profit margins in the industry. In fact, during the 1997 to 2007 insurance cycle, Brown & Brown grew EPS at 20% per year but, since that 2007 earnings peak, organic growth slowed significantly. In fact, 2012 and 2013s earnings growth was the best in several years and we believe earnings growth should continue in the 1015% range over the next couple of years; helped primarily by acquisitions. LOWES (LOW) is a leading home improvement retailer that generated revenues of over $53.4 billion in fiscal 2014 with net income of $2.3 billion. Diluted earnings per share should be $2.10 and we see that rising in 2015 to $2.60/share. The company continues to generate significant free cash flow exceeding $3 billion in 2013 providing for a solid dividend yield of just under 2% and continued share repurchases. While Home Depot continues to perform better than Lowes, as measured by same store sales, we believe that Lowes will continue to improve its merchandising operations and continue to buy back significant amounts of stock and improve its performance relative to Home Depot. Lowes stock price appreciated 40% in both 2012 and 2013 and we believe the stock price is nearing its intrinsic value. Lowes continues to aggressively repurchase stock and we anticipate that from the 1st quarter of 2011 with $1.3 billion fully diluted shares, that by 2016 the number of shares will be under 800 million resulting in a buyback of almost 40% of their shares outstanding.

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MARTIN MARIETTA MATERIALS (MLM) is the second largest domestic producer of construction aggregates and a producer of magnesium based chemicals and dolomitic lime. Aggregates refer to the business of selling crushed stone, rocks and sand and is an attractive business. It enjoys significant barriers to entry, including the challenges in gaining permits for new quarries, as well as the low value to weight ratio of aggregates creating local oligopolies that enable solid pricing power. As I mentioned in prior letters, it is one of few businesses I have ever studied that have experienced enormous volume declines yet have been able to continue to raise prices illustrating the power of their business model. We believe that MLM is well positioned for solid growth in its largest markets, Texas representing 19% of sales and North Carolina 17% of sales, for solid growth. Their top five states of Texas, North Carolina, Iowa, Georgia and South Carolina represent almost 60% of their 2013 sales. Sales in 2013 were $1.9 billion with operating earnings of $155 million translating into fully diluted earnings per share of $2.61 on their 46 million shares outstanding. While MLMs stock price has appreciated over 25% in 2012 and 6% in 2013, we still believe the companys assets remain undervalued and the company will continue to generate attractive revenue and profit growth as the undeniable need for infrastructure spending continues to grow. MERCURY GENERAL (MCY) is the largest auto insurer distributing policies through independent agents in California. They had a challenging but improved 2013. Net written premiums in 2013 were $2.7 billion, up from $2.6 billion in 2012. While 2013 was an improvement over 2012 for the company, we still believe the companys out standing California franchise makes it an excellent acquisition candidate for several firms seeking to growth their California operations. Furthermore, the companys excellent claims capability and solid distribution throughout California should enable the company to return to its historical excellent underwriting results going forward. We have enormous respect for George Joseph, an industry legend, who is now in his early 90s, and he, along with his ex-wife, control more than half of the 54.1 million shares outstanding. MOHAWK INDUSTRIES (MHK) is a leading manufacturer of flooring products whose revenues continue to increase as the economy and, in particular, the housing markets continue to rebound. Sales in 2013 should exceed $7.3 billion with net earnings of just over $400 million. The company continues to aggressively make acquisitions, including the purchases of Marazzi Group, the fifth largest producer by volume in the ceramic tile industry as well as Pergo and Spano. Combining Mohawks existing ceramic division Dal Tile with the Marazzi Group creates the largest ceramic tile company in the world on a revenue basis. Currently, about 9% of U.S. flooring consumption in value is made of ceramic tiles, a much lower percentage than in most other nations around the world. In Western Europe, tile represents 30%, and in countries like Italy tile can exceed 55- 60%. We anticipate continued improvement in the housing markets and in the U.S. economy. Mohawk sales should rise to approximately $8.1 billion in 2014 and generate net income of over $500 million or $7.10 per share. PEPSICO (PEP) is the leading global snack and beverage company that manufactures and markets a variety of salt and convenience snacks, carbonated and non-carbonated beverages and foods. The company operates through four segments: Beverages North America, Frito-Lay North America, PepsiCo International and Quaker Foods North America.

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PepsiCos fourth quarter 2013 earnings were $1.05. This was better than expected with stronger than anticipated volume and top-line growth, as it attained its full year performance objectives. Revenues generated in 2013 were $66.4 billion and earnings before interest and taxes of $9.7 billion and $4.32 in earnings per share. We believe the company can generate in excess of $10 billion in cash flow in 2014 with over $7 billion in free cash flow. PepsiCos return on equity exceeds 26% with an attractive 3% dividend yield. We continue to believe PepsiCo remains a solid long-term holding with a P/E multiple of 17x 2014 earnings. PROGRESSIVE (PGR) is the fourth largest auto insurer in the country and generated revenues of $17.4 billion in 2013 with operating income per share of $1.59. We project Progressives net premiums written to exceed $18.2 billion in 2014 generating operating income over $1 billion and fully diluted operating earnings per share of $1.60. UNITEDHEALTH GROUP (UNH) is a leading diversified managed health care company serving 75 million individuals and operating through two segments: UnitedHealth care, and Optum. The UniteHealthcare segment serves employers and individuals, communities, states, Medicare and retirement. The Optum service businesses include Optum Health, Optum Insight and Optum RX. Overall company revenues in 2013 exceeded $109 billion with earnings from operations of $8.9 billion and earnings per share of $5.50. The UnitedHealth care Segment has the #1 market position in several areas including: Medicare Advantage, Medicare Supplement, Medicaid and are #2 in commercial insurance. Furthermore, the companys geographic and product diversity serve to reduce business risk. The Optum segment of UnitedHealth Group is a health services business serving the broad health care marketplace, including payers, care providers, employers, government, life sciences companies and consumers. Using advanced data, analytics and technology, Optum helps improve overall experience and care provider performance. Revenues for the Optum Segments in 2013 were $37 billion with earnings from operations of $2.3 billion. Of the three segments, Optum Insight is a leader in healthcare data analytics and generated earnings from operations of $603 million, representing a 19% margin. The company is projecting 2014 revenues exceeding $128 billion and earnings from operations between $9.9 - $10.3 billion. US BANCORP (USB) is one of the top 10 largest banks in the country with assets of $357 billion at year end 2013. The company has an outstanding credit culture, resulting in few credit losses and generates substantial fee income providing greater stability and predictability in its earnings. In 2013 the company generated $10.9 billion in net interest income and $8.8 billion in fee income. Operating revenues were $19.6 billion and net income was $5.6 billion or $3.00 per share. The companys financial metrics are among the best in the industry with a return on common equity of over 16%, return on tangible common equity exceeding 23% and a return on assets of 1.6%. We believe US Bancorp is well positioned to continue to build upon its outstanding franchise both organically and through selective acquisitions in the years ahead. The company should earn in excess of $3.10 in 2014 representing a price earnings multiple of 12.5x earnings-a favorable valuation for an outstanding diversified financial institution. While interest rates remain low, when they do rise the bank is well positioned to grow its net interest income and margins. Furthermore, with a large fee income stream the bank is better able to weather low interest rate periods than most competitors who lack such a large recurring fee income stream.

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WELLS FARGO (WFC) is the fourth largest bank in the country with assets of $1.4 trillion at year-end 2013. The company generated operating revenues of $83.8 billion in 2013 with net income of $21.9 billion and reported earnings of $3.89 per share. The company is a diversified financial services company operating in a broad range of markets including the east and west coasts of our country, as well as several business segments including, banking, insurance, investments, mortgage, and commercial and consumer finance through over 9,000 locations, 12,000 ATMs and the Internet. Wells Fargo, like US Bancorp, also generates significant fee revenues providing a more stable and recurring revenue stream less impacted by the declining interest rates that have negatively impacted net interest margins over the past few years. In 2013, the company generated net interest income after the provision for credit losses of $40.5 billion while generating fee revenue of $41 billion. Net income for 2013 was $21.9 billion or $3.89 per diluted share. We believe that Wells Fargos diverse business model will continue to thrive in various economic environments and will benefit when interest rates rise, augmenting the net interest margin to once again exceed 4%; a level it has fallen below over the past several quarters. Nevertheless, Wells Fargo remains an outstanding financial services company generating a return on tangible common equity of 17%, and a return on assets of 1.4%. The company also maintains leadership positions in several businesses including a leading originator and servicer of mortgages. In fact, the company originates one of every three mortgages in this country. Over the next several years in a more normalized interest rate environment, we believe that Wells Fargo can generate in excess of $5 per diluted share in earning power. We estimate the company can earn in excess of $3.55 in 2014 and $3.80 in 2015. WORLD FUEL SERVICES (INT) is a global leader in fuel logistics, engaged in the marketing, sale, distribution and financing of aviation, marine and land fuel products and related services. The company provides one stop shopping for customers in this highly fragmented industry. World Fuel Services was founded in 1984 and in 2013 generated $41.2 billion in revenue and $203 million in net income. We believe the company has a long runway to continue to grow organically by expanding its customer base, geographic reach and additional product and service offerings, as well as through acquisitions. While a legal issue resulting from a devastating rail accident transporting oil in Canada remains a cloud over the company, we believe the companys insurance and strong balance sheet will be adequate to satisfy the legal claims. The company should generate earnings of $3.20 in 2014, representing a multiple of 14x. We want to thank you for the privilege and opportunity to serve you and we are grateful for the confidence and trust you have placed in us. We will continue to work diligently seeking attractive investment opportunities with a primary focus on capital preservation and a secondary focus on achieving attractive rates of return. Wishing you a delightful springtime filled with warmer days. Sincerely,

Paul J. Lountzis President

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