Business context and reporting period
Markel Corporation (the registrant named in the filing) filed this Form 10-K for the fiscal year ended December 31, 2010. It underwrites specialty insurance in Excess and Surplus Lines, Specialty Admitted and London markets, and owns non-insurance businesses through Markel Ventures. The filing includes unaudited quarterly results, including fourth-quarter 2010.
Key financial metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Operating revenues | $2.225 billion | $2.069 billion |
| Earned premiums | $1.731 billion | $1.816 billion |
| Net income to shareholders | $266.8 million | $201.6 million |
| Diluted EPS | $27.27 | $20.52 |
| Underwriting profit | $59.8 million | $86.3 million |
| Combined ratio | 97% | 95% |
| Net cash from operating activities | $223.3 million | $282.5 million |
| Investments, cash and cash equivalents | $8.224 billion | $7.849 billion |
| Debt and other debt | $1.016 billion | $964 million |
| Shareholders’ equity | $3.172 billion | $2.774 billion |
Operating income was $369.2 million; income before tax was $295.5 million and tax expense was $27.8 million (9% effective tax rate). Net investment income was $272.5 million and net realized investment gains were $36.4 million. Taxable-equivalent total investment return was 7.9%, versus 13.2% in 2009. Book value per share increased 16% to $326.36. Fourth-quarter revenue was $611.9 million, net income to shareholders $140.1 million and diluted EPS $14.37.
Insurance segment underwriting results: Excess and Surplus Lines earned premiums of $809.7 million and underwriting profit of $35.6 million; Specialty Admitted $343.6 million and $1.3 million; London Insurance Market $577.5 million and $26.1 million. Markel Ventures reported revenue of $166.5 million and net income to shareholders of $4.2 million.
Material changes versus prior comparable period
- Net income to shareholders rose 32%, primarily reflecting improved investment results and lower impairment write-downs; higher taxes and weaker underwriting results partly offset the increase.
- Earned premiums fell 5%, mainly from continued competition, economic weakness and lower activity-based exposures, particularly in Excess and Surplus Lines. Gross premium volume increased 4% to $1.982 billion, reflecting growth in Specialty Admitted and London, including acquisitions and transferred programs.
- Underwriting profit declined about 31% and the combined ratio deteriorated by 2 percentage points. Catastrophe losses from the Chile earthquake and Deepwater Horizon contributed $33.0 million, or two points, to the consolidated combined ratio.
- Prior-year reserve releases increased to $278.0 million from $235.3 million in 2009. These releases materially supported underwriting results; management cautioned against assuming the favorable trend will continue.
- Operating cash flow decreased 21%. Debt rose to $1.016 billion, while the debt-to-total-capital ratio improved to 24% from 26%.
- Book value per share rose from $282.55 to $326.36, supported by net income and a $163.5 million after-tax increase in unrealized investment gains.
Outlook, commentary, risks and unusual items
- Management described the insurance market as soft, with continued pricing pressure, especially in Excess and Surplus Lines; it said it would decline business when prices did not meet underwriting targets. Moderate price increases occurred in some London product lines.
- Management estimated 2011 favorable-to-adverse prior-year reserve movement could range from a $275 million redundancy to a $50 million deficiency. It also cautioned that loss reserve estimates are uncertain.
- Management expected FirstComp, acquired in October 2010, could produce an underwriting loss in 2011 of approximately $30 million amid weak workers’ compensation conditions. FirstComp generated $40.7 million of 2010 gross premium volume in the Specialty Admitted segment; management expected to increase its share of its business in 2011.
- Markel Ventures revenue was expected to exceed $250 million in 2011. Results of December 2010 acquisitions RetailData and Diamond Healthcare were to enter consolidated results beginning in first-quarter 2011.
- Unusual and material items included $74.7 million of underwriting losses on two mortgage-related programs, including a $19.9 million loss on settlement of litigation with Guaranty Bank; one program was being exited and the other placed in run-off. Further housing-market weakness could require additional reserves.
- Atlas systems and process initiative costs were $46 million in 2010. The implementation was refocused and simplified; previously capitalized costs of $7.7 million were expensed. Billing and collections system implementation was completed in October 2010, with data warehouse and agency internet functionality planned for 2011.
- Key risks include catastrophe exposure, reserve uncertainty (including asbestos and environmental claims), reinsurance recoverability and concentration, equity-market volatility and concentrated holdings, municipal bond credit risk, competition, regulation, acquisition integration and systems execution. Net asbestos and environmental reserves were $216.0 million; management considered reserves adequate but said they could increase.
- Liquidity: $745.3 million of cash and cash equivalents; a $270 million revolving credit facility with no year-end borrowings, expiring June 2013; and $885.6 million of invested assets at the parent company. Domestic insurance subsidiaries could pay up to $197 million in ordinary dividends over the following 12 months, subject to applicable restrictions. Management stated liquidity was sufficient for capital needs.
- No formal earnings or premium guidance was provided. The company said it did not expect to pay a common-stock cash dividend. The financial statement auditor gave an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether the $278 million of favorable reserve development is sustainable, and the sensitivity of long-tail and asbestos/environmental reserves to adverse development.
- Actual loss emergence and reserve adequacy for the mortgage-related programs, Deepwater Horizon and Chile earthquake claims, and FirstComp’s expected underwriting performance.
- Underlying premium and pricing trends by segment, particularly whether growth outside Excess and Surplus Lines offsets that segment’s contraction.
- Investment portfolio concentration and sensitivity: equity securities were 21% of invested assets, and the ten largest equity holdings were 55% of the equity portfolio.
- Reinsurance counterparty exposure: the ten largest groups represented 68% of recoverables before allowances; confirm collections, collateral and allowance adequacy.
- Acquisition integration, Markel Ventures growth and profitability, and the costs and delivery of remaining Atlas projects.