Business context and reporting period
Markel Corporation’s Form 10-K covers the fiscal year ended December 31, 2014. The company underwrites specialty property and casualty insurance and reinsurance and owns industrial and service businesses through Markel Ventures. Results include Alterra, acquired in May 2013, for all of 2014 but only part of 2013; reported growth is therefore not wholly organic. The company changed its underwriting segment structure in 2014 and recast prior-period segment data.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Operating revenues | $5.134 billion | $4.323 billion |
| Earned premiums | $3.841 billion | $3.232 billion |
| Net income to shareholders | $321.2 million | $281.0 million |
| Diluted earnings per share | $22.27 | $22.48 |
| Underwriting profit | $177.6 million | $103.0 million |
| Consolidated combined ratio | 95% | 97% |
| Net cash from operating activities | $716.8 million | $745.5 million |
| Invested assets | $18.638 billion | $17.612 billion |
| Senior long-term and other debt | $2.254 billion | $2.256 billion |
| Shareholders’ equity | $7.595 billion | $6.674 billion |
Revenue increased about 19% and shareholder net income about 14%; diluted EPS declined slightly. The combined ratio below 100% indicates an underwriting profit. Segment underwriting profits were $99.3 million for U.S. Insurance (95% combined ratio), $67.3 million for International Insurance (93%), and $38.9 million for Reinsurance (96%).
Net investment income was $363.2 million, up from $317.4 million; net realized investment gains were $46.0 million, down from $63.2 million. Net unrealized investment gains increased $981.0 million before tax; the after-tax increase in net unrealized investment gains was $661.7 million. Comprehensive income to shareholders was $935.9 million, substantially above net income, and book value per share rose 14% to $543.96.
Cash and cash equivalents were $1.960 billion, restricted cash $522.2 million, and short-term investments $1.595 billion. Debt to capital was 23%, down from 25%. The company reported $300 million of capacity under its revolving facility with no borrowings outstanding; a separate facility had $374.5 million of letters of credit outstanding and no borrowings. The filing states that insurance subsidiaries’ capital exceeded regulatory requirements. Markel Ventures generated $838.1 million in revenues and $9.6 million in net income to shareholders, versus $23.8 million in 2013.
Material changes versus the prior comparable period
- Underwriting profit increased, while the combined ratio improved from 97% to 95%. The 2013 expense ratio included $75.1 million of Alterra transaction and acquisition-related costs.
- Favorable development of prior-year loss reserves was $435.5 million in 2014, compared with $411.1 million in 2013. It supported underwriting results; the filing cautions that this favorable trend may not continue.
- Gross premium volume rose 23%, with growth driven in part by the full-year inclusion of Alterra, Reinsurance renewals, U.S. Insurance growth, Hagerty, and Abbey, acquired in January 2014. Cottrell and manufactured-housing community acquisitions also expanded Markel Ventures.
- Operating cash flow declined from $745.5 million, primarily because of higher income-tax payments. Investing activities used $622.2 million, including $319.1 million net cash used for acquisitions.
- Unrealized investment gains increased sharply, contributing materially to comprehensive income and book-value growth. Equity securities increased to 22% of invested assets from 18%.
Outlook, commentary, risks and unusual items
- Outlook: Management described the overall property and casualty market as soft, with softening prices in international catastrophe-exposed property and property reinsurance. It intended to pursue rate increases in 2015 where possible and not write business that failed underwriting-profit targets. No specific earnings or revenue guidance was provided.
- Reserves: Prior-year development included $250.4 million of reserve redundancies on selected long-tail casualty and professional liability lines, partly offset by $32.8 million of adverse development on asbestos and environmental (A&E) exposures. Management estimated that 2015 prior-year reserve movement could range from a deficiency of less than 1% (about $50 million) to a redundancy of about 6% (about $500 million); this is an estimate, not earnings guidance.
- Long-tail and run-off exposures: Gross unpaid losses and loss adjustment expenses were $10.4 billion. A&E net reserves were $287.7 million and are expected to pay out over 40–50 years. Life and annuity benefit reserves were $1.306 billion; the acquired book is in run-off, and reserve estimates depend on mortality, longevity, morbidity, lapse and interest-rate assumptions.
- Investments: The portfolio is exposed to equity-price and interest-rate changes. The ten largest equity holdings represented 45% of the equity portfolio. A hypothetical 35% equity-price decline would reduce shareholders’ equity by an estimated 12.8%, according to the filing’s sensitivity analysis.
- Reinsurance and catastrophe risk: The company remains primarily liable to policyholders if reinsurers fail to pay. The ten largest reinsurer groups represented 63% of recoverables before allowances. Catastrophes, reinsurer credit deterioration, disputes and limited availability or higher cost of reinsurance could affect results.
- Unusual items: Markel recorded a $13.7 million non-cash goodwill impairment charge for Diamond Healthcare, citing lower-than-expected and lower estimated future earnings. Markel Ventures net income also declined year over year.
- Other risks: The filing highlights soft-market pricing and competition, reserve-estimation uncertainty, concentrated investment risk, foreign-currency exposure, regulatory restrictions on subsidiary dividends, cyber and data-security risks, and the execution and integration of acquisitions.
The independent auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of December 31, 2014.
Most important facts an investor should verify
- How much of underwriting profit depends on favorable prior-year reserve releases, and how current accident-year loss trends develop.
- Whether pricing and underwriting discipline can sustain profitable results in softening catastrophe-property and reinsurance markets.
- The quality and concentration of equity investments, and the effect of market movements on book value and capital.
- Alterra, Abbey and Markel Ventures’ ongoing contribution to results, including acquisition-related costs, integration progress and the Diamond Healthcare impairment.
- Reserve adequacy for A&E and life-and-annuity run-off exposures, and the collectability of reinsurance recoverables.
- Debt obligations, available credit facilities, restricted assets and the amount of capital that can be distributed by regulated subsidiaries to the holding company.