Business context and reporting period
Markel Corporation’s Form 10-K covers the fiscal year ended December 31, 2015; the filing provides annual results, not standalone fourth-quarter results. Markel is a specialty insurance and reinsurance group with additional industrial and service businesses through Markel Ventures. Its underwriting segments are U.S. Insurance, International Insurance and Reinsurance. Figures below are U.S. dollars.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total operating revenues | $5.370 billion | $5.134 billion |
| Earned premiums | $3.824 billion | $3.841 billion |
| Operating income | $860.4 million | $557.8 million |
| Net income to shareholders | $582.8 million | $321.2 million |
| Diluted earnings per share | $41.74 | $22.27 |
| Comprehensive income to shareholders | $232.7 million | $935.9 million |
| Operating cash flow | $651.2 million | $716.8 million |
| Senior long-term and other debt | $2.241 billion | $2.254 billion |
- Underwriting profit rose to $429.7 million from $177.6 million. The consolidated combined ratio improved to 89% from 95%; ratios below 100% indicate an underwriting profit. By segment, 2015 ratios were 89% for U.S. Insurance, 86% for International Insurance and 90% for Reinsurance.
- Gross premium volume fell 4% to $4.633 billion; earned premiums declined slightly. U.S. Insurance earned premiums increased, while International Insurance and Reinsurance premiums decreased.
- Net investment income was $353.2 million, down from $363.2 million; net realized investment gains increased to $106.5 million from $46.0 million. Taxable-equivalent total investment return was negative 0.7%, versus positive 7.4% in 2014, reflecting weaker investment valuations.
- At year-end, invested assets were $18.181 billion, total assets $24.941 billion and shareholders’ equity $7.834 billion. Book value per share increased 3% to $561.23, compared with 14% growth in 2014. The after-tax decrease in unrealized investment gains was $320.5 million.
- Cash and cash equivalents were $2.630 billion, with $440.1 million of restricted cash. Operating cash flow decreased; cash flow included payments of $156.4 million for two retroactive reinsurance transactions and $29.0 million for a life-and-annuity novation.
- Debt-to-capital was 22%, compared with 23% in 2014. The $300 million revolving credit facility was undrawn at year-end and expires in August 2019. Insurance-subsidiary dividends and assets are subject to regulatory restrictions; the filing reports adequate regulatory capital and sufficient liquidity.
Material changes and unusual items
- Net income to shareholders increased 81%, driven mainly by stronger underwriting results and higher realized investment gains. The 2015 effective tax rate fell to 21% from 26%, substantially aided by foreign tax credits; management cautioned that a similar benefit may not recur.
- Prior-year reserve development was favorable by $627.8 million, compared with $435.5 million in 2014. Management attributed much of the improvement to better-than-anticipated claims experience and an $82.7 million reduction in reserves following reduced estimated volatility after ceding A&E exposures. This reserve release materially benefited the combined ratio and earnings.
- Markel completed two retroactive reinsurance transactions covering primarily older asbestos and environmental liabilities. One produced a deferred gain of $5.1 million; the other generated a $10.1 million underwriting loss. Net A&E reserves were $132.9 million at year-end, and management noted substantial uncertainty and a potential 40–50-year payout period.
- The December acquisition of CATCo investment-management assets cost $205.7 million in cash. The business was expected to begin earning management and performance fees in 2016, with assets under management expected to exceed $3 billion. Related employee incentive and retention payments were estimated at $100 million over the stated periods. Markel also acquired 80% of CapTech; its operating results were to enter consolidation beginning in January 2016.
- Markel Ventures reported approximately $1.0 billion in revenue, $11.0 million in net income to shareholders and $91.3 million in EBITDA. Diamond Healthcare goodwill was written down by $14.9 million, following a $13.7 million impairment in 2014. A contingent consideration obligation related to Cottrell increased and was expected to be paid in 2016.
Outlook, management commentary and risks
Management described the overall property and casualty market as soft, with pricing pressure in property, marine and energy, and large-account business. It intended to pursue price increases across most product lines in 2016 where possible, and not write business when pricing would not support underwriting targets. Management said further favorable reserve development in 2016 was possible but cautioned investors not to rely on the trend. Its estimated reasonable range of 2016 reserve movement extended from a deficiency of less than 1% (about $50 million) to a redundancy of approximately 5% (about $450 million) of year-end net reserves.
Principal risks include catastrophe losses, uncertainty in long-tail and A&E reserves, life-and-annuity run-off assumptions, reinsurer credit and collection risk, investment-market and interest-rate volatility, concentrated equity holdings, soft-market competition, foreign-currency exposure, regulation, acquisitions and cybersecurity. The independent auditor issued an unqualified opinion on the financial statements and internal controls; management reported effective internal control over financial reporting.
Important facts for investors to verify
- How much of 2015’s underwriting profit and earnings improvement depended on prior-year reserve releases, and whether current accident-year underwriting performance remains sound.
- Developments in remaining A&E claims, the performance and collectability of the retroactive reinsurance protections, and the eventual transfer of ceded liabilities.
- Whether the reduced investment return and unrealized-value declines persist, including effects of equity concentration and interest-rate changes.
- Actual CATCo fee income, assets under management and compensation costs, alongside integration and performance at CapTech and Markel Ventures businesses.
- Liquidity available at the holding company after regulatory dividend limits, restricted assets and debt obligations are considered.