Markel Corporation (named Markel Corporation in the filing) — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; comparisons are primarily with 2010. The filing describes a specialty-insurance business across Excess and Surplus Lines, Specialty Admitted and London Insurance Market segments, alongside non-insurance businesses operating as Markel Ventures.
Financial and operating results
| Metric | 2011 | 2010 |
|---|---|---|
| Earned premiums | $1,979 million | $1,731 million |
| Total operating revenues | $2,630 million | $2,225 million |
| Net income to shareholders | $142 million | $267 million |
| Diluted earnings per share | $14.60 | $27.27 |
| Operating cash flow | $311 million | $223 million |
| U.S. GAAP combined ratio | 102% | 97% |
| Taxable-equivalent total investment return | 6.5% | 7.9% |
- Revenue rose about 18%, reflecting higher earned premiums and substantial growth in non-insurance revenues. Net income to shareholders fell 47%, primarily because underwriting results deteriorated, especially due to catastrophe losses.
- Underwriting produced a $41 million loss, versus a $60 million profit in 2010. The consolidated combined ratio moved above 100%, indicating an underwriting loss.
- Segment underwriting results: Excess and Surplus Lines earned $109 million (86% combined ratio); Specialty Admitted lost $45 million (109%); London Insurance Market lost $109 million (116%).
- Net investment income was $264 million, down from $273 million; realized investment gains were $36 million. Net unrealized investment gains increased $183 million before tax. Management reported a 6.5% total investment return, including foreign-currency effects.
- Markel Ventures reported $318 million of revenue and $7.7 million of net income to shareholders, compared with $167 million and $4.2 million in 2010. Acquisitions contributed to the increase.
- Book value per share rose 8% to $352.10. Shareholders’ equity was $3,388 million at year-end.
Financial position, liquidity and debt
- Total assets were $11,532 million, versus $10,826 million in 2010. Investments and cash totaled $8,728 million; cash and cash equivalents were $775 million.
- Unpaid losses and loss-adjustment expenses were $5,399 million, broadly unchanged from 2010. Reinsurance recoverables on unpaid losses were $791 million.
- Debt was $1,294 million, up from $1,016 million. Debt to total capital increased to 27% from 24%. The company issued $250 million of 5.35% senior notes due 2021; it reported no borrowings under its $150 million revolving credit facility and compliance with its covenants.
- Cash from operations was $311 million; investing activities used $474 million, including $120 million net cash for acquisitions; financing activities provided $195 million. Year-end cash increased $30 million to $775 million.
- Domestic insurance subsidiaries could pay up to $222 million in ordinary dividends to the holding company over the following 12 months, subject to applicable rules. The company stated it believed liquidity was sufficient for its capital needs.
Changes, outlook and notable items
- Catastrophe-related underwriting losses were $152 million, or about eight points on the combined ratio, including events in Japan, New Zealand, Thailand, Australia and the United States. Management said estimates remained subject to volatility as claims information developed.
- Favorable prior-year reserve development was $354 million, compared with $278 million in 2010. Management cautioned against assuming the favorable trend would continue; its estimated 2012 development range was a deficiency of about $50 million to a redundancy of about $250 million.
- The company described insurance pricing as generally pressured, though declines stabilized in most lines in 2011 and selected lines saw increases. Management said it would pursue price increases across most product lines in 2012 and would not write business when pricing failed to meet underwriting targets.
- Beginning in 2012, adoption of ASU 2010-26 was expected to reduce deferred acquisition costs and increase 2012 underwriting, acquisition and insurance expenses by approximately $40–$45 million, or about two expense-ratio points.
- Acquisitions included several Markel Ventures businesses in 2011. After year-end, on January 1, 2012, the company acquired THOMCO for stated consideration of $108.7 million; purchase-price allocation was pending.
- Material areas of uncertainty include catastrophe frequency and severity, reserve estimates (especially long-tail and asbestos/environmental claims), reinsurance collectibility, concentrated equity investments, interest-rate and sovereign-credit risks, regulation, competition, technology security and acquisition integration. Asbestos and environmental net reserves were $245 million and are expected to pay out over roughly 50 years.
- The filing reports unqualified audit opinions on the financial statements and internal control over financial reporting. It states that ordinary-course contingencies were not expected to materially affect financial condition or results.
Important facts for investors to verify
- Whether the 2011 catastrophe loss estimates develop adversely as claims mature, and how subsequent catastrophe experience affects pricing and results.
- Whether favorable reserve releases are repeatable; review segment-level reserve development, the actuarial ranges and long-tail/asbestos exposures.
- Whether Specialty Admitted and London underwriting results improve from combined ratios of 109% and 116%, respectively, and whether management achieves planned rate increases.
- The quality and concentration of investment returns: the ten largest equity holdings were 51% of the equity portfolio, while 21% of invested assets were equities.
- Reinsurance recoverable concentration and collateral: the ten largest reinsurer groups represented about 72% of recoverables before allowances; confirm collectibility and allowance adequacy.
- The effect of the new acquisition-cost accounting guidance on 2012 expenses, and the performance and integration of recent acquisitions, including THOMCO.
- Debt-service capacity and holding-company liquidity, including regulatory limits on subsidiary dividends and the 2013 maturity of $246 million of senior notes.