Richmond, VA -(PRNewswire)- Markel Corporation (NYSE: MKL) reported diluted net income per share of $25.89 for the year ended December 31, 2012 compared to $14.60 in 2011. The 2012 combined ratio was 97% compared to 102% in 2011. Book value per common share outstanding increased 15% to $403.85 at December 31, 2012 from $352.10 at December 31, 2011. Over the five-year period ended December 31, 2012, compound annual growth in book value per common share outstanding was 9%.
Alan I. Kirshner, Chairman and Chief Executive Officer, commented, “We produced strong underwriting results in 2012 even with the impact of Hurricane Sandy in the fourth quarter. In addition, we earned solid investment returns and total operating revenues for the year exceeded $3 billion as we continued to expand both our insurance and non-insurance operations through acquisitions and organic growth. The result was book value per share growth of 15% for the year, with over $500 million in comprehensive income. In December, we announced our agreement to acquire Alterra Capital Holdings Limited (NASDAQ: ALTE; BSX: ALTE.BH). We believe the combination of Alterra with Markel will create a strong company in global specialty insurance and investments, with a demonstrated track record of underwriting discipline in niche market segments and proven asset management strengths that should benefit shareholders of both companies. We are well positioned to continue to build shareholder value and want to thank our associates for their significant accomplishments in 2012.”
The increase in diluted net income per share during 2012 was primarily due to improved underwriting results, which were driven by lower losses related to natural catastrophes, more favorable development of prior years’ loss reserves and lower attritional losses.
Comprehensive income to shareholders for 2012 was $503.8 million compared to $251.9 million in 2011. The increase was due to higher net income to shareholders and a more favorable change in net unrealized gains on investments in 2012 compared to 2011.
The decrease in the consolidated combined ratio was due to a lower current accident year loss ratio and more favorable development of prior years’ loss reserves, partially offset by a higher expense ratio compared to 2011. The 2012 combined ratio included $107.4 million, or five points, of underwriting loss from Hurricane Sandy in the fourth quarter. The 2011 combined ratio included $152.4 million, or eight points, of underwriting loss related to natural catastrophes, including the Thai floods, Hurricane Irene, U.S. tornadoes, Japanese earthquake and tsunami, Australian floods and New Zealand earthquakes. Also contributing to the improvement in the current accident year loss ratio were lower attritional losses primarily in the Excess and Surplus Lines and London Insurance Market segments. The 2012 combined ratio included $399.0 million of favorable development on prior years’ loss reserves compared to $354.0 million in 2011. The 2012 combined ratio also included $43.1 million, or two points, of underwriting, acquisition and insurance expenses related to the Company’s prospective adoption of Financial Accounting Standards Board Accounting Standards Update No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (ASU No. 2010-26). The combined ratios of each of our three operating segments likewise included two points of underwriting, acquisition and insurance expenses related to the prospective adoption of ASU No. 2010-26. Higher profit sharing costs in 2012 were offset by a favorable impact from higher premium volume.
The Excess and Surplus Lines segment’s combined ratio for 2012 was 94% (including five points of underwriting loss related to Hurricane Sandy) compared to 86% (including three points of underwriting loss related to natural catastrophes) in 2011. The increase in the 2012 combined ratio was primarily due to less favorable development of prior years’ loss reserves compared to 2011. The Excess and Surplus Lines segment’s 2012 combined ratio included $181.4 million of favorable development on prior years’ loss reserves compared to $227.5 million in 2011. The redundancies on prior years’ loss reserves experienced within the Excess and Surplus Lines segment in 2012 and 2011 were primarily on our professional and products liability and casualty programs. Excluding the impact of natural catastrophes in both periods, the Excess and Surplus Lines segment experienced a lower current accident year loss ratio due to lower attritional property losses in 2012 compared to 2011.
The Specialty Admitted segment’s combined ratio for 2012 was 108% (including three points of underwriting loss related to Hurricane Sandy) compared to 109% (including two points of underwriting loss related to natural catastrophes) in 2011. In 2012, more favorable development of prior years’ loss reserves and a lower current accident year loss ratio were offset by a higher expense ratio compared to 2011. The Specialty Admitted segment’s 2012 combined ratio included $46.7 million of favorable development on prior years’ loss reserves compared to $27.4 million in 2011. The redundancies on prior years’ loss reserves in 2012 were most notable on the 2011 accident year across several product lines. The improvement in the current accident year loss ratio was due in part to improved underwriting performance for two programs within our accident and health liability class. The increase in the 2012 expense ratio was driven by higher underwriting, acquisition and insurance expenses related to the Company’s prospective adoption of ASU No. 2010-26, higher profit sharing costs and the write-off of previously capitalized software development costs.
The London Insurance Market segment’s combined ratio for 2012 was 89% (including six points of underwriting loss related to Hurricane Sandy) compared to 116% (including 18 points of underwriting loss related to natural catastrophes) in 2011. Excluding the impact of natural catastrophes in both periods, the combined ratio decreased in 2012 due to more favorable development of prior years’ loss reserves and lower attritional losses on the current accident year, primarily on our property lines within the Specialty division. The London Insurance Market segment’s 2012 combined ratio included $192.0 million of favorable development on prior years’ loss reserves compared to $94.8 million in 2011. The redundancies on prior years’ loss reserves experienced within the London Insurance Market segment in 2012 and 2011 occurred in a variety of programs across each of our divisions. In 2012, prior year redundancies included $39.1 million of favorable development on the 2001 and prior accident years.
The Other Insurance (Discontinued Lines) segment produced an underwriting loss of $21.3 million for the year ended December 31, 2012 compared to an underwriting profit of $4.7 million in 2011. The underwriting loss in 2012 included $31.1 million of loss reserve development on asbestos and environmental exposures. We complete an annual review of these exposures during the third quarter of the year unless circumstances suggest an earlier review is appropriate. Over the past two years, the number of asbestos and environmental claims reported each year across the property and casualty industry has been on the decline. However, at the same time, the likelihood of making an indemnity payment has risen, thus increasing the average cost per reported claim. During our 2012 annual review, we reduced our estimate of the ultimate claims count, while increasing our estimate of the number of claims that would ultimately be closed with an indemnity payment. As a result, prior years’ loss reserves for asbestos and environmental exposures were increased. During our 2011 review, we determined that no adjustment to loss reserves was required. Adverse development of asbestos and environmental reserves in 2012 was partially offset by favorable movements in prior years’ loss reserves and allowances for reinsurance bad debt related to discontinued lines of business originally written by Markel International.
Gross written premiums for 2012 increased 10% compared to 2011. The increase in gross premium volume was attributable to higher gross premium volume in each of our three operating segments. In 2012, the Specialty Admitted segment included $79.2 million of gross written premiums from Thompson Insurance Enterprises, LLC (THOMCO), which was acquired in the first quarter of 2012. Gross premium volume in the Specialty Admitted segment also included $257.3 million of gross premium volume attributable to our workers’ compensation product line, compared to $226.7 million in 2011. The increase in gross premium volume in 2012 further reflected higher gross premium volume in the Excess and Surplus Lines segment and London Insurance Market segment, driven by more favorable rates, primarily in the excess and umbrella and property lines within the Excess and Surplus Lines segment and the Marine and Energy and Specialty divisions within the London Insurance Market segment. Foreign currency exchange rate movements did not have a significant impact on gross premium volume in 2012.
During the latter part of 2011, we saw price declines stabilize and achieved modest price increases in several lines, most notably the marine and energy products within the London Insurance Market segment. During 2012, we have generally seen mid-single digit favorable rate changes compared to flat to small single digit rate declines in 2011. We routinely review the pricing of our major product lines and will continue to pursue price increases for most product lines in 2013; however, when we believe the prevailing market price will not support our underwriting profit targets, the business is not written. As a result of our underwriting discipline, gross premium volume may vary when we alter our product offerings to maintain or improve underwriting profitability.
Net retention of gross premium volume was 88% for 2012 and 89% for 2011. As part of our underwriting philosophy, we seek to offer products with limits that do not require significant amounts of reinsurance. We purchase reinsurance in order to reduce our retention on individual risks and enable us to write policies with sufficient limits to meet policyholder needs.
Earned premiums for 2012 increased 8% compared to 2011. In 2012, the Specialty Admitted segment included $241.2 million of earned premiums attributable to our workers’ compensation product line, compared to $200.8 million in 2011, and $31.3 million of earned premiums from THOMCO. The increase in earned premiums in 2012 also was due to higher earned premiums in the Excess and Surplus Lines and London Insurance Market segments, primarily as a result of higher gross premium volume. Foreign currency exchange rate movements did not have a significant impact on earned premiums in 2012.
Net investment income for 2012 was $282.1 million compared to $263.7 million in 2011. The increase in 2012 was primarily due to a favorable change in the fair value of our credit default swap. Net investment income for 2012 included a favorable change in the fair value of our credit default swap of $16.6 million compared to an adverse change of $4.1 million in 2011. Excluding the change in the fair value of our credit default swap, lower investment income on our fixed income portfolio, due to lower invested assets, was offset by increased dividend income on our equity portfolio.
Net realized investment gains for 2012 were $31.6 million compared to $35.9 million in 2011. Net realized investment gains for 2012 included $12.1 million of write downs for other-than-temporary declines in the estimated fair value of investments compared to $20.2 million of write downs in 2011. Variability in the timing of realized and unrealized investment gains and losses is to be expected.
Other revenues and other expenses include the results of our non-insurance operations, which we refer to collectively as Markel Ventures. Our non-insurance operations are comprised of a diverse portfolio of industrial and service companies. In 2012, revenues from our non-insurance operations were $489.4 million compared to $317.5 million in 2011. Net income to shareholders from our non-insurance operations was $13.5 million in 2012 compared to $7.7 million in 2011 and EBITDA was $60.4 million in 2012 compared to $37.3 million in 2011. Revenues, net income to shareholders and EBITDA from our non-insurance operations increased in 2012 compared to 2011 primarily due to our acquisitions of WI Holdings Inc. in late 2011 and Havco WP LLC (Havco) in 2012.
In April 2012, we acquired an 85% controlling interest in Havco, a privately held company based in Cape Girardeau, Missouri that manufactures laminated oak and composite wood flooring used in the assembly of truck trailers, intermodal containers and truck bodies. In July 2012, we acquired 100% of the outstanding shares of Tromp Bakery Equipment B.V., a Netherlands based global supplier of high-tech food processing equipment which designs and manufactures baking equipment and sheeting lines for pizza, pastry, pie, and specialty bread bakers worldwide. In September 2012, we acquired an 85% controlling interest in Reading Baking Systems, a leading global designer and manufacturer of industrial baking systems for the production of crackers, pretzels, cookies, and other baked snacks based in Reading, Pennsylvania. Total consideration for these three acquisitions was $123.8 million. In connection with these three acquisitions, we recognized goodwill of $40.7 million and other intangible assets of $45.2 million.
Invested assets were $9.3 billion at December 31, 2012 compared to $8.7 billion at December 31, 2011. Equity securities were $2.4 billion, or 26% of invested assets, at December 31, 2012 compared to $1.9 billion, or 21% of invested assets, at December 31, 2011. Net unrealized gains on investments, net of taxes, were $946.9 million at December 31, 2012 compared to $704.7 million at December 31, 2011. At December 31, 2012, we held securities with gross unrealized losses of $17.2 million, or less than 1% of invested assets.
Interest expense for 2012 was $92.8 million compared to $86.3 million in 2011. The increase in 2012 was due in part to our $350 million issuance of 4.90% unsecured senior notes in July 2012.
Income tax expense for 2012 was 17% of our income before income taxes compared to 22% in 2011. In both periods, the effective tax rate differs from the statutory tax rate of 35% primarily as a result of tax-exempt investment income. Additionally, in 2012, we had higher earnings from our foreign operations, which are taxed at a lower rate.
In January 2012, we acquired THOMCO, a privately held program administrator headquartered in Kennesaw, Georgia that underwrites multi-line, industry-focused insurance programs. Results attributable to this acquisition are included in the Specialty Admitted segment. Total consideration for this acquisition was $108.5 million. In connection with the acquisition, we recognized goodwill of $26.1 million and other intangible assets of $81.2 million.
The complete earnings release is available here: Markel Reports 2012 Financial Results
Source: PRNewswire