Richmond, VA -(PRNewswire)- Markel Corporation (NYSE: MKL) recently reported diluted net income per share of $22.48 for the year ended December 31, 2013 compared to $25.89 in 2012. The combined ratio was 97% in both 2013 and 2012. Book value per common share outstanding increased 18% to $477.16 at December 31, 2013 from $403.85 at December 31, 2012. Over the five-year period ended December 31, 2013, compound annual growth in book value per common share outstanding was 17%.
Alan I. Kirshner, Chairman and Chief Executive Officer, commented, “We have a lot to be proud of in 2013. Our operating revenues increased 44% to $4.3 billion, which reflects solid growth across our insurance, investing and Markel Ventures operations. Our acquisition of Alterra played a significant role in helping us attain these results. Over the past five years, we achieved double-digit, compounded growth in book value per share. We continue to focus on growth opportunities, most recently completing the acquisition of Abbey Protection plc in January 2014. 2013 has been both a challenging and rewarding year, and it wouldn’t have been possible without the hard work and dedication of each of our associates and the support of our shareholders.”
On May 1, 2013 (the Acquisition Date) we completed the acquisition of Alterra Capital Holdings Limited (Alterra). Total purchase consideration was $3.3 billion. Alterra was a Bermuda-headquartered global enterprise providing diversified specialty insurance and reinsurance products to corporations, public entities and other property and casualty insurers. Our results include the results of Alterra since the Acquisition Date.
The increase in net income to shareholders during 2013 was driven by more favorable underwriting results and higher investment income, partially offset by higher income tax expense compared to 2012. The decrease in diluted net income per share during 2013 was due to the increase in weighted average diluted shares outstanding, which is attributable to shares issued in connection with the acquisition of Alterra.
Comprehensive income to shareholders for 2013 was $459.5 million compared to $503.8 million in 2012. The decrease was due to a less favorable change in net unrealized gains on investments, partially offset by higher net income to shareholders in 2013 compared to 2012.
Combined Ration Analysis
The consolidated combined ratio was 97% in both 2013 and 2012. In 2013, a lower current accident year loss ratio and lower expense ratio were offset by a less favorable prior accident years’ loss ratio compared to 2012.
The decrease in the consolidated current accident year loss ratio was due in part to the impact of catastrophes in 2012 and improved underwriting results within our Specialty Admitted segment in 2013 compared to 2012, partially offset by an unfavorable impact from Alterra’s current year losses. The 2012 combined ratio included $107.4 million, or five points, of underwriting loss from Hurricane Sandy which occurred during October 2012.
The 2013 combined ratio included $411.1 million of favorable development on prior years’ loss reserves compared to $399.0 million in 2012. Favorable development on prior years’ loss reserves in 2013 included $20.8 million of favorable development on Hurricane Sandy. The benefit of the favorable development on prior years’ loss reserves had less of an impact on the combined ratio in 2013 compared to 2012 due to higher earned premium volume in 2013.
The decrease in the consolidated expense ratio in 2013 reflected higher earned premiums in our Excess and Surplus Lines, Specialty Admitted and London Insurance Market segments in 2013 compared to 2012. The impact of transaction and other acquisition-related costs incurred by the Alterra segment in 2013 was offset by the impact of 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), in 2012. Underwriting, acquisition and insurance expenses included transaction and other acquisition-related costs of $75.1 million in 2013, or two points on the combined ratio. Excluding transaction and other acquisition-related costs incurred in 2013, the inclusion of the results of operations of Alterra had a favorable impact on the expense ratio, as the Alterra segment has a lower expense ratio than we historically have had. The prospective adoption of ASU No. 2010-26 increased our underwriting, acquisition and insurance expenses by $43.1 million in 2012, or two points on the combined ratio. Likewise, the 2012 combined ratios of the Excess and Surplus Lines, Specialty Admitted and London Insurance Market segments each included two points of underwriting, acquisition and insurance expenses related to the prospective adoption of ASU No. 2010-26.
The Excess and Surplus Lines segment’s combined ratio for 2013 was 80% compared to 94% (including five points of underwriting loss related to Hurricane Sandy) in 2012. The decrease in the 2013 combined ratio was due to a lower current accident year loss ratio, more favorable development of prior years’ loss reserves and a lower expense ratio compared to 2012. The improvement in the current accident year loss ratio in 2013 reflected the impact of losses related to Hurricane Sandy in 2012. The Excess and Surplus Lines segment’s 2013 combined ratio included $229.9 million of favorable development on prior years’ loss reserves compared to $181.4 million in 2012. The redundancies on prior years’ loss reserves experienced within the Excess and Surplus Lines segment in 2013 and 2012 were primarily on our casualty programs. The improvement in the expense ratio in 2013 was due to the impact of the prospective adoption of ASU No. 2010-26 in 2012 and higher premium volume and lower general expenses in 2013 compared to 2012.
The Specialty Admitted segment’s combined ratio for 2013 was 97% compared to 108% (including three points of underwriting loss related to Hurricane Sandy) in 2012. The decrease in the 2013 combined ratio was primarily due to a lower current accident year loss ratio compared to 2012. The lower current accident year loss ratio in 2013 reflected more favorable rates on our workers’ compensation business and a higher proportion of non-California workers’ compensation business (which carries a lower loss ratio than California workers’ compensation business) during 2013 compared to 2012. Also contributing to the lower current accident year loss ratio in 2013 was the contribution of premium from Hagerty Insurance Agency and Hagerty Classic Marine Insurance Agency (collectively, Hagerty), which carries a lower loss ratio than the rest of the Specialty Admitted segment. In January 2013, we acquired Essentia Insurance Company, a company that underwrites insurance exclusively for Hagerty throughout the United States. We also experienced improved underwriting performance within our Specialty Programs division across several product lines. The 2013 expense ratio for the Specialty Admitted segment was impacted by commission expense on the Hagerty business, which has a higher overall commission rate than the rest of the Specialty Admitted segment. The impact of the Hagerty commission expense on the 2013 expense ratio was offset by the impact of the prospective adoption of ASU No. 2010-26 on the 2012 expense ratio.
The London Insurance Market segment’s combined ratio for 2013 was 88% compared to 89% (including six points of underwriting loss related to Hurricane Sandy) in 2012. The impact of Hurricane Sandy on the 2012 combined ratio was offset by less favorable development of prior years’ loss reserves in 2013 compared to 2012. The London Insurance Market segment’s 2013 combined ratio included $141.6 million of favorable development on prior years’ loss reserves compared to $192.0 million in 2012. The redundancies on prior years’ loss reserves experienced within the London Insurance Market segment in 2013 and 2012 occurred in a variety of programs across each of our divisions. In 2013, prior year redundancies included $20.0 million of favorable development on the 2001 and prior accident years, compared to $39.1 million in 2012.
Following the acquisition of Alterra on May 1, 2013, we have included the underwriting results of Alterra in the Alterra segment. The Alterra segment’s combined ratio for the period from May 1, 2013 to December 31, 2013 was 118%, which included transaction and other acquisition-related costs of $75.1 million, or nine points on the combined ratio. The loss ratio for the Alterra segment included $25.5 million, or three points, of underwriting loss related to catastrophes that occurred during 2013 and was unfavorably impacted by applying our more conservative loss reserving philosophy to Alterra’s current year loss reserves.
The Other Insurance (Discontinued Lines) segment produced an underwriting loss of $30.4 million for the year ended December 31, 2013 compared to an underwriting loss of $21.3 million in 2012. The underwriting loss in 2013 included $28.4 million of loss reserve development on asbestos and environmental exposures resulting from our annual third quarter review of these exposures, compared to $31.1 million in 2012. 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. The Other Insurance (Discontinued Lines) segment also included other revenues of $1.1 million and other expenses of $28.1 million for the year ended December 31, 2013 related to the life and annuity reinsurance business which was acquired as part of the Alterra transaction on May 1, 2013. This business is in run-off and we are not writing any new life and annuity reinsurance contracts. The life and annuity benefit reserves on existing obligations are recorded on a discounted present value basis using assumptions that were determined at the Acquisition Date. The accretion of this discount is included in other expenses. Other revenues attributable to the life and annuity book included in this segment represent ongoing premium adjustments on existing contracts.
Beginning in 2014, we will monitor and report our ongoing underwriting operations in the following three segments: U.S. Insurance, International Insurance and Global Reinsurance. The U.S. Insurance segment will include all direct business and facultative placements written by our insurance subsidiaries domiciled in the United States. The International Insurance segment will include all direct business and facultative placements written by our insurance subsidiaries domiciled outside of the United States, including our syndicates at Lloyd’s. The Global Reinsurance segment will include all treaty reinsurance written across the Company. Results for lines of business discontinued prior to, or in conjunction with, acquisitions will continue to be reported as the Other Insurance (Discontinued Lines) segment.
Premium Analysis
Gross written premiums for 2013 increased 56% compared to 2012. The increase in gross premium volume was primarily attributable to the inclusion of premiums written by the Alterra segment from May 1, 2013, as well as higher gross premium volume in the Specialty Admitted and Excess and Surplus Lines segments. Gross premium volume in the Specialty Admitted segment increased 34% in 2013. The Specialty Admitted segment included $194.7 million of gross written premiums from Hagerty in 2013, which we began writing in the first quarter of 2013. Gross premium volume in our Excess and Surplus Lines segment increased 12% due in part to the impact of more favorable rates and improving economic conditions. Foreign currency exchange rate movements did not have a significant impact on gross premium volume in 2013 or 2012.
During 2012 and 2013, we have generally seen low to mid-single digit favorable rate changes in many of our product lines as market conditions improved and revenues, gross receipts and payrolls of our insureds were favorably impacted by improving economic conditions; however, during the fourth quarter of 2013, we began to experience softening prices on our catastrophe exposed property product lines and in our reinsurance book. We will continue to pursue price increases in 2014 when possible; 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 83% for 2013 and 88% for 2012. The decrease in net retention in 2013 was due to the inclusion of premiums written by the Alterra segment, which uses higher levels of reinsurance than we have used historically. Net retention of gross premium volume in the Alterra segment was 65% for the period from May 1, 2013 to December 31, 2013. Excluding premiums written by the Alterra segment, our consolidated net retention of gross premium volume in 2013 would have been 89%, which is comparable with 2012.
Earned premiums for 2013 increased 51% compared to 2012. The increase was primarily attributable to the inclusion of premiums earned by the Alterra segment and higher earned premiums in the Specialty Admitted and Excess and Surplus Lines segments. In 2013, the Specialty Admitted segment included $97.8 million of earned premiums from Hagerty. The Specialty Admitted segment also experienced continued growth in 2013 as a result of our acquisition of Thomco in early 2012. Foreign currency exchange rate movements did not have a significant impact on earned premiums in 2013 or 2012.
Net investment income for 2013 was $317.4 million compared to $282.1 million in 2012. Net investment income in 2013 included $74.3 million of net investment income attributable to the Alterra investment portfolio, which was net of $58.3 million of amortization as a result of establishing a new amortized cost for Alterra’s fixed maturity securities as of the Acquisition Date. Net investment income for 2013 also included a favorable change in the fair value of our credit default swap of $10.5 million compared to a favorable change of $16.6 million in 2012. Excluding net investment income attributable to the credit default swap and invested assets and net investment income attributable to the Alterra investment portfolio, net investment income decreased in 2013 compared to 2012 due in part to a decrease in our holdings of fixed maturities and increase in holdings of cash and cash equivalents.
Net realized investment gains for 2013 were $63.2 million compared to $31.6 million in 2012. Net realized investment gains for 2013 included $4.7 million of write downs for other-than-temporary declines in the estimated fair value of investments compared to $12.1 million of write downs in 2012. 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 Markel Ventures, a diverse portfolio of industrial and service companies in which we have a controlling interest. In 2013, other revenues from our Markel Ventures operations were $686.4 million compared to $489.4 million in 2012. Other expenses from our Markel Ventures operations were $613.3 million in 2013 compared to $433.0 million in 2012. Net income to shareholders from our Markel Ventures operations was $23.8 million in 2013 compared to $13.5 million in 2012 and earnings before interest, income taxes, depreciation and amortization (EBITDA) was $83.8 million in 2013 compared to $60.4 million in 2012. Revenues and net income to shareholders from our Markel Ventures operations increased in 2013 compared to 2012 primarily due to acquisitions in 2012 and 2013 and more favorable results at AMF Bakery Systems (AMF). EBITDA from our Markel Ventures operations increased in 2013 compared to 2012 due in part to acquisitions in 2012 and 2013 and more favorable results at Parkland Ventures, Inc. and AMF. See below for a reconciliation of Markel Ventures EBITDA to net income to shareholders.
Invested assets were $17.6 billion at December 31, 2013 compared to $9.3 billion at December 31, 2012. Equity securities were $3.3 billion, or 18% of invested assets, at December 31, 2013 compared to $2.4 billion, or 26% of invested assets, at December 31, 2012. The decrease in equity securities as a percent of invested assets is attributable to the investment portfolio acquired from Alterra, which had a different allocation than our historical investment portfolio allocation. Net unrealized gains on investments, net of taxes, were $1.1 billion at December 31, 2013 compared to $946.9 million at December 31, 2012. At December 31, 2013, we held securities with gross unrealized losses of $211.9 million, or approximately 1% of invested assets.
At December 31, 2013, our holding company had $1.3 billion of invested assets compared to $1.4 billion of invested assets at December 31, 2012. The decrease in invested assets is primarily the result of cash paid for the Alterra acquisition of approximately $1.0 billion and the repayment of our 6.80% unsecured senior notes in February 2013 partially offset by dividends received from our subsidiaries of $791.0 million and our March 2013 issuance of 3.625% and 5.0% unsecured senior notes.
Net cash provided by operating activities was $745.5 million in 2013 compared to $392.5 million in 2012. The increase in net cash provided by operating activities was due to higher cash flows from underwriting and investing activities, primarily as a result of the acquisition of Alterra. The increase in cash flows from underwriting activities was also driven by higher premium volume, primarily in our Specialty Admitted and Excess and Surplus Lines segments.
Interest expense for 2013 was $114.0 million compared to $92.8 million in 2012. The increase in interest expense in 2013 is due in part to $13.2 million of interest expense associated with our 6.25% unsecured senior notes and 7.20% unsecured senior notes which were assumed in connection with the acquisition of Alterra. Interest expense in 2013 also increased due to the March 2013 issuance of our 3.625% unsecured senior notes and 5.0% unsecured senior notes, partially offset by the repayment of our 6.80% unsecured notes in February 2013. In 2013, increased interest expense associated with our first full year of interest from the July 2012 issuance of our 4.90% unsecured senior notes was offset by the redemption of our 7.50% unsecured senior debentures in August 2012.
Income tax expense for 2013 was 22% of our income before income taxes compared to 17% in 2012. In both periods, the effective tax rate differs from the statutory tax rate of 35% primarily as a result of tax-exempt investment income. The increase in the effective tax rate in 2013 was driven by higher earnings taxed at a 35% tax rate and a smaller tax benefit related to tax-exempt investment income, which resulted from having higher income before income taxes in 2013 compared to 2012.
In January 2014, we acquired Abbey Protection plc (Abbey), an integrated specialty insurance and consultancy group headquartered in London. Abbey’s business is focused on the underwriting and sale of insurance products to small and medium enterprises and affinity groups in the United Kingdom providing protection against legal expenses and professional fees incurred as a result of legal actions or investigations by tax authorities, as well as providing a range of complementary legal, professional and reinsurance services. Total consideration for this acquisition was $190 million.
The complete financial results release is available here: Markel 2013 Financial Results
Source: PRNewswire