Alan I. Kirshner, Chairman and Chief Executive Officer, commented, "2006 was an exceptional year. While part of our success can be attributed to a benign hurricane season, good weather does not deserve all of the credit. Our associates deserve the real credit as their combined energy and discipline produced strong underwriting performance, outstanding investment returns and another year of record earnings."
The following table presents selected financial data from 2006 and 2005 (amounts in thousands, except per share amounts).
Year Ended December 31, 2006 2005 Net income $ 392,502 $ 147,915 Comprehensive income $ 525,782 $ 63,641 Weighted average diluted shares 10,024 10,171 Diluted net income per share $ 39.40 $ 14.80 December 31, December 31, 2006 2005 Book value per common share outstanding $ 229.78 $ 174.04 Common shares outstanding 9,994 9,799
The 2006 increase in diluted net income per share was due to improved underwriting performance and higher investment returns in 2006 compared to 2005.
Comprehensive income for 2006 was $525.8 million compared to $63.6 million in 2005. The increase in comprehensive income was primarily due to higher 2006 net income and an increase in the market value of the investment portfolio during 2006.
Over the one- and five-year periods ended December 31, 2006, compound annual growth in book value per common share outstanding was 32% and 16%, respectively. -Combined Ratio Analysis- Year Ended December 31, 2006 2005 Excess and Surplus Lines 78% 92% Specialty Admitted 91% 83% London Insurance Market 100% 126% Other NM NM Consolidated 87% 101% NM -- Ratio is not meaningful. Further discussion of Other underwriting loss follows.
The combined ratio for 2006 included $54.9 million, or 3 points, of underwriting losses related to Hurricanes Katrina, Rita and Wilma ("2005 Hurricanes") compared to $246.3 million, or 12 points, of underwriting losses on the 2005 Hurricanes included in the 2005 combined ratio. The additional losses on the 2005 Hurricanes during 2006 were primarily concentrated in our contract property and delegated authority books of business included in the Excess and Surplus Lines and London Insurance Market segments. In addition to the favorable impact of the benign hurricane season experienced this year, the improved combined ratio for 2006 was due in part to $193.8 million of favorable development on prior years' loss reserves before considering adverse development on the 2005 Hurricanes compared to favorable development of $50.6 million on prior years' loss reserves in 2005.
The Excess and Surplus Lines segment's combined ratio for the year ended December 31, 2006 was 78% (including 1 point of losses related to the 2005 Hurricanes) compared to 92% (including 10 points of losses related to the 2005 Hurricanes) in 2005. During 2006, unfavorable loss reserve development of $16.5 million on the 2005 Hurricanes was more than offset by $176.6 million of favorable development on other prior years' loss reserves. The favorable development experienced during 2006 was primarily on the specified medical, medical malpractice, products liability and employment practices liability programs at the Shand Professional/Products Liability unit and was a result of the favorable rates and terms experienced on the 2002 to 2005 accident years.
The Specialty Admitted segment's combined ratio for the year ended December 31, 2006 was 91% compared to 83% (including 5 points of losses related to the 2005 Hurricanes) in 2005. The increase in the 2006 combined ratio was primarily due to lower favorable development on prior years' loss reserves compared to 2005.
The London Insurance Market segment's combined ratio for the year ended December 31, 2006 was 100% (including 7 points of losses related to the 2005 Hurricanes) compared to 126% (including 22 points of losses related to the 2005 Hurricanes) in 2005. During 2006, unfavorable loss reserve development of $43.8 million on the 2005 Hurricanes was partially offset by $25.3 million of favorable development on other prior years' loss reserves. This favorable prior year development reflects improved risk selection and the favorable rates and terms associated with the London market in recent years. The combined ratio for 2006 also improved due to lower frequency and severity of losses on several property classes of business compared to 2005.
The London Insurance Market segment reported a combined ratio of 87% for the fourth quarter of 2006, which represents the third consecutive quarter that this segment has reported an underwriting profit. The underwriting performance for this segment may vary to a greater degree than our other segments due to Markel International's current mix of business, which includes a higher percentage of catastrophe-exposed business, and Markel International's minimal use of reinsurance.
The Other segment produced an underwriting loss of $23.4 million for the year ended December 31, 2006 compared to an underwriting loss of $28.8 million in 2005. The underwriting loss in 2006 and in 2005 included $16.7 million and $31.3 million, respectively, of loss reserve development on asbestos and environmental (A&E) exposures and related reinsurance bad debt. The increase in A&E reserves in both years was a result of the completion of our annual review of these exposures during the third quarters of 2006 and 2005. During these reviews, we noted an increase in the severity of losses on reported claims, which caused us to increase our estimate of ultimate loss reserves for A&E exposures. -Premium Analysis- Year Ended December 31, (dollars in thousands) Gross Written Premiums Earned Premiums 2006 2005 2006 2005 Excess and Surplus Lines $1,465,725 $1,439,744 $1,242,184 $1,138,525 Specialty Admitted 340,483 318,717 317,401 291,273 London Insurance Market 729,160 640,986 624,599 507,518 Other 862 1,887 197 1,145 Total $2,536,230 $2,401,334 $2,184,381 $1,938,461
Gross written premiums for the year ended December 31, 2006 increased 6% compared to 2005. The increase was primarily due to rate increases achieved by Markel International's Marine and Energy and Non-Marine Property divisions, as well as increased volume from new programs written by Markel Re's Specialized Markel Alternative Risk Transfer division. With the exception of large rate increases on catastrophe-exposed business, rates have generally been flat or down slightly compared to 2005. We have continued to experience increased competition throughout 2006, most notably in our professional liability programs, where rates are generally down 5% to 10%, and our casualty programs, where rates are generally flat to down 5%. We expect that competition in the property and casualty insurance industry will remain strong in 2007.
Net retention of gross premium volume was 87% for the year ended December 31, 2006 compared to 82% in 2005. Net written premiums for 2005 were reduced by $57.6 million of additional reinsurance costs resulting from the 2005 Hurricanes. As a result of these additional reinsurance costs, our net retention of gross premium volume was reduced by 3% for the year ended December 31, 2005. Aside from the impact of the storms in 2005, the increase in retention in 2006 was primarily due to purchasing lower amounts of reinsurance in the Excess and Surplus Lines and London Insurance Market segments during 2006 compared to 2005.
Earned premiums for the year ended December 31, 2006 increased 13% compared to 2005. Earned premiums for 2005 were reduced by $57.6 million of additional reinsurance costs resulting from the 2005 Hurricanes. In addition to the impact of additional reinsurance costs in 2005, earned premiums increased in 2006 due to higher gross premium volume and higher retentions compared to 2005.
Net investment income for the year ended December 31, 2006 was $271.0 million compared to $242.0 million in 2005. The increase in 2006 was due to higher investment yields on a larger investment portfolio compared to the same period of 2005.
Net realized investment gains for the year ended December 31, 2006 were $63.6 million compared to $19.7 million in 2005. Variability in the timing of realized and unrealized investment gains and losses is to be expected.
Interest expense for the year ended December 31, 2006 was $65.2 million compared to $63.8 million for 2005. The increase in interest expense is primarily due to the August 2006 issuance of $150 million of 7.50% unsecured senior debentures due August 22, 2046. Interest expense from the new debt issuance was partially offset by lower interest expense on our Junior Subordinated Deferrable Interest Debentures due to our retirement of a portion of these debentures during 2006. Proceeds from the August 2006 debt issuance were used to redeem the remaining Junior Subordinated Deferrable Interest Debentures on January 2, 2007. Interest expense in 2006 included interest expense on our Liquid Yield Option(TM) Notes (LYONs) through their redemption in December 2006.
The effective tax rate was 29% for 2006 compared to 20% for 2005. The effective tax rate in both years differs from the statutory tax rate of 35% primarily due to tax exempt investment income.
At December 31, 2006, our investment portfolio increased 14% to $7.5 billion from $6.6 billion at December 31, 2005. Net unrealized holding gains, net of taxes, on fixed maturities and equity securities were $462.5 million at December 31, 2006 compared to $302.5 million at December 31, 2005. Equity securities were $1.8 billion, or 23%, of our total investment portfolio at December 31, 2006 compared to $1.4 billion, or 21%, of our total investment portfolio at December 31, 2005.
Net cash provided by operating activities was $511.6 million for the year ended December 31, 2006 compared to $551.3 million for 2005. The decrease was primarily due to higher claim payments related to hurricanes and higher income tax payments in 2006 compared to 2005, offset in part by collections of related reinsurance balances, increased premium volume and cash received from reinsurance commutation agreements completed in 2006.
This release may contain forward-looking statements. This is a "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995 concerning forward-looking statements. It also contains general cautionary statements regarding our business, estimates and management assumptions. Future actual results may materially differ from those in any forward-looking statements because of many factors, including:
-- Gross and net loss estimates related to the 2005 Hurricanes are based upon currently available information related to covered exposures and assumptions about how coverage applies. As actual losses are reported, claims are adjusted and, as specific reinsurers are associated with those losses, both gross and net losses for the 2005 Hurricanes may change significantly. -- Adverse developments in insurance coverage litigation could result in material increases in our estimates of loss reserves. -- The costs and availability of reinsurance may impact our ability to write certain lines of business. -- Our anticipated premium volume is based on current knowledge and assumes no significant man-made or natural catastrophes, no significant changes in products or personnel and no adverse changes in market conditions. -- Changing legal and social trends and inherent uncertainties (including but not limited to those uncertainties associated with our asbestos and environmental reserves) in the loss estimation process can adversely impact the adequacy of loss reserves and the allowance for reinsurance recoverables. -- Regulatory actions can impede our ability to charge adequate rates and efficiently allocate capital. -- Economic conditions, volatility in interest and foreign exchange rates and concentration of investments can have a significant impact on the market value of fixed maturity and equity investments as well as on the carrying value of other assets and liabilities.
Our premium volume and underwriting and investment results have been and will continue to be potentially materially affected by these factors. Additional factors that could affect our business are discussed in our most recent reports on Forms 10-Q and 10-K. By making forward-looking statements, we do not intend to become obligated to publicly update or revise any such statements whether as a result of new information, future events or other changes. Readers are cautioned not to place undue reliance on any forward- looking statements, which speak only as at their dates.
Our previously announced conference call, which will involve discussion of our financial results and business developments and may include forward- looking information, will be held Thursday, January 25, 2007 at approximately 10:30 a.m. (Eastern Standard Time). Any person interested in listening to the call, or a replay of the call, which will be available from approximately two hours after the conclusion of the call until Friday, February 2, 2007, should contact Markel's Investor Relations Department at 804-747-0136. Investors, analysts and the general public may also listen to the call free over the Internet through Markel Corporation's web site, http://www.markelcorp.com. A replay of the call will also be available on this web site until Friday, February 2, 2007.
Markel Corporation markets and underwrites specialty insurance products and programs to a variety of niche markets. In each of these markets, the Company seeks to provide quality products and excellent customer service so that it can be a market leader. The financial goals of the Company are to earn consistent underwriting profits and superior investment returns to build shareholder value.
MARKEL CORPORATION AND SUBSIDIARIES Consolidated Statements of Income and Comprehensive Income Quarter Ended Year Ended December 31, December 31, 2006 2005 2006 2005 (dollars in thousands, except per share data) OPERATING REVENUES Earned premiums $ 558,750 $ 517,694 $2,184,381 $1,938,461 Net investment income 67,665 62,361 271,016 241,979 Net realized investment gains (losses) 23,758 (427) 63,608 19,708 Total Operating Revenues 650,173 579,628 2,519,005 2,200,148 OPERATING EXPENSES Losses and loss adjustment expenses 250,601 227,999 1,132,579 1,299,983 Underwriting, acquisition and insurance expenses 216,520 177,455 767,853 650,323 Total Operating Expenses 467,121 405,454 1,900,432 1,950,306 Operating Income 183,052 174,174 618,573 249,842 Interest expense 17,364 15,700 65,172 63,842 Income Before Income Taxes 165,688 158,474 553,401 186,000 Income tax expense 44,306 35,346 160,899 38,085 Net Income $ 121,382 $ 123,128 $ 392,502 $ 147,915 OTHER COMPREHENSIVE INCOME (LOSS) Net unrealized gains (losses) on securities, net of taxes: Net holding gains (losses) arising during the period $ 133,480 $ (14,509) $ 201,318 $ (61,755) Less reclassification adjustments for net gains (losses) included in net income (15,442) 278 (41,345) (12,810) Net unrealized gains (losses) 118,038 (14,231) 159,973 (74,565) Currency translation adjustments, net of taxes (2,482) 989 (1,680) (9,709) Net unrealized pension loss, net of taxes (25,013) - (25,013) - Total Other Comprehensive Income (Loss) 90,543 (13,242) 133,280 (84,274) Comprehensive Income $ 211,925 $ 109,886 $ 525,782 $ 63,641 NET INCOME PER SHARE Basic $ 12.41 $ 12.57 $40.43 $15.05 Diluted $ 12.17 $ 12.21 $39.40 $14.80 Selected Data (dollars and shares in thousands, December 31, December 31, except per share data) 2006 2005 Total investments and cash and cash equivalents $ 7,535,295 $ 6,588,222 Reinsurance recoverable on paid and unpaid losses 1,362,456 1,915,611 Goodwill 339,717 339,717 Total assets 10,088,131 9,814,098 Unpaid losses and loss adjustment expenses 5,583,879 5,863,677 Unearned premiums 1,007,801 993,737 Convertible notes payable - 98,891 Senior long-term debt 751,978 608,945 Junior Subordinated Deferrable Interest Debentures 106,379 141,045 Total shareholders' equity 2,296,393 1,705,433 Book value per share $ 229.78 $ 174.04 Common shares outstanding 9,994 9,799 Markel Corporation Segment Reporting Disclosures For the Quarters and Years Ended December 31, 2006 and 2005 Segment Gross Written Premiums Quarter Ended December 31, Year Ended December 31, 2006 2005 (dollars in thousands) 2006 2005 $ 346,264 $ 387,636 Excess and Surplus Lines $1,465,725 $1,439,744 70,391 68,744 Specialty Admitted 340,483 318,717 147,743 138,430 London Insurance Market 729,160 640,986 261 (39) Other 862 1,887 $ 564,659 $ 594,771 Consolidated $2,536,230 $2,401,334 Segment Net Written Premiums Quarter Ended December 31, Year Ended December 31, 2006 2005 (dollars in thousands) 2006 2005 $ 293,116 $ 317,280 Excess and Surplus Lines $1,228,797 $1,160,948 65,158 66,229 Specialty Admitted 322,466 299,665 137,776 118,938 London Insurance Market 643,485 510,836 15 (60) Other 197 1,145 $ 496,065 $ 502,387 Consolidated $2,194,945 $1,972,594 Segment Revenues Quarter Ended December 31, Year Ended December 31, 2006 2005 (dollars in thousands) 2006 2005 $ 309,528 $ 301,518 Excess and Surplus Lines $1,242,184 $1,138,525 80,125 77,685 Specialty Admitted 317,401 291,273 169,082 138,551 London Insurance Market 624,599 507,518 91,423 61,934 Investing 334,624 261,687 15 (60) Other 197 1,145 $ 650,173 $ 579,628 Consolidated $2,519,005 $2,200,148 Reconciliation of Segment Profit (Loss) to Consolidated Operating Income Quarter Ended December 31, Year Ended December 31, 2006 2005 (dollars in thousands) 2006 2005 $ 62,130 $ 128,267 Excess and Surplus Lines $ 279,315 $ 96,180 8,652 25,556 Specialty Admitted 28,096 50,261 21,389 (40,784) London Insurance Market (24) (129,491) 91,423 61,934 Investing 334,624 261,687 (542) (799) Other (23,438) (28,795) $ 183,052 $ 174,174 Consolidated $ 618,573 $ 249,842 Combined Ratios Quarter Ended December 31, Year Ended December 31, 2006 2005 2006 2005 80% 57% Excess and Surplus Lines 78% 92% 89% 67% Specialty Admitted 91% 83% 87% 129% London Insurance Market 100% 126% NM NM Other NM NM 84% 78% Consolidated 87% 101% NM -- Ratio is not meaningful.
SOURCE Markel Corporation
Bruce Kay of Markel Corporation, +1-804-747-0136