Why did Markel report an underwriting loss in 2005?

The filing states the 2005 underwriting loss was primarily due to losses related to Hurricanes Katrina, Rita and Wilma, which totaled $246.3 million of estimated losses, including $188.7 million of net losses and $57.6 million of additional reinsurance costs. Prior-year reserve development was favorable by $50.6 million, partially offsetting these costs, but the London Insurance Market segment also posted a significant underwriting loss.

What is the status of the SEC inquiry disclosed in the filing?

In late October 2005, the company received a subpoena from the SEC's Northeast Regional Office as part of an inquiry into certain loss mitigation insurance products. The subpoena sought documents concerning transactions in Fairfax Financial Holdings Limited securities and 'Non-Traditional Product' transactions between the company and Fairfax. The company states it fully cooperated and believes it has provided all information requested, and management does not expect the contingency to have a material impact on financial condition or results.

Does Markel pay dividends and what is its capital return policy?

The company states its current strategy is to retain earnings, and it has not paid and does not expect to pay a cash dividend on its common stock. In August 2005 the Board approved a repurchase of up to $200 million of common stock, under which the company repurchased 19,400 shares for $6.3 million in 2005 and an additional 129,200 shares for $42.4 million after year-end.

How did the company's investment portfolio perform in 2005?

The investment portfolio's ending balance was $6.57 billion, and net investment income was $242.0 million. Net realized investment gains were $19.7 million, but net unrealized holding gains decreased by $74.6 million, net of taxes, reflecting higher interest rates and pricing pressure in the property and casualty equity holdings. Taxable equivalent total investment return was 1.5% for 2005 versus 7.9% in 2004.

What is the company's planned investment in First Market Bank?

The company has agreed to make a minority investment in common and preferred equity of First Market Bank, a Richmond, Virginia thrift institution. The company filed an application with the Office of Thrift Supervision to become a thrift holding company. The transaction is subject to customary closing conditions, including regulatory approvals, and is expected to close in 2006.

MKL 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 3, 2006. Cited figures are marked; the original filing is the authoritative source.

Markel Corporation's 2005 Form 10-K reports net income of $147.9 million^a, down from $165.4 million in 2004, with diluted net income per share of $14.80 versus $16.41.

The decline was driven primarily by an underwriting loss of $11.8 million^b, compared with an underwriting profit of $72.1 million in 2004, largely due to losses from Hurricanes Katrina, Rita and Wilma. The consolidated U.S. GAAP combined ratio rose to 101% from 96%, and the filing attributes $246.3 million of estimated hurricane losses, or 12 points on the combined ratio, to the 2005 hurricanes. Partially offsetting this, net investment income rose to $242.0 million from $204.0 million, and book value per share increased 3% to $174.04.

The company operates in three specialty insurance segments: Excess and Surplus Lines (gross premium volume of $1.44 billion^c, underwriting profit of $96.2 million), Specialty Admitted ($318.7 million gross premium volume, underwriting profit of $50.3 million), and the London Insurance Market ($641.0 million gross premium volume, underwriting loss of $129.5 million). Total shareholders' equity was $1.71 billion, and total assets were $9.81 billion. Net cash from operating activities declined to $551.3 million from $690.7 million.

The filing also discloses a Securities and Exchange Commission subpoena received in October 2005 relating to an inquiry into certain loss mitigation insurance products, which the company says it has fully cooperated with. Management also disclosed a pending investment in First Market Bank, expected to close in 2006, and a share repurchase program of up to $200 million^d approved in August 2005. The company states it has not paid a cash dividend and does not expect to do so, choosing instead to retain earnings.

02—Key points

Key Highlights

Net income fell 11% to $147.9 million in 2005 from $165.4 million in 2004; diluted EPS was $14.80 versus $16.41.
Underwriting loss of $11.8 million in 2005 versus an underwriting profit of $72.1 million in 2004; consolidated combined ratio rose to 101% from 96%.
2005 Hurricanes Katrina, Rita and Wilma produced $246.3 million of estimated losses, representing 12 points on the combined ratio.
Net investment income increased to $242.0 million from $204.0 million; taxable equivalent total investment return declined to 1.5% from 7.9%.
Book value per share rose 3% to $174.04, with a five-year compound annual growth rate of 11%; the company's target is 20%.
London Insurance Market segment posted a $129.5 million underwriting loss with a 126% combined ratio, while Excess and Surplus Lines earned a $96.2 million underwriting profit.
Unpaid losses and loss adjustment expenses totaled $5.86 billion; the filing notes asbestos and environmental reserve development of $31.3 million in 2005.

03—Questions

Frequently Asked Questions

Why did Markel report an underwriting loss in 2005?
The filing states the 2005 underwriting loss was primarily due to losses related to Hurricanes Katrina, Rita and Wilma, which totaled $246.3 million of estimated losses, including $188.7 million of net losses and $57.6 million of additional reinsurance costs. Prior-year reserve development was favorable by $50.6 million, partially offsetting these costs, but the London Insurance Market segment also posted a significant underwriting loss.
What is the status of the SEC inquiry disclosed in the filing?
In late October 2005, the company received a subpoena from the SEC's Northeast Regional Office as part of an inquiry into certain loss mitigation insurance products. The subpoena sought documents concerning transactions in Fairfax Financial Holdings Limited securities and 'Non-Traditional Product' transactions between the company and Fairfax. The company states it fully cooperated and believes it has provided all information requested, and management does not expect the contingency to have a material impact on financial condition or results.
Does Markel pay dividends and what is its capital return policy?
The company states its current strategy is to retain earnings, and it has not paid and does not expect to pay a cash dividend on its common stock. In August 2005 the Board approved a repurchase of up to $200 million of common stock, under which the company repurchased 19,400 shares for $6.3 million in 2005 and an additional 129,200 shares for $42.4 million after year-end.
How did the company's investment portfolio perform in 2005?
The investment portfolio's ending balance was $6.57 billion, and net investment income was $242.0 million. Net realized investment gains were $19.7 million, but net unrealized holding gains decreased by $74.6 million, net of taxes, reflecting higher interest rates and pricing pressure in the property and casualty equity holdings. Taxable equivalent total investment return was 1.5% for 2005 versus 7.9% in 2004.
What is the company's planned investment in First Market Bank?
The company has agreed to make a minority investment in common and preferred equity of First Market Bank, a Richmond, Virginia thrift institution. The company filed an application with the Office of Thrift Supervision to become a thrift holding company. The transaction is subject to customary closing conditions, including regulatory approvals, and is expected to close in 2006.

04—Continue

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