Markel Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The filing is for Markel Corporation, a specialty insurer and reinsurer with investment, Markel Ventures, insurance-linked securities and program-services operations. Unless noted, amounts below are in U.S. dollars.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total operating revenues | $2.03bn | $2.24bn | $6.94bn | $5.80bn |
| Net income to shareholders | $205.6m | $409.4m | $1.279bn | $623.4m |
| Diluted earnings per share | $13.95 | $28.50 | $92.84 | $44.21 |
| Operating cash flow | Not separately presented by quarter | $712.0m | $763.2m |
- Quarterly revenue declined mainly because equity-security fair-value gains were much lower: $32.0m in Q3 2019 versus $426.6m in Q3 2018. For the nine months, such gains were $1.069bn versus $417.4m, materially boosting 2019 net income.
- Net investment income rose to $113.4m for Q3 and $339.4m year to date, from $106.3m and $319.7m, respectively. Net investment gains were $32.1m for Q3 and $1.070bn year to date.
- Underwriting profit was $72.7m for Q3, versus $6.5m, and $192.7m for nine months, versus $215.5m. Consolidated combined ratios were 94% and 95%, respectively, compared with 99% and 94% in 2018; below 100% indicates underwriting profit.
- Q3 underwriting improved chiefly through lower catastrophe losses and more favorable prior-year reserve development in Insurance. Year-to-date underwriting profit was lower, including because prior-year favorable reserve development declined to $336.9m from $389.7m.
- Markel Ventures operating revenue was $496.2m in Q3 and $1.568bn year to date. Operating income was $35.5m and $147.1m, respectively; nine-month operating income benefited from the absence of a $33.5m remediation-related charge and $14.9m intangible impairment recorded in 2018.
Financial position, debt and liquidity
- At September 30, 2019, total assets were $37.04bn, shareholders’ equity $10.62bn and book value per share $768.98, up from $653.85 at December 31, 2018.
- Investments totaled $18.73bn, including $6.98bn of equity securities. Invested assets including cash were $21.9bn; equity securities represented 32% of invested assets, versus 30% at year-end 2018.
- Cash and cash equivalents were $2.72bn and restricted cash $484.3m. Cash, cash equivalents and restricted cash totaled $3.20bn at period end.
- Senior long-term and other debt was $3.90bn, up from $3.01bn at year-end 2018; debt-to-capital was 27%, versus 25%. The company issued $1.4bn of senior notes during the first nine months, refinanced or repurchased certain outstanding notes, and recorded a $6.7m early-extinguishment loss. It redeemed a further $377m principal after quarter-end.
- A $300m revolving credit facility, expiring in April 2024, had no borrowings outstanding. Management stated it believed liquidity was sufficient for capital needs.
Changes, outlook and notable risks
- Gross premium volume in underwriting increased 11% for Q3 and 10% year to date. Management cited growth in Insurance, particularly general and professional liability, while Reinsurance premium volume was uneven and affected by non-renewals and treaty changes. Management described market pricing as improved in some lines but competitive overall, and said it would not write business that failed to meet its underwriting targets.
- Q3 catastrophe losses from Hurricane Dorian and Typhoon Faxai were estimated at $42.6m net. The company cautioned that estimates, particularly for Typhoon Faxai, remained uncertain. After quarter-end, it estimated Typhoon Hagibis net losses of $60m–$120m before tax, to be recorded in Q4.
- Markel CATCo is in run-off and will take an estimated three years to return investor capital. U.S. DOJ, SEC and Bermuda Monetary Authority inquiries into prior CATCo reserves remained ongoing; the company could not predict their outcome. Two senior executives departed. The related securities class action was voluntarily dismissed, while a former executive’s claims were in confidential binding arbitration.
- The company reported maximum net uncollateralized exposure of $191.6m on certain reinsurance contracts entered into for Markel CATCo Re. Separately, it noted potential underwriting exposure under a Nephila program if losses exceed a specified limit it considers unlikely to be exceeded.
- A Markel Ventures product-manufacturing matter had $21.4m accrued at September 30; additional costs could not be estimated and could materially affect pretax income, although management did not expect a material adverse effect on results or financial condition.
- Markel committed up to $100m to a new retrocessional insurance-linked fund expected to launch by January 1, 2020. It also acquired a minority interest in Hagerty for $212.5m.
- No specific consolidated earnings or premium guidance was provided. Management emphasized that catastrophe activity, reserve estimates, market conditions and the CATCo inquiries could cause results to vary materially. Brexit-related uncertainty remained a risk despite preparations to maintain EU business access.
Important facts for investors to verify
- How much 2019 earnings and book-value growth depended on equity-market gains, and how results perform excluding those fair-value movements.
- Whether catastrophe estimates for Dorian, Faxai and Hagibis develop materially, and whether prior-year reserve releases continue at a similar pace.
- The final regulatory and arbitration outcomes, costs and any additional liabilities related to CATCo, including the potential realization of uncollateralized exposure.
- Debt and liquidity following the post-quarter $377m note redemption, and the effect of higher debt and interest expense.
- Whether Markel Ventures growth, the Hagerty investment and the new Lodgepine fund deliver expected returns, and whether the product-manufacturing matter requires further accruals.