Markel Corporation — Form 10-Q, Third Quarter 2018
Reporting period: Quarter and nine months ended September 30, 2018. The filing identifies the registrant as Markel Corporation. Markel is a specialty insurance and reinsurance underwriter and owns a diversified group of non-insurance businesses through Markel Ventures.
Financial results and position
- Third-quarter revenue: $2.236 billion, versus $1.506 billion a year earlier. Net income attributable to shareholders was $409.4 million, compared with a $259.1 million loss; diluted EPS was $28.50, versus a loss of $18.82 per share. The large revenue and earnings swing was substantially affected by equity-security fair-value gains.
- Nine-month results: Revenue was $5.798 billion, versus $4.399 billion. Net income attributable to shareholders was $623.4 million, versus a $39.6 million loss; diluted EPS was $44.21, versus a loss of $4.52.
- Insurance underwriting: Earned premiums rose 8% in the quarter and 12% year to date. Consolidated underwriting profit was $6.5 million for the quarter and $215.5 million for nine months, versus losses of $372.5 million and $265.6 million in the comparable 2017 periods. Combined ratios improved to 99% for the quarter and 94% year to date, from 134% and 108%.
- Segment performance: Third-quarter Insurance combined ratio was 96%; Reinsurance was 115%. For nine months, the ratios were 92% and 100%, respectively. Markel Ventures revenue was $1.441 billion for nine months, up from $933.5 million; operating income was $60.4 million, down from $71.0 million.
- Investments: Net investment income was $106.3 million in the quarter and $319.7 million year to date. Equity-security fair-value gains were $426.6 million and $417.4 million, respectively. Nine-month net investment gains were $408.3 million, versus a $1.5 million loss in 2017.
- Cash flow and liquidity: Operating cash flow was $763.2 million for nine months, up from $598.7 million. Cash, cash equivalents and restricted cash totaled $2.627 billion at September 30. Invested assets, including cash and restricted cash, were $21.0 billion.
- Debt and capital: Debt was $2.993 billion, down from $3.099 billion at year-end 2017. The debt-to-capital ratio declined to 23% from 25%. Shareholders’ equity was $9.784 billion; book value per share was $704.70, versus $683.55 at year-end.
Material changes versus the prior period
- Lower catastrophe losses drove much of the underwriting improvement: 2018 Hurricane Florence and Typhoon Jebi losses were estimated at $75.7 million for the first nine months, versus $503.0 million from 2017 hurricanes and Mexico earthquakes.
- Prior-year reserve development was favorable by $389.7 million for nine months in 2018, compared with $335.5 million in 2017. These reserve releases materially benefited underwriting results.
- Markel adopted accounting guidance requiring changes in equity-security fair values to run through net income rather than other comprehensive income. Prior periods were not restated. The presentation change increases reported earnings volatility but does not change comprehensive income.
- Markel Ventures growth reflected acquisitions, including Costa Farms and State National-related operations, as well as higher sales. Year-to-date operating income was weighed down by a $33.5 million product-related investigation and remediation expense and a $14.9 million intangible-asset impairment.
- Nine-month net foreign-exchange gains rose to $65.4 million from $2.7 million, following a change in the functional-currency treatment of most foreign underwriting operations.
Outlook, risks and unusual items
- Management gave no specific earnings or premium guidance. It reported improved pricing particularly for catastrophe-exposed and loss-affected business, while describing the overall property-and-casualty market as soft. Management said it would not write business where pricing fails to support underwriting targets.
- After quarter-end, Markel estimated Hurricane Michael net losses of $60 million to $120 million before tax; claims were still developing and the estimate was to be recorded in the fourth quarter.
- Markel agreed to acquire Nephila for estimated cash consideration of $975 million, with closing expected in the fourth quarter of 2018, subject to customary conditions. In October, it acquired 90% of Brahmin for total consideration of $194 million, including $173.3 million cash.
- The product-related Markel Ventures matter could lead to additional costs that cannot yet be estimated and could materially affect pretax income, although management did not expect a material adverse effect on results or financial condition.
- A dispute over Aspen acquisition contingent value rights seeks $47.3 million plus interest and other damages. Management considers the claim without merit and any material loss remote.
- Risks highlighted include catastrophe frequency and severity, reserve and reinsurance uncertainty, investment-market volatility, Brexit-related access to European markets, and foreign-exchange exposure. Management noted that its European insurance restructuring depends on regulatory and court approvals.
- Management said liquidity was sufficient for capital needs. The planned Nephila purchase is a significant cash commitment. The company also reported a $102 million deferred U.S. tax provision related to electing to treat two U.K. subsidiaries as U.S. taxpayers.
Most important facts for investors to verify
- How much reported earnings depend on equity-security fair-value gains and on the accounting presentation change, rather than recurring underwriting and investment income.
- Whether favorable prior-year reserve development continues, and how catastrophe-loss estimates and reinsurance recoverables develop.
- Whether Reinsurance can sustain underwriting profitability and whether premium growth in Insurance continues at acceptable combined ratios.
- The ultimate cost and resolution of the Markel Ventures product matter, the Aspen CVR litigation, and Hurricane Michael claims.
- Funding and closing details for Nephila and Brahmin, and the effect of those transactions on liquidity and leverage.
- Brexit implementation and the approvals needed for European policy transfers and operating arrangements.