Business context and reporting period
Markel Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2018. Markel operates specialty insurance and reinsurance businesses, an investment portfolio, Markel Ventures businesses, and a fee-based insurance fronting platform. Comparisons below are with the corresponding 2017 periods unless stated otherwise. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total operating revenues | $1.987 billion | $1.481 billion | $3.562 billion | $2.893 billion |
| Operating income | $311.3 million | $240.5 million | $416.3 million | $367.8 million |
| Net income to shareholders | $278.2 million | $149.7 million | $213.9 million | $219.5 million |
| Diluted earnings per share | $19.97 | $10.31 | $15.72 | $14.20 |
| Underwriting profit | $97.4 million | $109.3 million | $208.9 million | $106.9 million |
| Consolidated combined ratio | 92% | 89% | 91% | 95% |
| Net investment income | $105.4 million | $99.3 million | $213.4 million | $199.7 million |
| Operating cash flow | Not presented by quarter | $307.5 million | $237.9 million |
- Earned premiums increased 11% in Q2 and 14% in the first half, driven mainly by Insurance segment growth. Insurance gross premium volume rose 11% in Q2 and 15% for the half; Reinsurance gross premium volume declined 16% and 12%, respectively.
- Underwriting results improved for the first half, while the consolidated combined ratio worsened in Q2. Insurance’s ratio was 92% for Q2 and 90% for the half; Reinsurance’s was 90% and 94%.
- Net income to shareholders rose sharply in Q2 but was slightly lower for the first half. The Q2 result included an $86.2 million pretax foreign-exchange gain and $112.9 million of gains from changes in equity-security fair values. First-half net investment results included a $9.2 million equity fair-value loss.
- Prior-year reserve development was favorable by $265.6 million in the first half of 2018, versus $184.4 million in 2017. The filing notes this benefit is subject to uncertainty in loss estimates.
- At June 30, total assets were $33.25 billion, total investments $18.15 billion, cash and cash equivalents $1.95 billion, and restricted cash $299.0 million. Debt was $3.02 billion, down from $3.10 billion at year-end. Debt to capital was 24%, compared with 25% at December 31, 2017.
- Shareholders’ equity was $9.48 billion, broadly unchanged from year-end; book value per share declined to $682.76 from $683.55. The company reported a $10.5 million comprehensive loss to shareholders for the half-year.
- Operating cash flow was $307.5 million; investing activities used $445.6 million and financing activities used $111.5 million. Cash, cash equivalents and restricted cash totaled $2.24 billion at period-end, down $256.5 million from the start of the year.
Material changes, outlook, risks and unusual items
- Markel Ventures revenue increased to $578.9 million in Q2 and $971.1 million for the half, mainly reflecting acquisitions and higher sales. Operating income declined to $13.0 million and $36.8 million, respectively, partly due to a product-manufacturing matter: Markel recorded $33.5 million of estimated costs and a $14.9 million intangible-asset impairment. Additional costs cannot currently be estimated and could materially affect pretax income; management does not expect a material adverse effect on overall results or financial condition.
- The first-half effective tax rate was 47%, including a $102.0 million deferred U.S. tax provision after electing to treat two significant U.K. subsidiaries as U.S. taxpayers. Excluding that election and other discrete items, the estimated annual effective rate was 20%. The filing cites the U.S. corporate tax-rate reduction from 35% to 21% as a factor.
- Beginning in 2018, equity-security fair-value changes are recognized in net income rather than other comprehensive income. Adoption transferred $2.6 billion of cumulative after-tax unrealized gains from accumulated other comprehensive income to retained earnings; prior periods were not restated. Markel also early adopted a standard that reclassified $401.5 million of tax effects to retained earnings. These presentation changes affect period-to-period comparisons.
- A functional-currency reassessment increased foreign-currency remeasurement through net income. Markel reported a $64.0 million pretax foreign-exchange gain for the first half, versus $1.0 million in 2017, and described a financial-statement mismatch between some reserve effects in earnings and supporting-security effects in other comprehensive income.
- Management gave no specific earnings or premium-growth guidance. It reported more favorable rates, particularly for catastrophe-exposed and loss-affected business, but continued to characterize the broader property and casualty market as soft. Management says it will decline business when pricing does not support underwriting targets.
- Key exposures include catastrophe frequency and severity, reserve adequacy and reinsurance recoverability, investment-market and foreign-exchange volatility, and Brexit-related uncertainty. Markel obtained approval to establish an insurer in Munich to support access to EU markets if U.K. access is impaired. Following U.S. sanctions changes, non-U.S. subsidiaries said they had stopped new Iran-related transactions previously permitted under General License H and were winding down authorized activity.
- An Aspen acquisition-related contingent-value-rights dispute remains pending. The claimant seeks $47.3 million plus interest and other amounts; management considers a material loss remote and intends to defend the case. The filing also notes no material change in disclosure controls; an ERP system was implemented during Q2.
Important facts for investors to verify
- How much of earnings growth reflects recurring underwriting and operating performance versus foreign-exchange gains and equity-security mark-to-market changes.
- Whether favorable prior-year reserve development continues, and the sensitivity of reserves and reinsurance recoverables to adverse claims development.
- The ultimate cost and operational impact of the Markel Ventures product matter, including whether further charges are required.
- The sustainability of premium growth and pricing, particularly in Insurance and Reinsurance, alongside changes in retention and catastrophe exposure.
- The effect of the U.K. tax election, Brexit developments, and currency movements on future taxes, earnings and capital needs.
- Liquidity, debt levels and investment valuation exposure, including the reported unrealized losses on fixed maturities and the company’s ability to meet claims and other obligations.