Markel Corporation — Q3 2016 Form 10-Q
Business context and period: Specialty insurance and reinsurance, investment, and Markel Ventures operations. This unaudited filing covers the quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods unless otherwise noted. Amounts below are in millions, except per-share data and ratios.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total operating revenues | $1,431.3 | $1,342.8 | $4,183.4 | $3,949.5 |
| Net income to shareholders | $83.8 | $102.5 | $323.0 | $384.9 |
| Diluted earnings per share | $5.60 | $7.39 | $22.16 | $27.60 |
| Underwriting profit | $22.3 | $113.3 | $205.1 | $311.0 |
| Consolidated combined ratio | 98% | 88% | 93% | 89% |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $324.4 | $550.4 |
- Q3 earned premiums were $974.2 million, up 1%; net investment income was $93.1 million, up 7%. Net realized investment gains were $27.4 million, versus a $14.7 million loss in Q3 2015.
- For the first nine months, earned premiums were $2,882.8 million, up 1%; net investment income was $279.4 million, up 3%; and net realized investment gains were $65.8 million, compared with a $3.0 million loss. The 2016 total included $12.1 million of other-than-temporary impairment losses.
- Q3 and nine-month underwriting profit fell substantially, principally reflecting less favorable prior-year reserve development. Markel reported $50.1 million of Q3 losses from management actions on medical malpractice and specified medical lines, including $36.5 million of prior-year reserve strengthening. Nine-month adverse development on those lines totaled $71.4 million.
- Q3 segment combined ratios were 101% U.S. Insurance, 91% International Insurance, and 94% Reinsurance. Nine-month ratios were 95%, 95%, and 87%, respectively. A ratio above 100% represents an underwriting loss.
- Markel Ventures revenue was $905.6 million for nine months, versus $784.2 million; net income to shareholders was $49.5 million versus $14.4 million, and EBITDA was $133.8 million versus $76.3 million. Results included CapTech, acquired in December 2015, and a $10.3 million Q3 expense for increased estimated CapTech contingent consideration.
Financial position and liquidity
- At September 30, total assets were $26.4 billion and shareholders’ equity was $8.5 billion, compared with $24.9 billion and $7.8 billion at December 31, 2015. Book value per share rose to $609.48 from $561.23.
- Investments, cash, and restricted cash totaled $19.4 billion, up from $18.2 billion at year-end. Available-for-sale investments were $16.8 billion. Cash and cash equivalents were $2.16 billion, down from $2.63 billion.
- Senior long-term and other debt was $2.59 billion, versus $2.24 billion at year-end. The debt-to-capital ratio was 23%, up from 22%; management cited a target capital structure of approximately 30% debt and said liquidity was sufficient for capital needs.
- Nine-month investing cash outflow was $994.6 million, reflecting increased purchases of fixed maturities and equity securities. Financing cash inflow was $203.0 million. Operating cash flow declined to $324.4 million from $550.4 million, with management citing higher claims and profit-sharing payments and a $51.9 million commutation payment.
- Comprehensive income to shareholders was $696.1 million for nine months, including $378.0 million of after-tax unrealized investment gains in other comprehensive income.
Changes, outlook, and material items
- In Q2, Markel issued $500 million of 5.0% senior notes due 2046 and used part of the proceeds to repurchase portions of higher-coupon debt. The transactions produced a $44.1 million early-extinguishment loss in the first nine months; the company said the refinancing extended average maturities at a more favorable interest rate. It expected to use proceeds to retire $90.6 million of 7.20% notes due in April 2017.
- Management reported modest pricing decreases across many lines, particularly international property and marine/energy, and continued strong reinsurance competition. It said it would not write business when prevailing prices did not support underwriting-profit targets. No specific earnings or premium guidance was provided.
- After quarter-end, Hurricane Matthew caused losses in the Caribbean and U.S. Southeast and mid-Atlantic. Markel preliminarily estimated net incurred losses of $40–$100 million before tax, to be recorded in Q4; claims data and potential business-interruption losses remained incomplete.
- Life and annuity reserves increased $57.5 million for nine months because of lower market yields on supporting investments; the corresponding adjustment reduced unrealized gains in other comprehensive income. A&E reserves remain subject to substantial uncertainty and are projected to pay out over 40–50 years; reinsurance recoverables were 63% of gross A&E reserves.
- Management identified reserve estimation, catastrophe activity, reinsurance recoverability, market and currency volatility, competition, and Brexit as risks. Brexit could affect access to EU markets for the London-based insurance operations and potentially require relocation of European operations.
Important facts for investors to verify
- Track medical malpractice and specified medical claim frequency, subsequent reserve development, and whether corrective underwriting actions improve results.
- Monitor the development of Hurricane Matthew claims relative to the preliminary $40–$100 million pretax estimate.
- Review the quality and sustainability of prior-year reserve releases, particularly given weaker favorable development than in 2015.
- Assess operating cash-flow trends, debt maturities and refinancing, and the impact of investment-market changes on book value and reported earnings.
- Check CapTech’s performance and contingent consideration, as well as Brexit’s implications for Markel’s EU business access.