Markel Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative period is Q1 2015. The filing is by Markel Corporation, a specialty insurance and reinsurance underwriter and owner of industrial and service businesses through Markel Ventures. Financial amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q1 2016 | Q1 2015 or prior date |
|---|---|---|
| Total operating revenues | $1.376 billion | $1.302 billion |
| Operating income | $245.2 million | $268.8 million |
| Net income attributable to shareholders | $160.4 million | $191.0 million |
| Diluted earnings per share | $11.15 | $13.49 |
| Underwriting profit | $119.0 million | $156.0 million |
| Consolidated combined ratio | 88% | 83% |
| Net investment income / realized investment gains | $91.3 million / $21.2 million | $92.9 million / $5.6 million |
| Net cash from operating activities | $(104.6) million | $22.8 million |
| Total assets / shareholders’ equity | $25.7 billion / $8.2 billion | $24.9 billion / $7.8 billion at December 31, 2015 |
| Debt; debt-to-capital ratio | $2.30 billion; 22% | $2.24 billion at December 31, 2015; 22% |
- Premiums earned rose 1% to $957.7 million; net written premiums rose to $1.182 billion from $1.035 billion. Gross premium volume increased 11% to $1.393 billion, and net retention rose to 85% from 83%.
- Comprehensive income attributable to shareholders was $397.0 million, versus $281.8 million. The increase chiefly reflected $225.8 million in after-tax unrealized investment gains; these gains are not equivalent to realized earnings.
- At March 31, cash and cash equivalents were $2.284 billion, restricted cash was $454.5 million, and total investments were $15.793 billion. Management reported invested assets of $18.5 billion, including cash and restricted cash, and said liquidity was sufficient for capital needs. Shareholders’ book value per share increased to $589.86 from $561.23 at year-end.
Changes versus the prior comparable period
- Revenue increased about 6%, but operating income fell about 9% and shareholder net income fell about 16%. Higher other revenue, particularly from Markel Ventures, was more than offset at the operating-income level by higher expenses and weaker underwriting profit.
- The combined ratio worsened to 88% from 83%. Favorable prior-year reserve development was $118.3 million versus $167.3 million in Q1 2015; the prior-year comparison included reserve releases related to reduced reserve volatility after a retroactive reinsurance transaction.
- Segment combined ratios were 89% for U.S. Insurance (84% in 2015), 95% for International Insurance (73%), and 82% for Reinsurance (89%). Reinsurance improved, while U.S. and International Insurance weakened.
- Markel Ventures operating revenue increased to $286.5 million from $245.4 million, and EBITDA increased to $41.1 million from $33.6 million. Management attributed growth to CapTech, acquired in December 2015, and stronger sales in certain manufacturing businesses.
- Operating cash flow shifted to an outflow, which management attributed to increased claims payments, employee profit-sharing and income-tax payments. Investing cash outflow was $243.9 million, including purchases of fixed maturities and equity securities.
Outlook, management commentary, risks and unusual items
- No quantified earnings or premium guidance was provided. Management emphasized its long-term goal of compounding book value per share and its underwriting discipline: it may forgo business when pricing does not support underwriting-profit targets. It reported small price decreases across many product lines, especially internationally, and pricing pressure in large accounts.
- Management cited lower current accident-year loss estimates across several lines, but also noted higher profit-sharing expense and commissions. It raised required rates for classes affected by adverse medical-malpractice and specified-medical reserve development.
- On April 5, 2016, the company issued $400 million of 5.0% unsecured notes due 2046, receiving $392.3 million net proceeds. It used part of the proceeds for tenders of higher-coupon notes and expected to retire $90.6 million of 7.20% notes at maturity in April 2017. The company expected a second-quarter loss of approximately $44 million on early debt extinguishment.
- Investment-market risks include equity-price, interest-rate, foreign-currency and credit risk. The company reported an average fixed-maturity rating of AA, with approximately 98% rated A or better, and less than 1% unrated or below investment grade. It cautioned that market declines could lead to further impairment charges.
- Other key risks include catastrophe severity and frequency, reserve-estimation uncertainty, reinsurance collectability and availability, pricing competition, acquisition integration, regulatory and economic changes, and market volatility. The filing added the potential effect of a U.K. vote to leave the E.U., including possible restrictions on the company’s ability to operate in E.U. markets.
- Contingencies arising in the ordinary course were not expected by management to materially affect financial condition or results. The IRS completed its examination of the 2012 federal return without adjustment to tax liabilities. The filing disclosed notices of vessels entering Iranian waters under global marine hull war policies; the company reported no specific Iran-related risk placement and no known reportable premium apportionment for the quarter.
Important facts for investors to verify
- Whether subsequent quarters sustain underwriting profitability, and whether the higher combined ratio reflects durable claims or expense trends rather than comparison-period reserve releases.
- Further development of loss reserves, particularly the medical-malpractice and specified-medical classes, and the effects of reserve estimates and reinsurance recoverables.
- Cash-flow trends and liquidity needs, including claims payments, investment purchases and restricted cash availability.
- The realized financial impact of the April 2016 debt refinancing, including the expected $44 million extinguishment loss and planned use of proceeds.
- Whether Markel Ventures growth and acquired-business performance continue, and how investment-market movements affect comprehensive income, book value and impairment charges.
- Potential effects of U.K.-E.U. developments and other regulatory, catastrophe, market and geopolitical risks on underwriting and investment results.