Markel Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. The registrant in this filing is Markel Corporation, a specialty insurer and diversified financial holding company with non-insurance businesses.
Financial performance
- Operating revenues: $819.9 million, up 12% from $733.1 million. Earned premiums rose 7% to $564.6 million; other revenues increased to $172.7 million from $111.8 million, largely reflecting growth in non-insurance operations and acquisitions.
- Earnings: Operating income was $141.4 million versus $96.7 million. Net income attributable to shareholders was $88.9 million ($9.53 basic and $9.50 diluted per share), compared with $57.3 million ($5.94 basic and $5.92 diluted). Management attributed the improvement primarily to stronger underwriting.
- Underwriting: Underwriting profit was $48.0 million versus $2.4 million. The consolidated combined ratio improved to 91% from 100%; Q1 2012 included about four points of expense from prospective adoption of an accounting standard. Excluding that effect, the 2013 ratio was still improved, with favorable prior-year reserve development and lower attritional losses contributing.
- Investments: Net investment income declined to $64.6 million from $79.8 million, partly because of lower fixed-maturity holdings and a smaller favorable fair-value change on a credit default swap. Net realized investment gains rose to $17.9 million from $11.9 million. Comprehensive income attributable to shareholders was $257.7 million, including $169.6 million of after-tax unrealized investment gains.
- Cash flow: Operating activities provided $55.6 million, versus $64.4 million used in Q1 2012. Investing activities used $353.3 million, primarily reflecting a $410.7 million increase in short-term investments and acquisitions. Financing activities provided $231.2 million. Cash and cash equivalents ended the quarter at $899.1 million, down from $973.2 million at year-end.
- Financial position: Total assets were $13.12 billion; shareholders’ equity was $4.15 billion. Book value per share rose to $431.10 from $403.85 at December 31, 2012. Invested assets were approximately $9.8 billion, with equity securities comprising 28% versus 26% at year-end.
- Debt and liquidity: Debt was $1.73 billion, up from $1.49 billion; debt-to-capital was 29% versus 28%, against a stated target capital structure of approximately 30% debt. The company issued $500 million of senior notes in March and repaid $246.7 million of 6.80% notes in February. Management said it believed available liquidity was sufficient for capital needs.
Changes, outlook, and notable matters
- Gross premium volume increased 15% to $743.3 million and net written premiums increased 14% to $663.0 million. Specialty Admitted growth included Hagerty business and Thomco; earned premiums in that segment rose 19%. Management reported modest price increases across many lines and said it would not write business where pricing did not support underwriting targets.
- Segment combined ratios were 77% for Excess and Surplus Lines (96% in Q1 2012), 109% for Specialty Admitted (113%), and 92% for the London Insurance Market (97%). Specialty Admitted remained above 100%, indicating an underwriting loss. Favorable prior-year reserve development totaled $78.1 million, including $7.4 million related to Hurricane Sandy in Excess and Surplus Lines and $2.0 million in Specialty Admitted.
- Markel Ventures revenue was $161.5 million versus $97.0 million, and EBITDA was $19.4 million versus $9.4 million. Management cited improved results at AMF Bakery Systems and the acquisition of Havco WP LLC.
- Markel had completed its acquisition of Essentia Insurance Company on January 1, 2013. The proposed Alterra merger, valued at approximately $3.1 billion based on the agreement-date share price, was approved by both companies’ shareholders and was expected to close May 1, 2013. Markel expected its shareholders to own approximately 69% of the combined company. The newly issued notes could be subject to redemption if the transaction did not close under specified terms.
- No numerical earnings or premium guidance was provided. Management emphasized underwriting discipline, liquidity, and flexibility in allocating capital. It also cautioned that investment values, insurance pricing, claims, and results may vary.
- Key risks include catastrophe frequency and severity, reserve-estimation uncertainty and litigation, reinsurance availability and collectability, investment-market and credit risks (including municipal and sovereign debt), acquisition execution and integration, and economic conditions affecting non-insurance businesses. The filing said ordinary-course contingencies were not expected to materially affect financial condition or results.
Important facts for investors to verify
- How much of the underwriting improvement reflects sustainable current-year performance versus favorable prior-year reserve development and the Q1 2012 accounting-comparison effect.
- Whether Specialty Admitted can bring its combined ratio below 100%, and the contribution and retention of Hagerty and Thomco business.
- The final Alterra closing terms, funding, integration costs, synergies, and effects on leverage, ownership, and reported results.
- Investment portfolio sensitivity to equity prices, interest rates, credit spreads, and unrealized gains; also monitor the Level 3 credit default swap and its fair-value assumptions.
- Cash, short-term investment, and debt levels following the Alterra transaction, alongside loss-reserve development and reinsurance recoverables.