Markel Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; balance-sheet comparisons are to December 31, 2010. The filing identifies the registrant as Markel Corporation. Unless stated otherwise, dollar amounts below are in millions.
Business context and financial results
Markel is a specialty insurance and financial holding company, with Excess and Surplus Lines, Specialty Admitted, and London Insurance Market insurance segments, as well as non-insurance businesses. Management describes growth in book value per share over time as its key measure of financial success.
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Total operating revenues | $621.6 | $536.7 |
| Earned premiums | $463.1 | $412.1 |
| Operating income | $30.4 | $80.5 |
| Income before taxes | $11.5 | $62.6 |
| Net income to shareholders | $8.3; $0.85 diluted EPS | $42.6; $4.33 diluted EPS |
| Net investment income / realized investment gains | $70.1 / $11.2 | $68.4 / $15.7 |
| Underwriting result / consolidated combined ratio | Loss of $53.6 / 112% | Loss of $4.7 / 101% |
| Operating cash flow | $(9.2) | $4.3 |
| Cash and cash equivalents at period-end | $649.9 | $745.3 at Dec. 31, 2010 |
Financial position and material changes
- Total assets were $11.04 billion and total equity was $3.26 billion at March 31, 2011. Shareholders’ equity was $3.20 billion.
- Investments totaled $7.61 billion: fixed maturities $5.39 billion, equities $1.78 billion, and short-term investments $434.5 million. Including cash, the investment portfolio was approximately $8.3 billion; equities were 22% of invested assets.
- Debt was $1.03 billion. Debt to total capital was 24%, unchanged from year-end; management’s target capital structure includes approximately 30% debt. Management said it believed liquidity was sufficient and cited holding-company invested assets, subsidiary dividends, a revolving credit facility, and capital markets as funding sources.
- Book value per share increased to $329.09 from $326.36 at year-end, primarily reflecting $24.7 million of comprehensive income to shareholders.
- Gross premium volume rose 21% to $590.8 million and net written premiums rose to $519.0 million from $446.5 million. Earned premiums increased 12%. Specialty Admitted growth included FirstComp; London growth reflected, among other factors, Elliott Special Risks moving to a risk-bearing operation. Excess and Surplus Lines premiums declined.
- Net income to shareholders fell to $8.3 million from $42.6 million, chiefly because underwriting deteriorated amid catastrophe losses. The consolidated combined ratio rose to 112% from 101%; a ratio above 100% represents an underwriting loss. Net investment income increased modestly, while realized gains declined. Comprehensive income to shareholders was $24.7 million versus $134.5 million, also reflecting lower investment unrealized gains.
- Non-insurance revenue increased to $68.0 million from $37.2 million, primarily following the 2010 acquisitions of RetailData and Diamond Healthcare. The acquisitions’ purchase-price allocation was completed in Q1; the filing reports $75.9 million of goodwill, $58.3 million of other intangibles, and $47.3 million of noncontrolling interests recognized in connection with them.
Underwriting, outlook, and risks
- Q1 2011 catastrophe losses from Australian floods and earthquakes in New Zealand and Japan totaled an estimated $68.7 million of underwriting loss, or 15 combined-ratio points. The London segment also recorded an estimated $13.0 million underwriting loss from the Gryphon vessel damage. London’s combined ratio was 152%, versus 109% a year earlier; Excess and Surplus Lines improved to 84% from 96%, while Specialty Admitted was 104% versus 105%.
- Prior-year reserve development was favorable by $74.5 million overall, including $56.8 million in Excess and Surplus Lines. A significant portion of liabilities on a mortgage-servicing errors-and-omissions program was resolved, reducing prior-year reserves by $15.8 million. These reserve releases partly offset current-period catastrophe claims.
- Management said catastrophe estimates were based on information then available but could be highly volatile because loss reports were arriving slowly; it intended to monitor claims and revise estimates as needed. It also cautioned that competitive pricing remained intense and market rates were generally below its targeted levels, potentially constraining premium volume.
- Management gave no specific earnings or premium guidance in the supplied filing text. It noted that non-insurance results depend on economic conditions and that investment values may be affected by market volatility. Other stated risks include catastrophe frequency and severity, reserve uncertainty and inflation, reinsurance cost and collectability, municipal-bond defaults, regulatory changes, acquisitions, and changes in interest and foreign-exchange rates.
- There were no investment other-than-temporary impairment write-downs in Q1 2011; Q1 2010 included $2.4 million. At March 31, securities had $58.5 million of gross unrealized losses, less than 1% of invested assets; management reported no identified other-than-temporary declines but warned further market declines could cause future charges.
- Operating cash flow was negative; management attributed cash-flow movements in both comparison periods in part to the timing of profit-sharing, agent-incentive, and pension payments. Investing activities used $91.5 million, versus $230.6 million in Q1 2010, primarily due to lower investment purchases.
Key facts for investors to verify
- Subsequent catastrophe claims and reinsurance recoveries compared with Q1 loss estimates, especially for Japan, New Zealand, Australia, and the Gryphon vessel.
- Whether favorable prior-year reserve development, including the mortgage-servicing E&O reserve reduction, proves sustainable and adequate.
- FirstComp’s underwriting performance and the effect of acquisition-related operations on Specialty Admitted results and expenses.
- Changes in premium volume and pricing discipline, particularly in Excess and Surplus Lines, and the renewal of reinsurance protection and its cost.
- Investment portfolio valuations and credit exposure, notably municipal bonds, equity securities, and the credit default swap; also monitor liquidity and debt levels.