Markel Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; unaudited. The filing registrant is Markel Corporation, although the request metadata identifies Markel Group Inc.
Business context
Markel operates specialty Insurance and Reinsurance businesses, an investment portfolio, and Markel Ventures, a group of businesses outside insurance. The filing describes its long-term objective as generating underwriting and operating profits and investment returns. Markel Ventures results are generally consolidated on a one-month lag.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Total operating revenues | $1.792B | $3.501B | $4.398B | $6.401B |
| Net income (loss) to common shareholders | $(934.4)M | $774.1M | $(987.2)M | $1.348B |
| Diluted earnings (loss) per share | $(69.19) | $57.02 | $(75.68) | $99.03 |
| Underwriting profit | $164.8M | $204.7M | $361.9M | $295.8M |
| Combined ratio | 91.0% | 86.9% | 89.9% | 90.4% |
| Net investment income | $93.7M | $96.3M | $166.4M | $192.8M |
| Net investment gains (losses) | $(1.555)B | $674.8M | $(1.913)B | $1.202B |
Earned premiums rose 17% year over year in both Q2 ($1.833B) and the first half ($3.593B). First-half net cash from operating activities was $921.0M, versus $813.2M a year earlier. Cash, cash equivalents and restricted cash totaled $4.911B at June 30.
At June 30, total assets were $47.947B, total liabilities $34.684B, shareholders’ equity $12.756B and debt $4.502B. Consolidated debt to capital was 26%, up from 23% at year-end 2021. Book value per common share declined 13%, from $1,036.20 at year-end to $898.53.
Material changes versus prior periods
- Investment markets drove the reported loss: first-half net investment losses were $1.913B, compared with gains of $1.202B in 2021. Equity-security fair-value declines were the main source of investment losses; rising interest rates reduced fixed-maturity values.
- Available-for-sale investments had $630.8M of gross unrealized losses at June 30, compared with $63.2M at December 31. Markel reported no allowance for credit losses and said it did not intend, or expect to be required, to sell the securities before recovery of amortized cost.
- Underwriting premiums grew, and first-half underwriting profit increased 22%; however, Q2 underwriting profit fell 19%. The Q2 combined ratio worsened by 4.1 points, primarily because prior-year reserve development was less favorable.
- Insurance and Reinsurance combined ratios for Q2 were 89.4% and 98.5%, respectively. First-half favorable prior-year reserve development was $122.7M, down from $226.1M a year earlier.
- Markel Ventures first-half revenue rose 30% to $2.312B, supported by acquisitions and higher demand/prices, while operating income fell 2% to $156.8M. Higher materials and labor costs weighed on results.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Management said rate increases remained favorable across most lines but were moderating; workers’ compensation continued to see low-single-digit rate decreases. Inflation and social inflation increased uncertainty around longer-tail claim costs.
- Russia-Ukraine conflict losses for the first half were estimated at $105.0M gross and $35.0M net, plus $12.3M of net ceded reinstatement premiums. Management cautioned that estimates remain uncertain and additional losses or reserve changes could be material; reinsurance protection could be exhausted.
- Equity-market declines, rising interest rates, inflation, supply-chain disruptions, catastrophe activity, reserve uncertainty, reinsurance collectability and adverse claims/legal trends are identified risks.
- Markel paid $101.9M, net of insurance proceeds, in connection with the Markel CATCo buy-out, recorded as an expense. It also recognized a $107.3M gain on the sale of most of its Velocity managing general agent business. A sale of its controlling interest in Volante, with expected consideration of $155M, was anticipated to close in Q4 2022, subject to approvals and customary conditions.
- Markel prepaid $350M into a trust to fund retirement of 4.90% senior notes due July 1, 2022; the notes were retired on that date. No borrowings were outstanding on the parent revolving credit facility at June 30; Markel Ventures subsidiaries had $296.1M outstanding on their facilities.
- The board authorized up to $750M in common-stock repurchases in February; $668.2M remained available at June 30. First-half repurchases totaled $126.3M.
- Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting. The filing notes the pending Yeransian litigation and states Markel believes any material loss is remote.
Important facts for investors to verify
- How investment portfolio values and book value respond to market movements, and whether unrealized losses become realized or credit-related.
- Subsequent development of Russia-Ukraine and other catastrophe claims, including reinsurance recoveries, reinstatement premiums and reserve adequacy.
- Trends in long-tail claim frequency and severity, social inflation, and prior-year reserve development.
- Whether Markel Ventures can offset materials, labor and shipping inflation through pricing and other actions, and the effects of acquisitions.
- Completion and economics of the planned Volante sale, as well as residual exposures from CATCo and fronting arrangements.
- Debt, liquidity and capital deployment, including repurchases and the impact of market losses on capital measures.