Markel Corporation — Q1 2018 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2018; unaudited consolidated results. Markel underwrites specialty insurance and reinsurance, owns Markel Ventures businesses, and operates a fee-based insurance fronting platform and investment-management business. The filing reports results for Markel Corporation, the registrant named in the filing.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 or prior date |
|---|---|---|
| Total operating revenues | $1.575 billion | $1.412 billion |
| Net income (loss) to shareholders | ($64.3 million) | $69.9 million |
| Diluted earnings per share | ($4.25) | $3.90 |
| Operating income | $105.0 million | $127.4 million |
| Net cash from operating activities | $57.7 million | $11.9 million |
| Investments, cash and restricted cash | $20.3 billion | $20.6 billion at Dec. 31, 2017 |
| Debt | $3.05 billion | $3.10 billion at Dec. 31, 2017 |
| Shareholders’ equity / book value per share | $9.32 billion / $671.05 | $9.50 billion / $683.55 at Dec. 31, 2017 |
Earned premiums rose 17% to $1.151 billion. Underwriting profit was $111.5 million versus a $2.4 million loss; the consolidated combined ratio improved to 90% from 100% (below 100% indicates underwriting profit). Insurance’s ratio was 89% versus 92%; Reinsurance’s was 97% versus 131%. Net investment income increased to $108.0 million from $100.4 million.
The company reported a $123.0 million net investment loss, including a $122.1 million decline in equity-security fair value, and a $22.1 million foreign-exchange loss. The effective tax rate was 253%, including a $99.5 million deferred-tax provision tied to electing to treat two U.K. subsidiaries as U.S. taxpayers. Cash from operations improved, while investing and financing activities used $68.2 million and $74.7 million, respectively. Cash, cash equivalents and restricted cash totaled $2.44 billion at quarter-end. Debt-to-capital was 25%, unchanged from year-end.
Material changes versus the prior comparable period
- Net income swung to a loss, substantially reflecting the equity fair-value decline now recorded in earnings and the one-time tax provision. Operating income also fell despite stronger underwriting.
- Underwriting improved notably, especially in Reinsurance, where the prior-year comparison included substantial adverse development related to the U.K. Ogden Rate change. Favorable prior-year reserve development was $108.1 million in Q1 2018 versus $22.7 million in Q1 2017.
- Insurance gross premiums increased 20%; Reinsurance gross premiums decreased 10%, partly because a large specialty treaty and certain property contracts did not renew. Markel Ventures revenue rose to $392.1 million from $286.9 million, while operating income fell to $23.8 million from $28.8 million.
- Adoption of ASU 2016-01 moved equity-security fair-value changes from other comprehensive income to net income; prior periods were not restated. The presentation shift affects comparisons of investment gains, earnings and other comprehensive income, but not comprehensive income in total.
- Markel completed its State National acquisition in November 2017. The acquired fee-based program-services business generated $461.2 million of gross premiums, substantially ceded to third parties; its results are outside the reportable underwriting segments.
Outlook, commentary, risks and contingencies
- No specific earnings or revenue guidance was provided. Management said it had sufficient liquidity for capital needs and seeks prudent leverage. It reported more favorable rates, particularly for catastrophe-exposed business, while describing the broader property-and-casualty market as soft and emphasizing underwriting discipline.
- Management cited catastrophe losses and reserve-estimation uncertainty as key risks. At March 31, the company had paid 51% of estimated net losses from 2017 catastrophes. The filing warns that market volatility could cause further investment-value declines and future impairment charges.
- Brexit could affect access to European markets for U.K.-based operations. Markel was pursuing regulatory approval for a German insurance company and noted a Lloyd’s European-market solution as a possible alternative or supplement.
- A Markel Ventures matter was under internal investigation; management could not yet estimate potential costs, but did not expect a material adverse effect on results or financial condition.
- In litigation concerning Aspen acquisition contingent value rights, the claimant seeks $47.3 million plus interest, possible default interest and other damages. Management considers the claim without merit and a material loss remote.
- Other risks include catastrophe severity, reserve adequacy, reinsurance recoverability, investment and foreign-exchange volatility, regulation, acquisitions, and operational risks. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- How much of future earnings depends on continued favorable prior-year reserve development, and how estimates for 2017 catastrophe claims evolve.
- The underlying equity portfolio performance and earnings volatility under the new fair-value accounting presentation.
- The ongoing tax and cash-tax consequences of the U.K.-subsidiary tax-status election.
- State National’s contribution to earnings and the economics and reinsurance arrangements of its fronting business.
- Potential outcomes and costs of the Markel Ventures investigation, Aspen CVR litigation, and Brexit-related market-access changes.