Markel Corporation — Form 10-Q Summary
Reporting period: Three months ended March 31, 2014. The filing is unaudited and reports under U.S. GAAP. Markel is a specialty insurance and reinsurance company with additional industrial and service businesses through Markel Ventures. Comparisons with first-quarter 2013 are affected by the May 2013 Alterra acquisition; results include Alterra only from its acquisition date in 2013.
Financial performance
Amounts below are in millions of dollars except per-share data and ratios.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total operating revenues | $1,239.7 | $819.9 |
| Operating income | $145.7 | $141.4 |
| Net income to shareholders | $87.7 | $88.9 |
| Diluted earnings per share | $6.25 | $9.50 |
| Net investment income | $86.7 | $64.6 |
| Net realized investment gains | $17.4 | $17.9 |
| Net cash provided by operating activities | $22.4 | $55.6 |
| Net cash provided by (used in) investing activities | $180.4 | ($341.0) |
| Net cash provided by (used in) financing activities | ($30.9) | $231.2 |
- Underwriting: Earned premiums were $949.4 million, up 68% as reported; underwriting profit was $51.6 million versus $48.0 million. The consolidated combined ratio rose to 95% from 91% (below 100% indicates underwriting profit). Pro forma, including Alterra in both periods, earned premiums increased to $949.4 million from $909.8 million, but underwriting profit declined to $56.3 million from $75.4 million and the combined ratio worsened to 94% from 92%.
- Segment combined ratios: U.S. Insurance 96% versus 91%; International Insurance 91% versus 94%; Reinsurance 94% versus 84%. Consolidated results included $107.4 million favorable development of prior-year loss reserves, compared with $84.8 million in Q1 2013.
- Margins and other operations: Higher earned premiums reduced the reported expense ratio, but higher current-year loss ratios and less favorable reserve development contributed to the higher consolidated combined ratio. Markel Ventures revenue was $171.2 million versus $161.5 million; net income to shareholders declined to $1.1 million from $3.6 million, and EBITDA to $14.1 million from $19.4 million.
- Comprehensive income: $230.3 million to shareholders, including $141.3 million of after-tax unrealized investment gains, versus $257.7 million in Q1 2013.
Financial position and liquidity
- Total assets were $24.45 billion at March 31, 2014, compared with $23.96 billion at December 31, 2013. Investments were $14.98 billion; cash and cash equivalents were $2.15 billion, with a further $634.0 million of restricted cash.
- Shareholders’ equity was $6.90 billion, up from $6.67 billion. Book value per share increased to $493.96 from $477.16.
- Senior long-term and other debt was $2.26 billion, essentially unchanged from year-end. Management reported a debt-to-capital ratio of 25% at both dates, against a target capital structure of approximately 30% debt.
- Management stated that liquidity was sufficient for capital needs, citing subsidiary dividends, holding-company invested assets, undrawn credit facilities, and access to capital markets. Operating cash flow fell year over year, primarily due to higher income-tax, profit-sharing, and agent-incentive payments.
- The investment portfolio included $3.40 billion in equity securities, 19% of invested assets. Fixed maturities averaged an “AA” rating; approximately 97% were rated “A” or better, and less than 1% were unrated or below investment grade.
Material changes, outlook, and risks
- Acquisitions and reporting: Markel acquired Abbey Protection for $190.7 million in cash in January 2014, adding specialty insurance and consulting operations. The company also reorganized underwriting reporting into U.S. Insurance, International Insurance, and Reinsurance segments as Alterra integration continued.
- Business conditions: Management reported modest price increases across many product lines but softening prices in international catastrophe-exposed property and reinsurance. It cited lower pro forma gross premium volume, driven partly by reinsurance non-renewals and softer markets, and said it would not write business when prices did not support underwriting targets. No specific earnings or premium guidance was provided.
- Underwriting and reserves: Management attributed elevated current-year losses partly to Alterra legacy long-tail business and its more conservative reserving approach. U.S. results also reflected adverse development on architects-and-engineers claims; discontinued lines recorded a $6.5 million underwriting loss, primarily from unfavorable development on Alterra run-off business. Reserve estimates, including reinsurance and life-and-annuity run-off reserves, involve significant judgment.
- Investments: The company reported no investment write-downs for other-than-temporary impairment in the quarter. Gross unrealized losses were $107.6 million at quarter-end; management cautioned that market declines could lead to impairment charges in future periods. Equity-price, interest-rate, currency, municipal-bond, and sovereign-credit risks remain relevant.
- Other matters: Interest expense increased to $29.7 million from $23.6 million, partly reflecting debt assumed with Alterra and notes issued in 2013. The company repurchased $17.3 million of common stock in Q1 under a $300 million authorization. Management said ordinary-course contingencies were not expected to materially affect financial condition or results.
- Forward-looking risks: The filing highlights catastrophe severity and frequency, competitive pricing, reserve uncertainty and claims trends, reinsurance recoverability, regulatory constraints, acquisition integration and synergy risks, investment-market volatility, economic conditions, and risks to Markel Ventures businesses. Management expected its annual asbestos and environmental reserve review in Q2 2014 and noted reserves could increase.
Key facts for investors to verify
- How much of reported premium and revenue growth reflects Alterra and Abbey acquisitions versus underlying organic growth; compare both reported and pro forma underwriting results.
- Whether the higher current-accident-year loss ratios and the use of more conservative reserving assumptions persist, and how prior-year reserve development evolves.
- Whether pricing pressure in reinsurance and catastrophe-exposed property affects premium volumes or underwriting profitability.
- Reserve adequacy for long-tail, reinsurance, asbestos and environmental, and life-and-annuity run-off exposures, including the Q2 asbestos and environmental review.
- Investment portfolio sensitivity to market movements and credit deterioration, and the effect of unrealized gains or losses on equity and book value.
- Cash generation, debt levels, and realized benefits and integration costs associated with Alterra and Abbey.