Markel Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; filed October 27, 2020. The filing identifies the registrant as Markel Corporation. It is a diversified specialty insurer and reinsurer with Markel Ventures businesses and insurance-linked securities operations.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total operating revenue | $2.912B | $2.033B | $6.379B | $6.945B |
| Operating income | $692.4M | $262.2M | $129.3M | $1.724B |
| Net income (loss) to common shareholders | $452.7M | $205.6M | ($31.3M) | $1.279B |
| Diluted earnings (loss) per share | $31.03 | $13.95 | ($3.76) | $92.84 |
| Net investment income | $90.4M | $113.4M | $274.2M | $339.4M |
| Net investment gains (losses) | $539.3M | $32.1M | ($230.9M) | $1.070B |
| Underwriting profit (loss) | $38.4M | $72.7M | ($44.8M) | $192.7M |
| Consolidated combined ratio | 97% | 94% | 101% | 95% |
Cash flow and liquidity: Nine-month operating cash flow was $1.262B, versus $712.0M in 2019. Cash, cash equivalents and restricted cash totaled $5.263B at September 30. Total investments were $18.326B; management reported invested assets of $23.6B including cash and restricted cash. Long-term and other debt was $3.498B, and the debt-to-capital ratio was 23%, compared with 24% at year-end 2019. The company reported no outstanding borrowings under its $300M revolving credit facility and said it believed liquidity was adequate. Holding-company invested assets were $3.8B.
Shareholders’ equity was $11.894B. Book value per common share was $819.71, up 2% from $802.59 at December 31, 2019; total shareholder return was down 15% for the nine-month period. In May, Markel issued preferred shares for $591.9M net proceeds, carrying a 6% non-cumulative dividend rate if declared. Common-share repurchases were suspended in March.
Material changes and operating performance
- Investment volatility drove the earnings comparison. Equity-security fair-value changes added $534.4M to Q3 2020 results, but were a $242.8M loss for the first nine months. The prior-year nine-month period included $1.069B of net investment gains. Lower short-term interest rates and reduced fixed-maturity holdings also lowered net investment income.
- Underwriting weakened year to date. Earned premiums rose 10% to $4.085B, but the consolidated combined ratio increased to 101% from 95%, producing a nine-month underwriting loss. Insurance premiums grew, while Reinsurance underwriting was loss-making. Q3 underwriting profit was $38.4M, down from $72.7M.
- Loss experience included pandemic and catastrophe claims. Nine-month underwriting results included $371.8M of net COVID-19 losses and loss-adjustment expenses directly attributed to the pandemic, plus $15.0M of indirect trade-credit losses; the MD&A reports total COVID-related underwriting losses of $373.9M including reinstatement-premium effects. 2020 catastrophes contributed approximately $101.0M of underwriting losses, versus $42.6M from 2019 catastrophes.
- Reserve releases offset some current-year pressure. Favorable development on prior accident-year loss reserves was $435.5M for the first nine months, compared with $336.9M in 2019. Management cautions that estimates remain subject to change.
- Markel Ventures expanded through acquisitions. Segment revenue rose to $2.013B from $1.568B for the nine months, with $563.6M of 2020 revenue attributed to Lansing and VSC. Segment operating income increased to $200.8M from $147.1M. Excluding those acquisitions, revenue at other Ventures businesses declined, particularly in transportation-related businesses affected by the pandemic.
Outlook, risks and unusual items
- Management gave no specific financial guidance and said it could not reasonably estimate the pandemic’s extent or duration. It warned that further changes to COVID-19 reserves could be material to results, financial condition and cash flows. Coverage interpretation, litigation, government action, claims emergence and reinsurance recoveries are key uncertainties.
- Management expects continued pandemic effects on Ventures demand and cash flows; some businesses may face working-capital, liquidity or debt-covenant pressure. The pandemic may also reduce insurance premiums, program-service fees and insurance-linked securities management fees, and could increase redemptions or limit third-party capital raising.
- At September 30, management concluded available information did not require an impairment test for goodwill and intangible assets, which totaled $4.425B. Further deterioration or weaker business performance could result in impairment charges.
- In October 2020, after the reporting date, Markel decided to discontinue writing catastrophe-exposed property business in its Global Reinsurance division, with Nephila to become its single point of entry for that market.
- The Lansing acquisition brought Markel’s ownership to 91% for total cash consideration of $556.2M. The purchase-price allocation remained provisional, including $290.8M of preliminary goodwill and $210.0M of intangible assets.
- Markel CATCo operations remain in run-off, expected to take approximately three years. U.S. and Bermuda authorities’ inquiries into historical CATCo loss reserves remained unresolved; the company could not predict their duration or outcome. A separate executive dispute was settled in July 2020 for an amount described as not material.
- Other matters include a product-manufacturing remediation contingency with $14.6M accrued at September 30, and litigation concerning Aspen contingent value rights. Markel said it believed the CVR suits were without merit and any material loss was remote.
Important facts for investors to verify
- How COVID-19 claims, court rulings and policy interpretations affect the $356.8M direct pandemic-loss estimate and the broader reported COVID-related underwriting losses.
- Whether catastrophe and prior-year reserve estimates develop adversely, and whether favorable reserve releases remain sustainable.
- Underlying investment performance apart from equity fair-value swings, including the effect of lower interest rates on recurring investment income.
- Post-acquisition Lansing and VSC performance, pandemic-related demand at existing Ventures businesses, and the final Lansing purchase-price allocation.
- Liquidity and capital needs at insurance subsidiaries and Ventures companies, including any impacts on debt covenants, and outcomes of CATCo inquiries and CVR litigation.