Markel Corporation — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; filed February 23, 2018. The filing identifies the registrant as Markel Corporation. Markel is a specialty insurance and reinsurance company with investment, program-services, insurance-linked securities and Markel Ventures operations.
Financial performance
- Revenue: Operating revenues were $6.06 billion, up 8% from $5.61 billion in 2016. Earned premiums rose 10% to $4.25 billion; gross premium volume was $5.51 billion, including $253.9 million from newly acquired program-services operations.
- Profit: Net income attributable to shareholders was $395.3 million, down 13% from $455.7 million. Diluted earnings per share fell to $25.81 from $31.27. Operating income declined to $219.7 million from $803.9 million.
- Underwriting and margins: The consolidated combined ratio rose to 105% from 92% (above 100% indicates an underwriting loss). Underwriting loss was $205.2 million, versus a $316.5 million profit in 2016. U.S. Insurance earned a $119.9 million underwriting profit (95% combined ratio); International Insurance lost $33.6 million (104%); Reinsurance lost $299.2 million (132%).
- Investments: Net investment income increased 9% to $405.7 million; net realized investment losses were $5.3 million, compared with $65.1 million in gains in 2016. Taxable-equivalent total investment return was 10.2%, versus 4.4%, substantially reflecting equity-market appreciation. Year-end invested assets were $20.57 billion.
- Cash flow: Operating cash flow was $858.5 million, up from $534.6 million. Investing activities used $744.5 million, including $1.43 billion net cash spent on acquisitions. Financing activities provided $256.3 million. Cash, cash equivalents and restricted cash totaled $2.50 billion at year-end.
- Financial position and liquidity: Total assets were $32.81 billion, shareholders’ equity $9.50 billion and senior long-term and other debt $3.10 billion. Debt to capital increased to 25% from 23%. The $300 million revolving credit facility was undrawn; Markel reported covenant compliance. Insurance subsidiaries’ capital exceeded regulatory minimums.
Material changes and unusual items
- 2017 catastrophe losses from Hurricanes Harvey, Irma, Maria and Nate, Mexico earthquakes and California wildfires totaled $565.3 million net, including $585.4 million estimated net losses and $20.1 million net assumed reinstatement premiums. Estimated losses included $490.3 million of reinsurance recoveries; the estimate remained subject to material uncertainty.
- Favorable prior-year reserve development was $501.5 million, broadly similar to $505.2 million in 2016. This benefit was partly offset in Reinsurance by $85.0 million of adverse development related to the U.K. Ogden bodily-injury discount-rate reduction.
- A $339.9 million one-time tax benefit from the December 2017 Tax Cuts and Jobs Act materially supported reported earnings; the total income-tax benefit was $313.5 million. Management said the tax-law calculations were partly provisional. Excluding the tax-law effect, the adjusted effective tax rate was 30%.
- Acquisitions included SureTec (April; $246.9 million consideration), Costa Farms (August; 81% acquired for $417.2 million total consideration) and State National (November; $918.8 million). State National added collateral-protection insurance and fronting/program-services operations. Acquisition accounting for State National was preliminary.
- Book value per share increased 13% to $683.55, mainly from $763.0 million of after-tax unrealized investment gains and net income. The share price rose 26% during 2017.
Outlook, management commentary and risks
- Management described the overall property-and-casualty market as soft, with pricing pressure in many lines. It reported more favorable pricing beginning in first-quarter 2018, particularly for catastrophe-exposed products, and more stable pricing in other lines. Markel intended to pursue rate increases where possible and avoid business that did not meet underwriting profit targets.
- No specific earnings or revenue guidance was provided. Management estimated a future effective tax-rate range of 16%–18% in most years, subject to tax-law interpretation and other assumptions. From 2018, equity fair-value changes would flow through net income, increasing earnings volatility.
- Management said additional favorable reserve development in 2018 was possible, but cautioned against relying on the trend; its estimated range ran from less than $50 million to approximately $650 million of favorable development.
- Key risks include catastrophe severity and reinsurance collection, uncertain loss and life-and-annuity reserves, soft-market pricing, concentrated equity investments, interest- and foreign-exchange-rate changes, acquisition integration and goodwill impairment, regulatory restrictions, cyber risk, broker concentration, and Brexit-related access to European markets.
- Other notable exposures include $1.1 billion of life-and-annuity benefit reserves in run-off; asbestos-and-environmental reserves with uncertain long-tail outcomes; and a disputed Aspen contingent-value-rights claim. Management considered material loss on the lawsuit remote and intended to defend it.
Most important facts to verify
- Whether catastrophe loss estimates and related reinsurance recoveries developed as expected after year-end.
- How much of earnings depended on the one-time tax benefit and favorable prior-year reserve releases, and whether either recurs.
- The adequacy of reserves, particularly long-tail casualty, U.K. auto, asbestos-and-environmental, and life-and-annuity exposures.
- The credit quality, collateral and collectability of reinsurance recoverables, including State National program-services recoverables.
- Whether acquisitions deliver expected performance, and whether State National purchase-price allocations or acquired goodwill and intangibles require adjustment.
- How 2018 equity fair-value accounting changes affect reported earnings and volatility; the filing reports $3.3 billion of net unrealized equity gains in accumulated other comprehensive income at year-end.
- Whether pricing improves enough to restore underwriting profitability, especially in International Insurance and Reinsurance.