Markel Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Financial statements are unaudited. The filing covers Markel Corporation, a specialty insurance and reinsurance company with non-insurance businesses. Comparisons are affected by the May 1, 2013 acquisition of Alterra; its results are included only from that date in reported 2013 results.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total operating revenues | $1.192 billion | $765.8 million | $3.043 billion | $2.192 billion |
| Operating income | $122.8 million | $77.2 million | $338.3 million | $315.2 million |
| Net income to shareholders | $65.6 million | $49.7 million | $182.3 million | $196.6 million |
| Diluted earnings per share | $4.67 | $5.32 | $15.33 | $19.67 |
| Net cash from operating activities | Not stated for quarter | $542.5 million | $239.5 million |
- Q3 earned premiums were $919.7 million, up 73%; nine-month earned premiums were $2.269 billion, up 44%. Growth chiefly reflects Alterra, alongside expansion in Specialty Admitted and Excess and Surplus Lines.
- Underwriting profit was $34.2 million in Q3, versus a $4.8 million loss a year earlier; nine-month underwriting profit was $61.6 million, versus $64.8 million.
- The consolidated GAAP combined ratio was 96% for Q3 versus 101% and 97% for the first nine months versus 96%. Below 100% indicates an underwriting profit.
- Net investment income was $86.2 million in Q3 and $228.8 million for nine months, compared with $64.4 million and $207.8 million, respectively. Nine-month net realized investment gains were $40.7 million, including $4.6 million of other-than-temporary impairment losses.
- Q3 net income improved, primarily on better underwriting and higher investment income. Nine-month net income declined, with higher amortization, interest expense and taxes partly offset by higher investment income. Nine-month effective tax rate rose to 28% from 19%.
Financial position and liquidity
- At September 30, total assets were $23.81 billion, total liabilities $17.27 billion, and shareholders’ equity $6.46 billion. Book value per share was $462.33, up from $403.85 at December 31, 2012.
- Investments were $14.46 billion; cash and cash equivalents were $2.12 billion, with a further $600.2 million of restricted cash. Total invested assets, including restricted assets, were approximately $17.2 billion. Approximately $5.8 billion of assets were restricted, pledged or held for policyholders, ceding companies or banks.
- Senior long-term and other debt was $2.25 billion, up from $1.49 billion at year-end 2012. Debt to capital was 26%, versus 28%. Markel reported no borrowings on its $300 million revolving facility or the $900 million Alterra senior credit facility; $439.6 million of letters of credit were outstanding under the latter.
- Operating cash flow was $542.5 million for nine months. Investing activities provided $513.5 million and financing activities provided $189.5 million. Cash and cash equivalents increased to $2.12 billion from $863.8 million at year-end.
Material changes and significant events
- Alterra acquisition: Completed May 1 for total consideration of approximately $3.3 billion, including $964.3 million cash and Markel shares. Alterra contributed $557.4 million of reported operating revenue and a $67.1 million net loss to shareholders from acquisition through September 30. Purchase-price valuations remained provisional, including for intangible assets, loss reserves and deferred taxes.
- Alterra’s reported combined ratio was 104% for Q3 and 118% from acquisition through September 30, including $8.5 million and $70.3 million, respectively, of transaction and acquisition-related costs. Pro forma combined ratios were 101% for Q3 2013 and 101% for the first nine months, compared with 104% and 97% in 2012.
- Consolidated underwriting results included favorable prior-year reserve development of $77.3 million in Q3 and $281.4 million for nine months. Conversely, the discontinued-lines segment recorded $28.4 million of adverse asbestos and environmental reserve development in both the quarter and nine-month period, following its annual review.
- Markel issued $500 million of senior notes in March and repaid $246.7 million of notes in February. It repurchased $56.9 million of common stock during the first nine months.
- On October 9, 2013, after the reporting date, Markel made an offer to acquire Abbey Protection plc for approximately £116.5 million ($187.4 million at the offer date), subject to approvals; closing was expected in January 2014.
Outlook, risks and management commentary
- No quantified earnings or premium guidance is provided. Management said it continued to pursue modest rate increases where possible and would not write business when pricing does not support underwriting targets.
- Management described a more defensive investment posture to preserve liquidity and capital-allocation flexibility amid low interest rates, while reducing fixed maturities and increasing equity holdings as it repositioned Alterra’s portfolio. Integration of Alterra was expected to continue through 2014.
- Management expected $8.9 million of additional Alterra stay-bonus costs through May 1, 2014. It stated that it believed liquidity was sufficient to meet capital needs and that it was in compliance with credit-facility covenants.
- Key risks include catastrophe severity and frequency, pricing and competitive cycles, uncertain insurance and reinsurance reserves, asbestos and environmental claims, life and annuity assumptions, reinsurer collectability, market and interest-rate volatility, regulatory capital restrictions, and the execution, retention and goodwill-impairment risks associated with acquisitions.
- The filing reports effective disclosure controls and no material third-quarter change in internal control over financial reporting. Management cautions that estimates—particularly loss reserves, reinsurance recoverables, life and annuity benefits, and provisional Alterra purchase accounting—may differ materially from actual outcomes.
Important facts for investors to verify
- How much of premium growth and earnings reflects Alterra acquisition effects versus organic growth, and how reported results compare with the filing’s unaudited pro forma figures.
- Whether Alterra’s underwriting performance improves as integration proceeds, and the impact of its higher reinsurance usage and conservative current-year reserving.
- Future development of loss reserves, especially the asbestos and environmental exposures and Alterra’s life and annuity run-off obligations.
- Completion of provisional Alterra purchase-price valuations, realization of expected synergies, and any further integration or retention costs.
- Availability of unrestricted liquidity given restricted assets, insurance-subsidiary dividend limits, debt obligations and the use of credit facilities for letters of credit.
- Progress and approvals for the Abbey offer, and subsequent developments in investment values, interest rates, catastrophe losses and reinsurance recoverables.