Business context and reporting period
Markel Corporation (the registrant named in this filing) is a specialty-insurance and financial holding company with Excess and Surplus Lines, Specialty Admitted, London Insurance Market, investing, and non-insurance operations. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2011; comparisons are to the corresponding 2010 periods unless otherwise noted. Dollar amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Earned premiums | $490.2 | $416.7 | $953.3 | $828.8 |
| Total operating revenues | $647.2 | $515.4 | $1,268.8 | $1,052.1 |
| Operating income | $58.6 | $48.2 | $89.0 | $128.8 |
| Net income to shareholders | $30.3 | $20.8 | $38.6 | $63.4 |
| Diluted earnings per share | $3.11 | $2.12 | $3.95 | $6.46 |
| Net investment income | $64.3 | $64.4 | $134.4 | $132.8 |
| Net realized investment gains | $1.3 | $(2.4) | $12.6 | $13.3 |
- Underwriting losses were $13.3 million for Q2 and $66.9 million for the first half. Consolidated combined ratios were 103% and 107%, respectively; ratios above 100% indicate underwriting losses.
- Six-month cash provided by operating activities was $100.3 million, versus $63.6 million. Investing activities used $310.6 million; financing activities provided $227.8 million. Cash and cash equivalents ended the period at $768.0 million, up $22.7 million from year-end.
- At June 30, total assets were $11.46 billion, total liabilities $8.12 billion, shareholders’ equity $3.28 billion, and total debt $1.27 billion. The debt-to-total-capital ratio was 27%, versus 24% at December 31, 2010; management’s target capital structure includes approximately 30% debt.
- Invested assets were $8.7 billion, including $5.48 billion in fixed maturities, $1.84 billion in equities, and $600.4 million in short-term investments. Book value per share rose to $338.66 from $326.36 at year-end. Six-month comprehensive income to shareholders was $120.8 million, including $78.9 million of after-tax unrealized investment gains.
Material changes versus the prior comparable period
- Q2 net income to shareholders rose to $30.3 million from $20.8 million, with management citing stronger non-insurance results and a lower estimated effective tax rate. For the first half, net income fell to $38.6 million from $63.4 million, primarily because catastrophe-related underwriting losses increased.
- Earned premiums increased 18% in Q2 and 15% for the first half. FirstComp, acquired in 2010, contributed $48.6 million and $92.4 million of earned premiums in those periods. The London segment also grew; Excess and Surplus Lines premiums declined.
- For the first half, the consolidated combined ratio worsened to 107% from 102%. Catastrophes accounted for an estimated $99 million, or 10 ratio points, of underwriting losses in 2011, compared with $17 million, or two points, from the Chilean earthquake in 2010. Favorable prior-year reserve development was $151.3 million in the first half of 2011, versus $75.1 million in 2010.
- Non-insurance revenue rose to $79.0 million in Q2 and $147.0 million for the first half, from $35.0 million and $72.3 million, primarily reflecting the late-2010 acquisitions of RD Holdings and Diamond Healthcare.
- On June 1, Markel issued $250 million of 5.35% senior notes due 2021, receiving $247.9 million net proceeds. Interest expense increased to $21.9 million for Q2 and $40.9 million for the first half.
Outlook, management commentary, and risks
- The filing provides no quantified earnings or premium guidance. Management said it was maintaining a defensive investment posture, accepting somewhat lower yields to preserve liquidity and flexibility, and preparing for increased catastrophe-claim settlements.
- Management described intense competition and market pricing below its targeted levels in many product lines. It said it would not write business when prevailing prices do not support underwriting targets; this discipline may constrain premium growth.
- Estimated 2011 catastrophe reserves reflect management’s best available information, but reported claims and loss information were developing slowly. Management warned estimates could be volatile and said it would revise them as information develops. First-half net catastrophe losses were estimated at $99 million; additional significant Marine and Energy losses and reinsurance costs brought total identified significant net losses to $122 million.
- Other risks include catastrophe frequency and severity, reserve-estimation uncertainty, reinsurance availability and collectability, municipal-bond and broader investment-market risks, foreign exchange movements, regulatory constraints, and integration and operating risks from acquisitions. Management said ordinary-course contingencies were not expected to materially affect financial condition or results.
- Investment impairment charges were $4.9 million for the first half. The company reported $27.5 million of gross unrealized investment losses at June 30 and cautioned that market volatility could lead to further impairments. Its fixed-maturity portfolio averaged AA; approximately 1% was unrated or below investment grade.
Important facts for investors to verify
- Track catastrophe claims emergence, reinsurance recoveries, and any changes to first-half 2011 loss estimates and reserves.
- Assess whether favorable prior-year reserve development continues and whether it masks current-year underwriting performance, particularly in London and Specialty Admitted.
- Monitor FirstComp profitability: it generated losses of $8.6 million in Q2 and $15.0 million for the first half; the filing notes challenging workers’ compensation conditions.
- Review debt and interest costs following the 2021 note issuance, alongside liquidity, claim payments, and the stated capital-structure target.
- Evaluate investment-market exposures, including the substantial municipal-bond portfolio, unrealized gains and losses, and the Level 3 credit default swap, whose notional exposure was $33.1 million.