Markel Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 21, 2020. The request identifies the company as Markel Group Inc., but this filing is for Markel Corporation.
Business context
Markel is a diversified financial holding company centered on specialty insurance and reinsurance, with investment activities, Markel Ventures businesses, insurance-linked securities (ILS), and program services/fronting operations. Its stated aim is to earn consistent underwriting and operating profits and superior long-term investment returns.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Total operating revenues | $9.53 billion | $6.84 billion |
| Earned premiums | $5.05 billion | $4.71 billion |
| Net investment income | $451.9 million | $434.2 million |
| Net investment gains (losses) | $1.60 billion | $(437.6) million |
| Net income (loss) to shareholders | $1.79 billion | $(128.2) million |
| Diluted earnings (loss) per share | $129.07 | $(9.55) |
| Operating cash flow | $1.27 billion | $892.9 million |
| Invested assets | $22.26 billion | $19.24 billion |
| Senior long-term and other debt | $3.53 billion | $3.01 billion |
| Shareholders’ equity | $11.07 billion | $9.08 billion |
- The consolidated combined ratio improved to 94% from 98% (below 100% indicates underwriting profit). Underwriting profit was $280.5 million, compared with $113.8 million.
- Insurance earned $4.14 billion in premiums and generated $309.8 million underwriting profit; its combined ratio was 93%. Reinsurance earned $903.6 million and recorded a $40.0 million underwriting loss; its combined ratio was 104%.
- Cash, cash equivalents and restricted cash totaled $3.50 billion at year-end. The company reported a 24% debt-to-capital ratio. Its $300 million revolving credit facility had no borrowings outstanding; it expires in April 2024.
- Book value per share rose 23% to $802.59. Common shares outstanding were approximately 13.79 million at year-end.
Changes versus the prior period
- Net income swung from a 2018 loss to substantial 2019 profit, primarily because investment results reversed: 2019 included $1.60 billion of net investment gains, largely from increases in equity-security fair value, versus $437.6 million of losses in 2018.
- Equity-security fair-value changes are recorded in net income under an accounting standard adopted in 2018; prior periods were not restated. This makes reported earnings notably sensitive to equity-market movements.
- Underwriting results improved as catastrophe losses declined: 2019 catastrophe underwriting losses were $100.4 million versus $287.3 million in 2018. Favorable prior-year reserve development remained significant, at $535.3 million versus $551.0 million.
- Underwriting gross premium volume increased 11%; earned premiums increased 7%. Net retention rose to 84% from 83%, following changes to the company’s reinsurance structure.
- Operating cash flow increased to $1.27 billion. Invested assets grew 16%, mainly reflecting equity-market appreciation, operating cash flows and net debt issuance.
Outlook, commentary and risks
- Management reported improved pricing, particularly for catastrophe-exposed and loss-affected business, and improved rates across many other lines. Workers’ compensation remained an exception, with rate decreases. Markel said it would pursue price increases in 2020 where possible and would decline business when pricing did not meet underwriting targets; it did not provide numerical earnings or revenue guidance.
- Management said further favorable reserve development in 2020 was possible, but cautioned against relying on that trend. It estimated a reasonably likely range from less than $50 million of favorable development to approximately $650 million, while emphasizing uncertainty in reserve estimates.
- Reserves for unpaid losses and loss adjustment expenses were $14.73 billion, including $11.81 billion for underwriting operations. The auditor identified estimation of underwriting loss reserves as a critical audit matter; actual claims and long-tail development may differ materially from estimates.
- Markel CATCo’s funds and reinsurance entity were placed into run-off in 2019. U.S. DOJ, SEC and Bermuda Monetary Authority inquiries into CATCo reserve-setting and disclosures remained ongoing; the company could not predict their duration or outcome. The related securities class actions were voluntarily dismissed, while a former executive’s claims were in confidential arbitration.
- Other exposures include catastrophe and climate-related losses, concentrated equity holdings, reinsurer credit and collection risk, broker concentration, regulatory and fronting restrictions, Brexit-related uncertainty, and cyber and operational risks. The top three independent brokers represented 28% of underwriting gross premiums.
- Unusual items included a $17.6 million loss on early debt extinguishment; a $51.4 million life-and-annuity reserve deficiency adjustment associated with lower investment yields; and a $33.5 million 2018 expense for a Markel Ventures product-manufacturing matter, with $20.2 million still accrued at year-end 2019 and potential additional costs not estimable.
- Management reported effective internal control over financial reporting; the auditor issued unqualified opinions on the consolidated financial statements and internal controls.
Important facts for investors to verify
- Separate recurring underwriting and investment income from the $1.60 billion equity fair-value gain when assessing 2019 earnings sustainability.
- Review reserve development by line and accident year, including the $535.3 million favorable prior-year development and the actuarial reserve ranges.
- Assess CATCo inquiry and arbitration developments, run-off progress, related costs, and the company’s committed $90 million investment to collateralize CATCo exposures.
- Review reinsurance recoverables, collateral and counterparty concentrations, particularly in program services, where the largest reinsurer group accounted for 21% of gross recoverables.
- Monitor debt, interest costs, capital allocation and the $300 million share-repurchase authorization; Markel stated it did not expect to pay a cash dividend.