Business context and reporting period
Markel Corporation’s Form 10-K covers the fiscal year ended December 31, 2018, with comparisons to 2017. The company combines specialty insurance and reinsurance underwriting with investments, Markel Ventures businesses, investment management and program services. In 2018, management reorganized underwriting reporting into global Insurance and Reinsurance segments; prior-period segment data was recast where applicable.
Financial results and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Total operating revenues | $6.84 billion | $6.06 billion |
| Earned premiums | $4.71 billion | $4.25 billion |
| Net income (loss) to shareholders | ($128.2 million) | $395.3 million |
| Operating income | $39.8 million | $216.6 million |
| Operating cash flow | $892.9 million | $858.5 million |
| Invested assets | $19.24 billion | $20.57 billion |
| Senior long-term and other debt | $3.01 billion | $3.10 billion |
| Shareholders’ equity | $9.08 billion | $9.50 billion |
- Underwriting: Consolidated underwriting profit was $113.8 million, versus a $207.2 million loss in 2017; the combined ratio improved to 98% from 105%. Insurance earned $3.78 billion and generated $228.8 million of underwriting profit (94% combined ratio). Reinsurance earned $928.6 million and recorded a $118.3 million underwriting loss (113% combined ratio).
- Investments: Net investment income rose 7% to $434.2 million; net investment losses were $437.6 million, compared with $5.3 million in 2017. Taxable-equivalent total investment return was negative 1.0%, versus positive 10.2% in 2017. The fixed-maturity portfolio had an average AA rating, with 98% rated A or better.
- Cash and liquidity: Cash, cash equivalents and restricted cash totaled $2.40 billion at year-end. Operating cash flow increased, while investing activities used $797.2 million and financing activities used $179.0 million. The $300 million revolving credit facility had no borrowings outstanding at year-end. Management said liquidity was sufficient for capital needs.
- Other businesses: Markel Ventures reported $1.92 billion in revenues, $77.5 million segment profit and $169.9 million EBITDA. Program services generated $2.1 billion of gross premium volume, substantially all ceded; reported program-services revenues were $95.7 million.
- Capital and shareholder measures: Debt to capital was 25%, unchanged. Book value per share fell 4% to $653.85; the closing share price fell 9% to $1,038.05. No cash dividend was paid, and management said it did not expect to pay one.
Material changes versus 2017
- Reported net income shifted to a loss, primarily reflecting investment losses and the absence of 2017’s $339.9 million one-time tax benefit under the Tax Cuts and Jobs Act. 2018 also included $122.5 million of income tax expense, including a $103.3 million deferred tax charge related to the change in U.S. tax treatment of major U.K. subsidiaries.
- The 2018 adoption of ASU 2016-01 moved equity-security fair-value changes into net income rather than other comprehensive income. The $425.6 million equity fair-value loss therefore reduced 2018 net income; the accounting change did not affect total comprehensive income, but increased reported net-income volatility.
- Catastrophe underwriting losses declined to $287.3 million (six combined-ratio points) from $565.3 million (13 points) in 2017. Favorable development of prior-year reserves was $551.0 million, versus $501.5 million in 2017.
- Gross premium volume in underwriting segments increased 10%; Insurance segment volume rose 15%, while Reinsurance declined 6%, partly because a large specialty treaty did not renew. The new State National fronting business contributed $2.1 billion of gross premiums, largely ceded.
- Acquisitions included Nephila for $972.6 million in November and 90% of Brahmin for total consideration of $193.8 million in October. The company also recorded a $199.2 million goodwill and intangible-asset impairment, including $179.0 million at Markel CATCo investment management.
Outlook, commentary, risks and unusual items
- Management reported slightly more favorable rates in 2018, particularly for catastrophe-exposed and loss-affected lines, but said other lines experienced rate decreases and markets remained competitive. It planned to pursue rate increases in 2019 where possible and not write business when pricing failed to support underwriting targets.
- Management said additional favorable prior-year reserve development in 2019 was possible, but cautioned against relying on the trend. Its stated reasonably likely range was favorable development of less than 1% (about $50 million) to approximately 7% (about $650 million) of year-end 2018 net reserves.
- Markel CATCo faced DOJ, SEC and Bermuda Monetary Authority inquiries into reserves at an unconsolidated managed reinsurer; an internal review was ongoing. Two senior executives departed, investors received special redemption rights, and related securities and executive lawsuits were filed. The company said it was cooperating, considered claims without merit, and believed material losses from the suits were remote; outcomes remained uncertain. CATCo’s ability to maintain or raise capital was adversely affected.
- A Markel Ventures business recorded $33.5 million for investigation, remediation, inventory write-down and settlement costs, plus a $14.9 million intangible impairment. The remediation continued into 2019; additional costs could not be estimated and could materially affect pretax income, though management did not expect a material adverse effect on overall results or financial condition.
- Brexit created uncertainty around U.K. insurers’ access to E.U. markets and servicing EEA policyholders. Markel established a German carrier and began transferring legacy EEA exposures, subject to court approval that was not assured by the anticipated Brexit date.
- Other key risks include catastrophe severity and climate-related exposure, reserve estimation and long-tail claims, equity-market concentration, reinsurance recoverability and collateral, competition, regulation, cyber risk, acquisition integration, and access to capital. The revolving facility matured in August 2019; the company amended its leverage covenant in February 2019 and noted that refinancing or renewal on favorable terms was not assured.
- Fourth-quarter 2018 net loss to shareholders was $751.5 million. The filing attributes the full-year loss to investment, tax and other factors; the precise allocation of the quarter’s loss among individual items is not fully stated in the provided text.
Important facts for investors to verify
- Track the CATCo inquiries, internal review, litigation, investor redemptions and any further impairment, support or liability exposure.
- Assess the sustainability of favorable reserve development and the adequacy of catastrophe and long-tail reserves, including the disclosed 2019 reserve-development range.
- Review equity portfolio concentration and the effects of market movements under the new fair-value accounting treatment.
- Monitor reinsurance recoverables, collateral coverage and counterparty exposure, especially in program services and the Syndicate 2357 arrangements.
- Confirm the outcome of Brexit-related policy transfers and the refinancing or renewal of the 2019 debt maturity and revolving credit facility.
- Follow remediation costs at the Markel Ventures business and the performance and integration of Nephila, Brahmin and other acquisitions.
KPMG issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management also concluded internal controls were effective as of December 31, 2018.