Markel Corporation — Q3 2014 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2014. Markel’s businesses include specialty insurance and reinsurance, investments, and Markel Ventures’ industrial and service companies. The company continued integrating Alterra, acquired in May 2013; 2014 results also include Abbey, acquired in January, and additional Markel Ventures acquisitions. Comparisons with 2013 are affected by Alterra being included for only part of that prior-year period.
Financial results and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total operating revenues | $1,299.3m | $1,191.7m | $3,797.9m | $3,043.3m |
| Operating income | $133.1m | $122.8m | $363.0m | $338.3m |
| Net income to shareholders | $75.8m | $65.6m | $203.6m | $182.3m |
| Diluted EPS | $5.30 | $4.67 | $14.21 | $15.33 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $536.6m | $542.5m |
- Earned premiums were $954.0m in Q3, up from $919.7m; nine-month earned premiums were $2,869.0m, up from $2,269.1m. Nine-month growth reflected the fuller inclusion of Alterra and growth in Hagerty business.
- Consolidated underwriting profit was $32.5m for Q3 and $73.3m for nine months. The consolidated combined ratio was 97% in both 2014 periods; a ratio below 100% indicates underwriting profit.
- Net investment income rose to $91.1m for Q3 and $270.0m for nine months. Net realized investment gains fell to $4.2m and $28.7m, respectively, from $11.2m and $40.7m.
- At September 30, total assets were $25.1bn, shareholders’ equity $7.2bn, and senior long-term and other debt $2.27bn. Debt-to-capital was 24%, versus 25% at year-end 2013. Book value per share increased to $514.06 from $477.16.
- Cash and cash equivalents were $1.77bn, with restricted cash of $583.3m. Invested assets totaled $18.2bn. The company reported a $300m revolving credit facility expiring in 2019 and a $650m secured credit facility.
- Nine-month net cash used in investing activities was $681.3m, including $316.3m of acquisition spending, versus $513.5m provided in the prior-year period. Nine-month financing cash use was $46.7m.
- Comprehensive income to shareholders was $36.5m in Q3, down from $144.4m, reflecting declines in unrealized investment gains and foreign currency translation. For nine months it was $517.4m, up from $253.0m, supported by investment gains in other comprehensive income.
Material changes versus prior periods
- Nine-month total revenue increased about 25% and net income to shareholders increased about 12%; diluted EPS nevertheless declined to $14.21 from $15.33. The filing’s EPS calculation includes adjustments for redeemable noncontrolling interests and a higher comparative weighted average share count in 2014.
- Nine-month gross premium volume rose 30%, reflecting Alterra’s inclusion across the insurance segments. Q3 gross premium volume increased 2%. Management reported modest price increases in many lines but softening prices in international catastrophe-exposed property and property reinsurance.
- The nine-month consolidated combined ratio remained 97%. Management attributed underlying pressure versus 2013 partly to less favorable prior-year reserve development; 2013 comparisons included favorable development on Alterra pre-acquisition reserves and acquisition-related costs.
- Shareholders’ equity and book value per share increased during the first nine months, mainly due to comprehensive income. Equity securities grew to $3.7bn, or 20% of invested assets, from $3.3bn, or 18%.
Outlook, commentary, risks and unusual items
- No numerical earnings, premium, or combined-ratio guidance is provided. Management says it will pursue price increases where possible and will not write business when market pricing does not support underwriting profit targets.
- The Other Insurance (Discontinued Lines) segment recorded $27.2m of adverse asbestos and environmental reserve development in the first half of 2014. The company says these long-tail reserves are highly uncertain, are not discounted, and are expected to pay out over 40–50 years; further increases are possible.
- Management identified higher loss ratios and less favorable prior-year development as factors affecting underwriting results. In the architects and engineers line, increased frequency of high-severity claims led to $17.6m of adverse development for the nine months.
- Investment risks include equity-price, interest-rate, foreign-currency and credit exposure. Unrealized investment losses were $59.7m at quarter-end; management cautioned that market volatility could lead to further declines or impairment charges. The fixed-maturity portfolio was reported as averaging AA, with approximately 97% rated A or better.
- The filing lists catastrophe frequency and severity, reserve estimation, reinsurance recoverability, competition and softening rates, municipal and sovereign credit, foreign exchange, acquisition integration, goodwill impairment, and capital-market access among risks that could materially affect results.
- Management stated that ordinary-course contingencies were not expected to materially affect financial condition or results. Disclosure controls were deemed effective; the company also completed a significant portion of the transition of acquired Alterra operations to its general ledger system.
Important facts for investors to verify
- Whether underwriting profitability holds as pricing softens, particularly in international catastrophe-exposed property and property reinsurance.
- Future development of loss reserves, especially asbestos and environmental, architects and engineers, and long-tail reinsurance exposures.
- How much reported premium and revenue growth reflects acquisitions and consolidation timing versus organic growth.
- Investment portfolio sensitivity to market movements, including the larger equity allocation and potential future impairment charges.
- Debt, facility availability, and acquisition-related funding needs, alongside the drivers of cash-flow changes.
- The reasons nine-month diluted EPS declined despite higher net income, including share-count and noncontrolling-interest adjustments.