Markel Corporation — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Markel markets and underwrites specialty insurance and also owns non-insurance businesses. Financial statements are unaudited; interim results are not necessarily indicative of full-year results. Amounts below are in millions except per-share data and ratios.
Financial results and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Earned premiums | $435.4 | $448.4 | $1,264.2 | $1,360.9 |
| Net investment income | $68.7 | $66.3 | $201.4 | $199.1 |
| Net realized investment gains (losses) | $8.8 | $(29.8) | $22.1 | $(100.4) |
| Operating income | $109.9 | $54.3 | $238.7 | $142.5 |
| Net income to shareholders | $63.3 | $59.1 | $126.7 | $108.3 |
| Diluted earnings per share | $6.48 | $6.02 | $12.93 | $11.02 |
| Operating cash flow | — | $172.8 | $218.6 |
- Q3 shareholder net income increased 7%; nine-month net income increased 17%. The filing attributes improvement mainly to better investment returns, including substantially lower impairment write-downs than in 2009. Nine-month underwriting results weakened and income taxes increased.
- Combined ratio was 93% for Q3 versus 96% and 99% for the nine months versus 97%. A ratio below 100% indicates underwriting profit. Nine-month underwriting profit was $10.5 million, down from $42.7 million.
- At September 30, total assets were $10.58 billion, total investments $7.42 billion, cash and equivalents $818.0 million, total liabilities $7.51 billion, and total equity $3.07 billion. Long-term and other debt was $996.7 million. Debt to total capital was 25%, compared with 26% at year-end 2009.
- Shareholders’ equity was $3.06 billion; book value per share was $314.74, up from $282.55 at December 31, 2009. The increase primarily reflected nine-month comprehensive income.
- Cash declined $32.5 million during the nine months to $818.0 million. Investing activities used $172.5 million, including increased purchases of investment securities; financing activities used $33.6 million. A $270 million revolving facility, expiring June 2013, was undrawn at quarter-end. Management said liquidity was sufficient for capital needs.
Material changes and unusual items
- Gross premium volume rose 8% in Q3 and 3% year to date, but earned premiums fell 3% and 7%, respectively, primarily from lower Excess and Surplus Lines premiums. Management cited competitive pricing and underwriting discipline; prevailing market rates were generally below its pricing targets.
- Favorable prior-year reserve development was $105.5 million in Q3 and $180.5 million year to date, compared with $61.5 million and $155.9 million in 2009. Favorable development supported results, particularly in Excess and Surplus Lines and London; the filing also reports adverse development in certain London professional-risk books.
- Reported underwriting losses included $32.7 million from the Chilean earthquake and Deepwater Horizon incident year to date. Two mortgage-related programs contributed $32.9 million of underwriting loss in Q3 and $71.9 million year to date. The company placed its mortgage-servicer errors-and-omissions program into run-off and settled Guaranty Bank litigation in September, recognizing a $19.9 million underwriting loss.
- The Atlas systems initiative was refocused and certain work deferred beyond 2011. Markel expensed $7.7 million of previously capitalized costs in Q3; management prioritized billing and collections delivery in October 2010, followed by data-warehouse and agency-internet work in 2011.
- Investment portfolio fair value gains increased shareholders’ accumulated other comprehensive income. Nine-month net unrealized investment gains were $327.3 million before tax presentation adjustments in the relevant investment disclosure; comprehensive income to shareholders was $326.0 million, below 2009’s $509.7 million, reflecting smaller unrealized gains.
- On October 15, 2010, after quarter-end, Markel acquired Aspen Holdings for approximately $125 million cash plus contingent value rights and converted options. Aspen writes workers’ compensation and related business and reported annual gross written premiums above $300 million.
Outlook, commentary, and risks
- No quantified earnings or premium guidance was provided. Management stated its goals are consistent underwriting profits and superior investment returns, and it targets a capital structure of approximately 30% debt.
- Management cautioned that weak residential-housing conditions could produce further mortgage-program claims and require reserve strengthening. Asbestos and environmental reserves also carry significant uncertainty and may increase.
- Other stated risks include catastrophe frequency and severity, reserve-estimation uncertainty, reinsurance cost and collectability, investment-market volatility and interest-rate, equity-price and foreign-exchange risk, regulation, and the cost or timing of the Atlas program and acquisitions.
- The investment portfolio was 19% equity securities at September 30; fixed maturities averaged an “AA” rating, with approximately 2% unrated or below investment grade. Markel reported $23.9 million of gross unrealized investment losses and said it did not identify material other-than-temporary impairments at quarter-end; future impairment charges remain possible.
- Disclosure controls were concluded effective. The filing reports no other material Q3 change in internal control over financial reporting.
Investor verification priorities
- Track reserve development and catastrophe losses, particularly mortgage-related exposures, Italian medical malpractice, Australian construction professional indemnity, and long-tail reserves.
- Reconcile premium-volume trends and combined ratios by segment, including the effect of reserve releases and the Guaranty Bank settlement.
- Assess investment portfolio valuation, equity exposure, unrealized losses, credit quality, and sensitivity to market changes.
- Verify post-quarter Aspen acquisition accounting, integration, reserve development, and any contingent consideration.
- Monitor Atlas implementation costs and milestones, debt levels, liquidity, and the availability and terms of the revolving facility.