Markel Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are to Q1 2018 unless noted. Markel is a specialty insurance and reinsurance underwriter and also operates Markel Ventures and insurance-linked securities businesses. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Operating revenues | $2.472 billion | $1.575 billion |
| Operating income | $794.8 million | $105.0 million |
| Income (loss) to shareholders | $576.4 million | $(64.3) million |
| Diluted earnings (loss) per share | $42.76 | $(4.25) |
| Operating cash flow | $18.7 million | $57.7 million |
- Reported revenue and earnings were heavily affected by equity-market movements: the fair-value change in equity securities was a $611.5 million gain, versus a $122.1 million loss in Q1 2018. This gain was the principal driver of the earnings swing and is not equivalent to recurring underwriting performance.
- Earned premiums rose 5% to $1.204 billion; net written premiums rose 11% to $1.477 billion. Underwriting profit declined to $61.0 million from $111.5 million. The consolidated GAAP combined ratio worsened to 95% from 90%; Insurance was 95% (89% prior year) and Reinsurance 99% (97%).
- Net investment income increased to $114.2 million from $108.0 million. Taxable-equivalent total investment return was 5.4%, compared with negative 0.5%.
- Markel Ventures operating revenue increased to $455.0 million from $392.1 million, and operating income rose to $29.9 million from $23.8 million. Management cited higher product sales and prices, Brahmin’s contribution, and growth in a consulting business.
Financial position and liquidity
- At March 31, total assets were $34.7 billion, total liabilities $24.8 billion, and shareholders’ equity $9.8 billion, up from $9.1 billion at year-end 2018. Book value per share rose to $706.98 from $653.85.
- Investments totaled $17.3 billion; cash and cash equivalents were $2.415 billion and restricted cash $349.0 million. Total debt was $3.059 billion, compared with $3.010 billion at December 31. Debt to capital was 24%, down from 25%.
- Cash from operating activities was $18.7 million; investing activities provided $342.1 million, while financing activities used $0.1 million. Cash, cash equivalents and restricted cash ended the quarter at $2.764 billion. Management attributed lower operating cash flow principally to higher claims payments and lower Markel Ventures cash flows, partly offset by tax refunds.
- In April 2019, Markel replaced its prior revolving facility with a new $300 million facility, expiring in April 2024, with up to $200 million available for letters of credit. The company said it believed liquidity was sufficient to meet capital needs.
Changes, outlook and notable items
- Underwriting results weakened year over year, largely because prior-year reserve releases were lower: favorable development was $70.2 million versus $108.1 million. Reinsurance also recorded $12.8 million of adverse catastrophe-related prior-year development, partly offset by favorable development elsewhere.
- Management reported more favorable rates, particularly for catastrophe-exposed and loss-affected business, and more stable pricing in some lines; workers’ compensation rates were decreasing and competition remained strong. Markel said it would not write business when market pricing did not support its underwriting targets. No specific earnings or revenue guidance was provided.
- Equity securities were 32% of invested assets at quarter-end, versus 30% at year-end. Management identified equity-price, interest-rate and foreign-currency exposure as key market risks. The fixed-income portfolio averaged AA, with 98% rated A or better.
- Investigations by the DOJ, SEC and Bermuda Monetary Authority into Markel CATCo Re’s late-2017 and early-2018 loss reserves remained ongoing. An internal review completed in April found no evidence of bad faith, but Markel could not predict the inquiries’ outcome. Two MCIM executives departed; related securities class actions and executive lawsuits were pending. Markel warned that adverse outcomes, regulatory action, costs or reputational damage could materially affect results or financial condition.
- CATCo fund investors representing 91% of net assets under management elected to redeem shares; some redemptions may be delayed until exposures are settled, potentially for up to four years. Markel stated that payment is an obligation of the funds, not Markel Corporation. Separately, Markel’s maximum net uncollateralized exposure on new CATCo reinsurance contracts was $191.6 million.
- A Markel Ventures product-manufacturing matter had $26.4 million accrued for remediation at March 31; additional costs could not be estimated and could materially affect pretax income, although management did not expect a material adverse effect overall. The filing also describes Brexit-related operating risks and measures, including transfer of legacy EEA exposures to Markel Insurance SE effective March 29, 2019.
- Lease accounting adoption added a $243.7 million right-of-use asset and $264.6 million lease liability at January 1, 2019, without a material effect on results or cash flows. The quarter also included a $25.8 million reserve deficiency adjustment for the life and annuity portfolio arising from lower market yields.
Key facts for investors to verify
- How much of future earnings and book-value volatility reflects equity-market fair-value changes, and how the portfolio performs through a full market cycle.
- Whether underwriting profitability and reserve development remain sound, especially in catastrophe-exposed and reinsurance lines.
- Developments and potential financial, regulatory and reputational consequences from the CATCo investigations, litigation, redemptions and uncollateralized exposure.
- Actual additional remediation costs for the Markel Ventures product matter and the resolution of the Aspen contingent-value-right litigation.
- Cash generation, claims-payment trends, leverage and liquidity availability, including compliance with the new credit facility’s covenants.