Markel Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; unaudited. The filing identifies the registrant as Markel Corporation.
Business context and financial performance
Markel is a specialty insurance and reinsurance company with investment, Markel Ventures, insurance-linked securities and program-services operations. Amounts below are in U.S. dollars.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total operating revenues | $2.439bn | $1.987bn | $4.912bn | $3.562bn |
| Net income to shareholders | $497.3m | $278.2m | $1.074bn | $213.9m |
| Diluted earnings per share | $36.07 | $19.97 | $78.85 | $15.72 |
| Net investment gains | $425.7m | $105.2m | $1.038bn | $(17.7)m |
| Underwriting profit | $59.0m | $97.4m | $120.0m | $208.9m |
| Consolidated combined ratio | 95% | 92% | 95% | 91% |
Six-month operating cash flow was $249.2m, versus $307.5m in 2018. Investing activities used $521.6m, including $212.5m for a minority investment in Hagerty Group; financing activities provided $520.2m. Cash, cash equivalents and restricted cash totaled $2.641bn at June 30.
At June 30, total investments were $18.518bn and shareholders’ equity was $10.396bn. Senior and other debt was $3.626bn, up from $3.010bn at year-end 2018; debt-to-capital was 26%, versus 25%. Book value per share rose to $751.94 from $653.85. A $300m revolving credit facility had no borrowings outstanding.
Material changes versus prior comparable periods
- Reported earnings increased substantially, led by fair-value gains on equity securities: $425.7m in Q2 and $1.037bn for the first half. These market-sensitive gains were a major contributor to the year-over-year earnings increase.
- Underwriting results weakened: the combined ratio increased to 95% from 92% for Q2 and to 95% from 91% for the first half. Management attributed this primarily to less favorable prior-year reserve development; first-half favorable development was $188.9m, compared with $265.6m in 2018.
- Earned premiums increased 4% in Q2 and 5% for the first half. Markel Ventures revenue and operating income improved, partly reflecting the 2018 Brahmin acquisition and the absence of 2018 product-remediation and impairment charges.
- Interest expense increased to $81.6m for the first half from $76.8m, reflecting the new 5.0% senior notes. The six-month effective tax rate was 22%, versus 47% in 2018, which included a one-time $102m deferred tax charge related to U.K. subsidiaries.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance is provided. Management reported more favorable rates, particularly for catastrophe-exposed and loss-affected business, while noting competitive markets and continued rate decreases in workers’ compensation. It says it will not write business when pricing does not support underwriting targets.
- In July 2019, after quarter-end, Markel announced that CATCo would stop accepting new fund investments and writing new reinsurance business; the funds and reinsurer would enter run-off, expected to take about three years. Redemptions are obligations of the funds, not Markel Corporation.
- DOJ, SEC and Bermuda Monetary Authority inquiries into CATCo reserves remain ongoing. Markel’s internal review found no evidence of bad faith in reserve judgments or disclosures, but identified policy violations by two senior executives, who departed. Related securities litigation is pending; Markel says the claims are without merit. Outcomes, costs and potential regulatory consequences remain uncertain.
- Markel reported maximum net uncollateralized exposure of $191.6m on certain contracts written on behalf of CATCo Re. Separately, a Nephila-related program had $200.9m of reinsurance recoverables due from Syndicate 2357; Markel retains risk above a specified loss limit that it believes unlikely to be exceeded, but such losses could be material.
- A Markel Ventures product-manufacturing matter had $26.4m accrued for remediation at June 30. Further costs cannot be estimated and could materially affect pretax income, although management did not expect a material adverse effect on overall results or financial condition.
- Other risks include catastrophe losses, reserve-estimation uncertainty, investment-market volatility and Brexit-related operating changes. Markel reported an average “AA” rating on fixed maturities, with 98% rated “A” or better; less than 1% was unrated or below investment grade.
Important facts for investors to verify
- How much of earnings growth reflects recurring underwriting and operating performance versus equity-market gains.
- Whether underwriting ratios and reserve development improve, particularly given lower favorable reserve releases and changes to reinsurance protection.
- Developments, costs and potential liabilities from the CATCo inquiries, litigation and run-off, including the $191.6m stated uncollateralized exposure.
- Collectability of reinsurance recoverables, including amounts due from Syndicate 2357, and the ultimate cost of the product-remediation matter.
- Debt levels, liquidity and the use of proceeds from the $600m, 5.0% notes issued in May 2019; management intended to use part of the proceeds to retire $234.8m of 7.125% notes due September 2019.