Markel Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The filing identifies the registrant as Markel Corporation.
Business context and financial performance
Markel is a specialty insurance and reinsurance underwriter and a holding company for non-insurance businesses, including Markel Ventures. Q3 results were materially affected by the 2017 catastrophes; nine-month underwriting results also reflected these events and a U.K. discount-rate change affecting certain reinsurance claims.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total operating revenues | $1.506bn | $1.431bn | $4.399bn | $4.183bn |
| Net income (loss) to shareholders | $(259.1)m | $83.8m | $(39.6)m | $323.0m |
| Diluted EPS | $(18.82) | $5.60 | $(4.52) | $22.16 |
| Net investment income | $104.5m | $93.1m | $304.2m | $279.4m |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $598.7m | $324.4m |
Earned premiums rose 13% in Q3 and 8% year to date. Underwriting results reversed from profit to loss: consolidated underwriting loss was $371.5m in Q3 versus profit of $22.3m a year earlier, and loss of $263.3m for nine months versus profit of $205.1m. Consolidated combined ratios were 134% and 108%, respectively, compared with 98% and 93% in the prior-year periods. A ratio above 100% indicates an underwriting loss.
Q3 total operating expenses increased to $1.834bn from $1.279bn, chiefly reflecting higher losses and loss adjustment expenses. Nine-month pretax loss was $56.4m versus pretax income of $449.7m in 2016; the prior-year period included a $44.1m loss on early debt extinguishment. Q3 comprehensive loss to shareholders was $19.9m, while nine-month comprehensive income was $545.7m, including $563.2m of after-tax unrealized investment gains.
Financial position, liquidity and debt
- At September 30, total assets were $28.52bn, total liabilities $19.46bn, shareholders’ equity $8.91bn, and debt $2.47bn. Debt-to-capital was 22%, down from 23% at year-end 2016.
- Investments were $17.62bn; cash and cash equivalents were $2.08bn and restricted cash was $279.4m. Combined cash and restricted cash totaled $2.36bn. Management said it believed liquidity was sufficient for capital needs.
- Operating cash flow was $598.7m for nine months. Investing activities used $94.2m, including $592.0m net cash used for acquisitions; financing activities used $299.3m. Cash, cash equivalents and restricted cash increased $270.5m over the period.
- Book value per share increased to $641.20 from $606.30 at December 31, 2016. The increase primarily reflected comprehensive income, substantially driven by unrealized investment gains.
Material changes, outlook and risks
- Catastrophe losses: Hurricanes Harvey, Irma and Maria and earthquakes in Mexico generated an estimated $503.0m underwriting loss through September 30, including $521.2m of estimated net losses and $18.2m of net assumed reinstatement premiums. Estimates included $464.4m of reinsurance recoverables; management cautioned that estimates were highly volatile and subject to revision.
- Reserves: Nine-month results included $335.5m favorable development on prior-year reserves, partly offset by $85.0m adverse development from the U.K. Ogden Rate change, which increased estimated bodily-injury claim payments.
- Investments: Q3 realized investment losses were $40.0m, including a $51.6m decline in the value of insurance-linked securities funds tied to catastrophe losses. Net unrealized investment gains increased materially. Equity securities represented 29% of invested assets, up from 25% at year-end 2016.
- Acquisitions: Markel acquired SureTec in April and 81% of Costa Farms in August. The proposed $919m acquisition of State National had shareholder approval but remained subject to customary closing conditions, including regulatory approval; closing was expected in Q4 2017.
- Non-insurance operations: Markel Ventures revenue increased, but nine-month net income to shareholders declined to $38.4m from $49.5m and EBITDA to $115.8m from $133.8m. 2017 expenses included a $20m estimated Hurricane Irma inventory loss; potential insurance recoveries were not recognized.
- Market conditions and other exposures: Management reported modest pricing decreases across many product lines, particularly international property and marine/energy, and pricing pressure on large accounts; it said it would not write business when prices did not support underwriting targets. Brexit, catastrophe frequency and severity, reserve estimation, reinsurance recoverability, market volatility, and acquisition integration were among disclosed risks.
- Subsequent event: After quarter-end, Northern California wildfires were preliminarily estimated to cause $40m–$80m of net pretax losses. The estimate was incomplete, including uncertainty around business interruption, and was expected to be recorded in Q4.
- Contingency: A dispute over Aspen acquisition contingent value rights sought $47.3m plus interest and other damages. Management considered a material loss remote and said it would defend the claim; the court had ordered arbitration, subject to a motion for reconsideration.
- No formal earnings or underwriting guidance was provided. Management stated that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- How catastrophe loss estimates and reinsurance recoverables develop, including the Q4 California wildfire estimate.
- Whether favorable reserve development continues and how the Ogden Rate impact evolves.
- Underwriting performance and pricing trends by segment, especially the Reinsurance segment’s 135% nine-month combined ratio.
- State National’s closing, final acquisition funding, and integration outcomes; also final purchase accounting for Costa Farms.
- The investment portfolio’s exposure to equity-market volatility and catastrophe-sensitive ILS funds, and the resulting effect on earnings and book value.