Markel Group Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparisons are to the same 2022 periods unless noted. Markel Corporation changed its name to Markel Group Inc. on May 26, 2023. The company’s businesses are organized around specialty insurance, investments and Markel Ventures.
Financial performance
| Metric | Q2 2023 | Six months 2023 |
|---|---|---|
| Total operating revenues | $4.14 billion (prior year: $1.79 billion) | $7.79 billion (prior year: $4.40 billion) |
| Net income to common shareholders | $677.5 million (prior year: loss of $933.8 million) | $1.17 billion (prior year: loss of $985.5 million) |
| Diluted earnings per common share | $50.09 (prior year: loss of $69.15) | $87.34 (prior year: loss of $75.56) |
| Net cash from operating activities | Not separately reported for the quarter | $1.01 billion (prior year: $921.0 million) |
| Underwriting profit | $145.4 million (prior year: $164.8 million) | $264.4 million (prior year: $361.9 million) |
| Consolidated combined ratio | 92.8% (prior year: 91.0%) | 93.4% (prior year: 89.9%) |
Revenue and earnings comparisons were heavily affected by investment-market movements. Net investment gains were $484.5 million in Q2 and $857.1 million for the first half, primarily reflecting increases in equity-security fair values; the comparable 2022 periods recorded losses of $1.55 billion and $1.91 billion. Net investment income rose to $169.7 million for Q2 and $329.0 million for the first half, helped by higher interest income on cash, short-term investments and fixed maturities.
Insurance earned premiums increased 11% in both Q2 and the first half. Insurance-segment premiums grew, while Reinsurance earned premiums were 2% higher in Q2 but 4% lower year to date. Underwriting profit declined despite higher earned premiums, as current-year loss and expense ratios increased. Prior-year reserve development was favorable by $67.9 million in Q2 and $139.2 million in the first half.
Markel Ventures operating revenue was $1.39 billion in Q2 and $2.49 billion for the first half, up 2% and 8%, respectively. Segment operating income rose 40% to $150.2 million in Q2 and 42% to $222.8 million year to date, supported by improved margins in consumer and building products businesses as material and freight costs stabilized.
Financial position, debt and liquidity
- At June 30, 2023, total assets were $52.18 billion, total liabilities $37.48 billion and total equity $14.24 billion. Shareholders’ equity was $14.19 billion.
- Investments totaled $23.47 billion; cash and cash equivalents were $4.31 billion, with another $935.0 million of restricted cash. The company reported $28.7 billion of invested assets, including cash and restricted cash.
- Senior long-term and other debt was $3.81 billion, down from $4.10 billion at year-end 2022. The consolidated debt-to-capital ratio declined to 21% from 24%. Markel retired $250 million of 3.625% senior notes in March.
- The corporate revolving credit facility provides $300 million of capacity and expires in June 2028; there were no corporate-facility borrowings at quarter-end and the company reported covenant compliance. Markel Ventures subsidiaries had $209.0 million borrowed against facilities with aggregate capacity of up to $715 million.
- For the first half, cash used in investing activities was $373.6 million and cash used in financing activities was $629.9 million. Total cash, cash equivalents and restricted cash increased by $19.4 million to $5.24 billion.
- Book value per common share was $1,023.23, versus $935.65 at December 31, 2022. The company repurchased $187.2 million of common stock during the first half; $323.8 million remained under its $750 million authorization.
Material changes and management commentary
- Underwriting: The consolidated combined ratio increased 1.8 points in Q2 and 3.5 points year to date. Management cited higher current accident-year losses and expenses, including increased attritional claims trends in professional and general liability and economic and social inflation. General liability also had adverse development, partly offset by favorable development in other lines.
- Pricing and retention: Rate increases continued across most lines but varied by product. Management cited significant increases in some property and marine and energy lines, low-single-digit rate decreases in workers’ compensation, and pricing pressure in professional liability, particularly large-account directors and officers. The company said it would allow business to lapse where pricing did not meet underwriting targets. Net retention declined year over year in both underwriting segments.
- Investments: The fixed-maturity portfolio had gross unrealized losses of $917.3 million at quarter-end, including $844.8 million on securities in loss positions for at least 12 months. Management reported no credit-loss allowance and said it did not intend, or expect to be required, to sell these securities before recovery of amortized cost. The portfolio’s average rating was AAA, with 99% rated A or better.
- Other notable items: A June sale of a licensed insurance subsidiary generated a $16.9 million gain. A March retroactive reinsurance transaction transferred a run-off U.K. motor casualty portfolio for $125.1 million, approximately its carrying value. Foreign-exchange losses were $15.0 million in Q2 and $47.9 million for the first half, compared with gains in 2022. Interest expense decreased following debt retirements.
- Outlook and risk: No specific earnings or revenue guidance was provided. Management said interim results are not necessarily indicative of full-year results and emphasized long-term performance. Risks include claims inflation and reserve-estimation uncertainty, catastrophe losses, reinsurance availability and collectability, market and interest-rate volatility, foreign exchange, and possible losses beyond limits in certain fronting and Nephila-related arrangements.
- Contingencies and controls: The company stated that ordinary-course contingencies are not expected to materially affect financial condition or results. A court ruled for Markel in the Yeransian contingent-value-rights litigation; the plaintiff appealed. Management concluded disclosure controls were effective and reported no material second-quarter change in internal control over financial reporting.
Investor verification points
- Assess how much reported earnings depended on equity-market gains and whether underlying underwriting and operating trends support the headline improvement.
- Track current-year claims severity, especially professional and general liability, and the durability of favorable prior-year reserve development.
- Review the duration, credit quality and recovery assumptions for the substantial unrealized fixed-maturity losses, including the concentration of losses outstanding for at least 12 months.
- Evaluate reinsurance recoverable exposure and the terms and limits of Nephila/fronting arrangements, including the disclosed potential for losses above certain limits.
- Monitor debt, subsidiary borrowing, repurchases and liquidity against catastrophe, claims-payment and investment needs.