Markel Corporation (NYSE: MKL) — Q1 2023 Form 10-Q
The filing is for the three months ended March 31, 2023, with balance-sheet comparisons to December 31, 2022 and year-over-year results compared with Q1 2022. The registrant is identified in the filing as Markel Corporation. Markel operates specialty insurance and reinsurance, investments, and Markel Ventures businesses. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total operating revenues | $3,643 million | $2,606 million |
| Operating income (loss) | $754 million | $(40) million |
| Net income (loss) to shareholders | $489 million | $(52) million |
| Diluted earnings (loss) per share | $37.26 | $(6.50) |
| Earned premiums | $1,968 million | $1,760 million |
| Net investment income | $159 million | $92 million |
| Net investment gains (losses) | $373 million | $(358) million |
| Consolidated underwriting profit | $119 million | $197 million |
| Consolidated combined ratio | 94.0% | 88.8% |
| Operating cash flow | $284 million | $415 million |
Reported earnings improved sharply year over year, principally reflecting the reversal from investment losses to investment gains, rather than stronger underwriting profit. The $373 million of investment gains largely reflected appreciation in equity securities. Net income also included $49 million attributable to noncontrolling interests.
Insurance earned premiums rose 16% to $1,711 million; Reinsurance earned premiums fell 9% to $257 million. Insurance underwriting profit declined to $97 million from $187 million, while Reinsurance underwriting profit increased to $24 million from $13 million. The consolidated combined ratio remained below 100% (underwriting profit), but worsened by 5.2 percentage points year over year. Current-accident-year loss ratio was 63.2%, versus 60.7%; favorable prior-year reserve development was $71 million, down from $96 million.
Markel Ventures revenue increased 16% to $1,105 million and operating income rose 46% to $73 million. Management cited stronger results in transportation-related and equipment-manufacturing businesses and a full-quarter contribution from Metromont, partly offset by weakness in consulting and some consumer/building-products businesses.
At March 31, total assets were $50.9 billion, total liabilities $36.7 billion, shareholders’ equity $13.7 billion, and debt $3.9 billion, down from $4.1 billion at year-end. The consolidated debt-to-capital ratio declined to 22% from 24%. Invested assets, including cash and restricted cash, were $28.0 billion. Cash, cash equivalents and restricted cash totaled $5.0 billion, down $217 million during the quarter. Book value per common share was $984.33, up from $935.65 at December 31, 2022.
Material changes and unusual items
- The year-over-year swing in investment performance was substantial: equity-security fair-value gains were $376 million in Q1 2023 versus losses of $365 million in Q1 2022. Fixed-maturity unrealized losses in accumulated other comprehensive income also narrowed; available-for-sale securities had $772 million of gross unrealized losses at quarter-end, versus $962 million at year-end.
- Operating cash flow decreased by $131 million year over year. Management primarily attributed the decline to a $125 million payment for a retroactive reinsurance transaction covering run-off U.K. motor casualty liabilities.
- Financing cash outflow was $412 million, including repayment of $250 million of 3.625% senior notes due in March, $82 million of share repurchases, and CATCo-related and other noncontrolling-interest payments. The company repurchased 63,272 shares for approximately $82 million; $428 million remained under its $750 million repurchase authorization.
- The company adopted the long-duration insurance accounting standard effective January 1, 2023 and restated prior periods presented. Adoption reduced accumulated other comprehensive income by $15 million at the transition date; the filing says other adoption provisions had no material impact on the periods presented.
- Q1 2022 included a $107 million gain on the sale of most of Velocity and a $102 million expense related to the Markel CATCo buy-out, making some year-over-year comparisons less directly comparable.
Outlook, commentary and risks
The filing provides no specific earnings or revenue guidance. Management said rate increases had slowed in many product lines from prior years, with conditions varying by line: significant increases continued in some property and marine/energy business, while workers’ compensation saw low-single-digit rate decreases. Management said it would allow business to lapse where pricing did not meet underwriting targets. It also cited economic and social inflation, recent bank failures affecting professional-liability assumptions, and caution in releasing reserves on longer-tail casualty lines.
Management described its priorities as consistent underwriting and operating profits and superior investment returns, generally assessed over five-year periods. It reported five-year annualized common-share-price growth of 2% and book-value-per-share growth of 8% through March 31, 2023, noting that the former was below internal targets. These are historical measures, not forecasts.
Key risks include catastrophe severity and frequency, reserve-estimation uncertainty, inflation and evolving claims trends, reinsurance counterparty recoverability, investment-market and interest-rate volatility, foreign exchange movements, and execution or market risks in Ventures. The company reported $1.3 billion due from Nephila Reinsurers and said certain programs expose it to losses above specified reinsurance limits. Markel also has $143 million of uncollateralized tail-risk exposure to adverse development in Markel CATCo Re; CATCo’s Q1 favorable reserve development was attributable to noncontrolling interests. Management said it believed liquidity was adequate, had no borrowings under its $300 million corporate revolver, and was in compliance with credit covenants. The revolver expires in April 2024. The filing says ordinary-course contingencies are not expected to materially affect financial condition or results; the company considers the Yeransian litigation without merit and any material loss remote.
Important facts for investors to verify
- How much of the earnings rebound reflects volatile equity-mark-to-market gains, and how underwriting results develop as combined ratios and current-year loss trends change.
- Whether reserve development remains favorable, particularly in longer-tail casualty and professional-liability lines, and how inflation and bank-related exposures affect ultimate claims.
- The collectability and concentration of reinsurance recoverables, including the Nephila balance and exposures above contractual limits, and the potential CATCo tail-risk exposure.
- Investment portfolio sensitivity to equity prices and interest rates, including the remaining unrealized fixed-maturity losses and any future need to sell securities before recovery.
- Cash generation after claims, reinsurance, debt maturities and capital returns; the corporate revolving facility’s April 2024 expiry; and the pace of share repurchases.
- Markel Ventures’ performance across its diverse businesses and whether recent revenue and margin improvements persist.