Markel Corporation (named registrant in filing) — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts are in U.S. dollars; financial statement amounts are rounded. Markel is a specialty insurer and reinsurer with industrial and service businesses through Markel Ventures.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total operating revenues | $1.481 billion | $1.376 billion | $2.893 billion | $2.752 billion |
| Net income to shareholders | $149.7 million | $78.8 million | $219.5 million | $239.2 million |
| Diluted EPS | $10.31 | $5.41 | $14.20 | $16.55 |
| Underwriting profit | $110.6 million | $63.7 million | $108.2 million | $182.8 million |
| Consolidated combined ratio | 89% | 93% | 95% | 90% |
| Net investment income | $99.3 million | $95.0 million | $199.7 million | $186.3 million |
- Q2 operating income was $241.3 million versus $193.7 million; six-month operating income was $368.8 million versus $438.9 million. Q2 income before tax rose to $209.5 million from $115.9 million. The prior-year periods included a $44.1 million loss on early extinguishment of debt.
- Six-month cash provided by operations was $237.9 million, compared with $70.2 million. Investing activities provided $436.8 million, including the effect of lower short-term investments and $202.0 million of acquisition cash outflow; financing activities used $198.6 million. Cash, cash equivalents and restricted cash totaled $2.586 billion at period end.
- At June 30, total assets were $27.203 billion, total liabilities $18.164 billion, shareholders’ equity $8.954 billion, and debt $2.486 billion. Debt-to-capital was 22%, down from 23% at year-end 2016. Book value per share rose to $643.37 from $606.30.
- Investments were $17.099 billion; equity securities were $5.341 billion, or 27% of invested assets. Six-month comprehensive income to shareholders was $565.6 million, including $341.0 million of after-tax unrealized investment gains.
Changes versus comparable periods
- Premium growth supported higher revenue: Q2 earned premiums rose 9% to $1.034 billion; six-month earned premiums rose 6% to $2.016 billion. Gross premium volume increased 6% in both periods. Net retention was 84% for Q2 and 85% year to date.
- Q2 underwriting improved from the prior year, partly because Q2 2016 included $25.3 million of Canadian wildfire losses and 2017 had greater favorable prior-year reserve development. The six-month combined ratio worsened to 95% from 90%, principally reflecting the U.K. Ogden Rate change and weaker Reinsurance results.
- Six-month prior-year reserve development was $184.4 million favorable, compared with $246.3 million favorable in 2016. In 2017, $85.0 million of adverse development from the U.K. Ogden Rate change partly offset reserve redundancies.
- Six-month net income to shareholders declined despite higher revenue and investment income. The 2016 comparison included the $44.1 million debt-extinguishment charge; underwriting profit also fell year over year.
Outlook, commentary, risks and unusual items
- No numerical earnings or premium guidance is provided. Management emphasizes long-term book-value-per-share growth, underwriting discipline and avoiding business where pricing does not support profit targets. It reported small price decreases across many product lines, particularly international property, marine and energy, and large-account business.
- SureTec acquisition closed April 28 for total consideration of $246.9 million, including $225.6 million cash and estimated contingent consideration. It added surety operations to U.S. Insurance.
- After quarter-end, Markel agreed to acquire 81% of Costa Farms for estimated cash consideration of approximately $255 million, with additional and contingent consideration possible. It also agreed to acquire State National for aggregate consideration expected to be approximately $919 million, subject to approvals and other closing conditions; closing was expected in Q4 2017.
- The U.K. Ogden Rate fell from +2.5% to -0.75%, increasing expected bodily-injury claims on legacy U.K. auto reinsurance exposures. Markel said reserve estimates may change as claim experience develops. It had ceased writing new U.K. auto reinsurance in late 2014.
- Management identified uncertainty from catastrophe frequency and severity, loss-reserve estimation, reinsurance recoverability, competitive pricing, investment-market volatility, Brexit and acquisition integration. Brexit could affect access to E.U. markets; Markel was pursuing preliminary steps for a German insurance entity while Lloyd’s planned a Brussels entity.
- A CVR holder lawsuit seeks $47.3 million plus interest, possible default interest and unspecified other damages. Management considers the suit without merit and a material loss remote. Management said ordinary-course contingencies were not expected to materially affect financial condition or results.
- Equity-market gains materially increased accumulated unrealized investment gains. Beginning in 2018, a new accounting standard was expected to move fair-value changes on certain equity securities from other comprehensive income to net income; accumulated after-tax unrealized equity gains were approximately $1.8 billion at June 30.
Important facts for investors to verify
- Whether favorable reserve development remains sustainable, and the eventual claims impact of the Ogden Rate change.
- Underlying segment underwriting trends, especially the six-month Reinsurance combined ratio of 108% and changes in pricing and retention.
- Investment portfolio valuation and earnings volatility, including the effect of equity-security gains and the forthcoming accounting presentation change.
- Funding, integration, contingent consideration and closing conditions for the Costa Farms and State National transactions.
- Progress and potential financial exposure from the CVR litigation and Markel’s Brexit-related market-access plans.