Markel Corporation — Q1 2015 Form 10-Q
Business and period: Specialty insurance and reinsurance, alongside Markel Ventures industrial and service businesses. This unaudited filing covers the three months ended March 31, 2015, compared with Q1 2014; balance-sheet comparisons are to December 31, 2014. Dollar amounts below are in millions unless stated otherwise.
Financial results
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Total operating revenues | $1,302.2 | $1,239.7 |
| Operating income | $268.8 | $145.7 |
| Net income to shareholders | $191.0 | $87.7 |
| Diluted earnings per share | $13.49 | $6.25 |
| Underwriting profit | $156.0 | $51.6 |
| Consolidated combined ratio | 83% | 95% |
| Net investment income | $92.9 | $86.7 |
| Net realized investment gains | $5.6 | $17.4 |
| Operating cash flow | $22.8 | $22.4 |
| Total assets | $25,253.4 | $25,200.4 at Dec. 31, 2014 |
| Debt | $2,249.6 | $2,253.6 at Dec. 31, 2014 |
| Shareholders’ equity | $7,869.7 | $7,594.8 at Dec. 31, 2014 |
Premiums and underwriting: Earned premiums were $943.7, down 1%; net written premiums fell to $1,035.4 from $1,139.3, and gross premium volume declined 8% to $1,252.5. Underwriting profit rose substantially, with combined ratios improving in U.S. Insurance (84% vs. 96%), International Insurance (73% vs. 91%) and Reinsurance (89% vs. 94%).
Cash, investments and capital: Cash and cash equivalents were $1,958.1; investments were $16,044.5, and restricted cash was $550.6. The company reported invested assets of approximately $18.6 billion. Cash decreased $2.1 during the quarter. Debt-to-capital was 22%, versus 23% at year-end; management’s target capital structure includes approximately 30% debt. Book value per share rose to $564.29 from $543.96.
Changes, drivers and management commentary
- Shareholder net income more than doubled year over year. Improved underwriting results, higher Markel Ventures revenues and a lower estimated tax rate contributed. The 19% estimated annual effective tax rate, versus 25%, reflected tax-exempt investment income and expected foreign tax credits; management said the credits may not be available in future years.
- Favorable prior-year reserve development was $167.3, compared with $107.4 in Q1 2014. Management reduced prior-year reserves by $36.0 after a retrospective reinsurance transaction reduced estimated volatility in net reserves. This reserve release materially benefited the quarter’s combined ratio and earnings.
- Markel Ventures revenue increased to $245.4 from $171.2, and EBITDA increased to $33.6 from $14.1. The company cited the July 2014 Cottrell acquisition and stronger manufacturing results; these contributed to higher consolidated other revenues and expenses.
- Net investment income increased, but realized gains declined and included $5.1 of other-than-temporary impairment losses. Taxable-equivalent total investment return was 0.5%, compared with 2.0% in Q1 2014, including foreign-currency effects.
- Equity securities represented 23% of invested assets, versus 22% at year-end. Management described continued softening prices in many property lines and marine and energy, while noting modest price increases across many other product lines. It said it would not write business when prevailing prices do not support underwriting targets.
Outlook, risks and unusual items
- No specific earnings or premium-volume guidance was provided. Management said interim results are not necessarily indicative of full-year results and emphasized underwriting discipline amid pricing pressure.
- On March 9, 2015, Markel ceded pre-1992 asbestos and environmental liabilities for consideration of $89.0, including $69.9 paid at closing. Reserves ceded were $94.1; a $5.1 gain was deferred and will be recognized as reinsurance recoveries are received. Formal transfer of the net reserves was expected in 2015. Management said the transaction reduced uncertainty and could provide greater flexibility to allocate capital, while lowering investment income in the short term.
- Operating cash flow included the $69.9 transaction payment. Despite positive operating cash flow, investing cash flow was $30.7 and financing cash flow was negative $33.4; investing and financing cash flows also reflect portfolio activity, share repurchases and other transactions.
- Key disclosed risks include catastrophe frequency and severity, reserve-estimation uncertainty (especially asbestos and environmental and reinsurance reserves), reinsurance collectability and availability, insurance-market pricing, investment-market and foreign-exchange volatility, municipal-bond credit exposure, and risks in Markel Ventures and recent acquisitions. Management stated ordinary-course contingencies were not expected to materially affect financial condition or results.
- The company reported effective disclosure controls. It completed the final transition of acquired Alterra operations to its general-ledger system during the quarter; no other material internal-control changes were reported.
Investor verification points
- Assess how much of the 83% combined ratio and earnings improvement came from reserve releases, including the $36.0 reserve reduction, versus current-year underwriting performance.
- Review the terms, recoveries and completion of the asbestos and environmental reinsurance transfer, including realization of the deferred $5.1 gain.
- Track premium-volume trends, foreign-exchange effects and pricing adequacy, particularly in reinsurance, property, and marine and energy lines.
- Evaluate Markel Ventures’ operating contribution separately from insurance results and consider the acquisition-related effect on year-over-year comparisons.
- Monitor foreign tax-credit assumptions, investment impairments and returns, catastrophe exposure, reserve adequacy, and liquidity after the transaction payment.