Markel Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. The filing is for Markel Corporation, now identified in the request as Markel Group Inc. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Business context
Markel is a specialty insurance and reinsurance company with additional industrial and service businesses. On May 1, 2013, it completed its acquisition of Alterra for approximately $3.30 billion, paid in cash and Markel shares. Alterra’s results are included only from the acquisition date in reported results, limiting direct comparisons with 2012.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total operating revenues | $1,031.8 million | $693.2 million | $1,851.6 million | $1,426.4 million |
| Net income attributable to shareholders | $27.8 million | $89.7 million | $116.7 million | $146.9 million |
| Diluted earnings per share | $2.24 | $8.42 | $10.79 | $14.35 |
| Net investment income | $78.0 million | $63.6 million | $142.6 million | $143.4 million |
| Net realized investment gains | $11.5 million | $8.2 million | $29.5 million | $20.1 million |
| Operating cash flow | Not presented by quarter | $240.0 million | $104.7 million |
Reported combined ratios were 103% for Q2 and 98% for the first half, versus 87% and 93% a year earlier. A ratio above 100% indicates an underwriting loss. Q2 underwriting loss was $20.7 million; first-half underwriting profit was $27.3 million. Shareholders’ equity was $6.32 billion at June 30, and book value per share was $451.72, up from $403.85 at year-end 2012.
Balance sheet, debt and liquidity
- Total assets were $23.50 billion and total liabilities $17.10 billion at June 30, 2013. Total debt was $2.25 billion, compared with $1.49 billion at December 31, 2012; the debt-to-capital ratio was 26%, down from 28%.
- Cash and cash equivalents were $1.70 billion. Investments, cash and restricted cash totaled approximately $16.6 billion; $5.7 billion of invested and other assets were restricted or held in trust or on deposit.
- Markel reported no borrowings under its revolving facility or Alterra’s $900 million senior credit facility. The latter had $460.3 million of outstanding letters of credit. Markel’s revolving facility capacity increased from $150 million to $300 million effective July 12, 2013.
- Management stated it believed liquidity was sufficient for capital needs. Domestic insurance subsidiaries and Alterra Bermuda could pay $305 million in ordinary dividends during the remainder of 2013, subject to applicable restrictions.
Material changes and unusual items
- Alterra contributed $243.2 million of operating revenue and a $55.7 million net loss to shareholders for May 1 through June 30. Its reported combined ratio was 136%, including $61.8 million of transaction and acquisition-related costs and $25.4 million of catastrophe underwriting losses.
- Acquisition-related expenses included $16.0 million of transaction costs, $28.2 million of severance, $6.1 million of stay bonuses and $11.5 million of accelerated compensation. Markel expected another $14.1 million of stay-bonus costs through May 2014.
- On a supplemental pro forma basis, assuming Alterra had been acquired January 1, 2012, shareholder net income was $72.1 million for Q2 2013 versus $118.6 million in Q2 2012, and $208.1 million for first-half 2013 versus $205.6 million in first-half 2012. Pro forma combined ratios were 97% and 94%, respectively, compared with 88% and 93%. These are illustrative, not reported results.
- Q2 comprehensive loss to shareholders was $149.1 million, chiefly reflecting a $166.7 million after-tax decline in unrealized investment gains. First-half comprehensive income to shareholders was $108.6 million.
- Favorable prior-year reserve development was $119.3 million in Q2 and $204.1 million in the first half, compared with $126.9 million and $190.9 million in 2012. Alterra’s reported-period results included no prior-year reserve development.
Outlook, management commentary and risks
Management reported modest price increases across many product lines and said it would pursue increases where possible, while declining business that did not support underwriting profit targets. Alterra integration was expected to continue through 2014. The company also anticipated approximately $73 million of additional hedge-fund redemptions during the remainder of 2013. No specific earnings or revenue guidance was provided.
Key risks include catastrophe frequency and severity; uncertainty in property, casualty, reinsurance, and Alterra life-and-annuity runoff reserves; reinsurer credit and collection risk; investment market, interest-rate, and credit-spread volatility; acquisition integration, retention of business and personnel, and realization of expected synergies. Alterra’s purchase-price allocations remained provisional, including valuations of certain intangibles, loss reserves and deferred taxes. Markel disclosed that, due mainly to adverse trends at two Alterra U.S. insurance subsidiaries, it agreed to make a $40 million capital contribution on August 1, 2013, after quarter-end.
Important facts for investors to verify
- How much of reported growth and earnings reflects Alterra, and how the pro forma results reconcile to reported results.
- Whether Alterra’s catastrophe losses, underwriting performance and integration costs improve, and whether anticipated synergies are achieved.
- Reserve adequacy, including the assumptions underlying favorable prior-year development and Alterra’s life-and-annuity runoff liabilities.
- Investment portfolio sensitivity to market movements, including the substantial Q2 decline in unrealized gains and the $201.1 million of gross unrealized investment losses at June 30.
- Liquidity and capital availability after restricted assets, regulatory dividend limits, letters of credit, debt obligations and the $40 million post-quarter capital contribution are considered.