Markel Corporation — Q3 2011 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and nine months ended September 30, 2011, compared with the same 2010 periods. Markel underwrites specialty insurance in Excess and Surplus Lines, Specialty Admitted and London markets, and owns non-insurance businesses. Dollar amounts below are in millions unless otherwise stated.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total operating revenues | $676.1 | $561.4 | $1,944.9 | $1,613.5 |
| Net income to shareholders | $53.3 | $63.3 | $91.9 | $126.7 |
| Diluted earnings per share | $5.48 | $6.48 | $9.42 | $12.93 |
| Net investment income | $62.2 | $68.7 | $196.6 | $201.4 |
| Operating cash flow | Not reported by quarter | Not reported by quarter | $261.1 | $172.8 |
| Underwriting profit (loss) | $0.3 | $28.9 | $(66.6) | $10.5 |
| Consolidated combined ratio | 100% | 93% | 105% | 99% |
- Revenue growth reflected higher earned premiums and increased non-insurance revenue, partly from acquisitions. Earned premiums grew 17% in Q3 and 16% year to date.
- Net income to shareholders declined 16% in Q3 and 27% year to date. Management attributed the declines primarily to weaker underwriting, including catastrophe losses; a lower estimated effective tax rate partly offset the effect.
- Q3 underwriting results were near break-even; the nine-month underwriting loss reflected catastrophe and other large losses. Nine-month results included $133.0 million of net catastrophe underwriting losses and $22.7 million of net Marine and Energy losses. Favorable prior-year reserve development of $250.2 million partly offset current-year losses.
- Segment performance diverged: nine-month combined ratios were 88% for Excess and Surplus Lines, 109% for Specialty Admitted and 119% for the London Insurance Market. The Specialty Admitted and London segments reported underwriting losses for the period.
- At September 30, total assets were $11.37 billion; investments were $7.68 billion and cash and equivalents were $920.2 million. Senior long-term and other debt was $1.27 billion, versus $1.02 billion at year-end 2010. Debt to total capital was 28%, up from 24%.
- Shareholders’ equity was $3.21 billion. Book value per share rose to $333.11 from $326.36 at December 31, 2010. Q3 comprehensive loss to shareholders was $52.6 million; nine-month comprehensive income was $68.2 million.
- Nine-month investing cash outflow was $294.5 million and financing cash inflow was $210.8 million. Cash and equivalents increased by $174.9 million to $920.2 million.
Material changes, outlook, risks and unusual items
- Catastrophe losses from events including the Japanese earthquake and tsunami, U.S. storms, New Zealand earthquake, Australian floods and Hurricane Irene materially affected underwriting. Management said estimates remained subject to significant volatility as claims information developed.
- Markel issued $250 million of 5.35% unsecured senior notes due 2021. It replaced its revolving credit facility with a $150 million facility, expandable to $300 million subject to conditions; no amount was drawn at quarter-end. Management said liquidity was sufficient and described a more defensive investment posture, holding more cash and short-term investments to preserve flexibility and prepare for claims payments.
- Investment income declined year over year. Q3 net realized gains included $10.0 million of other-than-temporary impairment losses; the nine-month amount was $14.9 million, compared with $6.3 million in 2010. Unrealized investment losses were $35.1 million at quarter-end. Management cautioned that market volatility could cause additional impairments.
- Soft market pricing and higher-than-expected severity and frequency of certain losses pressured Specialty Admitted results. Management said it would forgo business when pricing did not meet underwriting targets, potentially constraining premium growth.
- Acquisitions included PartnerMD and BAKE-TECH during 2011, and an 83% interest in Weldship after quarter-end. Purchase-price allocations for BAKE-TECH and Weldship were not yet complete. Acquisitions increase operational and control risks, as noted in the filing.
- Asbestos and environmental reserves are uncertain, undiscounted and expected to pay out over approximately 50 years; management said the 2011 actuarial review required no adjustment but reserves could increase. The filing states normal-course contingencies were not expected to have a material impact.
- No specific financial guidance was provided. The filing cautions that catastrophe activity, reserve estimates, reinsurance availability and recoverability, market prices and interest rates, competition, and non-insurance business conditions could affect future results.
- Disclosure controls were reported effective; no material third-quarter change in internal control over financial reporting was reported.
Important facts for investors to verify
- Subsequent catastrophe claim development, reinsurance recoveries and changes to the $133.0 million year-to-date catastrophe loss estimate.
- Whether favorable prior-year reserve development continues, and the adequacy of reserves for Specialty Admitted, London, asbestos and environmental exposures.
- Premium growth, pricing adequacy and combined-ratio trends by segment, particularly in Specialty Admitted and the London Insurance Market.
- Acquisition integration, remaining purchase-price allocations and the effect of acquired businesses on debt, earnings and cash flow.
- Investment portfolio valuation and impairment exposure, including municipal bond credit quality and equity-market sensitivity.
- Liquidity and leverage after the senior-note issuance, planned claims settlements and any further acquisitions or share repurchases.