Markel Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2021. The filing identifies the registrant as Markel Corporation.
Business context
Markel is a financial holding company with three principal businesses: specialty insurance and reinsurance, investing, and Markel Ventures, which owns businesses outside insurance. The results below are unaudited; amounts are in U.S. dollars.
Financial performance and position
- Revenue: Third-quarter total operating revenues were $2.687 billion, down from $2.912 billion a year earlier, primarily reflecting the swing in investment gains to losses. Earned premiums rose 17% to $1.631 billion. For the first nine months, operating revenues were $9.088 billion versus $6.379 billion, and earned premiums increased 15% to $4.696 billion.
- Profit: Net income to common shareholders was $188.1 million in Q3 versus $452.7 million in Q3 2020. For the first nine months, it was $1.536 billion versus a loss of $31.3 million. Diluted earnings per common share were $15.09 for Q3 and $114.20 year to date.
- Underwriting: Consolidated underwriting profit was $112.5 million in Q3 and $408.3 million year to date, versus $38.4 million and an underwriting loss of $44.8 million, respectively, in 2020. The combined ratio was 93.1% in Q3 (97.2% in 2020) and 91.3% year to date (101.1% in 2020); below 100% indicates an underwriting profit. Q3 Insurance segment combined ratio was 89.4%, while Reinsurance was 112.1%.
- Investments: Net investment income was $91.3 million in Q3 and $284.1 million year to date. Net investment gains were a $25.8 million loss in Q3 versus a $539.3 million gain in Q3 2020; year-to-date gains were $1.176 billion versus a $230.9 million loss. Management attributed the swings mainly to changes in equity-market values. Fixed-maturity unrealized gains also declined as interest rates rose.
- Markel Ventures: Q3 revenue increased 10% to $908.2 million, but operating income fell 31% to $55.0 million. Year-to-date revenue rose 34% to $2.690 billion and operating income rose 7% to $215.1 million. Management cited higher input costs and supply constraints, among other factors.
- Cash flow: Operating cash flow for the first nine months was $1.622 billion versus $1.262 billion in 2020. Investing activities used $2.732 billion, compared with $22.5 million provided in 2020, including purchases of fixed-maturity and short-term investments and the Buckner acquisition. Financing activities provided $439.4 million.
- Liquidity and debt: At September 30, total assets were $46.696 billion, total equity $14.040 billion, and debt $4.268 billion. Cash and cash equivalents were $3.939 billion, with another $568.4 million restricted. Total investments were $22.941 billion. The debt-to-capital ratio was 23%, up from 21% at year-end 2020. Book value per common share rose 11% from $885.72 at December 31, 2020 to $980.99.
Material changes and management commentary
- Premium growth was strongest in Insurance, particularly professional and general liability, with higher new business and more favorable rates. Management reported generally favorable pricing across most lines, while workers’ compensation continued to see low-single-digit rate decreases.
- Markel discontinued risk-bearing property reinsurance writing effective January 2021, but retained exposure on prior multi-year contracts and retrocessional property business.
- Year-to-date underwriting included $182.3 million of net losses from 2021 catastrophes, including Hurricane Ida, European floods and Winter Storm Uri. Prior-year reserve releases were $366.2 million, partly offset by adverse development in Reinsurance, including COVID-19-related reserve increases.
- In August, Markel acquired 90% of Buckner HeavyLift Cranes for $237.9 million in cash. The purchase accounting was provisional; the acquired business added $165.1 million of long-term debt.
- In May, Markel issued $600 million of 3.45% senior notes due 2052. It expected to use part of the proceeds to retire $350 million of 4.9% notes due in 2022 and the remainder for general corporate purposes.
- The SEC and DOJ concluded their investigations into Markel CATCo in September 2021 and stated they would not recommend or take enforcement action against MCIM. A proposed CATCo transaction, still subject to investor and court approvals, could involve up to $270 million of cash funding, $100 million of tail-risk cover, and $75 million of payments to or for investors. Closing was expected in Q4 2021 if approvals were obtained.
Outlook, risks and contingencies
The filing provides no specific consolidated earnings or revenue guidance. Management said it believed liquidity was sufficient for capital needs, while noting that access to capital could be affected by economic conditions and COVID-19-related uncertainty. The company stated there had been no material change in its assessment of pandemic risks during the first nine months of 2021.
Key uncertainties include catastrophe-loss estimates based on limited claims information, potential material changes to COVID-19 reserves, reinsurance collectability and reserve adequacy. The CATCo proposal carries approval, execution and adverse-loss-development risks. Other disclosed risks include equity-market and interest-rate movements, inflation and supply constraints, acquisitions, regulatory matters, and litigation. The filing also reports a contingent value rights arbitration valuation of $22.4 million excluding interest and a $20.1 million payment in September; related lawsuits remained pending.
Important facts for investors to verify
- How catastrophe and COVID-19 claims develop and whether reserve estimates require material revision.
- Whether favorable prior-year reserve development continues, particularly in Insurance, and whether Reinsurance underwriting returns to profitability.
- Whether the CATCo transaction receives all required approvals, its final costs and terms, and the extent of Markel’s retained tail exposure.
- Whether premium-rate gains offset claims inflation, supply constraints and rising costs across Markel Ventures.
- How investment portfolio values respond to equity-market and interest-rate changes, given the large impact of investment gains and losses on reported results.
- Debt repayment plans, the debt-to-capital trend, and cash needs for acquisitions, share repurchases and other commitments.