Markel Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; unaudited. The filing registrant is Markel Corporation, a specialty insurance and reinsurance company with Markel Ventures industrial and service businesses. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total operating revenues | $1,375.9 | $1,304.6 | $2,752.1 | $2,606.8 |
| Operating income | $193.7 | $129.6 | $438.9 | $398.4 |
| Net income to shareholders | $78.8 | $91.4 | $239.2 | $282.4 |
| Diluted EPS | $5.41 | $6.72 | $16.55 | $20.21 |
| Underwriting profit | $63.7 | $41.7 | $182.8 | $197.7 |
| Combined ratio | 93% | 96% | 90% | 90% |
| Net investment income | $95.0 | $90.6 | $186.3 | $183.5 |
- Revenue grew 5.5% in Q2 and 5.6% in the first half, driven principally by higher non-insurance revenues and investment gains. Earned premiums were nearly flat in both comparisons.
- Q2 operating income increased, and underwriting profit improved; however, shareholder net income and EPS declined. A $44.1 million debt-extinguishment loss and higher income tax expense weighed on earnings. Six-month underwriting profit declined despite a flat combined ratio.
- Q2 combined ratio improved to 93%, reflecting lower current-year losses and more favorable prior-year reserve development. The first-half ratio remained 90%; favorable reserve development was lower than in 2015.
- Markel Ventures revenue was $297.8 million in Q2 and $584.3 million for six months. Six-month EBITDA was $92.0 million versus $46.8 million. Growth reflected CapTech, acquired in December 2015, and improved manufacturing results; the 2015 comparison included a $17.6 million Cottrell contingent-consideration expense.
Financial position, cash flow and debt
- At June 30, total assets were $26.34 billion, shareholders’ equity $8.44 billion and book value per share $603.13, up from $561.23 at year-end 2015. Investments were $16.79 billion; cash and cash equivalents were $2.01 billion, down from $2.63 billion at year-end.
- Operating cash flow for the first half was $70.2 million, versus $238.0 million a year earlier. Management cited higher claims payments, profit-sharing and tax payments, and a $51.9 million commutation payment. Investing activities used $920.3 million; financing activities provided $229.9 million.
- Debt was $2.60 billion, up from $2.24 billion at year-end. Debt-to-capital was 24%, compared with 22%; management’s target capital structure includes approximately 30% debt. The company reported $19.2 billion of invested assets, including restricted cash, and said it believed liquidity was sufficient.
- Markel issued $500 million of 5.0% senior notes due 2046 and used part of the proceeds to repurchase higher-coupon notes. The refinancing extended average debt maturity but triggered the $44.1 million extinguishment loss. $90.6 million of 7.20% notes remained outstanding, due April 2017.
Changes, outlook and risks
- Canadian wildfires caused $25.3 million of underwriting losses, equal to about three points of the Q2 consolidated combined ratio. Lower attritional losses and favorable reserve development more than offset the impact in the quarter.
- Management reported small price declines in many product lines, particularly international property and marine and energy, and pricing pressure in large accounts. Reinsurance competition remained strong, though the rate of price decline had slowed or stabilized in some cases. The company said it would not write business when prices do not support underwriting targets. No quantitative earnings or premium guidance is provided.
- International Insurance’s combined ratio rose to 100% for Q2 and 98% for the first half; the expense ratio was affected by writing off previously capitalized software costs. Reinsurance’s ratios improved to 86% and 84%, respectively, aided by prior-year reserve development and lower losses.
- A $47.9 million life and annuity reserve deficiency adjustment arose from lower market yields on supporting investments; it increased benefit reserves and reduced unrealized investment gains in other comprehensive income. Management identifies reserve adequacy, catastrophe losses, reinsurance recoverability, market movements, foreign exchange and acquisition integration among key uncertainties.
- The June 2016 Brexit vote was added as a risk: it could restrict the company’s ability to serve EU markets through UK operations and affect markets, currencies and regulation. Management said effects were uncertain and could be adverse.
- Contingencies arising in the ordinary course were not expected to materially affect financial condition or results. Disclosure controls were judged effective, with no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether favorable prior-year reserve development is sustainable, and the sensitivity of reserves to claims trends and catastrophe experience.
- How pricing pressure and foreign-exchange movements affect premium growth and underwriting profitability, especially in International Insurance.
- Whether the lower first-half operating cash flow is temporary and how claims payments and investment purchases affect liquidity.
- The full impact of the debt refinancing, remaining maturities and the company’s debt-to-capital position.
- Potential effects of Brexit on licensing and EU access, and the eventual impact of new revenue-recognition rules on non-insurance operations.