Markel Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The filing is unaudited and reports results for Markel Corporation and subsidiaries.
Business context and financial performance
Markel operates specialty Insurance and Reinsurance businesses, an investment portfolio, and Markel Ventures, a diversified group of businesses outside insurance.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total operating revenues | $3.07 billion | $2.69 billion | $7.46 billion | $9.09 billion |
| Operating income (loss) | $72.7 million | $241.7 million | ($1.15 billion) | $2.07 billion |
| Net income (loss) to common shareholders | $65.4 million | $188.1 million | ($921.8 million) | $1.54 billion |
| Diluted earnings (loss) per common share | $3.50 | $15.09 | ($72.31) | $114.20 |
| Net cash provided by operating activities | Not separately reported | Not separately reported | $1.88 billion | $1.62 billion |
- Underwriting: Earned premiums increased 20% in Q3 and 18% year to date. Underwriting profit was $128.2 million in Q3 and $490.1 million year to date. Consolidated combined ratios were 93.4% and 91.2%, respectively; below 100% indicates underwriting profit.
- Investments: Net investment losses were $281.5 million in Q3 and $2.19 billion year to date, versus losses of $25.8 million and gains of $1.18 billion in the comparable 2021 periods. Net investment income was $107.7 million in Q3 and $274.1 million year to date. Nine-month total investment return, on the company’s taxable-equivalent basis, was negative 13.2% versus positive 5.1%.
- Markel Ventures: Nine-month operating revenue rose 31% to $3.53 billion, while operating income was nearly flat at $217.2 million. Management cited acquisitions and higher demand and prices, partly offset by inflation in materials and labor.
Financial position, liquidity and debt
- At September 30, 2022, total assets were $48.42 billion and total liabilities were $35.55 billion. Investments were $21.10 billion; cash and cash equivalents plus restricted cash were $4.80 billion.
- Shareholders’ equity was $12.29 billion, down from $14.72 billion at year-end 2021. Book value per common share fell 16%, from $1,036.20 to $868.68, mainly due to comprehensive losses.
- Debt was $4.13 billion, compared with $4.36 billion at year-end. The debt-to-capital ratio rose to 25% from 23%, largely reflecting lower equity. The $300 million corporate revolver had no borrowings; subsidiaries had $253.2 million outstanding on revolving facilities. The company reported covenant compliance.
- Operating cash flow was $1.88 billion; investing activities used $1.28 billion and financing activities used $491.1 million in the first nine months. Markel repurchased $208.1 million of common shares; $585.6 million remained under its $750 million repurchase authorization at quarter-end.
Material changes and management commentary
- Investment market declines drove the year-to-date loss and a $1.27 billion other comprehensive loss to shareholders. The filing attributes equity-security losses to falling public markets and fixed-maturity unrealized losses primarily to rising interest rates. Available-for-sale securities had $1.14 billion of gross unrealized losses at quarter-end; the company reported no credit-loss allowance and said it did not intend, nor expect to be required, to sell securities in loss positions before recovery.
- Insurance premiums grew across product lines, but Q3 Insurance underwriting profit fell to $85.5 million from $146.7 million. Its combined ratio increased to 95.0% from 89.4%, reflecting catastrophe losses, less favorable prior-year reserve development, and higher attritional losses in certain liability lines. Management noted rate increases were moderating in many lines, while inflation and social inflation added uncertainty to longer-tail claims.
- Reinsurance returned to profit: Q3 underwriting profit was $43.3 million versus a $30.4 million loss a year earlier; the combined ratio improved to 83.4% from 112.1%. The company was off-risk for substantially all property reinsurance exposures previously written on a risk-bearing basis from January 1, 2022.
- Hurricane Ian contributed an estimated $70 million of net losses to underwriting through September 30; an additional $850 million of gross program-services/fronting losses was ceded to third-party reinsurers. Russia-Ukraine conflict losses were estimated at $35 million net, plus $12.3 million of net ceded reinstatement premiums; management said further losses remain possible and estimates may change materially.
- Markel completed a Markel CATCo buy-out in March, including $101.9 million of net payments to or for investors, recorded as expense. It consolidated Markel CATCo Re and disclosed $142.7 million of uncollateralized tail-risk exposure to adverse reserve development. Favorable CATCo reserve development reported in 2022 was attributable to noncontrolling interests.
- Markel sold most of its controlling interest in Velocity in February, recognizing a $107.3 million gain. In October, after quarter-end, it sold its controlling interest in Volante for estimated cash consideration of $155 million; final accounting was pending.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management describes continued pricing opportunity in many lines, but also moderating rate increases, persistent inflation, supply-chain pressures, and uncertainty in claims severity. It states its liquidity is adequate for operating and capital needs, while noting that capital access depends on market and other conditions.
Key risks include uncertain catastrophe and conflict loss estimates; inflation and social inflation affecting claim costs and reserves; reinsurance recoverability, counterparty and coverage risks; investment-market, interest-rate and foreign-exchange volatility; and Markel Ventures’ exposure to materials, labor, shipping and demand conditions. Management said the consolidated fixed-maturity portfolio averaged AAA, with 99% rated A or better. A disclosed shareholder-related legal action was described by the company as without merit, with material loss considered remote. The filing says ordinary-course contingencies are not expected to materially affect financial condition or results, while separately detailing the CATCo and reinsurance exposures above.
Investor facts to verify
- Whether investment-market movements and higher interest rates continue to affect earnings, accumulated other comprehensive income and book value.
- Updates to Hurricane Ian and Russia-Ukraine loss estimates, and the extent and collectability of associated reinsurance recoverables.
- Reserve development trends, especially in Insurance professional liability and general liability lines amid economic and social inflation.
- Reinsurance counterparty concentrations and exposures under Nephila-related fronting arrangements; reported recoverables due from Nephila Reinsurers were $1.3 billion at quarter-end.
- Final Volante disposition accounting, remaining CATCo run-off and tail-risk exposure, and the pace of share repurchases relative to liquidity and capital needs.