Business context and reporting period
Markel Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2020. Markel operates specialty insurance and reinsurance businesses, an investment portfolio, Markel Ventures businesses, insurance-linked securities, and program services. Results were materially affected by the COVID-19 pandemic and market volatility.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Earned premiums | $1.360 billion | $1.199 billion | $2.691 billion | $2.403 billion |
| Total operating revenues | $3.132 billion | $2.439 billion | $3.468 billion | $4.912 billion |
| Net income (loss) to common shareholders | $921.8 million | $497.3 million | $(484.0) million | $1.074 billion |
| Diluted earnings (loss) per share | $65.75 | $36.07 | $(34.83) | $78.85 |
| Underwriting profit (loss) | $157.6 million | $59.0 million | $(83.2) million | $120.0 million |
| Consolidated combined ratio | 88% | 95% | 103% | 95% |
| Net investment income | $95.6 million | $111.8 million | $183.9 million | $226.0 million |
| Net investment gains (losses) | $911.2 million | $425.7 million | $(770.2) million | $1.038 billion |
Operating revenues and earnings were heavily influenced by changes in the fair value of equity securities, which flow through earnings. The first-half investment loss included a $777.1 million decline in equity portfolio fair value; Q2’s investment gain largely reflected a market rebound.
At June 30, 2020, total assets were $39.1 billion, total liabilities $27.4 billion, and total equity $11.4 billion. Cash and cash equivalents were $4.8 billion, restricted cash $793.7 million, and total invested assets approximately $22.3 billion. Debt was $3.6 billion at carrying value; management reported a 24% debt-to-capital ratio. Book value per common share was $783.58, down 2% from year-end 2019.
For the first six months, operating cash flow was $488.7 million, investing cash flow was $1.054 billion, and financing cash flow was $607.5 million. Financing included $591.9 million net proceeds from a preferred-stock issuance. Markel suspended common-stock repurchases in March.
Material changes versus comparable periods
- Premium growth continued: gross premium volume in underwriting operations rose 12% year over year for both Q2 and the first half; earned premiums increased 14% in Q2 and 12% year to date.
- Underwriting improved in Q2, with the combined ratio falling to 88% from 95%. For the first half, however, the ratio rose to 103% from 95%, primarily because of pandemic-related claims.
- Markel recorded $325 million of net losses and loss adjustment expenses directly attributed to COVID-19 in the first half, net of $58 million of ceded losses. No significant change to those estimates was recorded in Q2.
- Prior-year reserve development was favorable by $268.2 million in the first half of 2020, compared with $188.9 million in the prior-year period; this partly offset current-period pandemic losses.
- Markel Ventures first-half operating revenue rose to $1.189 billion from $1.072 billion and operating income rose to $121.2 million from $111.6 million, helped by acquisitions. Q2 operating income was slightly lower year over year, as pandemic-related lower demand offset acquisition contributions.
- In April, Markel acquired a 91% interest in Lansing Building Products for total cash consideration of $556.2 million; the purchase-price allocation remained provisional.
Outlook, risks, contingencies and unusual items
- Management said it could not reasonably estimate the extent or duration of COVID-19 impacts. It warned that claim estimates may change materially and that indirect pandemic losses may emerge in professional liability, trade credit, workers’ compensation, and reinsurance. Coverage disputes, litigation, government action, and policy interpretation are key uncertainties.
- Management expected pandemic-related disruption to continue affecting Markel Ventures demand and revenues; some businesses could face cash, working-capital, liquidity, or debt-covenant pressure. The company was reducing expenses and said it believed it had adequate liquidity and sufficient statutory capital at its insurance subsidiaries.
- Equity-market volatility, lower interest rates, and reduced investment income remain risks. Management reported that fixed maturities averaged an “AA” rating, with 98% rated A or better, and that unrealized gains on the equity portfolio were $2.8 billion at quarter-end despite the first-half decline.
- Management had not identified an impairment trigger for goodwill and intangible assets as of June 30, but further deterioration or weaker results could lead to future impairment charges. These assets totaled $4.5 billion.
- Markel issued $600 million of 6.00% non-cumulative Series A preferred shares in May. Dividends are payable only if declared; the shares rank senior to common stock for dividends and liquidation rights.
- Markel CATCo remains in run-off, and DOJ, SEC, and Bermuda Monetary Authority inquiries into historical reserves remain unresolved. The company said it could not predict their outcome. A settlement in principle in the Belisle arbitration was expected to be recorded in Q3 2020 and was described as not material.
- A separate dispute over Aspen contingent value rights seeks $47.3 million plus interest, potential default interest, and other relief; Markel said it believes the claims lack merit and any material loss is remote. A Markel Ventures manufacturing matter had $20.2 million accrued, with potential additional costs not estimable.
- No specific earnings or revenue guidance was provided. Management emphasized underwriting discipline and improving prices across most product lines, while noting low-single-digit rate decreases in workers’ compensation.
Most important facts for investors to verify
- Whether COVID-19 claim frequency, coverage litigation, government actions, or indirect losses require material changes to reserves.
- How equity markets and interest rates affect investment gains, investment income, capital, and book value.
- Whether underwriting profitability recovers after the first-half combined ratio of 103%, including the degree to which favorable prior-year reserve development persists.
- Whether continued pandemic disruption affects Markel Ventures cash generation, liquidity, or debt-covenant compliance, and whether Lansing meets expectations.
- Developments in the CATCo regulatory inquiries, Belisle settlement, Aspen CVR litigation, and the manufacturing contingency.