Markel Corporation — Form 10-Q Summary
Period: Quarter and nine months ended September 30, 2015. The filing is by Markel Corporation (the registrant named in the filing); interim financial statements are unaudited.
Business context and reporting period
Markel is a financial holding company whose principal operations are specialty insurance and reinsurance, alongside non-insurance businesses held through Markel Ventures. Its underwriting segments are U.S. Insurance, International Insurance and Reinsurance. Markel reports Markel Ventures results on a one-month lag.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Earned premiums | $963.7 million | $954.0 million | $2,864.9 million | $2,869.0 million |
| Total operating revenues | $1,342.8 million | $1,299.3 million | $3,949.5 million | $3,797.9 million |
| Operating income | $182.7 million | $133.1 million | $581.2 million | $363.0 million |
| Net income to shareholders | $102.5 million | $75.8 million | $384.9 million | $203.6 million |
| Diluted earnings per share | $7.39 | $5.30 | $27.60 | $14.21 |
| Net investment income | $87.1 million | $91.1 million | $270.5 million | $270.0 million |
| Net realized investment gains (losses) | $(14.7) million | $4.2 million | $(3.0) million | $28.7 million |
| Combined ratio | 88% | 97% | 89% | 97% |
For the nine months, operating cash flow was $550.4 million, versus $536.6 million in 2014; investing cash flow was $(168.2) million and financing cash flow was $(56.7) million. Cash and cash equivalents were $2.26 billion at September 30, 2015.
Total assets were $25.18 billion and shareholders’ equity was $7.70 billion. Senior long-term and other debt was $2.24 billion; management reported a 23% debt-to-capital ratio, against a target capital structure of approximately 30%. Book value per share was $551.63, up from $543.96 at year-end 2014. Total invested assets, including restricted cash, were $18.5 billion; 23% was in equity securities.
Material changes versus the prior comparable period
- Underwriting results improved: consolidated underwriting profit rose to $311.0 million for the nine months from $73.3 million, and the combined ratio improved to 89% from 97%.
- Management attributed the improvement to more favorable prior-year reserve development and lower current accident-year losses. Nine-month favorable prior-year development was $459.1 million, versus $260.1 million in 2014. A $36.0 million reserve reduction following reduced estimated volatility after the first-quarter A&E reinsurance transaction contributed to 2015 reserve releases.
- Nine-month earned premiums were nearly flat, while net written premiums declined to $3.02 billion from $3.11 billion. Gross premium volume declined 3%, largely reflecting lower Reinsurance volume; Q3 gross premium volume increased 6%.
- Nine-month net income to shareholders increased substantially, helped by stronger underwriting and higher non-insurance revenues. Other revenues rose to $817.2 million from $630.2 million, principally reflecting Markel Ventures growth, including the contribution of Cottrell, acquired in July 2014.
- Investment performance was a headwind to comprehensive income: the nine-month change in net unrealized investment gains was $(396.9) million, versus a $498.8 million increase in 2014. Comprehensive income to shareholders fell to $97.7 million from $517.4 million. Q3 2015 comprehensive loss to shareholders was $51.1 million.
- Net realized investment results included $23.4 million of nine-month other-than-temporary impairment losses, all attributable to equity securities, compared with $3.9 million in 2014.
Outlook, management commentary, risks and unusual items
- No specific earnings or premium guidance is provided. Management says it maintains underwriting discipline and will not write business when market prices do not support underwriting profit targets. It reported small price increases in many lines, but softening prices in most property lines and marine and energy, and pricing pressure in large-account business.
- Management expects the expiring $450 million secured credit facility not to be renewed; it stated other credit facilities should be sufficient. The facility expires in December 2015. The company reported adequate liquidity and access to subsidiary dividends, holding-company assets, credit facilities and capital markets.
- On September 9, 2015, Markel agreed to acquire substantially all assets of CATCo Investment Management and CATCo-Re for approximately $200 million in cash, subject to approvals and other conditions, with closing expected in Q4 2015.
- Markel completed a March 2015 A&E retrospective reinsurance transaction for $89.0 million, including $69.9 million paid at closing; it recorded a deferred gain of $5.1 million. A second A&E transaction was completed October 30, after quarter-end, for $86.5 million; the filing says its effect on reserve volatility would be reflected in Q4 results.
- A life and annuity reinsurance novation completed in April generated $29.0 million net cash and a $3.6 million gain. The company cautions that runoff life and annuity results are expected to continue to include losses from discount accretion.
- The nine-month effective tax rate was 21%, versus 25% in 2014, with foreign tax credits contributing to the lower rate. Management cautioned that a similar tax benefit may not be available in future years. The Q3 effective tax rate was 32%.
- Key risks include catastrophe frequency and severity, reserve-estimation uncertainty (particularly asbestos and environmental claims), reinsurance collectability and pricing, softening insurance rates, market and foreign-exchange volatility, municipal bond credit exposure, and risks associated with acquisitions and Markel Ventures operations. The IRS was examining the company’s 2012 federal tax return; management believed tax liabilities were adequate but noted they could change.
Important facts for investors to verify
- Whether reserve releases and the $36.0 million reserve adjustment are sustainable, and how subsequent A&E reinsurance transactions affect reserves and reported underwriting results.
- Whether favorable combined ratios persist without comparable prior-year reserve development, and how soft pricing affects premium growth and underwriting discipline.
- The investment portfolio’s equity-market exposure and the potential for further unrealized losses or impairment charges; nine-month total investment return was negative 1.2% on a taxable-equivalent basis.
- Completion, cash cost and operating contribution of the CATCo acquisition, and the final Cottrell contingent consideration payment, estimated at $40.1 million as of September 30, 2015.
- Liquidity and borrowing capacity after the secured facility expires, as well as the availability of foreign tax credits and the outcome of the IRS examination.