01—Abstract
Summary
Summary of the 10-K filed February 23, 2018. Cited figures are marked; the original filing is the authoritative source.
Markel Corporation reported a 2017 underwriting loss of $205.2 milliona, driven largely by $565.3 million of underwriting losses from the 2017 Catastrophes (Hurricanes Harvey, Irma, Maria and Nate, the Mexico earthquakes and California wildfires).
The consolidated U.S. GAAP combined ratio rose to 105% from 92% in 2016. Net income to shareholders fell 13% to $395.3 millionb, held up by a one-time $339.9 million tax benefit from the Tax Cuts and Jobs Act. Gross premium volume in the underwriting segments grew 10% to $5.25 billion, and total gross written premium reached $5.51 billion including $253.9 million from the newly acquired program services business.
Book value per share rose 13% to $683.55c, and shareholders' equity reached $9.50 billion, supported by a $763.0 million after-tax increase in net unrealized gains on investments. Invested assets grew to $20.57 billion, with a taxable equivalent total investment return of 10.2%. The company completed major acquisitions in 2017, including State National Companies ($918.8 million), SureTec ($246.9 million) and a majority stake in Costa Farms ($417.2 million), and total goodwill and intangible assets reached $3.1 billion, or 33.0% of shareholders' equity.
Beginning in 2018, changes in the fair value of equity securities will flow through net income rather than other comprehensive income, which the filing expects to increase earnings volatility. The filing also notes that favorable development on prior years' loss reserves of $501.5 milliond partly offset the catastrophe losses, though the filing cautions that the property and casualty market remains soft. The company's Markel Ventures operations reported revenues of $1.3 billion and EBITDA of $177.6 million in 2017.
02—Key points
Key Highlights
- Underwriting loss of $205.2 million in 2017 versus an underwriting profit of $316.5 million in 2016; consolidated U.S. GAAP combined ratio rose to 105% from 92%.
- 2017 Catastrophes produced a $565.3 million underwriting loss (13 points on the combined ratio), with $490.3 million of estimated reinsurance recoveries.
- Net income to shareholders declined 13% to $395.3 million, aided by a one-time $339.9 million TCJA tax benefit recorded in Q4 2017.
- Book value per share increased 13% to $683.55; shareholders' equity rose to $9.50 billion from $8.46 billion.
- Gross premium volume in underwriting segments increased 10% to $5.25 billion, and program services added $253.9 million of gross written premium after the State National acquisition.
- Acquisitions in 2017 included State National ($918.8 million), SureTec ($246.9 million) and Costa Farms ($417.2 million), lifting goodwill and intangibles to $3.1 billion (33.0% of shareholders' equity).
- Beginning in 2018, equity security fair value changes move through net income, which the company expects to increase earnings volatility; equity securities were 63% of shareholders' equity at year-end 2017.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 23, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $6.06B$5.61B | +8.0% |
| Operating Expenses | $5.85B$4.81B | +21.6% |
| Operating Income | $216.61M$805.17M | −73.1% |
| Interest Expense | $132.45M$129.90M | +2.0% |
| Net Income | $395.27M$455.69M | −13.3% |
| EPS (Basic) | $25.89$31.41 | −17.6% |
| EPS (Diluted) | $25.81$31.27 | −17.5% |
| Shares Outstanding (Basic) | 13.96M14.01M | −0.3% |
| Shares Outstanding (Diluted) | 14.01M14.08M | −0.5% |
05—Questions
Frequently Asked Questions
Why did Markel swing to an underwriting loss in 2017?
The filing attributes the swing primarily to $565.3 million of underwriting losses from the 2017 Catastrophes, including Hurricanes Harvey, Irma, Maria and Nate. The consolidated combined ratio rose to 105% from 92% in 2016, and the Reinsurance segment's combined ratio reached 132%. Favorable prior-year reserve development of $501.5 million partly offset these losses.
How did the Tax Cuts and Jobs Act affect 2017 results?
The company recorded a one-time tax benefit of $339.9 million in Q4 2017, mainly from remeasuring U.S. deferred tax liabilities at the lower 21% corporate rate. This benefit produced a negative 359% effective tax rate for 2017. The company expects the TCJA to favorably affect future after-tax earnings, with an expected future effective tax rate of 16% to 18% in most years.
What is driving the growth in book value and total investment returns?
Book value per share rose 13% to $683.55, primarily from a $763.0 million after-tax increase in net unrealized gains and net income to shareholders of $395.3 million. The taxable equivalent total investment return was 10.2% in 2017, driven by equity securities returning 25.5%, while the fixed maturity return was 3.4%.
What changes in accounting and reporting are coming in 2018?
Beginning in 2018, changes in the fair value of equity securities will be recorded in net income rather than other comprehensive income under ASU 2016-01, which the company expects to increase earnings volatility. The company will also report on a two-segment underwriting basis (Insurance and Reinsurance) and will report Markel Ventures as a single operating segment, and will measure success partly by total shareholder return.
What are the main risks highlighted for investors?
Key risks include exposure to catastrophe losses, the soft property and casualty market, reserve adequacy (including asbestos and environmental exposures and the U.K. Ogden rate change, which added $85.0 million of adverse development), reinsurer credit risk on $4.6 billion of reinsurance recoverables on unpaid losses, and the effects of Brexit on its London-based operations. Equity securities concentration is also significant, with the ten largest equity holdings representing 41% of the equity portfolio.
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