01—Abstract
Summary
Summary of the 10-K filed February 28, 2019. Cited figures are marked; the original filing is the authoritative source.
Markel Corporation (now Markel Group Inc.) reported a 2018 net loss to shareholders of $128.2 milliona, compared with net income to shareholders of $395.3 million in 2017.
The decline was primarily driven by an increase in net investment losses, which were $437.6 millionb in 2018 versus $5.3 million in 2017, largely from a $425.6 million decrease in the fair value of equity securities under the newly adopted ASU No. 2016-01. The 2017 results had also benefited from a one-time $339.9 million tax benefit from the Tax Cuts and Jobs Act. Total operating revenues rose to $6.84 billion from $6.06 billion, and the consolidated U.S. GAAP combined ratio improved to 98% from 105%, with underwriting profit of $113.8 million versus an underwriting loss of $207.2 million in 2017.
Shareholders' equity declined to $9.08 billionc, and book value per share decreased 4% to $653.85. The company completed the acquisitions of Nephila Holdings Ltd. for $972.6 million and Brahmin Leather Works (90% interest) for $193.8 million during 2018. It recorded a combined $179.0 million goodwill and intangible impairment at its Markel CATCo Investment Management unit, following U.S. Department of Justice, SEC and Bermuda Monetary Authority inquiries into loss reserves at Markel CATCo Re, the departure of two senior MCIM executives, and a special redemption offer to fund investors.
Shareholder class action and executive lawsuits were filed in early 2019, and management believes the claims are without merit. The company also reported $551.0 milliond of favorable development on prior years' loss reserves and $287.3 million of underwriting losses from 2018 catastrophes. Looking ahead, the filing highlights risks tied to Brexit, which the company says could affect its U.K. and E.U. operations, and notes that the revolving credit facility matures on August 1, 2019.
The company amended its leverage covenant in February 2019 to address the impact of the Nephila acquisition and fourth-quarter 2018 losses. Markel Ventures, the non-insurance operating group, generated $1.9 billion of revenues and $169.9 million of EBITDA in 2018.
02—Key points
Key Highlights
- Net loss to shareholders of $128.2 million in 2018, versus net income of $395.3 million in 2017, driven mainly by $437.6 million of net investment losses, including a $425.6 million decrease in equity securities fair value.
- Consolidated U.S. GAAP combined ratio improved to 98% in 2018 from 105% in 2017, producing an underwriting profit of $113.8 million versus a $207.2 million underwriting loss a year earlier.
- Total operating revenues increased to $6.84 billion from $6.06 billion, with gross premium volume of $5.8 billion in underwriting segments and $2.1 billion from program services.
- Acquired Nephila Holdings Ltd. for $972.6 million and 90% of Brahmin Leather Works for $193.8 million in 2018, adding investment management and Markel Ventures businesses.
- Recorded a $179.0 million goodwill and intangible impairment at Markel CATCo Investment Management following governmental inquiries into Markel CATCo Re loss reserves, and faces a securities class action and two executive lawsuits.
- Book value per share decreased 4% to $653.85, and shareholders' equity fell to $9.08 billion from $9.50 billion at year-end 2017.
- Recorded $551.0 million of favorable development on prior years' loss reserves, offsetting $287.3 million of underwriting losses from 2018 catastrophes.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 28, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $6.84B$6.06B | +12.9% |
| Operating Expenses | $6.80B$5.85B | +16.4% |
| Operating Income | $39.76M$216.61M | −81.6% |
| Interest Expense | $154.21M$132.45M | +16.4% |
| Net Income | -$128.18M$395.27M | −132.4% |
| EPS (Basic) | $-9.55$25.89 | −136.9% |
| EPS (Diluted) | $-9.55$25.81 | −137.0% |
| Shares Outstanding (Basic) | 13.92M13.96M | −0.3% |
| Shares Outstanding (Diluted) | 13.92M14.01M | −0.6% |
05—Questions
Frequently Asked Questions
Why did Markel report a net loss in 2018 after profit in 2017?
The net loss of $128.2 million was primarily due to $437.6 million of net investment losses, mostly a $425.6 million decline in equity securities fair value now recognized in net income under ASU No. 2016-01. The 2017 results also included a one-time $339.9 million tax benefit from the Tax Cuts and Jobs Act that did not recur. Underwriting results improved, with an underwriting profit of $113.8 million versus a loss of $207.2 million in 2017.
What is the Markel CATCo situation and how much did it cost?
The U.S. Department of Justice, SEC and Bermuda Monetary Authority are inquiring into loss reserves recorded in late 2017 and early 2018 at Markel CATCo Re, an unconsolidated subsidiary managed by MCIM. Two senior MCIM executives left the company, and investors were offered a special redemption. Management concluded MCIM's ability to raise capital was impaired and recorded a $179.0 million goodwill and intangible impairment. A class action and two executive lawsuits were filed, and the company believes the claims are without merit, though the internal review has reached no conclusions.
How did the 2018 catastrophe losses affect results?
The 2018 catastrophes, including Hurricanes Florence and Michael, Typhoon Jebi and California wildfires, produced an underwriting loss of $287.3 million, or six points on the consolidated combined ratio. This compares with $565.3 million, or 13 points, from the 2017 catastrophes. Favorable development on prior years' reserves of $551.0 million partially offset these losses.
What are the key risks for investors going forward?
The filing highlights Brexit uncertainty affecting MIICL and Lloyd's Syndicate 3000's ability to transact business in E.U. countries, with a U.K. High Court approval still pending for the transfer of EEA exposures to Markel Insurance SE. Equity securities represented 63% of shareholders' equity at year-end 2018, creating volatility in net income. The revolving credit facility expires on August 1, 2019, and the company may need to refinance its 7.125% notes due September 30, 2019.
06—Continue