Markel Corporation reported operating earnings of $5.13 per share in the second quarter of 2013, that missed the Zacks Consensus Estimate of $5.36 by 4.3%. Earnings also significantly lagged the prior-year earnings of $7.83 per share.
Including amortization of intangible assets and amortization of fair value adjustments acquisition costs, severance costs and stay bonuses, Markel reported net income of $2.24 per share in the second quarter, down 73.4% from $8.42 per share from the second quarter of 2012. Substantial increase in transaction costs and acquisition related expenses mainly led to the earnings shortfall.
Quarterly Operational Update
Total operating revenues of Markel during the second quarter amounted to $1.03 billion, up 48.8% year over year on account of higher premiums and increased investment income. The Excess and Surplus Lines, Specialty Admitted segment and the newly formed Alterra segment contributed significantly to the top line growth. Revenues were almost in line with the Zacks Consensus Estimate.
Total operating expenses during the quarter increased 73.5% year over year to $957.6 million. Higher expenses were driven mainly by an increase in losses and loss adjustment expenses, and underwriting, acquisition and insurance expenses.
Combined ratio for the second quarter of 2013 deteriorated 1600 basis points year over year to 103%. Higher transaction costs ($61.8 million), catastrophe losses worth $25.4 million associated with the new Alterra segment of the company pulled down the results. The underwriting, acquisition and $35 million of expenses related to the FASB adoption standards also led to the deterioration.
Quarterly Segment Update
Markel has been operating through three segments namely Excess and Surplus Lines, Specialty Admitted and London Insurance Segment. With the acquisition of Alterra during the second quarter, Markel formed a new segment– Alterra segment. However, the integration of Alterra in the existing operations of Markel is not expected to culminate until 2014.
Excess and Surplus Lines– Net written premiums in the segment increased 19.8% year over year to $231.5 million. Underwriting income increased 91% year over year to $48.4 million. Combined ratio showed an improvement of 1000 basis points year over year to 77% in the second quarter.
Specialty Admitted– Net written premiums in the segment increased 43.1% year over year to $242.3 million. Underwriting loss during the second quarter was $9.7 million, compared to a loss of $3.1 million in the year-ago quarter. Combined ratio deteriorated 300 basis points to 105% in the quarter.
London Insurance Segment– Net written premiums in the segment decreased 2% year over year to $199.9 million. Underwriting income during the second quarter was $22.2 million, down 51.5% year over year. Combined ratio deteriorated 1300 basis points to 87% in the quarter.
Balance Sheet and Capital Structure
Markel’s cash and cash equivalents stood at $2.1 billion as of Jun 30, 2013, improving from $899.1 million as of Mar 31, 2013. Cash flow from operations in the first six months of 2013 amounted to $240 million, up 129% from $104.7 million in the prior-year period.
Total assets of Markel as of Jun 30, 2013 stood at $23.5 billion, improving from $13.1 billion as of Mar 31, 2013. Total debt of Markel as of Jun 30, 2013 was $2.2 billion, up from $1.7 billion as of Mar 31, 2013. Shareholders equity was $6.3 billion as of Jun 30, 2013 compared to $4.2 billion as of Mar 31, 2013.
Additionally, book value per share increased 4.8% from $431.10 at Mar 31, 2013 to $451.72 at Jun 30, 2013, mainly on account of the Alterra acquisition.
To amplify its scale of operation, on May 1, 2013 Markel acquired Alterra Capital Holdings Limited , pursuant to the merger agreement on Dec 18, 2012. Post the acquisition, Markel created a new segment naming it the Alterra segment wherein the results of Alterra’s property and casualty insurance, and reinsurance operations will be included.
Performance of Other Insurers
On Jul 23, 2013, ACE Limited reported second quarter 2013 operating net income of $2.29 per share, up 19.3% from the Zacks Consensus Estimate of $1.92. Results improved 5.5% from $2.17 earned in the year-ago quarter.
On Jul 25, 2013, Chubb Corporation reported second-quarter operating earnings of $1.77 per share, significantly ahead of the Zacks Consensus Estimate of $1.38 per share. Earnings also increased 29% year over year.
Markel currently carries a Zacks Rank #3 (Hold).