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On Wednesday after the market close, shares of Markel (NYSE: MKL ) fell slightly after the company reported second-quarter earnings of $2.24 per diluted share, a huge decrease from the $8.42 it earned in the same period last year.
What's more, Markel's overall combined ratio worsened to 103% during the quarter -- meaning the company lost $3 for every $100 in premiums it wrote -- compared with a much more palatable 87% during the second quarter of 2012.
Before you go tapping that "sell" trigger, however, remember that all isn't exactly as it seems this time around with Markel's earnings.
Why? Because this report happens to be the company's first since it finalized its merger with reinsurance specialist Alterra Capital in May.
In fact, after Markel filed its pro forma combined statements for both companies earlier this month, I pointed out at the time that the consolidated company was trading significantly cheaper than the Markel-only figures would have you believe.
Here's why Markel's Q2 numbers are great
With that in mind, let's dig in to see how the new, larger Markel is really doing now.
First, management was quick to note that results for the quarter and six months ended June 30 were negatively affected by $61.8 million in transaction costs and acquisition-related expenses, as well as $25.4 million in catastrophe losses related to the new Alterra segment. Altogether, these items alone added 11 points to Markel's consolidated combined ratio last quarter.
In addition, similar to Markel's first-quarter report in May, this quarter's combined ratio also included $14 million, or three full points, of expenses related to its prospective adoption of new DAC accounting standards.
Meanwhile, CEO Alan Kirshner also highlighted the fact that Markel's book value grew to $451.72 per share by the end of June, which is a 4.8% sequential increase over last quarter's book value of $431.10 per share, and 12% higher than the $403.85 book value Markel reported last Dec. 31.
Based on Wednesday's closing price of $530.60 per share, that means shares of Markel are currently trading at an attractive 1.17 times book value.
For reference, at their closing price of just over $175,000 per share Wednesday, Class A shares of Berkshire Hathaway (NYSE: BRK-A ) currently sit around 1.43 times the $122,900 book value provided in Berkshire's most recent quarterly report just last week.
And considering Alterra's reinsurance operations arguably make Markel look more like a "mini-Berkshire" than ever, I'd say this stands as yet another reason Markel looks comparatively cheap, even next to the enviable conglomerate Buffett built.
What about the "old" Markel?
As Kirshner also pointed out, Markel's legacy underwriting results have remained as strong as ever, reflecting a 17% increase in gross premiums sold and a solid combined ratio of 89%.
What's more, Markel's investments continued to perform well, with net investment income for the second quarter coming in at $78 million, or a 22.6% increase over $63.6 million during the same year-ago period. Curiously enough, though, that number also includes $17.3 million attributable to Alterra as a result of establishing a new amortized cost for its fixed maturity securities as of the acquisition date.
In any case, for those of you keeping track, that brings Markel's net investment income to $142.6 million for the first six months of 2013.
Alterra's legacy operations, for their part, largely performed as expected, and you can bet Markel President and CIO Tom Gayner is looking forward to making the most of the combined company's invested assets of around $17 billion, as well as more than $6.3 billion in shareholder equity.
In all, despite what seemed to be weak results on the surface, Wednesday's report offered no real surprises.
Instead, there remained plenty of evidence of what we already know: Markel still looks like a great long-term-oriented company with a reasonably priced stock, and the Alterra integration so far appears to be moving along nicely. Once that's all done, however, I'm convinced Markel will still manage to continue its streak of handsomely rewarding shareholders for decades to come.
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