When I read Markel Corporation's (NYSE: MKL ) 2013 results Monday evening, I unsurprisingly found myself nodding in approval as I scrolled down the page. My eyebrows rose, however, when I reached one figure in particular, which made me pause, frown, then finally smile.
Before I explain, it helps to talk about how Markel fared during the past year. Perhaps most importantly, Markel's book value per share increased a respectable 18%, to $477.16, as of Dec. 31. With shares currently trading around 1.15 times book value, let it suffice to say that Markel stock still looks cheap to me today.
Next, operating revenue rose 44%, to $4.32 billion, which translated to net income growth of 10.9%, to $281 million. Diluted net income per share fell 13.2%, however, to $22.48 -- but that's a perfectly acceptable result of new shares issued in connection with Markel's acquisition of Alterra last May. And besides, analysts were already looking for lower earnings of $21.23 per share on higher sales of $4.39 billion.
When you dig deeper, you'll see the increase in Markel's net income was driven by a combination of investment income, which rose 12.5%, to $317.4 million, and solid underwriting results from Markel's insurance business. To be sure, Markel's consolidated combined ratio remained steady year over year at 97%, which means the company earned $3 for every $100 in premiums it wrote.
But that's also where the figure I first mentioned comes in. Take a look at the table Markel provided with its combined ratios for the past two years, and tell me which number doesn't belong:
|Excess and Surplus Lines||80%||94%|
|London Insurance Market||88%||89%|
Sure enough, while Markel's existing insurance operations each performed admirably in 2013, Alterra's combined ratio came in at a shockingly high 118%.
At first glance, it even brought back memories of the initial acquisition announcement, which caused Markel stock to drop by as much as 10% after investors feared it had bitten off more than it could chew acquiring such a large reinsurer.
Read further, however, and it starts to make sense. Specifically, Alterra's 118% only reflects the period from the closing date of the acquisition, or May 1, 2013, through December 31, 2013. In addition, it included transaction and other acquisition-related costs of $75.1 million, which added nine full points to the combined ratio.
Finally, Alterra's number also included $25.5 million, or three points, of underwriting loss related to catastrophes in 2013 and, in Markel's words, was "unfavorably affected by applying our more conservative loss reserving philosophy to Alterra's current year loss reserves."
And that last statement, my fellow Fools, should make you smile.
If it wasn't enough that acquisition costs already made Alterra's number look much worse than it really was, investors should take solace knowing Markel isn't afraid to take a hit in the short term if it means higher quality underwriting results over the long run.
There is no ugly
In the end, Markel may be the most "boring" stock in your portfolio, but investors would do well to note that this conservative approach to consistently creating value for shareholders is exactly what makes Markel so special.
Over the long term, and as Alterra settles into Markel's operations, I'm still convinced this stock has nowhere to go but up.
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