Markel Corporation (NYSE:MKL) is poised to release second-quarter 2016 results later this week. With shares of the specialty insurer down modestly after setting a fresh all-time high on the heels of its strong Q1 report in May, now is a good time for investors to start thinking about what to expect.
First, keep in mind that Markel doesn't typically offer specific financial guidance. But for perspective -- and while we don't pay much attention to Wall Street's near-term expectations -- analysts' consensus estimates call for Markel to turn in a 5.2% year-over-year increase in quarterly revenue, to $1.37 billion, and 1.1% growth in net income per share, to $6.39.
But since this is a financial holding company, a more effective way to measure Markel's progress is by tracking long-term growth in book value per share. In fact, management's cash and stock bonus compensation is tied to the five-year rolling average growth in book value per share -- ensuring that their interests remain aligned with those of fellow shareholders -- so it's unsurprising to see that Markel kicks off its quarterly press releases with an update for the metric. As of the end of last quarter, Markel's book value per share stood at $589.86, representing year-over-year growth of 4.5%, and sequential growth from the prior quarter of 5.1%.
Digging deeper into the drivers of that performance, Markel will also break its results down into three primary segments: investments, insurance operations, and its non-insurance/Markel Ventures portfolio of businesses.
Regarding investments, we'll see measures for comprehensive income to shareholders (up 40.9% year over year last quarter, to $397 million, driven by unrealized gains on investments), as well as net investment income (down 1.7% year over year in Q1, to $91.3 million, albeit mostly because of the timing of maturities from Markel's fixed maturity portfoliio).
Markel will also offer an update on its change in total invested assets ($18.5 billion last quarter), including how much of that total resides in equity securities ($4.3 billion in Q1, or 23%), fixed maturities (55%), and short-term investments, cash, and cash equivalents (22%). Regarding net unrealized investment gains, shareholders should note that Markel co-CEO and Chief Investment Officer Tom Gayner prefers to hold equities for long periods without selling. This not only allows the power of compounding to do its work, but it also helps Markel avoid the unnecessary tax burden that would otherwise come with frequent trading.
On the insurance side, listen for color on gross premium volume (up 11% year over year last quarter, to $1.39 billion), which itself will be broken down into gross premium volume changes from reinsurance (up 20% year over year in Q1, to $453.5 million), U.S. insurance (up 11% last quarter, to $647.8 million), and international insurance (up slightly, to $291.4 million).
Markel also breaks its underwriting performance down with respective combined ratios for its U.S. insurance, international insurance, reinsurance operations, and a consolidated combined ratio for the three. Last quarter, Markel's consolidated combined ratio was 88% -- which means it earned $12 for every $100 in premiums it wrote -- including 89% from U.S. insurance, 95% from international insurance, and 82% from reinsurance.
Note, however, that Markel's long-term average consolidated combined ratio is closer to the 95% to 97% range. So last quarter's results were exceptional -- thanks in part to a lack of major catastrophic events -- and may not be the norm going forward. For now, though, shareholders can enjoy the outperformance of Markel's insurance businesses, which has helped offset its lumpier results elsewhere in previous quarters.
On Markel Ventures
Last but not least, we can't forget Markel's diversified group of non-insurance businesses, which are each operated independently from one another but collectively report under the Markel Ventures moniker. To that end, Markel Ventures companies' performance are reported as part of one of four subsegments: manufacturing (up 16.7% year over year last quarter, to $286.5 million), non-manufacturing (up 20.2%, to $192.7 million, investment management (down 27.8%, to $7.2 million), and "other" (up slightly, to $6.3 million).
But Gayner did offer one warning during last quarter's call -- namely, that Markel Ventures' recent strength was derived from its transportation-related businesses, which tend to be "cyclical in nature."
"But it is important to make hay while the sun shines," Gayner elaborated. "And they are doing so. There is nothing more that I could ask them."
Of course, that's not to say another of Markel Ventures' "steady-Eddie" businesses, as Gayner often refers to them, won't be able to pick up the slack if the transportation segment wanes. But for now, Markel is benefiting from the strong results while they last.
And so it goes for Markel as a whole so far in 2016, with solid results from its investing, underwriting, and Markel Ventures operations alike. Whether one or all of those operations was able to sustain that momentum in the second quarter remains to be seen. But in the end, their respective abilities to prop up any impending weakness of the other segments is part of the beauty of Markel's strategy for consistently achieving market-beating returns.