Shares of Markel Corporation (MKL -0.09%) fell as much as 7% Wednesday and then partially recovered to close down 2.4% after the company released its third-quarter 2016 results. But before we jump to conclusions for this typically solid specialty insurer and financial holding company, let's take a closer look at what propelled Markel's business as it kicked off the second half of the year.
Markel's headline numbers
Quarterly operating revenue grew 6.6% year over year, to roughly $1.431 billion, and translated to a 24.3% decline in net income per diluted share, to $5.60. To be fair, Markel doesn't generally offer specific quarterly financial guidance. But for perspective, analysts' consensus estimates predicted Markel would turn in revenue of $1.44 billion, and earnings of $7.65 per diluted share.
But as a financial holding company, Markel rightly focuses on growth in book value per share as a more effective measure of its relative success. As of Sept. 30, 2016, Markel's book value per share was $609.48, marking an increase of 8.6% from $561.23 at the end of 2015, and up 10.5% from $551.63 at the end of last year's third quarter.
Markel Executive Chairman Alan Kirshner elaborated:
All three of our operating engines have made substantial contributions to our results in 2016. While our underwriting results for the quarter were adversely impacted by unfavorable development on our medical malpractice and specified medical product lines, we continue to exercise underwriting discipline and our results for the nine months are in line with our expectations. Growth in book value per share was also driven by strong performance in both our equity and fixed income investment portfolios. Contributions from our Markel Ventures operations reflect both organic growth and the recent acquisition of CapTech.
Let's take those comments one by one, starting with the performance of Markel's insurance business.
Markel's insurance segment achieved a consolidated combined ratio of 98% for the quarter -- which means they earned $2 for every $100 in premiums they wrote -- compared to 93% in the second quarter, and an abnormally low 88% in the same year-ago period. Included in its most recent consolidated total were combined ratios of 101% from U.S. insurance, 91% from international insurance, and 94% from reinsurance operations.
Gross premium volume declined 2.5% year over year, to approximately $1.13 billion, including a 4.3% increase in gross premiums from U.S. insurance, to $663.2 million, a 5.4% decline from international insurance, to $269.1 million, and a 17.6% decline at reinsurance, to $196.9 million. As Kirshner alluded above, these results also included just over $50 million (or five points on the consolidated combined ratio) of losses and loss adjustment expenses in response to claim trends in Markel's medical malpractice and specified medical product lines within U.S. insurance, namely those written for correctional facilities and contract physician staffing.
More specifically, Markel noted that late last year it saw an increase in claim frequencies for business written on those classes "which was inconsistent with the historical trends indicated by our actuarial analyses." However, as both claim frequencies and claims payments for those classes continued to steadily rise in more recent quarters, Markel insurance opted to prudently increase loss reserves and take corrective action for business written in those classes.
Meanwhile, Markel's investment operations continued to perform admirably. Comprehensive income to shareholders was $89.2 million for the quarter, compared to a comprehensive loss to shareholders of $51.1 million in last year's third quarter. Net investment income grew 7% year over year, to $93.1 million, which -- similar to last quarter -- was driven primarily by higher bond income on Markel's fixed maturity portfolio as it increased holdings of fixed maturity securities.
Total invested assets were $19.4 billion at the end of the quarter, up sequentially from $19.2 billion last quarter. Equity securities comprised $4.5 billion, or 23% of the total. That's flat from last quarter as a percentage of total invested assets, and represents around 52.8% of total shareholders' equity. For perspective, Markel has historically invested between 50% and 80% of shareholders' equity in securities.
Fixed maturities comprised around 53% of invested assets at the quarter's end, and short-term investments, cash, and cash equivalents made up the remaining 24%. Net unrealized gains (net of taxes) were $1.9 billion as of Sept. 30, up from $1.8 billion last quarter and $1.5 billion at the end of 2015. Shareholders should note Markel chief investment officer and co-CEO, Tom Gayner, aims to invest in high-quality equities for long periods of time without selling, maximizing the possibility unrealized investment gains will trend upward over the long term. This, in turn, maximizes the effects of compounding gains while simultaneously avoiding an unnecessary tax bill that would be incurred by selling.
Finally, Markel houses its portfolio of non-insurance businesses under the Markel Ventures moniker. Here, quarterly operating revenue increased 7.4% year over year, to $321.3 million, as a 5.6% decline in manufacturing business revenue, to $203.9 million, was more than offset by 41.3% growth at non-manufacturing business revenue, to $117.4 million. The latter was primarily driven by Markel Ventures' acquisition of IT consulting specialist CapTech last December.
Markel Ventures' net income to shareholders more than doubled year over year, to $13.5 million, up from $6.4 million in last year's third quarter. And Markel Ventures' earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped nearly 42% year over year, to $41.8 million. Relatedly, both figures were impacted by increases in Markel's estimates of contingent consideration obligations -- that is, when a portion of an acquisition's purchase consideration is based on future earnings -- including $10.3 million of expenses resulting from an increase of the consideration obligation for CapTech, whose earnings during the quarter exceeded Markel's initial projections. Either way, it's an enviable "problem" to have a recently acquired business performing at a higher-than-expected level.
In the end, with the exception of the hiccup in Markel's U.S. Insurance business -- which itself was handled in as prudent a manner as investors could hope -- there was little not to like about this report from Markel as it continued to enjoy the solid supplementary performance of its other businesses from investments, international insurance and reinsurance, and Markel Ventures. So while the market may be frowning at this seeming chink in Markel's armor, I think long-term investors have no reason to worry today.