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Markel Offers a Deceptively Good Quarter

By Steve Symington – Updated Apr 28, 2017 at 12:22PM

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The specialty insurer's underwriting operations took an unusual hit in Q1 while its other businesses picked up the slack.

Markel Corporation (MKL -0.42%) announced first-quarter 2017 earnings on Wednesday after the market closed, punctuated by a generally strong performance apart from an unusual item -- and one outside of Markel's control, at that -- which affected underwriting results. After initially declining on the news, shares of Markel closed up 0.8% Thursday as the market digested what the specialty insurer and financial holding company had to say.

Let's dig deeper to see what drove Markel's business as it kicked off the new year.

Markel headquarters sign


Markel results: The raw numbers


Q1 2017

Q1 2016

Year-Over-Year Growth

Operating revenue

$1.412 billion

$1.377 billion


Net income to shareholders

$69.9 million

$160.4 million


Net income per diluted share





What happened with Markel this quarter?

For perspective, consensus estimates predicted net income of $4.50 per share on revenue of $1.43 billion. As a financial holding company, however, a better way to gauge Markel's success is by looking at book value per share. Book value per common share outstanding at the end of the quarter was $620.30, representing 2.3% growth from $606.30 at the end of 2016 and up 5.2% from $589.86 at this time last year.

Looking closer at insurance operations, Markel's consolidated underwriting combined ratio this quarter was 100%, meaning it broke even on every dollar in premiums it wrote, compared to 89% last quarter (when it earned $11 for every $100 in premiums it wrote) and 88% in the same year-ago period. More specifically, consolidated underwriting results included:

  • 93% from U.S. insurance
  • 88% from international insurance
  • 132% from reinsurance operations

Of course, one of those isn't like the others. Reinsurance operations included $85 million of adverse development (equivalent to adding 38 points on the reinsurance combined ratio) primarily due to a decrease effective last month in the Ogden rate -- its first change since 2001 -- from 2.5% to negative 0.75%. The Ogden rate is used to calculate lump sum awards in U.K. bodily injury cases. So when this rate was reduced, it increased expected claims payments for those cases, which in turn required Markel management to increase loss reserves accordingly. 

"Otherwise," noted Markel executive chairman Alan Kirshner, "our underwriting results were in line with our expectations."

Turning to Markel's investment operations, net investment income increased 9.9%, to $100.4 million, driven by a combination of dividends, higher short-term interest rates, and interest from Markel's fixed income portfolio.

Total invested assets (including investments, cash and equivalents, and restricted cash and equivalents) were $19.34 billion at the end of the quarter, up from $19.06 billion at the end of 2016. Equity securities comprised $5.04 billion of that total, or 26%, up from $4.75 billion, or 25% of total invested assets last quarter. Fixed maturities comprised 51.7% of invested assets, and short-term investments, cash and cash equivalents comprised the remaining 22.3%.

Also, net unrealized gains (net of taxes) were $1.9 billion at the end of March, up from $1.7 billion last quarter. Keep in mind Markel's co-CEO and chief investment officer, Tom Gayner, prefers to buy shares of high-quality businesses he can own for long periods of time. In doing so, he can let the power of compounding returns do its work without the hefty tax bill he would otherwise incur should he sell.

Finally, we can't forget Markel Ventures, the moniker under which Market's non-insurance, non-investing portfolio of businesses operate. Markel Ventures first-quarter operating revenue increased only slightly from the same year-ago period, to $286.9 million, including:

  • an 8.1% decline in manufacturing business revenue, to $177.1 million
  • 17% growth in non-manufacturing business revenue, to $109.8 million

On the bottom line, Markel Ventures' net income to shareholders declined 0.5%, to $14 million, and its earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 1.3%, to $41.7 million.

What management had to say

During the subsequent conference call, Gayner said this about Markel Ventures:

Our cyclical related businesses began to feel a bit of the topping out we expected to see in their normal cyclical pattern. Our other businesses continue to make steady progress and performance as expected. My guess is that this is the pattern we'll probably continue to see for the rest of the year. We continue to actively search for additional opportunities at Markel Ventures, but we remain disciplined in doing so. Same stuff, different day.

"Returns on our investment portfolio drove growth in book value for the quarter and we continued to see positive contributions from our Markel Ventures operations," added Kirshner. "We remain focused on building long-term shareholder value by exercising underwriting discipline and will only write business that supports our underwriting profit targets."

Looking forward

Markel doesn't provide specific quarterly financial guidance, but that's not terribly surprising given its relentless focus on creating long-term financial value while all but shunning many investors' tendency to react to short-term fluctuations. With that in mind, it was equally unsurprising to see shares of Markel close higher in spite of its underperformance relative to the market's expectations.

Steve Symington owns shares of Markel. The Motley Fool owns shares of and recommends Markel. The Motley Fool has a disclosure policy.

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