With Market Volatility, Markel Leans on Insurance Strength

Markel Corporation (MKL 1.01%) announced first-quarter 2018 results on Tuesday after the market closed, punctuated by a net loss from the financial holding company's investment portfolio. But in keeping with executives' methodical approach to generating shareholder value, Markel management took the opportunity to showcase the merits of their long-term thinking and diversified business operations.

Let's dig deeper into how Markel started the new year, as well as what investors should expect from the company going forward.

Image source: Getty Images.

Markel results: The raw numbers

Data source: Markel Corporation.

What happened with Markel this quarter?

• Markel's net loss was negatively impacted by the adoption of new accounting standards implemented at the start of the year, which required recognizing a $122.1 million pre-tax loss related to the decline in fair value of its equities portfolio since the end of 2017. It also included a pre-tax foreign currency loss of $22.1 million, and a non-recurring tax expense of $99.5 million.
• Markel's comprehensive loss to shareholders -- which notably includes a $116.1 million decline in net unrealized gains on available-for-sale investments (net of taxes) -- was $174.8 million.
• At investment operations: 
  
  • Net investment income increased 7.6% to $108 million, driven by higher short-term interest rates and higher dividend income from equity investments.
  • Total invested assets were $20.3 billion as of March 31, 2018, down from $20.6 billion at the end of 2017. Equity securities were $5.9 billion, or 29% of invested assets, down from $6 billion at the end of last quarter.
  • Net unrealized gains on investments (net of taxes) were $3.4 billion as of March 31, 2017, down from $3.7 billion at the end of last quarter.
• At insurance operations:
  • The consolidated combined ratio for Markel's insurance operations was 90% -- which means it earned $10 for every $100 in premiums it wrote -- including combined ratios of 97% from reinsurance, and 89% from Markel's combined U.S. and international insurance segment.
  • Gross premium volume in underwriting operations grew 9% year over year to $2.047 billion. Note this doesn't include roughly $461.2 million of gross premiums written through Markel's program services business, which was acquired through its purchase of State National in late 2017. Essentially all gross premiums written through that business were ceded to third parties this quarter.
• At Markel Ventures:
  • Operating revenue grew 36.6% to $392.1 million, driven primarily by the acquisition of Costa Farms in last year's third quarter.
  • Ventures' net income to shareholders fell slightly year over year to $13.6 million, largely due to lower revenue and higher costs at one of Markel's industrial products businesses, as well as the impact of acquisition expenses and lower seasonal sales from Costa Farms.
  • Segment EBITDA grew 3.4% to $46.6 million.

What management had to say

Co-CEOs Richard Whitt and Tom Gayner together stated:

Our underwriting results for the quarter were solid and reflect profitable growth from recent acquisitions as well as our continued focus on underwriting discipline. Comprehensive loss to shareholders and book value per share were impacted by declines in both our fixed income and equity portfolios, driven by an increase in interest rates and unfavorable movements in the equity markets during the period. However, we continue to maintain a long-term focus with our investment strategy. Contributions from our Markel Ventures operations reflect both organic growth and the recent acquisition of Costa Farms.

During the subsequent conference call, Gayner reiterated that Markel's "short-term investment results reflect normal short-term volatility," and are essentially in line with changes in both equity markets and interest rates.

Gayner also offered this perspective:

In our equity portfolio, we were down 1.3% during the quarter. Over the last five and a quarter years, we're up 216% cumulatively. Over that time frame, we've been up as much as 33% in a single year and down as much as 2.5% in a year. I would happily sign up for those results for the next five years. And we continue to invest each day with the same discipline that has produced such outstanding long-term results.

Looking forward

Markel doesn't offer specific financial guidance. But while this quarter may not look great after a quick glance at the headline numbers, it represents a continuation of Markel's proven efforts to consistently grow its various businesses and generate market-beating returns in the process. And I think patient, long-term shareholders should be more than happy with its progress to that end.