Markel Corporation (MKL +0.26%) announced third-quarter results on Tuesday after the market closed, highlighting the relative outperformance of its equity portfolio, strength from its insurance segment despite significant catastrophe losses, operating improvements from its Markel Ventures group of businesses, and two notable acquisitions. Shares of the diversified financial holding company climbed as much as 3.3% early in the day, but settled to close up almost 2%.
Let's dig in to see what drove Markel's performance to start the second half.
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Markel results: The raw numbers
| Metric |
Q3 2018 |
Q3 2017 |
Year-Over-Year Growth |
|---|---|---|---|
|
Operating revenue |
$2.236 billion |
$1.506 billion |
48.5% |
|
Net income (loss) to shareholders |
$409.4 million |
($259.1 million) |
N/A |
|
Net income (loss) per diluted share |
$28.50 |
($18.82) |
N/A |
|
Book value per share |
$704.70 | $641.20 |
9.9% |
DATA SOURCE: MARKEL CORPORATION.
What happened with Markel this quarter?
- Comprehensive income to shareholders was $315.1 million, swinging from a $19.9 million loss in the same year-ago period. The increase was driven largely by short-term increases in the value of Markel's investment portfolio.
- At investment operations:
- Net investment income increased 1.7%, to $106.3 million, driven by higher short-term interest rates, higher dividend income from equities, and higher interest income on fixed-maturity investments.
- Total invested assets were $21.0 billion at the end of the quarter, up from $20.4 billion last quarter and $20.6 billion at the end of 2017. Equity securities were $6.5 billion of that total, or 31% of total invested assets, up from $6.1 billion at the end of last quarter.
- Net unrealized gains on investments, net of taxes, were $3.7 billion as of Sept. 30, 2018, up from $3.4 billion last quarter.
- At insurance operations:
- Markel's consolidated combined ratio was 99% -- which means it earned $1 for every $100 in premiums it wrote -- including ratios of 96% from U.S. and international insurance and 115% from reinsurance.
- These results included a $75.7 million underwriting loss from Hurricane Florence and Typhoon Jebi.
- Gross premium volume from underwriting operations increased 11.6%, to $1.483 billion, not including $561.3 million of gross premiums written through Markel's program-services business acquired through its acquisition of State National last year. Substantially all of those latter premiums were ceded to third parties.
- At Markel Ventures:
- Operating revenue climbed 41% year over year, to $469.4 million, driven largely by last year's acquisition of ornamental plant company Costa Farms.
- Operating income more than tripled, to $23.6 million. The increase came primarily as last year's third quarter included $20 million of inventory losses related to Hurricane Irma, for which insurance recoveries were not recognized until the following quarter. Segment EBITDA similarly almost doubled, to $45.8 million, while net income to shareholders climbed to $20.2 million from $3.8 million in the same year-ago period.
- In October, Ventures acquired 90% of fashion-handbag specialist Brahmin Leather Works for $173.3 million.
- In late August, Markel agreed to acquire Nephila Holdings Limited, a Bermuda-based investment manager with $12 billion in assets under management, for $975 million in cash. Following the close of the acquisition, Nephila will continue to operate as a separate business unit of Markel.
What management had to say
Markel co-CEOs Richard Whitt and Tom Gayner jointly stated:
Comprehensive income to shareholders for the third quarter reflects strong performance in our equity portfolio, while our fixed income portfolio was unfavorably impacted by rising interest rates. Our results for the quarter also reflect substantial contributions from our Markel Ventures operations. Within our underwriting operations, we produced a small underwriting profit, despite catastrophe losses in the quarter, and continue to maintain a strong balance sheet. We are excited about recent growth opportunities in both our Markel Ventures and insurance operations, including our most recent acquisition of Brahmin earlier this month, and our planned acquisition of Nephila, which is expected to close next month.
During the subsequent conference call, Gayner offered some perspective on the recent stock market weakness:
As we've all seen in the trick or treat month of October, we've had the trick part of lower overall stock prices and we've been able to enjoy the treat part of continuing to invest in quality companies at lower and more attractive prices. That volatility and our behavior in the face of that are nothing new. Our consistency admits to various conditions helps us to earn the significant returns that we've earned over the years. We will continue to act in a disciplined and consistent manner.
Looking forward
As usual, Markel didn't offer specific forward financial guidance. But there was nothing in this report that should cause investors to doubt the company's proven ability for consistently beating the market and growing its per-share book value over the long term.
