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Markel Takes the Long-Term View After Another Impressive Year

By Steve Symington - Feb 6, 2020 at 9:01AM

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The mini-Berkshire grew its book value nicely in 2019. But management already has its sights set on the next 10 years.

Markel (MKL 1.61%) released fourth-quarter and full-year 2019 results late Tuesday. With echoes of last quarter's deceptively solid results in mind, you may have noticed several news headlines have indicated Markel's revenue and earnings this quarter technically fell short of Wall Street's estimates.

But make no mistake, Markel is rightly pleased with both its achievements in 2019 and its position heading into the new decade. And shares of the diversified financial holding company rallied nearly 6% on Wednesday to a fresh all-time high as the market absorbed the news.

Let's take a closer look at how Markel ended the year, starting with its headline numbers:

Metric

Q4 2019

Q4 2018

Change

Operating revenue

$2.582 billion

$1.043 billion

147.6%

Net income (loss) to shareholders

$511.1 million

($751.5 million)

N/A

Net income (loss) per diluted share

$36.26

($53.88)

N/A

Book value per share

$802.59

$653.85

22.7%

Data source: Markel. 

Digging deeper

Keep in mind the above operating revenue figures under generally accepted accounting principles (GAAP) include net changes in the value of Markel's investment portfolio -- specifically of $531.7 million last quarter, compared to a negative $843 million impact a year ago. Excluding the these adjustments, operating revenue this quarter would have been closer to $2.05 billion, and net income would have been closer to $6.57 per share.

For perspective, and while we don't usually lend much credence to Wall Street's expectations, most analysts were technically modeling higher earnings of $8.38 per share on revenue of roughly $2.06 billion.

To be clear, however, arguably the best way to gauge Markel's success as a financial holding company is by tracking changes in its per-share book value -- a metric that grew nicely both over the past year and sequentially from $768.98 per share three months ago.

Man pointing to an arrow on a bar chart indicating gains.

Image source: Getty Images.

At Markel's investing operations, net investment income fell 1.8% year over year to $112.5 million. Total invested assets stood at roughly $22.3 billion at the end of the year, up from $21.9 billion last quarter and $19.2 billion a year ago. These gains were primarily driven by increases in the fair value of Markel's equity security investments, which comprised 34% of total invested assets (up from 32% last quarter and 30% at the end of 2018).

Meanwhile at Markel's insurance operations, earned premiums grew 9.7% year over year to $1.346 billion, and Markel's combined ratio fell slightly from last quarter to 93% -- which means they earned approximately $7 for every $100 in premiums written -- including 89% at the insurance segment and 120% from the reinsurance business.

At the Markel Ventures group of owned and acquired businesses (which operate outside the core insurance and investment groups), operating revenue grew 3.1% to $486.5 million, largely aided by contributions from Markel's acquisition of leather handbag specialist Brahmin a little over a year ago. Markel also acquired fire safety and security solutions company VSC for an undisclosed amount in the fourth quarter. And Ventures' operating income grew 25.3% to $21.4 million. 

"A record-setting year"

In a joint statement provided with the earnings release, co-CEOs Tom Gayner and Richard Whitt wrote:

Following continued growth in our insurance and Markel Ventures operations, 2019 was a record-setting year for Markel. Gross written premiums from our underwriting operations surpassed $6 billion, and we are excited about the synergies we are achieving between our underwriting and other insurance platforms. Within our Markel Ventures operations, revenues surpassed $2 billion and we continued to expand through our fourth quarter acquisition of VSC Fire & Security. Gains on our investment portfolio were just under $2 billion, driving record comprehensive income and book value per share. We are proud of what we accomplished in 2019 and want to thank our dedicated associates for their significant contributions, which support our aspiration to become one of the world's great companies.

During the subsequent conference call on Wednesday morning, Gayner touched on Markel's long-term thinking, adding:

The 2019 results are now history. Our energy and efforts are concentrated on what lies ahead. We're focused on the steps we are taking right now to continue to build Markel over the next decade. As someone once said, things don't change as much as you expect in six months and they change more than you can imagine in 10 years.

With shares hitting a fresh all-time high yesterday and having nearly quadrupled over the past decade, it seems clear Markel's three-tiered approach for consistently creating value for shareholders is succeeding. And after its impressive end to 2019, I'm still convinced this perennial top stock has what it takes to continue beating the market for the foreseeable future.

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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