Markel Corporation (NYSE:MKL) just released its fourth-quarter 2014 report Wednesday after the bell. And ever the outperformer, the specialty insurer didn't disappoint.
Quarterly operating revenue climbed around 4.4% year over year to $1.34 billion, which translated to 15.8% growth in net income per diluted share to $8.05. Analysts, on average, were expecting the same revenue to result in earnings of just $5.70 per share.
The most important metric
But as a long-term-oriented financial holding company, the best way to measure the performance of Markel is by looking at growth in book value per share. In the fourth quarter, Markel's book value increased 5.8% sequentially and 14% year over year to $543.96 per share as of Dec. 31. Over the five-year period ending Dec. 31, Markel's compound annual growth in book value per share was also 14%.
Shares of Markel closed just below $705 per share on Wednesday, which means the stock is trading at roughly 1.29 times book value -- not too expensive by any means, but still slightly above Markel's five-year average price to book ratio of roughly 1.21.
Breaking it down
Meanwhile, Markel's increase in net income was driven by favorable underwriting results and higher investment income. On the former, Markel's consolidated combined ratio came in at 95% for all of 2014 -- meaning it earned $5 for every $100 in premiums it wrote -- including 95% at its U.S. insurance segment, 93% from international insurance, and 96% from its reinsurance business. By comparison, Markel achieved a still-solid 97% combined ratio when all was said and done in 2013. To be fair, though, it's worth noting that those results were also negatively affected by acquisition-related costs for its purchase of Alterra, which closed in the middle of 2013.
Total invested assets were $18.6 billion at year-end 2014, up from $17.6 billion at Dec. 31, 2013. Equity securities comprised around $4.1 billion, or 22% of the total. That also puts equity securities at nearly 54% of total shareholder equity, up from around 48% at the end of 2013, as Markel methodically builds its equity percentage following the Alterra acquisition.
All told, net investment income climbed 5.2% year over year in the fourth quarter to $93.25 million, and 14% for the full-year 2014 to $363.23 million. Markel's net unrealized gains on investments also increased by $661.7 million last year, bringing its total net unrealized gains on investments to $1.8 billion as of Dec. 31, 2014. Markel CIO Tom Gayner has previously pointed out that taking profits on those positions would incur a tax liability of over $500 million, so shareholders should be happy that cash remains in Markel's coffers, helping to further compound their returns.
Finally, don't forget about the non-insurance side in Markel Ventures, which consists of Markel's diversified portfolio of industrial and service companies. Most recently, that includes the purchases "boring" but profitable businesses such as Tromp-Pol Baking Equipment and a majority stake in automobile transport trailer maker Cottrell -- the latter of which, by the way, marked Markel Ventures' single largest transaction to date at $130 million. Consolidated revenue from Markel Ventures increased 22.8% year over year in the fourth quarter to $253.3 million, while adjusted earnings before interest, taxes, depreciation and amortization rose 48.2% to $24.8 million. For the full year 2014, Markel Ventures' revenue and EBITDA increased 24.3% to $883.5 million, and 13.5% to $95.1 million, respectively.
All things considered, it was another solid quarter for this well-respected business. And even with the stock trading near all-time highs and slightly above its typical valuation, I won't be selling my shares anytime soon.