Though hardly a surprise to long-term investors, Markel Corporation (NYSE:MKL) just announced another great quarterly performance. For its second quarter ended June 30, Markel's operating revenue rose 3.6% year over year to just over $1.3 billion, while net income jumped to $6.72 per diluted share, up from $2.66 per share in the same year-ago period.
Analysts, on average, were anticipating revenue of only $1.28 billion, and earnings of $6.28 per share.
But Markel is a diversified financial holding company, so arguably the best way to measure its success is by looking at growth (or lack thereof) in book value per share, which includes all of its underwriting, operating, and investing results. During the second quarter, Markel's book value per share rose 2% sequentially, and 8.5% year over year to $554.97.
Shares of Markel closed at $892.50 per share on Wednesday, which means the stock is now trading around 1.61 times book value -- not overwhelmingly expensive, but well above its five-year average price-to-book ratio of roughly 1.22.
On underwriting results
Partly driving those results was a solid performance from Markel's insurance business, which achieved a consolidated combined ratio of 96% for the quarter -- meaning it earned $4 for every $100 in premiums it wrote -- including 93% at its U.S. Insurance segment, 98% at International Insurance, and 100% at its Reinsurance operations. This was an improvement over the 101% consolidated combined ratio Markel achieved in the same year-ago period, and it's a much more "normal" result compared with last quarter's stunning 83% combined ratio, which was driven at the time by unusual factors, including an absence of accident losses and the release of prior years' loss reserves.
"We continue to exercise a disciplined underwriting approach, despite soft market conditions," added Markel CEO Alan Kirshner, "and will only write business that supports our underwriting profit targets."
Next, Markel's net investment income fell 1.7% year over year to $90.6 million, while total invested assets at quarter's end were $18.5 billion, down from $18.6 billion at the end of Q1. Equity securities were around $4.4 billion, or 24% of that total, up from 23% of invested assets last quarter and 22% at the end of 2014.
Meanwhile, net unrealized gains fell to $1.7 billion from $1.9 billion three months ago, primarily because of a decrease in the fair value of Markel's fixed maturity portfolio as a result of increasing interest rates so far in 2015.According to CEO Alan Kirshner, this was a primary antagonist preventing greater growth in book value per share. Nonetheless, investors should remember by holding its positions for long periods of time without selling, Markel aims to bolster its net unrealized investment gains over the long term, thus avoiding an unnecessary tax bill and further compounding shareholder returns.
On Markel Ventures
Finally, non-insurance businesses operating under Markel Ventures grew operating revenue 30.4% year over year to $239.6 million, primarily driven by Markel's acquisition of auto-transport trailer manufacturer Cottrell just over a year ago.
At the same time, Markel Ventures' adjusted earnings before interest, taxes, depreciation, and amortization fell 37.1% to $13.2 million, which translated to a net loss to shareholders of $2.6 million. To Markel Ventures' credit, Cottrell's earnings so far this year have exceeded expectations. And because part of the purchase consideration for Cottrell was based on its post-acquisition earnings through 2015, Markel Ventures' net loss this quarter is due to a $17.6 million increase in its estimate for this contingent consideration obligation. That obligation now stands at $31.1 million, and will be paid in 2016.
In the end, despite the temporary hiccups with fixed-income investment results and Markel Ventures' bottom line, investors are still left with a predictably solid quarter that again exceeded Wall Street's expectations. However the market reacts on Thursday, I remain as impressed as ever by Markel's steady results and long-term focus.