For investors who have watched Markel Corporation (MKL 0.91%) consistently beat the market over the years, it should come as no surprise that shares of specialty insurer have fared well in the face of the market's recent pullback. Though shares of Markel have fallen around 2% since it released third-quarter 2015 results in early November, that pales in comparison with the S&P 500's steeper 12% decline over the same period.
So what should we expect to hear when Markel releases fourth-quarter results later this week? Though Markel doesn't typically provide specific financial guidance, it seems likely to treat shareholders to more of the same steady performance. For perspective, analysts' consensus estimates call for Markel's per-share net income to rise $0.03 from last year's fourth-quarter to $7.21, while revenue is expected to decline 0.6% to $1.33 billion.
On book value per share, investments
But as a financial holding company, Markel generally kicks off each quarterly report with a much more important metric to gauge its success: book value per share. As of the end of last quarter, book value per share had climbed 1.4% year over year to $551.63 but also fell slightly on a sequential basis from Q2, primarily as comprehensive income to shareholders was hurt by declines in the value of Markel's equity portfolio.
"However," explained Markel CEO Alan Kirshner, "we continue to maintain a long-term focus with our investment strategy."
That said, we should expect to receive updates on the latest performance of Marvel's equity and fixed-income portfolios in this week's report. Last quarter, Markel's net investment income dropped 4.4% year over year to $87.1 million, and total invested assets at as of Sept. 30 were roughly steady at $18.5 billion. Of that, equity securities were $4.2 billion, or 23% of the total, up from 22% at the end of last year and representing 54% of total shareholder's equity. In addition, net unrealized gains fell to $1.5 billion in Q3 from $1.7 billion in Q2, hurt by the decline in equities. But keep in mind that in his ideal world, Markel CIO Tom Gayner likes to buy stocks with the intention of never selling, to let compounding do its work and avoid unnecessary tax burdens he would otherwise incur.
On underwriting results
Next, listen for updates on underwriting results from Markel's insurance businesses. Last quarter, for example, Markel's insurance operations achieved a combined ratio of 88% -- which means they earned $12 for every $100 in premiums they wrote -- including 90% from U.S. insurance, 87% from international insurance, and 86% from the reinsurance segment. However, note that this may not be atypical, as Markel's combined ratio historically sits in the still-respectable 95% to 97% range. In this case, its most recent performance was driven by both a lower accident year-loss ratio to date in 2015, lower expenses, and favorable developments on last year's loss reserves. I've grown to admire Markel's underwriting prowess as a longtime shareholder myself, but I won't be surprised or disappointed if combined ratios rise to a less-profitable level going forward.
On ventures and acquisitions
Finally, look for details on the performance of Markel's non-insurance businesses, primarily contained under the Markel Ventures moniker. This is usually broken down into two sub-segments, including manufacturing-centric businesses (where revenue rose 27.3% year over year in Q3 to $216.1 million), and non-manufacturing businesses (roughly flat last quarter at $83.1 million).
But even as overall Markel Ventures revenue enjoyed solid growth, the segment's net income to shareholders dropped over 40% to $6.4 million. The silver lining? That decline came primarily as Markel Ventures' 2014 acquisition of auto transport trailer manufacturer Cottrell has performed significantly better than initial projections for each of the past two quarters and so far has required the company increase its contingent-consideration obligation related to the purchase by $40.1 million (to be paid in 2016). During last quarter's conference call, Gayner mused that it was a "very high-class problem that one of our recent acquisitions is doing better than we had projected at the time of purchase."
Also on the acquisitions front, note that in December, Markel took a majority investment in business and IT management consulting firm CapTech for an undisclosed sum. While the purchase is light on details, Markel investors can rest assured CapTech will be a good fit with Markel Ventures' growing portfolio of businesses, given Gayner's historically stringent criteria for identifying acquisition candidates.
In the end, barring any uncharacteristically large acquisitions revealed at the last minute, I suspect this week's report will contain few surprises from Markel. Given its history of steady, market-beating returns, investors should be more than pleased if that's the case.
