Markel Corporation (MKL +1.28%) is set to release first-quarter 2016 earnings later this week. With shares of the specialty insurer and diversified financial holding company up more than 20% over the past year and flirting with all-time highs on the heels of its solid quarterly report in February, you can be sure the market will be watching closely to see how it started the new year.
That's also not to say investors should expect any big surprises from Markel. Rather, I suspect this quarter will contain more hints of the same steady, long-term outperformance to which shareholders have grown delightfully accustomed. Nonetheless, let's take a closer look before Markel's official report hits the wires.
First, recall the company doesn't typically provide specific financial guidance. For perspective -- and with the caveat that we don't lend much credence to Wall Street's quarterly demands -- analysts' consensus estimates predict Markel's revenue will be up 1.9% year over year, to $1.33 billion, and translate to net income of $6.79 per share.
Metrics that matter: Book value and investment performance
But arguably the most effective measure to gauge Markel's success -- and the way Markel management typically kicks off each quarterly report -- is by inspecting its growth in book value per share. As of the end of last quarter, Markel's book value per share stood at $561.23, up 3.2% year over year. That also brought Markel's compound annual growth in book value per share to an impressive 11%.
In addition, we should receive updates on Markel's investments, the performance of which can be deceiving over the near term given volatility in equities, but also benefits from the superb long-term stock-picking prowess of Markel Chief Investing Officer (and now co-CEO), Tom Gayner. Last year, the value of Markel's investments fell 0.7%, as a 1.6% increase in Markel's fixed income portfolio was more than offset by a 2.9% decline from its equities.
Zooming in to last quarter's breakdown, net investment income declined 11.3% year over year, to $82.7 million, and total invested assets as of Dec. 31, 2015 were $18.2 billion, down fro $18.6 billion a year earlier. Equities comprised $4.1 billion, or 22% of that total, and 52.3% of shareholders' equity. Fixed maturities were 52% of invested assets at year-end, and short-term investments, cash and equivalents made up the remaining 26%.
This also means Markel almost certainly had plenty of cash to capitalize on the historically painful pullback our equities markets presented at the start of this year. So listen closely for comments from Gayner indicating as much.
Underwriting discipline
Next, recall stellar underwriting results from Markel's insurance operations last quarter helped prop up its overall performance -- and this despite flat and declining written premiums in today's tough insurance market. On a consolidated basis, insurance achieved a combined ratio of 88% in Q4 -- which meant Markel earned $12 for every $100 premiums it wrote -- including 87% from U.S. insurance, 83% from international insurance, and 83% from reinsurance, helped by favorable developments on last year's loss reserves (that is, money conservatively put aside for claims that never arose).
This also came as gross written premiums were flat last year in the U.S. at $2.5 billion, declined 3% to $1.2 billion internationally, and dropped 13% at reinsurance, to $965 million. And that's fair enough; until currently difficult insurance markets shift to a more amiable market for growing written premiums, investors should be content as Markel focuses on taking up the slack by ensuring the premiums it does write come with outsized profitability.
Everything else
Finally, we can't forget Markel's non-insurance, non-investing operations, namely contained in a diversified group of businesses operating under the Markel Ventures banner. Last quarter, Markel Ventures grew revenue 9.4% year over year, to $269.7 million, and brought the segment's total revenue for the year above $1 billion for the first time in 2015.
However, Markel Ventures also achieved a net loss of $3.3 million last quarter, and its earnings before interest, taxes, depreciation and amortization (EBITDA) fell slightly on a year-over-year basis, to $15 million. But both Markel Ventures' EBITDA and net income were net of a $14.9 million goodwill impairment charge related to the Diamond Healthcare unit -- albeit a temporary, isolated bit of bad news as Diamond Healthcare's goodwill balance stood at zero going into 2016.
To that end, listen for any updates on both new and recent Markel Ventures acquisitions. Most recently in December, Markel Ventures acquired a majority stake in IT services consulting firm CapTech Consulting, financial results from which will be included for the first time this quarter beginning in January.
In the end, patient investors know this single quarter's report won't make or break Markel. But it should serve as a valuable chance to at least take a pulse and delve deeper into the current state of Markel's operations. If Markel's history is any indication, I think this week's results will likely amount an exercise in affirming the decision to buy and hold shares of this solid, long-term oriented business.
