Markel Corp. (NYSE: MKL) released very good Q3 2015 earnings although the all important book value/share number suggests otherwise!
Underwriting results were outstanding, contributing just under $300 million to pretax profits for the first 9 months of 2015 as pointed out Anne Waleski, Markel’s CFO on the conference call.
The consolidated combined ratio declined to 89% down from 97% one year ago! All insurance segments contributed to this success. This is a remarkable succes given the still very competitive insurance market conditions!
But book value / share stood at $551.63 up only 1% compared to $543.96 at December 31, 2014.
“While underwriting results have made a significant contribution to shareholder value, the favorable impact from underwriting was muted by our investment results for the first nine months, which were adversely affected by volatility in the equity markets,” explained Anne Waleski.
“Net unrealized investment gains decreased $397 million for the first nine months of 2015, compared to an increase of $499 million for the same period last year which was attributable to decreases in the fair value of our equity and fixed maturity portfolios compared to prior yearend.”
Equities were down 5.3%, and fixed income earned a positive return at 1.3%.
But this is a temporary effect caused by volatility in the markets. Markel’s high investment standards remain unchanged and will lead to even higher gains in the future.
Interesting to note is that on the equity side, the allocation as a percentage of Markel’s total shareholders’ equity, equity securities stand at 54% on September 30th, compared to 55% at yearend 2014.
Historically, this number has ranged between roughly 50% and 80% over the last 25 years as underlined CIO Thomas Gayner.
That means Markel has large sums ready for investment when opportunities present themselves.
Markel Ventures the private equity arm of Markel caused “other revenues” to rise 30% to $817 million from $630 million last year, primarily due to the acquisition of Cottrell in 2014.
Only net earnings contribution of Markel Ventures was depressed because of a higher earnout payment as Cottrell is performing better than originally thought at the time of acquisition.
At a share price of $876.56 Markel trades at a book value/share of 1.6 which should be considered a fair price for this high quality speciality insurer.
The combined ratio will not remain a low as this quarter forever but given the forseeable upside in investment gains over the long term Markel remains a buy at this price !