Markel's Ugly Quarter Isn't As Bad As It Looks

Markel (NYSE:MKL) announced fourth-quarter and full-year 2018 results on Tuesday after the market closed. The diversified insurance and financial holding company detailed seemingly steep losses, albeit driven by a combination of one-time writedowns and new accounting standards that track the fair value of its equity portfolio.

With shares down 4.8% on Wednesday in response, let’s take a closer look to better understand how Markel ended the year.

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Markel results: The raw numbers


Q4 2018

Q4 2017

Year-Over-Year Growth

Operating revenue

$1.043 billion

$1.662 billion


Net income (loss) to shareholders

($751.5 million)

$434.9 million


Net income (loss) per diluted share




Book value per share




Data source: Markel.

What happened with Markel this quarter?
Operating revenue was affected by an $843 million reduction in the fair value of equity securities held in Markel’s investment portfolio — largely a consequence of the broader stock market’s steep decline at the end of 2018. As such, the comprehensive loss to shareholders during the quarter was $680.4 million, swinging from comprehensive income of $629.2 million in the same year-ago period. Given previously announced government inquiries into loss reserves recorded in late 2017 and early 2018 at an entity managed by Markel’s CATCo reporting unit, Markel reduced the carrying value of goodwill and intangible assets at CATCo, which Markel acquired in late 2015, to zero, resulting in an impairment charge of $179 million. Last month, the company also announced that two senior executives at CATCo are no longer with the company.  In investment operations: 
Net investment income climbed 12.8% year over year to $114.5 million, driven by higher short-term interest rates, dividend income from equities, and higher interest income on fixed-maturity investments. Total invested assets were $19.2 billion at the end of 2018, down from $20.6 billion a year earlier. Equity securities comprised 30% of that total, up from 29% a year earlier, while fixed maturities were 52%, up from 48% a year earlier. Short-term investments, cash, and cash equivalents represented the remaining 18%. Net unrealized gains on investments, net of taxes, were $48.1 million as of Dec. 31, down from $2.5 billion at the end of 2017 — though we should keep in mind that, upon their recent adoption of new accounting standards, cumulative net unrealized gains on equity securities of $2.6 billion (net of deferred income taxes of $684.4 million) were reclassified into retained earnings.
In insurance operations:
Markel’s consolidated combined ratio was 108% — which means it lost $8 for every $100 in premiums it wrote — including ratios of 99% from the insurance segment, and 151% from reinsurance. Still, Markel achieved a consolidated combined ratio of 98% for the full year 2018, including 94% from insurance and 113% from reinsurance. Earned premiums grew 8.4% to $1.228 billion.
In Markel Ventures:
Revenue climbed 18% year over year, to $472 million, primarily driven by Markel’s acquisition of ornamental-plant company Costa Farms last year — though this also includes a partial quarter’s contribution from Markel’s acquisition of 90% of fashion-handbag specialist Brahmin Leather Works in October. Ventures’ operating income declined 61% to $17.1 million, and EBITDA fell 39% to $41.6 million. For all of 2018, Ventures’ net income to shareholders fell to $35.3 million from $103.6 million in 2017, driven by a combination of higher insurance recoveries from storm losses in 2017, a one-time tax benefit of $37.1 million in Q4 of 2017 following the implementation of the Tax Cuts and Jobs Act, and higher interest expenses in 2018.
In November, Markel closed on its previously announced $975 million acquisition of Nephila Holdings, a Bermuda-based investment manager with $12 billion in assets under management.

What management had to say

Markel co-CEO Tom Gayner stated:

We continued to see organic growth and substantial contributions from our recent acquisitions within both our insurance and Markel Ventures operations. Our underwriting results for the year were positive, despite significant catastrophe losses in 2018. Comprehensive loss to shareholders and book value per share were impacted by declines in both our fixed income and equity portfolios, driven by an increase in interest rates and unfavorable movements in the equity markets during 2018. Our results were also impacted by a goodwill and intangible asset impairment in our Markel CATCo operations; however, we remain committed to our strategy in the insurance-linked securities market. In the fourth quarter, we completed the acquisition of Nephila, the industry’s preeminent insurance-linked securities investment manager, and we are excited about the strategic opportunities this business brings to Markel. The acquisition of Nephila, along with our other recent acquisitions, reflects our continued strategy and commitment to build long-term value for our shareholders.

Looking forward

This quarter certainly didn’t look great on the surface. But investors should note the issues that plagued Markel’s headline numbers are all short-term in nature. So contrary to what today’s share-price decline seems to indicate, there were no alarming red flags that might otherwise derail the company’s proven ability to consistently create shareholder value over the long term. 

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