Markel Earnings: Underwriting Results Disappoint

Markel’s MKL third-quarter results were a little disappointing, specifically in regard to underwriting. On the investment side, results were mixed with a weaker equity market partially offset by higher interest rates. Overall, though, we remain comfortable with our $1,310 fair value estimate for the no-moat company and see shares as mildly overvalued.

Net written premiums increased 1% year over year, with 4% growth in primary lines offset by a 26% decline in reinsurance. Given that the industry is currently seeing solid pricing increases, these figures suggest Markel is retreating a bit.

This more cautious stance might be justified given relatively weak underwriting results. The reported combined ratio came in 99.1%, compared with 93.4% last year. Favorable reserve development declined 280 basis points year over year, but catastrophe losses declined 140 basis points, which suggests a significant deterioration in underlying underwriting profitability. This deterioration in underwriting results and the weak absolute level puts Markel at odds with what we’ve seen from peers. As we move deeper into the hard market, we’ve generally seen underwriting margins at peers stabilize at attractive levels. In our view, the fact that the company appears to be unable to exploit favorable market conditions reflects poorly on its underwriting discipline.

On the investment side, Markel saw a $230 million decline in the value of its equity holdings as the market declined. However, this is somewhat offset by higher interest rates and better yields on fixed-income securities. Investment income increased almost 70% year over year. While Markel is seeing a benefit, we think its equity-heavy investment approach puts it at a relative disadvantage to other insurers when it comes to benefiting from higher interest rates.