Morningstar | A Bull Market Leads to a Good First Quarter for Markel
Markel posted solid underwriting results, but strong investment performance was the biggest driver of its quarter. While it worked in the company’s favor this quarter, we retain our concerns about Markel’s dependence on investment results to drive profitability and book value growth, especially given the premium valuation the market awards to the stock. We will maintain our $845 fair value estimate and no-moat rating.Markel continues to see solid growth, with net written premiums up 11% year over year. We’ve been somewhat skeptical of the company’s relatively high growth in recent years, but with a number of carriers calling out better pricing this quarter our concerns are abating.
The combined ratio did increase significantly, coming in at 95% compared with 89% last year. However, the increase was in large part due to lower favorable reserve development and a difficult comparison. The level this quarter was basically in line with our long-term expectation for underwriting margins.
We think a year-over-year comparison highlights how dependent Markel is on a bull equity market to drive results, given its relatively high allocation to equities within its investment portfolio. In the current quarter, a $612 million realized gain on equities was the key driver behind reported net income of $576 million and an 8% increase in book value per share. However, in last year’s quarter, a $122 million realized loss on equities led to a $64 million loss for the quarter. In our view, Markel’s performance remains highly leveraged to the direction of the equity markets. This has generally played to the company’s advantage in the post-crisis period, but we see its strategy as more risk-assumptive than value creative over time and don’t think investors should pay a premium for simple investment allocation decisions.
Markel is a financial holding company. The company's business operations are: Underwriting, which comprised of risk-bearing insurance and reinsurance operations; Investing, which is primarily related to underwriting operations; Markel Ventures, Inc., includes controlling interests in a portfolio of businesses that operate outside of the specialty insurance marketplace; Insurance-linked securities, which include investment fund managers that provide investment products, including insurance-linked securities, catastrophe bonds, insurance swaps and weather derivatives; and Program services, which serves as a fronting platform that provides access to property and casualty insurance market.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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