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Morningstar | Markel Reports Tough 4Q; Book Value Per Share Declines 4% in 2018

Markel had a difficult fourth quarter, with results dinged by catastrophe losses, capital market movements, and a government investigation into one of its units. As a net result, book value per share in 2018 declined 4%. While these factors are largely transitory, we think they help to showcase that the tailwinds that have driven Markel’s strong book value growth in recent years should not be expected to continue. We will maintain our $845 fair value estimate and no-moat rating.

Catastrophe losses dinged underwriting profitability in the quarter, with an overall combined ratio of 108% compared with 95% last year. This was primarily driven by an increase in catastrophe losses, and the 98% level for the full year is reasonable, in our view, given the elevated level of catastrophe losses. However, we remain somewhat concerned with the aggressive path the company is taking. Net written premiums in the quarter were up 15% year over year, and up 11% in reinsurance. Given somewhat difficult pricing conditions, we’ve seen the insurance franchises that we think are most disciplined taking a more cautious approach. We continue to believe pricing in reinsurance, in particular, is potentially inadequate. Growing aggressively in this type of environment is risky, in our view.

Markel had previously announced a government investigation in loss reserves at CATCo, which it acquired in 2015, and two senior executives at this unit left in January. In light of this, Markel wrote down the goodwill associated with this business to zero, resulting in a $179 million charge. We would note that historically we believe Markel as a whole has been conservative in setting loss reserves, as evidenced by the sizable favorable reserve development the company reports most years. But given that CATCo is a relatively recent acquisition, its operations in this respect may be unique. Regardless, while the ultimate results of the investigation are still unknown, the acquisition was clearly a mistake. We think the market gives Markel too much credit in terms of its ability to create value by recycling capital into acquisitions, and this development supports our view.

During the quarter, Markel recorded $846 million in realized investment losses, and this was the driving factor behind the decline in book value per share this year. The marks were driven mainly by volatility in the equity market. We don’t necessarily expect this type of loss to reoccur soon, but we would note that this year highlights how dependent Markel’s book value per share growth is on investment results. We think the low interest rate environment and bull equity market in the post-crisis period have been particularly favorable to Markel’s investment approach, and it was unlikely that this type of environment would persist indefinitely.