Morningstar | Markel's Book Value Growth Slows in 1H
Markel’s book value per share, management’s preferred metric, was essentially flat in the first half of the year, with a slight increase in the second quarter offsetting a decline in the first. In our view, this trend highlights the company’s dependence on investment results to drive overall results and supports our belief that Markel’s growth is likely to slow as the tailwind of a long bull equity market recedes. We will maintain our $813 fair value estimate and no-moat rating.On the underwriting side, results remained fairly solid. Net written premiums were up 4% year over year. Primary lines were up 9%, and we estimate that growth was 4% excluding acquisitions. Net written premiums in reinsurance were down 19%, a move we view positively given weak pricing conditions in that area. The combined ratio for the quarter came in at 92%, compared with 89% last year, but we believe the quarter’s level represents a healthy result in the current environment.
On the investment side, Markel saw a 6% increase in investment income, suggesting that potential yields are starting to improve slightly. In terms of growth in book value per share, realized investment gains in the quarter were largely offset by unrealized losses. For the first six months, investment losses remain significantly negative, which was the primary driver for the lack of growth in book value per share this year. While we don’t expect these results to necessarily be repeated, we do think this highlights Markel’s dependence on investment gains to generate reasonable overall results and supports our view that Markel’s relatively high allocation to equities is more risk-assumptive than value-creative.
Markel Ventures had a difficult quarter, with EBITDA margins declining to 6.2% from 16.7% last year due to a manufacturing issue at one of Markel’s businesses. While this looks like a one-off situation, it highlights the fact that acquiring noninsurance businesses is not without risk. We remain skeptical that Markel’s strategy of acquiring a suite of unrelated noninsurance businesses will prove value-creative in the long run.
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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