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Morningstar | Markel's Underwriting Steady in 3Q, but Investment Side Drags

Although catastrophe losses swayed comparisons in Markel's third quarter, underlying operating results were largely steady. Still, while driven partly by marks on the fixed-income portfolio due to higher rates, book value per share growth of only 3% year to date is lackluster and supports our view that the favorable operating environment Markel has seen in recent years is unlikely to persist. We will maintain our $845 fair value estimate and no-moat rating.

Net written premiums were up 11% year over year, with 13% growth in primary lines (partially aided by acquisitions) and 3% growth in reinsurance. The quarter suggests some renewed interest in reinsurance, as previous quarters had seen meaningful declines. We’ve seen peers continue to pull back, given weak pricing conditions, but management noted that the increases were concentrated on the casualty side, an area we view as less problematic.

Catastrophes skewed underwriting results, with the reported combined ratio falling to 99% from 134% last year. Excluding catastrophes and reserve development, the combined ratio was basically flat year over year, suggesting the underwriting environment is steady.

Markel incurred $76 million in catastrophe losses during the quarter and expects an additional $60 million-$120 million in losses from Hurricane Michael in the fourth quarter. For comparison, Markel had incurred a little over $500 million in catastrophe losses by this point last year. As such, we view the catastrophe load this year as quite manageable. Additionally, given the fairly muted pricing response to last year’s events, we think pricing increases could fade going into 2019.

Marks on the company’s fixed-income portfolio have been a bit of a drag on book value growth, although the impact of the bull equity market has been an offset so far this year, with Markel reporting a little over $400 million in realized equity gains through the third quarter. Given the recent pullback in the market, this could turn into a headwind in the fourth quarter. In our view, the last couple of years highlight how difficult it will be for Markel to sustain strong book value growth when it is not benefiting from a benign catastrophe environment and a bull equity market.