Markel Earnings: Underwriting a Little Weak, but Investment Results Are Strong

Markel MKL produced a solid overall second quarter. While the company appears to be lagging its peers on the underwriting side, a relatively aggressive investing approach paid off this quarter. Overall, though, we don’t see anything that materially alters our long-term view and will maintain our $1,310 fair value estimate for the no-moat company. We see shares as slightly overvalued.

Net written premiums were up only 5% year over year, with a slight decline on the reinsurance side. Given current industry pricing increases, this suggests to us that management is remaining cautious, although growth did pick up a bit from the first quarter.

Underwriting results remain a little weak relative to what we are seeing from peers. The combined ratio for the quarter came in at 92.8% compared with 91.0% last year. Management pointed to some issues in liability lines as the main culprit. Peers have generally recorded roughly flat year-over-year underwriting margins recently. Given that we’re fairly deep into the hard market and underwriting margins appear to have peaked at the industry level, it is disappointing to see Markel not fully capture the opportunity.

Results on the investment side were strong, with the company recording a $485 million realized gain in the quarter and seeing some uplift in investment income as interest rates rise. The gain appears to have come almost entirely from the equity portfolio, with the company benefiting from the rebound in the stock market. However, from a long-term perspective, we see Markel’s equity-heavy investing approach as more risk-tolerant than value-creative.