Markel Corp. (NYSE: MKL) is HOLD. On the positive side, we like the company’s focus on underwriting profitability and low combined ratio (excluding catastrophe losses). In addition, management is diversifying away from its insurance and reinsurance operations by expanding its portfolio of Markel Ventures businesses.
The beta on MKL is 0.68.
On October 27, Markel reported comprehensive income to shareholders of $520 million or $31.03 per share. Third-quarter operating revenue of $2.9 billion was up 28% from prior year. Markel’s combined ratio increased to 97 from 94 due in part to losses attributable to COVID-19 and weather events such as hurricanes and derechos. Excluding one-time events from both years, the combined ratio would have been 87 in 3Q20 compared to 91 in 3Q19.
The company continually refines its portfolio of businesses. In April 2020, it acquired a controlling interest in Lansing Building Products, LLC, a supplier of exterior building products and materials to professional contractors. This business was added to the Markel Ventures segment.
EARNINGS & GROWTH ANALYSIS
Markel reports revenue from three main business lines: Earned premiums (51% of 3Q revenue); which include the company’s risk-bearing insurance and reinsurance operations; Markel Ventures (30%), which includes its controlling interests in a diverse portfolio of businesses outside of specialty insurance; and Net Investment Gains (20%), which are primarily related to underwriting operations. Recent results are discussed below:
Earned premiums increased 7% during the most recent quarter. Insurance segment underwriting profit declined 8%. The reinsurance underwriting loss widened almost 600% as the combined ratio increased to 116 from 103 due to higher catastrophe losses and the COVID-19 pandemic.
Market Ventures operating revenue increased 66% in 3Q,driven by recent acquisitions. Segment profit more than doubled.
Net investment gains rose more than 200% and investing segment profit quadrupled. The Insurance division saw third-quarter net written premiums fall 68% year-over-year to $1.18 billion. However, in the first three quarters, net premiums written rose 11% to $3.68 billion, driven by organic growth and higher rates in the professional liability, general liability, and personal product lines. The division reported an underwriting profit of $75 million, down 7% from the prior year.
In the Investing division, net investment income fell 20% year-over-year to $90 million, reflecting the impact of lower short-term interest rates. The segment posted a profit of $630
million, up 334% from the pr r year, due to an increase in the value of the company’s equity portfolio value.
Markel Ventures, which owns businesses outside of specialty insurance, saw segment profit increase 124% to $80 million, helped by the recent acquisition of Lansing Building Products. In the Reinsurance business, net written premiums fell 4% to $179 million. The segment posted a 3Q20 net loss of $34.8 million. The combined ratio rose to 116 from 103, driven by higher catastrophe losses and the pandemic.
Markel’s reinsurance business and its equity ventures are less predictable than other traditional insurance lines such as Life or P&C. As a result, Markel’s ROE is in the mid-single-digit range, lower than the 12%-14% of most insurance peers.
FINANCIAL STRENGTH & DIVIDEND
Debt was $3.5 billion. Debt accounted for 23% of total capitalization. In the first three quarters, operating cash flow rose 77% to $1.26 billion, reflecting higher net premium collections in the insurance segment.
We believe that the lack of a dividend makes the shares less attractive to some investors.
The company has suspended its share repurchase program due to COVID-19. Its $300 million buyback authorization has $236 million remaining and no end date.
MANAGEMENT & RISKS
Tom Gayner and Richard Whitt became co-CEOs of the company in 2016, replacing Alan Kirshner, who had served as CEO and chairman for 30 years and worked at Markel for 60 years. Mr. Kirshner retired as the company’s chairman in May 2020 and was succeeded by Vice Chairman Steven Markel. Mr. Markel has served on the board since 1978 and is a grandson of the founder. Mr. Gayner manages the company’s Markel Ventures investment business.
Risks faced by Markel investors include the possibility that the company’s underwriters may misprice its policies, and suffer losses as claims exceed premiums written. The company may also be hurt by weak returns on its investment portfolio. In addition, Markel faces challenges related to the acquisition of acquired companies. Like other insurers, the company is also exposed to substantial risk from weather-related losses, natural catastrophes, and the pandemic.
Based in Glen Allen, Virginia, and established in 1930, Markel Corp. is a specialty insurance company. Through Markel Ventures, the company invests in various industrial and service businesses that operate separately from its insurance business. The company also has an IT consulting business. The company has 18,600 employees.
The shares are trading at 1.3-times book value, below the industry average of 1.5. Markel does not pay a dividend, compared to the industry average yield of 2.0%. We believe that these valuation metrics adequately reflect the company’s prospects for solid growth in insurance premiums, but also its low returns on equity. We may look to move MKL back to our BUY list if ROE improves or the shares drop back to support near $900.
On November 20, HOLD-rated MKL closed at $997.35, down $10.97.