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Morningstar has a very long commentary on risks and opportunity in the property and casualty insurance space, which includes some sections on Markel:

Coronavirus Poses Risk for P&C Insurers but Also Opportunity

Losses look manageable, and this could be a good time to buy.

Mentioned: WR Berkley Corp (WRB) , American International Group Inc (AIG) , Markel Corp (MKL) , Progressive Corp (PGR) , The Travelers Companies Inc (TRV) , Chubb Ltd (CB)

It typically takes time for insurance claims to come in after an event, but to the extent possible, insurers want to make sure they are recording claims losses when they happened. For natural catastrophes, insurers will typically estimate the ultimate claims they expect to incur over time and record the full amount in the period in which the natural catastrophe occurred. The difference between this charge and actual claims received is called “incurred but not reported.” In the context of COVID-19, this is trickier, as the event is ongoing, and actual claims activity was minimal in the first quarter. Therefore, the relative charges individual companies took in the first quarter, in our view, are more reflective of their approach to recognizing IBNR, as opposed to their actual exposure. At one end, Chubb took a minimal claim, taking the stance that it did not have enough information to make an informed IBNR estimate, whereas we believe Markel (MKL), on the other end, took the most aggressive approach in trying to fully estimate its losses.

Still, there is some information to be gleaned, and we see Markel’s estimate as the most interesting. On its call, management said its charge reflected its best estimate of the more immediate COVID-19 claims, particularly business interruption and event cancellation, but did not encompass more second-order effects in workers’ comp, liability, and surety. Still, while further losses are likely, Markel’s first-quarter estimate is very manageable at about 6% of annualized premiums and supports the idea that the industry can absorb these losses.


The COVID-19 crisis shows how two seemingly uncorrelated risks (equity market movements and claims losses) can become quickly and unexpectedly correlated. We believe an equity-heavy approach significantly raises uncertainty for Markel, as it faces potential stress on both sides of the balance sheet, and we believe investors should look for a higher margin of safety relative to its peers. Investment portfolios are used to pay claims. We believe the strategy of most insurers is to maintain a high-quality fixed-income portfolio to cover its loss reserves (typically with a bit of a cushion) and only then look to invest the excess in higher-risk securities. Except for Markel, fixed-income portfolios fully cover loss reserves at the companies we cover.

In addition to having more of its claims-paying ability contingent on the value of its equity portfolio, Markel’s overall investment portfolio relative to its loss reserves looks low relatively to peers. This does not overly concern us for a couple of reasons. First, within our coverage, we believe Markel is the most conservative in setting reserve estimates, as demonstrated by the relatively high level of favorable reserve development it has recorded historically. As such, its loss reserves are probably modestly overstated on a relative basis. Second, in addition to its publicly traded stock investments, Markel historically has acquired noninsurance operations, and we believe management sees these acquisitions as part of its overall investment portfolio. These noninsurance operations generated $264 million in EBITDA in 2019. While these operations are diffuse and the company’s disclosures don’t allow for individual valuations, to get Markel’s overall ratio of investment portfolio to loss reserves in line with the peer group average, we would only have to assume an enterprise value/EBITDA multiple of 9 times for these businesses, which seems reasonable. Still, these businesses ramp up the portion of claims-paying ability tied to equity investments and could prove difficult to sell in a worst-case scenario.

We see Markel’s risk as elevated until we have more clarity on the impact of COVID-19 on the industry, economy, and equity markets, and our uncertainty rating is very high. It is notable that Markel was the only domestic insurer in our coverage to see a double-digit decline in book value in the first quarter. While equities should generate a higher return than fixed income over time, they also carry more risk. The current situation supports our view that the risks and rewards of Markel’s strategy are balanced, and that a higher allocation to equities is not inherently a value-creative decision. We believe Markel has generally enjoyed an overly optimistic market valuation in the postcrisis period, when conditions were largely favorable to its approach. But now that the risks are more plain, we question whether the market will reassess the multiple the stock has carried in recent years, even after this crisis has passed.


We think Markel’s equity-heavy approach raises its risk during this period, and we don’t see the current market price as compelling.
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