Markel is a specialty insurance company that underwrites in three segments: Excess and Surplus (E&S), Apecialty Admitted, and the London market. Risks covered in the E&S area include highly specialized professional coverage, builder's risk for yachts and medical malpractice. The Specialty Admitted segment focuses on coverage for schools, camps, horse facilities and other hard-to-insure areas. The London market provides coverage for cargo, hulls, war risk and professional indemnity for architects, lawyers and financial professionals.
Hurricanes Hurt Results
Markel reported a net loss per share of $14.46 for the quarter, along with a combined ratio of 124%. The combined ratio contained 30 points of underwriting losses due to Hurricanes Gustav and Ike. Markel provided coverage for wind damage and sustained large losses due to the hurricanes over the past few months. The company maintains that it priced its coverage properly for such events. "The vast majority of our business units incurred losses from these hurricanes that were well within both our expectations and the level at which we can achieve very good returns on our capital," said Vice Chairman Steven Markel. (You can learn more about another way companies protect themselves from weather risks at Introduction To Weather Derivatives.)
The company reported a quarter-ending book value of $235.72, an 11% decrease from the $265.26 reported on Dec. 31. Book value is an important financial metric for insurance companies, and a decline of this size is stunning for a company with the reputation of Markel, although not unexpected, given the investment environment in 2008. (For more on this valuation, see Digging Into Book Value.)
Great Returns
Markel has always taken pride in its excellent record of investment returns. The company's five-year compound annual growth rate in book value per share was 18% as of Dec. 31.
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Markel Insurance return on investments
(Dec. 31, 2007)
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-
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Five-Year
Annual Return
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10-Year
Annual Return
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Equities
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11.8%
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10.7%
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Fixed Income
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4.8%
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5.8%
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Total
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7.0%
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7.2%
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For the first nine months of 2008, the investment portfolio returned a negative 5.1%, with the equity portfolio down 12%. The S&P 500 returned worse than negative 19% over the same period.
Good News On The Horizion
During the conference call, management was optimistic that the hard market in insurance was returning. "But let me be very clear about what is happening at Markel," Steven Markel said. "Our prices have been on downward trend for several years and while they are certainly not at a dangerously low level, we have no longer any room to reduce them further. We are increasing our prices."
Other insurers have also reported that prices for insurance are headed up. Evan Greenberg, the CEO of ACE Limited (NYSE:ACE), said "In my judgment, given both the rapid destruction and increased cost of capital, combined with the damage inflicted on a number of companies in our industry, the soft market for P&C [property and casualty] insurance is essentially over, and rates will begin to firm."
Platinum Underwriters Holdings (NYSE:PTP) was also optimistic, and CEO Michael Price said, "We anticipate improving reinsurance market conditions."
Joseph Taranto, the chairman and CEO of Everest Re Group (NYSE:RE), was also positive on the future during a recent call. Taranto said that a typical cycle would normally last for years, but that current events had shortened that correction period. "I see that timeframe dramatically reduced and expect the portions of the reinsurance and insurance market to improve by the one-month renewal season," Taranto said.
Bottom Line
The drop in book value by Markel was a rare miss for the company, which historically has produced superior investment results in its portfolio.
You can head back to basics with our special feature Insurance 101.
