Shares of specialty insurer Markel (NYSE:MKL) rose 14.8% in the first half of the year according to data provided by S&P Global Market Intelligence. Markel has benefited from improvements to its earnings compared to last year -- which saw larger losses from the COVID-19 pandemic -- and from the inflationary environment which could benefit interest-rate-sensitive stocks.
Markel is a provider of excess and surplus (E&S) insurance, and it focuses on serving niche markets including vehicle insurance for vintage car collectors, yacht insurance, wedding insurance, and high-value bicycle insurance.
According to S&P Global Market Intelligence, Markel was the third-largest E&S insurer in the U.S. in 2020, trailing only Berkshire Hathaway and AIG.
The company's business has three aspects: underwriting specialty insurance, investing in high-quality bonds with its earned premiums, and investments through Markel Ventures, which operates like a private equity firm. This business structure has earned the company the nickname "Baby Berkshire."
Markel has bounced back from last year thanks to improved underwriting conditions and improvements to its investment book. Earned premiums increased 12.5% in the first quarter compared to last year. Total operating revenue increased as well -- thanks to investment gains of $526 million in the quarter. Last year the company posted a $1.7 billion loss in the quarter amid the COVID-19 pandemic.
Profitability improved, too, with the insurer posting a combined ratio of 94% in the first quarter. A ratio below 100% means the company is profitable, while a ratio over 100% means the company is spending more on claims and operating expenses. In the first quarter last year the insurer posted a 118% combined ratio, which was elevated due to increased claims related to the COVID-19 pandemic.
Markel trades at a discount relative to its valuation over the past five years, sporting a price to earnings (P/E) ratio of six and a price to tangible book value (P/TBV) ratio of two.
Increasing concerns about inflation could be favorable for the insurer as well. Insurers tend to perform well amid inflation because they are cash-generating machines, and put the excess capital to work in bonds and other investments. Rising interest rates help insurers generate higher investment income as a result.
All in all, Markel has done a solid job of navigating the COVID-19 pandemic and is back on track for solid growth in 2021. Investors will look for a continuation of this growth when the company announces its second-quarter earnings at the end of this month.
Editor's note: A previous version of this article misstated Markel's share price growth. It is up 14.8%, not 18%.