On Aug 30, 2014, Zacks Investment Research downgraded Markel Corp. (MKL) by two notches to a Zacks Rank #5 (Strong Sell) from a Zacks Rank #3 (Hold).
Why the Downgrade?
Markelhas been facing downward estimate revisions owing to sluggish underwriting experience and cash flows, which also led to lower-than-expected second-quarter 2014 results and a slack outlook for the next quarter. Additionally, this property-casualty insurer delivered negative earnings surprises in three of the last four quarters with an average miss of 12.1%.
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On Aug 6, Markel reported second-quarter 2014 operating earnings per share (EPS) of $2.66, which significantly lagged the Zacks Consensus Estimate by 54.5%. However, EPS was higher than the prior-year figure by 18.8%.
While higher premiums and investment income supported the year-over-year top-line growth of 22%, net realized investment gains tanked 38.3%. Moreover, operating expenses rose 22.7%, along with an increase in interest and tax expenses. Additionally, a rise in loss reserves and cost of acquisitions led to an operating cash outflow of $243.5 million from against an inflow of $398.7 million in the year-ago period, thereby limiting share buybacks.
Markel is focused on expansion through the recent acquisitions of Alterra in May 2013 for about $3.3 billion, Abbey Protection Plc in Jan 2014 for $190.7 million, Cottrell Inc. in Jul 2014 for $130 million as well as Tromp-Pol Baking Equipment BV (Vanderpol) and Den Boer Baking Systems BV (Den Boer) in Aug 2014. However, these acquisitions have weighed on the company's financial leverage (with debt-to-capital ratio of 24% at Jun 2014-end) and cash flows.
Moreover, Markel faces the brunt of unfavorable reserve developments, which continues to hurt underwriting results in the property-casualty operations, which are already bracing competition. Overall, weak fundamental growth prospects amid significant underwriting and investment risks have failed to enlist any positive investor sentiment for the upcoming quarter as well.
Meanwhile, the Zacks Consensus Estimate for 2014 and 2015 declined 18.3% and 8.6% to $19.16 and $23.09 per share, respectively, in the last 30 days. There was no upward estimate revision for both the years over the same time frame. Moreover, on a year-over-year basis, earnings are expected to dip 0.2% in 2014.
Insurers That Warrant a Look
While we prefer to avoid Markelfor the time being, better-ranked insurers such as Global Indemnity Plc (GBLI), Mercury General Corp. (MCY) and Endurance Specialty Holdings Ltd. (ENH) are worth considering. All these stocks sport a Zacks Rank #1 (Strong Buy).
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