MKL - Markel Corp

[muscleman]

 

 

MKL is competing for a spot in my portfolio, against BAC -- that's why I pit one against the other.

 

How about BPOP? It is quite similar to BAC but I think it has a higher upside.

 

I haven't been looking.  I know there must be better opportunities out there, but I'm sitting tight and aside from a couple of good calls I'm a fairly below-average investor in terms of spotting a good company from a bad one.  I don't want to go back into the jungle, too much tiger in the jungle -- I just want to stay with the boat.

 

How about TPRE then? It is a similar model compared with MKL, except that it is younger and all assets are invested in Dan Leob's hedge fund.

[ERICOPOLY]

 

 

MKL is competing for a spot in my portfolio, against BAC -- that's why I pit one against the other.

 

How about BPOP? It is quite similar to BAC but I think it has a higher upside.

 

I haven't been looking.  I know there must be better opportunities out there, but I'm sitting tight and aside from a couple of good calls I'm a fairly below-average investor in terms of spotting a good company from a bad one.  I don't want to go back into the jungle, too much tiger in the jungle -- I just want to stay with the boat.

 

How about TPRE then? It is a similar model compared with MKL, except that it is younger and all assets are invested in Dan Leob's hedge fund.

 

It's once again a problem -- I have only ever done really well when I cherry picked ideas from others.  On my own, I can't really sort out one investment from another.  First I need the rubber stamp from some investment legend... like for example when Buffett invested in BAC... then from there I build up confidence if the investment makes sense to me after I spend a lot of time looking at it.

 

So I hardly even know who Dan Loeb is, and I don't know how good he is at reinsurance.  I remember when Montpelier Re lost 70% of shareholder equity in a single quarter -- I don't want that kind of result.

[muscleman]

 

 

MKL is competing for a spot in my portfolio, against BAC -- that's why I pit one against the other.

 

How about BPOP? It is quite similar to BAC but I think it has a higher upside.

 

I haven't been looking.  I know there must be better opportunities out there, but I'm sitting tight and aside from a couple of good calls I'm a fairly below-average investor in terms of spotting a good company from a bad one.  I don't want to go back into the jungle, too much tiger in the jungle -- I just want to stay with the boat.

 

How about TPRE then? It is a similar model compared with MKL, except that it is younger and all assets are invested in Dan Leob's hedge fund.

 

It's once again a problem -- I have only ever done really well when I cherry picked ideas from others.  On my own, I can't really sort out one investment from another.  First I need the rubber stamp from some investment legend... like for example when Buffett invested in BAC... then from there I build up confidence if the investment makes sense to me after I spend a lot of time looking at it.

 

So I hardly even know who Dan Loeb is, and I don't know how good he is at reinsurance.  I remember when Montpelier Re lost 70% of shareholder equity in a single quarter -- I don't want that kind of result.

 

 

Thank you for your insight!

[giofranchi]

So I hardly even know who Dan Loeb is, and I don't know how good he is at reinsurance.  I remember when Montpelier Re lost 70% of shareholder equity in a single quarter -- I don't want that kind of result.

 

Well, I know a lot of engineering firms which have failed, yet I don’t necessarily think mine is bound to repeat their results… Success and failure are always just the natural outcomes that proceed from very real and tangible, if not always self-evident, reasons. I know exactly WHY those engineering companies have failed, and I know mine is not repeating those same mistakes. And this give me confidence we won’t follow in their steps.

Similarly, it would be reasonable to worry about TPRE, only if you know exactly why Montpelier Re failed, and you see TPRE is making the same mistakes.

 

For what I know (and unfortunately I know very little about Montpelier Re!), Mr. Loeb is not involved in the reinsurance operations. Instead, he manages the investments part of the business (with a track-record of 21% net annualized since 1995). For the reinsurance operations, instead, he has chosen (wisely imo) Mr. Berger, who has an excellent track-record over more than 30 years.

What you have here is the combination of a “master investment professional” with a “master reinsurance professional”.

 

If you lack any more specific details about what they are doing and why they are supposedly following in Montpelier Re's steps, replicating Montpelier Re's errors, chances are very much in favor of the fact Mr. Loeb and Mr. Berger will keep on replicating their past track-records, instead of Montpelier Re’s.

 

Gio

 

[tombgrt]

You are deducting too much out of the failure and success of others IMO. There are many more possible mistakes and unknowns that make it extremely hard to determine who will eventually survive. The line between failure and success can be quite thin and often it is a matter of luck. I assume Eric wants to avoid "bad luck" even though no obvious mistakes are being made that are obvious NOW. In hindsight it's easy to point out the mistakes and why they happened.

 

 

[jouni1]

montpelier blew up because it was too much like TPRE is now (generalizing a lot sorry). after blowing up they started investing with way less risk and have done fine (i think? haven't looked at them in a while) since. i was reading their reports then and i think they went almost 100% fixed income. but it was the risky investment profile + nature of reinsurance business that almost took them down.

 

i guess it's been long enough since the big catastrophes for some people to make the same mistake again. and probably get rich while doing so.

[giofranchi]

You are deducting too much out of the failure and success of others IMO. There are many more possible mistakes and unknowns that make it extremely hard to determine who will eventually survive. The line between failure and success can be quite thin and often it is a matter of luck. I assume Eric wants to avoid "bad luck" even though no obvious mistakes are being made that are obvious NOW. In hindsight it's easy to point out the mistakes and why they happened.

 

Well, you just cannot do business that way. At least, I don’t see how… When you do business, you want to concentrate on ideas, review them carefully and thoroughly, and then, when you have finally made up your mind they have some merits, to proceed implementing them, committing as few mistakes as you can. That's all you can really do...

And that’s imo what Mr. Loeb is doing. Therefore, I like what I see… even if I cannot exclude bad luck from happening!

Trading, maybe, could be different… I don’t know… I don’t trade… A good trader might be successful in controlling even bad luck… But I don’t see how a good entrepreneur could. If you are looking for something that is "bad luck shielded", just forget about running a business! ;)

 

Gio

 

[giofranchi]

montpelier blew up because it was too much like TPRE is now (generalizing a lot sorry). after blowing up they started investing with way less risk and have done fine (i think? haven't looked at them in a while) since. i was reading their reports then and i think they went almost 100% fixed income. but it was the risky investment profile + nature of reinsurance business that almost took them down.

 

i guess it's been long enough since the big catastrophes for some people to make the same mistake again. and probably get rich while doing so.

 

Well, I am not really worried about the reinsurance side of the business: Mr. Berger has a wonderful track-record, and it went through many catastrophic events without being tarnished a bit! Of course, as I have just pointed out, bad luck might always happen…

On the investment side, instead, I am a bit more worried… Though Mr. Loeb has a wonderful track record, he did poorly in 2008 and he is way too aggressive now for my tastes… That’s basically why TPRE is a very small position in my firm’s portfolio right now.

Yet, once again, I like what I see. :)

 

Gio

 

[jouni1]

Well, I am not really worried about the reinsurance side of the business: Mr. Berger has a wonderful track-record, and it went through many catastrophic events without being tarnished a bit! Of course, as I have just pointed out, bad luck might always happen…

On the investment side, instead, I am a bit more worried… Though Mr. Loeb has a wonderful track record, he did poorly in 2008 and he is way too aggressive now for my tastes… That’s basically why TPRE is a very small position in my firm’s portfolio right now.

Yet, once again, I like what I see. :)

 

Gio

 

yep, this certainly isn't something what i'd put 2/3 of my net worth in. however, if they stay sensible, they can have nice returns over time. just not my cup of tea.

[tombgrt]

"Bad luck" probably was a bad choice of words. Take Mr. Berger. It can be entirely luck that he has avoided all those cats and damage to his reputation. I've learned not to put too much wait on such factors. Likewise it's not because you avoid certain mistakes that you will do fine, too much uncertainty. But as you mentioned, no way to avoid such possibilities in doing business..

[giofranchi]

Take Mr. Berger. It can be entirely luck that he has avoided all those cats and damage to his reputation.

 

For 30 years?! Hey! I am very well aware of the fact that there’s “randomness”, but I also believe in “process”, and “discipline”, and “focus”.

I look for someone “focused” on the right “process” (at least a process I can understand and agree with), and who shows the “discipline” to follow it.

If I can find 10 to 15 people like that… I guess I might even succeed in coping with “randomness” fairly well! ;)

 

Gio

 

[CorpRaider]

Wasn't loeb down less than MKL's equity portfolio was in 2008?  I thought he was down ~40% and MKL was down ~50%.  To me that was one reason why guys like him are looking for "permanent capital" so they don't get forced to sell via redemptions at the bottom of the market.

[ERICOPOLY]

Hmm... I think that came off the wrong way.  I was trying to put emphasis on my not having the right toolset to evaluate the winners from the losers in the reinsurance space.  Thus, I would be just as likely to pick another MRE because I don't know what to watch out for when reading the 10-Qs.

 

I wasn't trying to infer that I see anything wrong with Dan Loeb's company -- rather... I don't know where to look to find such bad things, and that's what makes me nervous.

 

Somebody asked me what I thought of it, TPRE, and I just pointed out that I'm not the guy to ask.

[Liberty]

RICHMOND, Va., Nov. 21, 2013 /PRNewswire/ -- Markel Corporation (NYSE: MKL) announced today that its board of directors has authorized a new share repurchase program covering purchases up to $300 million. The program replaces a similar program initially authorized in November 2010 under which approximately $101 million of the Company's common stock was repurchased over the last three years. Under the new program, as under the previous program, management has the discretion to purchase shares at prices that are deemed reasonable in light of circumstances at the time of purchase. Purchases are generally expected to be made through open market transactions.

[phil_Buffett]

RICHMOND, Va., Nov. 21, 2013 /PRNewswire/ -- Markel Corporation (NYSE: MKL) announced today that its board of directors has authorized a new share repurchase program covering purchases up to $300 million. The program replaces a similar program initially authorized in November 2010 under which approximately $101 million of the Company's common stock was repurchased over the last three years. Under the new program, as under the previous program, management has the discretion to purchase shares at prices that are deemed reasonable in light of circumstances at the time of purchase. Purchases are generally expected to be made through open market transactions.

 

nice thank you liberty.

 

so Tom sees value right now in the stock. good Investment the own Company right now at this low book  valuation

[ap1234]

Hi JPerez,

 

Welcome to the board! Thank you for sharing your thoughts on Markel.

 

I have two questions for you:

 

1. Where did you find the merger projections from Markel and Alterra that you used in the attached spreadsheet. Do you have the filing where I can find those #’s?

 

2. I agree that US GAAP earnings are distorted by non-cash charges that likely depress the current ROE of the business (it clearly is BV/share growth not ROE that matters). However, I am curious to get a sense for why you think the amortization of Alterra’s bond portfolio is not a real expense? I assume Markel acquired a bond portfolio from Alterra that was trading above par. If Markel holds the bonds to maturities, wouldn’t they take a hit as the bonds revert back to par? In other words, is it fair to say that the amortization of bonds trading at a premium is a real cost (it would either decrease earnings in the form of amortization or result it in a hit to BV over time as the bonds mature at par)?

 

Thanks for sharing your thoughts!

 

[twacowfca]

So I hardly even know who Dan Loeb is, and I don't know how good he is at reinsurance.  I remember when Montpelier Re lost 70% of shareholder equity in a single quarter -- I don't want that kind of result.

 

Well, I know a lot of engineering firms which have failed, yet I don’t necessarily think mine is bound to repeat their results… Success and failure are always just the natural outcomes that proceed from very real and tangible, if not always self-evident, reasons. I know exactly WHY those engineering companies have failed, and I know mine is not repeating those same mistakes. And this give me confidence we won’t follow in their steps.

Similarly, it would be reasonable to worry about TPRE, only if you know exactly why Montpelier Re failed, and you see TPRE is making the same mistakes.

 

For what I know (and unfortunately I know very little about Montpelier Re!), Mr. Loeb is not involved in the reinsurance operations. Instead, he manages the investments part of the business (with a track-record of 21% net annualized since 1995). For the reinsurance operations, instead, he has chosen (wisely imo) Mr. Berger, who has an excellent track-record over more than 30 years.

What you have here is the combination of a “master investment professional” with a “master reinsurance professional”.

 

If you lack any more specific details about what they are doing and why they are supposedly following in Montpelier Re's steps, replicating Montpelier Re's errors, chances are very much in favor of the fact Mr. Loeb and Mr. Berger will keep on replicating their past track-records, instead of Montpelier Re’s.

 

Gio

 

Montpelier Re would have failed had they not immediately realized how serious their situation was after first Katrina and then Rita And Wilma. They executed quick stock sales to recapitalize and saved the company.  They got in trouble because the dynamics of those three hurricanes led to a negative feedback loop like the LMX spiral.  After KRW most reinsurers are much more protected against such a spiral now.

 

Mr Berger is a respected insurance executive.  However his results in recent years are mediocre.

 

Mr Loeb is an outstanding fund manager.  However, he gets 20% and 2% as payment for his expertise ,and the CR for Mr Berger's insurance results may continue to be sub par.

[JPerez]

Hi JPerez,

 

Welcome to the board! Thank you for sharing your thoughts on Markel.

 

I have two questions for you:

 

1. Where did you find the merger projections from Markel and Alterra that you used in the attached spreadsheet. Do you have the filing where I can find those #’s?

 

2. I agree that US GAAP earnings are distorted by non-cash charges that likely depress the current ROE of the business (it clearly is BV/share growth not ROE that matters). However, I am curious to get a sense for why you think the amortization of Alterra’s bond portfolio is not a real expense? I assume Markel acquired a bond portfolio from Alterra that was trading above par. If Markel holds the bonds to maturities, wouldn’t they take a hit as the bonds revert back to par? In other words, is it fair to say that the amortization of bonds trading at a premium is a real cost (it would either decrease earnings in the form of amortization or result it in a hit to BV over time as the bonds mature at par)?

 

Thanks for sharing your thoughts!

 

Hi Ap1234,

The numbers are projections done by the management of both companies pre-merger, you can find them at the bottom of this document:

http://www.sec.gov/Archives/edgar/data/1096343/000119312513063168/d488112dex991.htm

 

About the amortization of the difference between the price they bought them for and par value, you are right. I am not implying for a moment that it is not a real charge.

My point here is that normally the variation of the market price of the bonds goes straight into other comprehensive income (markel always marks its holdings to market) but because of the merger now it goes through P&L and it is a non-cash item.

So as I see it to look at the real earnings of the company i would add that amortization back. (It is a non-recurrent item that will disappear once the merger is digested).

Of course as you say what matters is BV as a proxy for intrinsic value.

In a normal year the increase in book value would be the earnings + the variation of price of the securities.

The way I see it by merging with Alterra they have achieve 2 things:

1. They have increased their potential in the earnings part so that they can increase 8-9% the BV without major increases in the price of securities (admittedly this earnings will be very lumpy with the reinsurance but in the long term they should even out)

2. Adquire Alterra's float at close to book, this float was mainly in fix income and alternative investments (they are winding down the hedge fund part). Now they have a lot of cash and bonds that can be  redeploy in equity investments when the opportunity arises. In the short term it would be a drag in earnings but if the stock market would crash tomorrow they would be in a strong position to buy cheap equities.

I have a big chunk of my investments in Markel stock so I hope I am right. For me is the track record that make me feel comfortable with the investment.

I just hope that they keep adding business to Markel Ventures so that more of their earnings would come from non-insurance businesses. That would make them a much safer company in the berkshire style.

 

[ap1234]

Thank you JPerez. I really appreciate your insights!! You seem to be very knowledgeable about the business and quite detail oriented. Given that you have a significant % of your net worth tied up in Markel, I would love to hear your thoughts on the following question.

 

I apologize in advance for a long-winded post but I want to provide some color to help in the discussion. I should also mention that I am a MKL shareholder so my only goal is a constructive dialogue about the business and its prospects. If you think I am overlooking anything, I would be very interested to know what I am missing in my analysis.

 

Question: What is your expectation for Markel’s BV/share growth over the next 5+ years? I don’t care about the next 1 or 2 years. I want to know what you think they can grow BV over an investment time horizon? More importantly, I’m curious to hear your thought process. For example, if you expect 12% BV/share growth, how do you get to 12%? If you expect 15% BV/share growth, how do you arrive at 15.

 

The primary drivers of BV/share growth are below:

 

Insurance: $3.5-4B in net premiums – what is your expectation for premium growth and a normalized CR?

 

Investments: $16-17B in investments – what is a reasonable asset mix for cash, bonds and equities? Markel is underweight equities today which will go up over time but they are also restricted in how much they will need to have in bonds (regulated insurance entity). 

 

Given you normalized asset mix above (cash, bonds, stocks), what is your return expectation for each asset class? For example, if int. rates stay low, do you think the bond portfolio can do more than 3%/year over the next 5 years?

 

Ventures: $64 million YTD. What multiple do you assign to this business?

 

Putting this all together, how do you get to your BV/share growth assumptions over the next 5 years?

 

Why am I asking this? The difficulty I have is that most discussions about Markel seem to be high level and backward looking. Investors will say things like: “Markel has an enviable track record compounding BV/share at 17% for 2 decades.” Or “Markel is trading at the lowest P/B in 2 decades.” All the company has to do is compound at 15% or even 12% and you will get outsized returns. It sounds like a bargain!

 

I can’t argue with Markel’s track record. The company’s past is remarkable. The business is a rare combination of a high quality insurer and capital allocator. And I have tremendous respect for Tom Gayner (I have been to the Markel breakfast many times). If Markel can continue to compound BV/share in the double digits per annum, shareholders will be delighted.

 

My issue is that none of this has to do with the future. A discussion of the past should include a discussion of WHY they got the returns they did. The insurance operations are great. But the real source of returns is not from insurance (the premiums to equity ratio is only 0.6x). The primary driver of BV/share growth is the investment returns (investments to equity ratio of 2-3x). My primary concern with Markel is as follows:

 

1. The VAST majority of Markel’s investment portfolio has been in bonds

2. As an insurance company, Markel will always need to have a material % of their investments in bonds (after all they are using policy holder money to invest). Even if you think they will transition to Berkshire’s model of private businesses, it could take years before this becomes the majority of the investment portfolio. 

3. Since going public in 1986, interest rates have been in a secular decline. They have operated in only one environment, a secular bond BULL market.

4. Since 1986, corporate bonds have delievered an annual return of 8%!!

5. Given where int. rates are today, they can’t come close to getting the same returns in bonds over the next 5+ years. As such, BV/share growth will likely be much lower in the future. 

 

Nobody today would look at a bond manager and say “Wow. You did 8% per annum over the past 30 years. And you took on very little risk. Sounds fantastic. Where do I sign up?” Investors will instead say, “Congratulations. 8% per annum on bonds is great. But what do you think we can earn over the next 5-10 years?”

 

Markel doesn’t have unlimited flexibility. They can’t invest 100% of their investment portfolio in equities as they are using policyholder’s money. So at their core, they are still a bond manager that will allocate more to equities (public and private over time).

 

 

 

[racemize]

ap1234, I know you directed your question to JPerez, but I'll go ahead and give it a shot.  This is how I think of it:

 

For the reasons you listed below, it seems pretty clear to me that they will have difficulty returning double digits in BVPS in the near term.  However, we do know that MKL is using a good model, and it is one that has shown a good record over a long period of time, through many cycles.  In my opinion, as long as we trust the model and the people, we should let it operate as it does, and the long-term future expectation of growth should be similar, but lower due to size, than the past.  This is actually my main point, everything after is really just confirmations of this, including:

 

1) They are good underwriters, which should keep us moving positively;

2) They are good investors (though not Buffett, obviously);

3) Given the current environment, their actions seem very appropriate to me.  Bond yields are low, so they have kept a shortened duration (although the Alterra acquisition lengthened it again).  Value investors are becoming skittish in the equities market, so they have not deployed a lot of bonds into equities or maintained their historic equities allocation.  Perhaps they should be doing something different, but I'm not sure what it would be.

4) In the event of a significant correction, increase in bond yields, and/or a hard insurance market, they should be ready to act and get significant returns.

 

Future Returns

Given 1-4, above, at some point, they should be able to return to a normal operating environment, which will transition us from mid-high single digit growth to hopefully mid double digit growth.  Perhaps they will be able to have large returns on some large correction that will make up for the single digit growth. 

 

Thus, combining your shorter term analysis, and my long term analysis, we might expect something like 6-10% BVPS growth for 3-5 years, and then 12+% BVPS growth thereafter.  Averaging this over a very long period of time, I'm hopeful for 12+% BVPS growth over 10-20 years. 

 

Changes in Price to Book given those assumptions

So now, using the assumptions above, what would we expect from P/B values?  It seems clear to me that MKL is trading at the low end of P/B values now because of the lower growth prospects that you have identified.  However, we should consider what would happen to P/B when the lower growth prospects are raised to higher or even historic levels.  Looking at historic P/B levels for FFH/BRK/MKL when they were growing at double digit clips, they seem to be north of 1.4 (sometimes over 2x book).  Thus, my expectation is that when growth prospects return, the P/B will have expanded a fair amount from the current ~1.2 of book to a higher number, perhaps 1.5 (or even Gayner's 1.7 "fair" value, I think he has said).  So, over the period of time of investment, you get 25% in gains in P/B expansion as well as the underlying growth in BVPS.  Given the current environment, this seems like a pretty fair deal.  However, if you have a >15% discount rate, you probably can't invest in it with a margin of safety. 

 

 

I would appreciate any faults in the above thinking.  Incidentally, I have similar views for FFH, except that it is even more positioned for a downturn, so the near term expectations are even lower.  However, with its leverage and exposure to very profitable asian insurance, I could see them having 15-20% growth if it ever uncoiled/unhedged.  They are trickier, however, and there is a ton of discussion on that topic in other threads.

 

Here's a listing of P/B ratios from the Brooklyn Investor, as well as a good discussion:

http://brooklyninvestor.blogspot.com/2011/10/markel-at-book.html

 

 

 

[gary17]

I think looking at Japan and the competitive landscape of world economies, interest rate will likely stay low for a very, very long time. It could start to rise from current levels, but I doubt by much and if any will be very slow. 

 

[giofranchi]

ap1234, I know you directed your question to JPerez, but I'll go ahead and give it a shot.  This is how I think of it:

 

For the reasons you listed below, it seems pretty clear to me that they will have difficulty returning double digits in BVPS in the near term.  However, we do know that MKL is using a good model, and it is one that has shown a good record over a long period of time, through many cycles.  In my opinion, as long as we trust the model and the people, we should let it operate as it does, and the long-term future expectation of growth should be similar, but lower due to size, than the past.  This is actually my main point, everything after is really just confirmations of this, including:

 

1) They are good underwriters, which should keep us moving positively;

2) They are good investors (though not Buffett, obviously);

3) Given the current environment, their actions seem very appropriate to me.  Bond yields are low, so they have kept a shortened duration (although the Alterra acquisition lengthened it again).  Value investors are becoming skittish in the equities market, so they have not deployed a lot of bonds into equities or maintained their historic equities allocation.  Perhaps they should be doing something different, but I'm not sure what it would be.

4) In the event of a significant correction, increase in bond yields, and/or a hard insurance market, they should be ready to act and get significant returns.

 

Future Returns

Given 1-4, above, at some point, they should be able to return to a normal operating environment, which will transition us from mid-high single digit growth to hopefully mid double digit growth.  Perhaps they will be able to have large returns on some large correction that will make up for the single digit growth. 

 

Thus, combining your shorter term analysis, and my long term analysis, we might expect something like 6-10% BVPS growth for 3-5 years, and then 12+% BVPS growth thereafter.  Averaging this over a very long period of time, I'm hopeful for 12+% BVPS growth over 10-20 years. 

 

Changes in Price to Book given those assumptions

So now, using the assumptions above, what would we expect from P/B values?  It seems clear to me that MKL is trading at the low end of P/B values now because of the lower growth prospects that you have identified.  However, we should consider what would happen to P/B when the lower growth prospects are raised to higher or even historic levels.  Looking at historic P/B levels for FFH/BRK/MKL when they were growing at double digit clips, they seem to be north of 1.4 (sometimes over 2x book).  Thus, my expectation is that when growth prospects return, the P/B will have expanded a fair amount from the current ~1.2 of book to a higher number, perhaps 1.5 (or even Gayner's 1.7 "fair" value, I think he has said).  So, over the period of time of investment, you get 25% in gains in P/B expansion as well as the underlying growth in BVPS.  Given the current environment, this seems like a pretty fair deal.  However, if you have a >15% discount rate, you probably can't invest in it with a margin of safety. 

 

 

I would appreciate any faults in the above thinking.  Incidentally, I have similar views for FFH, except that it is even more positioned for a downturn, so the near term expectations are even lower.  However, with its leverage and exposure to very profitable asian insurance, I could see them having 15-20% growth if it ever uncoiled/unhedged.  They are trickier, however, and there is a ton of discussion on that topic in other threads.

 

Here's a listing of P/B ratios from the Brooklyn Investor, as well as a good discussion:

http://brooklyninvestor.blogspot.com/2011/10/markel-at-book.html

 

Joel,

great post! :)

 

I am not really comfortable with insurance and reinsurance regulations… So, I ask you a question: if, like ap1234 suggests, MKL cannot invest wherever it finds value (because is obliged to always invest in bonds), how could it be so much different for a reinsurance company like GLRE? For what I know, in fact, GLRE has no capital invested in bonds.

 

Thank you,

 

Gio

[skanjete]

If I may add something :

 

- it is exactly because of the lower expectations for BVPS growth that the P/BW ratio is historically low. With a different outlook/expectations, you'll have a different P/BW

 

- there are more ways to grow BVPS than premiums or investment results. Look at their Alterra takeover which was beneficial to their BVPS (granted, partly because they issued shares at a premium above book)

 

- opportunities present themselves in all environments. I think the Markel management is alert enough to recognise them as such and profit from them.   

[racemize]

I do not know the statutory requirements all that well.  Assuming Brooklyn investor got his numbers right in this post:

http://brooklyninvestor.blogspot.com/2011/12/so-what-is-berkshire-hathaway-really.html

 

it appears that float is generally invested in cash and bonds--I presume this is due to regulation/requirements.  Thus, the end of the long-bond bull is definitely a headwind for all of these insurers.  It seems like it could be offset with:

 

1) higher underwriting profits

2) higher levels of underwriting/higher leverage (need a hard market)

3) higher equity returns

4) higher interest rates (essentially removing the headwind)

 

MKL is already fairly good at 1), so I wouldn't think we'd see a huge increase there.  2) is unpreditcable to me.  3) requires a significant down-turn.  4) could take a long time, depending on what macro model you are using.

 

My assumption is that one or more of the above will change in the next 5 years.  I don't know which ones or how though.

[racemize]

Although, I wonder, does the bond-bull really matter for these insurers?  I presume they were holding to maturity, so then the only thing that would matter is the yield, not the fact that it was worth more over the time held (since all they got was the investment + coupons).  Thus, it would still be a head wind that yields are now very low, but not in the sense that it can't go lower.