MKL - Markel Corp

[racemize]

I thought this portion of the call was good to hear:

 

James Davis - Silver Point Capital

Hi guys. Thanks for taking my question and congrats on a long track record of great performance.

 

Tom Gayner - President and Chief Investment Officer

Thank you.

 

James Davis - Silver Point Capital

The 15% compound book value growth track record is what caused us to take a look at the company. And as we have been doing our diligence, we have noticed some changes in the company that suggests that book value growth is likely to be meaningfully lower in the future, but we wanted to get your thoughts to make sure we are thinking about this the right way? The two big changes that seem to have taken place at the company are, first, investment leverage has declined meaningfully. 10 to 20 years ago, investments were about four times your book value, but today this is only about half that, 2.1 times your book value. And second, investment yields have declined meaningfully. 10 to 20 years ago, portfolio yields were in the 5% range versus to 2.2% today. So, our math suggests these two factors combine to create a pre-tax ROE drag of about 15% relative to previous periods, making it tough to get that double-digit ROE without a significant rally in the equity market? And we seem to be seeing this play out this year as a relatively minor hiccup in the equity markets has resulted in flat book value growth for the year. Are we missing something or have these changes made historical returns very tough to meet going forward?

 

Tom Gayner - President and Chief Investment Officer

Yes, this is Tom. I will try to take those. Compared to 10 or 20 years ago, I think you are correct. I mean, the amount of premium leverage we can get relative to our equity capital is lower. Now, specifically what we can do in the face of that is that we can increase the allocation to higher total returns theories, because the reason we would have the fixed income portfolio is predominantly to over-collateralize the insurance liabilities and the claim spends that we expect to make. So, if we have less leverage and we are writing less business, what that means is we can allocate a higher percentage of the portfolio to equities, where we would expect to pickup higher return.

 

The second pool you mentioned is the lower overall investment yields. I would agree with that. I would also suggest that that the higher yields occurred during a period of higher inflation. So nominal yields are lower, but real yields have not decreased as much. So nominally, it’s a lower return environment, that’s correct. But in a real sense, if we make high single-digit, low double-digit returns in a zero interest rate world, both the nominal yields and the inflation circumstance that we faced that will be a spectacular economic outcome. And we are optimistic about our ability to do so.

 

James Davis - Silver Point Capital

Okay, got it. Got it. That makes sense. And then with the equities, as you mentioned previously on the call, you are currently at kind of 54% of book value versus the historical range of 50% to 80%. So, in terms of the opportunity to increase to higher return assets, we are not necessarily seeing that right now. Is there an intention to increase that allocation to try to makeup for that difference is the first question? Then I guess on the second question, makes perfect sense, lower inflation, lower nominal yields. I guess, are we right to think that, that just translates into lower nominal ROEs as well, going forward relative to what we have seen in the past?

 

Tom Gayner - President and Chief Investment Officer

Yes. I mean, that’s the math of lower nominal ROEs. But in real terms, as I said, we are going to try and do the best we can. And in real terms we have generated excellent returns for a long time and hope we have the formula in place to continue to do so. In terms of the additional allocations to the equity portfolio, whisper some good ideas to me after the call and we will put it to work. But just like the acquisition question, we work all day everyday looking for things. At the moment, we are driving down the road tapping the brakes a little bit just as a function of being picky about what we buy. But as we see things and we hunt for them everyday, we do have the capital to put money into the equity portfolio and we would love to do so when we see it.

 

James Davis - Silver Point Capital

It makes perfect sense. And so did I hear correctly that in the current environment the view is the kind of high single moving into the low double-digit would be a great outcome?

 

Mike Crowley - President and Co-Chief Operating Officer

Yes. We don’t make forward-looking forecasts or any expectations of that sort, but when you penciled out the math that you did, I don’t think you are doing that incorrectly.

 

James Davis - Silver Point Capital

Got it. And then just final question, we have always admired the discipline at the company. And like you said, there is a lot of headwinds in the market right now, the investment leverage and rates, which we talked about. But like you pointed out, pricing is weakening, equity markets are a little more difficult trading in elevated multiples on above trend margins. The private acquisitions are certainly tougher, given the prices out there today. And in terms of your core business, like you said, accretive acquisitions are tougher, as it seems like there’s an M&A premium kind of built into everything that’s trading out there. Is the right way to think about Markel right now that it’s a tough environment, you have reduced leverage, you are kind of retrenching and will have a period of lower returns, but as the market changed, there will be the ability to play more offense and move to higher returns at some point in the future?

 

Mike Crowley - President and Co-Chief Operating Officer

Well, let me split that. And I think Richie alluded to this a bit in his discussion of CATCo. It’s always tough. Markets are always competitive. So I don’t think there’s anything new about that than what has been the case during all of the time that the record you speak so kindly of looks great, it’s always tough. But break capital into two forms. There is financial capital and there’s intellectual capital. Financial capital is what a lot of people have a lot of. I mean, there’s a lot of money flashing around everything, and that leads to the comments about it turns into too pricey an acquisition pricing, things of that nature. But intellectual capital, that’s scarce and that’s where the returns really can be generated. So just like Richie was talking about the creativity behind the folks at CATCo and what they are doing, a good portion of the returns they generate is because they thought of stuff. They were creative and they applied intellectual capital. That is similarly the case in the Markel Ventures operations. We are looking at businesses that have the markets they have and have the customers they have because they creatively have found a way to take care of their customers. And they tend to operate in markets that are not distorted by big gobs of financial capital. Similarly, you look at the historical set of businesses that Markel underwrites in our insurance world, we need expertise. We need creativity. We need people who know what they are doing in different and unique lines of business. And there is really nothing about that that changes. And I think creativity intellectual capital will always be able to earn a return.

 

Richie Whitt - President and Co-Chief Operating Officer

The other opportunity that we have and that’s been proven out in the past with acquisitions like Com-Co and FirstComp and others is that there are a number of private industries out there that would fit with Markel, and the principles of those industries don’t necessarily sell to the highest price. We were successful in some of those acquisitions because the principles were looking for a long-term place and a good fit for their employees and for themselves and for patient capital for the long term to continue doing what they were doing rather than be gobbled up and chopped up and stripped and flipped and whatever. So I think those opportunities still exist and will present themselves to us over the next few years as well. We weren’t the highest price in some of those deals.

 

James Davis - Silver Point Capital

Got it. That’s a huge advantage. And we compete against the same gobs of capital, so we understand exactly what you are going through. Appreciate your answering the questions. I guess our last thought is just when we look at the current valuation of the stock, it seems like the market is expecting the same future returns as what they have seen in the past in terms of the stock trading at 1.5 times book value. And that’s kind of the root of the questions. We think the franchise is very valuable. The opportunity is very valuable. We are just trying to figure out right now kind of what price makes sense? Thanks so much.

 

Mike Crowley - President and Co-Chief Operating Officer

And we don’t comment on valuation, but we interest in your questions. Thank you.

[rpadebet]

I thought this portion of the call was good to hear:

 

James Davis - Silver Point Capital

Hi guys. Thanks for taking my question and congrats on a long track record of great performance.

 

Tom Gayner - President and Chief Investment Officer

Thank you.

-

-

-

-

 

Mike Crowley - President and Co-Chief Operating Officer

And we don’t comment on valuation, but we interest in your questions. Thank you.

 

Very Interesting. thanks for this.

 

I was thinking along the same lines wrt current BV multiple of 1.6ish.

 

Wasn't MKL trading between 2 -2.5 during the golden days of high nominal ROE? If so doesn't the current multiple make sense relatively speaking? It is still a small company, so the runway is big, so some sort of growth premium is typically warranted for such companies anyway.

 

Current Fixed Income yields are low historically speaking, so clearly nominal ROE is depressed. I think assuming rates are cyclical and we are currently close to the bottom means the current ROE is cyclically depressed. To get to fair valuation on cyclical earnings, I would imagine, we should typically apply a larger than average multiple at trough earnings and lower than average multiple at peak earnings.

 

Current valuation makes sense thinking of it this way. I am looking for thoughts from others..

[Jurgis]

Wasn't MKL trading between 2 -2.5 during the golden days of high nominal ROE? If so doesn't the current multiple make sense relatively speaking? It is still a small company, so the runway is big, so some sort of growth premium is typically warranted for such companies anyway.

 

No, it doesn't. ;)

 

Well, sure you can argue that it does. Obviously Mr. Market is arguing that.

 

For me, MKL was cheaper recently, so that's one data point.

Also, there are all the other usual suspects of valuing (re)insurers: no big cats for couple years running, very low bond yields (great bond bull has been a great place for insurers who did not play games), high stock prices.

 

Or let's look at it another way: would you pay 1.5x NAV for a mutual fund that's guaranteed to outperform index by 1-2% a year? Or let's ask it differently: what outperformance would justify 1.5x NAV?

 

Sure, yeah, you can argue that MKL is not a mutual fund, that there's leverage (which may enhance or subtract returns), that it's partially bonds, not pure stocks (but that's more of an argument for lower multiple on NAV, not higher).

 

Anyway, just my opinion. I hold some MKL. But I don't think I'll buy more here. And I expect subpar returns going forward from this price. I would likely to buy more if it drops to 1.2x or so.

 

YMMV. :)

[ScottHall]

Wasn't MKL trading between 2 -2.5 during the golden days of high nominal ROE? If so doesn't the current multiple make sense relatively speaking? It is still a small company, so the runway is big, so some sort of growth premium is typically warranted for such companies anyway.

 

No, it doesn't. ;)

 

Well, sure you can argue that it does. Obviously Mr. Market is arguing that.

 

For me, MKL was cheaper recently, so that's one data point.

Also, there are all the other usual suspects of valuing (re)insurers: no big cats for couple years running, very low bond yields (great bond bull has been a great place for insurers who did not play games), high stock prices.

 

Or let's look at it another way: would you pay 1.5x NAV for a mutual fund that's guaranteed to outperform index by 1-2% a year? Or let's ask it differently: what outperformance would justify 1.5x NAV?

 

Sure, yeah, you can argue that MKL is not a mutual fund, that there's leverage (which may enhance or subtract returns), that it's partially bonds, not pure stocks (but that's more of an argument for lower multiple on NAV, not higher).

 

Anyway, just my opinion. I hold some MKL. But I don't think I'll buy more here. And I expect subpar returns going forward from this price. I would likely to buy more if it drops to 1.2x or so.

 

YMMV. :)

 

Guaranteed to? Yes, I would. Over a lifetime, you'd end up with far more buying the 1.5x NAV index+2% grower than the index at 1x. Even assuming the price eventually returns to NAV.

 

For example, over 40 years you end up with the following scenarios. Let's assume 8% for the index and 10% for the fund, just for some reasonable inputs.

 

Index

 

$1 NAV at start, $1 market price. Over 40 years at 8%, that $1 grows to $21.72, roughly. A CAGR of 8%.

 

Guaranteed +2% Grower

 

$1 NAV at start, $1.50 market price. Over 40 years at 10%, that $1 grows to $45.26, roughly. But we paid $1.50, so the denominator is a bit different. $45.26 / $1.50 = 30.17 or so. 30.17 ^ (1 / 40) = 8.89% CAGR. Even though you paid more to start, you still outperform over a lifetime of investing.

 

If it stays at 1.5x NAV, you end up earning the 10% per year.

 

Just IMO.

[TwoCitiesCapital]

Wasn't MKL trading between 2 -2.5 during the golden days of high nominal ROE? If so doesn't the current multiple make sense relatively speaking? It is still a small company, so the runway is big, so some sort of growth premium is typically warranted for such companies anyway.

 

No, it doesn't. ;)

 

Well, sure you can argue that it does. Obviously Mr. Market is arguing that.

 

 

For me, MKL was cheaper recently, so that's one data point.

Also, there are all the other usual suspects of valuing (re)insurers: no big cats for couple years running, very low bond yields (great bond bull has been a great place for insurers who did not play games), high stock prices.

 

Or let's look at it another way: would you pay 1.5x NAV for a mutual fund that's guaranteed to outperform index by 1-2% a year? Or let's ask it differently: what outperformance would justify 1.5x NAV?

 

Sure, yeah, you can argue that MKL is not a mutual fund, that there's leverage (which may enhance or subtract returns), that it's partially bonds, not pure stocks (but that's more of an argument for lower multiple on NAV, not higher).

 

Anyway, just my opinion. I hold some MKL. But I don't think I'll buy more here. And I expect subpar returns going forward from this price. I would likely to buy more if it drops to 1.2x or so.

 

YMMV. :)

 

Guaranteed to? Yes, I would. Over a lifetime, you'd end up with far more buying the 1.5x NAV index+2% grower than the index at 1x. Even assuming the price eventually returns to NAV.

 

For example, over 40 years you end up with the following scenarios. Let's assume 8% for the index and 10% for the fund, just for some reasonable inputs.

 

Index

 

$1 NAV at start, $1 market price. Over 40 years at 8%, that $1 grows to $21.72, roughly. A CAGR of 8%.

 

Guaranteed +2% Grower

 

$1 NAV at start, $1.50 market price. Over 40 years at 10%, that $1 grows to $45.26, roughly. But we paid $1.50, so the denominator is a bit different. $45.26 / $1.50 = 30.17 or so. 30.17 ^ (1 / 40) = 8.89% CAGR. Even though you paid more to start, you still outperform over a lifetime of investing.

 

If it stays at 1.5x NAV, you end up earning the 10% per year.

 

Just IMO.

 

Sure, 89 bps over the course of 40 years, assuming nothing goes wrong, would end up increasing your returns a lot. But in any given year, 89 bps is hardly compensation for the risk that you take of them falling short of such a long-term goal IMO.

 

If they fall short of 2% per year over 40 years, and instead hit 1% (still very admirable), you actually end up underperforming by 10 bps a year for 40 years. 

 

It doesn't even have to be a mistake that results from the investment side of their business. Maybe there's a massive, unforeseen catastrophe that hits the balance sheet pretty hard one year and it takes two years or so to recover from fully. Maybe one of their larger non-insurance businesses gets wiped out by technological change etc. Maybe the current management team retires and the new management isn't quite as strong in performance.

 

I guess my point is, unless if you think that book value is fundamentally understated by a large margin 1.5x is a steep price to pay due to all of the unforeseen risks that could occur. All you have to do to "lose" money is market perform.

 

[Williams406]

I've owned Markel since 2002 and generally feel pretty comfortable owning the good underwriters. When you see 2x, 2.5x book multiples for WR Berkley, Markel, etc. that's typically been during hard markets when book value growth is mid 20%. Everyone gets excited, extrapolates those returns farther out than they should and...

 

There is your fair value estimate, then there's your margin of safety. Both will be different for everyone. My approach is to not pay much of a premium to book at all. In 2010, WR Berkley could be had right at book value. I figured without a hard market, I'd likely earn high single-digits returns under most scenarios. Markel traded close to book in 2012. Once or twice a decade I'll get a chance to add to my holdings at low multiples. I really like how Markel operates, but by p/b measures, won't pay a big premium for them up front. This thinking has shot me in the foot with RLI (having never owned it), though, so maybe it isn't that smart. 

[gary17]

Hi William

did you ever look at AWH?  Any idea why it always trades just shy of book value ?

[Guest notorious546]

Wasn't MKL trading between 2 -2.5 during the golden days of high nominal ROE? If so doesn't the current multiple make sense relatively speaking? It is still a small company, so the runway is big, so some sort of growth premium is typically warranted for such companies anyway.

 

No, it doesn't. ;)

 

Well, sure you can argue that it does. Obviously Mr. Market is arguing that.

 

For me, MKL was cheaper recently, so that's one data point.

Also, there are all the other usual suspects of valuing (re)insurers: no big cats for couple years running, very low bond yields (great bond bull has been a great place for insurers who did not play games), high stock prices.

 

Or let's look at it another way: would you pay 1.5x NAV for a mutual fund that's guaranteed to outperform index by 1-2% a year? Or let's ask it differently: what outperformance would justify 1.5x NAV?

 

Sure, yeah, you can argue that MKL is not a mutual fund, that there's leverage (which may enhance or subtract returns), that it's partially bonds, not pure stocks (but that's more of an argument for lower multiple on NAV, not higher).

 

Anyway, just my opinion. I hold some MKL. But I don't think I'll buy more here. And I expect subpar returns going forward from this price. I would likely to buy more if it drops to 1.2x or so.

 

YMMV. :)

 

Guaranteed to? Yes, I would. Over a lifetime, you'd end up with far more buying the 1.5x NAV index+2% grower than the index at 1x. Even assuming the price eventually returns to NAV.

 

For example, over 40 years you end up with the following scenarios. Let's assume 8% for the index and 10% for the fund, just for some reasonable inputs.

 

Index

 

$1 NAV at start, $1 market price. Over 40 years at 8%, that $1 grows to $21.72, roughly. A CAGR of 8%.

 

Guaranteed +2% Grower

 

$1 NAV at start, $1.50 market price. Over 40 years at 10%, that $1 grows to $45.26, roughly. But we paid $1.50, so the denominator is a bit different. $45.26 / $1.50 = 30.17 or so. 30.17 ^ (1 / 40) = 8.89% CAGR. Even though you paid more to start, you still outperform over a lifetime of investing.

 

If it stays at 1.5x NAV, you end up earning the 10% per year.

 

Just IMO.

 

i like your thinking scott.

[Crip1]

IMHO, MKL is not properly compared to a mutual fund: MKL’s capital is far more “sticky” in that they do not need to worry about redemptions of their equity funds nearly to the extent that a mutual fund does, nor do they need to worry about window dressing for year end, etc. Furthermore, MKL has a very solid operating business with underwriting profits as well as MKL Ventures which will increasingly add to earnings. Operations will continue to add to the returns of their investment portfolio the majority of years. All considered, IMHO, MKL at 1.5x BV is a more attractive investment then an Index fund at 1X. I am not sure that would be the case if MKL was selling at 2x but am VERY sure that would be the case if MKL was selling at 1x BV. 

Speaking of valuation, I don’t recall MKL getting much above 2x BV, certainly not to 2.5x but I could be wrong. While I hate the idea of selling very good companies, I made the decision a while ago that if MKL ever got close to 2x BV again, I would sell half of my position and then would buy back as many shares that were sold, or more, if it got close to 1x BV. This strategy would fall short of being “High-Frequency Trading” since in the 20 years I’ve owned MKL, I do not recall seeing those valuations more than 2 times respectively. As the company grows, it may make sense to reduce those numbers to 1.8 and 1.2 or so. After the post-earnings run-up, we’re close to 1.6x BV.

 

-Crip

[Williams406]

Crip,  Regarding p/b multiples I was painting with broad brush strokes. WR Berkley has, I think traded at near 2.5x book and Markel may have done it briefly in the mid-2000's, not sure. It's a slippery slope from 20-year holding periods to HFT--don't go crazy. Markel is getting big and I think you're right to note that may impact future multiples. We shall see. 

 

Gary, I'm not familiar with AWH beyond hearing the name a few times.

[Crip1]

Crip,  Regarding p/b multiples I was painting with broad brush strokes. WR Berkley has, I think traded at near 2.5x book and Markel may have done it briefly in the mid-2000's, not sure. It's a slippery slope from 20-year holding periods to HFT--don't go crazy. Markel is getting big and I think you're right to note that may impact future multiples. We shall see. 

 

Gary, I'm not familiar with AWH beyond hearing the name a few times.

 

 

Williams,

Not looking to turn this into a HFT deal by any stretch but, your "don't go crazy" advice is correct. The market overshoots to the upside and downside without respect to the company. When one sees it overshoot to the upside, the urge to sell is compelling. Today it hit a new intra-day high of $900 which is starting to look frothy. No sell orders put in as of yet, but I'd be surprised if I could not buy in again at $800 or so in the next 12-18 months.

 

 

That damned crystal ball is broken, again.

 

 

-Crip

 

 

[obtuse_investor]

Friday night 8-K... Markel has Co-CEOs now.

 

Here is a snipplet of the filing:

 

On November 19, 2015, Markel Corporation (the “Company”) announced that, effective January 1, 2016, Thomas S. Gayner, President and Chief Investment Officer, and Richard R. Whitt, III, President and Co-Chief Operating Officer, will serve as Co-Chief Executive Officers of the Company. In addition, F. Michael Crowley, President and Co-Chief Operating Officer, will serve as the sole President of the Company as of the same date. Each of Messrs. Crowley, Gayner and Whitt will continue to report to Alan I. Kirshner, who will serve as the Company’s Executive Chairman of the Board.

 

Full filing: http://www.sec.gov/Archives/edgar/data/1096343/000109634315000101/a8-knovember2015document.htm

[CorpRaider]

I saw that.  It seems a good confirmation that capital allocation is the chief long-term focus.  Congrats to Mr. Gayner! 

[Shooter MacGavin]

anyone else getting nervous on the valuation here?  I don't get why the market is rallying on the appointment of Gayner/Whitt as Co-CEOs...Alan did a phenomenal job.  As an investor do you really want the chief investment officer and chief underwriter to go out and have to deal with the SEC, shareholders, state regulators, on top of their day jobs etc etc?

 

seems like an irrational "Gayner" celebrity premium to me or am I missing something?

 

If you're paying 1.7x book, then for you to earn an 10% return (call this the market required rate or discount rate), you think they'll compound at 17% per year.  However, its a stretch for them to do that at this point.  Tom admitted this in the 3Q earnings call.  I think they are aspiring to high single digits (from memory).  Really you should be paying around book to a little over book to earn a 10% rate of return and a little more to earn a little less...(what they compound book value at should be a function of the investment book returns * the asset leverage) plus the value of markel ventures.

 

I've owned this stock for a bit but I'm getting nervous that i may not get as juicy a bid a few months out so tempted to sell. I hope they issue stock and do another Alterra style acquisition.

 

[TwoCitiesCapital]

anyone else getting nervous on the valuation here?  I don't get why the market is rallying on the appointment of Gayner/Whitt as Co-CEOs...Alan did a phenomenal job.  As an investor do you really want the chief investment officer and chief underwriter to go out and have to deal with the SEC, shareholders, state regulators, on top of their day jobs etc etc?

 

seems like an irrational "Gayner" celebrity premium to me or am I missing something?

 

If you're paying 1.7x book, then for you to earn an 10% return (call this the market required rate or discount rate), you think they'll compound at 17% per year.  However, its a stretch for them to do that at this point.  Tom admitted this in the 3Q earnings call.  I think they are aspiring to high single digits (from memory).  Really you should be paying around book to a little over book to earn a 10% rate of return and a little more to earn a little less...(what they compound book value at should be a function of the investment book returns * the asset leverage) plus the value of markel ventures.

 

I've owned this stock for a bit but I'm getting nervous that i may not get as juicy a bid a few months out so tempted to sell. I hope they issue stock and do another Alterra style acquisition.

 

I got nervous around $800-$850 and exited my position there. Great company, but if you pay up for growth, you may never realize the benefits of it.

[100 Shares]

anyone else getting nervous on the valuation here?  I don't get why the market is rallying on the appointment of Gayner/Whitt as Co-CEOs...Alan did a phenomenal job.  As an investor do you really want the chief investment officer and chief underwriter to go out and have to deal with the SEC, shareholders, state regulators, on top of their day jobs etc etc?

 

seems like an irrational "Gayner" celebrity premium to me or am I missing something?

 

If you're paying 1.7x book, then for you to earn an 10% return (call this the market required rate or discount rate), you think they'll compound at 17% per year.  However, its a stretch for them to do that at this point.  Tom admitted this in the 3Q earnings call.  I think they are aspiring to high single digits (from memory).  Really you should be paying around book to a little over book to earn a 10% rate of return and a little more to earn a little less...(what they compound book value at should be a function of the investment book returns * the asset leverage) plus the value of markel ventures.

 

I've owned this stock for a bit but I'm getting nervous that i may not get as juicy a bid a few months out so tempted to sell. I hope they issue stock and do another Alterra style acquisition.

 

what would you do if you sold, keep cash or reinvest in another opportunity?

 

If it's the latter, that's pretty straightforward if you  think you have better opportunity move the money to that.

 

If it's the former, would you rather have cash or Markel? Are you trying to get good returns over the next year or do you have a ten year horizon? I think back to Phil fisher, if you have a phenomenal company don't sell it with the hope to buy back in cheaper, you hardly ever get to and do you have the discipline to buy it later, are the taxes worth it, is maybe buying it 10% cheaper, worth never replenishing the shares you sold?

 

Also I disagree on your return being a function of earnings yield. If you hold this for the long term it will correlate to Return on capital not original earning yield

[Jurgis]

If I had a very large position, I'd probably cut it here. As it is, I continue to hold. I do not expect a great return from current prices though.

 

As I mentioned in other places, I couldn't have guessed the huge divergence of MKL vs. FRFHF/BRK performance this year. I can't explain it fully post factum either.

[Guest Grey512]

Optically expensive until you consider what happens to earnings power in an environment where interest rates are 200bps higher.

 

[Jurgis]

Optically expensive until you consider what happens to earnings power in an environment where interest rates are 200bps higher.

 

OK, let's say I agree. But that would apply to (m)any (re)insurance cos. Not many (any?) trade at 1.7 book.

 

Edit: Y not Y then? Or RE? I somewhat stopped following a bunch of other (re)ins, but with time I can probably find bunch more candidates.

Edit 2: FRFHF would probably qualify too, no?

[TwoCitiesCapital]

Optically expensive until you consider what happens to earnings power in an environment where interest rates are 200bps higher.

 

You also need to consider the probability of that happening and the timeline for it to happen. As it stands right now, it'd likely be 2-3 years before the back-end was 200 bps higher assuming the Fed, who has been wildly optimistic this entire time, is correct. So there's your optimistic timeline.

 

Then you have to consider the likelihood - there has not been a single country since 2008 who has successfully gotten off the 0-bound for interest rates. Canada, Israel, Switzerland, Japan, and the Eurozone have all raised rates since 2008 and all were forced to back-track and now sit at rates lower than when they started (with the exception of Canda which is just 25 bps higher). So, how likely is it that the U.S. economy will be able to do something that no other developed economies have been able to do, the first time, while the global economy is weaker than when they attempted it? I mean, I guess it's possible, but I don't think it's near as likely as everyone else seems to think.

 

 

So, you have a timeline of 3 years (optimistically) for the Fed to succeed at something that every other country that has attempted has failed to do, to justify today's price with earnings 3 years from now. That's not really a bet that I'm willing to take.

 

But you're right - if a miracle occurs, Markel is only optically expensive.

[ScottHall]

anyone else getting nervous on the valuation here?  I don't get why the market is rallying on the appointment of Gayner/Whitt as Co-CEOs...Alan did a phenomenal job.  As an investor do you really want the chief investment officer and chief underwriter to go out and have to deal with the SEC, shareholders, state regulators, on top of their day jobs etc etc?

 

seems like an irrational "Gayner" celebrity premium to me or am I missing something?

 

If you're paying 1.7x book, then for you to earn an 10% return (call this the market required rate or discount rate), you think they'll compound at 17% per year. However, its a stretch for them to do that at this point.  Tom admitted this in the 3Q earnings call.  I think they are aspiring to high single digits (from memory).  Really you should be paying around book to a little over book to earn a 10% rate of return and a little more to earn a little less...(what they compound book value at should be a function of the investment book returns * the asset leverage) plus the value of markel ventures.

 

I've owned this stock for a bit but I'm getting nervous that i may not get as juicy a bid a few months out so tempted to sell. I hope they issue stock and do another Alterra style acquisition.

 

I'm sorry, can you please explain your rationale here? That's only really true if they can't reinvest at high rates... if Markel earned 17% on equity and paid it all out, you'd earn 10% annually buying at 1.7x book. If it could reinvest at a high rate for a long period then your return would be much better. A company that can compound BVPS at 17% per year for a long period of time would be worth many, many multiples of book value.

 

Assuming a 10% discount rate, in any case.

[TwoCitiesCapital]

http://seekingalpha.com/article/3713236-why-markel-will-fall-short

 

Bearish article on SA.

[jay21]

If I had a very large position, I'd probably cut it here. As it is, I continue to hold. I do not expect a great return from current prices though.

 

As I mentioned in other places, I couldn't have guessed the huge divergence of MKL vs. FRFHF/BRK performance this year. I can't explain it fully post factum either.

 

For BRK: a lot of railroads sold off

[Jurgis]

If I had a very large position, I'd probably cut it here. As it is, I continue to hold. I do not expect a great return from current prices though.

 

As I mentioned in other places, I couldn't have guessed the huge divergence of MKL vs. FRFHF/BRK performance this year. I can't explain it fully post factum either.

 

For BRK: a lot of railroads sold off

 

Yes. And also IBM/AXP underperformed.

 

But look at MKL: it's a (re)insurance company in soft pricing environment, at a time where we haven't had supercat for 3+ years, at a time when the equity valuations of market (and their portfolio) are elevated and it's trading at elevated P/book. Not only it's at high P/book, its book is possibly "too high" due to elevated equity valuations. So possibly double whammy coming.

 

Would you seriously say that MKL is/was more attractive than BRK/FRFHF now or in the beginning of this year (Jan 1, 2015)?

 

The only attractiveness I see is that MKL is smaller and its CIO is way younger. Not sure I'd pay 1.5-1.7 p/b for that.

[ourkid8]

Fairfax has a smaller Marketcap then Markel. 

 

The only attractiveness I see is that MKL is smaller and its CIO is way younger. Not sure I'd pay 1.5-1.7 p/b for that.