MKL - Markel Corp

[Jurgis]

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.

 

Right. I shouldn't try to compare against two companies in one sentence. :)

[ourkid8]

I got your point  :) 

 

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.

 

Right. I shouldn't try to compare against two companies in one sentence. :)

[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.

 

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.

 

sure let's do the math. (I'm ignoring markel ventures to keep it simple, since its impact is small)

 

If you start with 1.7x book, and they earn 17% per year, reinvest 100% and keep earning incremental 17% per year, and then you exit at 1.7x book...then you capture 17%, per year sure.  I'd love to do that.

 

If you start with 1.7x book and they earn high return high single digits, low double digits and you exit with 1.7x book, then you earn high high single / low double (Tom's words, not mine...from 3Q earnings calls)

 

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 yield and the inflation circumstance that we face, that would be a spectacular economic outcome. And we're optimistic about our ability to do so.

 

But if you're earning low double digits, then certainly the exit multiple in year 10 can't be 1.7x book can it?  it should be more like 1.1 or 1.2x -1.3x if the prospective investor at that point needs to earn at least 9-10%...

 

so if you start with 1.7x book, earn say 12% and then exit with 1.2x book, your return is much worse than 12% per year....over a 10 year stretch you'll have earned 8% per year. 

 

so then it begs the question well what kind of returns can they earn? 

 

The investment to equity leverage at this point is 2.0x.  Their investment book is 75% fixed income and 25% equities (as of 9/30/15, and climbing more towards equities in a very, very slow manner).  When you have a portfolio like that, what kind of returns can you do?  well if you can do the historic 6%, then you'll do 12% growth in book value (6%*2).  But remember over the last 6 years they've had the tailwind of not only a strong equities market, but also a declining interest rate environment, which was helping their fixed income book total return.  Then we had our current year in equities, and their equities book is down 5.3%  Nine months to date, they're down -1.2% (and flattish ex-fx).

 

From a go forward perspective, I'm not sure.  Maybe they continue to do 6-7%, and therefore earn 12%-14%.  But if the growth in float is not commensurate with the growth in their investment book, then the investment leverage has to keep coming down.  In a flattish premium writing environment, that is happening more and more. 

 

I'm not saying this isn't a great business and a great management team.  They may do a great deal.  They may find way to eek out more premiums faster and take up that leverage.  They'll over time, invest more in equities and hopefully squeeze out a point or more in the overall investment return book. In fact, I'd love to see them issue stock and do another Alterra like deal.  I'm just saying that when you pay 1.7x at the outset, you're setting yourself up for a drag on the multiple compression in a modest (10-12%) incremental return environment.  In other words, valuation matters.  They always say its harder to sell than to buy and I'm finding that to be the case here, but I'm getting tempted with a $925 quote.

[Jurgis]

I'm not saying this isn't a great business and a great management team.  In fact, I'd love to see them issue stock and do another Alterra like deal.  I'm just saying that when you pay 1.7x at the outset, you're setting yourself up for a drag on the multiple compression in a modest (10-12%) incremental return environment.  Valuation matters.  It's not a knock on the company.  It's a judgment on the certainty you have in compounding your own capital.

 

This.

[rishig]

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.

 

sure let's do the math. (I'm ignoring markel ventures to keep it simple, since its impact is small)

 

If you start with 1.7x book, and they earn 17% per year, reinvest 100% and keep earning incremental 17% per year, and then you exit at 1.7x book...then you capture 17%, per year sure.  I'd love to do that.

 

If you start with 1.7x book and they earn high return high single digits, low double digits and you exit with 1.7x book, then you earn high high single / low double (Tom's words, not mine...from 3Q earnings calls)

 

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 yield and the inflation circumstance that we face, that would be a spectacular economic outcome. And we're optimistic about our ability to do so.

 

But if you're earning low double digits, then certainly the exit multiple in year 10 can't be 1.7x book can it?  it should be more like 1.1 or 1.2x -1.3x if the prospective investor at that point needs to earn at least 9-10%...

 

so if you start with 1.7x book, earn say 12% and then exit with 1.2x book, your return is much worse than 12% per year....over a 10 year stretch you'll have earned 8% per year. 

 

so then it begs the question well what kind of returns can they earn? 

 

The investment to equity leverage at this point is 2.0x.  Their investment book is 75% fixed income and 25% equities (as of 9/30/15, and climbing more towards equities in a very, very slow manner).  When you have a portfolio like that, what kind of returns can you do?  well if you can do the historic 6%, then you'll do 12% growth in book value (6%*2).  But remember over the last 6 years they've had the tailwind of not only a strong equities market, but also a declining interest rate environment, which was helping their fixed income book total return.  Then we had our current year in equities, and their equities book is down 5.3%  Nine months to date, they're down -1.2% (and flattish ex-fx).

 

From a go forward perspective, I'm not sure.  Maybe they continue to do 6-7%, and therefore earn 12%-14%.  But if the growth in float is not commensurate with the growth in their investment book, then the investment leverage has to keep coming down.  In a flattish premium writing environment, that is happening more and more. 

 

I'm not saying this isn't a great business and a great management team.  They may do a great deal.  They may find way to eek out more premiums faster and take up that leverage.  They'll over time, invest more in equities and hopefully squeeze out a point or more in the overall investment return book. In fact, I'd love to see them issue stock and do another Alterra like deal.  I'm just saying that when you pay 1.7x at the outset, you're setting yourself up for a drag on the multiple compression in a modest (10-12%) incremental return environment.  In other words, valuation matters.  They always say its harder to sell than to buy and I'm finding that to be the case here, but I'm getting tempted with a $925 quote.

 

Its not a binary decision - buy or sell - for me in cases like this. I sell shares to take my initial investment out, effectively reducing the position size. If they continue to amaze with their superior performance, you still have a non-zero position to participate in the upside. If like most businesses, they falter somewhere down the road for temporary reasons, you increase the position size.

 

Position sizing is not a science and what I suggesting works for me. Not to say this is the only way to do things.

[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.

 

sure let's do the math. (I'm ignoring markel ventures to keep it simple, since its impact is small)

 

If you start with 1.7x book, and they earn 17% per year, reinvest 100% and keep earning incremental 17% per year, and then you exit at 1.7x book...then you capture 17%, per year sure.  I'd love to do that.

 

If you start with 1.7x book and they earn high return high single digits, low double digits and you exit with 1.7x book, then you earn high high single / low double (Tom's words, not mine...from 3Q earnings calls)

 

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 yield and the inflation circumstance that we face, that would be a spectacular economic outcome. And we're optimistic about our ability to do so.

 

But if you're earning low double digits, then certainly the exit multiple in year 10 can't be 1.7x book can it?  it should be more like 1.1 or 1.2x -1.3x if the prospective investor at that point needs to earn at least 9-10%...

 

so if you start with 1.7x book, earn say 12% and then exit with 1.2x book, your return is much worse than 12% per year....over a 10 year stretch you'll have earned 8% per year. 

 

so then it begs the question well what kind of returns can they earn? 

 

The investment to equity leverage at this point is 2.0x.  Their investment book is 75% fixed income and 25% equities (as of 9/30/15, and climbing more towards equities in a very, very slow manner).  When you have a portfolio like that, what kind of returns can you do?  well if you can do the historic 6%, then you'll do 12% growth in book value (6%*2).  But remember over the last 6 years they've had the tailwind of not only a strong equities market, but also a declining interest rate environment, which was helping their fixed income book total return.  Then we had our current year in equities, and their equities book is down 5.3%  Nine months to date, they're down -1.2% (and flattish ex-fx).

 

From a go forward perspective, I'm not sure.  Maybe they continue to do 6-7%, and therefore earn 12%-14%.  But if the growth in float is not commensurate with the growth in their investment book, then the investment leverage has to keep coming down.  In a flattish premium writing environment, that is happening more and more. 

 

I'm not saying this isn't a great business and a great management team.  They may do a great deal.  They may find way to eek out more premiums faster and take up that leverage.  They'll over time, invest more in equities and hopefully squeeze out a point or more in the overall investment return book. In fact, I'd love to see them issue stock and do another Alterra like deal.  I'm just saying that when you pay 1.7x at the outset, you're setting yourself up for a drag on the multiple compression in a modest (10-12%) incremental return environment.  In other words, valuation matters.  They always say its harder to sell than to buy and I'm finding that to be the case here, but I'm getting tempted with a $925 quote.

 

I didn't say anything about Markel's relative valuation right now. It's higher than it has ever been since I've owned it, and I'm not adding.

 

The only thing I was attempting to point out is that your idea of returns given certain compounding rates are off base, even using a simple justified P/B model. Paying 1.7x for a 17% compounder would be a massive steal; the returns would be meaningfully higher than 10% given any reasonable length of time.

[Shooter MacGavin]

yeah that's fair.  that valuation shortcut was wrong. 

[WhoIsWarren]

Thanks all for taking the time to put down your thoughts on Markel.  Thoughtful stuff and really appreciated.

 

To the discussion I would throw in my view that Markel's reserves are on the high side of what they'll end up paying out.  This of course cannot be taken as a given, but it's their stated objective to over-reserve upfront, release after.

 

You can see that their accident year combined ratios are regularly above 100%, whereas the overall CR (which includes prior year reserve releases) is around 10 points lower (last 10 years, average numbers).  The 2014 accident year CR was 106%......overall CR was 95%.

 

Thus, reserve releases tend to be quite chunky.  If we take reported net reserves at year end 2010 as an example, they were initially estimated at $4.6bn and as of year end 2014 had been re-estimated at $3.5bn.  History would suggest this number may fall modestly from here, but even ignoring that, this reduction in net reserves of $1.1bn equates to around one-third of 2010 shareholders' equity ($3.2bn).  In other words, sitting there in March 2010 with a freshly printed 10-K and perfect knowledge of the over-reserving tail-wind to come, Markel was really trading on a Price-to-Book ratio of 0.9x ($4bn market cap, shareholders' equity of $3.2bn + $1.1bn) and not the stated 1.25x.

 

So what does this mean? Perhaps nothing! Perhaps I'm reaching......but if I was to bet one way or the other I'd say that the current net reserves estimate of $7.2bn is over-cooked -- certainly relative to other insurers out there.

 

The current equity base is around $7.7bn......you can do you own "what ifs".

 

The other thing to consider is the value of their float, which is around $10bn.  Again you can do your own "what ifs", but assuming no growth in the float, modest after tax investment returns from here (say 4%) a cost of float (perhaps -3%??) and a required rate of return of 10% and you can more or less justify the current stated 1.7x P/B.  Add in growth of float and you get a higher warranted valuation still.

 

These are the positives. 

 

The clear potential negative is the valuation of their investment assets.  Markel has c.$4bn of equity securities.  Also, they say they are buying only the best quality bonds, but if yields back up their bonds will fall in value (modestly, but still could be impactful on equity).  Then again, backing up of yields gives Markel the opportunity to get higher investment returns going forward.

 

So in summary, of course I'd like Markel to be trading cheaper and investment prospects to be higher, but it ain't so.  I think Markel is a great company with a long future of growth ahead of it, better than the market is currently pricing.  I just have to accept that my future return will be a bit lower.

 

And I ask you: Where are the really cheap companies with trustworthy managements and robust business models??

 

(On this subject I would point to you the LUK discussion, where I am also long.  Benhacker has done a good job of outlining the investment case).

 

P.S. I hope I've done all my numbers / calculations correct.....I'm kind of rushing out the door.  Please let me know of any errors.

[Jurgis]

And I ask you: Where are the really cheap companies with trustworthy managements and robust business models??

 

BRK. FFH. Y. Perhaps RE.

 

Disclosure: I own positions in MKL, BRK, FFH. No current positions in Y and RE.

[WhoIsWarren]

And I ask you: Where are the really cheap companies with trustworthy managements and robust business models??

 

BRK. FFH. Y. Perhaps RE.

 

Disclosure: I own positions in MKL, BRK, FFH. No current positions in Y and RE.

 

Hi Jurgis, yes indeed BRK and FFH.  I own both.  Though it's not like these businesses are trading on their valuation knees.....both trading on around 1.4x book off the top of my head.  And it's got to be asked: is FFH's insurance business as good as Markel's?  I wouldn't be confident enough to say so (though as time goes on I'm getting more relaxed on that front).  Also some of the things Fairfax have been doing in the last few years.....well......let's just say the P/B discount to Markel is not that unreasonable.

 

I don't know Alleghany much.

 

I know Everest Re (RE) reasonably well as I held it for a number of years before selling a couple of months ago.  The undemanding headline P/B (around 1x or so) is enticing.  However I worried about the relatively new management team that has grown pretty strongly in the last number of years, into new geographies and into insurance.  Given the falling pricing / competitive insurance environment out there I worried they were overstretching -- probably unnecessarily so, but there you go.

[Jurgis]

@WhoIsWarren: What you say makes sense. I don't have anything more to add at this time. :)

[james22]

Markel (NYSE:MKL): Q4 EPS of $14.14 beats by $6.93.

 

Revenue of $1.42B (+6.0% Y/Y) beats by $90M.

 

http://seekingalpha.com/news/3098416-markel-beats-6_93-beats-revenue

 

Nice.

 

 

 

[giofranchi]

Markel (NYSE:MKL): Q4 EPS of $14.14 beats by $6.93.

 

Revenue of $1.42B (+6.0% Y/Y) beats by $90M.

 

http://seekingalpha.com/news/3098416-markel-beats-6_93-beats-revenue

 

Nice.

 

Yes! Very nice.

 

It is selling at 1.5xBVPS though, and I think in this market I'll wait for a lower multiple.

 

Cheers,

 

Gio

[fareastwarriors]

I'm watching this and hopefully it goes down some more so I can scoop in for some shares.

;)

[Guest notorious546]

anyone going to Markel Brunch, i just signed up the other day.

[Scudbucket]

Can't make it this year.  But please take notes for us!

[Crip1]

Tom Gayner from the Q4 2015 Conference Call Transcript:

 

 

"In 2015, we emphasized defense in our investment operations as well. We did so through the following specific actions. First, we maintained our high credit quality profile in our fixed income operations. Secondly, we kept our equity exposure at the low end of our range for equity investments over the last 25 years. Thirdly, we maintained a strong and highly liquid balance sheet in order to be ready to actively deploy the funds when conditions warrant doing so.

 

These primary actions along with other decisions allow us to be in a great position to play first-class defense and make sure that we are fully prepared to take advantage of investment opportunities and Markel Ventures' additions as available."

 

 

Wondering if and, if so, how they are deploying cash in light of recent market declines. MKL sold a few holdings which should show up on the 13F due out Friday the 12th. I do like the idea of Gayner having some dry powder.

 

 

-Crip

[james22]

http://www.rationalwalk.com/?p=14086

[ECCO]

anyone going to Markel Brunch, i just signed up the other day.

 

Would like to assist too, can you tell me where you signed up?

[Guest notorious546]

http://markelbrunch2016.markelcorp.com/

[ECCO]

http://markelbrunch2016.markelcorp.com/

 

Great! Thanks !!!

[cleonard12]

2015 Annual Letter is up on the website: https://www.markelcorp.com/~/media/investor%20relations/letters%20to%20shareholders/2015.pdf?la=en

 

 

[Guest roark33]

I read their annual report today.  They mentioned the following:

 

"As we followed this bottom up approach during the year we sold several longstanding holdings. We became concerned that the changing landscape of competitive conditions diminished our expectation for fundamental levels of profitability."

 

I was curious what they sold, so I compared year end 2014 with year end 2015 13-f and here are the positions that were either sold out or decrease materially. 

 

Cisco

Expeditors International

Fairfax

Federated Investors

General Electric

Intel

LGI Homes

McDonalds

Wal-Mart

 

[CorpRaider]

Does anyone go to their annual meeting in Richmond?  Not planning on going this time, but you know...east coast.

[EricSchleien]

I'll be there :)