MKL - Markel Corp

[thepupil]

This is kind of odd; they seem to have just stuck their finger in the air and concluded things will get bad without having any material losses/claims yet.

 

I understand the concept of reserving but I guess I don’t quite understand the connection between covid and liability for medical institutions. Are they saying there will be a bunch of lawsuits?

 

No position, just following as a (inferior in my opinion) comp to Berkshire

 

 

 

Underwriting Operations

As efforts to respond to the pandemic continue to evolve, the Company expects that losses indirectly related to the COVID-19 pandemic and associated with a broader range of coverages are likely to emerge. As an example, the Company provides liability coverage for health and medical institutions and professions, as well as other professions, which have been strained or otherwise impacted by the pandemic, for which few claims have been reported thus far. Other product lines that may be impacted by losses derived from COVID-19 include the Company's trade credit business and workers’ compensation product lines, among others, including the Company's reinsurance product lines. Few losses have been reported at this time. Losses attributed to these exposures that are indirectly related to COVID-19 will be recognized in the period incurred.

The widespread economic and social disruption caused by COVID-19 has created significant financial hardships for individuals and businesses worldwide. In response, the Company is currently halting cancellations and delinquency actions following requests from customers and brokers for customers who express a financial hardship due to COVID-19, as well as directives from certain government authorities. While these actions will impact the timing of premium collections, at this time, the Company does not believe there has been any material change in its exposure to credit losses.

The significant decline in economic activity is likely to have an unfavorable impact on the Company's premium volume, due to business closures, reduced recreational activity and lower gross receipts, revenues and payrolls of insureds, among other things. For those policies where the underlying loss exposures have been reduced as a result of decreased economic activity or shelter-in-place orders resulting from COVID-19, the Company may also be required to refund premiums to policyholders. These adverse impacts on premium volume could be material.

[Spekulatius]

^ Yes, COVID-19 will be big Catastrophe even for medical institutions and some companies. Think inadequate PPE, inadequate safety protocols for medical workers, cross infection of patients, problems with patient care due Overload etc. It will take a while to figure out, but I am sure lawyers are already looking for angles.

 

It’s not just medical either - when you look at the news from meat fabrication plants from Tyson with clear evidence of work related outbreak clusters, you know there are going to be lawsuits.

[BroKon]

I was a little disappointed to see they increased cash, net sold some equity holdings, and suspended their buyback. I assume they are convinced conditions deteriorate at least on the liability side.

Markel always seemed a little expensive, so suspending their buyback when their valuation finally became fair is surprising.

[bookie71]

Controlling their cash.  Old adage: "To win the race you must first finish the race."

Just being smart and cautious.

[CorpRaider]

I was a little disappointed to see they increased cash, net sold some equity holdings, and suspended their buyback. I assume they are convinced conditions deteriorate at least on the liability side.

Markel always seemed a little expensive, so suspending their buyback when their valuation finally became fair is surprising.

 

Buying back stock at 2.0x book in amounts that track compensation dilution and then suspending them in the storm?  Doesn't walk exactly like a duck, does it?

[vinod1]

From Conf Call:

 

Recognizing the importance of liquidity in times of uncertainty, we've taken several actions, including retaining cash proceeds from the maturity of short-term investments and fixed maturities, pausing our purchases of equity securities and in certain instances selling equity holdings, suspending repurchases of our shares and focusing on expense reductions across the company. We continue to maintain a fixed maturity portfolio comprised of high credit quality investment-grade securities with an average rating of AA.

 

Vinod

[scorpioncapital]

do they mean selling equities that may do badly and buying other ones, or just selling them to raise cash for insurance claims or liquidity? Although they are pretty liquid in general right?

[vinod1]

Raising cash based on the statement. They also seem to be bit worried about insurance exposure to business

 

Recognizing the importance of liquidity in times of uncertainty, we've taken several actions, including retaining cash proceeds from the maturity of short-term investments and fixed maturities, pausing our purchases of equity securities and in certain instances selling equity holdings, suspending repurchases of our shares and focusing on expense reductions across the company. We continue to maintain a fixed maturity portfolio comprised of high credit quality investment-grade securities with an average rating of AA. Our debt to total capital ratio at the end of March was 27%, in line with our target range. We have no unsecured senior debt maturing in the next 24 months. We believe we are well positioned to meet our ongoing capital and liquidity needs, including the cash required to complete our pending acquisition of Lansing Building Products.

 

Switching to losses. As discussed in our 10-Q and previously on this call by Jeremy, we recorded $325 million of reserves, virtually all of it IBNR, for direct COVID-19 insured losses in the first quarter. These reserves relate primarily to potential U.K. business interruption claims and worldwide event cancellation exposures.

On the workers' compensation front, while we have received very few claims so far, we also expect to see an increase in claims that are directly related to COVID-19.

It is worth noting that all of our U.S. property policies require a physical damage to occur before business interruption coverage is triggered, and almost all of those policies also include a communicable disease or virus exclusion. Here, I'll stop and just say some of our policies have affirmative coverage, often sub limited, that would cover the events of COVID-19 and those are included - our reserve estimates for those are included in our first quarter. Therefore, our U.S. property policies are not expected to respond to COVID-19-related business interruption losses, although we will be investigating each claim on its own merit.

Our reserves were based on a ground-up analysis, but we're also informed by very preliminary industry estimates that suggest, over time, COVID-19 could produce anywhere from a $50 billion to $100 billion insurance industry loss event.

We would also expect to see meaningful losses indirectly related to the COVID-19 pandemic as a result of the disruption in the global economy and financial markets. These could include lines such as D&O, E&O, workers' compensation, trade credit, surety and casualty losses and the possibility of these types of losses impacting reinsurance business that we write.

Similar to the losses that emerged as a result of the 2008 financial crisis, we would expect these losses to - these indirect losses to emerge over the coming quarters. Our underwriters, actuaries and claims personnels will be working to quantify the increases to our loss ratios potentially required by these indirect losses.

Finally, we are prepared for elevated litigation expenses as it relates to COVID-19, particularly as it relates to business interruption claims in both the U.S. and abroad. Where appropriate, we are taking steps to mitigate future exposure to pandemic losses by raising prices and adding policy terms and conditions, including additional exclusions.

 

 

Vinod

[Pedro]

Rate increases coming for MKL policy holders

Hard market is in the early innings.

[Xerxes]

This is so interesting, how companies across different industries (not unique to MKL or FFH) cannot do buybacks when it is most deemed required of them.

Because although the value of their share has dropped in absolute terms, their intrinsic value has also dropped at the same rate … and perhaps more.

 

So, does it really make sense to buyback ones own shares just because the absolute value has gone done dramatically (alongside IV).

 

For a company to be truly contrarian, it is not enough to preserve cash to that have that option, but to also have the mental capacity to want to bet that their intrinsic value would recover … ahead of the absolute value of their share price.

 

It is very exhaustive mental exercise, and I think you can only do that if you have a huge cash pile so that you have safety net if you are wrong about your IV recovering.

[Spekulatius]

This is so interesting, how companies across different industries (not unique to MKL or FFH) cannot do buybacks when it is most deemed required of them.

Because although the value of their share has dropped in absolute terms, their intrinsic value has also dropped at the same rate … and perhaps more.

 

So, does it really make sense to buyback ones own shares just because the absolute value has gone done dramatically (alongside IV).

 

For a company to be truly contrarian, it is not enough to preserve cash to that have that option, but to also have the mental capacity to want to bet that their intrinsic value would recover … ahead of the absolute value of their share price.

 

It is very exhaustive mental exercise, and I think you can only do that if you have a huge cash pile so that you have safety net if you are wrong about your IV recovering.

 

It’s not a matter of mental capacity, it is the issue that they have no idea  what’s ahead of them. I also don’t think MKL is egregiously cheap right now. Insurers are in the “ trust me” business so a strong balance sheet beyond doubt is paramount. Berkshire very likely has the same issue and while I bet they will be buying back share, the same basic thinking applies and constraints them more than people think.

[Xerxes]

This is so interesting, how companies across different industries (not unique to MKL or FFH) cannot do buybacks when it is most deemed required of them.

Because although the value of their share has dropped in absolute terms, their intrinsic value has also dropped at the same rate … and perhaps more.

 

So, does it really make sense to buyback ones own shares just because the absolute value has gone done dramatically (alongside IV).

 

For a company to be truly contrarian, it is not enough to preserve cash to that have that option, but to also have the mental capacity to want to bet that their intrinsic value would recover … ahead of the absolute value of their share price.

 

It is very exhaustive mental exercise, and I think you can only do that if you have a huge cash pile so that you have safety net if you are wrong about your IV recovering.

 

It’s not a matter of mental capacity, it is the issue that they have no idea  what’s ahead of them. I also don’t think MKL is egregiously cheap right now. Insurers are in the “ trust me” business so a strong balance sheet beyond doubt is paramount. Berkshire very likely has the same issue and while I bet they will be buying back share, the same basic thinking applies and constraints them more than people think.

 

Makes perfect sense.

PS: Wish us luck this weekend at the BRK AGM. :)

 

[Txvestor]

Anyone have an idea what level of exposure each of these insurers like MKL, Allegheny and Fairfax have to business I nterruption? Buffett seemed to suggest one of their smaller competitors might be on the hook. I know MKL took a 325M guesstimate of damages, I think Fairfax said 83M and of course Allegheny is get to report but all of heir stocks sold off more than the market and I am wondering if markets pricing in exposire into this risk.

[scorpioncapital]

MKL is definitely safer than some reckless insurers I've seen but they did make 65m of net operating income without swings in capital account (as an example Berkshire made 6 billion without the equity swing). So I think BRK > MKL. However MKL is not something you'd feel uncomfortable holding. If you split it up:

Equities - a portfolio of stocks. You can do this on your own.

Insurance float - Equities on leverage of 2:1 at presumably 0% interest rate.

The 2nd part is where it's interesting in this environment. A person can sort of borrow money at around 1.5% at the broker nowadays. So insurance float becomes less valuable in low rate environment. Plus in a catastrophe, rates go down but insurance float cost goes up! (118% for Markel so far)

However when things normalize they will have huge advantage on the leverage part. Your variable rate loan will go up , theirs will stay the same or be zero - even negative. Also your loan is callable, theirs is not. This won't matter if you're prudent but it is a risk.

 

[Spekulatius]

Anyone have an idea what level of exposure each of these insurers like MKL, Allegheny and Fairfax have to business I nterruption? Buffett seemed to suggest one of their smaller competitors might be on the hook. I know MKL took a 325M guesstimate of damages, I think Fairfax said 83M and of course Allegheny is get to report but all of heir stocks sold off more than the market and I am wondering if markets pricing in exposire into this risk.

 

I assume all these are prudent underwrites, but CINF got the thumbs down and is making new loans, because they make substantial BI insurance with no explicit pandemics exclusion in addition having a substantial equity exposure (book value /share was down ~$10). I actually think they were a good underwriter traditionally,  it may have been caught by this pandemics.

 

Exclusive pandemics insurance shouldn’t be be necessary in principle, since BI insurance only covers causes due to property damage, but I am sure lawyers will torture this if it isn’t explicitly excluded. Even if it’s is explicitly excluded, lawyers may still go after them, encouraged by some politicians.

 

 

I don’t know if CINF is the insurer in question, as there may be others. TRV for example explicitly mentioned in their CC that they have an exclusion for pandemics in most of their contracts.

 

I think reinsurers May be in trouble here too, depending on how these custom contracts are written.

 

[Parsad]

Anyone have an idea what level of exposure each of these insurers like MKL, Allegheny and Fairfax have to business I nterruption? Buffett seemed to suggest one of their smaller competitors might be on the hook. I know MKL took a 325M guesstimate of damages, I think Fairfax said 83M and of course Allegheny is get to report but all of heir stocks sold off more than the market and I am wondering if markets pricing in exposire into this risk.

 

I assume all these are prudent underwrites, but CINF got the thumbs down and is making new loans, because they make substantial BI insurance with no explicit pandemics exclusion in addition having a substantial equity exposure (book value /share was down ~$10). I actually think they were a good underwriter traditionally,  it may have been caught by this pandemics.

 

Exclusive pandemics insurance shouldn’t be be necessary in principle, since BI insurance only covers causes due to property damage, but I am sure lawyers will torture this if it isn’t explicitly excluded. Even if it’s is explicitly excluded, lawyers may still go after them, encouraged by some politicians.

 

 

I don’t know if CINF is the insurer in question, as there may be others. TRV for example explicitly mentioned in their CC that they have an exclusion for pandemics in most of their contracts.

 

I think reinsurers May be in trouble here too, depending on how these custom contracts are written.

 

Most likely AIG.  Cheers!

[Spekulatius]

Most likely AIG.  Cheers!

 

Yeah, hadn’t thought of them honestly, but it makes perfect sense. They have been sloppily underwriting for 20 years now.

[racemize]

Most likely AIG.  Cheers!

 

Yeah, hadn’t thought of them honestly, but it makes perfect sense. They have been sloppily underwriting for 20 years now.

 

It certainly could be, but he did say "relative to their size", which to me means it wasn't a huge company.  That being said, pandemic insurance can be large "relative" to anyone's size, so maybe that didn't mean what I thought...

[GregS]

Has anyone seen a COVID-related charge larger than Markel's?  TRV had $86m and CB $13m.

[Foreign Tuffett]

Has anyone seen a COVID-related charge larger than Markel's?  TRV had $86m and CB $13m.

 

Looks like COB&F was right that AIG would have issues

 

https://www.bloomberg.com/news/articles/2020-05-04/aig-takes-272-million-in-covid-19-losses-and-withdraws-guidance

[Parsad]

Has anyone seen a COVID-related charge larger than Markel's?  TRV had $86m and CB $13m.

 

Looks like COB&F was right that AIG would have issues

 

https://www.bloomberg.com/news/articles/2020-05-04/aig-takes-272-million-in-covid-19-losses-and-withdraws-guidance

 

That's actually not as bad as I expected.  I thought for sure they lost $1-2B in the 1st quarter.  Let's see what their adverse losses look like going forward.  Cheers!

[KFS]

Markel Reports Second Quarter And Six-Months Results

 

https://www.markel.com/about-markel/press-releases/markel-reports-second-quarter-and-six-months-results-16176

 

 

[Xerxes]

Since BRK and FFH were getting overanalyzed for their investment decision in Q2 i thought it would be good to look at Markel as well.

 

Very much like two above, the insurer in question was busy making sure it has enough for its liabilities.

 

https://www.dataroma.com/m/m_activity.php?m=MKL&typ=s

 

BUYS

Q2  2020

≡ NVR - NVR Inc.                         Add 7.23%

≡ OTIS - Otis Worldwide Corp. Buy 112,000

≡ CARR - Carrier Global Corp. Buy 224,000

≡ PYPL - PayPal Holdings Inc.         Buy 1,830

 

Q1  2020  [those above 20% increase, which i think might at the back end of Q1]

≡ ILMN - Illumina Inc.                 Add 300.00% 3,000

≡ BKNG - Booking Holdings Inc. Add 105.00% 210        

≡ IAC - IAC/InterActive Corp.         Add 43.48% 500      

≡ BK - Bank of New York Mellon      Add 37.80% 96,000

≡ OI - O-I Glass Inc.                   Add 26.86% 94,000

≡ HCSG - Healthcare Services Group Add 21.80% 125,000

≡ TRUP - Trupanion Inc.           Add 21.18% 23,300

 

Q2  2020  [sELLS that were 100% of positions]

I think a whole bunch of tracker-position got removed for liquid/cash

 

≡ KMX - CarMax Inc. Sell 100.00%

≡ MAR - Marriott Int'l. Sell 100.00%

≡ WBA - Walgreens Boots Alliance Sell 100.00%

≡ ADP - Automatic Data Processing Inc. Sell 100.00%

≡ ANTM - Anthem Inc. Sell 100.00%

≡ TRV - Travelers Companies Inc. Sell 100.00%

≡ LYV - Live Nation Inc. Sell 100.00%

≡ LUV - Southwest Airlines Sell 100.00%

≡ PH - Parker-Hannifin Sell 100.00%

≡ BA - Boeing Co. Sell 100.00%

≡ CHH - Choice Hotels Int. Inc. Sell 100.00%

≡ DAL - Delta Air Lines Inc. Sell 100.00%

≡ MCK - McKesson Corp. Sell 100.00%

≡ FWONK - Liberty Media Corp Formula One Series C Sell 100.00%

≡ FWONA - Liberty Media Corp Formula One Series A Sell 100.00%

≡ PAG - Penske Automotive Group Sell 100.00%

≡ AN - AutoNation Inc. Sell 100.00%

≡ AAL - American Airlines Group Inc. Sell 100.00%

≡ BKNG - Booking Holdings Inc. Sell 100.00%

≡ LEN - Lennar Corp. Sell 100.00%

 

[NotSoWise]

If you look at the list, its interesting to see Markel selling mostly: airlines/ travel/ hotel/ retail related => areas of impact from COVID or online retail.

Was it for liabilities or rather was it fast sale of stuff negatively related to Covid and "old" retail or both reasons?

[KFS]

Markel Reports Third Quarter And Nine-Months Results

 

https://www.markel.com/about-markel/press-releases/markel-reports-third-quarter-and-nine-months-results-16266