MKL - Markel Corp

[masseyrock]

I'm really enjoying all the analysis and thinking that goes on in this forum...

 

Re: 1.5-2.0x BV - from your computer to God's ears!  I do think if all goes well over time (mid-sd float growth, decent underwriting profits, high sd equity returns, low sd fixed income returns) then 15%+ BV growth is very reasonable.  With some assumed growth, a 1.5-2.0x BV is supportable and is also consistent to where they have traded historically.

 

However, I'm a pathological skeptic who wants my investment thesis to be based on: "all this stuff can be poor to mediocre and I STILL increase my purchasing power".  So, I weight my various scenarios to come up with a narrower range of intrinsic value.  What if the pricing environment remains anemic and MKL doesn't grow float and underwriting profits don't add much to book value?  What if low sd portfolio returns are the reality over the next five years?  What can MKL grow and what is the downside to valuation?

 

There is still a big enough range of outcomes that I'm not comfortable basing my thesis on a more optimistic $690-$920 current fair value (1.5-2.0x).

 

Another way I look at it, what is my downside if Vinod's scenario is right - stocks go down 30%.  Not just stock 'downside' but true 'permanent loss of capital'.  We can estimate with decent accuracy what happens to BV but I do feel comfortable that my capital in MKL will be well protected in this scenario.  Gayner can get his newly found cash to work at higher expected returns. 

 

From that viewpoint, MKL is truly 'anti-fragile' - they'll get stronger and grow long-term intrinsic value faster if the market sells off by 30%.

 

An investment profile that is 0.5 beta in a down market and 1.0+ in an up market is a terrific proposition.  (And I don't mean stock volatility beta but beta of intrinsic value, if that makes sense).

[giofranchi]

1. I am probably not conveying my point clearly. I agree we can never put a precise number on IV. What I am trying to get is at market lows, MKL book value would be marked down below normal level (normal market level defined as a level that produces historically generated returns of around 9%). For example, at market lows in 2008 I think MKL book value got around to $220 or so per share compared to around $280 or so when the market is at a peak a few months earlier. Applying any multiple to the reported book value number would mislead us to underestimate the IV at a market bottom and overestimate IV at market top. It results in about a 20-25% change to one's estimate of IV.

 

2. That comment surprised me. It was like a mutual fund manager saying he got a lot of money from investors at the top of the cycle to increase his percentage of portfolio in cash. Apart from tax considerations, MKL could have had the same result by reducing its stock portfolio. If he thinks he can take advantage of the opportunities and it is better to wait for the portfolio that he getting via acquisition, I do not see how it makes sense to sit with 65% of shareholders equity in stocks.

 

Vinod

 

Vinod,

 

1. On the contrary, I had understood what you meant. Probably, I didn’t explain myself properly. Let’s answer this way: if I thought MKL’s BV to be “undervalued”, like it was the case at the beginning of 2009, I would factor in my calculations of IV a CAGR of BVPS in between 17% and 20% (like I actually did back in 2008). Vice versa, if I thought MKL’s BV to be “fairly valued”, I would factor in my calculations of IV a CAGR of BVPS of 15%. Finally, if I thought MKL’s BV to be “slightly overvalued”, I would factor in my calculations of IV a CAGR of BVPS of 12%. That’s exactly what I am doing right now. Why just “slightly overvalued”, and not “very much overvalued”, like I think the market right now is? Two reasons: a) I don’t see Mr. Gayner to keep investments in overvalued stocks, so what applies to the market in general, hardly applies to MKL’s stock portfolio; b) with the acquisition of Alterra, much of MKL’s BV is in cash or short term bonds… it follows it cannot be that much overvalued!

 

2. From an interview a few days ago:

Interviewer: “So, Mr. Zell, are you investing in the stock market right now?”

Mr. Sam Zell: “We are always invested in the stock market.”

Interviewer: “So, you are putting new money to work!”

Mr. Sam Zell: “No. We are building cash.”

 

:)

 

giofranchi

 

[Junto]

1. I am probably not conveying my point clearly. I agree we can never put a precise number on IV. What I am trying to get is at market lows, MKL book value would be marked down below normal level (normal market level defined as a level that produces historically generated returns of around 9%). For example, at market lows in 2008 I think MKL book value got around to $220 or so per share compared to around $280 or so when the market is at a peak a few months earlier. Applying any multiple to the reported book value number would mislead us to underestimate the IV at a market bottom and overestimate IV at market top. It results in about a 20-25% change to one's estimate of IV.

 

2. That comment surprised me. It was like a mutual fund manager saying he got a lot of money from investors at the top of the cycle to increase his percentage of portfolio in cash. Apart from tax considerations, MKL could have had the same result by reducing its stock portfolio. If he thinks he can take advantage of the opportunities and it is better to wait for the portfolio that he getting via acquisition, I do not see how it makes sense to sit with 65% of shareholders equity in stocks.

 

Vinod

 

Vinod,

 

1. On the contrary, I had understood what you meant. Probably, I didn’t explain myself properly. Let’s answer this way: if I thought MKL’s BV to be “undervalued”, like it was the case at the beginning of 2009, I would factor in my calculations of IV a CAGR of BVPS in between 17% and 20% (like I actually did back in 2008). Vice versa, if I thought MKL’s BV to be “fairly valued”, I would factor in my calculations of IV a CAGR of BVPS of 15%. Finally, if I thought MKL’s BV to be “slightly overvalued”, I would factor in my calculations of IV a CAGR of BVPS of 12%. That’s exactly what I am doing right now. Why just “slightly overvalued”, and not “very much overvalued”, like I think the market right now is? Two reasons: a) I don’t see Mr. Gayner to keep investments in overvalued stocks, so what applies to the market in general, hardly applies to MKL’s stock portfolio; b) with the acquisition of Alterra, much of MKL’s BV is in cash or short term bonds… it follows it cannot be that much overvalued!

 

2. From an interview a few days ago:

Interviewer: “So, Mr. Zell, are you investing in the stock market right now?”

Mr. Sam Zell: “We are always invested in the stock market.”

Interviewer: “So, you are putting new money to work!”

Mr. Sam Zell: “No. We are building cash.”

 

:)

 

giofranchi

 

probably good to provide link to interview if you are going to quote one... or specifics (who, what, when, and where).

[giofranchi]

probably good to provide link to interview if you are going to quote one... or specifics (who, what, when, and where).

 

Junto,

what I wrote was actually just to paraphrase what Mr. Zell had said. I absolutely didn’t mean to quote his words or the interviewer’s! To me what was important is just the general meaning of Mr. Zell’s words, not his exact words. Actually, now that I have listened again to the interview, I realize Mr. Zell hadn’t said he was “building cash”, he just said he wasn’t increasing his positions in the stock market. Therefore, I inferred he was building cash…

Anyway, here is the link to the interview:

 

http://www.zerohedge.com/news/2013-04-10/sam-zell-stock-market-feels-housing-market-2006

 

giofranchi

 

[Saidal]

Did anyone head to the breakfast yesterday? If so, how was it?

[woltac]

Did anyone head to the breakfast yesterday? If so, how was it?

I thought the quality of the questions and answers was excellent.  Unfortunately, I took no notes and cannot provide any details. 

 

This was my first Markel meeting and I thoroughly enjoyed it.  After ten years of attending the BRK meeting, the Q&A has become somewhat repetitive. 

[CorpRaider]

Did they discuss any particular investments?  I'm looking at Synalloy; one they own and recently had to announce a ~ 7% passive stake in.  Chuck Royce owns ~8% as well. 

[jay21]

Did anyone head to the breakfast yesterday? If so, how was it?

I thought the quality of the questions and answers was excellent.  Unfortunately, I took no notes and cannot provide any details. 

 

This was my first Markel meeting and I thoroughly enjoyed it.  After ten years of attending the BRK meeting, the Q&A has become somewhat repetitive. 

 

Did anyone see any notes posted anywhere?

[alpha231616967560]

http://covestreetcapital.com/Blog/wp-content/uploads/2013/05/2013-Markel-Breakfast-Notes.pdf

 

Very good notes. I just read them this morning.

[giofranchi]

http://covestreetcapital.com/Blog/wp-content/uploads/2013/05/2013-Markel-Breakfast-Notes.pdf

 

Very good notes. I just read them this morning.

 

Thank you very much! :)

 

giofranchi

[CorpRaider]

Thanks for sharing.  Sounds like there could be a buying opportunity on some integration turbulence with Alterra.  Not really sure how "we'll shrink it until it is profitable" jibes with "we paid full value for this one".

[jay21]

Appreciate the notes

 

 

Thanks for sharing.  Sounds like there could be a buying opportunity on some integration turbulence with Alterra.  Not really sure how "we'll shrink it until it is profitable" jibes with "we paid full value for this one".

 

I think we are missing some context here by only reading the notes.  Based upon the other bullets surrounding this indicate to me that people were discussing the competitiveness of reinsurance.  And basically they were saying, "We aren't going to try to match rates and write unprofitable business.  Profitable underwriting comes first and if we have to shrink the business to remain profitable, we will." 

 

This quote should also be comforting to you and supports my take:

 

"This is a scalable business and you can take a few people and write a lot on insurance. They are going to wait for their spots and are not keep

tons of people around"  So shrink when rates are competitive and grow massively when the market is hardening.

 

 

I thought the more interesting note was on growing the sidecar and cat bond side of ALT's business.

[Kiltacular]

I think we are missing some context here by only reading the notes.  Based upon the other bullets surrounding this indicate to me that people were discussing the competitiveness of reinsurance.  And basically they were saying, "We aren't going to try to match rates and write unprofitable business.  Profitable underwriting comes first and if we have to shrink the business to remain profitable, we will." 

 

This quote should also be comforting to you and supports my take:

 

"This is a scalable business and you can take a few people and write a lot on insurance. They are going to wait for their spots and are not keep

tons of people around"  So shrink when rates are competitive and grow massively when the market is hardening.

 

 

I thought the more interesting note was on growing the sidecar and cat bond side of ALT's business.

 

jay21,

 

Nice color...very helpful delineation...thanks!!

 

And, thanks to the OP for the link to the notes.

[giofranchi]

http://www.marketwatch.com/story/like-berkshire-markel-thrives-on-buy-and-hold-2013-06-05?siteid=yhoof2

 

giofranchi

[jay21]

MKL's portfolio activity is even more boring than BRK's:

 

http://www.dataroma.com/m/holdings.php?m=MKL

 

 

[james22]

Markel is a value buy based on its current P/B ratio of 1.17.

 

http://www.insidermonkey.com/blog/markel-corporation-mkl-is-this-forever-stock-the-next-berkshire-hathaway-inc-brk-a-221462/?singlepage=1

[obtuse_investor]

Another Markel venture purchase. Acquisition number 14, to be precise.

 

Markel Ventures Acquires the Eagle Companies

 

RICHMOND, Va., Aug. 16, 2013 /PRNewswire/ -- Markel Ventures, Inc. ("Markel") and Eagle Construction of VA, LLC ("Eagle"), announced today that Markel has acquired Eagle Construction and its affiliated entities. The terms of the transaction were not disclosed.

 

Founded in 1984 by Bryan Kornblau and Bud Ohly, Eagle primarily engages in the construction of single family residential homes in Virginia.  Through its subsidiaries Eagle Realty, Eagle Commercial Construction and NAI Eagle, Eagle also provides residential realty, commercial construction and commercial realty services.

 

The transaction marks the second investment Markel has made into Eagle's platform. Markel|Eagle Partners, a leading real estate asset manager in the region, is a joint venture formed between Markel and principals of Eagle in 2010.

 

"Eagle's longstanding relationship with Markel gave us the assurance that they share our deep commitment to our customers, trade partners and dedicated team of employees," said Robert "Bud" Ohly, Jr., President of Eagle Construction. "Our new partnership positions the Eagle Companies to build on our experience and further our evolution into one of the premier diversified real estate firms in Central Virginia and beyond."

 

"We like Markel's strategy," said Jeffrey Kornblau, the Chief Operating Officer of Eagle Construction and part of the third generation of leadership at Eagle Construction. "They provide permanent capital for their partners and expect you to continue to run your business based on the values that attracted them to you in the first place."

 

Thomas S. Gayner, President and Chief Investment Officer of Markel Ventures observed that, "Homebuilding is an integral part of our society, promoting economic development and, more importantly, strengthening our communities.  As a leading homebuilder in Virginia, Eagle has a 29 year history of providing customers with quality products and outstanding customer service, a hallmark of our Markel Ventures companies."

 

Eagle will be the fourteenth company in the Markel Ventures family of companies.  Consistent with all previous Markel Ventures transactions, Eagle's current leadership team and associates will remain in place.

[klarmanite]

I have a question for the forum that I am hoping to get some feedback on:

 

Assessing MKLs post merger with Alterra value on a SOTP basis, I am encountering some practical problems. I think (an appropriate multiple on the insurance business earnings ex investment income + an appropriate multiple of mkl ventures earnings + net investments less debt ) / shares outstanding should be theoretically correct.

 

1. How to properly assess value of the insurance business ex investments?

2. What is the optimal metric to use when valuing Markel ventures (EBIT, EPS, OE?)

3. What debt value should be subtracted?

 

Any thoughts from MKL aficionados would be much appreciated.

 

[bmathews03]

I have a question for the forum that I am hoping to get some feedback on:

 

Assessing MKLs post merger with Alterra value on a SOTP basis, I am encountering some practical problems. I think (an appropriate multiple on the insurance business earnings ex investment income + an appropriate multiple of mkl ventures earnings + net investments less debt ) / shares outstanding should be theoretically correct.

 

1. How to properly assess value of the insurance business ex investments?

2. What is the optimal metric to use when valuing Markel ventures (EBIT, EPS, OE?)

3. What debt value should be subtracted?

 

Any thoughts from MKL aficionados would be much appreciated.

 

Hi klmaranite -

 

I don't think you're starting with the right formula.  Here's my alternative suggestion:

 

Add up the following three things:

1) Underwriting profits (premiums times combined ratio)

2) Investment income (total investments times expected rate of return)

3) Pre-tax profits Markel Ventures (you're probably need to estimate this, I don't Markel shares many details)

 

To that sum, apply a reasonable tax rate. 

 

That will leave you with comprehensive income.

 

Divide comprehensive income by market cap.

 

That will give you the return you can expect to achieve by owning Markel stock.

 

I have model that does this automatically and updates with CapIQ data.  The answer for Markel is 7%.

 

If you're happy earning 7% annually, then the stock is perfectly priced.  If you're greedy and want to earn 14% every year, then the stock is 2x too expensive. If like to set your sights low, say 3.5% per year, then you're in luck -- the stock is at a 50% discount to its fair value.

 

So that's it... oh, except I forgot the first step. Before doing your valuation, you should decide if you want to buy the stock.  That way, if you don't like the answer that you're getting, you know which way to change the estimates to achieve the proper result.  Otherwise, how else would you know what to do?

[giofranchi]

I have a question for the forum that I am hoping to get some feedback on:

 

Assessing MKLs post merger with Alterra value on a SOTP basis, I am encountering some practical problems. I think (an appropriate multiple on the insurance business earnings ex investment income + an appropriate multiple of mkl ventures earnings + net investments less debt ) / shares outstanding should be theoretically correct.

 

1. How to properly assess value of the insurance business ex investments?

2. What is the optimal metric to use when valuing Markel ventures (EBIT, EPS, OE?)

3. What debt value should be subtracted?

 

Any thoughts from MKL aficionados would be much appreciated.

 

Hi klmaranite -

 

I don't think you're starting with the right formula.  Here's my alternative suggestion:

 

Add up the following three things:

1) Underwriting profits (premiums times combined ratio)

2) Investment income (total investments times expected rate of return)

3) Pre-tax profits Markel Ventures (you're probably need to estimate this, I don't Markel shares many details)

 

To that sum, apply a reasonable tax rate. 

 

That will leave you with comprehensive income.

 

Divide comprehensive income by market cap.

 

That will give you the return you can expect to achieve by owning Markel stock.

 

I have model that does this automatically and updates with CapIQ data.  The answer for Markel is 7%.

 

If you're happy earning 7% annually, then the stock is perfectly priced.  If you're greedy and want to earn 14% every year, then the stock is 2x too expensive. If like to set your sights low, say 3.5% per year, then you're in luck -- the stock is at a 50% discount to its fair value.

 

So that's it... oh, except I forgot the first step. Before doing your valuation, you should decide if you want to buy the stock.  That way, if you don't like the answer that you're getting, you know which way to change the estimates to achieve the proper result.  Otherwise, how else would you know what to do?

 

And where do you put growth?

The problem with not taking into consideration growth is that in investing you don’t want to be either an optimist nor a pessimist: instead, you just want to be right.

And, if you don’t consider growth in valuing MKL, you will most probably be wrong.

MKL has an history of increasing BVPS at a CAGR of 17%. I just cannot see why it should fail to go on increasing BVPS at around 15% annual. Now it is selling for 519 / 451 = 1.15 x BVPS. If it compounds BVPS at 15% annual and in 10 years it is still trading at 1.15 x BVPS, the CAGR of your capital invested today in MKL will be 15%.

So, if you don’t consider growth, you get to a 7% annual: you probably won’t invest. Instead, if you consider growth, you get to a 15% annual: you probably will invest. One of the two must be right, and the other wrong. It is up to each of us to decide. :)

 

giofranchi

 

[klarmanite]

I chose to go with 3 different methods to arrive at a fair value for Markel, which I will withold for now (I'd rather post my thesis when it's all done) except to say that I completely disagree that the company is overvalued  :D

 

One is a SOTP based on Buffett's letters to shareholders in the past (not similar to my pathetic outline above) and Tom Gayner's thoughts on the subject, the other two are implied valuations from different ROE scenarios which lead to certain P/E multiples, and the third is a normalized price/book multiple. I'm happy with these methods for now.

[giofranchi]

I chose to go with 3 different methods to arrive at a fair value for Markel, which I will withold for now (I'd rather post my thesis when it's all done) except to say that I completely disagree that the company is overvalued  :D

 

Well, who says MKL is overvalued?!?! Cannot really believe that!! Is this serious?!

 

giofranchi

 

[klarmanite]

I am wondering what MKLs vulnerability to regulatory changes could be (in terms of effectively reducing their investable capital because of any increased capital requirements and thus ROE). Thoughts?

[JBird]

I have a quick question myself: In the 2012 annual they wrote, "Our insurance operations require capital to support premium writings, and we remain committed to maintaining adequate

capital and surplus at each of our insurance subsidiaries. The National Association of Insurance Commissioners (NAIC) developed amodel law and risk-based capital formula designed to help regulators identify domestic property and casualty insurers that may be inadequately capitalized. Under the NAIC’s requirements, a domestic insurer must maintain total capital and surplus above a calculated threshold or face varying levels of regulatory action. At December 31, 2012, the capital and surplus of each of our domestic insurance subsidiaries was above the minimum regulatory thresholds."

 

Does anyone know quantitatively how much Markel's capital exceeds minimum regulatory capital? Thanks

[giofranchi]

I have a quick question myself: In the 2012 annual they wrote, "Our insurance operations require capital to support premium writings, and we remain committed to maintaining adequate

capital and surplus at each of our insurance subsidiaries. The National Association of Insurance Commissioners (NAIC) developed amodel law and risk-based capital formula designed to help regulators identify domestic property and casualty insurers that may be inadequately capitalized. Under the NAIC’s requirements, a domestic insurer must maintain total capital and surplus above a calculated threshold or face varying levels of regulatory action. At December 31, 2012, the capital and surplus of each of our domestic insurance subsidiaries was above the minimum regulatory thresholds."

 

Does anyone know quantitatively how much Markel's capital exceeds minimum regulatory capital? Thanks

 

I couldn’t find any further information on the subject about MKL.

FFH, instead, provides more detailed information. I quote it below, because I wouldn’t be much surprised, if similar numbers apply (more or less) to MKL as well:

In the U.S., the National Association of Insurance Commissioners (“NAIC”) has developed a model law and risk based capital (“RBC”) formula designed to help regulators identify property and casualty insurers that may be inadequately capitalized. Under the NAIC’s requirements, an insurer must maintain total capital and surplus above a calculated threshold or face varying levels of regulatory action. The threshold is based on a formula that attempts to quantify the risk of a company’s insurance and reinsurance, investment and other business activities.

At December 31, 2012, the U.S. insurance, reinsurance and runoff subsidiaries had capital and surplus in excess of the regulatory minimum requirement of two times the authorized control level – each subsidiary had capital and surplus in excess of 3.6 times (3.7 times at December 31, 2011) the authorized control level, except for TIG which had 2.3 times (2.3 times at December 31, 2011).

--FFH 2012 AR

 

 

giofranchi