MKL - Markel Corp

[giofranchi]

Gio, think of it this way:

 

I know I need to pay out a claim for $100 ten years from now. I buy a $100 10 yr, which will return my $100 after 10 years (plus I get interest along the way).  It doesn't matter how much rates move, at the end of the period I am guaranteed to have my $100 back.

 

If I put the $100 in stocks for 10 years, who knows what it will be worth when I need the $100 10 years from now.

 

jay,

I don’t see it that way… It is volatility you have to protect yourself against, when you write insurance policies… Because you never know when unexpected accidents might occur, and therefore when you'd need to have cash at hand to cover claims.

If it weren’t so, and all that really mattered were the “long term”, I guess a much higher percentage of capital + float would be invested in stocks by both FFH and MKL!

 

Gio

 

[vinod1]

 

Vinod.  Good points and I don't disagree with them but I think that Burlington Northern is actually held by National Indemnity. 

 

If correct, I believe Buffett did this because he lacked flexibility during the crash as his financials -- AXP and WFC -- were getting destroyed. 

 

Anyone know for sure -- globalfinanceparnters, you out there?

 

Kiltacular,

 

Thanks for pointing it out. You are right. BNSF 2009 10-K mentions the following:

 

"100% of the membership interests of Burlington Northern Santa Fe, LLC are outstanding as of May 3, 2010, and held by National

Indemnity Company, an indirect, wholly owned subsidiary of Berkshire Hathaway Inc."

 

An additional reason why it is held here could be that the initial investment in BNSF shares are held by National Indemnity.

 

Vinod

[james22]

Though shares have ticked up from my original purchase price at 1.2 times book value, Markel shares look cheaper than my first purchase, as imminent catalysts lie in wait: A savvy management team’s poised to capitalize on hardening underwriting markets and interest rates turning higher. And yet, the market’s still pricing Markel shares as if its best days are past. I don’t think that’s the case. That’s why I’m adding...

 

http://www.nextiphonenews.com/2013/12/why-im-buying-markel-corporation-mkl-again/

[zippy1]

2013 annual result out.

RICHMOND, Va., Feb. 10, 2014 /PRNewswire/ -- Markel Corporation (MKL) reported diluted net income per share of $22.48 for the year ended December 31, 2013 compared to $25.89 in 2012.  The combined ratio was 97% in both 2013 and 2012.  Book value per common share outstanding increased 18% to $477.16 at December 31, 2013 from $403.85 at December 31, 2012.  Over the five-year period ended December 31, 2013, compound annual growth in book value per common share outstanding was 17%.

 

http://finance.yahoo.com/news/markel-reports-2013-financial-results-213600115.html

[skanjete]

A very nice set of results.

A part of the rise in book value of course is due to the acquisition (and share issue) of Alterra. But that doesn't matter.

 

C.R. Alterra segment : 118%. Seems that they have been reserve strengthening the Alterra business. Part of it will be due to transaction costs as well of course.

 

I'm looking forward to the conference call.

[klarmanite]

CR of 97%, in line with the historical median since 1986 (the avg is 96%). I noticed Morningstar states the following in their MKL analysis ("no moat" rating):

 

"we require an insurance company to have consistently profitable underwriting results, as measured by the combined ratio, in order to have an economic moat. While Markel has effectively lowered claims, the expenses it incurs in order to do this prevent it from strong insurance profitability in aggregate. As a consequence, its average combined ratios are in the lower half of the P&C insurers we cover, which indicates it does not have a durable competitive advantage. "

 

Odd when you consider the industry as a whole has an average combined ratio of 105 since 1986.

 

I wonder what average they are referring to.

[skanjete]

CR of 97%, in line with the historical median since 1986 (the avg is 96%). I noticed Morningstar states the following in their MKL analysis ("no moat" rating):

 

"we require an insurance company to have consistently profitable underwriting results, as measured by the combined ratio, in order to have an economic moat. While Markel has effectively lowered claims, the expenses it incurs in order to do this prevent it from strong insurance profitability in aggregate. As a consequence, its average combined ratios are in the lower half of the P&C insurers we cover, which indicates it does not have a durable competitive advantage. "

 

Odd when you consider the industry as a whole has an average combined ratio of 105 since 1986.

 

I wonder what average they are referring to.

 

From what I remember, in the years that Markel had a C.R. higher than 100, it was generally due to acquisitions of inferior insurers that they subsequently repaired by reserve strengthening.

 

I didn't make the exercise explicitly, but I think that if one calculated the C.R. for their operations that they have owned for at least, say 5 years, that a C.R. higher than 100 would be very exceptional.

 

In my view, their conservative reserving is definitely a competitive advantage.

Just look at their book of business : in 2012 they wrote as much business as in the years 2004 or 2006, and that is despite several acquisitions from 2004-2012. In 2013 they wrote some more, mainly because of the Alterra acquisition. But this illustrates clearly that they write for profit, not for volume.

Just imagine what could happen if for some reason, there are a couple of years with a real hard insurance market. You will see their premium volume (& underwriting profit) explode.

[jay21]

The letter was out.  Also, Plan tweeted this link/infographic: https://twitter.com/PlanMaestro/status/447789563222556672/photo/1/large

 

Notice where Alterra is.

[Liberty]

http://brooklyninvestor.blogspot.ca/2014/03/markel-2013-annual-report.html

[writser]

http://basehitinvesting.com/markel-mkl-a-compounding-machine/

 

Another compelling write-up. I'm having a hard time choosing my favorite insurance stock. I have owned Berkshire for a long time. A friend of mine once told me that whenever he made a stupid investment decision he forced himself to buy more Berkshire. A mechanism to avoid self-destruction and to keep your ego in check. I thought it was a good idea and ended up buying quite some BKR-B over the years. Now I'm a bit attached to it - it's a reminder not to overestimate myself.

 

Nevertheless I think they're just getting too big. At this point their equity holdings pretty much start to represent the S&P 500. I'm considering switching into Markel; a similar company culture but more room for growth. Lancashire looks attractive as well. So far sloth has kept me from doing anything.

[Liberty]

http://basehitinvesting.com/markel-mkl-a-compounding-machine/

 

Another compelling write-up. I'm having a hard time choosing my favorite insurance stock. I have owned Berkshire for a long time. A friend of mine once told me that whenever he made a stupid investment decision he forced himself to buy more Berkshire. A mechanism to avoid self-destruction and to keep your ego in check. I thought it was a good idea and ended up buying quite some BKR-B over the years. Now I'm a bit attached to it - it's a reminder not to overestimate myself.

 

Nevertheless I think they're just getting too big. At this point their equity holdings pretty much start to represent the S&P 500. I'm considering switching into Markel; a similar company culture but more room for growth. Lancashire looks attractive as well. So far sloth has kept me from doing anything.

 

Thanks for the link.

 

I agree about Markel being very similar to Berkshire, but earlier in its development, which should be a good thing. The fact that their float has been cost-free on average for a long time and that they have tons of spare capacity to write premiums if the market goes hard is a big plus IMO. I'm excited about the potential for deploying the Alterra investments into more equities and (hopefully) better-performing bonds, and for Markel Ventures to keep growing. I like this quote by Gaynor from the last call:

 

The second thing I would like to point out is sort of a secondary effect of the Alterra acquisition is that the size of deal we would look at in Markel Ventures is aided and improved and increased by the total size of the Markel balance sheet. And we are just getting to look at better quality, larger more substantial companies that have more runways than would have been the case in the past. That also comes about because Markel Ventures in and of itself is going down the learning curve and we learn and there are things that in retrospect I wish I would have done differently or lessons that we take, but there is just no way to get from here today without making some mistakes and going down learning curves, but I am very pleased with the way that that process is going. And it has been accelerated by the Alterra acquisition.

 

I own only two insurance companies, and they are AIG (warrants) and Markel. I wish I could also own Fairfax, but as much as I love their culture and track record and they are an inspiration in many ways, I don't feel comfortable enough with their recent strategy. Maybe someday I'll be able to add them as a long-term holding... I kind of own Berkshire; They are Markel's biggest equity holding, and I've bought some for my wife's account.

[jay21]

I'm still trying to get a handle on Ventures, because I think at this stage you can find more See's Candy type business, where you can see phenomenal results.  The additional disclosure and commentary this year was much appreciated.

 

A few stand out things:

 

Net Income of ~24m and most likely an uneconomic amortization of ~17m for roughly ~41m of adjusted earnings

 

Operating CF of ~76m and depreciation of ~19m.  Assuming depreciation equates to maintenance capex, ~57m FCF

 

EBITDA of ~84m and ~217m of debt.

 

Equity of ~500m and equity minus goodwill is ~309m.  There is plenty of intangible as well that could probably be backed out.

 

Also disclosed in the 10-K: "With the exception of the Markel Ventures Diamond Healthcare reporting unit, we believe the fair value of each of our reporting units exceeded their respective carrying amounts as of October 1, 2013 and December 31, 2013. Additionally, we do not believe we are at risk of failing Step 1 at any of our reporting units with the result being a material impairment of goodwill.

 

However, as of October 1, 2013 and December 31, 2013, we believe that the carrying value of the Diamond Healthcare reporting unit approximates fair value and we believe we are at risk of failing Step 1 at our Diamond Healthcare reporting unit in future periods. At December 31, 2013, goodwill associated with this reporting unit was approximately $29 million."

 

So, I give them the benefit of the doubt and would floor my valuation at $500m. 

[Munger_Disciple]

I own only two insurance companies, and they are AIG (warrants) and Markel.

 

What are your thoughts on the size of bond holdings on Markel balance sheet? At the end of 2013, the balance sheet shows bonds of $10.14B, which come to 150% of book value of $6.7B. It seems that their portfolio & book value will be quite sensitive to interest rates.

[stevevri]

What are your thoughts on the size of bond holdings on Markel balance sheet? At the end of 2013, the balance sheet shows bonds of $10.14B, which come to 150% of book value of $6.7B. It seems that their portfolio & book value will be quite sensitive to interest rates.

 

From Markel's 2013 annual report:

 

In our fixed income operations we earned a total return of zero percent. Going into 2013 we worried that interest rates were unnaturally low and that the risks of owning longer-term bonds outweighed the returns available from doing so. We worried about that in 2012 and earlier

as well.

We knew that we couldn't forecast when interest rates would go up with precision. Therefore, we simply let our fixed income securities mature and we built up our balances of cash and shorter term bonds.

Starting in the second quarter of 2013, interest rates finally did begin to rise. Our total return this year was diminished by the market values of our existing bond holdings falling. The very good news is that we are extremely liquid and now able to reinvest our cash balances at rates which make more sense to us.

[Munger_Disciple]

A large portion (68%) of the bonds mature in 5-30 years, so they are still sensitive to changes in long term rates.

[CorpRaider]

I think there's a lot of discussion about this earlier in the thread, is there not?  Something about the matching of the duration of the assets and liabilities.

[no_free_lunch]

For what it's worth, interest rates went down to rock-bottom levels in the early 30's and stayed there until the mid 50's.  Japan has been low for 25 years as well.  That's not a prediction that they will stay low but just an observation that they don't have to rise anytime soon.

[Liberty]

I own only two insurance companies, and they are AIG (warrants) and Markel.

 

What are your thoughts on the size of bond holdings on Markel balance sheet? At the end of 2013, the balance sheet shows bonds of $10.14B, which come to 150% of book value of $6.7B. It seems that their portfolio & book value will be quite sensitive to interest rates.

 

Others have given good replies, but I'll add that I indeed think being a kind of leveraged bond fund is definitely a headwind, but it is one for the whole industry, and I think Markel is higher quality than the vast majority of the industry and has more levers to pull to compensate (a conservative value approach that keeps them out of trouble, a bigger but high-quality equity portfolio, better at bond investing than average, a history of underwriting profit, Markel Ventures starting to really take off). Management has been asked about this (I don't remember where I saw this, maybe in notes from a recent AGM?), and they didn't seem to be too worried. They've been positioning themselves for this for a while, so it shouldn't catch them flat-footed.

 

So I wouldn't pay 2x book with interest rates this low, but I think that between 1.1-1.2 is pretty reasonable for a business of this quality that should keep compounding nicely between 10-15% for years. I don't think it's priced and positioned to give the 20%+ returns that many are looking for, but I also see it as one of the safest companies I own, and that's worth something.

 

There's also always the possibility of a good hard market to rev up the machine, but who knows when that would happen...

[Munger_Disciple]

If interest rates stay low for an extended period of time, there will not be any significant MTM losses arising from the bond portfolio, but investment income earned will be low and P/B will likely stay at the lower end of historical range. If interest rates go up gradually, Markel will do fine (perhaps best case scenario for Markel?). However if the rates (especially long term rates) go up quickly, there is possibility for a significant drop in book value and this drop may not be accompanied by an increase in P/B ratio as one of the posters conjectured. And impairment from long dated bonds may be permanent in this case. Essentially Markel investors are betting that rates will not go up quickly and that Gaynor will successfully reduce the duration of bond portfolio significantly before such an event happens (if it materializes).

[Liberty]

If interest rates stay low for an extended period of time, there will not be any significant MTM losses arising from the bond portfolio, but investment income earned will be low and P/B will likely stay at the lower end of historical range. If interest rates go up gradually, Markel will do fine (perhaps best case scenario for Markel?). However if the rates (especially long term rates) go up quickly, there is possibility for a significant drop in book value and this drop may not be accompanied by an increase in P/B ratio as one of the posters conjectured. And impairment from long dated bonds may be permanent in this case. Essentially Markel investors are betting that rates will not go up quickly and that Gaynor will successfully reduce the duration of bond portfolio significantly before such an event happens (if it materializes).

 

I wonder if a rapid increase in interest rates could help create a hard market by removing capital from the insurance industry and forcing higher rates. Does anyone know if this has happened in the past?

[DCG]

A lot of insider selling in the last few months.

[Liberty]

A lot of insider selling in the last few months.

 

I'm not sure if I would agree it's "a lot".

 

According to Yahoo finance, insiders own 2.02 million shares, and in the past 6 months they've sold 1,051 shares (they also purchased 1,455, but these were not in the public market, though a bunch of directors purchased shares for $583.30 last month).

 

As they say, there's a thousand reasons to sell some stock, but there's only one for buying, so of course I'd rather see insiders buy in the public market. But small sales don't need to be a negative sign; maybe someone has a basement to renovate or something.

[Munger_Disciple]

I wonder if a rapid increase in interest rates could help create a hard market by removing capital from the insurance industry and forcing higher rates. Does anyone know if this has happened in the past?

 

Perhaps. But right now, Markel is way more levered to the investment portfolio than the insurance premiums written. Premiums written ~ 0.6xBook, and investments ~ 2.6xBook.

[Liberty]

I wonder if a rapid increase in interest rates could help create a hard market by removing capital from the insurance industry and forcing higher rates. Does anyone know if this has happened in the past?

 

Perhaps. But right now, Markel is way more levered to the investment portfolio than the insurance premiums written. Premiums written ~ 0.6xBook, and investments ~ 2.6xBook.

 

But wouldn't premiums written go up significantly (and very profitably) in a hard market?

[Munger_Disciple]

Yes they could, but there is a limitation imposed by regulators how much premiums can be written in relation to book value. Thus the companies that can write profitably in tough times are the ones that protected their book before the hard times.