MKL - Markel Corp

[CorpRaider]

Not to dismiss the legitimate questions about the impact of rates on the book value over the shorter term, but to quote WEB from Berkshire's 1975 annual letter:

 

We have continued to maintain a strong, liquid position in our insurance

companies. In last year’s annual report, we explained how variations of 1/10

of 1% in interest rates result in million dollar swings in the market value of

our bonds. We consider such market fluctuation of minor importance, as our

liquidity and general financial strength make it highly improbable that

bonds will have to be sold at times other than those of our choosing.

[Liberty]

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.

 

Agreed. And I think Markel is doing a good job of that. They shortened their durations a lot, have lots of cash, have a lot of equity in solid companies, and cash coming in from ventures. But maybe you disagree and think they should have done something else?

[Munger_Disciple]

They shortened their durations a lot, have lots of cash, have a lot of equity in solid companies, and cash coming in from ventures. But maybe you disagree and think they should have done something else?

 

I think Markel is a good company, and it may do quite well. My main concern is the portion of long term bonds they hold. I know they are talking about reducing the duration of bond portfolio, but at year end 2013, they still had 68% of bond portfolio in long dated paper (> 5 years). I like to see them reduce this % significantly. Of course, this comes with a penalty of putting up with some near term loss in investment income. Just for comparison, Berkshire holds 4% of their book value in bonds with duration > 5 Years. I like Markel Ventues, but it is early and a bit difficult to judge how well it is doing since they don't seem to provide much color into it.

 

Regarding hardening insurance markets, Peter Eastwood, Berkshire executive hired recently from AIG said a few weeks ago that the hard premium insurance cycle has gotten much shorter than in the past. He thinks it is due to "alternate" capital from pension funds, hedge funds, etc. looking for returns.

 

One final thing: Markel has been a public company since 1986 IIRC. From 1982-2013, there has have been a secular bull market in bonds. So, it is just an unknown how Markel will perform in a potential secular bear market in bonds in the next 10-20 years.

 

In summary, I like Markel, and it may indeed produce higher returns (although by no means it is assured), but I think it is significantly riskier than Berkshire.

 

[Liberty]

I'd need to look again to confirm and I don't have my notes here, but I think that Markel has inherited a lot of longer-duration bonds from Alterra. It is likely not their preference to have that much of those and they are probably in the process of adjusting the portfolio, which can take some time. Unless there's a big interest spike soon, I think they should have time to further optimize things.

 

But this is from memory, I could be wrong about this.

[stevevri]

I'd need to look again to confirm and I don't have my notes here, but I think that Markel has inherited a lot of longer-duration bonds from Alterra. It is likely not their preference to have that much of those and they are probably in the process of adjusting the portfolio, which can take some time. Unless there's a big interest spike soon, I think they should have time to further optimize things.

 

But this is from memory, I could be wrong about this.

 

I read the same in their annual report, and deeper in this thread. Alterra lengthened the duration of their bond portfolio. Part of the upside from the Alterra acquisition was the fact they could strategically reconfigure Alterra's investment portfolio by increasing equities, losing the hedge funds and getting the durations more in line.

[Munger_Disciple]

From 2012 AR (prior to Alterra acquisition), total bond portfolio was $4.3B in December 2012 out of which $1.5B are maturities < 5 Years. Long duration bonds made up 66% of bond portfolio at the end of 2012.

[stevevri]

From 2012 AR (prior to Alterra acquisition), total bond portfolio was $4.3B in December 2012 out of which $1.5B are maturities < 5 Years. Long duration bonds made up 66% of bond portfolio at the end of 2012.

 

Have you looked at how the duration matches their liabilities? At quick glance I see nearly $1.6B in liabilities longer then 5 year duration for Life Insurance and Annuities and around $3B in estimates losses with a duration greater then 5 years.

 

Also on page 137 of the 2013 report you see what happens with interest rates rising, and also interest rates declining on both the bond portfolio and liabilities. Notice the liabilities also decrease when rates go up.

[Munger_Disciple]

From page 137 of 2013 AR, if rates increase 200bp, they lose $1B in bond portfolio and gain $300M due to their debt, for a net loss of $700M. The shareholder equity drops by 10% as they show.

[jay21]

From page 137 of 2013 AR, if rates increase 200bp, they lose $1B in bond portfolio and gain $300M due to their debt, for a net loss of $700M. The shareholder equity drops by 10% as they show.

 

That's a parallel shift I believe, which is highly unlikely.  You note their debt FV will drop, which is not MTM, but do you make any adjustments to the FV of their float?

 

From 2012 AR (prior to Alterra acquisition), total bond portfolio was $4.3B in December 2012 out of which $1.5B are maturities < 5 Years. Long duration bonds made up 66% of bond portfolio at the end of 2012.

 

Do you count cash and short term investments in this % calc?

[Munger_Disciple]

I am just pointing what they say on page 137. If they do not MTM the debt, book value will drop by more than 10% (more like 14%).

 

I am looking only at the bond portfolio and the ratio of long term bonds as a % of total bonds.

[stevevri]

I am just pointing what they say on page 137. If they do not MTM the debt, book value will drop by more than 10% (more like 14%).

 

I am looking only at the bond portfolio and the ratio of long term bonds as a % of total bonds.

 

They indicate change in Shareholders Equity for the change in interest rates in Total Fixed Maturities Securities, which would cover book value. So the -9.8% would seem right for 200 bps.  Which would be fairly substantial change in the short term and yes not be good.

 

It would also seem there is a GAAP accounting effect at play where the bonds losses would be included immediately in Other Comprehensive income and the decrease in related liabilities would lag.

 

I'm just learning here too but the 1980 Berkshire Letter seems to be an awesome read on a quick rate rising environment and the choices faced by insurers. It can get ugly.

[ScottHall]

You all are really over thinking this thing...

[Liberty]

You all are really over thinking this thing...

 

How are you thinking about it?

[ScottHall]

You all are really over thinking this thing...

 

How are you thinking about it?

 

Figure out a reasonable estimate of long-term growth in BV per share and value it based off that. I use a justified P/B model, personally, but you can crack that nut however you want. A 10% decrease in BV brings it to $429 per share. At today's prices, it'd be at a 1.43x multiple at that point. That, for a company that has grown BVPS at ~11% annually over the past decade despite the biggest market crash since the depression. The long run track record's a lot better than that; about 16.8% since 1990, and in the mid-teens pretty consistently until the crash.

 

Obviously you need to determine for yourself whether the future will look like the past or if the company's best days are behind it, how long the company can keep up its excellent performance, etc. But focusing on a one-off like the impact of a 200 basis point increase in interest rates isn't going to help much one way or the other. I think the stock is a bargain at today's prices or if interest rates knock BV down 10%, but that's just me.

 

We could go deeper in to this, but the five second version is to not overweight a one-off problem vs. the core drivers and economics of the business. People do this all the time, usually to their detriment.

 

Best wishes.

[Liberty]

Thanks Scott.

 

That's kind of like how I think about it too. I want to make sure that there's not a predictable single event that could be catastrophic for the company, and I don't think the rate hike that was discussed is, so once that's out of the way, I look at the long-term track record, the quality of the assets, quality of management, and the overall strategy, and it made me very confident that the company was worth more than 1.2x book (what I paid) and should be able to keep compounding nicely for years (if not decades) to come.

[Liberty]

For those who aren't lucky enough to be at the Markel meeting, @HardcoreValue has been live-blogging parts of it on Twitter:

 

[zippy1]

Q1 results out

http://finance.yahoo.com/news/markel-reports-first-quarter-2014-205800458.html

RICHMOND, Va., May 7, 2014 /PRNewswire/ -- Markel Corporation (MKL) reported book value per common share outstanding of $493.96 at March 31, 2014, up 4% from $477.16 at December 31, 2013. Comprehensive income to shareholders was $230.3 million for the quarter ended March 31, 2014 compared to $257.7 million for the first quarter of 2013. The combined ratio was 95% for the first quarter of 2014 compared to 91% for the first quarter of 2013. Diluted net income per share was $6.25 for the quarter ended March 31, 2014 compared to $9.50 for the first quarter of 2013. 

[bmathews03]

You all are really over thinking this thing...

 

A very astute comment.

[Liberty]

One more business for Markel Ventures:

 

https://www.markelcorp.com/About-Markel/NewsRoom/Reuters1950509

 

Markel Ventures, Inc. ("Markel") announced today the acquisition of a majority interest in Cottrell, Inc. and affiliated entities ("Cottrell").  Headquartered in Gainesville, Georgia, Cottrell is a global leader in the design, manufacture and delivery of over-the-road automobile transport equipment. Terms of the transaction were not disclosed.

 

Danny Zink, Cottrell's President and CEO, stated, "We wanted to find a partner that understood the way we do business and that would support us as we continue down the path we started on over 35 years ago. Markel is clearly that partner."

 

Thomas S. Gayner, President of Markel Ventures, added, "For 35 years Cottrell has found success by staying close to its customers and by responding rapidly to their needs.  Our approach allows Cottrell to continue doing exactly that as a permanent member of the Markel Ventures group of companies."

[Evolveus]

Forgive my ignorance, but what is "over-the-road" auto transport?  Are they referring to the 18wheelers and special trailers used to haul cars from auction to dealer and such?  Curious to get more insight as to what Markel Ventures considers a great business and why.

 

[CorpRaider]

http://www.cottrelltrailers.com/

[Evolveus]

Thanks Corp raider - I guess i could haven just googled it - it was late...I was on my iphone etc...so thank you.  The Ventures group is an interesting group of companies.  Not doubting Gayner, just a lot of businesses that I hadn't thought about as being competitively advantaged in a buffett-esque moat sense.  Bakery machinery, dredging, paneling, car haul trainlers, AMF bowling.  Admittedly I have not studied these induvidual companies in detail, simply stating these are a bit off the beaten path, but maybe there is more to learn from Gayner by examining the unique attributes of these purchases.

 

long: MKL

[Scudbucket]

Any idea why Markel doesn't talk about Goodhaven on their ventures site?

[Liberty]

http://www.fool.com/investing/general/2014/07/25/an-interview-with-markels-tom-gayner.aspx

 

20-minute video interview with Tom Gayner.

[Ian L]

2nd quarter results: https://www.markelcorp.com/About-Markel/NewsRoom/Reuters1956173

 

BVPS $511, up from $477 at the end of 2013 and up from $494 at end of Q1.

 

Alan I. Kirshner, Chairman and Chief Executive Officer, commented, "We are pleased with our growth in book value for 2014, which was driven by strong performance in our equity and fixed income investment portfolios. Our underwriting results in 2014 included unfavorable development on our asbestos and environmental exposures, which have continued to adversely impact the property and casualty insurance industry. We continue to expand our non-insurance operations and are excited about our most recent acquisition of Cottrell in July 2014."