MKL - Markel Corp

[gjangal]

Last i read their 10q they have about 10b fixed income book. maturities greater than 5 years around 6b . cmbs and residential around 1.8b. Their total investment portfolio is around 18b

[scorpioncapital]

It's about 'time'. I read that in the 80s, inflation was 15% and government bonds were 13%. So you had a negative 2% real return. That may not seem that bad on a temporary basis if it doesn't last forever, but imagine that the ramp up to 13% took a few years. If you have a long duration portfolio, even 5 years, and the average inflation over that time is say 5-6% per year, that's quite a loss in purchasing power until you can roll over into the new, higher maturities. Expected inflation is somewhat manageable, it's unexpected inflation that can have huge impact on insurer's piggy bank. Being large ships, they can't move very fast.

 

[CorpRaider]

Interesting that TG talked about beating S&P 500 by 100 basis points over the period and also over the long term.  I wonder if a 1.6 levered midcap index would perform similarly/better.

[racemize]

Probably would have, but the leverage of insurance companies is mostly applied to bonds not equities.  TG isn't Buffett, obviously, but 1% outperformance is significant over the years.

[JBTC]

Interesting discussion. I have a small position in MKL. I have been enamored by MKL and hope to be able to buy more. My concern is about the possibility of slowing book value growth in a rising rate environment.

 

Take 4Q16. BPS fell because MKL booked profit of $133mn, which was more than offset by a net holding loss of $136mn, resulting in a negative comprehensive income. Given both underwriting and Venture profits were strong, clearly the impact from higher rates on MKL's bond portfolio were not small.

 

I understand rates had a large move in 4Q, otherwise book value may not decline. The question for me is if I assume future rate rises are slow and steady, how much book value can grow?

 

In 2005-15, MKL's average return from its fixed income portfolio was 4.6% per year. In the future this should likely be lower.

 

In 2005-16, combined ratio averaged 95%. So the 89-92% combined ratio in the past two years were above average. So underwriting profit may also decline in the future (not saying it must).

 

Of course, even if both bond returns and underwriting profits decline, in theory MKL could post large returns from its stock portfolio to offset those and grow book value. That was what happened in 2013 when its return from bonds was 0%, but stocks were up 30%+.

 

There seem two ways to look at MKL. The optimistic view is the co has a long track record, and BPS grew 11% in the past five years, which was good. The pessimistic view is MKL's entire track record coincided with the bull market in bonds, and as the bond bull market came to an end, its future growth could be lower, possibly as evidenced by its BPS growth of just 5.5% on average in the past two years.

 

Shares are now trading at 1.6x P/B. Appreciate any thoughts on what future book value growth is now in the price - 10%+ or 5% or somewhere in between?

 

[racemize]

Well, Gayner is on record in saying that 8-9% would be good returns in the current environment, and I probably agree with him.

 

Anyway, while rising interest rates are painful in the short term, they help get longer returns up--we need higher reinvestment of float, and these low rates will kill future growth of BVPS.  So, I'd much rather take write-downs on the bonds to get higher interest rates, all things being equal.

[Guest Schwab711]

Interesting discussion. I have a small position in MKL. I have been enamored by MKL and hope to be able to buy more. My concern is about the possibility of slowing book value growth in a rising rate environment.

 

Take 4Q16. BPS fell because MKL booked profit of $133mn, which was more than offset by a net holding loss of $136mn, resulting in a negative comprehensive income. Given both underwriting and Venture profits were strong, clearly the impact from higher rates on MKL's bond portfolio were not small.

 

I understand rates had a large move in 4Q, otherwise book value may not decline. The question for me is if I assume future rate rises are slow and steady, how much book value can grow?

 

In 2005-15, MKL's average return from its fixed income portfolio was 4.6% per year. In the future this should likely be lower.

 

In 2005-16, combined ratio averaged 95%. So the 89-92% combined ratio in the past two years were above average. So underwriting profit may also decline in the future (not saying it must).

 

Of course, even if both bond returns and underwriting profits decline, in theory MKL could post large returns from its stock portfolio to offset those and grow book value. That was what happened in 2013 when its return from bonds was 0%, but stocks were up 30%+.

 

There seem two ways to look at MKL. The optimistic view is the co has a long track record, and BPS grew 11% in the past five years, which was good. The pessimistic view is MKL's entire track record coincided with the bull market in bonds, and as the bond bull market came to an end, its future growth could be lower, possibly as evidenced by its BPS growth of just 5.5% on average in the past two years.

 

Shares are now trading at 1.6x P/B. Appreciate any thoughts on what future book value growth is now in the price - 10%+ or 5% or somewhere in between?

 

If they plan to be a going concern then it probably doesn't matter. If your scenario is true then BV remains stagnate but earnings power (and thus ROE) increase. Higher excess ROE implies higher P/BV multiple, all else equal. Some of the concerns with rising rates might be temporary increased liquidity risk and potential for inflation to exceed increase in investment yield. In the past, localized inflation (to an industry or region), especially if >> CPI, has destroyed insurers (I think auto inflation almost wiped out GEICO). The latter risk has been essentially zero for almost a decade.

[StevieV]

Shares are now trading at 1.6x P/B. Appreciate any thoughts on what future book value growth is now in the price - 10%+ or 5% or somewhere in between?

 

I don't know.

 

I like and own MKL.  When I first started a position, I thought that most of the potential for the multiple was on the upside.  From a return perspective, I figured:  growth in BVPS + some multiple expansion.  I mostly thought of the multiple expansion as a possible kicker.

 

Going forward, I expect to be able to get around this multiple for my shares at times in the future.  However, I am no longer expecting multiple expansion.  Perhaps, but I think it would require some greater growth from MKL.  I think something like 2.0 would be pretty rich for MKL at this stage.

 

I am not sure what the market is pricing in.  If MKL grows BVPS by about 5%/year for a while, one would certainly expect the multiple to contract.

 

IMO, an increase in interest rates has to be good for MKL, even if it suprresses book value in the near term.  The bonds pay the coupons they pay.  If interest rates increase, they'll be able to buy higher yielding bonds than if rates don't increase.  Just the mark-to-market of the bonds they own goes down.

[TBW]

I like MKL and own but it's fully valued here imo.  I am not selling though

 

As for rates it's a question I have been wondering myself.  I think rates and combined ratio are a dynamic relationship.  So combined ratio should go higher as rates go up as insurers become more aggressive, offset by higher investment yields.  Basically, as insurers target 10% ROE's if yields are low as they are now, combined ratios have to go lower to compensate.  That likely reverses.  Hopefully combined ratios stay stickier as yields rise and insurers could do quite well in that case.

 

As for book value impacts I think it depends if they are under or overweight interest rate risk relative to its liabilities.  Given they raised 30yr debt at 5% recently I would think they are underweight and thus should do well as rates rise.  I also recall them talking in the past at the annual meeting how they were sceptical of low rates.  So I would imagine the book is positioned for higher rates.  So I am not that concerned but there certainly could be some noisy quarters in the future.

 

What concerns me more in terms of noise is their equity portfolio.  Given Gaynor's style they own high quality companies.  Given low rates those companies stocks are quite expensive here.  Looking at their holdings from WhaleWisdom the weighted average PE is 24.5.  Let's say there is a mkt correction and these stocks still trade at a premium to the market (as they are higher quality companies) and trade at 17 - that would wipe 1.25bil off of book value.  That would be a loss of 15%. 

 

They have cash to re-invest at a clip of 600mil per year the loss isn't that material.

 

So with that potential stock loss at the same time of a book value impact due to its bond portfolio I wonder how that could affect the stock?

 

In 2009, they did very well by having plenty of cash to invest and the correction was an opportunity for them.  In that instance their bond portfolio did offset some equity losses.  Also bonds could be sold for a gain to invest in stocks.  That may not be the case this time.

 

All that said I am trying to take a long-term view.  These guys are great operators and should continue to compound through the cycles.  But I do think this it will be hard to see this multiple expanding and more likely see multiple compression.

 

[JBTC]

Chuck Akre has owned MKL for more than 20 years, and he values MKL by comparing the stock price to the growth in BPS (in his words the real economic earnings).

 

In a 2014 interview on WealthTrack, he argued that MKL was cheap because it traded at less than 10x its growth in BPS in 2013.

 

In 2016 the growth in BPS was $45. So on this basis MKL is now trading at 21x.

 

I suppose there's no reason to buy at this level.

 

[CorpRaider]

Hey, so are you guys working with investments per share of ~ $1,340?

[John Hjorth]

Reactions: Tony Markel reflects on 50 years of service [06.03.2017].

[Cigarbutt]

For those following Markel and wondering about valuation.

http://www.rationalwalk.com/?p=15972

I have followed for a long time.

My take is that Markel is a good long term investment at present levels.

Expectations of return should rest perhaps mostly on their capacity to maintain trajectory.

Multiple expansion is probably not in the cards.

[Nebraska]

Went to the Markel breakfast yesterday in Omaha and have to say I was impressed by what I heard. Unfortunately I didn't take anything to write with and I'm not the best at quotes so don't really have any insights to share.

 

I'm really excited to hold them over the longterm, unfortunately the current price makes it hard to pull the trigger to add more at present.

[ScottHall]

Went to the Markel breakfast yesterday in Omaha and have to say I was impressed by what I heard. Unfortunately I didn't take anything to write with and I'm not the best at quotes so don't really have any insights to share.

 

I'm really excited to hold them over the longterm, unfortunately the current price makes it hard to pull the trigger to add more at present.

 

I feel the same way. I am going to continue to hold my MKL shares and wait for a pullback in multiple to buy more, if that happens.

[matthylland]

Went to the Markel breakfast yesterday in Omaha and have to say I was impressed by what I heard. Unfortunately I didn't take anything to write with and I'm not the best at quotes so don't really have any insights to share.

 

I'm really excited to hold them over the longterm, unfortunately the current price makes it hard to pull the trigger to add more at present.

 

Always a fun event. I'm sure there were more than a few CoBF readers there.

 

I dont think i have come up with any "big takeaways" at this event, it is like the Bekshire meeting in a way, you almost know what they are going to say most of the time, but it's still fun. The insight from the CarMax guy was a surprise and something new I guess.

 

I added an additional 5% of my portfolio to MKL a couple months ago, partially as a rebalance and partially because there are so few stocks that I can hold today that don't keep me up at night (that is becoming a much more attractive quality to me anymore).

[Kiltacular]

Went to the Markel breakfast yesterday in Omaha and have to say I was impressed by what I heard. Unfortunately I didn't take anything to write with and I'm not the best at quotes so don't really have any insights to share.

 

I'm really excited to hold them over the longterm, unfortunately the current price makes it hard to pull the trigger to add more at present.

 

Always a fun event. I'm sure there were more than a few CoBF readers there.

 

I dont think i have come up with any "big takeaways" at this event, it is like the Bekshire meeting in a way, you almost know what they are going to say most of the time, but it's still fun. The insight from the CarMax guy was a surprise and something new I guess.

 

I added an additional 5% of my portfolio to MKL a couple months ago, partially as a rebalance and partially because there are so few stocks that I can hold today that don't keep me up at night (that is becoming a much more attractive quality to me anymore).

 

Would you expand on CarMax comments?  Thanks

 

Anyone have notes or links to same, please post.  Thanks

[wolverine890]

 

Would you expand on CarMax comments?  Thanks

 

Anyone have notes or links to same, please post.  Thanks

 

First time posting. Sorry if the formatting is off.

 

Austin Ligon, co-founder of CarMax, was asked to come up and share his thoughts on the advent of autonomous cars.

Ligon essentially said this is his main concern and it keeps him up at night. However, he has found hope in Japan. He said something to the extent, ‘in Japan many people don’t need cars. Yet, every family has at least one.” If I remember correctly, his takeaway from this was that self-driving cars are coming, but it will take a long time before the trends of car ownership change.

 

He also reiterated that CarMax and their people understand this as a threat to their business; they are doing everything they can to figure out how to make the best business given the highly probable future of self-driving cars. 

 

[John Hjorth]

wolverine890,

 

Thank you for your post, and welcome to CoBF! : - )

[chrispy]

wolverine,

 

Thank you for that interesting piece.

 

The example of how the Japanese are behaving makes quite a bit of sense to me.  Owning a car is so ingrained in american culture that not owning one if you can afford it would be a little taboo. 

 

I know many people who live in Washington DC, commute to work by walking, bike, or metro, yet they still own a car for the handful of times they have to drive a few hours to visit family or get away for the weekend.  I have a hard time seeing that situation change.

 

Car purchasing frequency could decrease significantly though.

[wolverine890]

 

I know many people who live in Washington DC, commute to work by walking, bike, or metro, yet they still own a car for the handful of times they have to drive a few hours to visit family or get away for the weekend.  I have a hard time seeing that situation change.

 

Car purchasing frequency could decrease significantly though.

 

Spot on!I believe this was Ligon's main point. However, he thinks that the decrease in frequency of purchase will effect the big car dealers more than the resale market. But this could also just be my opinion being imposed on Ligon.

 

Also, i am one of the guilty that walk and bike everywhere; yet I still own a car.

[Liberty]

Good presentation about markel:

 

http://valueseekerinvestments.blogspot.ca/2017/06/markel-corp-mkl-brief-overview-38.html

[chrispy]

Liberty, very informative slide deck, than you for sharing. 

 

My thoughts on simplified possibilities for markel in the near term:

 

Current rate environment, no major cat:  mid single digit growth

Major cat and/or market correction: short term pain in stock price and book value but that will be used as an opportunity for greater future growth

Interest rates increase quickly: short term pain in stock price and book value but that will be used as an opportunity for greater future growth

 

I am having trouble seeing significant growth in BVPS or expansion of multiple in today's environment.  It seems that in order to have any greater increase in BVPS, first some kind of pullback in stock price will be required... 

[racemize]

We had a very similar discussion a few years ago, and all concluded that BVPS couldn't increase that quickly due to the low fixed income returns.  Bolstering this conclusion, in the google talk, Gayner indicated that 9% growth would be a strong outcome in the current interest rate environment. 

 

However, returns and BVPS growth were pretty decent since that time.  So maybe they can continue to do pretty ok.  Clearly, neither BVPS nor share price growth will be spectacular, but I don't know of many spectacular opportunities around.

[ScottHall]

For me this is a long term hold in my taxable account. I am not a buyer at today's valuation... but I will never sell as BVPS now exceeds my cost basis and I suppose Markel can at least come close to market returns. It's a steady, tax-efficient grower that has given me good returns in the past. I would like to buy again at 1.2x 1-3x book.