MKL - Markel Corp

[wolverine890]

Markel Corporation (NYSE: MKL) reported book value per common share outstanding of $671.05 at March 31, 2018, down 2% from $683.55 at December 31, 2017. Comprehensive loss to shareholders was $174.8 million for the first quarter of 2018 compared to comprehensive income of $223.2 million for the first quarter of 2017. The combined ratio was 90% for the first quarter of 2018 compared to 100% for the first quarter of 2017. Diluted net loss per share was $4.25 for the quarter ended March 31, 2018 compared to diluted net income per share of $3.90 for the first quarter of 2017.

 

Net loss to shareholders was unfavorably impacted by the adoption of ASU No. 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Liabilities, effective January 1, 2018. As required by the new accounting standard, the Company recognized a pre-tax loss of $122.1 million ($101.3 million net of taxes) as a result of the decline in the fair value of its equity securities since December 31, 2017. Prior to the adoption of ASU No. 2016-01, changes in the fair value of the Company's equity securities were included in other comprehensive income on an after-tax basis.

 

Additionally, net loss to shareholders for the quarter ended March 31, 2018 included a pre-tax foreign currency loss of $22.1 million ($17.5 million net of taxes) and a non-recurring tax expense of $99.5 million.

 

http://www.markelcorp.com/About-Markel/NewsRoom/Reuters2344372

[Crip1]

Curious to any board members who have knowledge of insurance-linked securities management or Nephila in particular, I'd appreciate any thoughts.

 

 

https://finance.yahoo.com/news/markel-acquire-nephila-holdings-limited-125900629.html

 

 

-Crip

[walkie518]

Curious to any board members who have knowledge of insurance-linked securities management or Nephila in particular, I'd appreciate any thoughts.

 

 

https://finance.yahoo.com/news/markel-acquire-nephila-holdings-limited-125900629.html

 

 

-Crip

ILS have brought a lot of liquidity that previously never existed to carriers--this is the logical extension of the Lloyd's platform bringing transparency and standardization to an otherwise deal-by-deal market. 

 

I can only think of two kinds of companies that might provide insight into this transaction: buyers of runoff (Enstar) and perhaps more directly asset managers focusing on insurance and reinsurance (Blue Capital).  Blue Capital might be a more direct comp on a far, far smaller scale and not remotely as successful but it's public (BCRH) and its filings might be an interesting place to look.

 

Hope this helps

[Cigarbutt]

Curious to any board members who have knowledge of insurance-linked securities management or Nephila in particular, I'd appreciate any thoughts.

 

https://finance.yahoo.com/news/markel-acquire-nephila-holdings-limited-125900629.html

 

-Crip

 

Hi Crip,

Not sure where you want the conversation to go but here is some basic info which may help?

 

Nephila has a long history and, as reported, is a large player in its field.

I understand that they started out mainly in the catastrophe area and have gradually diversified into various "climate" risks, renewable energy risk management and others.

 

Apart from the basic primers easily available, I've found that the Artemis site is good to follow what happens in the ILS market.

Few relevant samples for Nephila:

The playing field:

http://www.artemis.bm/ils_fund_managers/

An early "landmark" deal:

http://www.artemis.bm/deal_directory/kelvin-ltd/

Another interesting example:

http://www.artemis.bm/blog/2016/11/15/microsoft-benefits-from-allianz-nephila-wind-farm-revenue-swap/

 

The field is fascinating but conceptually is simply an outgrowth of the convergence between capital markets and risk management.

 

[plusalpha]

Tom Gayner talk in India

https://www.moneycontrol.com/news/business/markets/coffee-can-investing-tom-gayner-reveals-how-he-became-a-successful-investor-3096591.html

[james22]

Pretty significant drop over the last month.

 

Anyone buying?

[walkie518]

Pretty significant drop over the last month.

 

Anyone buying?

1.5x book seems a little exp when BRK is trading at 1.4x?

[mwtorock]

Pretty significant drop over the last month.

 

Anyone buying?

1.5x book seems a little exp when BRK is trading at 1.4x?

 

Not to mention that there is a safety net in BRK that the old man set for buybacks.

[dwy000]

https://www.marketwatch.com/story/markel-stock-drops-after-hours-on-regulatory-inquiries-2018-12-06?mod=newsviewer_click

 

Bermuda regulators questioning reserves.

[Cigarbutt]

https://www.marketwatch.com/story/markel-stock-drops-after-hours-on-regulatory-inquiries-2018-12-06?mod=newsviewer_click

 

Bermuda regulators questioning reserves.

Looks like an event in the ordinary course of business.

http://news.ambest.com/presscontent.aspx?refnum=27417&altsrc=9

[dwy000]

https://www.marketwatch.com/story/markel-stock-drops-after-hours-on-regulatory-inquiries-2018-12-06?mod=newsviewer_click

 

Bermuda regulators questioning reserves.

Looks like an event in the ordinary course of business.

http://news.ambest.com/presscontent.aspx?refnum=27417&altsrc=9

 

What makes you say ordinary course?  The link above and the company's press release don't indicate that - just that the company is cooperating and has no further comment.  Not saying it isn't ordinary course but I haven't seen one for Markel before (especially that resulted in a press release reply) and the stock is down.

[Cigarbutt]

What makes you say ordinary course?  The link above and the company's press release don't indicate that - just that the company is cooperating and has no further comment.  Not saying it isn't ordinary course but I haven't seen one for Markel before (especially that resulted in a press release reply) and the stock is down.

Short answer: I don't know.

 

By ordinary course, it was meant that one has to decide if 1-this is manipulation, poor reserving or simply a "mistake" and 2-this is localized in one sub or systemic or "cultural".

FWIW I think this is likely to be a localized "mistake" in CATCo.

 

Why?

-In a way, the ILS market, especially in the collateralised reinsurance or retrocession instruments, is "learning" how to deal with loss picks and loss creep.

-Interestingly, the ILS market has been more transparent and timely versus reserve develoment public disclosure compared to the traditional reinsurance segment.

-CATCo relies on loss information from cedants so development is based on others' models.

-CATCo is a large player and a relevant target for regulators.

-This is not typical for the "culture" at MKL.

 

 

A concern exists as to what extent the development is beyond reasonable expectations but IMO this does not seem to be the first of several cockroaches.

 

Other point: The evolving pain recognized due to successive "events" and the associated trapped collateral suggests that the alternative market pricing mechanism may be insufficicent in the context of transactions looking more and more like traditional reinsurance and retrocession transactions.

 

Hope this helps and please show me how this line of thinking is wrong as the market does not seem to agree.

 

[Guest compoundsnowly83]

I believe the exposure for Markel is small and the market is not pricing this risk correctly.  It is my understanding (but am open to a different interpretation) that the Markel exposure to Markel Catco is limited to the income from the management fees / performance fees of operating these entities which was $28.7mm in 2017, the investment of $20.5mm in the funds as of 2017, as well as the goodwill of $91.9mm as of 12/31/2017 and intangibles of $113mm that were added to the balance sheet at the time of the acquisition when the company acquired Catco for $205.7mm in December 2015. For a point of comparison, the total book value is just over $9.9bn

 

Below are some of the lines from the most recent annual report:

 

"Our other operations also include our Markel CATCo operations, which are conducted through Markel CATCO Investment Management Ltd. (MCIM). MCIM is a leading insurance-linked securities investment fund manager and reinsurance manager headquartered in Bermuda focused on building and managing highly diversified, collateralized retrocession and reinsurance portfolios covering global property catastrophe risks. MCIM receives management fees for its investment and insurance management services, as well as performance fees based on the annual performance of the investment funds that it manages. Total revenues attributed to MCIM for the year ended December 31, 2017 were $28.7 million. As of December 31, 2017, MCIM's total investment and insurance assets under management were $6.2 billion, which includes $6.0 billion for unconsolidated variable interest entities."

 

"The Company also holds an investment in CATCo Reinsurance Opportunities Fund Ltd. (CROF), a limited liability closed-end fund listed on the London and Bermuda Stock Exchanges, which is not a VIE. This investment is included in equity securities (available-for-sale) on the Company's consolidated balance sheet. CROF is managed by MCIM and invests substantially all of its assets in one of the unconsolidated Funds. At December 31, 2017 and 2016, the fair value of the Company's investment in CROF was $20.5 million and $26.3 million, respectively."

[dwy000]

I think that's right.  And I hope that the company (or the regulator) comes out with more details.  The concern (I would think) is that if this entity has under reserved or been overly aggressive in reserving, does that possibility prevail beyond this contained entity? 

 

Given the high degree of integrity I've always put on Markel (close to Berkshire) I'm more worried about that "halo" disappearing than the $ at risk from this little entity.

[theLiberties]

I think there is a decent probability that they under reserved deliberately.

On the closed-end funds market, there were two vehicles to invest in Cat bonds/ILS : Catco and Blue Capital Alternative Income. Last year, after all the events, BCAI was very quick to take a significant loss. That led to the shares trading much below NAV and an activist fund took a position to force the winding down of the fund. Catco was much slower to book losses. With the new year they even pitched for a new vehicle (with the usual spiel "those catastrophes will lead to improved pricing" that anybody reading artemis blog knew was not true). That's only after the new vehicle ended its sucessful fundraising that the old vehicle started to book significant losses. This behaviour smells of foul play.

Sources :

https://www.theinsurer.com/news/markel-didnt-invest-in-catcos-23bn-reload-/2329.article (free access once registered)

https://citywire.co.uk/investment-trust-insider/news/catco-ill-wind-turns-fair-as-reinsurance-fund-raises-400m/a1073590?section=investment-trust-insider

https://www.investegate.co.uk/staude-capital-ltd/rns/staude--calls-for-orderly-windup-of-blue-capital/201804300700184675M/

+file attached

[John Hjorth]

Welcome to CoBF, theLiberties! [ : - ) ],

 

I'm surprised by reading your post. I hope you wouldn't mind sharing a link to your source, thank you in advance.

[Cigarbutt]

I think there is a decent probability that they under reserved deliberately.

On the closed-end funds market, there were two vehicles to invest in Cat bonds/ILS : Catco and Blue Capital Alternative Income. Last year, after all the events, BCAI was very quick to take a significant loss. That led to the shares trading much below NAV and an activist fund took a position to force the winding down of the fund. Catco was much slower to book losses. With the new year they even pitched for a new vehicle (with the usual spiel "those catastrophes will lead to improved pricing" that anybody reading artemis blog knew was not true). That's only after the new vehicle ended its sucessful fundraising that the old vehicle started to book significant losses. This behaviour smells of foul play.

Interesting take theLiberties.

Would be interested also in your factual or reasoning process.

 

-When looking at the loss creep for Hurricane Irma for instance, most participants have disclosed progressively higher losses in relation to what cedants report.

-The ILS market has been incredibly competitive with only temporary and mild price increases for Florida wind (despite Irma's poor development patterns) early in 2018 followed by essentially flat prices, suggesting that there is competitive pressure that could impact underwriting discipline or conservatism.

-Poor discipline is worrisome but different from what you describe and obviously requires a different approach from head office. Deliberate fudging can be explained (but not justified) when the firm faces survival issues but why would one deliberately use wrong assumptions only for temporary benefits in terms of market share as investors will invariably switch ILS funds or even go back to traditional channels when poor results show up?

[Spekulatius]

MKL without the halo would just be another reinsurance company trading at 1.1-1.2x  book? That seems to be the downside case.

[Gregmal]

https://seekingalpha.com/pr/17385447-markel-issues-statement-markel-catco

 

It's amazing how many people piss away great jobs or just generally speaking make irrational decisions because they can't keep their genitals covered. Bezos dumping his wife and half the Amazon empire for a grade A Hollywood skank is the big story right now, but stuff like this happens all the time and it's mind boggling. That said the supply of young to middle aged single women in Bermuda is rather limited...

[thowed]

Thanks for this, Gregmal.

 

I'd briefly looked at Catco (closed-end fund listed in London) when it was acquired by Markel, on the basis of trust in Markel.  This is a good reminder about how careful you have to be with trusting the 'jockey' at different levels.

[Guest compoundsnowly83]

Any interesting takeaways from the 4th quarter results?  I am surprised that Markel Ventures wasn't a larger contributor to the bottom line.  I also didn't see any discussion of share buybacks but could have missed it.

[CorpRaider]

Interesting mention on the buybacks.  I haven't looked in while, but my recollection was that they have been sort of steadily buying back stock over the last several years, seemingly regardless of valuation, perhaps to offset dilution from compensation.  It sounds like you been tracking this.  I wonder, do you know offhand if my recollection is correct?

[woltac]

My takeaway is a question: In light of the following passages from the press release, what is the exposure to Markel of the CATCo mess?

 

My first impression is their exposure may go well beyond the goodwill write off.

 

• the pending governmental inquiries into loss reserves recorded at an entity managed by Markel CATCo in late 2017 and early 2018 (the Markel CATCo Inquiries) may have an adverse impact on the operations of Markel CATCo and may result in adverse findings, reputational damage, the imposition of sanctions, increased costs, litigation and other negative consequences;

 

• the ongoing internal review into loss reserves recorded in late 2017 and early 2018 at an entity managed by Markel CATCo may result in adverse findings;

 

• the Markel CATCo Inquiries and Markel CATCo Departures, as well as certain redemption rights that are now being offered to investors in ILS Funds managed by Markel CATCo, will adversely impact Markel CATCo’s ability to maintain or raise capital.

 

 

 

[Guest compoundsnowly83]

I actually believe that the incremental exposure to Markel Catco is limited as they took the pain this quarter and completely wrote off all of the goodwill. The remaining exposure appears to be the small investment that Markel owns in the Catco funds which was only $58M at the end of 2018.

 

The share buybacks were $111M in 2017 and was $31MM through the first nine months of 2018.  I would have expected to see some talk of the buyback on the conference call with the stock's poor performance but that did not take place.  The cash flow was not provided in the disclosures so we will have to wait for the K to see the total number.

[woltac]

From the 3q report:

 

The Company's exposure to risk from the unconsolidated Funds and the reinsurance company is generally limited to its investment and any earned but uncollected fees. The Company has not issued any investment performance guarantees to these VIEs or their investors. As of September 30, 2018, total investment and insurance assets under management of MCIM for unconsolidated VIEs were $6.6 billion, which includes funds held that will be used to settle claims for incurred losses.

 

At least $2.1 billion of the $6.6 billion was added since June 2017.  The investors who put money in recently will be anxiously awaiting the results of the loss reserve investigations.