MKL - Markel Corp

[undervalued]

Can someone help me understand why MKL is getting particularly punished today?

 

It’s not just MKL, TRV and other insurance cos are also getting crushed. I think it’s due to the huge rate cut, which is going to impact their fixed income earnings. neither MKL nor TRV are particularly vulnerable because both are more short tail insurers, it’s the long tail insurers that can’t reprice their policies  and have huge issues.

 

Is there a quick way to see which you insurers are long vs short tail? Thank you for the reply.

[Spekulatius]

Can someone help me understand why MKL is getting particularly punished today?

 

It’s not just MKL, TRV and other insurance cos are also getting crushed. I think it’s due to the huge rate cut, which is going to impact their fixed income earnings. neither MKL nor TRV are particularly vulnerable because both are more short tail insurers, it’s the long tail insurers that can’t reprice their policies  and have huge issues.

 

Is there a quick way to see which you insurers are long vs short tail? Thank you for the reply.

 

I always look at their premiums vs claims + reserves + customer payables. In TRV’s case it’s $28B premium / $71B in claims. That’s a ~2.5 year tail.

 

This is obviously very simplified , but if you compare different insurance cos, this heuristic is helpful. I was looking at MKL as well, but haven’t done any work. It could be had for ~$805/ share, however MKL also has equity exposure, which TRV little off (just a few billion in total). TRV very likely will show a decent increase in book value because bonds are moving up with lower interest rates, unless spreads are blowing up for the high grade stuff even.

[TwoCitiesCapital]

Can someone help me understand why MKL is getting particularly punished today?

 

It’s not just MKL, TRV and other insurance cos are also getting crushed. I think it’s due to the huge rate cut, which is going to impact their fixed income earnings. neither MKL nor TRV are particularly vulnerable because both are more short tail insurers, it’s the long tail insurers that can’t reprice their policies  and have huge issues.

 

 

I always look at their premiums vs claims + reserves + customer payables. In TRV’s case it’s $28B premium / $71B in claims. That’s a ~2.5 year tail.

 

This is obviously very simplified , but if you compare different insurance cos, this heuristic is helpful. I was looking at MKL as well, but haven’t done any work. It could be had for ~$805/ share, however MKL also has equity exposure, which TRV little off (just a few billion in total). TRV very likely will show a decent increase in book value because bonds are moving up with lower interest rates, unless spreads are blowing up for the high grade stuff even.

 

Is there a quick way to see which you insurers are long vs short tail? Thank you for the reply.

 

Spreads are definitely blowing out on the high grade stuff. Even mortgages and munis are suffer right now. Probably won't remain the case ,but is so presently.

[Pedro]

I imagine insurers including MKL are trying to quantify their exposure from their policy holders being forced to shut down via civil authority order due to COVID 19. I forsee weak Q1/Q2 results on the underwriting side due to the cumulative effect of potential claims payments from interruption coverage across all policy holders.  I can't see a situation where combines across the industry don't deteriorate.

 

I see COVID 19 as a cat event for the industry so maybe mr market does too an is anticipating poor combines to start the year.

 

[Spekulatius]

I imagine insurers including MKL are trying to quantify their exposure from their policy holders being forced to shut down via civil authority order due to COVID 19. I forsee weak Q1/Q2 results on the underwriting side due to the cumulative effect of potential claims payments from interruption coverage across all policy holders.  I can't see a situation where combines across the industry don't deteriorate.

 

I see COVID 19 as a cat event for the industry so maybe mr market does too an is anticipating poor combines to start the year.

 

Interesting, didn’t think of this. I don’t think TRV has written much business interruption insurance they have some worker’s comp, but mostly surety, home owners and car insurance. Perhaps there is something hiding that I am not aware off.

 

They do write worker’s compensation insurance which tends to do worse in a recession, but they can’t be an existential threat. TRV did navigate the GFC quite well.

[obtuse_investor]

Markel is now selling at similar valuation as Berkshire.

 

If you wanted to start buying more of these two, which one would you choose?

 

I currently own both (about equal amounts). I am thinking to pick Markel because of longer runway and a much younger company.

 

 

[Jurgis]

Markel is now selling at similar valuation as Berkshire.

 

If you wanted to start buying more of these two, which one would you choose?

 

I currently own both (about equal amounts). I am thinking to pick Markel because of longer runway and a much younger company.

 

There are couple issues with Markel vs BRK:

- Markel's fully owned business part is much smaller and lower quality than BRK's.

- With low/zero/negative interest rates, fixed income from (re)insurance is low and float is not worth a lot.

- (Re)insurance has had weak pricing. This may change, but overall (re)insurance returns have been weak.

 

Personally, I'd probably rather buy a stock portfolio via good mutual fund rather than buy MKL that's a stock portfolio + (re)insurance and fixed income.

 

I'm not as positive on BRK as a lot of people are either. Like you said, the size is an issue. There are other issues (Buffett's age, conservatism, portfolio composition, etc.).

 

I would not be surprised if BRK and MKL won't outperform the index long term coming out of the crisis.

 

Disclosure: I hold BRK position. I have sold most of MKL position. I don't plan to buy MKL. I may add to BRK for the conservative side of my portfolio. I may be totally wrong about everything above.

[intensityjp]

I imagine insurers including MKL are trying to quantify their exposure from their policy holders being forced to shut down via civil authority order due to COVID 19. I forsee weak Q1/Q2 results on the underwriting side due to the cumulative effect of potential claims payments from interruption coverage across all policy holders.  I can't see a situation where combines across the industry don't deteriorate.

 

I see COVID 19 as a cat event for the industry so maybe mr market does too an is anticipating poor combines to start the year.

 

From what I understand, most interruption coverage has an exclusion for 'viruses and bacteria'. I have personally seen this exclusion in Markel's property insurance policy docs.  Interruption coverage usually only kicks in if it is from property loss.

 

On the contrary, P&C may have less claims due to the drop in business activity.

[Jurgis]

insurance

[inˈSHo͝orəns]

NOUN

 

Business that takes your money when you are doing fine and does not pay out when you are not.

[Cigarbutt]

I imagine insurers including MKL are trying to quantify their exposure from their policy holders being forced to shut down via civil authority order due to COVID 19. I forsee weak Q1/Q2 results on the underwriting side due to the cumulative effect of potential claims payments from interruption coverage across all policy holders.  I can't see a situation where combines across the industry don't deteriorate.

 

I see COVID 19 as a cat event for the industry so maybe mr market does too an is anticipating poor combines to start the year.

 

From what I understand, most interruption coverage has an exclusion for 'viruses and bacteria'. I have personally seen this exclusion in Markel's property insurance policy docs.  Interruption coverage usually only kicks in if it is from property loss.

 

On the contrary, P&C may have less claims due to the drop in business activity.

Contracts are typically clear (inclusion and exclusion criteria) and, AFAIK, should not be a source of losses apart from specific policies, but i haven't looked in detail recently for Markel. In the US, there is the risk of an expanded definition of 'social inflation' but it does not seem like a material threat at this point.

https://www.insurancejournal.com/news/national/2020/03/19/561705.htm

@Jurgis

That's probably why average combined ratios at the industry level (property and casualty) in the last 10 years stand above 100%. 8)

[obtuse_investor]

insurance

[inˈSHo͝orəns]

NOUN

 

Business that takes your money when you are doing fine and does not pay out when you are not.

 

Hah! That's why it is better to take the other side of that trade-- own insurance companies.

[obtuse_investor]

Markel is now selling at similar valuation as Berkshire.

 

If you wanted to start buying more of these two, which one would you choose?

 

I currently own both (about equal amounts). I am thinking to pick Markel because of longer runway and a much younger company.

 

There are couple issues with Markel vs BRK:

- Markel's fully owned business part is much smaller and lower quality than BRK's.

- With low/zero/negative interest rates, fixed income from (re)insurance is low and float is not worth a lot.

- (Re)insurance has had weak pricing. This may change, but overall (re)insurance returns have been weak.

 

Personally, I'd probably rather buy a stock portfolio via good mutual fund rather than buy MKL that's a stock portfolio + (re)insurance and fixed income.

 

I'm not as positive on BRK as a lot of people are either. Like you said, the size is an issue. There are other issues (Buffett's age, conservatism, portfolio composition, etc.).

 

I would not be surprised if BRK and MKL won't outperform the index long term coming out of the crisis.

 

Disclosure: I hold BRK position. I have sold most of MKL position. I don't plan to buy MKL. I may add to BRK for the conservative side of my portfolio. I may be totally wrong about everything above.

 

Thanks for your perspective, Jurgis.

 

I find that both these businesses are rather anti-fragile. That is, they get stronger when put under stress. There is no shortage of stress these days. Berkshire gets stronger in large bursts (thanks to Warren's elephant gun), while Markel gets stronger in a slow methodical manner (thanks to Ventures, new business like ILS, algorithmic investing of equity portfolio).

 

I ran a twitter poll for the same question:

FWIW, BRK.B 60%; MKL 20%; Both: 20%

[menlo]

For what it's worth, I did a quick word search of "pandemic" in the latest annual reports/10-Ks for Berkshire, Fairfax and Markel.  If one assumes that finding "pandemic" in the report/10-K suggests claims exposure, then Fairfax and Markel have exposure and Berkshire does not.

 

Very curious what others find and/or know.

[scorpioncapital]

Do you mean markel sold policies for which it specifically included pandemic risk ? That could indeed be pricey if true.

I would think this type of insurance has more chance of having to payout - " Civil authority coverage applies when access to property is prevented by government action."

Here is a typical clause - https://www.markelinsurance.com/-/media/specialty/agents-sales-materials/forms/mcp040.pdf?la=en

 

The funny thing is it always refers to physical damage and also if you cannot access the surrounding area. Very weird conditions but it will be an interesting fight between constitutional and contract law and the desire of government to offload risk to insurers for which they did not charge enough premium because they did not think they were insuring this particular covid risk.

[obtuse_investor]

If the government is successful in passing the risk off to insurance companies then in one month they’ll have to bail out the sector.

 

Interesting times we live in.

 

~~

In FFH AGM Prem mentioned that there was no known pandemic risk on their books. They are expecting their combined ration was below 100 for Q1.

 

 

[StubbleJumper]

If the government is successful in passing the risk off to insurance companies then in one month they’ll have to bail out the sector.

 

Interesting times we live in.

 

~~

In FFH AGM Prem mentioned that there was no known pandemic risk on their books. They are expecting their combined ration was below 100 for Q1.

 

 

Yes, a bailout of some insurance companies would probably be necessary.  But, if I were a bureaucrat providing advice to the US government, my larger concern would be if you take the opportunity to stick it to the insurance companies during covid, you'll end up with no insurance companies who would ever write another BII policy in the US in the future (why would you take that risk ever again if you cannot reasonably predict your losses?).  So, the federal government would end up needing to establish a federal BII program similar to the national flood insurance program (flooding is another peril that insurers don't like to write because it's almost impossible to price it properly).

 

If you break it, you own it.

 

 

SJ

[matts]

It might be a stupid thing for the government to do, but that doesn't mean they won't do it. Especially in an election year.

 

If you dismiss this risk as highly unlikely and not worth haircutting, I'd reconsider.

 

If you do consider the risk, then the lower bound of IV estimates of many insurers goes much much lower.

 

Lawyers will be the big winners here.

 

 

 

[Williams406]

Quite a bit of biz interruption discussion in the 1Q WR Berkley call: https://finance.yahoo.com/news/edited-transcript-wrb-earnings-conference-074259769.html

[scorpioncapital]

Some have suggested for the government to give stimulus funds to the insurer and the insurer acts like a servicer, like mortgage servicing, to disperse the funds to policyholders based on specific circumstances of the losses. Kind of like a gatekeeper. But I have no idea why this is more efficient than just wire funds into bank accounts for businesses that are interrupted. That should be easy enough.

[StubbleJumper]

Some have suggested for the government to give stimulus funds to the insurer and the insurer acts like a servicer, like mortgage servicing, to disperse the funds to policyholders based on specific circumstances of the losses. Kind of like a gatekeeper. But I have no idea why this is more efficient than just wire funds into bank accounts for businesses that are interrupted. That should be easy enough.

 

 

The best explanation that I can imagine is that the fact that a client paid an insurance premium indicates that he was actively managing his business risk, and therefore might be more meritorious of federal assistance than somebody who was more cavalier and failed to purchase an insurance policy.  What is more, the insurance policies that businesses purchased have other characteristics that could be used in a federal program, such as a policy max, a deductible or other cost sharing mechanisms.  A potential federal program administrator could hold the view that the federal government will only provide a coverage expansion to an existing policy by adding Covid as a specified peril for federal coverage, with all of the other parameters of the existing policy remaining constant.

 

TL;DR: God helps those who help themselves.

 

 

SJ

[scorpioncapital]

sure but they should set up the program with the insurers instead of tanking the stocks thinking there may or may not be a 'bailout'.

Btw, some countries have just paid every business of some size, no matter what. But perhaps it won't work in a giant country like USA.

[GregS]

It might be a stupid thing for the government to do, but that doesn't mean they won't do it. Especially in an election year.

 

If you dismiss this risk as highly unlikely and not worth haircutting, I'd reconsider.

 

If you do consider the risk, then the lower bound of IV estimates of many insurers goes much much lower.

 

Lawyers will be the big winners here.

 

A retroactive change to the contracts would be unconstitutional, full stop. Of course, that doesn't prevent the market from imposing a discount until it's resolved.

 

Poor drafting is a larger risk, and there will be judges that make stupid decisions, but insurance companies will win most of these suits or settle on favorable terms eventually.  Plaintiffs' lawyers are selling their clients hard on a hope and a prayer.  Clients getting played.

[Spekulatius]

It might be a stupid thing for the government to do, but that doesn't mean they won't do it. Especially in an election year.

 

If you dismiss this risk as highly unlikely and not worth haircutting, I'd reconsider.

 

If you do consider the risk, then the lower bound of IV estimates of many insurers goes much much lower.

 

Lawyers will be the big winners here.

 

A retroactive change to the contracts would be unconstitutional, full stop. Of course, that doesn't prevent the market from imposing a discount until it's resolved.

 

Poor drafting is a larger risk, and there will be judges that make stupid decisions, but insurance companies will win most of these suits or settle on favorable terms eventually.  Plaintiffs' lawyers are selling their clients hard on a hope and a prayer.  Clients getting played.

 

I have heard the wording is pretty standardized and precludes pandemics. The wording was drafted by national insurers organization after the 2003 SARS episode. I willing to bet that this is just noise.

[scorpioncapital]

In any case the government would have to announce a deal with Insurers as a servicing program for pandemic fund disbursement. To make it happen as a disorganized let the insurer fail ,oh and then we will swoop in as the lender of last resort is ridiculously short sighted.

[KFS]

Q1 2020 

 

https://www.markel.com/about-markel/press-releases/markel-reports-first-quarter-2020-results-16006

 

https://markel.gcs-web.com/static-files/31926a82-2e14-4333-9c03-e697a83fbce4