MKL - Markel Corp

[Xerxes]

Here are some excerpt that i found interesting in the call:

Impressive ain't it. What a non-insurance operating business they built within Markel in a span of 5 years !

 

"Revenues from Markel Ventures surpassed $2 billion through the first nine months of 2020, compared to $1.6 billion last year. This increase reflects the contribution of revenues from our recent acquisition of Lansing Building Products, which we completed in late April, and the acquisition of VSC Fire & Security, which closed during the fourth quarter of 2019. Excluding the contributions of Lansing and VSC in 2020, operating revenues in our Markel Ventures operations decreased compared to 2019 as a result of decreased demand attributed to the economics of social disruption caused by the COVID-19 pandemic."

 

"EBITDA from Markel Ventures was $284 million for the first nine months of 2020, compared to $219 million last year, reflecting the contribution of Lansing and VSC, as well as growth and improved operating results at certain of our businesses. Looking at our consolidated results for the year. Our effective tax rate for the first nine months of 2020 was not meaningful due to the small pre-tax loss in the period. The effective tax rate was 22% for the nine months ended September 30, 2019."

 

"For your reference, I checked my notes from the third quarter year-to-date conference call from five years ago in 2015. In that year, we reported revenues from Markel Ventures of $784 million for the first nine months and EBITDA of $76 million. I don't remember the exact economic circumstances and conditions of 2015, but I'm pretty sure it didn't include dealing with the worldwide pandemic. Our efforts to build an enduring and resilient system at Markel continue to unfold."

 

 

[Xerxes]

Q3 Net investment gain/loss $539 million

Q3 Markel Venture $824 million top line

 

Q2 Net investment gain/loss $911 million

Q2 Markel Venture $678 million top line

 

Q1 Net investment gain/loss ($1.7 billion)

Q1 Markel Venture $511 million top line

 

Net investment gain/loss through Q3 = ($230 million)

 

From the conference call on buy-backs:

 

Unknown speaker

 

Hello, gentlemen. I have a why-not instead of a but-for. Ventures has been facing horrific conditions, whether they're fires or storms or COVID, and yet you have maintained and grown the equity of the company during this horrific period. Over my many decades in this business, I've seen many companies that had share repurchase plans, not buy, when the price was low but buy when the price was high.

 

I know you're very attuned to value when you make that decision. But if the skies are not perfectly blue now, but it seems like you are envisioning times when they're going to get a lot bluer than they are currently. The pricing is good. Ventures is doing well.

 

You feel good about all the insurance arms. Why not take the handcuffs off the statement that you're not open to buying shares back today? You've got cash, I believe, of $4.5 billion, I've never seen. If that's correct. I haven't seen that ratio to value of the company in your history.

 

Why wait for the last cloud to clear to have the ability to pull the trigger if you choose to do so? It doesn't mean you have to in the last quarter of the year, but you would have told the market that you want to have that arrow back in your quiver, and you may or may not use it.

 

Tom Gayner -- Co-Chief Executive Officer

 

Right. Charles, this is Tom. Thanks for the question. And really, the long tent in the pole from my point of view is the regulatory and rating agency environment that we continue to need to be sensitive to.

 

So in the environment which we continue to be in, the current growth rate of what we're experiencing in our Insurance business has regulators and rating agencies being very particular about the amount of capital we have and the form in which it is held. So we continue to work with them to try to make them as comfortable as we possibly can, and that's an ongoing process. And at the point where the growth rate slows down a little bit, that will actually free up sort of the regulatory capital and rating agency capital that we need to be sensitive to for the Insurance business. But other than that, I agree with everything you said.

 

Unknown speaker

 

Well, then the other signal would be insiders should consider doing heavy buying since they see things going so well.

 

Tom Gayner -- Co-Chief Executive Officer

 

From your mouth to God's ear.

 

Unknown speaker

 

Just give me the phone call. I can make it happen.

 

[chrispy]

Great back and forth - thanks for sharing.

 

I do not see MKL being particularly cheap with rates as low as they are and their inability to grow book value the past few years. Akre, who used to speak quite favorably about MKL, has been allowing the stake of MKL in his fund to decrease quite a bit over the recent years by never buying more while AUM increases.

[CorpRaider]

They could stop the insider selling first.  Looks like $7MM in sells over the last year (Mostly Richie Whit and the Markel boys) and ~$800K in purchases from one director.

[ValueMaven]

P/BV has compressed and is now 1.25x - modest underwriting losses and lower rates for their fixed-income sleeve have hurt.  The question is - is this structural, or a good time to get in to what many consider to be a mini-Berkshire.  'In His Image' from 2008 is a great article on Markel trying to mirror Berkshire. 

[clutch]

P/BV has compressed and is now 1.25x - modest underwriting losses and lower rates for their fixed-income sleeve have hurt.  The question is - is this structural, or a good time to get in to what many consider to be a mini-Berkshire.  'In His Image' from 2008 is a great article on Markel trying to mirror Berkshire.

 

But mirror Berkshire of when... you don't want to mirror an underperforming stock.

[Xerxes]

Discussion with Tom Gayner of Markel on a Podcast.

I found the second 30 min of the podcast super interesting.

 

https://www.listennotes.com/podcasts/we-study/tip332-long-term-investing-w--V9GLC_Dgbp/

[nwoodman]

Discussion with Tom Gayner of Markel on a Podcast.

I found the second 30 min of the podcast super interesting.

 

https://www.listennotes.com/podcasts/we-study/tip332-long-term-investing-w--V9GLC_Dgbp/

 

Thanks, it was a good interview. Tom Gayner’s integrity shines through. Not bad value at the current price IMHO.  It was a line ball between BRK and MKL, I opted for a bit of diversification. They should both do OK (10-12%) compounding from these levels.  Set and forget

 

cheers

nwoodman

[Spekulatius]

Discussion with Tom Gayner of Markel on a Podcast.

I found the second 30 min of the podcast super interesting.

 

https://www.listennotes.com/podcasts/we-study/tip332-long-term-investing-w--V9GLC_Dgbp/

 

Thanks, it was a good interview. Tom Gayner’s integrity shines through. Not bad value at the current price IMHO.  It was a line ball between BRK and MKL, I opted for a bit of diversification. They should both do OK (10-12%) compounding from these levels.  Set and forget

 

cheers

nwoodman

 

How do you get 10-12% from here? They have compounded book value at 8% CAGR in the last 5 years and with interest rates being low, I don’t see much more than that going forward Even worse, they take a lot of equity risk compared to other insurers. Assuming an 8% CAGR gain in book value, MKL is worth about book, but not more, imo.

[Ismael]

Discussion with Tom Gayner of Markel on a Podcast.

I found the second 30 min of the podcast super interesting.

 

https://www.listennotes.com/podcasts/we-study/tip332-long-term-investing-w--V9GLC_Dgbp/

 

Thanks, it was a good interview. Tom Gayner’s integrity shines through. Not bad value at the current price IMHO.  It was a line ball between BRK and MKL, I opted for a bit of diversification. They should both do OK (10-12%) compounding from these levels.  Set and forget

 

cheers

nwoodman

 

How do you get 10-12% from here? They have compounded book value at 8% CAGR in the last 5 years and with interest rates being low, I don’t see much more than that going forward Even worse, they take a lot of equity risk compared to other insurers. Assuming an 8% CAGR gain in book value, MKL is worth about book, but not more, imo.

 

Isn't the 8% CAGR the result of problems with reinsurance and ILS acquisitions?  Do you think they will continue to have problems with these subs?  Low interest rates isn't a very compelling argument to be bearish on the stock.

[skanjete]

The low interest rates makes their float worth less.

 

So in this climate of low interest rates, it's normal that P/B ratio's of insurers or banks are falling.

[Spekulatius]

The low interest rates makes their float worth less.

 

So in this climate of low interest rates, it's normal that P/B ratio's of insurers or banks are falling.

 

Yes, that’s a simple fact. P/B ratios have been falling for most insurers, except short tail (auto) because the profits from investing the float are reduced in a low interest rate environment.

[petec]

The low interest rates makes their float worth less.

 

So in this climate of low interest rates, it's normal that P/B ratio's of insurers or banks are falling.

 

Yes, that’s a simple fact. P/B ratios have been falling for most insurers, except short tail (auto) because the profits from investing the float are reduced in a low interest rate environment.

 

Actually it's not *that* simple a fact. Discounts rates should theoretically fall with interest rates. If your discount rate is 10% then you need a stock to have a 10% ROE to trade at 1xBV. But if your discount rate is 6% then it only needs a 6% ROE to trade at 1x.

[Broeb22]

The low interest rates makes their float worth less.

 

So in this climate of low interest rates, it's normal that P/B ratio's of insurers or banks are falling.

 

Yes, that’s a simple fact. P/B ratios have been falling for most insurers, except short tail (auto) because the profits from investing the float are reduced in a low interest rate environment.

 

Actually it's not *that* simple a fact. Discounts rates should theoretically fall with interest rates. If your discount rate is 10% then you need a stock to have a 10% ROE to trade at 1xBV. But if your discount rate is 6% then it only needs a 6% ROE to trade at 1x.

 

+1 It's like people forget that all the arguments supporting why no-growth CPG/industrial companies trade at 25x don't matter for financial companies just because part of their earnings are exposed to low interest rates.

[skanjete]

The low interest rates makes their float worth less.

 

So in this climate of low interest rates, it's normal that P/B ratio's of insurers or banks are falling.

 

Yes, that’s a simple fact. P/B ratios have been falling for most insurers, except short tail (auto) because the profits from investing the float are reduced in a low interest rate environment.

 

Actually it's not *that* simple a fact. Discounts rates should theoretically fall with interest rates. If your discount rate is 10% then you need a stock to have a 10% ROE to trade at 1xBV. But if your discount rate is 6% then it only needs a 6% ROE to trade at 1x.

 

That's exactly what I'm saying. With the low interest rates, their float doesn't generate income as it used to, and ROE has already fallen to well lower than 10% in the insurance industry.

 

The low interest rates are also the reason the combined ratios are structurally lower than they used to be in the 80's for example. Back then, inflation and competition pushed CR's higher, but interest rates (and thus profit from float) could compensate for the losses in underwriting.

 

From here one, income will have to come even more from underwriting profitability in stead of float. The question is if underwriting profit on its own can produce ROE's of 10%. I don't think this is possible for the industry as a whole.

[petec]

The low interest rates makes their float worth less.

 

So in this climate of low interest rates, it's normal that P/B ratio's of insurers or banks are falling.

 

Yes, that’s a simple fact. P/B ratios have been falling for most insurers, except short tail (auto) because the profits from investing the float are reduced in a low interest rate environment.

 

Actually it's not *that* simple a fact. Discounts rates should theoretically fall with interest rates. If your discount rate is 10% then you need a stock to have a 10% ROE to trade at 1xBV. But if your discount rate is 6% then it only needs a 6% ROE to trade at 1x.

 

That's exactly what I'm saying. With the low interest rates, their float doesn't generate income as it used to, and ROE has already fallen to well lower than 10% in the insurance industry.

 

The low interest rates are also the reason the combined ratios are structurally lower than they used to be in the 80's for example. Back then, inflation and competition pushed CR's higher, but interest rates (and thus profit from float) could compensate for the losses in underwriting.

 

From here one, income will have to come even more from underwriting profitability in stead of float. The question is if underwriting profit on its own can produce ROE's of 10%. I don't think this is possible for the industry as a whole.

 

I agree with you about return on float and also combined ratios.

 

But you said that because return on float is lower, p/bv multiples are lower.

 

That does not necessarily follow. ROE falls as interest rates fall, but so (in theory) does the rate at which profits are discounted for the purposes of valuing equity, so the same p/bv multiple may well be justifiable even with a lower ROE.

 

 

[Ismael]

The low interest rates makes their float worth less.

 

So in this climate of low interest rates, it's normal that P/B ratio's of insurers or banks are falling.

 

Yes, that’s a simple fact. P/B ratios have been falling for most insurers, except short tail (auto) because the profits from investing the float are reduced in a low interest rate environment.

 

Actually it's not *that* simple a fact. Discounts rates should theoretically fall with interest rates. If your discount rate is 10% then you need a stock to have a 10% ROE to trade at 1xBV. But if your discount rate is 6% then it only needs a 6% ROE to trade at 1x.

 

That's exactly what I'm saying. With the low interest rates, their float doesn't generate income as it used to, and ROE has already fallen to well lower than 10% in the insurance industry.

 

The low interest rates are also the reason the combined ratios are structurally lower than they used to be in the 80's for example. Back then, inflation and competition pushed CR's higher, but interest rates (and thus profit from float) could compensate for the losses in underwriting.

 

From here one, income will have to come even more from underwriting profitability in stead of float. The question is if underwriting profit on its own can produce ROE's of 10%. I don't think this is possible for the industry as a whole.

 

I agree with you about return on float and also combined ratios.

 

But you said that because return on float is lower, p/bv multiples are lower.

 

That does not necessarily follow. ROE falls as interest rates fall, but so (in theory) does the rate at which profits are discounted for the purposes of valuing equity, so the same p/bv multiple may well be justifiable even with a lower ROE.

 

Reasonable people can disagree on the interest rates impact.  The ROE impact of poor performance on ILS and reinsurance is a lot more tangible though.  Anyone have confidence they can turn these businesses around?

[nwoodman]

Decent set of results

 

https://markel.gcs-web.com/static-files/e6a8a5d3-3a2f-4a25-9cf9-e0de57ba6615

 

BVPS $885

 

P/B 1.12

 

Strong CR of 89% Q4

 

 

Cheers

nwoodman

[thepupil]

the de-rating here has been quite nice (as a prospective shareholder/painful as a shareholder), from 1.8x (August 2018) ---> 1.17x (now)

 

I think it could go lower and don't know this as well as I'd like, but I've initiated a small position today.

[Spekulatius]

the de-rating here has been quite nice (as a prospective shareholder/painful as a shareholder), from 1.8x (August 2018) ---> 1.17x (now)

 

I think it could go lower and don't know this as well as I'd like, but I've initiated a small position today.

 

The derating is found around the entire insurance space and did not just occur for MKL. For example ORI used to trade a premium to book and when I bought it, it was at 0.7x book and ORI even benefits from lower interest rates (refinances occur when interest rates go lower and ORI title insurance business benefits from this. MKL is really hurt by lower interest rates as evident by the lower book value growth for the last couple of years.

[thepupil]

yep, and I own ORI in bigger size (thanks to you) and far more Berkshire (much more of an operating business) and always preferred Berkshire to Markel (lwas kind of hating on MArkel a few years ago https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/mkl-markel-corp/msg318546/#msg318546).

 

But  MKL's compounder premium has gone away. For example, to take August 2018 (when MKL peaked at 1.8x) the S&P 500 Insurance Index was at 1.4x, now it's at 1.17x. So not only has the industry de-rated, but MKL has come to trade down in line with it. they've had some issues, but I prefer to start when things are a little hairy rather than when it's all butterflies and roses. it's not clear to me that Markel is a commodity insurance co, think that they may earn > industry returns over time.

 

it's a starter for me.

[vince]

.

[CorpRaider]

Well said Vince.  My sentiments exactly.  ;D

[coc]

Markel is doing pretty well all things considered. The ILS business has not been a home run. But the insurance business is in great shape, facing a hard market, and Markel Ventures is probably worth upwards of $3-4 billion now. With decent interest rates, not only will they be able to make a lot more money, but the stock will be rated differently.

 

And if the do make the ILS business work...

[insight]

Discussion with Tom Gayner of Markel on a Podcast.

I found the second 30 min of the podcast super interesting.

 

https://www.listennotes.com/podcasts/we-study/tip332-long-term-investing-w--V9GLC_Dgbp/

 

Thanks, it was a good interview. Tom Gayner’s integrity shines through. Not bad value at the current price IMHO.  It was a line ball between BRK and MKL, I opted for a bit of diversification. They should both do OK (10-12%) compounding from these levels.  Set and forget

 

cheers

nwoodman

 

How do you get 10-12% from here? They have compounded book value at 8% CAGR in the last 5 years and with interest rates being low, I don’t see much more than that going forward Even worse, they take a lot of equity risk compared to other insurers. Assuming an 8% CAGR gain in book value, MKL is worth about book, but not more, imo.

Book value CAGR has been closer to 10% the last 5 years.