MKL - Markel Corp

[ap1234]

"Except Markel used overvalued stock in the deal, and both LUK & JEF were undervalued relatively the same.  Cheers!" 

 

Parsad, can you provide some additional color on your comments re: Markel being overvalued. I'd love to hear your thoughts on this as you've followed these businesses for a long time and I'm new to the space.

 

I only recently started looking at Markel. However, from my initial cursory analysis, it appears that Markel was not significantly overvalued.

 

-The company has historically been able to grow BVPS in well in excess of 10%/year over a fully business cycle.

-It's a rare insurance business that seems to generate meaningful profitability from both underwriting and investing.

-The company is increasing their equity weight in their investment portfolio

-The P&C insurance market has been in a hard market since '05. Similar with US housing, it appears to be a question of when and not if the insurance market ultimately hardens. According to management, they will perform even better than the industry average during a hard market given their particular insurance lines. 

-At last year's Markel breakfast in Omaha I recall mgmt. stating that they believed the company was worth between 1.5x-2xBV over a full cycle.

-On a side note, over time I imagine BV will become less meaningul of a proxy for value as Markel Ventures increases in size.

 

As of Q3 2012, Markel had a BVPS of $395. Based upon a closing price of $486 yesterday, the company was trading at 1.2x BV.

 

Why do you think 1.2xBV for Markel is overvalued? What is a fair price for the business?

 

 

 

[racemize]

 

Why do you think 1.2xBV for Markel is overvalued? What is a fair price for the business?

 

I think he just means overvalued relative to LUK's issuance, which was below book value and has a similar compounding record.

[giofranchi]

Why do you think 1.2xBV for Markel is overvalued? What is a fair price for the business?

 

ap1234,

I clearly cannot speak for Parsad, but, if I might guess, I would suggest that “overvalued” means MKL purchased all Alterra shares at book value, using its own shares that were trading at 1.2 x book value. So they were “overvalued”, if compared to what MKL was able to buy with them.

Parsad, please forgive me, if I am way off the mark!

MKL actually increased BV per share at a 17% CAGR since 1991 (21 years). Nothing that compounds BV per share at 17% is overvalued, I mean in “absolute” terms, selling at 1.2 x BV.

Furthermore, with the Q4 2012 end of the year rally in stocks, and with a low exposure of MKL to Sandy, I wouldn’t be surprised to see its BV per share at $405 by year end, that’s to say 10 days from now.

Today I bought a small position, that I plan to significantly increase in the future, at $445: $445 / $405 = 1.1 x BV. Or Buffett’s (former) threshold to buyback BRK shares.

MKL is a very good business and I like the Alterra deal (at least for what I could see on its presentation).

I look forward to averaging down aggressively in the future.

 

giofranchi

[giofranchi]

 

Why do you think 1.2xBV for Markel is overvalued? What is a fair price for the business?

 

I think he just means overvalued relative to LUK's issuance, which was below book value and has a similar compounding record.

 

racemize,

sorry! I hand't read your post yet! ;)

 

giofranchi

[masseyrock]

I'm not jumping up and down with excitement that they paid just over 1x BV for a business where comps are averaging <0.9x but the opportunity to recast the investment portfolio and add $1.5-2.0b to Gayner's portfolio should create value.  It doesn't seem Alterra was necessarily shopping themselves around either so I'm a bit perplexed as to why / where MKL sees such a value opportunity.

 

By my math, BV after the deal closes (and including 4Q12 portfolio gains / Sandy losses) should be ~$420 depending on purchase accounting adjustments and the inevitable reserves that will be added.  So I think we are below 1.1x today.  Risk has increased given the size of the deal and the inevitable hiccups (hopefully this is another Terra Nova).

 

Back of the envelope earnings multiple on the investment portfolio: $1,150 / share x 5% after-tax return = $58 or 7.7x.  This of course excludes any earnings from underwriting.

[jeffmori7]

Some key points for the merger:

1. Purchase is at 1x book value of Alterra.

2. Total investment portfolio doubles from $8.2 b to 16.4 b

3. Current equity portion of MKL portfolio is 25%. Alterra's investment portfolio is all fixed-income. The equity portion of the combined portfolio will be 14%. If MKL increases the equity portion of the combined portfolio to 25%, about $2 billion can be used to purchase equities. Based on MKL's historical investment performance, the value will be created.

 

True, and about your third point, they will also have the possibility to put more money to work into Markel Ventures.

[berkshiremystery]

Why do you think 1.2xBV for Markel is overvalued? What is a fair price for the business?

 

ap1234,

I clearly cannot speak for Parsad, but, if I might guess, I would suggest that “overvalued” means MKL purchased all Alterra shares at book value, using its own shares that were trading at 1.2 x book value. So they were “overvalued”, if compared to what MKL was able to buy with them.

Parsad, please forgive me, if I am way off the mark!

MKL actually increased BV per share at a 17% CAGR since 1991 (21 years). Nothing that compounds BV per share at 17% is overvalued, I mean in “absolute” terms, selling at 1.2 x BV.

Furthermore, with the Q4 2012 end of the year rally in stocks, and with a low exposure of MKL to Sandy, I wouldn’t be surprised to see its BV per share at $405 by year end, that’s to say 10 days from now.

Today I bought a small position, that I plan to significantly increase in the future, at $445: $445 / $405 = 1.1 x BV. Or Buffett’s (former) threshold to buyback BRK shares.

MKL is a very good business and I like the Alterra deal (at least for what I could see on its presentation).

I look forward to averaging down aggressively in the future.

 

giofranchi

 

Gio,...

 

I had admired Markel for probably over a decade, since I ever heard of them the first time. And I have religiously studied their annual reports, which are a master piece of integrity. They are in my opinion in the crown league of owner run insurance companies/i.e. jockey stocks (BRK, FFH, MKL, LUK). I purchased MKL shares after the financial crises and owned them til last year,... but redeployed my MKL funds into much cheaper BAC. So, I would agree with Sanjeev, that MKL is currently in my opinion not extremely cheap. But their current deal is good, because they do the purchase with some nicely valued stock.

 

 

[ShahKhezri]

Perfect example of this is Y/TRH last year.  Y sold off about 10% post announcement and it happened around this time last year.  If you listen to the CC, you can tell this is not another Terra Nova 1) if they learned their lesson and 2) looks like they don't believe loss reserves are at-risk. 

 

I bought Y last year and sold last month for a decent gain.  I already own a position in MKL, bought last year at $350, still have no opinion on this transaction, but might add when I form an opinion.  If you think Gaynor is a decent investor and that the equity markets are reasonably valued, it will work. 

 

I happen to think Gaynor is good for MKL and specially this type of equity environment.

 

Jay Cohen

Q

Great. Let's see, I guess when I think about the costs associated with the cash, I think it's relatively low. You

wouldn't have to raise any debt for this $1 billion plus cash payment. Is that correct?

 

A

No, we don't need to raise any debt for this.

 

Jay Cohen

 

Q

Okay.

 

A

We'll give up the yields on those three month treasury bonds.

 

[obtuse_investor]

Based on Pro-forma book value per share of $424, after today's drop MKL is trading at 1.03xBook.

 

This is an intriguingly low multiple if the deal goes through.

 

It is an incredible steal if the ALTE deal doesn't go through because MKL was trading 1.22xBook yesterday, before the deal was announced...

 

[Crip1]

Well...this clears everything up quite nicely.

 

http://www.fool.com/investing/general/2012/12/19/a-brutal-beating-for-baby-berkshire.aspx

 

It's not that I think he's right or wrong, but it's just that the individual in the video shows nothing more than the most superficial knowledge of what the he** he's talking about.

 

-Crip

 

[giofranchi]

Why do you think 1.2xBV for Markel is overvalued? What is a fair price for the business?

 

ap1234,

I clearly cannot speak for Parsad, but, if I might guess, I would suggest that “overvalued” means MKL purchased all Alterra shares at book value, using its own shares that were trading at 1.2 x book value. So they were “overvalued”, if compared to what MKL was able to buy with them.

Parsad, please forgive me, if I am way off the mark!

MKL actually increased BV per share at a 17% CAGR since 1991 (21 years). Nothing that compounds BV per share at 17% is overvalued, I mean in “absolute” terms, selling at 1.2 x BV.

Furthermore, with the Q4 2012 end of the year rally in stocks, and with a low exposure of MKL to Sandy, I wouldn’t be surprised to see its BV per share at $405 by year end, that’s to say 10 days from now.

Today I bought a small position, that I plan to significantly increase in the future, at $445: $445 / $405 = 1.1 x BV. Or Buffett’s (former) threshold to buyback BRK shares.

MKL is a very good business and I like the Alterra deal (at least for what I could see on its presentation).

I look forward to averaging down aggressively in the future.

 

giofranchi

 

Gio,...

 

I had admired Markel for probably over a decade, since I ever heard of them the first time. And I have religiously studied their annual reports, which are a master piece of integrity. They are in my opinion in the crown league of owner run insurance companies/i.e. jockey stocks (BRK, FFH, MKL, LUK). I purchased MKL shares after the financial crises and owned them til last year,... but redeployed my MKL funds into much cheaper BAC. So, I would agree with Sanjeev, that MKL is currently in my opinion not extremely cheap. But their current deal is good, because they do the purchase with some nicely valued stock.

 

Hi berkshiremystery,

I have absolutely no doubt that BAC right now is much more undervalued that MKL (or at least it was a few days ago: congratulations to all of you for the very nice rise in BAC stock price!). But you also know that I just don’t jump from an undervalued stock to another. I know and understand well it is a very sound way to make a lot of money, but I just don’t enjoy the process… Instead, what I like is running businesses, which generate some free cash flow, and use that cash to buy other businesses, that become parts of my own firm (or, at least, I like to think about them that way! Call me delusional…). Therefore, I wait for the right price, I buy, and then I very seldom sell. From this it immediately follows the great emphasis I put on knowing the management very well, on understanding what they are doing (how and why), and on trusting them 100%. I never start a project, within the two businesses that I personally run, if I don’t have the right people in place. Why should I invest differently?

I know that striving to maximize the fcf I can extract from my businesses, using it to purchase owner/operators at good prices, stick with them, and constantly increasing my firm ownership of those businesses over time, will surely turn out to be a much slower way to accumulate wealth, than jumping opportunistically from one undervalued stock to another. But that’s what I like to do! And I literally “tap-dance” to work every morning: why should I change something that makes me feel so good?! :)

Just for the sake of completeness, it is not true that I never sell: but, when in fact I do sell, it is to adjust my firm’s portfolio to the overall market exposure I want it to maintain. As I have already said, Sir John Templeton’s “Yale Plan” still makes great sense to me, and I try to follow it as best as I can. Look, with the exception of the two businesses I fully control, my firm’s other investments are all listed in some stock exchange: to believe they are not subject to market risk is dangerous and simply not true.

 

Finally, I would really like to know what twacowfca thinks about Markel and their new deal with Alterra: very few people are as knowledgeable as twacowfca about the insurance industry, so his opinion would be greatly appreciated!

Thank you,

 

giofranchi

 

[steph]

This is a very smart move from Markel.  I have been surprised that there hasn't been more m&a activity in this sector with so many companies trading with large discounts to book.

Buying cheap insurance stocks today makes a lot of sense for every investor, but makes even more sense for a player like Markel since they can extract synergies out of this deal.

 

[twacowfca]

Why do you think 1.2xBV for Markel is overvalued? What is a fair price for the business?

 

ap1234,

I clearly cannot speak for Parsad, but, if I might guess, I would suggest that “overvalued” means MKL purchased all Alterra shares at book value, using its own shares that were trading at 1.2 x book value. So they were “overvalued”, if compared to what MKL was able to buy with them.

Parsad, please forgive me, if I am way off the mark!

MKL actually increased BV per share at a 17% CAGR since 1991 (21 years). Nothing that compounds BV per share at 17% is overvalued, I mean in “absolute” terms, selling at 1.2 x BV.

Furthermore, with the Q4 2012 end of the year rally in stocks, and with a low exposure of MKL to Sandy, I wouldn’t be surprised to see its BV per share at $405 by year end, that’s to say 10 days from now.

Today I bought a small position, that I plan to significantly increase in the future, at $445: $445 / $405 = 1.1 x BV. Or Buffett’s (former) threshold to buyback BRK shares.

MKL is a very good business and I like the Alterra deal (at least for what I could see on its presentation).

I look forward to averaging down aggressively in the future.

 

giofranchi

 

Gio,...

 

I had admired Markel for probably over a decade, since I ever heard of them the first time. And I have religiously studied their annual reports, which are a master piece of integrity. They are in my opinion in the crown league of owner run insurance companies/i.e. jockey stocks (BRK, FFH, MKL, LUK). I purchased MKL shares after the financial crises and owned them til last year,... but redeployed my MKL funds into much cheaper BAC. So, I would agree with Sanjeev, that MKL is currently in my opinion not extremely cheap. But their current deal is good, because they do the purchase with some nicely valued stock.

 

Hi berkshiremystery,

I have absolutely no doubt that BAC right now is much more undervalued that MKL (or at least it was a few days ago: congratulations to all of you for the very nice rise in BAC stock price!). But you also know that I just don’t jump from an undervalued stock to another. I know and understand well it is a very sound way to make a lot of money, but I just don’t enjoy the process… Instead, what I like is running businesses, which generate some free cash flow, and use that cash to buy other businesses, that become parts of my own firm (or, at least, I like to think about them that way! Call me delusional…). Therefore, I wait for the right price, I buy, and then I very seldom sell. From this it immediately follows the great emphasis I put on knowing the management very well, on understanding what they are doing (how and why), and on trusting them 100%. I never start a project, within the two businesses that I personally run, if I don’t have the right people in place. Why should I invest differently?

I know that striving to maximize the fcf I can extract from my businesses, using it to purchase owner/operators at good prices, stick with them, and constantly increasing my firm ownership of those businesses over time, will surely turn out to be a much slower way to accumulate wealth, than jumping opportunistically from one undervalued stock to another. But that’s what I like to do! And I literally “tap-dance” to work every morning: why should I change something that makes me feel so good?! :)

Just for the sake of completeness, it is not true that I never sell: but, when in fact I do sell, it is to adjust my firm’s portfolio to the overall market exposure I want it to maintain. As I have already said, Sir John Templeton’s “Yale Plan” still makes great sense to me, and I try to follow it as best as I can. Look, with the exception of the two businesses I fully control, my firm’s other investments are all listed in some stock exchange: to believe they are not subject to market risk is dangerous and simply not true.

 

Finally, I would really like to know what twacowfca thinks about Markel and their new deal with Alterra: very few people are as knowledgeable as twacowfca about the insurance industry, so his opinion would be greatly appreciated!

Thank you,

 

giofranchi

 

Thank you Giofranchi for your kind remarks.  We also like to buy great owner operator companies and hold them as long as they are not overpriced.  However we occasionally speculate in value situations, even if we don't particularly like a company or their situation.

 

We have been and out of BAC with a very large position entered in March, 2009 almost exactly at the bottom and then sold a few months later for a double because I didn't like their situation of becoming a TBTF ward of the government.  We bought BAC B warrants last year when the price of their stock was one day off their low at the point of maximum pessimism, and then sold it a few months later for a three bagger.  Unfortunately, the second BAC buy turned out to be a micro position through strange circumstances, and we sold it early because I didn't like holding it with high implied volatility.  Congratulations to all the others on the board who had the courage of their convictions to buy and hold a lot of BAC. 

 

That said, I don't like big banks for many reasons as a long term hold through the credit cycle.

 

Markel is a great company in all respects.  They  are in  the same league  as FFH, and BRK and LUK. They are very good equity investors.  I think that buying Alterra at BV gives them almost twice as much low cost float and assets to invest.  It's a great move, and Markel is now attractively priced for purchase.  :)

[jay21]

Markel is a great company in all respects.  They  are in  the same league  as FFH, and BRK and LUK. They are very good equity investors.  I think that buying Alterra at BV gives them almost twice as much low cost float and assets to invest.  It's a great move, and Markel is now attractively priced for purchase.  :)

 

I hate being faced with such a tough decision of which insurance company that has a normalized teens ROE would I like to buy at (or around) BV  ;)

[twacowfca]

Markel is a great company in all respects.  They  are in  the same league  as FFH, and BRK and LUK. They are very good equity investors.  I think that buying Alterra at BV gives them almost twice as much low cost float and assets to invest.  It's a great move, and Markel is now attractively priced for purchase.  :)

 

I hate being faced with such a tough decision of which insurance company that has a normalized teens ROE would I like to buy at (or around) BV  ;)

 

These are easy choices to make depending on your view of the future market.  FFH is a good choice if you are bearish.  Markel is a good choice if you're bullish or neutral.  BRK is a good choice if you're bullish, bearish or neutral.  All three should do well long term regardless of Mr. Market's moods.  :)

[racemize]

Does anyone have a PDF of their annuals up to 2005 (or present)?  I'd like to read through them from the beginning.

 

Thanks!

[masseyrock]

http://phx.corporate-ir.net/phoenix.zhtml?c=104364&p=letters

[racemize]

http://phx.corporate-ir.net/phoenix.zhtml?c=104364&p=letters

 

Ah, thanks, I just noticed it as well--I was looking at the annuals section instead of the letters.

[fareastwarriors]

http://beta.fool.com/symie5/2012/12/19/markel-bags-whale-now-time-buy/19399/

 

 

Markel Bags a Whale: Is Now the Time to Buy?

[giofranchi]

These are easy choices to make depending on your view of the future market.  FFH is a good choice if you are bearish.  Markel is a good choice if you're bullish or neutral.  BRK is a good choice if you're bullish, bearish or neutral.  All three should do well long term regardless of Mr. Market's moods.  :)

 

twacowfca,

don’t you think it is always a good idea to invest in something that could benefit from short-term volatility/disorder, still retaining the potential to “do well long term regardless of Mr. Market’s moods”?

Ok, maybe not such a good idea at the beginning of a secular bull, but what about now? When general stock market prices are high and a bundle of still un-restructured debt plague the whole developed world?

That’s why I have loaded the boat with FFH.

 

giofranchi

[twacowfca]

These are easy choices to make depending on your view of the future market.  FFH is a good choice if you are bearish.  Markel is a good choice if you're bullish or neutral.  BRK is a good choice if you're bullish, bearish or neutral.  All three should do well long term regardless of Mr. Market's moods.  :)

 

twacowfca,

don’t you think it is always a good idea to invest in something that could benefit from short-term volatility/disorder, still retaining the potential to “do well long term regardless of Mr. Market’s moods”?

Ok, maybe not such a good idea at the beginning of a secular bull, but what about now? When general stock market prices are high and a bundle of still un-restructured debt plague the whole developed world?

That’s why I have loaded the boat with FFH.

 

giofranchi

 

FFH is definitely the one to benefit from down volatility.

[ShahKhezri]

Good article from The Brooklyn Investor:

 

http://brooklyninvestor.blogspot.com/2012/12/markel-alterra-merger.html

 

Based on pro-forma book value of $424, you can buy MKL today at book.  I'll wait a little more, but thinking of doubling my position that I purchased last year. 

 

[giofranchi]

That said, I don't like big banks for many reasons as a long term hold through the credit cycle.

 

If you list the businesses that have generated the most wealth in history, you would see that they all have optionality. ... the largest generators of wealth in America historically have been, first, real estate (investors have the option at the expense of the banks), and, second, technology (which relies almost completely on trial and error). Further, businesses with negative optionality (that is, the opposite of having optionality) such as banking have had a horrible performance through history: banks lose periodically every penny made in their  history thanks to blowups.

"Antifragile", by Mr. Taleb

 

giofranchi

 

[Guest hellsten]

the largest generators of wealth in America historically have been, first, real estate (investors have the option at the expense of the banks), and, second, technology (which relies almost completely on trial and error).

 

I find this hard to believe without further context. Without technology we would live in trees. Is the quote from the book "Antifragile"?

[giofranchi]

the largest generators of wealth in America historically have been, first, real estate (investors have the option at the expense of the banks), and, second, technology (which relies almost completely on trial and error).

 

I find this hard to believe without further context. Without technology we would live in trees. Is the quote from the book "Antifragile"?

 

Yes! From the paragraph “Life Is Long Gamma”, page 185 of the hardcover version of the book.

 

Anyway, I don’t know if he is right about real estate and technology. I believe, though, he is quite right about banks! ;)

 

giofranchi