MKL - Markel Corp

[masseyrock]

On bonuses: they will almost certainly qualify as we exit 2013 since 2008 starts to roll off the 5yr CAGR. 

[racemize]

By my math:

 

Current diluted BV: $403

Estimated BV w/ Alterra: $426 (6% accretion)

 

Current Portfolio / Share: $966

Estimated with Alterra: $1,197 (24% accretion)

 

Thank you!  Just using the merger SEC filing for the calculation?

[masseyrock]

Hopefully this attaches correctly.  I think the math is right here - please correct if I'm off.

MKL_ALTE_Calculation.xlsx

[giofranchi]

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.

 

Yesterday Markel announced a 2012 year end BV per share of $403.85… I missed a little, but not much!!  ;D

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Markel_Reports_2012_Financial_Results.pdf

[ourkid8]

Very good call!!! I bought a small position as well during the selloff which has done very well. I am looking to add significantly in the future.

 

S

 

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.

 

Yesterday Markel announced a 2012 year end BV per share of $403.85… I missed a little, but not much!!  ;D

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

[racemize]

Notes from the call (since there is no replay):

 

General:

General Recap of results, as already reported yesterday.

 

Rate increases across all segments (~8% I think).

 

NA:

High growth of rates in NA (>10%)

 

every line of business had increased rates.

 

International:

Price increases moderated over the year.

 

Rate increases were stable or increased modestly, except for P&C which was 20%(?)

 

Alterra:

 

Been very busy since announcement.  Getting regulatory approvals (some already underway).  Transaction may close by April.  Generally upbeat

 

Tom Gayner

recap of history + optimism going forward

 

Investment returns - no negatives for the year

returns were 9% overall, 19% equity, 5% fixed

Interest rates are too low! - keep bond horizon short

building cash and fixed income

barbell shape should not last forever, cash provides option for future opportunities

 

markel ventures quiet due to acquisition of alterra, but still looking for opportunities

cheesy toolbox analogy about hammers...

 

Questions:

Total Sandy was 107 million

 

Essentia Gross Revenue Opportunity - base at 170million, should grow from there

 

fixed income duration is < 3 years (90 days shorter than 3rd quarter)

 

property has the largest pricing increases, more modest in the casualty, on average mid-single digits (maybe all lines?)

 

vision for Alterra portfolio - recast into Markel model over time, barbell distribution is tactical, not long term strategy, want to get more into equities over time

 

not reaching for yield, but ready to go wherever makes sense

 

in inflationary environment, determine rates each day, are not victims of long duration liabilities (did not catch all of this discussion very well)

 

regulations are moving along pretty nicely for merger

 

streamline opportunities for combination (e.g., release cash due to overlap)?  They'll do what makes sense!  Over the next year, capital and corporate structure should be streamlined/simplified.

 

One syndicate/managing agent for Lloyds on combination.

 

call cut out a lot for me at this point.  Someone's executing on plan!  They hit their targets!  (Still don't know who this is).  Maybe thomco?

 

Loss trends in NA, benign?  Not seeing anything signficiant, more benign than expected over the last several years.  Still need price increases to deal with underlying trend--whole market needs to increase to get to a good level. 

 

 

 

 

 

 

 

 

 

 

 

 

[Liberty]

Thanks for the notes, racemize.

[Crip1]

Yes, Racemize...thanks for the synopsis.

 

The London Insurance Market results really jumped out at me. This segment accounted for nearly half (48%) of the company's positive development of prior years' losses...not bad for the area which had underwriting losses during much of the last decade.

 

Jury is out on the Alterra acquisition (though it looks good). Nothing in here which compels me to sell a single share.

 

-Crip

 

 

[Crip1]

 

 

Full Conf Call transcript.

 

 

http://seekingalpha.com/article/1158131-markel-corporation-s-ceo-discusses-q4-2012-results-earnings-call-transcript?source=yahoo

 

[Liberty]

Thanks Crip!

[WhoIsWarren]

Here's a recent presentation on Markel given at ValueX, Klosters (Switzerland).  A good summary of the company and the investment case.

 

http://www.scribd.com/doc/123873695/Josh-Tarasoff-Markel-Insurance?goback=%2Enmp_*1_*1_*1_*1_*1_*1_*1_*1_*1

[giofranchi]

Here's a recent presentation on Markel given at ValueX, Klosters (Switzerland).  A good summary of the company and the investment case.

 

http://www.scribd.com/doc/123873695/Josh-Tarasoff-Markel-Insurance?goback=%2Enmp_*1_*1_*1_*1_*1_*1_*1_*1_*1

 

Thank you for posting the presentation.

Much appreciated!

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

[jay21]

Found it interesting that the bond portfolio's duration is the lowest ever at under 3 years.  Pretty contrarian given that high grade debt is at the highest duration ever at 6+ years.  Anyone know some companies with longer duration unhedged bond books?

[ap1234]

I’m really enjoying the Markel thread. The upside scenario from the Markel-Alterra merger seems intriguing. However, I’m having trouble understanding the Alterra merger from the perspective of the insurance side of the business. I’d be interested to hear your thoughts on the following questions:

 

1. Does anyone have a view on the ‘strategic’ fit between Markel and Alterra on the insurance side of the business? I understand the financial implications of the transaction (i.e. accretive on BV/share, larger investment portfolio, re-weight towards equities, expense synergies, hardening of P&C markets, etc.). However, I’m having trouble trying to understand the benefit of acquiring Alterra’s insurance book of business?

 

Markel and Alterra have some overlap in the E&S and London insurance businesses. Is their any advantage to Markel in acquiring Alterra’s insurance mix (i.e. acquiring expertise in a particular type of insurance, new growth opportunities in certain lines, etc.)? In addition, Alterra has significant exposure to global insurance/re-insurance. How does Markel benefit from this new exposure? I don’t really understand the argument for increased diversification. It appears that Markel has generated an impressive underwriting track record for many decades without taking on excess risk and needing any additional diversification.

 

In other words, was there something attractive about Alterra’s particular insurance mix or would Markel have acquired any profitable insurance business if they could buy it at 1x BV and benefit from re-weighting the investment portfolio from bonds to equitieis?

 

2. Does Alterra have any competitive advantages on the underwriting side? I’ve never looked at this business before and am trying to understand their underwriting edge.

 

3. Markel is acquiring a large re-insurance book from Alterra. Is this a good business to be in? Would Alterra be competing directly against BRK? How do you get comfortable with Markel’s new exposure to longer tail lines like re-insurance.

 

Thanks in advance for sharing your thoughts on the Markel-Alterra merger.

 

[jay21]

 

3. Markel is acquiring a large re-insurance book from Alterra. Is this a good business to be in? Would Alterra be competing directly against BRK? How do you get comfortable with Markel’s new exposure to longer tail lines like re-insurance.

 

Thanks in advance for sharing your thoughts on the Markel-Alterra merger.

 

Reinsurance isn't necessarily long tail.  Also, MKL does a very good job at writing long tail insurance.  I think they highlighted that this deal will actually increase the amount of short tail business they write.

 

The limited work I have done on Alterra shows they are good underwriters.  Just by MKL taking over that book and investing in equities the ROE of the company and BV goes up.  The way I look at it is that MKL spent $1b buying a company at BV that is probably worth 1.5 to 2 times book when MKL starts investing for them.  So a very good deal imo.

[WhoIsWarren]

1. Does anyone have a view on the ‘strategic’ fit between Markel and Alterra on the insurance side of the business? I understand the financial implications of the transaction (i.e. accretive on BV/share, larger investment portfolio, re-weight towards equities, expense synergies, hardening of P&C markets, etc.). However, I’m having trouble trying to understand the benefit of acquiring Alterra’s insurance book of business?

 

Markel and Alterra have some overlap in the E&S and London insurance businesses. Is their any advantage to Markel in acquiring Alterra’s insurance mix (i.e. acquiring expertise in a particular type of insurance, new growth opportunities in certain lines, etc.)? In addition, Alterra has significant exposure to global insurance/re-insurance. How does Markel benefit from this new exposure? I don’t really understand the argument for increased diversification. It appears that Markel has generated an impressive underwriting track record for many decades without taking on excess risk and needing any additional diversification.

 

In other words, was there something attractive about Alterra’s particular insurance mix or would Markel have acquired any profitable insurance business if they could buy it at 1x BV and benefit from re-weighting the investment portfolio from bonds to equitieis?

 

Hi ap1234,

 

I think that's an important question too: why Alterra?

 

Alterra has been on Markel’s radar for 5-10 years (although there are many such insurers on Markel's radar).  Also, Alterra has an office in Richmond, VA., which is headed up by some ex. Markel guys.  So Markel management believes it has a good feel for the calibre and culture of the Alterra people.  That said, there are probably a few other insurers of which the above could be said. 

 

Most importantly though, Alterra management was looking to sell.  And it was looking for a buyer that wouldn’t result in job losses for the rank and file employees.  Incidentally, Markel doesn’t expect top management of Alterra to stick around – the underwriters and the ‘field marshalls’, the relationship guys, that’s what they’re really after.  Markel as a buyer was suitable to Alterra -- not a lot of overlap between the two companies and secondly a good cultural fit.

 

For Markel, Alterra was trading on a discount to book and had significant capital relative to levels of insurance underwritten.  And as mentioned above, management believes Alterra should be a good cultural fit.  Alterra has the same underwriting discipline, so they don’t expect legacy underwriting issues.  Alterra is expected by management to be much better cultural fit than their last major acquisition (2001?), Terra Nova, which had legacy issues (and in addition, I think that the Terra Nova management team stayed around, which may have added to the integration issues).

 

The deal expands Markel’s lineup into larger clients.  Breadth and depth and size of Markel is expanded, which allows the enlarged group greater access to opportunities to grow into areas with fewer players / less competition / better profitability.

 

Markel writes very little reinsurance itself.  Therefore the Alterra reinsurance guys will continue to run the reinsurance division.  In my opinion this introduces a new dimension of risk into the Markel equation.  Reinsurance has the potential to be a risky business.  It is new to Markel and is being run by people who the Markel leadership likely doesn't know very well yet.  According to the company, the risk profile of the enlarged group will not change, but I can't help being a little concerned.  An interesting aside is that, as a reinsurer, Markel will get to have a look at the books of many primary insurers, its competitors.

 

Hope this helps.

 

[giofranchi]

3. Markel is acquiring a large re-insurance book from Alterra. Is this a good business to be in? Would Alterra be competing directly against BRK? How do you get comfortable with Markel’s new exposure to longer tail lines like re-insurance.

 

I don’t think the reinsurance business is inherently more or less risky than the insurance business. Look at, for instance, FFH: OdysseyRe has historically enjoyed much lower CRs than any other insurance company inside the FFH family. Imo, it all depends on people: do they understand risk? Do they posses the discipline to act accordingly? And, therefore, do they behave opportunistically? If it is so, they will be successful both as insurance underwriters and as reinsurance underwriters. As an aside, that’s why I truly believe that the appointment of Mr. Barnard as President and Chief Operating Officer of the Fairfax Insurance Group bodes well for future results.

The same good results I expect from MKL’s newly established reinsurance operations in the future.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

[Liberty]

RICHMOND, Va. and HAMILTON, Bermuda, Feb. 26, 2013 /PRNewswire/ -- Markel Corporation (NYSE: MKL) ("Markel") and Alterra Capital Holdings Limited (NASDAQ: ALTE; BSX: ALTE.BH) ("Alterra") today announced that their respective shareholders have voted in favor of all proposals necessary for the acquisition of Alterra by Markel. Completion of the transaction remains subject to receipt of regulatory approvals and other customary closing conditions and is expected to occur in the second quarter of 2013.

 

Under the terms of the merger agreement, each Alterra common share (other than any shares as to which appraisal rights are exercised or restricted shares that do not vest in connection with the transaction) is converted into the right to receive 0.04315 Markel common shares (with cash paid for fractional shares), plus a cash payment of $10.

[Liberty]

For those who have an account, there's a new writeup on Markel on the VIC.

[LC]

For those who have an account, there's a new writeup on Markel on the VIC.

Must be nice :P

[jay21]

For those who have an account, there's a new writeup on Markel on the VIC.

Must be nice :P

 

Anyone can sign up in order to access this write-up.  IIRC, it wasn't too insightful.

[valueinvesting101]

Letter to shareholders:

 

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

[jeffmori7]

Thank you! The letter is great this year. Markel is really an outstanding insurance company.

[obtuse_investor]

This part in the letter perked up my ears:

 

The fantastic news is that the opportunity costs from

taking this approach are as low right now as they have

ever been given the low level of interest rates. As we see

the “whites of their eyes” in investment markets we have

more ammo to expend than ever before. This is a tough

concept to quantify but it represents one of the most

dramatic capital allocation and value opportunities that

has ever existed at Markel.

 

I am reading this as:

• Markel will continue to raise cash from Alterra's large fixed asset portfolio
  
• They will continue to sit on this cash because the opportunity cost is low
  
• They will jump into quality equities at a time of pessimism-- something they didn't quite do in late 2008 and early 2009
  

 

Sounds like Markel is taking the same approach as Berkshire, and building cash reserves.

 

Fairfax Financial is doing the same, but also actively shorting, as equity and CPI hedges.

 

Rather different approaches, but Fairfax's approach has a higher risk of going wrong.

[jay21]

I thought MKL's comments were more about bond prices than equities.  But they also did note that the expect to make less Ventures acquisitions because of inflated prices.  So it will be interesting to watch what they do with the new portfolio.  Hopefully, they are more opportunistic when the next cycle hits.  That is my only criticism of the company; the CIO is merely good as opposed to extraordinary like Buffet.

 

Also, I it was nice to hear that they don't expect to have to strengthen Alterra's reserves.