Markel Corporation - a case study to value insurance companies

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I have tried to give a detailed account of a global specialty insurance company (Markel Corporation). This might be useful for people who are trying to understand the evolution of insurance businesses and might give us some insights into how insurance might evolve in India. Looking forward to hearing from everyone :slight_smile:

Markel Corporation is a holding company with operations in specialty property and casualty insurance headquartered in Richmond, Virginia (USA). It started operation in 1930 and was operated by the Markel family and was first listed in 1986. It has compounded its share price at a rate of 15% from a low of $9.25 in 1987 to the current price of $978 (as on 03.06.2020). Their shareholder letters are a delight to read (link). I have compiled my notes from the time of their listing in 1986 summarized in the three posts below (the pdf below contains my notes in a better formatting).

Notes.pdf (261.6 KB)

1986:

  • IPO in December 1986
  • Inducted on their board Prem Watsa and Stewart M. Kasen as directors
  • Goal to grow at 20% with ROE > 20%
  • Claims administration operation showed losses

1987:

  • Share count increase led to lower increase in EPS compared to net profits
  • ROE ~ 35%
  • Brokerage operations: Bad results
  • Contingent commissions business was good, however it’s hard to forecast how this will do in the future
  • Owns 21.6% equity interest in Fairfax financial holdings
  • Claims administration: Acquired Lindsey & Newsom Insurance Adjusters (Texas) to expand into international claims adjusting and claims management business
  • Acquired 35% stake in Shand Morahan and Evanston Services using leverage ($12 mn) (specialty insurance company providing professional and product liability insurance), speaks highly of Joe Prochaska (CEO of the company)
  • Added Edmund G. (Ned) Langhorne (turned around claims operation business) and Leslie A. (Les) Grandis (helped in two acquisitions and in taking company public)

1988:

  • ROE ~ 31%
  • Brokerage operations were good
  • Severe price competition in transportation and animal mortality business
  • Equity stake in Fairfax increased to 23%
  • Diluted 650’000 shares at $16.25 (raising net after tax amount of $9.6 mn) at low PE multiples to increase investment in Shand/Evanston group.
  • Increased borrowing to $15 mn
  • Excess provisioning done in insurance underwriting business to be conservative

1989:

  • ROE ~ 24%
  • Brokerage operations : Acquired certain assets of Rhulen Agency using debt. Should double revenues
  • Increased borrowings to $44.5 mn
  • Claims administration: Continue investing in expansion of Lindsey & Newsom
  • Underwriting: Essex Insurance and Markel American Insurance – combined ratio of 79%

1990:

  • Underwriting: Combined ratio of 80%
  • Acquired remaining shares of Shand/Evanston group (using debt) and divested Fairfax and Lindsey & Newson (claims administration) – had been continuously investing in Lindsey/Newson before.
  • Focus has now become only on marketing and underwriting specialty insurance
  • Increased long term borrowings to $127 mn
  • Brokerage operations: Significant growth on back of previous acquisition of Rhulen
  • Stock market declined
  • Investment portfolio: $360 mn
  • Equity returns: (-7%), Fixed income returns: 10.3%, Overall: 6.2%
  • As majority of revenues will be from underwriting activity, company will not seek to maintain 20% growth rate as future growth target to be prudent while writing risk
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1991:

  • ROE ~ 21%
  • Underwriting : Combined ratio of 106% largely due to one specific program under the American Underwriting Managers division which has now been discontinued
  • Equity returns: 26.9%, Fixed income returns: 15.1%, Overall: 17%
  • Reduced debt by $33 mn
  • Long term goal is to keep d/e ~ 0.33
  • Stock market rebounded leading to good performance in equity investments
  • Brokerage operations : Sees the Rhulen as largely an underwriting business
  • Given that five years have passed since the acquisition of Shand/Evanston, original sellers have disagreed with company about reserve estimates
  • Investment portfolio : $436 mn (inclusive of cash)

1992:

  • ROE : 27%
  • Underwriting : Combined ratio of 97%
  • Equity returns: 13.1%, Fixed income returns: 7.8%, Overall: 8.2%
  • Long term debt ~ $101 mn
  • Sold governmental programs division (was a brokerage business) to focus on specialty underwriting business
  • Tony Markel became President and Chief Operating Officer of Markel Corp and is responsible for insurance underwriting business
  • Steve Markel promoted to Vice Chairman and will be responsible for capital allocation
  • Darrell Martin became CFO; Alan Kirshner remains CEO
  • Investment portfolio : $442 mn ($290 mn in fixed investments, $74 mn in equities)
  • Shand/Evanston case: Markel’s reserve estimates found to be more adequate requiring additional payment to the original sellers by Markel
  • Insurance business is getting hugely competitive due to lower priced premiums

1993:

  • ROE : 18%
  • Underwriting : Combined ratio of 97%
  • Equity returns: 28.7%, Fixed income returns: 9.1%, Overall: 11.8%
  • Investment portfolio: $597 mn ($108 mn in equities)
  • Collected $66 mn from reinsurers by releasing them of their future potential losses
  • Long term debt ~ $78 mn (issued public bonds at 7.5% repaying bank borrowings) (d/e ~ 0.34)
  • Share count ~ 5.4 mn
  • Clearly said that wont give cash dividends or do splits
  • Accelerated amortization to reduce tax liabilities as large part of these assets are tax deductible

1994:

  • Underwriting : Combined ratio of 97% (higher because of Northridge earthquake)
  • Equity returns: (-3.3%), Fixed income returns: (-0.2%), Overall: (-1.1%)
  • Higher premium collection and increased retentions
  • Have been growing in new lines of insurance (natural hazard insurance for commercial properties, local and intermediate distance freight, horse industry, property coverage for mobile homes and low value dwellings, etc.)
  • Interest rates started going up
  • Five year weighted average returns were 7.9% (7.8% from fixed income, 11% from equity)
  • Investment portfolio : $612 mn
  • Successfully reached settlement agreements with previous owners of Shand/Evanston

1995:

  • Underwriting : Combined ratio of 99%
  • Equity returns: 29.7%, Fixed income returns: 14.4%, Overall: 15.7%
  • Property/casualty insurance industry continues suffering from competitiveness leading to poor industry dynamics and increased consolidation
  • CAGR growth in earned premiums has been 54% over the last 5 years
  • Investment portfolio : $909 mn
  • Several one-time gains: $83 mn (from reinsurance), $60 mn (related to acquisition of Lincoln Insurance), $19 mn (sale of home office buildings)
  • Bonus structure :
    o Dependent on individual performance
    o Individuals who have a direct impact on underwriting profits get bonuses linked to underwriting profits by their division
    o Senior executives are rewarded based on 5-year average CAGR on book value (no bonus if 5-year CAGR on book value < 15%)
  • Granted stock options which will not be done in the future. Instead there are various incentives offered to directly buy stocks instead of granting stock options
  • Associate ownership ~ 32.5% of overall company shares

1996:

  • Underwriting : Combined ratio of 100% (have shown profits for 9 out of last 10 years)
  • Investment portfolio : $1.1 bn ($207/share)
  • Raised $150 mn in borrowings (for future acquisitions)
  • Creates excess loss reserves (5-10% approx.) for conservative accounting
  • Aims to generate 10% underwriting profits from mobile home insurance business (cannot create lot of investment income because of claims are made quickly). Made $1.7 mn losses due to Hurricane Fran
  • Exited physicians’ medical malpractice area because of losses
  • An insurance vertical benefits after catastrophe as insurance premiums rise and insurers exit market (eg: Special property insurance for commercial property against natural calamities which was started in 1993 benefitted from 1994 Northridge earthquake which made competitors exit the market)
  • Acquired Investors Insurance Holding corp (New management team was brought on with sound business plans to overcome its past track record)

1997:

  • Underwriting : Combined ratio of 99%
  • Equity returns: 31.4%, Fixed income returns: 9.2%, Overall: 12.8%
  • Investment portfolio : $1.4 bn
  • Was listed in NYSE in June 1997
  • Comments on declining premiums in casualty insurance
  • Past acquisitions
    o Shand Morahan & Evanston insurance
     Initially invested in 1987, fully acquired in 1990 (total investment: $85 mn)
     Has got dividends worth $83 mn in this time period
     Net premium collection of $100 mn in 1997 with small underwriting profits
     Investment portfolio has become $650 mn which is generating significant investment returns
     Current book value ~ $210 mn
    o Rhulen (total investments: $57 mn)
     Acquired in 1989
     Transformed from a brokerage to a full service insurance business
     No dividends received yet
     Earned premiums of $68 mn in 1997 with underwriting losses
     Investment portfolio has become $178 mn
    o Lincoln Insurance company
     Acquired in 1995 at $24 mn
     Received dividends of $35 mn
     $6 mn in premium volume
    o Investors Insurance Holding corp.
     Acquired in 1996 at $38 mn
     Earned premiumns of $30 mn (with combined ratio of slightly over 100%)
     Investment assets ~ $160 mn
     Book value ~ $46 mn

1998:

  • Underwriting : Combined ratio of 98%
  • Equity returns: 13.3%, Fixed income returns: %, Overall: 8.9%
  • Investment portfolio : $ 1.8bn
  • Does not own any hi-tech stocks as a result they are trailing S&P returns
  • Asia crisis, problems in Russia and Brazil, failure of long term capital management hedge fund
  • Prem Watsa leaves board
  • Tom Gayner joins board (joined company in 1990 and manages equity portfolio)
  • Gryphon acquisition
    o Investment $150.7 mn + $55 mn (debt)
    o $200 mn in annual premiums, will decline by 50% to improve underwriting standards
    o Had underwriting losses in each of last 4 years
    o Had aggressive loss reserves
    o Investment portfolio ~ $400 mn
    o Three insurance companies inside :
     Associated International insurance (California)
     Calvert Insurance (New Jersey)
     First Reinsurance company of Hartford (Chicago)
  • Business model is to not have any underwriting losses; Have $4 in investment for every $1 in book value, earn 5% after tax returns on investments through debt + equity; this will lead to book value growth of 20%

1999:

  • Investment portfolio : $ 1.6bn
  • Equity returns: (-10%), Fixed income returns: 0.9%, Overall: 6.9%
  • Poor equity returns because of concentration in insurance stocks rather than tech stocks
  • Underwriting : Combined ratio of 101% (96% excluding Gryphon)
  • Plans to acquire Terra Nova (Bermuda) holdings (@ $660 mn)
    o Slightly bigger than Markel
    o Half in cash, half by issuing 1.8 mn common shares
    o Gross premium written in 1999 was $865 mn
    o Investment portfolio: $1.5 bn, Book value: $436 mn
    o Casualty insurance and reinsurance company
    o Operations in London (headquartered in Bermuda)
    o Believes it’s a high quality international insurance business at a fair price
    o Will add goodwill to balance sheet which will be amortized over 20 years
    o Will add 3 board members
     Nigel Rogers, president & CEO
     Jack Byrne, director, past executive at GEICO and Fireman’s fund, CEO of White Mountains Insurance (Bermuda based reinsurance company)
     Mark Byrne, Jack’s son, previously MD of Global Fixed Income arbitrage at Credit Suisse First Boston
  • Acquire renewal rights to Acceptance Insurance Companies’ Scottsdale business
  • Realized investment losses to create tax assets
  • Seeing better opportunities for underwriting profitable insurance policies
  • Continue restructuring Gryphon & sold certain business lines
    o Calvert Insurance for $22 mn
    o Investors Insurance for $54 mn
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2000:

  • Underwriting: Combined ratio of 114% (97% for North American operations; 116% for international operations, 6% worse from expected; 143% from discontinued operations)
  • Equity returns: 26%, Fixed income returns: %, Overall: %
  • Investment portfolio: $3.1 bn
  • Equity dilution of $200 mn
  • Improving industry underwriting trends (more profitable)
  • Withdrew from E&S insurance business with New York contractors as it proved difficult to insure profitably
  • Completed acquisition of Terra Nova
  • Consolidated International operations to five units from earlier 11 units
  • Jack Byrne will not be continuing on board because of involvement in White Mountains Insurance
  • Doug Eby joined board (President of Robert E. Torray & Co; manages $6 bn in investment assets); Torray is Markel’s largest outside shareholder

2001:

  • Underwriting: Combined ratio of 124% (102% for North American operations; 134% for international operations; 229% from discontinued operations)
  • Equity returns: 16.9%, Fixed income returns: 7.7%, Overall: 8.4%
  • Investment portfolio: $3.6 bn ($544 mn in equity)
  • Equity dilution; issued 2.5 mn shares raising $408 mn (improving d/e to 0.24)
  • World trade center attack in September; Recognized $29 mn losses from one North American program and $109 mn from international business
  • If we ignore equity dilution, book value went down by 10%
  • Continue enjoying improving industry underwriting trends
  • Mark Byrne will leave board due to personal commitments

2002:

  • Underwriting: Combined ratio of 103% (94% for North American operations; 107% for international operations)
  • Equity returns: (-8.8%), Fixed income returns: 9.8%, Overall: 8.3%
  • Investment portfolio: $4.3 bn ($551 mn in equity)
  • Optimal equity allocation ~ 20-25% of investment portfolio (75-80% of net worth)
  • Borrowed $140 mn from banks to repurchase $35 mn of short term convertible notes and improve capital adequacy
  • Inducted Jay Weinberg as independent director (Chairman of Hirschler Fleischer law firm)

2003:

  • Underwriting: Combined ratio of 99% (94% for North American operations; 107% for international operations); First underwriting profits since acquisition of Gryphon and Markel International; Correct pricing in the last few years are finally showing results
  • Equity returns: 31%, Fixed income returns: 4.5%, Overall: 10.5%
  • Investment portfolio: $5.3 bn ($969 mn in equities)
  • Premium prices are still going up (tailwind), albeit at a slower pace
  • Moved Gerry Albanese (chief underwriting officer at Shand) and Richie Whitt (Corporate Comptroller and Treasurer) to London office to manage Markel International
  • Issued $200 mn of ten year notes to repay bank debt and pre-pay debt maturing this year
  • Will have 4 independent board members out of 7 total board directors (Tom Gayner, Gary Markel, and Darrell Martin will step down from the board to make this happen)

2004:

  • Underwriting: Combined ratio of 96% ( for North American operations; London business still reporting losses)
  • Equity returns: 15.2%, Fixed income returns: 4.8%, Overall: 7.9%
  • Investment portfolio: $6.3 bn ($1.3 bn in equities)
  • Debt: $610 mn in senior long-term, $150 mn in junior subordinated debentures (equity like and included as equity in d/e calculations), $95 mn in convertible notes
  • Premium prices are become weak (i.e. more competition coming up)
  • Inducted Al Broaddus as a director (past president of Federal Reserve Bank of Richmond)
  • Darrell Martin will retire as CFO (was holding this post since 1988) and pass the baton to Richie Whitt (joined Markel in 1991)
  • Increased retained gross premium to 81% compared to 77% in 2003

2005:

  • Underwriting: Combined ratio of 101% (Underwriting losses due to hurricanes Katrina, Rita and Wilma)
  • Equity returns: (-0.3%), Fixed income returns: 3.9%, Overall: 1.5%. Overweight on financial services led them trailing S&P
  • Non-insurance acquisitions:
    o Majority stake in AMF Bakery (Richmond based) – a manufacturer of bakery instruments ($60 mn in revenue)
    o Minority stake in First Market bank (Richmond), in partnership with Ukrop family – a grocery business
  • Underwriting quality and prices in industry deteriorated
  • Bought back 49’400 stocks worth $16 mn
  • Net premium retention of 82%

2006:

  • Underwriting: Combined ratio of 87% (Markel International finally has a combined ratio of 100%)
  • Equity returns: 25.9%, Fixed income returns: 5.2%, Overall: 11.2%.
  • Bought back 140’000 stocks worth $46 mn ($328 stock price; 1.4 times book value)
  • Missed underwriting target 6 times over the 20-year period (mainly during the 2001 acquisition phase and large hurricanes of 2005)
  • d/e ~ 0.27
  • Issued $150 mn of 7.5% senior notes due in 40 years with a five year par call
  • Net premium retention of 87%
  • Added Lemuel E. Lewis to board of directors (CFO of Landmark Communications, Virginia; also serves on board of Reserve Bank of Richmond)

2007:

  • Underwriting: Combined ratio of 88% (Markel international showed 93% combined ratio FINALLY! Paying its first cash dividend)
  • Equity returns: (-0.4%), Fixed income returns: 5.6%, Overall: 4.8%. Overweight on financials and consumer businesses and underweight on energy and commodities led to lower relative returns. Betting on recovery in lending businesses
  • Insurance market is getting undisciplined again with very competitive pricing
  • Despite very little growth in gross written premium over the past five years, book value has grown at 18% CAGR due to better underwriting and superior investment incomes
  • Shand Morahan and Essex changed names to Markel Shand and Markel Essex for better brand visibility
  • Associated owned more than 10% of outstanding shares

2008:

  • Underwriting: Combined ratio of 99% (major Hurricane hit Houston metropolitan region; Markel International back to underwriting losses)
  • Insurance pricing continues to decrease (industry recorded loss in 2008)
  • Equity returns: (-34%), Fixed income returns: 0.2%, Overall: (-9.6%). Experienced permanent loss of capital by holding debt in Lehman, Washington Mutual and Fannie and Freddie; Permanent loss of capital by selling equity positions in Citigroup, MBIA, LandAmerica
  • Reduced equity holdings from a higher of 75% of shareholder equity in Dec 2006 to a low of 49% in Dec 2008
  • Non-insurance acquisitions:
    o Parkland ventures: owner and operator of manufactured housing parks
  • No bonus for executive team because of 5-year book value growth < 15%
  • Tony Markel stepped down as President and became Vice Chairman; Paul Springman became president and Chief Operating Officer (joined in 1984)
  • Promoted Gerry Albanese to Chief Underwriting Officer (was president of Markel International and one of the most talented Underwriting officers; joined 24 years ago)
  • William Stovin named President of Markel International
  • Britt Glisson became Chief Administrative Officer (joined Markel in 1990)

2009:

  • Underwriting: Combined ratio of 95% (Markel International: 91%; Markel Specialty: 99%)
  • Equity returns: 25.7%, Fixed income returns: 9.8%, Overall: 13.2%
  • Equity exposure is 17% of investment portfolio (lower than historical averages)
  • International business pricing is better compared to US pricing
  • One Markel initiative – Offer all Markel products from the five regional offices and they are responsible for sales and underwriting responsibility. Product line group led by Chief Underwriting Officer is responsible for product development, underwriting guidelines, and pricing.
  • Atlas – Have unified systems to handle operational issues such as underwriting, invoicing, policy issuance, claims, billing, agency relationship management and reinsurance (total cost: $190 mn)
  • Acquired Elliott Special Risks in Canada (controls $90 mn of specialty professional and general liability business)
  • Wants to grow in India, China and Southeast Asia
  • Non-insurance acquisitions:
    o Panel Specialists (PSI): Provides laminated furniture products to universities/hospitals
    o Ellicott Dredge Enterprises: manufactures dredges for transportation, water and mining applications
  • Mark Crowley joined Markel to head specialty insurance operations
  • Les Grandis passed away (was on board since 1987)
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2010:

  • Underwriting: Combined ratio of 97% (Markel International: 95%; Markel Specialty: 100%; Deepwater horizon disaster; Chilean earthquakes)
  • Equity returns: 20.8%, Fixed income returns: 5.4%, Overall: 7.9%
  • Very competitive pricing in insurance industry
  • d/e ~ 0.24
  • Gerry Albanese made Executive Vice President of Markel
  • Non-insurance business:
    o Grown from $50 mn revenues in 2005 to $250 mn revenues in 2010
    o EBITDA for 2010 ~ $20.4 mn vs $4.6 mn for 2009
  • Insurance acquisition:
    o FirstComp: Workers’ compensation specialty operation serving 8000 retail agents across US
  • Non-insurance acquisition:
    o Solbern: Manufactures equipment for food processing industry
    o RetailData: Provides market intelligence services to grocery, general merchandise, drug stores and other retailers
    o Diamond healthcare: Provides behavioral health services in over 75 communities across US
    o Markel eagle partners (non-controlling stake): Deals in Mid-Atlantic real-estate
    o GoodHaven Asset management (non-controlling stake): Mutual fund and separate account offerings

2011:

  • Underwriting: Combined ratio of 102% (Markel International: 116%; Markel Specialty: 109%; floods in Australia and Thailand; New Zealand earthquakes; Japan tsunami; tornadoes and hurricanes in US)
  • Equity returns: 3.8%, Fixed income returns: 7.6%, Overall: 6.5% (Internal cost to manage equity investments are < 0.10% of equity AUM)
  • d/e ~ 0.27 (issued $250mn of 5.35% ten-year senior note)
  • Property and catastrophe insurance rates are moving up as a result of large industry-wide losses
  • Expand international insurance business with a new office in Holland, two small acquisitions in Sweden, second office in Spain, and small offices in Hong Kong and Beijing
  • Non-insurance business:
    o Revenues of $351 mn
    o EBITDA of $37.3 mn
  • Non-insurance acquisition:
    o PartnerMD: Concierge medical practice headquartered in Richmond (Virginia)
    o Weldship: Provides tube trailers and storage equipment for industrial gas industry

2012:

  • Underwriting: Combined ratio of 97% (Markel International: 89%; Markel Specialty: 108%; hurricane Sandy)
  • Equity returns: 20%, Fixed income returns: 5%, Overall: 9%
  • Tepid insurance prices
  • Insurance acquisition:
    o Thomco: Program administrator (20 insurance programs) headquartered in Atlanta, Georgia with a 30-year operating history (specialty insurance); Controlled $170 mn in insurance premiums
    o Partnership with Hagerty: Finalized terms of partnership with Hagerty (premier insurance agency serving classic collector car and boat markets)
    o Essentia Insurance: Underwrites insurance exclusively to Hagerty customers
  • Non-insurance business:
    o Revenues of $489 mn
    o EBITDA of $60 mn
  • Non-insurance acquisition:
    o Havco: Wood flooring supplier for trailer part of a tractor trailer
    o Idreco: Dutch based dredge manufacturer; Acquired by Ellicott Dredge;
    o Reading and Tromp: added by AMF Bakery. AMF has grown revenues four-fold from its acquisition in 2005 (based on multiple acquisitions)
  • Successfully finished IT upgradation with a centralized warehouse of all wholesale insurance data

2013:

  • Underwriting: Combined ratio of 97%
  • Equity returns: 33.3%, Fixed income returns: not reported, Overall: 6.8% (Interest rates began rising; increasing the duration of fixed income portfolio to make use of higher interest rates; equity allocation is 49% of net worth because of Alterra acquisition, will take it up to 80%)
  • Shares repurchases worth $57 mn
  • Non-insurance business:
    o Revenues of $686.4 mn
    o EBITDA of $83.8 mn
  • Insurance acquisition:
    o Alterra: Large insurance company with demonstrated track record of underwriting performance (not a troubled insurance company) – Issued 4.3 mn shares to fund Alterra acquisition
  • Non-insurance acquisition:
    o Eagle construction: Homebuilder in Central Virginia. Previously partnered with them to buy real-estate after 2008-09 crisis
  • Reinsurance business facing tremendous competitiveness on premiums

2014:

  • Underwriting: Combined ratio of 95% (Markel International: 93%; Reinsurance: 96%)
  • Equity returns: 18.6%, Fixed income returns: 6.5%, Overall: 7.4%
  • Non-insurance business:
    o Revenues of $838.1 mn
    o EBITDA of $81.4 mn (goodwill impairment charges ~ $13.7 mn on Diamond Healthcare)
    o Goodwill: $216 mn
  • Alterra acquisition has gone smoothly
  • Non-insurance acquisition:
    o Cottrell: Car hauling trailer manufacturer
    o AMF bakery is now called Markel Food group
    o Acquired additional manufactured housing communities at Parkland ventures

2015:

  • Underwriting: Combined ratio of 89% (US segment: 89%; Markel International: 86%; Reinsurance: 90%; no major catastrophe)
  • Equity returns: (-2.5%), Fixed income returns: 1.6%, Overall: (-0.7%)
  • Gross written premiums and volumes reduced (intense competition even in international markets)
  • Markel International opens new office in Dubai
  • Non-insurance business:
    o Revenues of $1 bn
    o EBITDA of $91.3 mn (Full goodwill impairment write-down of remaining ~$14.9 mn on Diamond Healthcare)
  • Insurance acquisition:
    o Acquired assets of CATCo (Insurance linked securities)
  • Low interest rates has resulted in low ROCE across sectors and industries
  • Cottrell acquisition has gone well
  • Non-insurance acquisition:
    o Captech: Management consulting firm (Richmond Virginia)
  • Hired Reid Colson to lead analytics department

2016:

  • Underwriting: Combined ratio of 92%
  • Equity returns: 13.5%, Fixed income returns: 2.4%, Overall: 4.4%
  • Insurance market globally very competitive
  • Having problems in reducing their expense ratio (39%). Promised that expenses will come down
  • Non-insurance business:
    o Revenues of $1.2 bn
    o EBITDA of $165.1 mn (including goodwill write-off of $18.7 mn for a subsidiary which is cyclical in nature)

2017:

  • Underwriting: Combined ratio of 105% (Hurricanes Harvey, Irma, Maria, Nate, California wildfire, Mexico earthquakes, Asian cyclones, European crop damage; highest ever loss by insurance industry; total catastrophic expected loss for company ~ $535 mn; CAT increased combined ratio by 13%; change in UK government policies increased combined ratio by 2%)
  • Equity returns: 25.5%, Fixed income returns: 3.4%, Overall: 10.2%
  • US tax cut from 35% to 21% reduced deferred taxes on unrealized equity gains by $402 mn
  • Non-insurance business:
    o Revenues of $1.3 bn
    o EBITDA of $178 mn
  • Bought back stocks worth $111 mn
  • Raised $300 mn 30-year fixed rate financing at 4.3%
  • Reduced expense ratio from 39% to 37%
  • Insurance acquisition:
    o SureTec: Brings specialized knowledge of the surety market (Founder John Knox directly approached Markel for acquisition)
    o State National: Brings specialized insurance services in certain segments (Insurance linked Securities)
  • Non-insurance acquisitions:
    o Costa farms: World’s largest grower of houseplants (largest non-insurance acquisition)

2018:

  • Underwriting: Combined ratio of 98% (Reinsurance: 113%; higher than average property catastrophe losses)
  • Equity returns: (-3.5%), Fixed income returns: 1.3%, Overall: (-1%)
  • Insurance marketplace remains hypercompetitive
  • Non-insurance business:
    o Revenues of $1.9 bn
    o EBITDA of $170 mn
  • Received enquiry from US and Bermuda authorities into loss reserves recorded in 2017 and 2018 of CATCo (acquired in 2015)
  • Insurance acquisition:
    o Nephila: Market leader in Insurance linked securities (ILS)
  • Insurance linked securities (ILS): Risk for insurance is taken by an investor (eg: endowment fund) and Markel charges management and incentive fees. In essence, there is no balance sheet risk for Markel
  • Non-insurance acquisitions:
    o Brahmin leather: Sells luxury handbags

2019:

  • Underwriting: Combined ratio of 94% (Reinsurance: 104%)
  • Equity returns: 30%, Fixed income returns: 6.5%, Overall: 14.6% (equity prices rose faster than intrinsic value of companies). Equity management cost: 0.08%
  • Lloyd London insurance business is very competititve
  • Catco Enquiry update: Enquiry from US and Bermuda authorities are on-going. Internal audit suggests no wrong doing. All investor money gone and CATCo is winding up (was acquired in 2015). Markel also invested in ILS fund of CATCo and had to take losses along with other co-investors
  • State National and Nephila ILS funds are going well so far
  • Non-insurance business:
    o Revenues of $2.1 bn
    o EBITDA of $264 mn
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Quality of investment portfolio

In an insurance operation, float is defined as the money that the insurance company gets to hold onto between the time customers pay premiums and the time they make claims on their policies. In the meanwhile, the insurance company holds the float and invests it. Markel’s policy is to have an optimal equity allocation of 20-25% of investment portfolio, which translates to 75-80% of their net worth. They have shown reasonable skill in their stock picking (thanks to Tom Gayner and his team) beating S&P 500 since 1990. Their equity and debt portfolio performance is shown below.

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Quality of underwriting

Since 1987, Markel has shown underwriting profits (i.e. combined ratio below 100) for 25 years out of 34 years. This is an enviable track record mostly achieved because they underwrote specialty insurance where there are very few players (giving their some element of pricing power). As a result, book value has grown by 18% since 1986. As Markel doesn’t pay dividend, all the profits have been retained in growing the book value, along with some buybacks.

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Non-equity investments

Markel ventured into non-insurance non-listed businesses in 2005 with the acquisition of a majority stake in AMF bakery and a minority stake in First Market Bank (Richmond) in 2005. Since then, they have done numerous acquisitions and grown their non-insurance and non-equity portfolio to a revenue of $2.1 bn generating close to $264 mn in EBITDA (as of CY19).

So in essence, Markel invests the float into the following:

  • Listed global stocks
  • High grade bonds
  • Private ventures

This has led to quite remarkable results in book value growth as shown below:

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Valuations
The current market capitalization of Markel is $13.4 bn (P/B ~ 1.3). In the 1990s due to their small size, book value growth was >20%, which has now tapered down to the early teens. Over a period of 35 years, their price/book value has varied between 0.74 times (2008 financial crisis) to 3.22 times (in 1987). In general, a price/book value of ~1 is considered attractive based on their past track record.

Key risks

  • Low interest rates are bad for insurance business as it requires them to invest a larger portion of their corpus into higer risk instruments such as equity.
  • Underwriting is always a key monitorable. On this front, Markel has done very well generating profits in 25 out of the last 34 years.
  • Large acquisitions have always been a problem for Markel. Their 2000 acquisition of Terra Nova led to successive underwriting losses for the next 3 years. They have improved on this front as their last large acquisition of Alterra in 2013 went pretty smoothly.

Disclosure : I dont have any direct investment in Markel as on date.

Other useful links :
Omaha brunch 2019, C-suite conversation, Motley fool

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Markel Annual Shareholders Meeting
Monday May 11, 2020

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Selected Excerpts from the Shareholder Meeting May 11, 2020

Jeremy Noble

All right. One more on insurance, Richie. Can you please discuss the current hardening of the insurance market and how factors like the COVID-19 pandemic and economic conditions affect our outlook for insurance rates and perhaps our ability to grow?

Richard Whitt

Yes. Insurance market pricing has been improving or hardening, as is often said, for at least the last 18 months. During that time, there has been a gradual yet accelerating improvement in pricing. And maybe even more importantly, and Tom mentioned this, terms and conditions, very hard to quantify or put an exact number on the impact of improving terms and conditions, but that has been a big part of what’s been happening, certainly over the last 18 months-plus, with terms and conditions also improving.

I would absolutely expect the COVID-19 crisis to accelerate the hardening or improving the pricing and terms and conditions that we’re seeing in the market. And that’s a result of a couple of things: the amount of insurance capital has been reduced as a result of dislocation in the financial markets and people having to take – put up losses for COVID-19; and also, maybe even more importantly, people’s risk tolerance has been reduced as a result of what’s happened with COVID-19.

So what we are seeing is various forms of derisking going on in our industry. When you add all of that up, that’s going to reduce the supply of insurance out there and it’s going to drive up the pricing.

Jeremy Noble

Tom, let’s turn to our third engine, Markel Ventures. How have the different Markel Ventures businesses been impacted by COVID-19?

Thomas Gayner

Thank you. We have an array of roughly 17 different companies that do everything, as I mentioned earlier, from making the equipment that bakes bread to provide housing, to protecting people against fire, to selling house plants. So we participate really across a diverse set of the economy. All of them, to greater and lesser degrees, have felt the effects of what’s happened in the economy. Sometimes – and it happens both on the demand side and how much product they can sell. And it also happens on the supply side, i.e., how efficiently it can run the factories, how the supply chains are working. So the effect has been substantial and that will show up through the course of the year.

Fortunately, the first quarter did get off to a good start. In the second quarter, we would still expect profitability. And we expect to be profitable through the year. We’re very encouraged by the steps of – the economy starting to reopen in bits and pieces, and we will try to operate our businesses to increase supply in a safe and appropriate manner. And we think that the increased activity out there, what we do people want and need, and they’ve done that for years. These are basic goods and services that are attractive in every dimension you can imagine that provide great value to the customer. So we think demand will come back. But clearly, the – COVID-19 is a sort of thing that leaves a mark.

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Thanks for sharing this @Donald. Bad macroenvironment is generally very good for prudent insurance companies as it leads to increase it premium pricing and a shift of market share towards the more prudent insurers. I noticed similar management commentary for past crisis as well. Something we should also keep in mind for Indian insurers.

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HI Harsh @harsh.beria93 , any insights on markels 2021 financials.

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Markel 2021 results were good.
All three engines ( as they say ) performed well, Insurance, Ventures( owning businesses, stock portfolio).

If you are further interested you can read their annual report ( 10K) their stock portfolio (13F-HR). You can also read their annual letter in the same section attached below.

Markel reports

Best
Siva

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When reading the results Markel please make sure you look at each engine separately Insurance the combined ration is important ( premiums collected -premium paid out) 100% means no profit no loss below 100% they are making profit and above 100% making loss. Float from this insurance business is put into their portfolio again look at portfolio returns separately last year US market was on fire so good returns there not every year it would be the same. Finally Ventures which are wholly owned operating businesses by far the biggest of them is Lansing building products. This is where I personally focus, this is how Berkshire so big as it is today.
Another downside/not so favorable thing for holding companies is, they trade at a discount market is perception based mechanism. And also here you are betting to some extent on the jockey ( capital allocator), Berkshire in the form of Buffett ( who is majority share owner) is an excellent jockey. Tom Gaynor is very good but he is not majority share owner, he owns significant shares but not majority like Buffett. Still they instilled very strong culture, I personally own 20 shares( at avg cost $1150/share) and I cheer for their success. My views may be biased since I own them.
Hope this helped
Siva

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My 2020 and 2021 notes are at the end. Despite higher than average natural catastrophe, Markel has executed very well. Book value has grown from $803 in 2019 to $1035 in 2021(13.5% CAGR). This is largely because of their superior underwriting (combined ratio has been in very good control) and good equity performance (15.2% in 2020 and 29.6% in 2021). It always helps to look back and see how company has evolved over time. 10-year book value growth has tapered down to 10-12%, price to book has largely been between 1-1.8x. Its a steady compounder that can offer 15%+ stock price returns in USD (if bought at 1-1.2x P/B) and low volatility.

Book value compounding

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Equity and fixed market returns

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2020:

  • Underwriting: Combined ratio of 98%
  • Equity returns: 15.2%, Fixed income returns: 5.7%, Overall: 9.4%.
  • Insurance: Faced losses in pandemic related insurance policies (like tennis tournament in England, Japan Olympics, etc.). All of these correlated with each other. Despite this, combined ratio was 98%, thereby making the overall operations profitable. Have reduced exposure to natural catastrophe related businesses. Reduced expense ratio from 37.7% in 2018 to 36.0% in 2020 through better efficiency. Targeting $10bn of annual insurance premium in next 5-years (vs $6bn in 2020) with underlying profits of $1bn
  • Not satisfied with stock price performance over last 5-years
  • Acquired Lansing Building Products. Formal discussions begun in 2019
  • During pandemic, company halted purchasing additional equity securities and liquidated a portion of portfolio to help fund opportunities in existing insurance business and to complete the Lansing acquisition. Company also stopped repurchasing shares. All this was resumed at the end of 2020
  • Raised $600 million of preferred stock (callable in 2025) in May to improve balance sheet quality and fund growth opportunities
  • ILS fund: Reported revenues of $316 mn and operating income of $5 million, which was after $59 million of amortization expense and $51 million of expenses from CATCo runoff operations
  • Catco Enquiry update: Continued to resolve the lingering issues associated with the CATCo operations. Profitability from these operations was constrained by costs associated with winding up and settling matters related to CATCo, which obscured the underlying progress evident in the ongoing businesses
  • Over last 15 years we’ve cumulatively invested $2.7 bn to acquire businesses in the Ventures group. These companies have dividended back and built up internal cash balances of $1.2 billion. Combined EBITDA from these was $367 mn in 2020
  • Non-insurance business:
    o Revenues of $2.8 bn
    o EBITDA of $367 mn
    o Several businesses in this segment are cyclical and sensitive to economic conditions (like auto sales, freight volumes, capital equipment, etc.)

2021:

  • Underwriting: Combined ratio of 90% (vs 98% in 2020)
  • Equity returns: 29.6%, Fixed income returns: (-) 0.7%, Overall: 8.8%. Purchased $88mn of net stocks and bought back $199mn of Markel stock
  • Insurance:
    o Gross premium written is $8.5bn (vs $7.2bn in 2020) with underwriting profits of $628mn (vs $128mn in 2020). With higher than average incidence of natural catastrophe, focus has been on reducing exposure to natural catastrophe insurance policies.
    o On track with their 5-year plan (proposed in 2020) to reach $10bn in annual insurance premium and $1bn in underlying profits
    o Hagerty (started partnership in 2013) went public in 2021 (is a specialty car insurance provider). In 2019, we purchased 25% of the company for $213mn. In December of 2021, Hagerty raised additional capital by going public. Markel invested additional $30 million and now own 23% of the company. Total market value of Hagerty is $4.7bn, valuing Markel’s stake at $1.1bn (vs invested amount of $257mn). Carrying cost on Markel’s balance sheet is $257mn (vs $1.1bn market value)
  • ILS (Insurance, reinsurance and insurance linked securities)
    o Lowers cost of insurance for buyers by connecting them with capital providers (pension funds, endowments) who seek stability and non-correlation in their returns (especially with stock or bond markets) with acceptable rates of return.
    o Acquired CATCo in 2015 which offered products with very high (and volatile) returns. This didn’t work out and winding up of operations started in 2019
    o Acquired State National in 2017 which has certain ILS operations but is largely a traditional insurance operation. This acquisition has worked out wonderfully. State National, in its Program Services division, provides a suite of administrative services that any ILS provider requires to operate in the regulated industry of insurance. They produced record results and profitability in 2021, continuing to exceed expectations
    o Acquired Nephila in 2018 which offered products designed to produce non-correlated returns with lower volatility than other ILS providers. In this segment, balance sheet risk is taken by their customers and Nephila earns incentive fees on achieving return expectations. Returns have been below initial expectations due to lower than expected returns. This is because of a series of larger than expected natural catastrophe losses in recent years, as a result of which they are increasing rates. Expect modest profitability in 2022
  • Non-insurance business:
    o Revenues of $3.6bn (vs $2.8bn)
    o EBITDA of $403mn (vs $367mn)
    o Acquired majority interests in Metromont which is the leading producer of precast concrete in the southeast US (used in data centers, parking garages, office buildings, multifamily residential buildings, and other facilities)
    o Acquired majority interests in Buckner Heavy Lift Cranes which operates the largest domestic fleet of cranes that can lift up to 2000 tons. They are used for erecting wind turbines used to generate electricity at scale, large stadium construction, and renovation and other major construction projects
    o Have cumulatively invested $3.4bn (vs $2.7bn until 2020) to acquire businesses in the Ventures group. These companies have dividended back and built up internal cash balances of $1.5bn (vs $1.2bn until 2020). Combined EBITDA from these was $403mn (vs $367mn in 2020)

Disclosure: Invested (position size here, no transactions in last 1-month)

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Hi Harsh,

Hope you are well.

The notes on Markel that you have shared since its IPO, were these notes available somewhere (on a forum, research platform, VIC, Mergent Reports, etc) or did you take them down from 10Ks on the parameters that you were focused on?

And secondly, the numbers on excel spreadsheet - may I ask where did you get them from (and if you cleaned them or not)?

Regards
M

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All data including the excel sheet nos are compiled from annual reports. I read through them and put the relevant nos in the document I have shared.

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Decent enough, Thanks for your response.

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Why did combined ratio suddenly jump in 1990, some M&A ?
Also, any thoughts on KNSL. It has combined ratio below 80%, could it be similar to Markei in 1980’s

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MKL – Markel – August 1st 2024:

We are betting more on the jokey than we are on the business. We are extremely biased with the calibre of the management because we adore and admire Thomas Gayner. We may be as blindsided with Thomas Gaynor as we were with Frans Van Houten (Philips NV). We might know what the business does but we really do not understand the insurance industry. Both of us have a slightly different method of valuing the business- neither of which is in detail. We have merely done a conservative (according to us) yet general back of the envelope valuation and made the 1st position in this stock at $1550.

What we still have to figure out and agree upon is - when should we sell the stock? How do we know that we were wrong in our thesis?

As of the writing,

  • the business has a manageable debt of approximately $3.8 billion versus a net profit of about $2 billion per year
  • Officers and directors own approximately 1.71% of the common stock
  • Thomas Gaynor personally purchased shares from the open market in the beginning of 2024 (he agreed at a conference that he found the shares to be undervalued at the at the price he purchased - estimate that to be approximately $1300)
  • has a record of taking more reserves than are really needed
  • pension assets are greater than pension obligations
  • has reduced outstanding shares from 13.99 million in 2013 to 13.13 million in 2023
  • no dividends are being declared
  • Buffett had a general rule of paying 1.2 times of book value for Berkshire stock to be repurchased.

The following are the risks that we identified:
a) The insurance side of business (Depending on the type of insurance they underwrite) does not have past the data to price the risk and this could be a possible detractor to future performance in the form of huge insurance payouts. (writing insurance they shouldn’t write and an epidemic/CNBC type event)
b) Human Nature: The insurance executives try to show growth in written premiums by sacrificing the quality of underwriting.
c) Accounting risk (two parts): Firstly Thomas Gayner has said that Markel (and he) has more conservative estimates of the reserves than are needed, but on the flip side, buys/acquires subsidiaries for Markel ventures by using the EBIT and EBITA multiple concepts. Secondly, Markel (and Thomas Gayner) value Markel ventures by the amount of EBIT and EBITDA they generate - this is contradictory to how WEB valued his operating subsidiaries.
d) ILS (Insurance Linked Securities): This is something new that they have introduced to contain risk. They are the first players in this game and therefore any new hot buzzword is always a red flag. This were the 4 risks identified on the operating side of businesses (as of August 1st 2024).
e) The market venture side of the business faces the risk just in the same way as private equity because there exists the risks of overpaying (paying too much for too little value in return i.e ISCAR type of deal with WEB) and secondly the risk of being blindsided by them wanting to close the deal (this however might be in check for as long as Thomas Gayner is at helm but you never know for sure).

Valuation of HH:
HH has gone for something that he calls asset-based earnings valuation. He assumes that Markel will earn approximately 7 percent (net) on assets of approximately $24 billion (current market value of the stocks plus bond portfolio). This translates to a net profit of approximately 1618M dollars. Applying a PE multiple of 11 implies a market cap of approximately $18.4 billion. This implies a current value of approximately $1421.00 per share at about 13 million outstanding shares. Ten years out applying the rule of 72 implies that the net profit would be approximately 3360M. Again applying a PE multiple of 11 implies market cap of approximately $36.9 billion. Assuming if outstanding shares remain constant at 13 million the per share value could be $2843. Value line predicts outstanding shares to be 8M by 2027-29 period. I personally find this to be very optimistic but it’s possible only if we experience a period of depressed values from the current overpriced valuations of the entire market in August 2024. By looking at the previous 10 years I expect the outstanding shares to be approximately 12 million which would imply a per share value of $3075 dollars. HH Has made a note of holding the stocks for as long as the bonds plus stocks portfolio are growing. He notes that MKL will not grow the portfolio but rather provide some stability.

Valuation of MH:

Markel initially came on our radar during Q2 2023 when Tom Russo added Markel to his portfolio. My remark at the time was “We got to buy it at about 16B Mcap implies a price of 1200 USD per share.” I cannot recall how that valuation was done. Markel was also added to two other portfolios during Q3 and Q4 2024 as well. However there are no comments for that. It once again came on the radar in Q1 2024 and my valuation at the time was as follows: has total debt of about 3.8 billion and a net debt of about 0.2 million. PE multiples have been around 20X+ but has come down since interest rates went up to 13-7-10-8x. Revenues grew from 4.3 billion to 16.6 billion in 10 years whereas operating margins ranged from 12-3-13-18% (current). Interest expense is approximately 180 million. And there is some preferred dividends an minority interest being given out. PAT margins at 6-10-18-8-12% (current). OS from 12.59 to 13.3M over the last 10 years. I came up with the future market cap of 13.2-19.8-23.4-26.4B (I can’t say if this was a 5/10 year valuation and neither can I remember how I got this numbers. The above valuation was done in Q1 2024).

Five years out I assume revenues to be in the range of 20-21-22 billion. I assume profit margins of 6% to 9% to 12%. Applying AP multiple of 8X, 10X and 13X implies a market cap of 9.6 billion, 18.9 billion and 34 billion. Average market cap comes to about $20.8 billion ($1600 per share 5 yrs out). Applying a at 20% margin of safety in this case, results in a market cap of $16.64 billion ($1280 per share). This valuation (revenues and profit margins) includes (a) interest and dividend income and (b) gain or loss on sale of investments. These numbers however do not include the per share value of the stock and bond portfolio at its current market value of approximately $24 billion.

This however should not be seen as a stand alone asset on a per share basis because this is recorded as a part of assets on the balance sheet with liabilities on the other side of the balance sheet. Total assets - total liabilities = common equity; which might be a reliable substitute but it doesn’t make much sense in an insurance operation or the one that Markel has. This is how I would value the stocks and bond portfolio: I assume a market decline of about 30% and as a result an equal draw down on the market value of the stock and bond portfolio from 24B to 16.8B. In addition, I assume that reserves of 24 billion are off by 50% and therefore would require an additional $12 billion (which is to come out of the depressed stock and bond portfolio). This equates to 16.8B – 12B = 4.8B (This is what is left for equity holders, if Markel has had a disastrous year and survives, if it doesn’t, then all bets are off!). This implies a 4.8B/13M shares  $369 per share of value. Adding this to the original $1600 avg value 5 years out, gives 1600+369 = $1969 value (on our conservative basis). On a best case basis, this would be 34000M/13M = 2615 +369 = $2984 value (Our best case. This could be higher because we have assumed a worst case for the $369 stock + bond portfolio value). On a worst case basis, this would be 9600M/13M = $738 + $369 = $1107 value per share. This concludes to $1107 on the downside, $1969 on a base case and $2984 on a best case basis. From the current price of $1550, this implies a downside of -$443 vs an upside of +$1434 (a 3.2x upside versus the downside).