Markel Corporation - a case study to value insurance companies

International Opportunities
4

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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