Markel Corporation: Backstory

Markel (MKL) is a well-known compounding machine.

It is often compared to Berkshire Hathaway, and for good reason.

MKL adopted the BRK playbook of using “float” from an insurance operation as “permanent capital”, to turbo-charge dependable investment returns, into out-sized compounding rates of book value.

It has been written up many times by many observant value investors, and I will simply list these sources in rough chronological order.

  1. The amazing Brooklyn Investor looked at MKL after their 2012, 2013, and 2014 annual reports.
  2. A PDF report by Check Capital Management from May 2014
  3. MKL is another favorite at Basehit Investing, and has been featured multiple times, most recently in December 2014.
  4. Just Value had two excellent posts in December 2015, on compounding and intrinsic value.
  5. The Rational Walk looked at MKL in June 2015. He did a in-depth analysis of Ventures in May 2016.

Facts

  • Over its history, Markel has compounded BVPS at an amazing 18%+ rate. Even though the growth was front-loaded in the early years, the rate of book value growth has been a respectable 10%+ over the past decade. For a high-quality company, this is nothing to sneer at.
  • It has performed significantly better than BRK and S&P500 over almost any reasonable time-period. It also has a much longer runway. BRK has a market cap of $350B. MKL has a market cap of $13B. MKL is nearly 30 times smaller than BRK.
  • It has a superbly run insurance operation, which has a combined ratio consistently less than 100, and the industry average. Float is not only a source of funds, but also of actual operating profits.
  • Like BRK, it has three sources of income: underwriting profit, levered gains from investments, and Markel Ventures – which consists of wholly owned subsidiaries. For BRK, the operating companies is where the majority of the value increasingly lies. MKL is what BRK was like about 15-20 years ago. It still derives most of its value from investment gains.
  • Markel’s equity portfolio has outperformed S&P over most time-periods. They do generate “alpha”.
  • MKL reinvests all its economic earnings. Since these earnings accrue to the balance sheet, the increase in BVPS is a good proxy for the comprehensive EPS. This is a better number to use than ROE, because ROE ignores unrealized capital gains on long-term holdings.
  • MKL’s P/B ratio has hovered between 1 and 2.5. In 2013, it had dipped to nearly 1. Since then the market price has nearly doubled. The P/B ratio currently is near 1.6.
  • MKL’s investment leverage (total investments + cash equiv.)/BV has varied between 4.5 in the early years to a historical low of 2.25 on 3/31/2016. If MKL earned 5% on its invested capital, this would account for  the comprehensive “ROE” of 4.5 * 5% = 22.5% in the early days, and 2.25 * 5% = 11.25% in more recent years. The insurance market is currently soft. Since MKL is uninterested in writing insurance business on unprofitable terms, this ratio might remain low, until the tide turns. However it is useful to know, that in the long run, we should expect leverage to increase somewhat.
  • Not only is leverage low in recent years, so is the equity allocation of the investment portfolio. Currently, only 20-25% of the investment portfolio is invested in equities. Given the leverage ratio this implies that about 55% of the BV is allocated to equities. Some of it may have to do with needs of the insurance business, a fairly valued market with a lack of great bargains, or the Alterra acquisition. But management has signaled that it would like greater equity exposure under the right terms.
  • Leverage, of course, cuts both ways. Therefore, it is crucial to protect the downside! MKL has been remarkably successful at this. The CAGR on the total investment portfolio (equities + fixed income + cash) has consistently shuffled between 6-8%.
  • Their reluctance to jack up the leverage, or rapidly increase equity allocation, must be understood through this lens. When the opportune time comes they will have enough dry powder to deploy productively, and reap benefits over many years following.

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