Company
Markel Corporation (MKL, Financial) is one of the most profitable and sound insurance companies in the world. The company has built its business on focusing on underserved and niche markets where it could explore for constant underwriting profits. Markel is in the business of making underwriting profits, unlike the rest of the insurance sector. Unlike its competitors Markel is willing to wait or even take shrinkage in its premium base to protect its underwriting profits or to make underwriting profits. The company has a cult-like focus on making an underwriting profit on every policy that it underwrites. Unlike other insurance companies that want to expand its premium base as much as they can and are willing to underwrite policies that are risky and wont make a profit. Because of this, most of the insurance sector over the last 28 years have average a 110% combined ratio, while Markel has average a 96% combined ratio. Markel is one of those few great capital allocators that is selling at a reasonable prices and offers above average returns for its investors.
Business Overview
Markel is a holding company headquartered in Richmond, Virigina and was founded in the 1920's. In each of the company's businesses, the company seeks to deliver innovated products and responsive customer service that makes the company a leader in the insurance market. The company since its founding has focus on underwriting customized insurance products. Insurance segments include Markel Wholesale, Global Insurance, Markel Specialty, Global Reinsurance, Markel International, and Markel Resseguradora do Brazil S.A. Markel Ventures is a subsidary that focuses on making strategic investments in companies outside of the insurance sector.
Focus On Niche Markets
During 2013, Markel became the premier insurer of classic cars through the company's underwriting relationship with Hagerly. This relationship is an example of Markel's abilities to find underserved niche markets that other insurance companies overlook or dismiss outright. Markel has expertise in focusing in specialty niche markets like hard-to-place risk, where there is little to no competitors since most insurance companies wont go near this market. Through the company's history Markel has insurered classic cars, summer camps, vacant properties and even the red slippers from the Wizard of Oz wore by Judy Garland.
Constant Discipline In Underwriting
Image From Basehitinvesting
The image above show that Markel has had massive growth in premiums and maintained a 96% average combine ratio. The majority of Markel competitors have been taking losses on there underwriting while Markel has made profits which has made its float cost free or even negative - costing the company nothing to use. I think the fact that Markel's float today is a negative cost to the company shows its comsumer advantage to its competitors.
Investment Segment
The investment portfolio of Markel is run by Thomas Gayner its CIO who is a well known value investor whose results has put him in the top 10% of any investment managment category. Over the last 20 years Markel has produced pretax annual investment returns in stock 13% and and its overal portfolio of 7%. These returns far exceed that of most P/C insurance companies over the same time span.
Thomas Gayner Uses Four Simple Rules:
- Profitable companies that produce high return on capital
- Management that is talented and honest
- Look for businesses that have opportunities for sizeable reinvestments
- At a Fair Price
Both Images From Basehitinvesting
Company History
- The company was founded by Samuel A. Markel in the 1920's to provide insurance to jitney buses.
- The company was originally structured as a mutually owned company, but was restructured in 1926 to a stock company.
- The company, after the restructuring, began insuring motor freight carriers.
- At one point the company became the largest insurer of trucks and buses in the country.
- In the 1930's the company established Markel Service, a separate company to handle direct and reinsurance of AF&C.
- Overtime the company expanded beyond trucks and bus companies.
- In the 1980's the company founded Essex Insurance Company in Delaware, to provide property insurance.
- In 1985, Prem Watsa (Trades, Portfolio) took over Markel Financial Holdings, a Candian based speciality trucking insurance provider.
- In 1986, Markel went public on the NASDAQ for $8.33 per share, giving the company a market cap of $15 million.
- In 1987, the company acquired half of Shand Morahan & Company.
- In 1989, the company acquired Rhulen Agency, specialty insurance provider for children summer camps and youth organizations.
- In 1996, the company acquired Investors Insurance Holding Corporation.
- In 1997, the company moved from the NASDAQ to NYSE.
- In 2000, the company founded Markel Southwest Underwriting after purchasing Arizona policies from Acceptence Insurance Company.
- In March, 2000 the company completed its acquistions of Terra Nova Holding Ltd.
- In 2009, Markel acquired Elliott Specialty Risk LP
- In 2010, the company acquired Aspen Holdings Inc.
- In 2012, the company completed its acquisition of Thomas Insurance Enterprises.
- In 2013, the company completed its acquisition of Alterra Capital Holdings Limited.
Subsidaries
- Essex Insurance Company
- Markel Insurance Company
- Markel Capital Holdings Ltd
- Markel American Insurance Company
- Markel Ventures Inc.
Management
Markel clearly has an excellent mangement team in place that has proven record of efficiently mangement the company and grow its book and equity value at above average rates over 28 years. Throughout much of the company's history it has been family owned and controlled and members of the family still have a say in the company and its operations. The Markel family put in place a culture of honesty, integrity, customer service, and work ethic and it is very clear that these prinicple are still the center piece of the management of the company today.
Board Of Directors:
- Chairman of the Board - Alan I. Kirshner.
- Vice Chairman - Steven A. Markel.
- Vice Chairman - Anthony F. Markel.
- Board Member - J. Alfred Broaddus Jr - Private Investor.
- Board Member - K. Bruce Connel - Retired Excutive Vice President XL Group plc
- Board Member - Douglas C. Eby - Retired President Torray LLC
- Board Member - Stewart M. Kasen - Retired President and Chief Excutive Officer S&K Famous Brand Inc.
- Board Member - Lemuel E. Lewis - Retired Excutive Vice President and Chief Financial Officer Landmark Communication Inc.
- Board Member - Darrell D. Martin - Retired Excutive Vice President and Chief Financial Officer Markel Corporation.
- Board Member - Michael O'Reilly - Retired Vice Chairman The Chubb Corporation.
- Board Member - Jay M. Weinberg - Chairman of Emeritus Hirschler Fleischer, a professional corporation.
- Board Member - Debora J. Wilson - Former President and Chief Excutive Officer The Weather Channel.
Excutive Management Team
- Alan I Kirshner - Chairman and Chief Executive Officer
- Athony F. Markel - Vice Chairman
- Steven A. Markel - Vice Chairman
- F. Michael Crowley - President and Co-Chief Operating Officer
- Richard R Whitt III - President and Co-Chief Operating Officer
- Thomas S. Gayner - President and Chief Investment Officer
- Gerard Albanese Jr - Excutive Vice President and Chief Undwriting Officer
- Britton L. Glisson - Chief Administrative Officer
- Anne G. Waleski - Excutive Vice President and Chief Financial Officer
- Michael Scyphers - Chief Information Officer
- Thomas K. Smith - Chief Marketing Officer
Top Excutive Compensation:
- Alan I Fisher - $5,106,283
- Anna G. Waleski - $2,244,723
- Gerald Albanses Jr - $4,681,763
- Richard R. Whitt - $4,606,883
- Thomas S. Gayner - $4,606,763
- F. Michael Crowley - $4,581,874
Total Executive Compensation - $25,828,289
Financial Summary
During fiscal year 2013, Markel's total revenues grew 44% to $4.3 billion, and income came in at $459 million. Also during the year the Markel doubled its insurance operation through its May 1st acquistion of Alterra. Gross written premiums rose 56% in 2013 to $3.9 billion from $2.5 billion in 2012. After the acquistion of Alterra, Markel added two new divisions: Global Insurance and Global Reinsurance.
Gross Written Premiums From Segments:
- Excess and Surplus Segment which includes the wholesale division produced grew gross written premiums of $1.1 billion versus $956 million in 2012, an increase of 12%.
- London Insurance Market Segment which includes the Markel International Operations produced gross written premiums of $914 million in 2013 versus $888 million in 2012, an increase of 3%.
- Specialty Admitted Segment which includes the Markel Specialty division which produced gross written premiums of $900 million versus $670 million in 2012, an increase of 34%.
- Global Insurance Segment which produced gross written premiums of $275 million in 2013
- Global Reinsurance Segment which produced gross written premiums of $408 million
For the six months ended June 30, 2014, revenues increased 35% to $2.5 billion and net income to shareholders increased 7% to $127 million. Revenues reflect net investment income increase of 25% to $178 million. Net income was partially offset by Other (Discontinued Lines) segment loss increased from $4.9 million to $15 million. Earnings per share decreased from $10.84 to $8.95.
Balance Sheet
| 2013 31/12 | 2012 31/12 | 2011 31/12 | 2010 31/12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Total Current Assets | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Assets | 23955.51 | 12556.59 | 11532.1 | 10825.59 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Total Current Liabilities | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Liabilities | 17281.93 | 8667.93 | 8144.59 | 7654.07 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Total Equity | 6673.58 | 3888.66 | 3387.51 | 3171.52 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Total Liabilities & Shareholders' Equity | 23955.51 | 12556.59 | 11532.1 | 10825.59 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Common Shares Outstanding | 13.99 | 9.63 | 9.62 | 9.72 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Preferred Shares Outstanding | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income Statements
| 2013 31/12 | 2012 31/12 | 2011 31/12 | 2010 31/12 | ||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total Revenue | 4327.79 | 3012.19 | 2650.15 | 2237.6 | |||||||||||||||||||||||||||||||||||
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| Total Operating Expenses | 3852.04 | 2607.38 | 2373.7 | 1868.43 | |||||||||||||||||||||||||||||||||||
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| Operating Income | 475.75 | 404.81 | 276.45 | 369.17 | |||||||||||||||||||||||||||||||||||
| Interest Income (Expense), Net Non-Operating | -114 | -92.76 | -86.25 | -73.66 | |||||||||||||||||||||||||||||||||||
| Gain (Loss) on Sale of Assets | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Other, Net | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Net Income Before Taxes | 361.74 | 312.05 | 190.2 | 295.51 | |||||||||||||||||||||||||||||||||||
| Provision for Income Taxes | 77.9 | 53.8 | 41.71 | 27.78 | |||||||||||||||||||||||||||||||||||
| Net Income After Taxes | 283.85 | 258.25 | 148.49 | 267.73 | |||||||||||||||||||||||||||||||||||
| Minority Interest | -2.82 | -4.86 | -6.46 | -0.94 | |||||||||||||||||||||||||||||||||||
| Equity In Affiliates | - | - | - | - | |||||||||||||||||||||||||||||||||||
| U.S GAAP Adjustment | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Net Income Before Extraordinary Items | 281.02 | 253.38 | 142.03 | 266.79 | |||||||||||||||||||||||||||||||||||
| Total Extraordinary Items | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Net Income | 281.02 | 253.38 | 142.03 | 266.79 | |||||||||||||||||||||||||||||||||||
| Total Adjustments to Net Income | 1.96 | -3.1 | - | - | |||||||||||||||||||||||||||||||||||
| Income Available to Common Excluding Extraordinary Items | 282.98 | 250.28 | 142.03 | 266.79 | |||||||||||||||||||||||||||||||||||
| Dilution Adjustment | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Diluted Net Income | 282.98 | 250.28 | 142.03 | 266.79 | |||||||||||||||||||||||||||||||||||
| Diluted Weighted Average Shares | 12.59 | 9.67 | 9.73 | 9.79 | |||||||||||||||||||||||||||||||||||
| Diluted EPS Excluding Extraordinary Items | 22.48 | 25.89 | 14.6 | 27.27 | |||||||||||||||||||||||||||||||||||
| DPS - Common Stock Primary Issue | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Diluted Normalized EPS | 22.78 | 26.93 | 16.22 | 28.4 | |||||||||||||||||||||||||||||||||||
Cash Flow Statements
| 2013 31/12 | 2012 31/12 | 2011 31/12 | 2010 31/12 | ||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Period Length: | 12 Months | 12 Months | 12 Months | 12 Months | |||||||||||||||||||||||||||||||||||||||||||||
| Net Income/Starting Line | 283.85 | 258.25 | 148.49 | 267.73 | |||||||||||||||||||||||||||||||||||||||||||||
| Cash From Operating Activities | 745.52 | 392.53 | 311.32 | 223.29 | |||||||||||||||||||||||||||||||||||||||||||||
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| Cash From Investing Activities | 187.39 | -377.13 | -491.11 | -283.34 | |||||||||||||||||||||||||||||||||||||||||||||
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| Cash From Financing Activities | 175.37 | 141.96 | 194.59 | -45.61 | |||||||||||||||||||||||||||||||||||||||||||||
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| Foreign Exchange Effects | 6.49 | 3.14 | -1.82 | 0.43 | |||||||||||||||||||||||||||||||||||||||||||||
| Net Change in Cash | 1114.76 | 160.51 | 12.98 | -105.23 | |||||||||||||||||||||||||||||||||||||||||||||
Compared Valuation to Bekshire Hathaway 
Image From BrooklynInvestor
The image above shows that both Bershire Hathaway and Markel have both failed Warren Buffett (Trades, Portfolio)'s five year test against the S&P 500. Berkshire Hathaway has an 20 average price-to-book multiply of 1.58 while Markel has had an average of long-term price to book multiply of 1.73. Berkshire Hathaway Book value in 2013 grew for 2013 grew at 18% just like Markel. Over the last 28 years Markel has on average grown book value at 20% and Berkshire Hathaway over its 48 years has grown it at 19%. That is very impressive for Bershire Hathaway and its just a one percent difference betweem Markel. Both companies are sound and highly profitable in the insurance market with there insurance operations breaking even or even making a profit. Both companies have grown there float annual at 19% over time and both companies have average 96 to 97 combined ratios as well. Based on the numbers its clear that Markel is very simuler to Berkshire Hathaway were it matters, in growth in premiums, return in book value and combined ratio. Clearly Markel is a great candidate for the next Bershire Hathaway.
Image above shows how well Markel have perform against the S&P and Berkshire Hathaway. Makels has had a long term total return of 4.52K % far outperforming Berkshire Hathaway.
Valuation
Markel currently maintains a current leverge to investment assets/equity of 2.6 or $2.60 of investments for every $1 of equity capital. This is well below Markels historic average of 3.5, if Markel increased its leverage to 3.0 invested capital to equity then the contribution to Return on Equity from investment portfolio would be 15%. At the company's current leverage if Markel's portfolio can produced an 5% after tax return then the portfolio would gain $63 per share. Based own a 5% after tax return for the portfolio, then Markel would be priced at 10x its comprehense earnings. When compared to the current P/E ratio of 31x, which doesn't take into account unrealized investement gains, show how backwards GAAP can be. Currently the company is sell for 1.3x its book value which a far below its historic average of 1.73x book value.
Markel's True Value Lies in its Float
Before we go any further we first need to adjust Markel's book value for its float, which by GAAP standards considers its a liability and is deducted from book value. Warren Buffett (Trades, Portfolio) said Berkshire Hathaway's 2013 Annual Report that the company's book value is understated because GAAP make the $77 billion Float into a liability and is deducted from book value. Since Markel cost of float is pretty much zero to negative, which makes its float free money for the company, then it should be considered an asset. Markel now has a combined float of $8.9 billion thanks to it acquisition of Alterra. You have to add the $8.9 billion in float into the current book value to get Markels true book value. When you adjust it book value for the float Markel produces an adjusted book value of $1212 per share. If Markel can grow its book value at 13% over the next five year then book value would grow to 1,612 over the next five years. Now if Markel can trade back up to 1.5x its book which is still far below its historic average, then Markel would sell for $2,418 giving investors an annual compounded return onf 16%. Currently is sell for $658 based on unadjusted book value, but if it should a 1.3x adjusted book value then the company would sell for $1,575.60. It is clear that Markel is undervalued and selling for less than its intrinsic value. Based on adjusted book value Markel is selling for 0.55x its book value far below reported price to book 1.34x.
Add It All Up:
- Conservated Price to Book 1.5x
- Leverage (Investment assets to equity) 3.0
- Adjusted Book Value $1,212 based on its $8.9 billion Float when added to book value.
- Next five year growth in book value 13%
- Selling for 0.55x Adjusted Book Valued.
- Selling at 10x comprehense earnings
When you add up of this you get a fair value for Markel between $1,575 and $2,418
