Thursday, March 14, 2013

Markel 2012 Annual Report

The Markel (MKL) results have been out, but I just noticed that the annual report is out too (I don't check so it may have been out for a while).  The MKL annual report is a very good read of you have the time to check it out.

We know this from the earnings release, but MKL grew book value a nice +14.7% in 2012 (despite Sandy) and had a 97% combined ratio.   They had a $399 million reserve release last year, but that's because they tend to be conservative in their reserving (they explain it in the annual report).  Some may complain that the combined ratio in recent years is phoney due to these releases, but that's like saying AIG isn't really as bad as it looks because they are just taking hits on past policies they wrote that were bad.  If we can penalize some for under-reserving, why should we penalize others for being conservative?

Anyway, the investment portfolio at Markel did quite well too with the equity portfolio rising +20% and fixed income portfolio earning 5%.

There was a nice explanation in the report about their approach to equity investing.  Their equity portfolio has returned +9%/year in the past ten years (versus +7%/year for the S&P 500 index) and +10%/year in the past twenty years (versus +8%/year for the S&P 500 index).  I wonder if there are any mutual funds or even hedge funds out there with 20 year returns like this?   Probably not too many.

The book value per share (BPS) at MKL also increased nicely over the long term rising +13%/year over  ten years (versus +7%/year for the S&P 500 index) and +16%/year over twenty years (versus +8%/year for the S&P 500 index).

This is how they explained what they do in their equity portfolio (this should be boringly familiar to regular readers here):

MKL's underwriting continues to do well (MKL combined ratio):

And here is an updated table on their investment portfolio:

There's a lot more in the annual report so check it out.  

Anyway, all of these five, ten and twenty year figures got me curious.  I do follow a lot of these "Berkshire-like" entities and have been updating their performance so I figured, why not put all of this stuff into a table?   The annual reports of these entities are starting to dribble out (Y and FRFHF are out too).  How are these guys doing compared to the S&P 500 index and Berkshire Hathaway over time?  

                          2012           5 year          10 year        20 year
MKL                +14.7%        +8.8%         +13.1%      +16.1%   
Y                     +10.8%          +6.1%           +8.8%            na
FRFHF              +6.5%       +10.6%          +11.6%      +16.2%
L                        +5.1%         +9.6%         +10.0%        +11.2%        
LUK                  +9.6%          +2.0%        +12.4%        +10.6%
GLRE                +1.9%          +5.8%

BRK                 +14.4%        +7.9%         +10.6%       +14.4%
S&P 500          +16.0%        +1.6%           +7.1%         +8.2%

(All of the above include dividends except LUK and FRFHF.  FRFHF 2012 return includes dividends, but historical BPS growth does not)

What's pretty amazing is that not only did MKL beat the S&P 500 index in most time periods, it also beat BRK in all of the above time periods.  Of course, it's not in the nature of the MKL folks to mention that in their annual report, but there it is.

MKL is trading now at $504/share versus 2012 year-end BPS of $403.85/share, around 1.3x book.  MKL is certainly not dirt cheap but with performance figures like the above it may well be worth the premium.    

(Update after the fact:  The above $403.85/share BPS doesn't take into account the Alterra merger which will be about 4% accretive to BPS.  Plus a strong stock market, up 10%, would push up pro-forma BPS by another 3% or so, so the BPS would be 7% higher (the equity portfolio would be 30% or so of pro-forma shareholders' equity))


  1. This is the first comment I make in this blog although I've been following it for quite some time.

    Please keep the hard work because your posts are so well thought.


    P.S.: It would be great to hear about AIG and its reserves. It would be great to hear your opinion.
    Berkowitz's huge position is what I find more interesting.

    1. Hi,

      Thanks for the comment.

      AIG is certainly an interesting situation. There are some interesting things about AIG floating around in terms of analysis; it is a popular hedge fund long now. I don't have any particular insight into their reserves, though, other than their reputation of having been aggressive in writing policies over the past few years. I have no idea if that is the case now.

      Anyway, I may post about AIG in the future.

    2. Ok, In fact, I am also interested in the stock because of the TARP warrants, not only Berkowitz's position. The only (but hugely important) issue that I have is the book value quality.


  2. Hi KK,

    Great post. Your blog is one of my favorites in the online value investing community.

    Anyone who would say Markel's combined ratio is phony really just doesn't understand this company. Its reserve releases are largely offset by unnecessary additional reserving during each year, so it's really like taking money out of one pot and putting it in to another. It (roughly) nets out.

    If it grows premiums at a decent pace it could actually harm its GAAP earnings because the unnecessarily established reserves will exceed prior years' reserve releases.

    Although Markel doesn't explicitly state this, conservative reserving can be a smart move because it allows the company to defer paying taxes on what it would otherwise record as profit, giving it an additional - albeit much smaller - form of float to earn interest on.

    Tom Gayner is a great investor and should do very well for Markel shareholders over time. He's a really swell guy.

    Best wishes,

    Scott Hall

  3. Another one you may want to add to your list is Canadian company Power Corp (POW.TO, PWCDF). It's a bit of a complex structure, but the main earnings generators are Great West Life and Investors Group. Great West recently bought out Irish Life for a good price and is now a major player in this recovering economy.

    This story from the Globe and Mail was written in 2011, but is still relevent:

    Plus, the nice thing about Power Corp is you also receive a good dividend yield of 4.3%.

  4. Hi kk

    Read a lot of your post and I really like the way you think and there seem to be a lot of knowledge behind your thinking.
    I'm looking to make an addional investment to my stock portfolio and don't have the time to analyze hundreds of stocks. So I was thinking about looking into stocks that has been pre-analyzed by you.
    So I was hoping I could get you to give me your top 3 best value stock buys? I would like to have them prioritized.
    You don't have to elaborate or anything (if you do, it would be great). A simple list will do.

    Anyways. Thanks for a great blog.

    Best regards
    Mikkel /Denmark

  5. Just a brief elaborating.
    1. I can handle the risk, so if the stock falls 50 % it is not a problem for me economically. So just give the stocklist with the stocks you expect to give the highest returns. (Should probably say risk adjusted return)
    2. I'm thinking 10 years ahead. So it's a long term buy i'm looking for. (I can't see one year ahead)

    Best regards

    1. Hi, sorry for the late response; I was away for a couple of days. Um, that's a good question. I still like most of the stocks I mentioned here but they are mostly financials / banks / insurance companies.

      But I can't really tell you which basket to own or anything like that as I do tend to shift around according to valuations.

      Any company with good managements that allocate capital well with a history of outperforming will probably continue to do well, like BRK, L, MKL etc...

      Thanks for reading.

  6. I was wondering if you were going to cover WTM--annual report just came out

    Anyway, enjoy the blog

    1. Hi,

      Thanks. Yes, WTM is a great company too. I don't own any now but have in the past. I may post about it in the future.

  7. What do you think of valuing MKL and similar Insurance/holding companies, as Tom Gayner and others have suggested? More specifically, assuming underwriting is breakeven and then adding in investments per share + the earnings stream from companies they own, subtracting debt? The quote of Gayner and the math is shown in this article

    I'd be interested to hear of your opinion on this valuation method. Thanks.

    1. Hi,
      That approach is basically the same as the two column method to value Berkshire Hathaway; investments per share plus value of non-insurance operating businesses. I've written about what I think about that aproach (what is float worth? and other BRK posts). It makes sense, but my only reservation is that I think equity investors use a higher discount rate that would make the investments per share worth LESS to them than it's mark-to-market value.

      At the end of the day, when I buy MKL, I am an equity owner and I am mostly interested in the return on that equity. I don't care what investments per share is. If it's high and leveraged, that means I make a high ROE. So I would usually be willing to pay a multiple of book value depending on what the normalized ROE or BPS growth over time would be. Look up my posts on BRK for more on this issue.

      Thanks for reading.


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