Josh Tarasoff Presentation on The Long Case For Markel

Josh Tarasoff presentation on Markel Corporation.

  • Markel Corporation (NYSE:MKL) is a financial holding company, the primary business of which is specialty property and casualty insurance
  • Has compounded book value per share at ~20% annualized since its IPO in 1986
  • Founded in 1930; run by three generations of the Markel family; in 2010, passed day-to-day operations to the next generation of senior management


Markel’s key statistics:

  • $440 stock price (as of 01/04/13)
  • $4.3 billion market cap
  • $3.8 billion book value
  • Recently announced agreement to acquire Alterra Capital Holdings Ltd (NASDAQ:ALTE) for $3.1 billion in cash and stock
  • Markel Corporation (NYSE:MKL) trading for a slight premium pro-forma book value per share

Insurance: Generally Mediocre

  • Insurers make (or lose) money in two ways
    • Underwriting
    • Investing
  • Most underwriting operations lose money
    • Highly commoditized product, so competition is based primarily on price
    • Cyclical business, most of the time “soft market” (excess capacity, low prices) prevails
    • We have been in a soft market since 2005
  • The insurance industry makes up for underwriting losses through investments
    • Insurers run large investment portfolios
    • “Float”—policyholder funds that are held before claims must be paid—is normally the single largest source of funds
  • Not surprisingly, the industry earns single-digit ROEs on average

Insurance: Can Be Wonderful

The intrinsic value of our insurance business will always be far more difficult to calculate than the value of, say, our candy or newspaper companies. By any measure, however, the business is worth far more than its carrying value. Furthermore, despite the problems this operation has periodically handed to us, it is the one—among all the fine businesses we own—that has the greatest potential. ~Warren Buffett, 1990 Letter to Shareholders (emphasis added)

Markel’s Value-Creation Track Record

  • 20% annualized BVPS compounding since the IPO in 1986
  • BVPS declined in only 4 years since the IPO
    • In each case a new high was reached within 12 months
  • Minimum trailing 5-yr BVPS growth = 9% annualized
    • This occurred over the 5 years through 2011, during which there was a “perfect storm” of a soft insurance market, low interest rates, and low equity returns
  • Markel Corporation (NYSE:MKL)’s incredible record begs the question: What are the competitive advantages that have allowed it to defy the dismal economics of its industry?

H/T Guy Spier

Josh Tarasoff: Markel Insurance


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