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THIS DOCUMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY. NO PART OF THIS DOCUMENT IS A RECOMMENDATION OR A SOLICITATION. THE INFORMATION AND BELIEFS CONTAINED HEREIN ARE BELIEVED TO BE CORRECT, BUT THERE IS NO GUARANTEE.
MKLs incredible record begs the question: What are the competitive advantages that have allowed it to defy the dismal economics of its industry?
If you can think of some insurance product that you need, and you could get a policy for it quickly and easily, well Markel doesnt do that. On the other hand, if you were to answer no two or three times to an insurance questionnaire, now thats getting closer to what we like to do. What we do is insure things that are rather complicated and unusual, like childrens summer camps, bass boats with overpowered engines, weddings and event cancellations, vacant properties, new medical devices, new technology, or the red slippers Judy Garland wore in the Wizard of Oz. ~Steven Markel, 2008 Value Investing Conference at Darden Business School
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MKL was built from the ground up to achieve underwriting profits and has carefully cultivated its disciplined culture for decades Underwriters bonuses are based on the actual profitability of their own business; therefore, paid out over multi-year periods MKL has the deserved trust of its employees that when premium volume is shrinking, the expense structure will be managed with a long-term view
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#5. Culture
The Markel Style
Markel has a Commitment to Success. We believe in hard work and a zealous pursuit of excellence while keeping a sense of humor. Our creed is honesty and fairness in all our dealings.
The Markel way is to seek to be a market leader in each of our pursuits. We seek to know our customers needs and to provide our customers with quality products and service. Our pledge to our shareholders is that we will build the financial value of our Company. We respect our relationship with our suppliers and have a commitment to our communities. We are encouraged to look for a better way to do thingsto challenge management. We have the ability to make decisions or alter a course quickly. The Markel approach is one of spontaneity and flexibility. This requires a respect for authority but a disdain of bureaucracy. At Markel, we hold the individuals right to self-determination in the highest light, providing an atmosphere in which people can reach their personal potential. Being results-oriented, we are willing to put aside individual concerns in the spirit of teamwork to achieve success. Above all, we enjoy what we are doing. There is excitement at Markel, one that comes from innovating, creating, striving for a better way, sharing success with otherswinning.
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Insurance and investing are two businesses in which culture is indisputably critical to long-term success
Successful organizations must attract talented employees, permit them to operate free from short-term constraints, and incent them to manifest a long-term mindset
For us the underwriting of our specialty insurance risk is really the same process as the fundamental analysis necessary to make sound investment decisions.
Performance-based compensation
Senior executive bonuses based on trailing 5-year compounding of book value per share Underwriter bonuses based on actual profitability of their own business (multi-year)
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In such cases, great results can be obtained by owning a non-meanreverting business over the long term I think the business models that are most likely to defy meanreversion are self-reinforcing business models
The likelihood of future success increases as time goes on
MKL has self-reinforcing dynamicsvirtuous circleswhich I believe will propel continued above-average performance over the long term
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Employee Ownership
Aligns long-term interests
Longevity
Accumulated expertise Reputation Customer relationships
Culture
Disciplined Long-term minded Performance-based
Underwriting
UW profit Free float Risk management
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Employee Ownership
Aligns long-term interests
Longevity
Accumulated knowledge Idea network Reputation / deal flow
Culture
Disciplined Long-term minded Performance-based
Investing
Capital appreciation Investment income Operating income
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Optionality
Multiple opportunity sets Opportunistic capital allocation Capitalize on turbulence
Markel Ventures
Internal investment Free cash flow
Public Securities
Fixed income Equities
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Alterra Acquisition
This past December 19th, MKL announced its acquisition of Alterra Capital Holdings Limited
Alterra is a publicly traded specialty insurer (ALTE) that had been trading at 80% of book value Deal value is $3.1 billion in 1/3rd cash and 2/3rd stock; 1.1x Alterras book value Major acquisition for MKL: Alterras gross premiums and book value are equal to 80% and 77%, respectively, of its own Modestly accretive to MKLs book value per share ($395 $415)
Complementary insurance operations will produce a diversification of insurance risks, economies of scale, and business opportunities
Trailing-12-month gross premiums written will increase by 80% to $4.4 billion
Alterra (continued)
Following the announcement of the acquisition, MKL stock traded down by ~10% ($486 to current $440) I believe this is the result of two factors:
Arbitrage-related selling Concern that Alterra is under-reserved (the liability on its balance sheet representing the estimate of future claims is understated)
Investors have unpleasant memories of MKLs last major acquisition, that of Terra Nova in 2000
Terra Nova entailed several years of adverse reserve developments and underwriting losses, before reaching profitability
Admittedly, the operational outlook for the next few years is far from clear
(But this is always the case!)
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Valuation
MKLs historical price / book value ratio (1986 2012)
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Valuation (continued)
Current MKL stock price of $440 represents ~105% of pro-forma book value per shareone of its lowest valuations ever
MKL is priced not merely for mean-reversion, but for an immediate end to its ability to generate high returns on capital
Historical average P/B = 2x Pro-forma net investments per share = 2.45x PF BVPS MKL has enormous momentum to propel further compounding of intrinsic value
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All of these factors working in combination should produce extraordinary results (and they have for over 2 decades)
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Thank You
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