Timon Schneider | SOPA images | AP
Company: Markel Group (MKL)
Business: Markel Group is a holding company that consists of various companies and investments. Its segments include Specialty Insurance, Investments and Markel Ventures. The Specialty Insurance segment includes the Company's insurance and reinsurance capabilities as part of its underwriting activities, as well as insurance-linked securities and all contract reinsurance written on a risk-bearing basis. The Investing segment includes all investment activities related to Markel's insurance business and asset portfolio of fixed maturities, equities, short-term assets and cash equivalents. The Markel Ventures segment consists of controlling interest in a diverse portfolio of companies operating in various industries.
Market value: $22.33 billion ($1,735.79 per share)
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Markel Group in 2024
Activist: Jana Partners
Property: n/a
Average cost: n/a
Comment from activists: Jana is a highly experienced activist investor founded in 2001 by Barry Rosenstein. The company made a name for itself by taking deeply researched activist positions with well-thought-out plans to create long-term value. Rosenstein called his activist strategy “V-rolled.” The three “Vs” were “(i) Value: Buy at the right price; (ii) Votes: Know whether you have the votes before starting a proxy fight; and (iii) diversity of profit opportunities: having more than one strategy to increase value and exit an investment. Since 2008, the Company has gradually transitioned this strategy to what we characterize as the three “S”: (i) Stock Pricing – Buying at the Right Price; (ii) Strategic Activism – Selling a business or spin-off of a business; and (iii) Star Advisors/Nominees – working with top industry executives to advise them and take board seats when necessary.
What happens
Jana called on Markel to improve his insurance operations and explore a separation or sale of his private investment business. The company also noted that the entire business represents an attractive acquisition target for larger insurers.
Behind the scenes
The Markel Group is a financial holding company with its core business of specialty insurance. The capital base provided by the premiums from the insurance business enabled the company to finance its two other business segments: Investments and Markel Ventures. Its investment segment includes a $30 billion portfolio of fixed-term securities, equity securities and short-term investments. Markel Ventures, a private equity-like firm, owns majority stakes in a diverse portfolio of companies ranging from construction materials to bakery equipment to luxury handbags. Because of its business model of reinvesting premiums to fund investment activities, Markel has been compared to Berkshire Hathaway.
Specialty insurers have enjoyed a very robust and tough market (i.e. increasing premiums and reduced capacity) for several years. However, Markel has experienced underperformance relative to its peers over an extended period of time. On a one-, three- and five-year basis, Markel has returned 25.6%, 41.5% and 56.2%, respectively, which is in stark contrast to its peers which have an average return of 28.0%, 85%. achieved 4% and 162.3%. Additionally, performance underperformed the Dow Jones US Property and Casualty Insurance Index in each of these periods.
When looking for the cause of underperformance, you should always first focus on the core business that was experiencing capital allocation and operational issues. When it comes to capital allocation, Markel Group has undertaken some value-destroying mergers and acquisitions. In 2018, Markel Corp bought Nephila, an investment manager specializing in reinsurance risk, for $975 million. As of December 2018, Nephila had $11.6 billion in net assets under management. Today it stands at $7 billion. At an operational level, management has had some underwriting challenges which have led to under-reserving in recent years after many years of over-reserving. Not only does this result in management having to increase reserves rather than releasing excess reserves, but it also unsettles the market a bit as insurance company investors may fear future liabilities that are not currently being accounted for. As a result, the company's combined ratio (a measure of insurance company profitability) has been higher than its competitors for several years. The combined ratio is calculated by dividing the company's sum of insurance expenses and losses incurred by the premium earned. The higher the ratio, the lower the profitability. Markel's combined ratio was 96.4% last quarter, 98.4% last year and for several years in the 1990s. In comparison, the average for competitors is in the mid-80s, with some even in the high 70s.
While turning around the core business is always the first step, even with an improved and efficient insurance business, Markel would still have valuation overhang in the form of its ventures business. Of the company's three divisions (insurance, investments and ventures), this is the one that makes the least sense. It is also unique to Markel among its peers and the most difficult for the market and investors to value. Monetizing this business could be the best opportunity to create value.
Jana urges the Board and management to improve the core insurance business and reduce the combined ratio through stricter underwriting, more disciplined cost management and a more opportunistic selection and focus on insurance lines and markets. If management can improve performance in its core business, this should lead to a re-evaluation of the company. Second, Jana recommends management explore a divestment of the ventures business, which has impacted Markel's valuation. The company trades at 1.3 times book value, compared to peers that trade at an average of 2.5 times book value. Additionally, the last time Markel traded at 2.5 times book value was before the company launched its ventures business. Through his ventures arm, Markel owns controlling interests in a Boston-based luxury handbag company, a boutique home factory, a bakery equipment manufacturer, a home builder and 16 other companies in which a specialty insurance company has no real expertise. That would be great for the company to sell this business either as a whole or through the sale of individual businesses at the 8x EBITDA multiple that it bought them for. Not only would this provide Markel with money that he could use for his business or return to shareholders, but it would also give investors more confidence and certainty in the company's businesses.
Finally, while she is not directly calling for a sale of the company, Jana acknowledges that the company could be a strategic asset for other larger specialty insurers such as Tokio Marine, Zurich Insurance Group and Arch Capital. When this opportunity arises, Jana, as a fiduciary and economic animal, will ensure that the board balances this opportunity against the risk-adjusted return of a standalone plan to maximize long-term value for shareholders.
There is no reason to believe that Jana and management disagree on this. Certainly the parties agree that the company is undervalued and has an incentive to increase its share price. Not only was Jana a buyer of the shares, but the board also recently approved a $2 billion share buyback and the CEO personally purchased shares. Jana has some time to think about the next step: The window for nominating directors does not open until January 22, 2025 and ends on February 21, 2025. However, we do not expect this commitment to last until one Jana will lead the nomination of directors.
This is the first new activist campaign since the launch of the 13D Monitor Company Vulnerability Ratings (“13DM CVR”). Of the more than 2,500 companies we evaluated, Markel was in the sixth percentile of companies most likely to be hired by an activist.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, an investment fund that invests in a portfolio of 13D activist investments.