Timon Schneider | SOPA Images | AP
Company: Markel Group (MKL)
Business Overview: Markel Group operates as a holding company with a variety of businesses and investments in its portfolio. It operates through several primary segments such as Specialty Insurance, Investing, and Markel Ventures. The Specialty Insurance division includes the company’s insurance and reinsurance operations, insurance-linked securities, and treaty reinsurance underwritten on a risk-bearing basis. In the Investing segment, Markel handles activities linked to its insurance operations and manages a diverse asset portfolio comprising fixed-income securities, equities, short-term assets, and cash equivalents. Finally, Markel Ventures holds controlling stakes in multiple businesses across various industries.
Stock Market Value: The company is valued at $22.33 billion, trading at $1,735.79 per share.
Activist: Jana Partners
Background: Jana Partners, led by Barry Rosenstein, has made a name for itself since its inception in 2001 by taking well-researched activist positions complemented by solid plans for long-term value creation. Rosenstein’s strategy, initially called "V cubed," strived for Value, Votes, and Variety of approaches to enhance and exit investments. Over time, they shifted towards new principles: Stock price strategy, Strategic activism involving company sales or spin-offs, and utilizing Star advisors.
Current Developments
Jana is urging Markel to enhance its insurance operations and consider selling or separating its private investments segment. They also see Markel as a promising acquisition target for bigger insurance players.
Behind the Scenes
Markel Group, well-regarded in specialty insurance, relies on the capital generated from premiums to support its other segments: Investments and Markel Ventures. Its investment arm manages a hefty $30 billion portfolio of various securities, and Markel Ventures, akin to a private equity firm, owns stakes in a diverse range of ventures, from construction supplies to luxury bags. This model has led to comparisons with Berkshire Hathaway.
While specialty insurers have been benefiting from a robust market with rising premiums and limited capacity, Markel has lagged. In comparison to its peers, which have scored more substantial returns over the past few years, Markel’s performance hasn’t been as strong, underperforming the Dow Jones U.S. Property and Casualty Insurance Index as well.
Delving into the reasons for underperformance reveals issues within the company’s ground operations, particularly in capital allocation. There have been unwise M&A choices, like the Nephila acquisition for $975 million, that haven’t panned out as expected, with net assets taking a nosedive since the purchase. Underwriting missteps have also led to reserve deficiencies, unsettling investors with potential future liabilities. Resultantly, Markel’s combined ratio has been consistently higher than its rivals, indicating lower profitability.
Fixing the core operations is vital, but even so, the Ventures business remains a challenge, contributing to a valuation overhang. Unlike many insurers, Markel’s Ventures segment complicates valuations. Realizing value from this segment could be pivotal. Jana is advocating for strengthening the insurance business by lowering the combined ratio via disciplined and focused operations. They also suggest divesting the Ventures business, which has, over time, diluted Markel’s valuation. Currently, the company trades at 1.3 times book value, compared to peers around 2.5 times. Prior to launching its Ventures, Markel was valued similarly to its rivals.
Selling either the whole Ventures segment or parts of it could provide funds to reinvest or return to shareholders, offering clarity and confidence in the company’s core focus. Furthermore, there’s potential for Markel as an acquisition for larger insurers like Tokio Marine or Zurich. While not directly advocating for a sale, Jana sees the strategic value Markel offers to bigger players and wants the board to consider potential offers seriously.
Despite varying opinions on the next steps, Jana and Markel’s management appear aligned in their view that the company is undervalued, sharing a mutual goal of boosting stock prices. Share buybacks and the CEO’s personal stock purchases reflect this alignment. Jana’s next move is on standby with the director nomination window set for early 2025. Nevertheless, there’s optimism that a consensual strategy between Jana and Markel will emerge without needing a directorial shake-up.
This is a first in activist movements since launching the 13D Monitor Company Vulnerability Ratings, with Markel ranking in the sixth percentile among companies likely to encounter activist engagement.
Ken Squire, the founder of 13D Monitor, dedicated to shareholder activism research, and portfolio manager of the 13D Activist Fund, specializes in investments following activist 13D filings.
