Activist Jana calls on Markel to focus on insurance. Here’s how the firm can help create value

Business: Markel Group is a holding company comprised of different businesses and investments. Its segments include Specialty Insurance, Investing and Markel Ventures. The Specialty Insurance segment includes the company’s insurance and reinsurance capacities within its underwriting operations, as well as insurance-linked securities and all treaty reinsurance written on a risk-bearing basis. The Investing segment includes all investing activities related to Markel’s insurance operations and asset portfolio of fixed maturities, equities, short-term assets and cash equivalents. The Markel Ventures segment consists of controlling interests in a diverse portfolio of businesses that operate in various industries.

Stock Market Value: $22.33B ($1,735.79 per share)

Ownership: n/a

Average Cost: n/a

Activist Commentary: Jana is a very experienced activist investor founded in 2001 by Barry Rosenstein. The firm made its name by taking deeply researched activist positions with well-conceived plans for long term value. Rosenstein called his activist strategy “V cubed.” The three “Vs” were” (i) Value: buying at the right price; (ii) Votes: knowing whether you have the votes before commencing a proxy fight; and (iii) Variety of ways to win: having more than one strategy to enhance value and exit an investment. Since 2008, the firm has gradually shifted that strategy to one which we characterize as the three “Ss” (i) Stock price – buying at the right price; (ii) Strategic activism – sale of company or spinoff of a business; and (iii) Star advisors/nominees – aligning with top industry executives to advise them and take board seats if necessary.

Jana called on Markel to improve its insurance operations and explore a separation or sale of its private investments business. The firm also noted that the entire company presents an attractive acquisition target for larger insurers.

Markel Group is a financial holding company with a core business of specialty insurance. The capital base provided by the premiums from its underwriting business has enabled the company to fund its other two business segments: Investments and Markel Ventures. Its investing segment encompasses a $30 billion portfolio of fixed maturity securities, equity securities and short-term investments. Markel Ventures, a private equity-like business, owns controlling stakes in a diverse portfolio of businesses ranging from building supplies to bakery equipment and luxury handbags. Given its business model of reinvesting premiums to fund investment activities, Markel has been likened to Berkshire Hathaway.

Specialty insurers have enjoyed a very robust and hard market (i.e., rising premiums and reduced capacity) for several years. However, Markel has experienced a protracted period of underperformance relative to its peers. On a one-, three- and five-year basis, Markel has returned 25.6%, 41.5% and 56.2%, which stands in stark contrast to its peers which have returned an average of 28.0%, 85.4% and 162.3%. It has also underperformed the Dow Jones U.S. Property and Casualty Insurance Index over each of these periods.

When looking for the source of its underperformance, the first place to always look is the core business, which has experienced capital allocation and operational issues. On capital allocation, Markel Group has engaged in some value-destructive M&A. In 2018, Markel Corp purchased Nephila, an investment manager specializing in reinsurance risk for $975 million. In December 2018, Nephila had $11.6 billion in net assets under management. Today, it stands at $7 billion. Operationally, management has had some underwriting challenges that have led to under-reserving in recent years after many years of over-reserving. This not only causes management to have to increase the reserve as opposed to releasing surplus reserve, but it also spooks the market a little as insurance company investors may fear future liabilities not presently accounted for. As a result, the company’s combined ratio (a measure of profitability for insurance companies) has been higher than peers for several years. The combined ratio is calculated by dividing the sum of the company’s underwriting expenses and incurred losses by its earned premium. The higher the ratio, the lower the profitability. Markel’s combined ratio was 96.4% in its most recent quarter, 98.4% last year and in the nineties for several years. This compares to peers’ average in the mid-eighties, with some even in the high seventies.

While fixing the core business is always the first step, even with an improved and efficient insurance business, Markel would still have a valuation overhang in the form of its Ventures business. Of the company’s three engines (Insurance, Investments and Ventures) this is the one that makes the least sense. It is also unique to Markel among its peers and is the hardest for the market and investors to value. Monetizing this business could be the best opportunity to create value.

Jana is urging the board and management to improve the core insurance business and reduce its combined ratio through better underwriting rigor, more disciplined expense management and a more opportunistically targeted selection and focus on insurance lines and markets. If management can improve performance in its core business, it should result in a re-rating of the business. Second, Jana is recommending that management explore a divestiture of the Ventures business, which has been deflating Markel’s valuation. The company trades at 1.3 times book value versus peers that trade at an average of 2.5 times. Moreover, the last time Markel traded at 2.5 times book value was before it launched its Ventures business. Through its Ventures arm, Markel owns controlling interests in a Boston-based luxury handbag company, a boutique house plant operation, a bakery equipment manufacturer, a homebuilder and 16 other businesses that a specialty insurance company has no real expertise in. It would be great for the company to sell this business either in whole or by selling individual businesses at the 8 times EBITDA multiple it bought them for. This would not only give Markel cash to use in its business or return to shareholders, but it would also give investors more confidence and certainty in the company’s business lines.

Finally, while not outright 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. If this opportunity arises, as fiduciaries and economic animals, Jana will ensure that the board weighs this opportunity versus 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 are not on the same page here. Certainly, the parties agree that the company is undervalued and are incentivized to increase the stock price. Not only has Jana been a buyer of the stock, but the board recently authorized a $2 billion share buyback, and the CEO has personally been buying shares. Jana has some time to figure out its next move: The director nomination window does not open until Jan. 22, 2025, and closes on Feb. 21, 2025. However, we do not expect this engagement will lead to a nomination of directors by Jana.

This is the first new activist campaign since we launched the 13D Monitor Company Vulnerability Ratings (“13DM CVR”). Of the more than 2,500 companies we rated, Markel fell in the sixth percentile of companies most likely to be engaged 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, a mutual fund that invests in a portfolio of activist 13D investments.