The holding company can invest in Markel Ventures without regulatory issues. Markel could own the Markel Venture companies through its insurance companies but it would involve regulatory issues.
AMF Bakery Systems has paid large dividends to Markel.
They like to keep a cash buffer of $600 million to $1 billion. They now have about $1 billion cash at the holding company level.
Berkshire Hathaway is their largest holding. Buffett is explicit that Berkshire is undervalued.
They own Carmax which Gaynor thinks has a long runway of growth.
Will cheap financing affect deal flow? Yes, but they are willing to do nothing. Patience.
Because of bonds current riskiness, they are keeping the duration shorter. They do not stretch for yield.
They look to grow intrinsic value. This is a function of investment leverage plus underwriting profits. Investment leverage (total investments/equity) is about 3 to 1.
Book value has historically grown at 20%. Leverage used to be 4 to 1. Interest rates are now low. Underwriting margins have been low. They expect strong double-digit growth over the long-term. Market Ventures changes the game. There will be more earnings and cash flow in Markel Ventures. They wants mid double-digit returns.
Gaynor believes that over time the Markel culture drives intrinsic value. They have a 25-year history of following the same core values.
The insurance business is inherently feast or famine.
Markel has some regulatory concerns but philosophically they would like to put more capital to work in equities. They have a very long runway.
There are more specialty insurers, but they believe the basic insurance cycle is still in tact. The underwriting cycle and the cycle of bull and bear markets are very similar.
Regarding the cost of capital and hurdle rates, they don’t get interested unless they are going to make at least >10% (double digits). They use 10% as their cost of capital.
What is the intrinsic value of Markel? Decompose Markel: investments per share, profitability of the insurance business (multiple of cash flow), and the value of Markel Ventures. You get a big number.
It is a leap of faith (or not) how you think about insurance liabilities (float). Do you treat it as a true liability? Gayner argued that if you’re given $1 to hold and you never need to give it back it should be worth more than $1.
You need to earn this trust.
Investors should think about Markel’s float growth over time.