Jana, an activist, urges Markel to prioritize insurance in order to generate value.

Company: Markel Group (MKL)

Markel is a holding company that encompasses various businesses and investments. Its segments include Specialty Insurance, Investing, and Markel Ventures. The Specialty Insurance segment includes Markel's insurance and reinsurance capabilities, underwriting operations, insurance-linked securities, and all treaty reinsurance written on a risk-bearing basis. The Investing segment involves all investing activities related to Markel's insurance operations and its asset portfolio, which includes fixed maturities, equities, short-term assets, and cash equivalents. The Markel Ventures segment comprises controlling interests in a diverse portfolio of businesses that operate across different industries.

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

Activist: Jana Partners

Ownership: n/a

Average Cost: n/a

Jana, founded in 2001 by Barry Rosenstein, is a highly experienced activist investor known for its well-researched positions and long-term value plans. Rosenstein's activist strategy, dubbed "V cubed," focused on three key elements: value, votes, and variety of ways to win. Since 2008, the firm has shifted its strategy to a three-pronged approach, which includes buying at the right stock price, engaging in strategic activism, and aligning with top industry executives through star advisors and nominees.

What's happening

Jana requested Markel to enhance its insurance operations and consider separating or selling its private investments business. Additionally, the company mentioned that it is an attractive acquisition target for larger insurers.

Behind the scenes

Markel Group is a financial holding company that specializes in underwriting specialty insurance. The premiums from its core business have allowed the company to fund its other two segments: Investments and Markel Ventures. Its investing segment manages 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 variety of companies, including building supplies, bakery equipment, and luxury handbags. Due to its business model of reinvesting premiums to fund investment activities, Markel has been compared to Berkshire Hathaway.

Despite the robust and hard market for specialty insurers, Markel has underperformed its peers in terms of returns for several years. Specifically, Markel has returned 25.6%, 41.5%, and 56.2% on a one-, three-, and five-year basis, respectively, which is significantly lower than the average returns of its peers, which have returned 28.0%, 85.4%, and 162.3% over the same periods. Additionally, Markel has underperformed the Dow Jones U.S. Property and Casualty Insurance Index over each of these periods.

When examining the reasons for underperformance, the first step is to investigate the core business, which has faced capital allocation and operational issues. Markel Group has engaged in some value-destructive M&A, such as the $975 million purchase of Nephila in 2018, which resulted in a decrease in net assets under management from $11.6 billion to $7 billion today. Additionally, management has faced underwriting challenges that have led to under-reserving in recent years, causing the company's combined ratio (a measure of profitability for insurance companies) to be higher than peers for several years. Markel's combined ratio was 96.4% in its most recent quarter, 98.4% last year, and in the nineties for several years, compared to peers' average in the mid-eighties, with some even in the high seventies.

Although Markel's core business is always the first priority, the company still has a valuation overhang due to its Ventures business. This engine is the least profitable among Markel's three, and it is also unique to the company. Investors and the market struggle to value this business, making it the most challenging to monetize.

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. Additionally, 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. Furthermore, 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 beneficial 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

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, 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.

It is evident that Jana and management share the same viewpoint regarding the undervaluation of the company and are motivated to increase the stock price. Jana has previously purchased shares, and the board has recently approved a $2 billion share buyback. Additionally, the CEO has personally bought shares. Although Jana has some time to decide on its next move, we do not anticipate that this engagement will result in the nomination of directors by Jana. The director nomination window opens on January 22, 2025, and closes on February 21, 2025.

Since the launch of the 13D Monitor Company Vulnerability Ratings, Markel is among the top 6% of companies most likely to be targeted by an activist.

Ken Squire is both 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.