MKL - Markel Corp

[james22]

As it stands, Markel shares are priced to deliver 4% on its investment portfolio and break even on an underwriting basis -- in perpetuity. That's silly.

 

http://www.fool.com/investing/value/2013/09/19/why-im-buying-markel.aspx

[bmathews03]

I chose to go with 3 different methods to arrive at a fair value for Markel, which I will withold for now (I'd rather post my thesis when it's all done) except to say that I completely disagree that the company is overvalued  :D

 

Well, who says MKL is overvalued?!?! Cannot really believe that!! Is this serious?!

 

giofranchi

 

I certainly didn't say Markel is overvalued. I like it and own shares, I was just pointing out that you might not get the right answer out of a model. My farce of a comment was meant as a criticism against modeling in general. Not Markel.

[bmathews03]

I have a question for the forum that I am hoping to get some feedback on:

 

Assessing MKLs post merger with Alterra value on a SOTP basis, I am encountering some practical problems. I think (an appropriate multiple on the insurance business earnings ex investment income + an appropriate multiple of mkl ventures earnings + net investments less debt ) / shares outstanding should be theoretically correct.

 

1. How to properly assess value of the insurance business ex investments?

2. What is the optimal metric to use when valuing Markel ventures (EBIT, EPS, OE?)

3. What debt value should be subtracted?

 

Any thoughts from MKL aficionados would be much appreciated.

 

Hi klmaranite -

 

I don't think you're starting with the right formula.  Here's my alternative suggestion:

 

Add up the following three things:

1) Underwriting profits (premiums times combined ratio)

2) Investment income (total investments times expected rate of return)

3) Pre-tax profits Markel Ventures (you're probably need to estimate this, I don't Markel shares many details)

 

To that sum, apply a reasonable tax rate. 

 

That will leave you with comprehensive income.

 

Divide comprehensive income by market cap.

 

That will give you the return you can expect to achieve by owning Markel stock.

 

I have model that does this automatically and updates with CapIQ data.  The answer for Markel is 7%.

 

If you're happy earning 7% annually, then the stock is perfectly priced.  If you're greedy and want to earn 14% every year, then the stock is 2x too expensive. If like to set your sights low, say 3.5% per year, then you're in luck -- the stock is at a 50% discount to its fair value.

 

So that's it... oh, except I forgot the first step. Before doing your valuation, you should decide if you want to buy the stock.  That way, if you don't like the answer that you're getting, you know which way to change the estimates to achieve the proper result.  Otherwise, how else would you know what to do?

 

And where do you put growth?

The problem with not taking into consideration growth is that in investing you don’t want to be either an optimist nor a pessimist: instead, you just want to be right.

And, if you don’t consider growth in valuing MKL, you will most probably be wrong.

MKL has an history of increasing BVPS at a CAGR of 17%. I just cannot see why it should fail to go on increasing BVPS at around 15% annual. Now it is selling for 519 / 451 = 1.15 x BVPS. If it compounds BVPS at 15% annual and in 10 years it is still trading at 1.15 x BVPS, the CAGR of your capital invested today in MKL will be 15%.

So, if you don’t consider growth, you get to a 7% annual: you probably won’t invest. Instead, if you consider growth, you get to a 15% annual: you probably will invest. One of the two must be right, and the other wrong. It is up to each of us to decide. :)

 

giofranchi

 

g = ROE * (1 - payout ratio).

 

I'd say for MKL, you could replace the 'E' in earnings with 'CI' comprehensive income.  Anyway, the point is that Markel requires capital to grow, that's the nature of the business. So it retains its capital, reinvests it, and fuels growth. I have no problem with that policy, as Markel reinvests at good rates, generally. A few MKL Ventures companies might be able to grow without capital, but that's a rounding error.

 

Anyway, the framework/model that I set out is absolutely correct. If you wanted to criticize it or disagree, growth isn't the right argument. You could have pointed out that earnings are understated because of conservative reserving. That would've been a good argument.

 

So, my larger point stands, the key is to decide first whether you want to invest, then back-fill the valuation to suit your needs. I prefer using a correct model and adjusting the inputs to suit my bias. I suppose using an incorrect model is also an option that achieves the same goal, but I'd be too embarrassed to do it publicly.  Of course, I'm being (mostly) sarcastic.

 

I like Markel (and own it). Tom Gayner has sold me his snake oil. If you own shares for a long period, you'll probably do very well.

[tengen]

So that's it... oh, except I forgot the first step. Before doing your valuation, you should decide if you want to buy the stock.  That way, if you don't like the answer that you're getting, you know which way to change the estimates to achieve the proper result.  Otherwise, how else would you know what to do?

 

I laughed and then I winced.

 

[bmathews03]

So that's it... oh, except I forgot the first step. Before doing your valuation, you should decide if you want to buy the stock.  That way, if you don't like the answer that you're getting, you know which way to change the estimates to achieve the proper result.  Otherwise, how else would you know what to do?

 

I laughed and then I winced.

 

Yes - that is one of my most brilliant insights as an investor. As Charlie Munger says, you must always invert. So, I've inverted the valuation process.

 

[JBird]

So that's it... oh, except I forgot the first step. Before doing your valuation, you should decide if you want to buy the stock.  That way, if you don't like the answer that you're getting, you know which way to change the estimates to achieve the proper result.

 

Were you saying this ironically?

[bmathews03]

So that's it... oh, except I forgot the first step. Before doing your valuation, you should decide if you want to buy the stock.  That way, if you don't like the answer that you're getting, you know which way to change the estimates to achieve the proper result.

 

Were you saying this ironically?

 

I don't want to give up the joke, but yes -- it was mostly ironic. I wouldn't suggest doing that, unfortunately, it is done by even great, successful investors.

[JBird]

So that's it... oh, except I forgot the first step. Before doing your valuation, you should decide if you want to buy the stock.  That way, if you don't like the answer that you're getting, you know which way to change the estimates to achieve the proper result.

 

Were you saying this ironically?

 

I don't want to give up the joke, but yes -- it was mostly ironic. I wouldn't suggest doing that, unfortunately, it is done by even great, successful investors.

 

Then this is one of my favorite comments on the entire board. Can I quote you?

[bmathews03]

So that's it... oh, except I forgot the first step. Before doing your valuation, you should decide if you want to buy the stock.  That way, if you don't like the answer that you're getting, you know which way to change the estimates to achieve the proper result.

 

Were you saying this ironically?

 

I don't want to give up the joke, but yes -- it was mostly ironic. I wouldn't suggest doing that, unfortunately, it is done by even great, successful investors.

 

Then this is one of my favorite comments on the entire board. Can I quote you?

 

Thanks for the nice compliment. I'm glad that someone gets my sense of humor. I was starting to think I'm actually not funny. Quote away -- I'd be honored.

[klarmanite]

Definitely funny. and true for many...I know I catch myself doing this subconciously from time to time

[Libs]

So that's it... oh, except I forgot the first step. Before doing your valuation, you should decide if you want to buy the stock.  That way, if you don't like the answer that you're getting, you know which way to change the estimates to achieve the proper result.  Otherwise, how else would you know what to do?

 

This is great. Reminds of a bad poker player, who after each revealed card, adjusts his 'read' of his opponent's hand to whatever fits his agenda. Truly an 'lol' comment.

[twacowfca]

I have a question for the forum that I am hoping to get some feedback on:

 

Assessing MKLs post merger with Alterra value on a SOTP basis, I am encountering some practical problems. I think (an appropriate multiple on the insurance business earnings ex investment income + an appropriate multiple of mkl ventures earnings + net investments less debt ) / shares outstanding should be theoretically correct.

 

1. How to properly assess value of the insurance business ex investments?

2. What is the optimal metric to use when valuing Markel ventures (EBIT, EPS, OE?)

3. What debt value should be subtracted?

 

Any thoughts from MKL aficionados would be much appreciated.

 

Hi klmaranite -

 

I don't think you're starting with the right formula.  Here's my alternative suggestion:

 

Add up the following three things:

1) Underwriting profits (premiums times combined ratio)

2) Investment income (total investments times expected rate of return)

3) Pre-tax profits Markel Ventures (you're probably need to estimate this, I don't Markel shares many details)

 

To that sum, apply a reasonable tax rate. 

 

That will leave you with comprehensive income.

 

Divide comprehensive income by market cap.

 

That will give you the return you can expect to achieve by owning Markel stock.

 

I have model that does this automatically and updates with CapIQ data.  The answer for Markel is 7%.

 

If you're happy earning 7% annually, then the stock is perfectly priced.  If you're greedy and want to earn 14% every year, then the stock is 2x too expensive. If like to set your sights low, say 3.5% per year, then you're in luck -- the stock is at a 50% discount to its fair value.

 

So that's it... oh, except I forgot the first step. Before doing your valuation, you should decide if you want to buy the stock.  That way, if you don't like the answer that you're getting, you know which way to change the estimates to achieve the proper result.  Otherwise, how else would you know what to do?

 

"So convenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for everything one has a mind to do."

 

    -- B. Franklin. :)

[giofranchi]

Markel Baby Berkshire Is On Sale

 

http://seekingalpha.com/article/1762702-markel-baby-berkshire-is-on-sale?source=email_rt_article_readmore

 

 

giofranchi

[obtuse_investor]

Gio,

Thanks for reminding me to look at MKL again-- I hadn't been looking at anything lately because everything seems to be making new highs.

 

I increased my position by ~50% today. <grin>

 

PS: In my opinion, that seeking alpha article is unreasonably bullish; but in spite of that, MKL is very cheap at these prices.

[Guest Qu1nt3ss0n]

Gio,

Thanks for reminding me to look at MKL again-- I hadn't been looking at anything lately because everything seems to be making new highs.

 

I increased my position by ~50% today. <grin>

 

PS: In my opinion, that seeking alpha article is unreasonably bullish; but in spite of that, MKL is very cheap at these prices.

 

+1

[giofranchi]

Gio,

Thanks for reminding me to look at MKL again-- I hadn't been looking at anything lately because everything seems to be making new highs.

 

I increased my position by ~50% today. <grin>

 

PS: In my opinion, that seeking alpha article is unreasonably bullish; but in spite of that, MKL is very cheap at these prices.

 

I agree. :)

 

Cheers!

 

giofranchi

[BRK IN MKE]

Not sure if this was already posted on Markel, but I noticed it in the comments section of the recent seeking alpha article http://bit.ly/1allwoi. Like the SA piece, I find the linked article from Islamorada Investment Management to be too optimistic. With that said, I often think of the following Buffett quote when I think about investing in Markel.

 

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price" -WEB

 

IMO Markel is a wonderful company selling at a fair price. I think current shareholders will be very happy with their investment in MKL 10+ years from now.

[klarmanite]

I enjoyed Cale's write-up very much, and I think his focus is on the right drivers going forward. His valuation section was more upbeat than my own ended up being, but I think there is a lot of upside in MKL - a large margin of safety even at 525 or whatever it is right now.

 

Where I differ from Cale is mainly in that I arrive at somewhat lower normalized ROE estimates than he does after modeling the ROE contribution from normalized investment returns, normalized insurance contributions and the effects of increased float post-Alterra. I also think some adjustments should be made for any impact of new solvency rules (granted, that must be speculative as these rules are not clear by any means).  But even with fairly conservative assumptions, I get a fair value a fair bit above today's stock price (about 750 USD).

 

While that's "only" 40 ish % upside, considering the quality of this organization, the company should be considered cheap IMO.

 

Would be interested in seeing what other people think MKLs "new normal" ROE is likely to be and how you arrive at that number/range.

 

 

[steph]

In these somewhat more expensive markets I believe that Markel is an excellent proposition. You don't need a miracle for book value to grow +10% on average and you can reasonably expect the market to pay at some point a larger premium to book, which today is rather at the low end of its historical multiple.

[mcliu]

Isn't 750, 2x BV? What kind of BV growth are you projecting?

 

I mean with FFH trading at 1.3x BV.. why MKL?

[klarmanite]

No, about 1.65 x. (BV is 459).

[mcliu]

Oh okay, nvm! So it's trading at ~1.2x. Fair enough.

[returnonmycapital]

Assuming: 35% tax rate, $3.6 billion in earned premiums and a 98% combined ratio post-Alterra.

For comprehensive earnings to get to $53 per share (10% of current stock price), I get a required rate of return on the investment portfolio of 7% pre-tax.

My concern with attaining this hurdle is that less than 50% of book value is in equity investments (currently around 44%, down from 70% in 2007).

 

 

[ERICOPOLY]

Lack of dividend at MKL is a positive. 

 

The FFH dividend for example would cost me about 75 bps of compounding (lost to the tax collector).  Over time that adds up.  Destroys 7.7% of the investment after 10 years.

 

[no_free_lunch]

returnonmycapital,

 

There is also the private equity piece (Markel Ventures), which while small currently, should grow at a fast pace.