MKL - Markel Corp

[jeffmori7]

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).

 

Equity investments is down because of Alterra acqusition I think..it should raise again while they convert the former Alterra portfolio.

[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).

 

Equity investments is down because of Alterra acqusition I think..it should raise again while they convert the former Alterra portfolio.

 

I include Markel Ventures in investments.

 

Last year, from what I can gather from the annual report, Ventures produced about $13.5 million of net income (about $21 million pre-statutory-tax) on a year end value of assets of $891 million (about $786 million of net assets). That isn't very close to 7%. This year looks better, year-to-date but still a ways from 7% pre-tax.

[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).

 

Equity investments is down because of Alterra acqusition I think..it should raise again while they convert the former Alterra portfolio.

 

My calculations of Equity investments as a percentage of Book Value:

 

2007 70%

2008 49%

2009 49%

2010 54%

2011 55%

2012 48%

2013 Q2 44%

 

2008's investment return (-34% in equities, if memory serves) probably has something to do with the decline. And the growth in Markel Ventures too. Returns on Ventures investments need to improve in order to help with the overall 7% pre-tax hurdle rate.

[klarmanite]

My basic ROE scenarios are attached. Note that "current climate" assumes what I think are reasonable estimates given the current economic climate, not what the exact numbers are today.

 

The other scenarios take into account increased leverage, higher interest rates and growth in investments. I assume an overall combined ratio of 96% in line with the long term historical average of MKL.

 

[klarmanite]

Assuming shareholder equity increases in line with the 5yr avg towards 2015, I think these are reasonable estimates of fair value today (see attachment). As you can see, whether MKL is fairly valued or undervalued depends on the ROE you think they are able to achieve. Obviously, I'm in the camp that thinks MKL can improve ROE toward the 14% area in the long term. I tried think in terms of probabilities in this case, and you may disagree with me on the various weightings as well as other parts of this analysis. But anyway, this is how I arrive at my FV estimate of 760 USD.

 

I think it's reasonable, other people may not.

[giofranchi]

https://sumzero.com/headlines/financials_and_insurance/MKL/201-odds-of-a-double-very-high-for-mini-berkshire-markel

 

 

giofranchi

[Guest hellsten]

http://www.scribd.com/doc/123873695/Josh-Tarasoff-Markel-Insurance

 

Current MKL stock price of $440 represents ~105% of pro-forma book value per share

one of its lowest valuations ever. MKL is priced not merely for mean-reversion, but for an immediate end to its ability to generate high returns on capital

 

(as of 01/04/13)

[returnonmycapital]

As at September 30:

 

Net investments per share (including cash & Markel Ventures net assets) = $1,088

Per-share Q3 premiums earned (annualized) = $262

 

Assuming 35% statutory tax rate & 2% underwriting profit, the pre-tax return on net investments required to earn comprehensive earnings of 10% of present market value is approx. 7.2%:

 

Comprehensive earnings per share equal to 10% of present market value = $54

Underwriting: $262 * .02 = $5.24 * .65 = $3.41

Investments: $54 - $3.41 = $50.59 / .65 = $77.83 / $1088 = 7.2%

 

Equities together with Markel Ventures net assets currently at 59% of book value.

[link01]

http://www.scribd.com/doc/123873695/Josh-Tarasoff-Markel-Insurance

 

Current MKL stock price of $440 represents ~105% of pro-forma book value per share

one of its lowest valuations ever. MKL is priced not merely for mean-reversion, but for an immediate end to its ability to generate high returns on capital

 

(as of 01/04/13)

 

I was wondering why the name josh tarasoff sounded familiar; he made a bull case for amzn that was also posted on this board. he's not your avg value investor type, it seems

[ERICOPOLY]

What is the P/E of MKL if you take the look-through earnings of it's equity holdings?

 

I can understand a somewhat lighter valuation for MKL given where we are with general equity prices.  Less upside to book value if markets don't keep rising.  So if you take out rising equities from the equation and just look at how much they actually earn on a look-through basis, how much would the forward 12 months earnings contribute to today's book value, expressed as a percentage of book?

[CorpRaider]

Yeah, and isn't another possible explanation for the seemingly compelling valuation the merger?  How much of that book value is attributable to the acquired operations yet to be integrated?  I know that is why I'm not buying right now.  The last time they did a big acquisition it didn't go so well, most mergers destroy value and it arguably ups the risks until we see how it goes.

[muscleman]

As at September 30:

 

Net investments per share (including cash & Markel Ventures net assets) = $1,088

Per-share Q3 premiums earned (annualized) = $262

 

Assuming 35% statutory tax rate & 2% underwriting profit, the pre-tax return on net investments required to earn comprehensive earnings of 10% of present market value is approx. 7.2%:

 

Comprehensive earnings per share equal to 10% of present market value = $54

Underwriting: $262 * .02 = $5.24 * .65 = $3.41

Investments: $54 - $3.41 = $50.59 / .65 = $77.83 / $1088 = 7.2%

 

Equities together with Markel Ventures net assets currently at 59% of book value.

 

Sorry I am confused.

Just a few posts above, another member said:

"Current MKL stock price of $440 represents ~105% of pro-forma book value per share

one of its lowest valuations ever. MKL is priced not merely for mean-reversion, but for an immediate end to its ability to generate high returns on capital"

 

But you just said "Equities together with Markel Ventures net assets currently at 59% of book value."

So what is the right way to view the book value? ::)

[ERICOPOLY]

Compared to "historical valuation", the float is worth less today because of the interest rates. 

 

A 2.6% 10 yr Treasury bond taxed at 30% only generates 1.82% after tax.

 

My view of a lot of these insurers is that they would be most attractive if purchased at the peak of the interest rate cycle, not at the bottom!

 

So that's also worth somewhat of a discount compared to historical P/B trading levels.

 

 

[returnonmycapital]

Compared to "historical valuation", the float is worth less today because of the interest rates. 

 

A 2.6% 10 yr Treasury bond taxed at 30% only generates 1.82% after tax.

 

My view of a lot of these insurers is that they would be most attractive if purchased at the peak of the interest rate cycle, not at the bottom!

 

So that's also worth somewhat of a discount compared to historical P/B trading levels.

 

Yes, it would probably still work, despite the sloppy underwriting assured at higher yields.

And MKL has almost $2.3 billion in debt at interest rate costs of 6%, on average. That is a lot higher than the overall yield on their fixed income portfolio. Float might be costless, but it ain't worth 100 cents on the dollar.

[muscleman]

Compared to "historical valuation", the float is worth less today because of the interest rates. 

 

A 2.6% 10 yr Treasury bond taxed at 30% only generates 1.82% after tax.

 

My view of a lot of these insurers is that they would be most attractive if purchased at the peak of the interest rate cycle, not at the bottom!

 

So that's also worth somewhat of a discount compared to historical P/B trading levels.

 

Yes, it would probably still work, despite the sloppy underwriting assured at higher yields.

And MKL has almost $2.3 billion in debt at interest rate costs of 6%, on average. That is a lot higher than the overall yield on their fixed income portfolio. Float might be costless, but it ain't worth 100 cents on the dollar.

 

Could you please tell me what is Pro-forma net investments per share? Is that book value per share?

I think I saw similar presentations mentioning Pro-forma net investments per share about why BRK.B is undervalued by Whitney Tilson, but I don't understand what it is.

[thepupil]

liquid investment securities / shares outstanding. it is not book value because book takes into account liabilities like float. investments/share is thrown around for berkshire and markel. the thought process is if underwriting profits are 0 or greater, the deduction of float liability from book can be ignored and equity holders effectively receive all the benefits of those securities even if they have an insurance claim against them.

 

it's aggressive, but as long as you believe in the endurance of the underwriting capability, not out of line.

[zippy1]

Q3 results

http://finance.yahoo.com/news/markel-reports-third-quarter-nine-213800678.html

Markel Corporation (MKL) reported diluted net income per share of $4.67 for the quarter ended September 30, 2013 compared to $5.32 for the third quarter of 2012.  Diluted net income per share was $15.33 for the nine months ended September 30, 2013 compared to $19.67 for the same period of 2012. The combined ratio was 96% for the third quarter of 2013 compared to 101% for the third quarter of 2012. The combined ratio was 97% for the nine months ended September 30, 2013 compared to 96% for the same period of 2012.

[nestorius]

FYI, Markel taking down $100M of the BB deb issue.

 

The buyers of the debs are listed in a 13D filed for BB

 

FFH $250M

Mackenzie Financial $200M

Canso Investment $300M

Markel $100M

BAM $50M

Qatar Holding $100M

Total $1,000

 

See Schedule A: http://www.sec.gov/Archives/edgar/data/915191/000119312513432720/d622931dex3.htm

[muscleman]

As at September 30:

 

Net investments per share (including cash & Markel Ventures net assets) = $1,088

Per-share Q3 premiums earned (annualized) = $262

 

Assuming 35% statutory tax rate & 2% underwriting profit, the pre-tax return on net investments required to earn comprehensive earnings of 10% of present market value is approx. 7.2%:

 

Comprehensive earnings per share equal to 10% of present market value = $54

Underwriting: $262 * .02 = $5.24 * .65 = $3.41

Investments: $54 - $3.41 = $50.59 / .65 = $77.83 / $1088 = 7.2%

 

Equities together with Markel Ventures net assets currently at 59% of book value.

 

Could you please tell me how to get the net investment per share figure? From Whitney Tilson's BRK.B presentation, he uses net investment per share + operating subsidiaries' income per share * 8 to get his per share intrinsic value, which makes sense, so I am trying to do a similar exercise here. :)

[returnonmycapital]

As at September 30:

 

Net investments per share (including cash & Markel Ventures net assets) = $1,088

Per-share Q3 premiums earned (annualized) = $262

 

Assuming 35% statutory tax rate & 2% underwriting profit, the pre-tax return on net investments required to earn comprehensive earnings of 10% of present market value is approx. 7.2%:

 

Comprehensive earnings per share equal to 10% of present market value = $54

Underwriting: $262 * .02 = $5.24 * .65 = $3.41

Investments: $54 - $3.41 = $50.59 / .65 = $77.83 / $1088 = 7.2%

 

Equities together with Markel Ventures net assets currently at 59% of book value.

 

Could you please tell me how to get the net investment per share figure? From Whitney Tilson's BRK.B presentation, he uses net investment per share + operating subsidiaries' income per share * 8 to get his per share intrinsic value, which makes sense, so I am trying to do a similar exercise here. :)

 

From the 09/30/13 10Q:

 

Add "Investments"

Total investments = $14,461,010

Cash = $2,115,322

Non-insurance operations = $903,795

 

Subtract Debt = $2,250,479

 

Equals Net investments = $15,229,648

 

Divide by Shares outstanding = 14,001

 

Equals Net investments per share = $1,087.75

[muscleman]

Compared to "historical valuation", the float is worth less today because of the interest rates. 

 

A 2.6% 10 yr Treasury bond taxed at 30% only generates 1.82% after tax.

 

My view of a lot of these insurers is that they would be most attractive if purchased at the peak of the interest rate cycle, not at the bottom!

 

So that's also worth somewhat of a discount compared to historical P/B trading levels.

 

I always enjoy your acute views.

So I am thinking, if we would like to bet that interest rate will go up in the next 5 years, will MKL be a decent instrument to do that? If we lose this bet, we will probably make 10% a year. If we are right, then the market will assign a good value to its float, and we will make a lot of money. It will be a win-win bet. What do you think?

[jay21]

Compared to "historical valuation", the float is worth less today because of the interest rates. 

 

A 2.6% 10 yr Treasury bond taxed at 30% only generates 1.82% after tax.

 

My view of a lot of these insurers is that they would be most attractive if purchased at the peak of the interest rate cycle, not at the bottom!

 

So that's also worth somewhat of a discount compared to historical P/B trading levels.

 

The market seems to lower the P/B at the bottom of the cycle and raise it at the top.  I think the bottom is the place to be.

 

Pricing is a little less competitive due to low rates as well because it would need to improve in order for insurers to hit acceptable ROEs.  If ROEs are low, capital exits.

[ERICOPOLY]

Compared to "historical valuation", the float is worth less today because of the interest rates. 

 

A 2.6% 10 yr Treasury bond taxed at 30% only generates 1.82% after tax.

 

My view of a lot of these insurers is that they would be most attractive if purchased at the peak of the interest rate cycle, not at the bottom!

 

So that's also worth somewhat of a discount compared to historical P/B trading levels.

 

The market seems to lower the P/B at the bottom of the cycle and raise it at the top.  I think the bottom is the place to be.

 

Pricing is a little less competitive due to low rates as well because it would need to improve in order for insurers to hit acceptable ROEs.  If ROEs are low, capital exits.

 

Doesn't the bottom drop out of the book value in a rising interest rate environment that is both punishing to their stocks and their bonds?

 

So, I suppose, is the stock trading at a bigger premium to book than it looks if you re-price their book based upon a 5% 10 yr rate environment.  I know for example that a 10yr bond earning 3% suffers a 20% loss if it is re-priced to a 5% yield.

[cayale]

Compared to "historical valuation", the float is worth less today because of the interest rates. 

 

A 2.6% 10 yr Treasury bond taxed at 30% only generates 1.82% after tax.

 

My view of a lot of these insurers is that they would be most attractive if purchased at the peak of the interest rate cycle, not at the bottom!

 

So that's also worth somewhat of a discount compared to historical P/B trading levels.

 

The market seems to lower the P/B at the bottom of the cycle and raise it at the top.  I think the bottom is the place to be.

 

Pricing is a little less competitive due to low rates as well because it would need to improve in order for insurers to hit acceptable ROEs.  If ROEs are low, capital exits.

 

Doesn't the bottom drop out of the book value in a rising interest rate environment that is both punishing to their stocks and their bonds?

 

So, I suppose, is the stock trading at a bigger premium to book than it looks if you re-price their book based upon a 5% 10 yr rate environment.  I know for example that a 10yr bond earning 3% suffers a 20% loss if it is re-priced to a 5% yield.

 

If I remember correctly, their bond portfolio is awfully short.  They are sitting in a lot of cash as a result of the acquisition.  They have a lot of dry powder at this moment.

[jay21]

Yeah, they were at a <3 year duration last time i've seen it disclosed.  They have a ton of cash from hedge fund redemption and are redeeming more in the near future.