Archive for July, 2009

Markel: Valuation

July 13th, 2009 Comments off

But how to value Markel’s stock?

To value an insurance company is not an easy task. Insurance companies depend a lot of management’s quality:

Are they able to price adequately policies?

How exact are their loss estimates and their loss reserves?

Insurance companies are not such a leveraged risky business model as banks as we all had to learn in 2008 and 2009 but nevertheless management mistakes can wipe out the float or the company whole together.

Net earnings and their multiples are not very meaningful when you value an insurance company:

Earnings can be great if the company does not reserve properly for eventual future losses. When later losses hit the company, it has to record big losses or even becomes an endangered species.

So how to mesure the value of its float?

Markel measures itself by „book value/share”, its stockholder’s equity divided by the number of outstanding shares.

Let’s have a look at the price-to-book value ratio.

In normal times the stock market values a good insurer at 2 times book value. More can be a too rich valuation and less can hint at problems. Or a difficult market like today temporarely undervalues the true value of insurance companies.

Markel’s book value/share at the end of the first quarter 2009 was $ 222.14

It’s share price at present sits at $ 280 at present.

So if we simply assume the book value did not change until today, we get a price to book value ratio of 1.3.

Markel’s manegement is excellent. Markel views its shareholders as business partners. There has never been a significant stock dilution in the history of this company.

Growth in book value averages 10-15% over the long term

1.3 times book value/share to me seems an interesting price for an outstanding company like Markel Corp.

What do you think?

How does Markel invest?

July 4th, 2009 Comments off

They invest obviously in what they know best and so they have a high percentage invested in insurance companies.

As their equity investment criteria are very similar to those of Berkshire it certainly does not come as a surprise that their biggest investment is in Berkshire stock itself.

For more details on their holdings watch their latest SEC 13F Filing (date May 2009).

As Markel’s general goal is „to earn consistent underwriting profits and superior investment returns to build shareholder value” (Markel Annual Report 2008) they aim for an average annual return of at least 15% on their equity portfolio over the long term.

But obviously this all didn’t work well in 2008. As most of us they did not expect a market decline of this magnitude.

Markel’s return on its equity investment portfolio was – 34%. They went heavely down but still managed to outperform the S&P 500 index.

As they put it in their Annual Report: „The best thing we can say about 2008 is that it is over!”

But they believe that the insurance markets will improve beginning in 2009. „Unprofitable companies have to go out of business some day (with government help or without)”.

And they are rather bullish for the equity markets for the next decade seen the performance of the last ten years!

They know that the average historical performance of the S&P 500 index over the last 100 years was 11% (dividends reinvested) and there were always extended periods of flat or negative markets. So simply put stocks will not stay flat forever.

…. continues ….

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