Markel: Valuation
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?