Mr. Market decided to mark down his price on Markel (MKL) shares on December 19, the day that Markel announced that it would purchase Alterra Capital Holdings Limited (ALTE) for $3.13 billion, by about 10%. The closing price for Markel on Dec 18 was $486.05 and on Dec 19 it was $436.24. I think this is an overreaction to the news and presents a chance to buy a solid company at a discount.
The only criticism of the deal that I have read in the financial press was from Meyer Shields of Stifel Nicholas. As reported by Reuters he said, "We have enormous respect for Markel's underwriting and investing expertise, but we think its M&A track record is frankly less impressive. Its last major acquisition (Terra Nova, in 2000) experienced regular and significant adverse development for years following the deal." Stifel Nicholas downgraded their rating on the stock from buy to hold. Their price target had been $550.
Markel's book value, one way to value a company, does not show much of an adverse development after the Terra Nova purchase. Markel purchased Terra Nova in March 2000. Markel's book value, as reported in their 10-K's posted on their website, increased that year and in the following years as shown below:
- 1999 $68.59
- 2000 $102.63
- 2001 $110.50
- 2002 $117.89
- 2003 $140.38
- 2004 $168.22
Markel agreed to pay around one times book value for Alterra. At the end of the third quarter, Alterra's book value per share, as reported by Alterra in their 10-Q posted on their website, was $29.57. After the deal was announced Markel price dropped from 1.2 times book value to 1.1 times book value. Markel's book value at the end of the third quarter as reported by Markel was $395.48.
Alterra seems to be a conservatively run insurance company and Markel will add Alterra's float to its own to benefit shareholders of both companies.
Alterra's book has as reported by Alterra in their 10-Ks posted on their website was as follows in the three most recent annual reports:
- 2011 $27.51
- 2010 $26.30
- 2009 $28.01
If the reason you are interested in Markel is because of its experience underwriting insurance and excellent track record of investing its float, I don't see anything to be scared of because of this deal.
Tom Gaynor, Markel's Chief Investment Officer, continues to do a great job managing the company's equity portfolio. On December 20, Carmax (KMX), its largest holding as of the end of the third quarter as reported in their 13-F, reported record third quarter revenue and earnings and its stock rose to a record high. Carmax is up over 22% year to date.
For investors who are waiting for a good time to purchase Markel, Mr. Market is now offering the company on sale.