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Markel Corporation: 4 Models Point To Undervaluation

May 04, 2020 5:30 PM ETMarkel Group Inc. (MKL)22 Comments
Ohio Capital Ideas profile picture
Ohio Capital Ideas


  • Markel Corporation has a long history of delivering value to shareholders with returns of 15% per year since its IPO in 1986.
  • Markel's sources of value today have broadened beyond insurance to include Markel Ventures, a collection of majority owned businesses, and a large bet on the insurance linked securities market.
  • First quarter results included $325 million in pandemic related losses and a large $1.7 billion loss from the equity portfolio.
  • Four valuation models point towards a fair value of $1,200 per share after these losses are accounted for and a haircut is applied to Venture's valuation.
  • With shares at a 30% discount to fair value and trading at less than 1.2x book value and 14x economic earnings, now appears to be the best time in close to a decade to invest.

Markel Corporation (NYSE:MKL), now nearing a hundred years in age, has provided investors with impressive returns for several decades. Although it was founded in 1930 to insure jitney buses, Markel did not go public until 1986 at $8.33 per share. Its stock price has compounded at a 15% annual rate since then, beating the S&P 500's total return of 10%.

Despite the continued success of Markel, like any other stock, it cannot be purchased at any price. Book value per share, despite being a less relevant metric today than it once was, has grown long-term at a high single-digit to low double-digit rate, but for the last ten years, the stock has mostly not kept pace with the S&P 500.

Markel Long-Term Compounding of Book Value and Market ValueMarkel total return to investors and change in book value compared to the total return of the S&P 500 over various time periods. All market prices (Markel's and S&P 500's) are as of 4/30/2020 while book value is as of the end of the first quarter of 2020. The S&P 500 total return assumes dividends are reinvested. Source: Author.

Obviously the recent declines of the book value and share price of Markel have a disproportionate impact on more recent comparisons. But, declining interest rates have been a big part of the relative underperformance of Markel over the last decade.

Markel Investment Yield, 2003-2019Source: Author.

Investment yields are set to begin declining again as interest rates have tumbled this year. But, Markel is also slowly positioning itself quite differently today than it has in the past. With consistently profitable underwriting, historically strong investment results, and a growing amount of value attributable to its non-insurance operations and insurance-linked securities, Markel still has the potential to have a bright future and a recent sell-off in the stock represents an attractive entry point. Unlike much of the stock market, which has regained a considerable amount

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Ohio Capital Ideas profile picture
"Two types of choices seem to me to have been crucial in tipping the outcomes towards success or failure: long-term planning and willingness to reconsider core values. On reflection we can also recognize the crucial role of these same two choices for the outcomes of our individual lives.”-Jared DiamondOhio Capital Ideas is a private investor, investment analyst, and writer from Ohio. My interest in investing was first sparked by watching the tech bubble of the late 1990s and the attitude of the time that successful investing was easy. Experience has shown that investing is far from easy. Since then, I have spent a significant amount of time growing my knowledge of successful investing, reading about other successful investors, and managing my own family’s investments. The process of writing, as well as respectfully debating points of view through comments and messages with others, is a great aid to the investment process.The name “Ohio Capital Ideas” comes from the book Capital Ideas by Peter Bernstein. For a period of time I wrote under the name “Capital Ideas”, but added the “Ohio” to distinguish between other commentators and newsletters using the generic term “Capital Ideas” and avoid any possibility of confusion.Ohio Capital Ideas is not a registered investment advisor, legal or tax advisor, or a broker / dealer. All opinions expressed are from personal research and intended to be educational. You should consider your own personal situation and seek tailored professional advice if needed before making any investing or financial decisions for yourself.

Analyst’s Disclosure: I am/we are long MKL, BRK.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (22)

Do they have to pay corporate taxes on dividends received and on realized capital gains from their investment portfolio? Does the new corporate minimum tax on unrealized capital gains apply to Markel?
How did you calculate their insurance float since they don't disclose that figure? I get $9.8bn, not $12bn like you mentioned.

Ohio Capital Ideas profile picture
I added unpaid losses and LAE, life and annuity benefits, unearned premiums, and payables to insurers and subtracted reinsurance recoverables, DPAC, and prepaid reinsurance premiums.

I just rounded down to $12 billion as a rough figure, but at the end of last year I actually come up with $12.8 billion and at the end of Q1 it was $13.2 billion.
i Don’t own MKL but waited years to buy ACGL at a better value. Well, with valuation at their lowest in Ofer a decade I finally got my chance at around 24.40ish. So why post on a MKL board. Well because I don’t seem to see much concern around several states passing bills (not yet laws) to make insurers pay for business interruption even if they had a virus and pandemic exclusion which nearly all have since SARS. Many can argue that it is unconstitutional and of passed will ultimately go nowhere. Or that it’s just posturing by politicians to get concessions from insurance companies. The problem I have is that politicians and people in black robes scares the day lights out of me. I just wonder if it’s worth owning these names until this is resolved which could be years as it can be caught about in the courts??!
Ohio Capital Ideas profile picture
It's a good point to make. I think there are two avenues by which insurers could be forced to pay these claims. One is that insureds sue the insurance company directly by claiming that the language of the policy does not preclude reimbursement and the other is some attempt at retroactive legislation by states.

Insureds will definitely sue, but these policies have been standard for decades and the case law has been consistent: There must be some relationship between physical damage of structures and a civil order closing down businesses.

The more worrisome path may be the efforts of state legislatures to retroactively change what is required under these policies. I know of proposed legislation in Ohio, Louisiana, New Jersey, New York, Massachusetts, Pennsylvania, South Carolina, and Michigan. No proposed legislation has been passed.

Beyond just arguing that these laws would be unconstitutional, there is zero question that these bills violate the contracts clause of the Constitution. But, more practically if there was a nationwide push to force insurers to cover these claims contrary to the language in the policies themselves, most insurers would become insolvent and rates for all sorts of insurance lines would increase. In some cases drastically. If an individual state or states passed these bills it would likely cause some insurers to withdraw from that state and business interruption policies to no longer be offered at all, at least at affordable prices.

I'm not saying that both stupid and unconstitutional actions cannot be taken, but I am saying that I think its unlikely payouts can/will be forced.
I don’t disagree with your comments. That said, I never thought SCOTUS would uphold Obamacare. Politics aside, judges seem to be more activists nowadays and regardless of the law rule depending on what they think is fair. So they find a way to “interpret” a part of the law to rule in a way they think “fair”.
I've been an owner of Markel since the very day it came public in the mid 1980's. Articles aand valuations such as these come often and are all based on the models people have developed over time. I've too been in the insurance business (brokerage/agency owner) and now retired. I'd been an owner of Berkshire since 1975 via inheritance so Markel was something I'd conceptualized fairly easy.

In any event all those models for now are less relevant than normal, we are not in the standard model's world currently. So there's some unknowns and their longevity is unknown. I'd take a chill pill if I were investing thinking "Wow....incredible...30% discount...I'm gunna make great with this!"

We are in a different time right now, this may last a while. Markel's entire business group is going to suffer and my guess is the investment porfolio is also faced with an extended problem. Time will tell, but we just added trillions of debt and business is not going to jump back to where "price-to-book" or any such normal valuation is rational thinking anytime soon.
Ohio Capital Ideas profile picture
There's no question that there's less clarity today then there has been for decades and I tried not to downplay that fact.

I'd point out that using the same framework, Markel has not always looked cheap. For several years earlier this decade shares were relatively expensive.

Given the uncertainty, it makes sense to be cautious in equity allocation right now. But, allocating nothing to equities holds its own risks and there are some quality companies that are still relatively close to their own lows and look like they have a good chance of outperforming broader indexes. I think Markel is one of those companies.
How did you come up with your ILS valuation in the SOTP table? Based on my model, I am coming up with a far lower value here.
Ohio Capital Ideas profile picture
I've used the historical cost of the acquisitions. State National was $919 million, Nephila was $974 million, CATCo was a little more than $200 million.
Oddmund Grotte profile picture
Thanks for your in-depth article of Markel. I have owned MKL for a while, but I was quite surprised by their insurance provisions and remarks about Covid-19.

Anyway, I believe at these levels, the lowest P/B since 2009-2013, MKL will deliver good returns over the next decade. I'm adding a few shares.
Ohio Capital Ideas profile picture
Hello @Oddmund Grotte

Thanks for your comment. Your article on Markel last year was very good.

I was a little surprised too at the loss. AIG came out with earnings yesterday, which gives some good context on industry losses as well.
It seems like liability exposure from Markel's small business, event, and disruption insurance products could be crippling. Any thoughts on potential risks/exposures in that regard?
Ohio Capital Ideas profile picture

The $325 million in Q1 underwriting losses from the pandemic was the company's best estimate on losses for the remainder of the year. There's more uncertainty about that estimate than is usually the case and we could see more reserves in Q2, but even though there's some risk there I wouldn't say that the liability exposure is likely to be crippling.

On the Q1 call, the company was pretty transparent about how they estimated the losses.
It seems it will only be crippling if the states that have bills written actually become law and the Supreme Court doesn’t shoot them down for being unconstitutional. To tell insurers that regardless of a virus and pandemic exclusion that they still have to retroactively Pay for business interruption is beyond the pale. That said politicians are the worst. Forget the law or contracts. You will do what I say. One has to hope the people in robes shoot it down. Scary stuff. I posted above concerned about my new ACGL position for this very reason.
I just recently discovered Markel in the last few weeks and very much appreciate your article. I learned a lot about an investment that interested me but that I didn't understand too well. I hope to be a buyer in the $750 to $775 range. It may take 5 years or so to get to your valuation, but I'm confident it will happen. Thank you.
Ohio Capital Ideas profile picture
Thanks for your comment and good luck with Markel.
ConservativeOutperformer profile picture
Great analysis. Long both MKL and BRK as well. I'm a buyer of MKL around BV, and will accumulate heavily again if we get there. I watched for years, waiting for an attractive price and got it in late March. I'm at a full position in one portfolio I manage, in my personal account I will get there.

Thanks and good luck!
Ohio Capital Ideas profile picture
Thanks, @ConservativeOutperformer. Even with today's uncertainty, it is hard to believe that over time an investment in Markel at book value will fare poorly.

Good luck to you.
Very good report thank you for your efforts thoughtful and well-developed
Ohio Capital Ideas profile picture
Thanks a lot for your comment and I'm glad the article was useful to you.
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