Markel Corporation is a specialty property and casualty insurance company headquartered in Richmond, Virginia. Markel started its operations in 1930 by writing insurance for makeshift taxi cabs, also known as jitneys, in Virginia. Over the following decades the company grew along with the growing transportation industry as the country developed automobiles trucks and interstate highways. The company went public in 1986. At that time it had a market capitalization of $35 million. As of this writing its market capitalization is around $12 billion. Click here to read the rest.

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Hey Jana,

Another very nice analysis! =] now you can see why I like RNR.

Re. the valuation, you emphasized that MKL’s historical CAGR of book value is 15%, but you calculated the valuation according to a 0% growth – you discounted the future earning by 10%, i.e. your required rate of return minus eternal growth rate equals 10% (r – g). if I’m not mistaken, you tend to use a required rate of return of 10% and deduct some Growth rate from it, if any.

So I wonder why did you go with a 0% growth rate after acknowledging and highlighting MKL’s terrific CAGR.

Have a great weekend,

Michael

Hi Michael,

Thanks for reading my writeup.

I should have added a couple more lines to the valuation part. If one buys at fair value which is $770 or slightly above if one discounts the unrealized equity losses which Markel took in Q3 via AOIC.

Then if they hold the stock for a decade then odds of stock returns matching the business returns is very high. This should be anywhere between 10 – 14 percent. Also Markel has some more room to safely lever up without risk which can boost the returns further.

Regards,

Jana

Hey Jana,

A shareholder would get an annual return equal to the ROE if he buys the share for 1:1 book value. If the shareholder buys the share for more than book value, than he would get an annual return equal to the ROE only if there will be Growth as well.

In your calculation of MKL’s valuation you used some sort of this formula: (ROE * BPS) / (r – g)

[BPS = book value per share]

Now, as I understand, you calculated it as: (14% * 551) / (10%) = $771 of MKL’s intrinsic value.

So I guess you went conservative with no Growth. But as MKL is known for its above 0% growth, one could lose an opportunity to invest in MKL if he’s too conservative.

Kind regards,

Michael

Micheal,

If a shareholder pays fair value which is 1.4 times book then during this holding period he would make what the business earns. If it compounds at 10 percent then he would get that.

I own Markel and I am not recommending one should strictly buy at $771. You can still get away by paying $800 if you are holding it for a decade.

Regards,

Jana