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Please Explain


Guest swf83
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Guest swf83

From the Markel (MKL) 1st Quarter earnings release today:

 

"Book value per common share outstanding was $222.14 at March 31, 2009"

 

 

Markel closed today at $295.20.

 

My question is why does Markel deserve to trade at a premium to book value (and a rather large one at that, in my opinion, for this environment) while Fairfax trades at a discount to book value?

 

Scott

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Hey Scott, my thoughts:

 

1) Markel's insurance business is perceived (and likely is) better than Fairfax's on aggregate.  It's niche-y and generates good combined ratios generally.

2) Their investment arm is perceived as superior (they are good, but they are not Fairfax)

3) Their loss reserves may be overstated (meaning book is actually higher).

4) Corporate culture is widely perceived as top notch - a rare event in this field.

5) The market may just be stupid, or maybe they are both great deals and FFH is just cheaper.

6) Fairfax is a more complicated business to understand (in my opinion) - emerging market subsidiaries, minority interest calculations, worldwide operations with cross holdings, short campaings, lawsuits.... it certainty takes a while to really understand this beast, that probably creates a hurdle in terms of analysis.

 

I think so much about insurance revolves around management trust that there are probably many investors gladly willing to pay 1.25x book for MKL, but they just don't know, or never got comfortable with Fairfax.

 

If Markel were trading only at a 5-10% book multiple premium to FFH, I would likely own it (although I confess to having only preripherally followed it for the last 9 months as it was really a no contest on which company I would invest in)...  but I can see how many others would be happy with a bigger premium for MKL.

 

They are both great companies, if you think the misvaluation is big enough, I always ask myself "Why not short one and go long the other?"  Usually my answer to that question answers the 'why' of the valuation.  The bottom line is that a 20-50% difference in P/B multiples is really noise for great companies... 20 years from now, who knows who will be the leader here in terms of stock performance.

 

Long winded, but that is my thought.

 

Ben

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Guest swf83

Ben, thanks for the reply and your points are well-taken. Much like you, I would rather be buying FFH at these levels than MKL at its levels.

 

Scott

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My take is Fairfax is doing so much better in the investment side than in the underwriting side.

 

So, funds which wanted to find a insurance co. to invest in; they will look at companies' normalized earning.. which Fairfax isn't that strong on.

 

Sounds kind of silly... but I think the market is valuing Fairfax as the on-par insurance co ONLY.

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