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Markel vs. Alleghany vs. Fairfax vs Greenlight


LowIQinvestor
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You can't look at them in vacuums...each has different strengths and weaknesses based on underwriting, investment results, leverage and lines of business.  Fairfax has the best investment results, but weaker underwriting due to lines of business and leverage.  Markel & Alleghany have great underwriting due to lines of business, culture and leverage, but investment results aren't anywhere as good as Fairfax.  Berkshire is the rare insurer that is incredible at both with less leverage, but far too big and unwieldy now.  Cheers! 

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Markel is a great company and probably a great investment too but this thing about it trading at book is very misleading.  It's "Book" value includes $1B of goodwill which really should not be considered when you are trying to value a company as it's just an accounting placeholder.  There tangible book is about $270 / share based on yahoo finance.  So based on that it is around 1.6x book.  Not sure what the value will be after the acquisition goes through.

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Markel is a great company and probably a great investment too but this thing about it trading at book is very misleading.  It's "Book" value includes $1B of goodwill which really should not be considered when you are trying to value a company as it's just an accounting placeholder.  There tangible book is about $270 / share based on yahoo finance.  So based on that it is around 1.6x book.  Not sure what the value will be after the acquisition goes through.

 

One thing I like about MKL is that their comp is based upon 5 year CAGR in BV (not tangible book).  The current threshold is 11%.

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Markel is a great company and probably a great investment too but this thing about it trading at book is very misleading.  It's "Book" value includes $1B of goodwill which really should not be considered when you are trying to value a company as it's just an accounting placeholder.  There tangible book is about $270 / share based on yahoo finance.  So based on that it is around 1.6x book.  Not sure what the value will be after the acquisition goes through.

 

Some of that goodwill is based on the acquisitions they have made for ventures.  I increased my MKL position by 150% in the last week or so. 

 

I think wtm should be in the discussion as well. 

 

 

 

Well, it obviously depends on two things:

1) Has Markel overpaid for the acquisitions made for ventures?

2) Have the true economic values of the businesses Markel acquired increased or decreased?

If the answer to question n.1 is: no, they have not overpaid. And if the answer to question n.2 is: after the acquisitions, they have kept increasing. Then, there is absolutely no reason to exclude goodwill from BV per share.

 

Warren Buffett has clearly thought us in his 1983 letter to shareholders:

 

businesses logically are worth far more than net tangible assets when they can be expected to produce earnings on such assets considerably in excess of market rates of return. The capitalized value of this excess return is economic Goodwill.

 

And also:

 

My own thinking has changed drastically from 35 years ago when I was taught to favor tangible assets and to shun businesses whose value depended largely upon economic Goodwill.  This bias caused me to make many important business mistakes of omission, although relatively few of commission.

 

giofranchi

 

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giofranchi,

 

I don't mean to say that the book value is worthless.  Clearly it has value as the market is valuing Markel at a premium to tangible book.  Markel has an excellent long term record of growing the companies tangible and book value per share so that is definitely worth something.  If you want to say that Market is worth 1.6x tbook then that is fine, it probably is :).  But the evaluation of what sort of premium to assign is best left up to you based on it's business characteristics.  When we start talking about a company trading at book, to me that means it is at it's true net asset value, irregardless of how the business does.  When we talk about book with goodwill, we are including the business characteristics in the book which is a confusing thing.  I would say start with the tangible book, and from there determine how much of a premium to pay.

 

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giofranchi,

 

I don't mean to say that the book value is worthless.  Clearly it has value as the market is valuing Markel at a premium to tangible book.  Markel has an excellent long term record of growing the companies tangible and book value per share so that is definitely worth something.  If you want to say that Market is worth 1.6x tbook then that is fine, it probably is :).  But the evaluation of what sort of premium to assign is best left up to you based on it's business characteristics.  When we start talking about a company trading at book, to me that means it is at it's true net asset value, irregardless of how the business does.  When we talk about book with goodwill, we are including the business characteristics in the book which is a confusing thing.  I would say start with the tangible book, and from there determine how much of a premium to pay.

 

Well, I am much less sophisticated…

What I do is simply this: if I trust management, and, believe me, it takes a lot of time and a lot of work before I fully trust management, I let them do their job and question their decisions as rarely as possible. If management says: BV per share, after the deal will go through, is $424, that’s the figure I consider for my investing decisions. Because I trust the management to provide me with the data that are really relevant. And I must get to the point I trust management more than I trust my ability to judge the company. Because they will always know everything about the company, while my knowledge of the company will always be partial and incomplete (at best!).

That’s exactly how I behave with any new project inside my own firm: I spend a lot of time, trying to find the right people, then I let them work. And I trust them, because they will always know a lot more about that single project than me.

 

For instance, what’s the difference between goodwill (if the acquirer has paid too much) and an investment in an overvalued stock? MKL has $2.34 billion of equities at market value, or 62% of shareholders equity. I guess you should understand which stocks in MKL’s portfolio are overvalued, make a judgment of their fair value instead, and reduce MKL’s equity accordingly.

My reasoning might be flawed, but, if you subtract goodwill from the value of shareholders equity, why shouldn’t you also adjust it for possible (if not probable) overvaluations in their stocks portfolio?

 

It seems to me that it can get very complicated…

 

giofranchi

 

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You can't look at them in vacuums...each has different strengths and weaknesses

 

This is absolutely right - here is what I got for compounded returns from 2000-2011 inclusive for these companies:

 

FRFHF:  7.2% ( annual book value increase from 2011 report )

MKL  :  10.82%

BRKA :  8.4%

 

from 2001-2011

 

Y      : 7%

 

so, how does each co's op earnings plus amortization of goodwill charges added back in compare to growth of book over the same period look?

 

not having done these comps myself (yet) my guess is brk trumps all of them

 

tho, qualitatively, y has possibly increased its per share earnings potential going forward alot as a result of its acquisition of tansatlantic combined with getting joe brandon into the bargain as president of alleghany holdings

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"For instance, what’s the difference between goodwill (if the acquirer has paid too much) and an investment in an overvalued stock?"

 

You have a very good point with that argument.  Perhaps my reliance on tangible book value is too simplistic for holding companies.  I had a look at Berkshire and they have about 1/3 of the book value in goodwill/intangibles so this is certainly not unique to Markel.

 

I think either way it really just becomes an input into the valuation metric.  As long as you are conscious when valuing the company that the goodwill portion of the book value represents business characteristics, you could subtract that from your calculations and still come up with the same number.

 

I guess I am just very dubious of goodwill as I have invested in cases where the company was trading below "book" and the goodwill subsequently was written down due to an underperforming business.  In one case this resulted in the company shifting from a share price below book to an infinite price / book multiplier as tangible book was negative.  The stock went on to lose ~95% of it's value before staging a weak comeback.  After that experience I have a very hard time looking at anything other than tangible.  Not that I won't buy stocks above tangible, I just keep in mind that I don't have the same safeguard when goodwill and intangibles are included and it becomes all about evaluating the business characteristics.

 

 

In regards to the original question of the post.. GRLE ran combined ratios in the 97-98 range for the first few years and the last few years has been writing in the low 100's.  They posted a 114 combined ratio in the most recent quarter but I think that was a one time thing.

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I think it might be important to look at these companies as investments per share. 

 

Alleghany:

Price $331

Investments per share: $1066

Equity investments per share: ~$88

 

Markel:

Price $430

Investments per share: ~$1100

Equity investments per share: ~$163 (Normalized maybe 250+)

 

I would rather pay $430 for markel's investment portfolio than $330 for Alleghany's...  Fixed Income is more of a risk than a long term investment in my eyes right now.

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I think it might be important to look at these companies as investments per share. 

 

Alleghany:

Price $331

Investments per share: $1066

Equity investments per share: ~$88

 

Markel:

Price $430

Investments per share: ~$1100

Equity investments per share: ~$163 (Normalized maybe 250+)

 

I would rather pay $430 for markel's investment portfolio than $330 for Alleghany's...  Fixed Income is more of a risk than a long term investment in my eyes right now.

 

Interesting point.  I know MKL has a short duration FI portfolio which limits their interest rate risk, which may be something else to consider.  Also, MKL will deploy funds into private businesses through Ventures.  I don't know much about Y.  What kind of equity investments do they like and how concentrated are they?  Also, do they invest in distressed FI products, which you might want to consider adding to the equity investments per share?

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Um... why don't you read the 10k and find out?

 

Distressed debt is looking like a bubble to me, I actually have considered starting a short in HY ETF's.  If I were to buy insurance companies right now I would want them to have as low of an interest rate risk as possible.

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