Markel (MKL) in the business of specialty insurance business. They usually have very little to no competition and can charge high rates because they provide insurance solutions to niche markets. Markel has a history of making an underwriting profit (ie. They take in more money in premiums than they pay out in claims) and is extremely disciplined about underwriting insurance. Markel’s invesment portfolio is run by Tom Gaynor who is a great value investor and has had market beating performance for years. In my opinion Markel is already at a fair value and it might get cheaper. Warren Buffett has mentioned that insurance rates are falling, in the short term this has put downward pressure on all Insurers. Share of Insurance companies also usually drop going into Hurricane season. There may be a chance to buy this great company at a wonderful price.

Valuation
In this October 2000 Businessweek article Bruce Berkowitz of Fairholme mentioned how he valued Markel.

“Look, the key concept for insurance companies is to take a look at the investments per share. And you can find companies where the investments per share are significantly higher than the stock price. Markel has roughly $400 per share of investments. If they can break even on their underwriting and only make a 5% after-tax investment return, that’s $20 per share. Not bad for a company at $140 per share. So the trick is to have that investment leverage and at the same time break even or make an underwriting profit.”

Any underwriting profit that Markel makes is a bonus.

What are the current numbers ?
Markel has $7,122,257,000 in Investments and $612,056,000 in cash. With 9,947,000 shares outstanding that works out to $777.55 per share in Cash and Investments

Per share cash and investments: $775
5% after-tax investment returns: $38.87
Current share price: $406

Berkowitz bought Markel at 7 times what the investment returns would be. To buy Markel now at the same valuation of 7 times that Berkowitz paid in 2000. You would need to buy the shares at $272. Markel’s visibility has increased a great deal in the last few years with a lot of people comparing it to Berkshire Hathaway. See my article of the next Berkshire Hathaway’s which included Markel. A chance to buy Markel at a valuation of 7 looks extremely unlikely but I feel that any valuation under $390 which is 10x estimated after-tax investment return seems a decent price for Markel. The shares have dropped from last years peak of $554 down to $406, I have my fingers crossed for.

Disclosure : I do not own shares of Markel. I do plan to buy at these levels and I hope to buy a lot more if the shares go lower.