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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 213702  
Subject: Markel vs Berkshire Date: 12/19/2012 1:22 PM
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Markel appears to be trading at 1.05x pro-forma book value after accounting for the Alterra merger. An initial review of Alterra's history leads to some optimism regarding the prospects of the operations to continue providing underwriting profits and, by extension, low or cost free float. Currently, Alterra's investments are exclusively in fixed income. This is going to change when the merger goes through according to Gayner's comments on today's conference call. My interpretation of the data indicates that Gayner would have to reallocate around $1.8 billion of Alterra's investment portfolio from fixed income to equities for the combined Markel/Alterra to have the same percentage of the investment portfolio in equities as the pre-merger Markel. To put this in perspective, Markel's equity portfolio at 9/30/12 was $2.3 billion.

Mr. Market appears to be adjusting Markel's valuation downward to account for the fact that a significant part of the combined entity will be in reinsurance and the reinsurance industry typically struggles to even trade at book value these days. What I think the market is missing is that most reinsurance companies are not active in equities and most certainly don't have someone of Gayner's abilities in charge.

It is interesting to contemplate prospective returns for Berkshire at 1.2x book versus Markel at 1.05x pro-forma book. The new Markel will still be relatively small and have a much longer runway for growth compared to Berkshire. It would not strike me as crazy to reallocate capital from Berkshire to Markel at current valuations. In doing so, one would have to sacrifice selling something that is demonstrably cheap and diversified with a promising future for something that is demonstrably cheap, not as diversified, and may have an even more promising future. It's definitely an intriguing subject to think about.
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Author: PhntmFool One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197092 of 213702
Subject: Re: Markel vs Berkshire Date: 12/19/2012 2:01 PM
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While I am an admirer and owner of MKL, I would have to say that it has had some underwriting issues in the past and has not always shown the same degree of discipline that BRK's operations have (albeit MKL shows much more discipine than most). Whilst BRK has relied on Buffett and to some degree Munger to manage investments, they now have two others that seem (like Tom Gaynor) to be super (and all three are managing comparable amounts). So to me, you get more with BRK and it should sell for a premium to MKL. I also am happy to own both (which I do). I don't think selling BRK at this price will ever look like a good decision, even to buy MKL.

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197094 of 213702
Subject: Re: Markel vs Berkshire Date: 12/19/2012 2:08 PM
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I put together some pro-forma numbers this afternoon and posted a summary here:

http://boards.fool.com/pro-forma-30441853.aspx

I don't think selling BRK at this price will ever look like a good decision, even to buy MKL.

I can't quite pull the trigger on a sell order either but I did buy more Markel earlier today.

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Author: LONGREITS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197095 of 213702
Subject: Re: Markel vs Berkshire Date: 12/19/2012 2:11 PM
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"What I think the market is missing is that most reinsurance companies are not active in equities and most certainly don't have someone of Gayner's abilities in charge."

I've never been blown away by Gayner's investment ability. I could be mistaken, but I remember reading his 10 year returns ending in the last year or so were 100% +/- total return vs. 15-20% total return from the S&P. Sure, 7% annualized is a lot better than 1% annualized, but I'm not sure it would have taken an investment genius to compound at 7%. Moreover, I have rarely, if ever, noticed Markel is a first mover into a stock. The portfolio usually holds a lot of the usual value investor holdings - not necessarily a bad thing, but I'm just saying. I don't claim to be much different in my approach, either.

I think Gayner is a good, solid investor, I just wouldn't put him among the top few dozen alive in the US today. I don't see him running the investment portfolio into the ground, but I also don't think he is a gamechanger. I'm not even certain he would outperform all posters on this board over the next 10 years.

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197098 of 213702
Subject: Re: Markel vs Berkshire Date: 12/19/2012 2:21 PM
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I think Gayner is a good, solid investor, I just wouldn't put him among the top few dozen alive in the US today. I don't see him running the investment portfolio into the ground, but I also don't think he is a gamechanger. I'm not even certain he would outperform all posters on this board over the next 10 years.

I think he does very well when it comes to downside protection. If you look at the equity portfolio vs. the S&P 500 since 2000, he completely avoided the carnage of 2000-2002 beating the S&P 500 by 35.5%, 28.8%, and 13.3% in 2000, 2001, and 2002 respectively. His margin over the S&P 500 has been more modest in recent years but he has only trailed in three years: 2005, 2007, and 2009. It's fair to note that his portfolio was crushed in 2008 along with almost everyone else but he still beat the S&P 500 by 3%.

He doesn't run a very concentrated portfolio but much more concentrated than most with the top 10 positions at over 49% of the portfolio (if considering BRKA and BRKB as one position):

http://www.dataroma.com/m/holdings.php?m=MKL

The big game changer for Markel may not be in the equity portfolio but in Markel Ventures where Gayner is attempting to replicate Berkshire's model of acquiring operating companies outside the insurance industry. It is too soon to know whether this will succeed or not but I can say that any family business that likes Berkshire's "buy forever" approach but is too small for Buffett would do well to talk to Gayner. It actually wouldn't shock me if Buffett himself directs pitches that are too small to Gayner but I'm just speculating on that.

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Author: mdtls Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197099 of 213702
Subject: Re: Markel vs Berkshire Date: 12/19/2012 2:23 PM
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"I think Gayner is a good, solid investor, I just wouldn't put him among the top few dozen alive in the US today. I don't see him running the investment portfolio into the ground, but I also don't think he is a gamechanger. I'm not even certain he would outperform all posters on this board over the next 10 years."

To paraphrase WEB: i'd rather be fairly right than absolutely wrong"

Gayner is a top 1% jockey. I'm letting him ride my horse.

m

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197101 of 213702
Subject: Re: Markel vs Berkshire Date: 12/19/2012 2:30 PM
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Gayner is a top 1% jockey. I'm letting him ride my horse.

It's also important to note that Gayner can't pursue a Weschler style portfolio (enormous positions as % of assets) within an insurance company structure. Weschler is able to do this at Berkshire because the funds he has been given to manage at Berkshire are tiny as a percentage of Berkshire's capital base. So within Weschler's $3-4 billion portfolio, he can be 40% in one company if he wants. But if Weschler is in charge of Berkshire's overall portfolio in the future, he will not be able to be quite as concentrated.

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Author: LONGREITS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197102 of 213702
Subject: Re: Markel vs Berkshire Date: 12/19/2012 2:38 PM
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"Gayner is a top 1% jockey."

I never said he wasn't. He is solid; he isn't David Einhorn, Leon Cooperman, Ted Weschler, Seth Klarman, Chuck Akre, Bill Ackman, David Tepper, Lou Simpson, Donald Yacktman. But sadly, it might not take all that much to get into the top 1% of money managers today. If you're in the top few percent, pick a few dozen stocks that value investors widely own and go on vacation. Trail the indices after taxes and fees? Who cares. The investors often don't care about that, or they can probably get talked out of caring if they do. For the money manager: next year will always be different. True money managers (very rare) can easily spot the phonies.

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197103 of 213702
Subject: Re: Markel vs Berkshire Date: 12/19/2012 2:38 PM
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FWIW, here's what I have in my spreadsheet for Gayner's equity record:


                 2011    2010    2009    2008    2007    2006    2005    2004    2003    2002    2001    2000    1999
-----------------------------------------------------------------------------------------------------------------------
Portfolio        3.8%	20.8%	25.7%	-34.0%	-0.4%	25.9%	-0.3%	15.2%	31.0%	 -8.8%	 16.9%	26.4%	-10.3%
S&P 500          2.1%	15.1%	26.5%	-37.0%	 5.5%	15.8%	 4.9%	10.9%	28.7%	-22.1%	-11.9%	-9.1%	 21.0%
MKL vs S&P 500   1.7%	 5.7%	-0.8%	  3.0%	-5.9%	10.1%	-5.2%	 4.3%	 2.3%	 13.3%	 28.8%	35.5%	-31.3%


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Author: LONGREITS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197104 of 213702
Subject: Re: Markel vs Berkshire Date: 12/19/2012 2:41 PM
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"It's also important to note that Gayner can't pursue a Weschler style portfolio (enormous positions as % of assets) within an insurance company structure. Weschler is able to do this at Berkshire because the funds he has been given to manage at Berkshire are tiny as a percentage of Berkshire's capital base. So within Weschler's $3-4 billion portfolio, he can be 40% in one company if he wants. But if Weschler is in charge of Berkshire's overall portfolio in the future, he will not be able to be quite as concentrated."

Definitely. I'm just saying I think Gayner gets too much credit because MKL has done well, not that his own portfolios have been some sort of 8th wonder of the world. Like I said previously, he is solid ... great for an insurance company. I think he's a very good investor, top 1% (not sure what that means - perhaps a low bar?). He just isn't in the top few dozen, IMO. He is good enough - but so would be owning the top 25-30 widely held stocks on Dataroma in equal proportions.

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197105 of 213702
Subject: Re: Markel vs Berkshire Date: 12/19/2012 2:58 PM
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The investor presentation for today has his track record:

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9M... (page 7)

Top 1% or not, this kind of record demonstrates obvious "alpha" generation capabilities on the equity side over long periods of time. On the fixed income side, it is actually impressive that Markel hasn't trailed the benchmark by more given the conservative posture management has taken on average duration over the years.

Anyway, the topic really was MKL vs BRK from the perspective of which is likely to produce higher returns to investors based on today's share price. I actually think Markel deserves a P/B higher than Berkshire based on its future prospects. A P/B of 1.05x makes no sense to me. Having said that my holdings of Markel are still far smaller than Berkshire although Markel is now firmly my #2 position.

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Author: LONGREITS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197106 of 213702
Subject: Re: Markel vs Berkshire Date: 12/19/2012 3:03 PM
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"Top 1% or not, this kind of record demonstrates obvious "alpha" generation capabilities on the equity side over long periods of time."

Completely agree.

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Author: mdtls Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197107 of 213702
Subject: Re: Markel vs Berkshire Date: 12/19/2012 3:56 PM
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<He is good enough - but so would be owning the top 25-30 widely held stocks on Dataroma in equal proportions.>

While i do manage my own nest egg, I am not a money manager and respect my inability to hyper actively study and manage my portfolio. I have a day job.

Therefore, for the most part i'm a "set it and forget it" kinda guy....which is why i trust WEB, Prem, Ian and Joe, and Gayner to make better decisions than I ever could over the long haul.

Simple i realize.

m

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197108 of 213702
Subject: Re: Markel vs Berkshire Date: 12/19/2012 4:06 PM
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FWIW, I posted a very rough back of envelope valuation update for Markel based on today's merger announcement:

http://boards.fool.com/back-of-envelope-valuation-30442202.a...

I view Markel to have a very strong probability of 10-20% annualized gains over the next five years with modest assumptions for investment results and insurance underwriting and assuming nothing from Markel Ventures. I wouldn't be surprised with Lollapalooza results of 25% annualized - a 3-bagger - over five years if Ventures starts to really contribute to results, if underwriting is profitable rather than break-even, or if Gayner continues to achieve investment results far above average.

It's no surprise that I'm very bullish on Berkshire as well at current levels. If BV/share grows at 9% annualized over the next five years and Berkshire ends with a P/B of 1.5, that's roughly 14% annualized. So I think Berkshire is a wonderful and safe way to outperform but I don't see any Lollapalooza outcomes for Berkshire (>20% annualized) and there is a glimmer of that possibility at Markel.

Of course there is downside possible for both companies - horrible underwriting, bad investment results, P/B contraction, etc etc etc...

Anyway I'm happy to own both.

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197109 of 213702
Subject: Re: Markel vs Berkshire Date: 12/19/2012 4:42 PM
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FWIW, here's what I have in my spreadsheet for Gayner's equity record:

Another interesting figure.

Book value growth for both Markel and Berkshire has been pretty steady since 2002.
The best-fit trend line for Markel is 12.33%/year, for Berkshire 9.59%/year.
Phrased another way, had Berkshire experienced Markel's book growth rate since
the end of 2002 the BRK/A book per share would be $3 shy of $140000 at Sept 30.

Lots of confounding effects, of course.
It's likely more of Markel's value growth has showed up in book than has Berkshire's.
But still very impressive.
Very naively, if one expected this situation to continue (a very big if), one might be
tempted to pay (12.33/9.59-1)=28% more per dollar of book value for Markel.

Jim

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Author: knighttof3 Big red star, 1000 posts 10+ Year Anniversary! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197110 of 213702
Subject: Re: Markel vs Berkshire Date: 12/19/2012 5:42 PM
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Markel deserves a lower P/B than Berkshire, based on the predominance of the weights of securities vs operating companies.
Like LONGREITS, I don't think Gayner is in the same category as (apparently) Weschler is, though Gayner's hands may have been tied by regulations as noted by rationalwalk.
I do like that his portfolio has been adding stocks I've been buying as well - notably WAG, MAT, HAS. Great minds think alike and all that.

From gurufocus:

Performance of Markel Corp. Equity Portfolio
Year Return% S&P500% Excess Gain%
2011 3.8 2.11 1.7
2010 20.8 15.1 5.7
2009 25.7 26.5 -0.8
2008 -34 -37 3.0
2007 -0.4 5.61 -6.0
5-Year Cumulative 3.6 -1.1 4.7
2006 25.9 15.79 10.1
2005 -0.3 4.91 -5.2
2004 15.2 12 3.2
2003 31 28.7 2.3
2002 -8.8 -22.1 13.3
10-Year Cumulative 79 34.9 44.1
2001 16.9 -11.9 28.8
2000 26.4 -9.1 35.5
1999 -10.3 21 -31.3
1998 13.3 28.6 -15.3
1997 31.4 33.4 -2.0
15-Year Cumulative 253.2 124.3 128.9
1996 26.9 23 3.9


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Author: knighttof3 Big red star, 1000 posts 10+ Year Anniversary! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197111 of 213702
Subject: Re: Markel vs Berkshire Date: 12/19/2012 6:07 PM
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I am sure it has been posted here before, but - a long and insightful Jan 2012 interview with Gayner is at http://www.gurufocus.com/news/157847/answers-from-tom-gayner....

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Author: commoncents33 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197113 of 213702
Subject: Re: Markel vs Berkshire Date: 12/19/2012 11:12 PM
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To paraphrase WEB: i'd rather be fairly right than absolutely wrong"



Not to pick nits, but I think the Buffett phrase you're referring to is: I'd rather be approximately right than precisely wrong. That is, fancy calculations and formulas are deadly if they fool you into thinking that they can compensate for fundamentally flawed methods. Kind of like someone doing a fancy spreadsheet discounted cash-flow analysis on a business they don't really understand, as opposed to one who has followed a business like Berkshire for years and simply says, "It's crazy cheap" (without ever lifting a pencil).

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Author: soycapital Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197128 of 213702
Subject: Re: Markel vs Berkshire Date: 12/20/2012 6:18 PM
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Bought a few shares of MKL today. We can go back up now. I think good long term one at least hoping so. Appreciate seeing posts about it here, have been considering a purchase for some time. Have FRFHF, LUK, BRK-B, and now some MKL.

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197134 of 213702
Subject: Re: Markel vs Berkshire Date: 12/21/2012 6:30 AM
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Have FRFHF, LUK, BRK-B, and now some MKL.

No L?

Jim

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197137 of 213702
Subject: Re: Markel vs Berkshire Date: 12/21/2012 9:08 AM
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Brooklyn Investor has a great article on the MKL/ALTE merger:

http://brooklyninvestor.blogspot.com/2012/12/markel-alterra-...

I'm cross posting it here in addition to the MKL board because it has such an interesting analysis of the implications of investing float in strategies other than fixed income ... something relevant to Berkshire as well.

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Author: dealrake Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197255 of 213702
Subject: Re: Markel vs Berkshire Date: 12/27/2012 3:42 PM
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Anybody remember the days when Morningstar would write something about Markel's float being as good as equity which supported their "fair value" of nearly 4 times book value?

Then for the next ten years Markel pretty much performs as the young chaps at Morningstar suggested.....yet the "fair value" now from the advisory is 1.1 times book value.

Amazing how value investing advisories "float" from one positive obsession to one negative funk.

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197261 of 213702
Subject: Re: Markel vs Berkshire Date: 12/27/2012 7:32 PM
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The merger prospectus is now on EDGAR:

http://www.sec.gov/Archives/edgar/data/1096343/0001193125125...

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197263 of 213702
Subject: Re: Markel vs Berkshire Date: 12/27/2012 10:22 PM
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As of this evening, Markel trades at 1.01x pro-forma book value if purchased directly or 0.97x pro-forma book value if "created" by purchasing Alterra shares.

Markel does not have a published buyback threshold and it would not surprise me to see large repurchases when the annual report comes out. I now own 50% more Markel shares compared to my holdings prior to the merger announcement with a small Alterra position added recently as well.

I would be surprised if Markel doesn't outperform Berkshire over the next 10 years in terms of book value per share growth and stock price appreciation but Berkshire is by far the more diversified company today.

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Author: robinstarveling Two stars, 250 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197275 of 213702
Subject: Re: Markel vs Berkshire Date: 12/28/2012 9:41 AM
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I think you're right that the market now perceives Markel/Alterra as a reinsurer. I have to remind myself that reinsurance is only half to 60% of Alterra's business mix and thus a smaller part of the combined Markel/Alterra ($870M / $4400M = 19.77%). This is a little different than the premium mix listed on p. 12 of the merger presentation (property 29%, general casualty 22%, prof/prof liability 23%, worker's comp 6% other 19%).

In the merger presentation, investment income from Markel and Alterra are summed (p. 10). But if Alterra's float can be invested as productively as Markel's has been, and book value for the combined entity compounds at 12% (seems a conservative figure), price per share in 2017-18 should be around $750 even if the combined entity is still valued at 1x book. ceteris partibus, cygnus negrus absens, etc.

If Mr. Market has a fit of enthusiasm and awards it a 1.25 multiple at the end of that period, price would be around $935/share. Better investment results and a higher multiple are both possible.


http://www.markelcorp.com/SiteCollectionDocuments/MarkelAcqu...

http://www.nasdaq.com/article/the-markelalterra-combo-and-re...

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 197276 of 213702
Subject: Re: Markel vs Berkshire Date: 12/28/2012 9:52 AM
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If Mr. Market has a fit of enthusiasm and awards it a 1.25 multiple at the end of that period, price would be around $935/share. Better investment results and a higher multiple are both possible.

My baseline estimate is for a stock price of around $1,000 in five years based on the following assumptions:

1. Cost free float (combined ratio of 100 on average, despite much better record than this for both companies).

2. No contribution from Markel Ventures (probably too conservative)

3. Investment leverage of 280% (pro-forma invested assets to equity at 9/30/2012).

4. Estimated portfolio after tax return of 4.5%/year.

5. After tax debt service of $400 million over the five year period.

6. Terminal p/b of 1.5.

Of these assumptions, all are conservative except maybe the investment return assumptions if rising interest rates really pound the fixed income investments (despite the short duration of the portfolio) and the equity markets are subdued. I view the terminal P/B as not either aggressive or conservative.

If I change investment returns to 3% and the terminal P/B to 1.25x, then I come up with $720 stock price in five years.

I view returns of 10% to 18% compounded over five years to be very likely and returns of >25% would not be surprising either with a combination of underwriting profits vs. break even, contributions from Markel Ventures, and a more healthy and historically justified P/B ratio. If everything breaks the right way, shares could be pushing $1,400-$1,500 in five years.

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 205338 of 213702
Subject: Re: Markel vs Berkshire Date: 10/21/2013 6:57 PM
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It has been ten months since the original post in this thread and since that time Mr. Market has seen fit to assign Berkshire a much more appropriate (although still somewhat undervalued) multiple. The same isn't true for Markel. I roughly estimate that Markel is today trading at about 1.13x book compared to Berkshire at around 1.4x book. Seems to me that the market isn't really buying the idea of Markel being a mini-Berkshire. Instead the verdict seems to be that Markel is a pretty ordinary run of the mill insurer.

Market cap is $7.3 billion. Berkshire could pay a 40% premium and bid $730/share cash and that would still be a $10 billion acquisition, much smaller than the one that apparently slipped away recently.

And the P/B multiple paid would hardly be outrageous at less than 1.6x book, arguably far too low given Markel's record and prospects going forward. Gayner could retain control of the Markel Ventures group, his existing portfolio at Markel, plus several more billion dollars allocated by Buffett. And we would get a third investment manager and a very credible potential CEO candidate in his early 50s.

I could see worse ways to deploy $10 billion and Buffett gave the impression of the cash burning a hole in his pocket on CNBC recently.

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