Buying on Bad Earnings: Markel

By Travis Johnson, Stock Gumshoe, November 5, 2008

I picked up a few more shares of Markel (MKL) today.

The specialty insurer had an awful quarter, announced this morning — big losses, and terrible investment performance. Probably not terribly shocking, since we’re coming off of a couple big storms and the company’s portfolio focus in strongly on value investing, and we all know that many, many property and casualty insurers have taken a terrible beating. Some might debate about whether value investors or Texas waterfront homeowners took have more complaints this year, but there’s no doubt that this has been a very bad several months for both, and for almost every insurance company in the United States.

But Markel is a core holding in my portfolio, and I like to add a few shares here and there as I can. This is a fairly rare company whose management I trust almost implicitly (perhaps that’s putting it too strongly — I don’t know them, but I do believe they will always do the right thing for shareholders). Now is the time not to look back and worry about whether Markel can cope with the current investment performance and the claims of their policyholders — by all accounts, they continue to have a fairly conservative balance sheet, and there should be no significant problems. What we should focus on now, I believe, is their potential — Markel is continuing to hold firm on pricing, only writing business that they can justify as profitable, and they have the financial flexibility to pick up new business as many of their competitors, including AIG and many others who are looking for financial backing, have to exit businesses or scale back.

I don’t know how Markel will do in the next year or so, and I don’t want to understate just how weak their current performance is — they lost a bundle, more than $14 a share. The book value dropped, to about $225 a share. The underwriting performance was awful — the combined ratio climbed to 122% in the quarter (and 104% on the year through September). Underwriting performance is a common measure of profitability in insurance — it is essentially a measure of the costs divided by the premiums, so you take the expenses and claims paid during a given period, and divide them by the premiums taken in. Anything under 100% is an underwriting profit, and while a company can ...

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