Markel released their earnings last night, and they were, well, typical very good Markel earnings — they actually had an above average year in some ways, with good underwriting and not much catastrophe loss and good increases in sales (written premiums). And now, after crashing to about 1.05X book value after announcing the Alterra acquisition, the shares are back to 1.2X book value.
That’s a pretty quick turnaround — my argument that Markel should be one of the best performers of 2013 (at least in the little universe of stocks I can keep track of) wasn’t based on a quick spurt like this, but I’m happy to see it. I thought we’d have to wait until we started to see what magic Markel can work with the massive Alterra investment portfolio before we shot back up in value like this, but investors have gotten very comfortable with the acquisition very quickly.
Alterra had a good year but a tough fourth quarter, thanks to Hurricane Sandy, and their book value fell slightly in the quarter by a few percent. Markel’s book value rose in the quarter by about 2% from the last quarter, so I’d wager that the combined book value of the two companies together will still be in the neighborhood of $425 per share. I still think there’s some uncertainty in how the market will value Markel over the next few quarters as the consolidated company is evaluated, but I think we’re going to see investment returns get significantly better pretty quickly because of Markel’s much more flexible allocation strategy (Markel has a shorter duration on its bonds of just about three years and a large equity and venture stake, Alterra is all bonds and cash with a bond duration of 4.5 years, and the portfolio per share at Alterra is much larger — the combined portfolio will evolve to look like Markel’s current portfolio over time, which should generate better long-term results).
I’m still very comfortable with paying 1.1X the combined book value for the company, but that’s less than the market price now — Markel shares were up about 2% on the earnings release and have trickled up even a bit more in the couple days since. I really like what Markel and Alterra are saying about the relatively smooth combination of the two and the likelihood that the deal might close as ...