Our database of insider trading activity shows some recent purchases at insurance company Markel Corporation (NYSE:MKL). Three insiders bought between 100 and 200 shares- even that is a moderately large insider buy, given the stock price in the $430 range- and a Board member bought 1,000 shares at an average price of $428.99 per share. Studies show that on average stocks bought by insiders tend to outperform the market (read our analysis of studies on insider trading) and stocks which multiple insiders are buying tend to do particularly well (see how well consensus insider purchases beat the market). Markel has announced plans to merge with fellow insurance company Alterra Capital Holdings Ltd (NASDAQ:ALTE).
In its 10-Q for the quarter ending September 2012, Markel reported that its premiums revenue rose 4% from the third quarter of 2011. Investment income and realized gains on investments showed little change in terms of the company’s overall revenue, but total revenue rose 13% due to other items. Miscellaneous expenses also drove growth in costs, with the result being that Markel’s earnings were down slightly. The book value of Markel’s equity has also risen, and it now trades at a P/B ratio of 1.1.
The small premium to book value corresponds with where Markel Corporation trades in terms of its earnings: the trailing P/E multiple is 18, which we would think of as being high unless we expected the company to generate substantial earnings growth over the next several years. We’ve seen that in its most recent quarter net income was actually down, and so we don’t think that we would be buying right now; even with the consensus insider purchases we would want to wait and see an improvement on the bottom line. This is particularly the case given that a normally optimistic sell-side community actually expects lower earnings in 2013, as shown by the forward P/E of 22. In addition, M&A tends to reduce shareholder value and so we’d have that concern as well.
Markel Corporation is one of Akre Capital Management’s favorite stocks; the fund, which is managed by Chuck Akre, owned about 200,000 shares at the end of the third quarter. This was essentially unchanged from three months earlier. Learn more about Akre’s approach to investing and see more of his stock picks. Robert Caruso’s Select Equity Group also reported a large position in Markel (check out more stocks that Select owned).
CNA Financial Corp (NYSE:CNA), Meadowbrook Insurance Group, Inc. (NYSE:MIG), and The Travelers Companies, Inc. (NYSE:TRV) are three peers for Markel. The forward P/Es at these companies are in the 8-11 range, even in the case of Travelers which is a much larger company by market cap. Not only are those multiples cheap by themselves, they represent quite a large discount to where Markel trades. CNA and Meadowbrook also have quite low P/B ratios, of 0.6 and 0.5 respectively, so the market is valuing them at a sizable discount to Markel on that basis as well (in addition to their own book values). We think that there is a good case for taking a closer look at those two companies, though in Meadowbrook’s case we would need more details as to how the company will achieve that multiple given that its earnings have not been good recently. Travelers has a P/B of 1.1; with very low revenue growth in its most recent quarterly report versus a year earlier, it’s a closer call but its earnings multiples are so much lower than Markel’s that we think it is a more attractive investment as well. There are consensus insider purchases at Markel, and investors who find that particularly appealing could certainly examine the company more closely, but in general we would say that the company’s peers seem to be better values.
