Investment management firm, Davis Advisers, released its “Davis Financial Fund” 2022 annual investor letter. A copy of the same can be downloaded here. In 2022, the fund declined −8.91% slightly outperforming the S&P 500 Financials Index which returned −10.53%. Investments in property and casualty (P&C) insurance, foreign banks, and Berkshire Hathaway were the primary contributors while U.S. bank and consumer-lending holdings detracted from the performance. In addition, please check the fund’s top five holdings to know its best picks in 2022.
Davis Financial Fund highlighted stocks like Markel Corporation (NYSE:MKL) in its 2022 annual investor letter. Headquartered in Glen Allen, Virginia, Markel Corporation (NYSE:MKL) is a financial holding company that underwrites insurance products. On March 10, 2023, Markel Corporation (NYSE:MKL) stock closed at $1,262.31 per share. One-month return of Markel Corporation (NYSE:MKL) was -7.72%, and its shares lost 6.88% of their value over the last 52 weeks. Markel Corporation (NYSE:MKL) has a market capitalization of $16.926 billion.
Davis Financial Fund made the following comment about Markel Corporation (NYSE:MKL) in its 2022 annual investor letter:
“As the relative risk/reward trade-off has shifted back toward our bank holdings, the fund has reallocated some capital away from P&C insurance, though it still remains a meaningful position at 17%. A closer look at one of those holdings, Markel Corporation (NYSE:MKL) Corporation, illustrates why. Referred to by some as a “mini-Berkshire Hathaway,” Markel allocates its capital between writing P&C insurance, investing in publicly traded stocks, purchasing controlling interest in private companies and repurchasing its own stock. Such flexibility conveys an advantage over those who limit themselves to one or two of those options. It also complicates the analysis of the company by investors, and despite its $18 billion market capitalization, Markel is covered by relatively few brokerage analysts. Insurance companies in general earn two streams of profits: the profit (loss) from underwriting clients’ risks, and the investment income generated from assets financed with the float provided by their customers (and their own capital). Markel has a demonstrated record as a highly competent underwriter, illustrated by management’s targeted underwriting margin of 10% in the medium-term, an outcome that would translate into an attractive mid-teens return on equity if it were conventionally structured.
But Markel is not conventional: It carries far more equity capital than its insurance operations need on a standalone basis, and that excess is allocated to stocks and owned private companies. Markel is projected to earn $1.25 billion of net income in 20236, but this metric only captures the dividends received on its $8 billion stock portfolio. The underlying companies in that portfolio—which include Berkshire Hathaway, Deere & Co., Home Depot and Alphabet, among others—earn perhaps $350 million more than they pay out in dividends.7 Moreover, these companies are reinvesting much of that into their own businesses at attractive rates of return, which over time will materialize into stock price appreciation. Adjusting Markel’s reported earnings for these retained earnings would decrease its 2023 valuation multiple from 14 times to 11 times. Furthermore, the contribution to this adjusted measure of earnings from these stocks and from the approximate $2 billion invested in private companies is roughly 45% of the total. These are non-financial businesses that generally command higher valuation multiples than typical financial companies.…” (Click here to read the full text)
Pixabay/Public Domain
Markel Corporation (NYSE:MKL) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 29 hedge fund portfolios held Markel Corporation (NYSE:MKL) at the end of the fourth quarter which was 32 in the previous quarter.
We discussed Markel Corporation (NYSE:MKL) in another article and shared Warren Buffett’s stock portfolio and his recent buys. In addition, please check out our hedge fund investor letters Q4 2022 page for more investor letters from hedge funds and other leading investors.
Suggested Articles:
- 30 Countries with the Highest GDP in 2022
- 11 Best Debt Free Stocks to Buy
- 11 Best Long-term Growth Stocks for Strong Returns
Disclosure: None. This article is originally published at Insider Monkey.
