TechniqueFrameworkValuationCapital allocation
Orange and Blue: a two-part intrinsic value that decides whether to buy back or issue
Thomas Gayner · Markel Group's 2023 letter to business partners · 2024
The idea
Gayner's 2023 letter explains, in a chief executive's own words, how Markel estimates what it is worth. Orange is investments and cash less debt, per share. Blue is normalised operating earnings after interest and tax, multiplied by a conservative and consistent multiple, per share. Added together they give the firm's sense of intrinsic value, and the buyback follows from it: Markel bought back more in 2023 than in 2022 as the discount widened, and says it would issue shares if the price ever exceeded its estimate. It is the Buffett test with the valuation shown, which is rarer than it should be.
Publish the method for intrinsic value, then let it decide: buy back below it, issue above it, and keep the multiple consistent so the method cannot flatter.
When it works
Valuing a holding company or an insurer with an investment portfolio, and any discussion of how management should decide on buybacks.
When it may fail
The method depends on the multiple chosen and the definition of normalised, both of which management picks. Consistency is the safeguard, and only a reader checking across years can verify it.
How to use it
Run the two-part sum on a company you follow: net investments per share plus a multiple of normalised earnings. Compare with the price, and ask whether its buyback history matches the gap.
Where it came from
Letter Markel Group's 2023 letter to business partners · Thomas Gayner
What the source says. Orange is investments and cash less debt per share; Blue is normalised operating earnings after interest and tax times a conservative, consistent multiple per share; repurchases rose to $445 million in 2023 from $291 million in 2022, and Markel would issue shares above its estimate.
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