Markel's a Buffett-In-Waiting - Barron's

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Includes: BRK.A, MKL
by: Judy Weil

How has insurer and Berkshire Hathaway-wannabe Markel (NYSE:MKL) doubled its net worth and share price every five years since its 1986 IPO? Barron's says partly by insuring small businesses like garages and beauty parlors and not home and auto loans; and partly through high underwriting standards. Those are just some of the Buffett-like value investing ethics that the Markel family has duplicated in their corporate culture.

Yet Markel’s discipline has cost it. The property-casualty market slump impelled industry-wide, cutthroat reductions in fees and poorer underwriting standards. Markel won’t lower premiums to unsustainable levels, and big insurers are moving in on the company’s niche markets. Last year, Markel underwrote $2.4 billion of policies, down 7% from 2006. Q1’08 had 9% less than Q1’07. Shares are down to $400 from $550 last fall.

Bulls insist Markel will gain now that higher underwriting standards are back in vogue. Others might also copy Markel’s incentive model that gives employee’s cheap funds to buy stocks, rather than options. Markel’s P/E is historically low and industry pricing should improve. CIO Thomas Gayner’s stock picks for the holding company have also been remarkably successful—despite a penchant for financials. Bulls see a 20%+ rise for the stock.

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Travis Johnson agrees that Markel is very Buffett-like—and not just because Berkshire Hathaway is a major holding for the company. Markel is also slowly but steadily diversifying its portfolio away from stocks-only in to investments like First Market Bank and a bakery equipment business. Johnson doesn’t know if Markel as an investment opportunity is the next Berkshire, but thinks the company is certainly moving in the right direction.