Mini-Berkshire Doesn't Compare

| About: Markel Corporation (MKL)

Summary

Markel Corporation has a reputation as a mini-Berkshire.

Niche insurance lines aren't returning the premium you'd expect.

Highly competitive re-insurance business.

Markel Corporation (NYSE:MKL) has built it's reputation on being a mini-Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B). The company runs and insurance business with a mix of specialty insurance and re-insurance. They expanded the re-insurance business in 2013 with the acquisition of Alterra in 2013. Re-insurance now makes up roughly 25% of premiums for Markel.

What Attracts Investors

Markel is different than a lot of insurance companies as they invest, instead of return, the majority of their excess cash flow. Their goal is to compound growth over a long period of time and increase shareholder value.

Tom Gayner has an enviable record of beating the S&P 500 by over 2 percentage points over the last decade. This is truly impressive and would be outstanding if you were investing directly in the equity portfolios returns. This structure however differs from Berkshire where there main investments are wholly owned. Merkel has started to do some buy the businesses type investments that Berkshire is famous for but so far the non-insurance investments haven't done terribly well. Making about 6% return on invested capital over the last 4 years. The company may have over paid for these assets.

Flies in the ointment

While the investment returns are impressive. The underwriting hasn't been as stellar. Markel suffers from very high expense ratios which are common for specialty insurance lines. They have now expanded the re-insurance side of the business. Reinsurance is notorious for the boom bust nature of the business. With a significant amount of competition in this area it's very easy to unknowingly under price risk. This means Markel is overpaying for the float it's getting from these insurance lines. While that may be ok as long as they have higher than expected investment returns if and when those returns regress to the mean they'll be in a very difficult position. This is very different than the business model for Berkshire where they are very disciplined about the underwriting they are doing and have made money on it for the last 13 years.

Valuation

Markel currently trades at a PE of 21.3 and price to book of 1.6 compared to Berkshire at a PE of 14.5 and price to book of 1.4 (with Warren Buffett reiterating they are willing to buy shares back at 1.2x book).

Investment Play

The returns by the team at Markel are impressive and you can count me in if he ever opens a mutual fund or hedge fund. Berkshire "the original" is more for me and it comes with Warren Buffett put at 1.2x book. It's true that Berkshire is the much larger company making it more difficult for Warren and Co. to move the needle but Markel's investment returns have to substantially out perform into the future to justify the premium.

I think Markel is a stock ripe for the watch list. It has a kind of cult following. Someday it may take a hit and give us the opportunity to buy it at a reasonable multiple. For now I'd buy Berkshire over Markel.

Disclosure: I am/we are long BRK.B.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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