Even though insurance company Markel (NYSE:MKL) has been around a long time, its name is not as recognizable as some others in the industry. That’s partly because it operates mostly in specialty niches and partly because it’s kind of a hybrid — part insurer, part investor. That business mix has led some to call it a “baby Berkshire.”
Like Berkshire Hathaway, Markel has been a remarkably steady performer, with only one down year for its stock over the past decade and a 10-year annualized return of over 12% through 2019.
And like Berkshire, Markel has has multiple ways to generate revenue — insurance, and investing in both publicly traded stocks and private companies. In the third quarter, Markel reported comprehensive income of $520 million, or $31.07 per share, up from $250 million in the third quarter of 2019. Let’s take a closer look at Markel’s business and see if it can keep winning for investors.
Markel is a provider of excess and surplus (E&S) insurance. This encompasses areas of the market that standard carriers won’t typically cover, like special event insurance or liability insurance for high-risk businesses, usually small or mid-size. Markel also has a reinsurance business, which involves providing insurance for insurance companies in cases that are higher-risk. So if an insurer is expecting big losses from a hurricane, for example, it may acquire reinsurance from a provider like Markel to cover claims above a certain threshold.
Markel reported earned premiums of $1.39 billion in Q3, up from $1.3 billion the same quarter a year ago. The combined ratio, which measures losses plus expenses compared to earned premiums, was 97%. That’s a solid figure, particularly in a pandemic. Anything under 100 is good, as that means the company is taking in more in premiums than it is paying out. Markel’s combined ratio has consistently been in the low- to mid-90% range over the past five years.
That speaks to Markel’s disciplined underwriting process. Despite taking major hits this year due to the pandemic, the company has seen an increase in earned premiums through the first nine months. On the third-quarter earnings call, co-CEO Richard Whitt said, “We’ve implemented many key strategic changes over the last several quarters designed to reduce the number of … items that could potentially impact our future results. We believe the changes we have made and will continue to make will reduce the volatility of our insurance business results going forward.”
Investing in companies, public and private
What sets Markel apart is its diverse revenue streams, and that includes two very high-performing investing businesses.
One of them is a large portfolio of stocks that it invests in with earned premiums. Currently, Markel has a portfolio of about 113 stocks, including Berkshire Hathaway, Amazon, and Walt Disney. This quarter, the investment portfolio generated $539 million, up from $32 million a year ago. The stock portfolio was buoyed by strong gains in the equity markets over the last two quarters. This segment is going to fluctuate with the movements of the stock market so the returns won’t always be as high as they were this quarter. But, the fact is, the company has produced consistently high returns over the past decade. Over the last 10 years, the $22.3 billion portfolio has returned 15.2% per year on an annualized basis.
The other major revenue generating arm is Markel Ventures, which is essentially a private equity firm that invests in private companies. Last year, Markel Ventures generated $2.1 billion in revenue and $264 million in EBITDA (earnings before interest, taxes, depreciation, and amortization), so it’s a significant chunk of change. In the third quarter, Markel Ventures posted $824 million in revenue, up from $496 million.
The strong performance came from two recent acquisitions, Lansing Building Products and VSC Fire & Security. Markel is very selective and diligent in the companies it invests in, working directly with principals, not intermediaries, with the goal of being partners for a long time and letting them operate autonomously.
Is Markel a buy?
So, when you put it altogether, Markel, like Berkshire Hathaway, is a good investment.
Markel has a great valuation, with a price-to-book ratio of about 1.2 at Friday’s prices, which means, with its consistent earnings power, it should have some room to run. Markel has a great business model and is a well-run company with the performance to prove it. It is a good, solid buy in any market.