If a firm that has earned the title of "Baby Berkshire"
actually outperforms Warren Buffett's legendary
Berkshire Hathaway (NYSE:
, what should it be called then?
It's just a hypothetical question, but I ask because the stock
of one pretty well-known Baby Berkshire has been soundly beating
the real Berkshire for quite some time.
As you can see, this Baby Berkshire is substantially ahead at
just about every time, and it has led by nearly 2 full percentage
points a year for the past decade and a half.
The firm takes after Buffett's Berkshire in a couple key ways,
including its business model -- a diverse and profitable
insurance business supplemented by an adeptly managed stock
portfolio. Also, the firm refuses to let the constant din of
notoriously shortsighted Wall Street distract it from its goal of
delivering excellent long-term results.
I'm referring to specialty insurer
, which currently only has a market capitalization of $9.1
billion (Berkshire's Class A shares alone are worth more than
$310 billion). But I don't think it'll be long until Markel
achieves large-cap status -- thanks to fast-rising revenues,
which have more than doubled since 2009, to $4.7 billion a
Revenues come mainly from the insurance side of the business,
where Markel has made it hard for competitors to gain a foothold
by developing expertise in a wide variety of policies. These
include some common everyday coverage like property and casualty
(P&C) insurance, as well as various types of professional
liability such as medical malpractice.
But where the firm has really made its mark is in the
provision of specialty products most other insurers don't delve
into. Examples include coverage for camps and recreation
programs, racehorses, health clubs, child care centers,
railroads, artisan contractors, light manufacturing operations,
shipping cargo and even vacant buildings. Last November, Markel
introduced liability insurance for the U.K. biomedical and life
Periodic acquisitions have long contributed to the firm's
expansion and product lineup, and in May 2013, management
completed a $3.1 billion buyout of reinsurer Alterra. Some
analysts criticized the deal because reinsurance (policies that
insurance firms purchase to protect themselves from large losses)
is considered higher-risk due to the potential scale of
reinsurance claims, among other reasons.
These analysts do have a point. However, management pursued
the deal because it expected Alterra would help diversify
Markel's book of business. I agree not only because the
acquisition made Markel more like Berkshire, which also offers
reinsurance, but because of the importance of reinsurance in
promoting stability in the overall insurance industry.
Several commonly used industry metrics bear out management's
acumen, not only in the case of Alterra but in general. For
instance, premium income has risen dramatically in the past
couple years, climbing from nearly $2 billion in 2011 to more
than $3.2 billion currently. (The addition of Alterra certainly
contributed a large portion of recent growth.) During the past 20
years, Markel's income from premiums has increased by an average
of about 18% annually.
The firm has also posted a solid combined ratio of 97% during
the past couple years, indicating that operating expenses and
claims payments have been significantly lower than premium income
recently. (The combined ratio is obtained by dividing the
combined total of losses and expenses by the premium earned; the
lower the percentage, the better.) During the past decade, the
firm's combined ratio averaged 96% and has dropped below 90% on
occasion. By comparison, the combined ratio for the overall
P&C industry is currently about 98% and has sometimes
significantly exceeded 100%.
Book value is another useful metric for insurance companies
because it accurately reflects the health of their balance
sheets. In Markel's case, book value has grown at a very solid
12%-a-year pace for about a decade, from $168 in 2004 to $494
The firm probably wouldn't possess industry-leading metrics
like these if it obsessed over quarterly results like so many
competitors. Indeed, within the industry, Markel is famous for
encouraging underwriters to avoid issuing unprofitable policies
even though doing so might appease Wall Street by padding the top
With the oversight of noted value investor Tom Gayner,
Markel's $3.3 billion stock portfolio has long beaten the market.
Indeed, its five- and 10-year compound annual growth rates of
21.6% and 12.4%, respectively, are well ahead of the S&P
500's 18.8% and 7.8% rates of return during the same periods. As
of March 31, Gayner's top five holdings were Berkshire Hathaway,
Brookfield Asset Management (NYSE:
When selecting stocks, Gayner focuses on several features in
addition to attractive valuations, including high returns on
capital relative to competitors, and management with talent and a
reputation for integrity. He also prefers companies that are in a
position to do a better job than competitors of compounding
earnings and cash flow.
Markel doesn't pay a dividend, opting instead to reinvest
profits back into the business. Based on the stock's long-term
outperformance, this approach has clearly benefited
Risks to Consider:
Though uncommon, catastrophic losses from man-made or natural
disasters are a significant concern for P&C insurers like
Markel and could decimate the company financially.
Action to Take -->
With a trailing price-to-earnings (P/E) ratio of 32, investors
are paying a premium for Markel's stock. However, this is
warranted, in my view, because of this Baby Berkshire's high
quality operations and top-notch investment management. With
analysts projecting earnings per share (
) growth of more than 11% a year, upside for the stock is in the
50% range during the next five years. Thus, the price could jump
to more than $980 by mid-2019 from $655 currently.
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