EUR 850.00 For Business Accounts Only

Morningstar | We're skeptical of Markel's reputation as a mini-Berkshire.

Markel has built a reputation as a "mini-Berkshire," and while we think it has developed a solid franchise, we believe the premium the market awards the company based on this narrative is not fully justified. At first glance, Markel would appear to have the making of a moaty business, as it focuses on specialty lines. The company has substantial excess and surplus lines operations, but it also focuses on niche underwriting areas such as insuring summer camps, childcare centers, and livestock. We think the most common path to a moat for commercial property and casualty insurers is to focus on niche lines such as these. However, underwriting results have fallen a bit short of the strongest players in the industry, largely because of a relatively high expense ratio. We think the primary reason Markel draws interest is how it differentiates itself in terms of capital allocation. Most insurers actively return the bulk of their free cash flow, but Markel retains the vast majority of its capital; its goal is to compound this capital at high rates of return over a long period. However, this is much easier said than done, and we think expecting Markel to replicate Berkshire Hathaway's historical performance is unrealistic. While Tom Gayner has a good investing track record, the company's M&A efforts look like a mixed bag to us, and we see its equity-heavy investing approach as more risk-assumptive than value-creative.Admittedly, the company has had a strong run recently, with book value per share growing at a 11% CAGR from 2012 to 2017. However, low interest rates, a bull equity market, and relatively benign catastrophe environment made for an essentially ideal backdrop during this period, given Markel's strategy, and it is questionable whether this growth rate is sustainable. One part of these tailwinds ended in 2017, with a spate of natural catastrophes driving Markel to an underwriting loss. Markel will likely remain a relatively strong performer so long as equity markets continue to rise, but investors might rethink the high multiple the stock enjoys if the markets decline and book value growth slows.