One company garnering a lot of attention recently is Markel Corp. (NYSE: MKL). Many investors have been curious about the stock after Berkshire Hathaway invested in the specialty insurance company.
Markel has drawn comparisons with Berkshire because of how it runs its business. Here’s what you should know about the company.
Berkshire’s big investment
Berkshire Hathaway recently added a position in Markel, buying more than 420,000 shares totaling $620 million. Berkshire Chief Executive Officer Warren Buffett is a big fan of the insurance industry, so it shouldn’t be too surprising he added a position in a solid company like Markel.
Buffet likes that insurance companies collect premiums up front and then pay out claims later, meaning it can invest that money — called “float” — until policy holder claims deplete it. Not only that, but insurance companies can be good investments because they have pricing power and can adapt by raising premiums during inflationary times like we are experiencing today.
Markel specializes in hard-to-place risks
Markel writes specialty insurance coverage, known as excess and surplus (E&S) insurance. The company concentrates on writing policies on hard-to-place risks that traditional insurers don’t cover. Some of its lines of coverage include insurance for wind and earthquake, classic cars, and transaction-related risks.
Markel has done a solid job of increasing premiums, which have grown at an 11% compound annual growth rate (CAGR) over the past five years. It has also done a decent job of managing its risk, as seen by its combined ratio.
The combined ratio is a crucial metric in the insurance industry that shows the underwriting profit, and is the sum of claims and expenses divided by premiums taken in. A ratio below 100% means a company is writing profitable policies, where the lower percentage, the better. Over the past five years, Markel’s combined ratio has averaged 97% and went over 100% once, in 2017.
Why Markel is nicknamed “baby Berkshire”
Markel’s underwriting ability isn’t anything to write home about. After all, the property and casualty industry combined ratio averaged 99% during the same five-year period. What makes Markel special is its large investment portfolio — which is why the insurer earned the nickname “baby Berkshire.” Markel’s stock investment portfolio totals $8.5 billion, and its top holdings include names like Berkshire Hathaway, Brookfield Asset Management, Alphabet, and Amazon. Over five years, the company has seen its investment portfolio grow at 8% compounded annually.
It also has a segment called Markel Ventures, where it owns a controlling interest in various businesses outside of insurance. Some of the companies it holds here include ones that provide building products, crane rental services, or sell consumer goods like luxury handbags. This segment has grown quickly, with operating revenues increasing by 25%, compounded annually since 2017.
Markel is a solid company that looks to emulate Berkshire Hathaway’s success. Over the past 20 years, Markel stock has delivered a 608% return for investors, beating the S&P 500‘s 410% return and even Berkshire Hathaway’s 468% return. The shares are up almost 4% so far this year compared with a 17% decline for the S&P 500.
Markel put up a solid performance during the first quarter, increasing its earned premiums by 17% as it looked to stay ahead of inflation. The insurer has done a solid job pricing policies on hard-to-place risks while expanding its investment portfolio and is well positioned to thrive — even if the economy enters a recession in the near future.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Courtney Carlsen has positions in Alphabet (C shares). The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Berkshire Hathaway (B shares), Brookfield Asset Management, and Markel. The Motley Fool recommends Brookfield Asset Management Inc. CL.A LV and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.