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Markel: It’s a Solid Franchise, but It’s Not a Mini-Berkshire

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We think Markel MKL is a solid franchise with a number of attractive qualities, but the “mini-Berkshire” narrative that surrounds the company is misleading. We will maintain our $1,310 fair value estimate and no-moat rating. Starting with the positives: CEO Tom Gayner has a record of outperforming the S&P 500 using an investing philosophy similar to that employed by Morningstar and Berkshire Hathaway’s Warren Buffett. Through Markel Ventures, the company appears to be acquiring moaty noninsurance operations at good prices. Finally, the company has materially outperformed the overall industry in terms of underwriting profitability.

However, its underwriting results fall short of the level achieved by the narrow-moat companies we cover and are somewhat underwhelming, considering Markel’s focus on specialty lines. While Gayner has generated impressive investing results, we think investors should distinguish between asset allocation decisions and alpha. The company’s relatively high allocation to equities has been the primary driver of book value growth, but we see this allocation as risk-tolerant, not value-creative. Gayner’s alpha drove only 40 basis points in annual book value growth over the past decade, on average. Even if investors believe Gayner can continue to outperform the market, this can only justify a modest premium, in our view. Additionally, the capital market environment in the previous decade was characterized by low interest rates and a bull equity market, which was essentially ideal for the company’s investment approach. The rise in interest rates will make it more difficult for Markel to outperform other insurers on the investment side. We think the market tends to award Markel a book multiple in line with the strongest commercial insurers, but we would prefer narrow-moat names like Chubb, Travelers, and W.R. Berkley that are more focused on the underwriting side, which we see as the only reliable source of competitive advantage in the industry.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Brett Horn

Senior Equity Analyst
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Brett Horn, CFA, is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers insurers and credit bureaus. He also oversees the equity research team’s stewardship rating methodology.

Before joining Morningstar in 2006, Horn worked in the banking industry for about a decade, most recently as a commercial loan officer for First Bank, where he was responsible for underwriting loans and managing relationships with middle market clients. Before that, Horn worked for Mizuho Corporate Bank, where he managed loan portfolios and client relationships, primarily with Fortune 500 companies.

Horn holds a bachelor’s degree in business administration, with a concentration in finance, from the University of Wisconsin and a master’s degree in business administration from the University of Illinois. He also holds the Chartered Financial Analyst® designation. He ranked first in the business and industrial services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

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