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5 Things to Know About Markel from Its Annual Letter

By Billy Duberstein – May 10, 2017 at 1:14PM

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Berkshire Hathaway has more cash than it can reinvest right now. Should you consider Berkshire's "little brother" instead?

When great business leaders speak, investors listen. The attendance at last week's Berkshire annual meeting was evidence of that.  But with Berkshire now so big that Warren Buffett lamented the amount of cash they have lying around, perhaps it's time to for investors to look at smaller companies with a similar business philosophy.

One such company is Markel (MKL -6.72%), also known as "Baby Berkshire Hathaway." Like Berkshire Hathaway, Markel is an insurance company, offering a variety of personal and commercial lines in the U.S. (55%), internationally (23%), as well as reinsurance (22%). The company uses its insurance float to invest in stocks, bonds, and private companies, which it calls Markel Ventures. Its annual report from February revealed several similarities.

woman reading a tablet in hammock

source: Getty images

Profitable even in brutal conditions

 Markel reported insurance markets have been "soft," meaning extremely competitive, since the mid-2000s, citing only 2012 as a rebound year for pricing.  .

Despite these challenges, Markel has grown gross premiums from $2.2 billion in 2008 (pre-crisis) to $4.8 billion last year. More remarkably, the company kept its combined ratio below 100% every single year of that stretch except 2011, when it was 102%. A combined ratio measures the costs of the insurance underwriting, so a ratio below 100 indicates profitable underwriting, before investment income is taken into account. That kind of profitable growth in a competitive environment is commendable and mirrors Berkshire's similar conservatism.

Investing like Buffett

On the investing side, Markel's CIO Tom Gaynor has also excelled, with the 5-year return on its equity portfolio of 15.9%, versus 12.2% for the S&P 500 (with dividends reinvested), and a 10-year return of 8% versus a return of 7.51% for the S&P (with dividends reinvested) over that time. This is at a time when most active managers are finding it very difficult to beat passive index funds. Like Berkshire, Markel has an excellent investor to head that department. 

Thinking long term

Markel points to its long-term mindset as an advantage that enables it to produce these returns. In its report, Markel states, "We think about your company in two distinct yet completely connected time horizons, namely, forever and right now."

This long-term mindset gives Markel a competitive advantage by not having to chase quarter-to-quarter or even year-to-year performance, which can backfire if one writes unprofitable insurance business.

You can see the long-term mindset in the annual report itself, as the company chooses to break out investing performance and book value growth in five-year rolling increments. That means the company thinks of five years as the shortest time frame upon which to grade its performance.

Like Berkshire, the company does not chase growth on a quarterly basis, but invests in safe assets that will appreciate over the long term. As Buffett once said, "our favorite holding period is forever."  

But technology is making capitalism more brutal

At the same time, management realizes that focusing on the long-term is not the same thing as being complacent. The company writes,

We won't sugar coat it. Business, (and life) these days, resembles an all-out, full sprint, winner-take-all race, to adapt to the changes wrought by technology. We must continuously learn, and adapt to new conditions, adopt new technological tools, abandon obsolete business practices and systems, find new markets, develop new products, acquire new businesses, and succeed at every other challenge you can think of to continue to build Markel... The emphasis on right now means we need to make appropriate changes and adapt to this way of doing business right now! There is no time for cherishing old ways and reminiscing about an idyllic past. 

Like Berkshire Hathaway's recent investments in IBM and Apple, which mark a break from Buffett's traditional investing philosophy,  Markel management realizes it must adapt to technological change. 

Management uses quotes from non-investors

As Buffett always likes to quote actors, comedians, writers, and athletes in his annual letters to make his points, so does Markel. 

In the 2016 annual letter, Markel did not disappoint, citing quotes from none other than Bruce Springsteen and former Packers football coach Vince Lombardi to illustrate the selfless culture it tries to nurture.

Bruce Springsteen: "Rock and roll bands that last have to come to one basic human realization. It is: the guy standing next to you is more important than you think he is. And that man or woman must come to the same realization about the man or woman standing next to him or her, about you. Or everyone must be broke, living far beyond their means and in need of hard currency. Or: both."

Vince Lombardi: "Individual commitment to a group effort-that is what makes a team work, a company work, a society work, a civilization work."

For those wishing to invest in a Berkshire-like company that isn't so big, at 1/30th the size, Markel may be worth a look. 

Billy Duberstein owns shares of Apple and IBM. The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), and Markel. The Motley Fool has a disclosure policy.

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