Why Markel Is Not Just a “Baby Berkshire”

Markel (MKL 1.10%) is often referred to as a "Baby Berkshire" in reference to Berkshire Hathaway (BRK.A 0.97%) (BRK.B 1.22%), the massive conglomerate led by Warren Buffett.

One reason many investors make this comparison is because both Markel and Berkshire Hathaway are -- at least in part -- insurance companies that, like all such businesses, invest their float to earn a return. And like Berkshire, Markel has historically been very successful in its float investing operations.

Image source: Getty Images.

This comparison, however, vastly overstates and oversimplifies the similarities in these two fantastic companies, and it fails to give Markel its due as the unique business it really is.

How the companies make money

A great way to begin understanding any company is to look at how it generates revenue. For Markel, taking this approach leads to an obvious conclusion -- it's primarily an insurance company. Insurance companies collect premiums from customers upfront in exchange for the obligation to pay out benefits in the event the customer suffers a loss that is covered under the terms of their insurance policy. The money the insurance company holds in its own accounts between the time it's collected from customers as premiums and paid out for claims is called the float. An insurance company invests this float to earn a return until it needs to pay out claims, which boosts overall company profits.

Since both Markel and Berkshire have historically done well in investing their float, and since they both have world-class investors running those operations, it's tempting to assume they are basically the same business, just operating at different scales. But are they both primarily insurance companies as the comparison implies? Let's take a look at their respective revenue mixes for last year: 

Data sources: Markel and Berkshire Hathaway 2018 annual reports.

As you can see, over two-thirds of Markel's top line last year came from insurance operations. Given this breakdown, it makes sense that Markel calls itself an insurance company on its own website: "At Markel, our main operations are insurance." On the other hand, by doing the same for Berkshire, you'd be ignoring over three-quarters of the company's revenue.

Clearly, in terms of how they make their money, these are fundamentally different businesses, but just looking only at their insurance operations,  even those are very different. Markel is primarily a specialty insurer, offering coverage in various niche markets, including workers' compensation, classic cars, and environmental and energy liability.

Berkshire takes a different approach. While the company does have a diverse portfolio of insurance and reinsurance offerings, over $33 billion of its $57 billion in insurance revenue last year came from its Geico subsidiary, which primarily sells what is perhaps the simplest and most well-known insurance product in the United States -- auto insurance.

Divergent acquisition strategies

A review of each company's recent M&A activity further reveals the differences in their overall business approaches. Markel and Berkshire both make a habit of acquiring other companies to enhance and diversify their respective businesses. The focus of the two companies' acquisitions is quite different, though. Markel has generally stayed within its insurance wheelhouse:

Data source: Markel 2018 annual report. *Costa Farms and Brahmin Leather deals for 81% and 90% stakes, respectively.

But Berkshire happily expands its already large stable of non-insurance businesses:

Data source: Berkshire Hathaway 2018 annual report. 

In addition to the completed deals shown above, we've recently learned that Berkshire is providing $10 billion in financing for a large merger in the oil industry. Berkshire's acquisition strategy is all about doing what Warren Buffett does best -- identifying and buying great businesses wherever and whenever he can find them. Only one of the company's recent major purchases was in the insurance industry, and it was the smallest of the group.

Most of Markel's recent buyouts were insurance companies as it continues to expand and grow its core insurance operations. Costa Farms and Brahmin came in as part of the Markel Ventures segment.  

Investor perception

Finally, a brief look at the annual shareholder meetings for each company provides another more subtle example of how different these two companies can be.

Berkshire Hathaway's shareholder meeting is, of course, a huge event for investors: tens of thousands of people, a large exhibit space full of booths from the company's subsidiaries, hours of Q&A with CEO Warren Buffett and Vice-Chair Charlie Munger. The discussion is all over the map, ranging from detailed questions about a specific subsidiary to broad inquiries about Berkshire's overall performance and the global economy, politics, and how to live a good life.

At Markel's shareholder meeting, other than the smaller scale, shareholders are more likely to hone in one the insurance business and want to understand it more. Richard Whitt, the head of Markel's insurance operations (and a co-CEO), is on stage along with other key members of management. He gives a detailed presentation on the insurance operations which typically comes before co-CEO Tom Gayner's presentation on the investment operations. Markel's shareholder meeting puts the insurance operations front and center, because that's what drives the company.

So despite the common comparisons, Markel and Berkshire are both great but very different companies. To fully appreciate Markel and properly evaluate the stock, however, investors should consider the business on its own terms. To look at Markel only in the shadow of its larger peer is to do this excellent company a great disservice.