Markel (NYSE:MKL) is a specialty insurance company at its core, but it is a hard company to pigeonhole. It also makes a significant portion of its revenue from investments in both private and public companies. Some have called it a "mini Berkshire" because of its similarity to the Berkshire Hathaway business model.
It is also similar to Berkshire Hathaway in that it has a solid track record of generating returns for its investors. Over the 10-year stretch that ended in 2020, it posted an annualized return of 10.6%. Over that same time period, the S&P 500 returned about 9.3%. Markel turned in another solid year in 2020, but the stock price didn't really reflect it, as it fell 9.6%. And this year, the stock is roughly even year to date. The market is not recognizing its value, which might make it a good time to buy.
A strong fourth quarter
Markel has three primary revenue streams. Its insurance business, where it sells excess and surplus insurance, is where it underwrites higher-risk small and mid-sized businesses that most other insurers don't -- think special events, terrorism insurance, or really anything that most insurers deem too risky to cover. One of Markel's strengths over the years has been its very disciplined approach to underwriting. The company also offers reinsurance, which is insurance for insurance companies in the event they are hit with heavy claims due to a major storm or something like a pandemic.
The second line of business is its investment portfolio, which it funds with its earned premiums. It holds a portfolio of about 113 stocks, including Walt Disney and Amazon. The third revenue stream is Markel Ventures, a private-equity business that invests in privately held companies.
In the fourth quarter, Markel posted strong gains in revenue and net income. It earned $3.3 billion in revenue, a 27% increase over the fourth quarter of 2019, and it turned in a 52% increase in operating revenue to $1.1 billion. Overall, net income jumped 62% year over year to $829 million, or $59.33 per share.
Markel's gains came primarily from its investing segment, which accounted for $946 million of the $1.1 billion in operating revenue. The portfolio was up 46% over the fourth quarter of 2019, reflecting market gains in the quarter year over year. The insurance business also saw a 28% increase in operating revenue as earned premiums rose 13% to $1.5 billion.
The company's gains came despite significant losses due to the pandemic and natural disasters. The company benefited from "meaningful rate increases and new business in targeted growth areas globally, while exercising strong expense discipline," Co-CEOs Thomas Gayner and Richard Whitt said in a statement. As a result, the company had an excellent 89% combined ratio in the fourth quarter.
A good option
These year-end numbers illustrate why Markel has been a good performer over the years. Markel's diverse revenue stream allows it to navigate the market's ups and downs. When the stock market is down, it may be offset by the insurance, reinsurance, or private equity business. In the previous decade, it had only one year with a negative return.
Over the five-year period that ended in 2020, Markel's book value per share increased by an average of 10% annually, while its share price only increased by an average of 3%. At Friday's prices around $1,090 per share, the stock looked undervalued, with a price-to-book ratio a little over 1.2. While the share price should be irrelevant to the value of the stock, the reality is that some investors are hesitant to buy five shares of a $1,000 stock rather than 100 shares of a $50 stock -- even though they're investing the same total amount either way. If you're not put off by Markel's share price, it looks like a great buy at this valuation as we prepare to exit the pandemic and, hopefully, enter a period of economic and market growth.