Markel Corporation

DETTA INLÄGG ÄR ETT UTDRAG UR KVARTALSBREVET JAG SKICKADE TILL PANDIUMS ANDELSÄGARE 3 NOVEMBER 2014.

Markel is an US-based insurance company with local presence in more than 20 countries. They focus on specialty insurance within a couple of niche markets.

The insurance business is very interesting. Simply described running an insurance company can be split into two parts: underwriting and investing. Underwriting is the business of selling insurance policies and paying out benefits (when the customers has suffered some kind of damage). Underwriting is most often a bad business. In fact, most insurance companies lose money on underwriting. This is where the investing part comes in. Because between the time the customer pays for her insurance and the time a benefit is paid out the insurance company can invest the money and make a profit on it. Done properly this should compensate for the underwriting losses. In practice underwriting provides debt that can be invested. In general successful insurance companies have focused on either becoming superior underwriters or good investors. Markel has done both.

On the underwriting side Markel has during the last 10 years had costs of c. 96 cents for every dollar they have received in premiums. You could say that Markel is borrowing money and getting paid 4% per year for it. What is even more impressive is what their Chief Investment Officer Tom Gayner, has done with that money. In 2003, Markel had a net worth of $1.4 billion. During the following ten years profits from investments amounted to $3.4 billion. That translates to a compounded annual growth rate of c. 13%.[1] This powerful combination of strong underwriting with great capital allocation has enabled Markel to grow its net worth from $4.66 per share in 1987 to $477 per share in 2013. That is a compounded annual growth rate of 19.5% over 26 years. Not too bad.

But that is old news, right? What about the future? There are a couple of reasons I believe that Markel will continue to perform well over the coming years. Their main engine of value growth is the investing business and with a track record like that it is likely that Tom, that has been with Markel since 1990, will continue to outperform. On the underwriting side, Markel has a strong position in several niches that can provide for continued growth of volumes and high returns. But equally important they have proven that they are good underwriters and that competence does not disappear overnight. 

But even if things do not developed as well as they have done historically Markel was bought at a valuation that should give you downside protection and upside potential.


[1] The returns on the unlevered capital are lower.