Markel

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Markel is a diversified financial holding company that operates primarily in specialty insurance, reinsurance, and Markel Ventures, with a unique business model centered around underwriting expertise and long-term investing.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Markel’s moat, while present, is not as clearly defined as those of companies with dominant brands or network effects. They hold a reasonable niche market and some economies of scale. Their moat rating is 3 / 5.

Detailed Moat Analysis & Rating Justification:

  • Underwriting Expertise (Narrow Moat): Markel’s primary moat is its expertise in specialty insurance underwriting. They focus on complex risks that other insurers might avoid, allowing them to charge premium prices and generate above-average profits by successfully avoiding major losses. This focus on specialized insurance, such as professional liability and workers’ compensation, creates a niche where competition is limited, especially in emerging or specialized industries. However, this expertise can be replicated by other skilled underwriters, making it a “narrow moat,” as this moat can be eroded over time. However, expertise-based moats have proven to have a bit more longevity than a basic advantage, like pricing or quality.
  • Strong Culture and Long-term Focus: Markel’s culture and long-term investment horizon, which is partially derived from Berkshire Hathaway, create a competitive advantage. A long-term mindset allows them to prioritize sustainable value creation over short-term gains, and a culture that promotes disciplined underwriting is not easy for competitors to replicate.
  • Decentralized Operations: Markel runs a decentralized organization and they allow the management to do what they do best. This kind of culture and organization attracts highly skilled and talented individuals. Also, it can act as a safeguard for when someone is not working out. However, this is hard to measure and difficult to consider a real edge.
  • Market Ventures (Contributes to Moat, but not primary): Through their Markel Ventures arm, they acquire and own businesses outside the insurance sector. The unique insight and expertise they gain by managing their holdings across different sectors give them an extra edge, knowledge, and unique capabilities, contributing to their moat, especially because this arm of the business provides higher ROICs.
  • No “Priceless Assets”: The company does not have any brand, patent, or regulatory advantages that could create a sustainable long-term advantage. Their business is not based on a network of users or clients, or any other unique and hard-to-replicate feature. Because of this reason, a large portion of their revenues and success depends on its people and a culture focused on quality. This puts a bit of risk into the business, as a culture might shift if the wrong people get into management positions.

Legitimate Risks to the Moat and Business Resilience:

  • Economic Cyclicality: The insurance business is cyclical and can be affected by economic downturns, which can lower demand for insurance products, reduce premiums, and increase claims costs. Also, a bad recession can force companies into bankruptcy, leading to high levels of claims.
  • Catastrophic Events: Large-scale catastrophes can cause large losses, for a long period of time, and they will have an adverse effect on MKL’s reserves and financials. Also, because of the uncertainty of timing and location of such events, the company can also underperform severely at any point in the business cycle.
  • Low-Interest Rates: Because insurance companies get revenue from investing premiums until those claims are made and the claims are made in a few years, low-interest rates can cause reduced investment income, lowering future profits and diminishing the margin of safety that Markel tries to create. This makes it harder to make higher ROIs from their investments, and can also erode their future value creation, depending on how much their premium and fees will cover for the reduced returns.
  • Competition: The specialty insurance industry is very competitive, and a lot of players in this industry have increased their capabilities and expertise over the past few years, adding more competition. Other competitors can replicate what makes the company great. These new entrants into the market can reduce their market share and margins.
  • Management Changes: Markel has a very strong culture of long-term-oriented management, with a decentralized structure that allows for a lot of flexibility. If key people are not replaced with managers who maintain this culture, the company might lose some of its edge.
  • Underwriting Mistakes: A mistake in underwriting policies can result in massive losses. Underwriting can be seen as an art, and it is inherently impossible to always get it right. Although their focus on specialist, complex fields, with a small focus group means the risk is lower, they still need to be always aware of this issue and take preventive measures.
  • Inflation: Inflation and increased costs can be difficult to handle in a fast-moving macro-economic world. Although the company claims they have had experience from this in the past, they can still face issues if they can not pass costs to their end clients.

Business Description (Revenues, Industry, Margins, Competition, & Differentiation):

  • Revenue Distribution: Markel’s revenue comes from three segments: insurance, reinsurance, and Markel Ventures.
    • Insurance: Underwrites specialty insurance policies for a range of customers and industries with a focus on niche or difficult to price insurance products. Provides professional liability, workers’ compensation, and other insurance lines.
    • Reinsurance: Provides reinsurance products, meaning they are insuring other insurance companies against claims. The majority of their business here is a mix of property and casualty reinsurance.
    • Markel Ventures: Acquires and operates companies outside the insurance industry. These businesses tend to have higher ROIC and growth potential. They can be categorized into consulting, manufacturing, and wholesale.
  • Industry Trends: The insurance industry is increasingly competitive, and is seeing increased regulatory requirements and increased commoditization of many insurance products. However, this is not the case for specialty insurance, as it depends more on the expertise of management and not pricing or other such quantitative methods.
  • Margins: The core business of the company, insurance, operates at a lower operating margin, around 12% in 2022. However, the other division, Markel Ventures, operates with higher margins that hover around 40%. For long-term success of the company, it is more important for them to balance these two aspects and make them work in tandem.
  • Competitive Landscape: The specialty insurance industry is very competitive. Some players are Zurich Insurance, Swiss Re, American Financial Group, AXA, Fairfax Financial, and Alleghany. Markel has managed to do well because they focus on expertise, which helps in avoiding direct competitors that have low-cost models. Also, many companies are not well equipped to deal with specific types of insurance, like Marine, or specific industries, like healthcare. This gives the company an opportunity to carve out its space in a large, competitive market.
  • Differentiation: The company differentiates itself from competitors through its focused underwriting strategies and their long-term value creation approach that also encompasses investments. They can hold stakes for the long term, which reduces the necessity for trading and generating more value over time. Their use of a decentralized structure and management also helps them stay a nimble and fast-growing company, all while retaining their core principles. The company also tries to maintain an entrepreneurial mindset, as they want people to use creativity to solve business problems.

In-Depth Financial Analysis:

  • Overall Performance: MKL has a consistent record of profitability with long-term growth. Revenue has grown more than fivefold in the last 10 years, indicating the growth the company is enjoying across all the sectors they operate in. ROIC also grew steadily during this same time, showcasing that value is being created during its growth.
  • Insurance Operations: The company’s insurance segment has consistent profitability, albeit at a lower margin compared to Markel Ventures. The combined ratio has been below 100 over the last 10 years, demonstrating underwriting discipline and expertise. However, as seen in 2022, the company can also face high levels of losses in a certain period of time.
  • Markel Ventures Operations: This arm has high levels of revenues and profit generation, with higher margins than the insurance businesses. However, these are more cyclical and have less predictable revenues because of the vast variety of industries they operate in. Also, Markel Ventures focuses on long-term investments and does not do short-term trading, which can give a lot more flexibility.
  • Debt: They are moderately leveraged at a Debt/Equity ratio of about 0.8, which is manageable. The company has a long track record of managing a steady increase in debt, so it should not provide additional risks in the near future.

Recent Concerns / Controversies & Management Response:

  • 2022 Underwriting Loss: In 2022, Markel’s insurance segment experienced underwriting losses due to Hurricane Ian and other weather-related events, which caused a net underwriting loss of $62 million, resulting in an 11% fall in operating income and higher combined ratio. Management has said they continue to maintain their discipline in underwriting, which is the best path forward. They also said that they have a highly diversified product mix, which should help in limiting those types of losses in the future.
  • Stock Performance: The company has underperformed the S&P 500 by a large margin in the last few years. In a volatile macro-economic climate, investors have shifted away from mid-cap value names, which can be a reason for the company’s underperformance. However, the management has tried to reassure investors that they are focused on long-term value and are not trying to chase short-term earnings. They are focused on investing in strong businesses and providing excellent long-term results. They are trying to take advantage of the stock correction in 2022, to buy up more shares in their business.

Understandability Rating: 3 / 5

  • While the basic principles of insurance are understandable, their specific business and investment operations can be complex. Especially since they are a holding company with various businesses in their arsenal, they can be difficult for new investors to get their head around. This coupled with the complex nature of insurance makes the company a bit complicated.

Balance Sheet Health Rating: 4 / 5

  • Markel has a good history of managing debt and assets. Their current debt is not very high compared to their total assets. Also, because of the diverse nature of their businesses, they have been able to maintain consistent earnings growth over the years. The majority of the company is also not highly correlated to macro-economic factors and hence their cash flows and returns should not be hit greatly by any changes in the future.