I’m sure you’ve heard of Berkshire Hathaway Inc (BRK).
BRK operates insurance companies to generate capital known as “float”. BRK then invests them into businesses. Subsidiaries are businesses that BRK owns >50% shareholdings in. Meanwhile for equities, these are shares of public listed companies that BRK own. Combined, BRK is today a diverse conglomerate that earns multiple sources of income which is worth US$ 1 trillion.
It is a brilliant business model.
As I continued my studies on US equities, I discovered a few more US listed insurers that adopt, operate and run their businesses “quite like” BRK. One of the few is Markel Group Inc (MKL). As I write, MKL has a market capitalisation of US$ 23.3 billion. It is 1/40 the size of BRK and hence, MKL is often known as a “mini-Berkshire”.
Here, I’ll share 7 findings on MKL after reading through its annual reports.
1. Insurance
MKL is a leading global specialty insurer. It offers a range of insurance products to businesses & individual customers. To name a few, MKL underwrites products such as general liability, marine & energy, workers’ compensation and professional liability. As for individual customers, MKL has products to insure vehicles (bikes, boats and cars), pets, horses, farms, specialty real estate like coastal homes, manufactured homes and multi-family housing partnerships.
MKL’s earned premium grew at a 10-year CAGR of 9.89%, up from RM 3.23 billion in 2013 to as much as US$ 8.30 billion in 2023. But, throughout the ten-year period, its profit margin averaged at 4.9% for its combined ratio (Loss ratio + Expense ratio) averaged at 95.9%. Overall, MKL had generated US$ 2.63 billion in underwriting profits in 2014-2023. This means that MKL generated profits from raising capital known as “float”. It is like having a loan and getting paid interests on it (awesome, isn’t it?)
2. Investment
With “float”, MKL grew its invested assets from US$ 17.6 billion in 2013 to US$ 34.6 billion in Q3 2024. In Q3 2024, its invested assets comprise fixed maturity securities, short-term investments, cash and cash equivalent, and equity securities. Its breakdown is as follows:
Source: Markel Group Inc’s Q3 2024 Report
MKL’s fixed maturity securities, short-term investments, and cash & cash equivalents generate a steady stream of interest income. Meanwhile, MKL’s equities securities would generate dividend income. Collectively, in line with its growth in invested assets, MKL has generated an increase in net investment income, up from US$ 317.4 million in 2013 to US$ 734.5 million in 2023.
As MKL has equity investments, MKL is required to report their fluctuational gains or losses over the short-term in their quarterly and annual reports. These are known as changes in fair value of equity securities and they will cause huge distortion in MKL’s reporting of actual earnings. So, as investors, it is unrealistic to value MKL’s shares with P/E Ratio based on its actual earnings.
Source: MKL
3. Markel Ventures
Apart from investments, MKL invests “float” raised from its insurance operations into a collection of businesses in the consumer and building products, construction services, consulting services, transportation products, and equipment manufacturing products. The following are brands which MKL owns currently under Markel Ventures:
Source: MKL
In line with its growing portfolio of businesses, Markel Ventures has generated consistent growth in operating revenue and net income to shareholders over the past 10 years. Operating revenue had increased by a CAGR of 21.93%, up from US$ 686.5 million in 2013 to as much as US$ 5.0 billion in 2023. With greater margins, its net income to shareholders grew by a CAGR of 27.25% from US$ 23.8 million in 2013 to US$ 265.1 million in 2023.
MKL’s return on equity (ROE) from these businesses had improved from under 5% in 2013 to as much as 10.90% in 2023.
Source: MKL
4. Actual Net Income
As mentioned, MKL’s actual net income reported is distorted by fluctuation gains or losses by its equity investments in the short-term. Such fluctuations caused MKL to report net losses in years such as 2018 & 2022 due to unrealised losses from its equity investments and significantly huge net income due to unrealised gains from its equity investments in 2019, 2021 and 2023.
Source: MKL
Because of this, MKL’s actual earnings are not reflective of its ability to produce income.
5. Capital Allocation
In 2014-2023, MKL raised US$ 14.44 billion in operating cash flows and US$ 1.79 billion in debt and issuance of preferred stocks. This means, for each US$ 100 in total cash inflows, US$ 90 of them were raised from operating cash flows and the remaining US$ 10 were raised from debt.
From it, MKL spent US$ 11.49 billion in acquiring fixed maturity securities, equities, businesses, and other investments, US$ 1.29 billion in acquiring property and equipment, US$ 1.34 billion in share buybacks, and US$ 0.13 billion in preferred dividends. It increased its bank balances from US$ 1.96 billion in 2013 to US$ 4.33 billion in 2023. This means, MKL has allocated US$ 70 into investments, US$ 7.80 into capital expenditures, US$ 8.10 in share buybacks and the remaining balance was mostly kept within its bank accounts in that ten-year period (2014-2023).
Source: MKL
6. Debt-to-Operating Cash Flows Ratio
MKL grew its amount of debt from US$ 2.26 billion in 2013 to US$ 4.36 billion in Q3 2024. But, it had increased its operating cash flows at a much faster rate as compared to its debt. Hence, the debt-to-operating cash flow ratio of MKL fell from 3.03 years in 2013 to 1.49 years in Q3 2024. It means that MKL has the ability to pay off its debt in 1.49 years, if it chooses to do so.
7. Price-to-Book Ratio (P/B Ratio)
In 2014-2023, MKL had increased its stock price from US$ 682.84 to US$ 1,419.90. This growth was in line with its rise in book value per share from US$ 543.96 in 2014 to US$ 1,095.95. Such growth was attributed to a rise in shareholders’ equity during the period. In the 10-year period, MKL’s P/B Ratio fluctuated between 1.16 to 1.67 and had averaged 1.41.
Source: Google Finance
Conclusion:
MKL has a similar business model with BRK. In 2013-2023, it had increased its invested assets, which led to a growth in net investment income (interest + dividends). Also, Markel Ventures had attained growth in operating revenue and contributed a rise in net income to its shareholders. As investors, the simplest method to value MKL is to calculate its P/B Ratio. Such a figure would be used to compare against its past historical P/B Ratio and against BRK.
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