Markel’s Hidden Gem

While I like to think of myself as a technologist, I find myself with some boring investments. Markel is one of these. It’s an insurance company that runs itself as a Berkshire Hathaway copy. Markel tries to use the money made from insurance to buy private and public companies instead of paying dividends. When left alone for a long time, this is a very powerful, although boring, model. But what is more important than it being boring is that it is something I think I understand.

And if you’ve studied Berkshire Hathaway (BRK), you’ll know that trying to figure out what it is worth is a fun game. Warren Buffett and Charlie Munger simply refuse to tell you how they value BRK, but over the years they’ve given out a lot of clues. So for someone like me, it’s a fun treasure hunt to take the earnings reports and try to produce a stock price. Well, once you’ve done that with BRK, you can apply the same methods to Markel (MKL) and see what you get.

As of today, my methods have MKL somewhat undervalued and BRK somewhat overvalued. Nothing too extreme here. One is 2% of the size of the other and gets less than 2% of the eyeballs and coverage. One still has the most famous investor ever as chairman, the other has a virtually unknown executive running it. So why did I buy MKL a while back?

Well, for starters, I already have a bunch of BRK. And secondly, I found MKL to be similar to BRK, but cheaper. Lastly, I think inflation is going to run hotter than 2% for a long while, and I like insurance companies that get to reprice policies regularly when inflation is a risk. It might not work out either, maybe the government forces them to buy crappy US bonds because of our fiscal situation. Maybe the courts/juries grant ever larger awards at a rate faster than inflation. But I like the idea. I like the hedge.

So how did I find this hidden gem in something I already own and had evaluated? I found it by shopping for car insurance. After thoroughly looking around, I recently ended up with a policy from Hagerty. It had the best price for a car I’m not going to drive all the time. Later that day, I thought I recalled that Markel owned part of Hagerty, like 20%. It turns out my memory wasn’t wrong. Markel owns roughly 23% of Hagerty.

I already knew this, what makes it hidden? Well, Markel accounts for Hagerty using the equity method. As we talked about with PAG’s Penske Transportation Services, the equity method of accounting doesn’t really account for the true market value of a holding. Instead the earnings flow through and the asset is held on the balance sheet at cost. Just as PTS’ value is a little hidden to PAG owners, Hagerty’s value is a little hidden from Markel owners. Markel’s stake in Hagerty is easy to value in the open market. Markel has 78 million shares and Hagerty shares are worth $13.08 today. That’s $1B today. However, Markel accounts for Hagerty as $276M in equity and then lets the earnings flow through to the income statement. Yet this year in particular, Hagerty, a public company, is reporting virtually no earnings because of a transition regarding its relationship with Markel. Over the coming years, if earnings really do show up for Hagerty, those earnings will show up in Markel’s income statement, but as of today, not so much.

So to put it simply, my model of Markel was missing $725M in value ($1B - $275M) because of this. Now since Markel is currently worth $22.4B, $725M is only a 3% change, this isn’t a reason to go out and buy MKL shares. But I found it fascinating and thought I would share. And since I already own Markel, I’m happy for it to be worth 3% more than I thought! :-D