Fairfax vs Markel vs WR Berkley

[Viking]

Comparing Fairfax, Markel and WR Berkley is interesting. Their market caps today are similar. But what about the size of their insurance businesses? And their investment portfolios? Yes, all three have different business models. However, all three are still insurance companies at their core. Let’s take a quick look at some of the key metrics and see what we can learn.

 

Fairfax Financial, Markel and WR Berkley all have similar market caps today.

• Markel = $18.3 billion
• Fairfax = $16.0 billion
• WR Berkley = $15.6 billion

This suggests investors expect future earnings (total $) to be roughly similar. Let’s start by looking at the insurance side of the businesses and net premiums written.

 

Net premiums written (2022):

• Fairfax = $22.3 billion
• WR Berkley = $10 million
• Markel = $8.2 billion

Fairfax’s net premiums written is larger than both Markel and WR Berkley combined. That is a big difference. What about underwriting profit?

 

Underwriting profit (2022):

• WR Berkley = $960 million
• Fairfax = $950 million (when you net out losses from runoff)
• Markel = $610 million

In terms of underwriting profit, WRB and Fairfax are earning similar amounts (total $) and Markel is earning quite a bit less. However, both WRB and Markel each have a much lower CR.  Let’s now pivot and look at the investments side of the businesses.

 

Investment portfolio (2022):

• Fairfax = $55.5 billion
• Markel = $27.4 billion
• WR Berkley = $22.9 billion

Fairfax’s investment portfolio is larger than both Markel and WR Berkley combined. What about interest and dividend income?

 

Interest and dividend income:

                                     2022                      2023E

• Fairfax =        $960 million            $1.5 billion
• WR Berkley = $780 million            $940 million
• Markel =         $450 million           $620 million

In 2023, Fairfax is going to earn about the same as WRB and Markel combined. That is significant outperformance.

 

Yes, Markel has Markel Ventures. Fairfax also has significant equity holdings. ‘Share of profit of associates’ for Fairfax is expected to be about $900 million in 2023 and my guess is this is larger than what Markel Ventures will deliver in 2023. WRB is much smaller.

 

What about realized investment gains? This bucket of earnings has always been a significant advantage for Fairfax over Markel and WRB and my guess is this will continue in the future.

 

What are analysts expecting for net earnings in 2023?

• Fairfax = $2.5 billion
• WRB = $1.3 billion
• Markel = $1 billion

Analysts expect Fairfax to earn more than WRB and Markel combined.

 

What is the learning from all of this? Fairfax's market cap / earnings does not make any sense when compared to Markel and WR Berkley. Same market cap for 2 times the earnings? That only makes sense if you think earnings for Fairfax are inflated. Or not durable. This suggests to me that investors still do not appreciate what has happened with Fairfax's investment portfolio over the past couple of years:

1. Share of profit of associates: delivering close to $1 billion per year moving forward
2. Interest and dividend income delivering more than $1.5 billion in 2023, 2024 and 2025. 

As a result, Fairfax's stock continues to be very undervalued when compared to peers.

 

 

Note: share count is basic (easier to find). The table above is meant to be directional (not precise) to allow very top line comparisons to be made for the three companies.

——————

Notes:

• WRB and Markel have better quality insurance businesses (much lower CR)
• Fairfax’s fixed income portfolio is much larger and looks better positioned today.
• Fairfax’s net debt is likely higher (interest costs are included in net earnings estimate).
• Fairfax’s insurance business is much more international.
• WRB has been a very consistent performer over the years (by far, the most consistent of the three).

Edited May 9, 2023 by Viking

[Malmqky]

Good post. FFH has so much torque built up it’s kind of ridiculous. I understand the hesitancy a few years ago but today? Watsa impresses me and the set-up is quite attractive.

 

Markel on the other hand…meh.

Edited May 9, 2023 by Malmqky

[Xerxes]

There must be a correlation between number of podcast Markel folks do every three months and Markel’s premium to book. 
 

Wait till Prem gets on that bandwagon

[sleepydragon]

nice post.

[glider3834]

1 hour ago, Viking said:

Comparing Fairfax, Markel and WR Berkley is interesting. Their market caps today are similar. But what about the size of their insurance businesses? And their investment portfolios? Yes, all three have different business models. However, all three are still insurance companies at their core. Let’s take a quick look at some of the key metrics and see what we can learn.

 

Fairfax Financial, Markel and WR Berkley all have similar market caps today.

• Markel = $18.3 billion
• Fairfax = $16.0 billion
• WR Berkley = $15.6 billion

This suggests investors expect future earnings (total $) to be roughly similar. Let’s start by looking at the insurance side of the businesses and net premiums written.

 

Net premiums written (2022):

• Fairfax = $22.3 billion
• WR Berkley = $10 million
• Markel = $8.2 billion

Fairfax’s net premiums written is larger than both Markel and WR Berkley combined. That is a big difference. What about underwriting profit?

 

Underwriting profit (2022):

• WR Berkley = $960 million
• Fairfax = $950 million (when you net out losses from runoff)
• Markel = $610 million

In terms of underwriting profit, WRB and Fairfax are earning similar amounts (total $) and Markel is earning quite a bit less. However, both WRB and Markel each have a much lower CR.  Let’s now pivot and look at the investments side of the businesses.

 

Investment portfolio (2022):

• Fairfax = $55.5 billion
• Markel = $27.4 billion
• WR Berkley = $22.9 billion

Fairfax’s investment portfolio is larger than both Markel and WR Berkley combined. What about interest and dividend income?

 

Interest and dividend income:

                                     2022                      2023E

• Fairfax =        $960 million            $1.5 billion
• WR Berkley = $780 million            $940 million
• Markel =         $450 million           $620 million

In 2023, Fairfax is going to earn about the same as WRB and Markel combined. That is significant outperformance.

 

Yes, Markel has Markel Ventures. Fairfax also has significant equity holdings. ‘Share of profit of associates’ for Fairfax is expected to be about $900 million in 2023 and my guess is this is larger than what Markel Ventures will deliver in 2023. WRB is much smaller.

 

What about realized investment gains? This bucket of earnings has always been a significant advantage for Fairfax over Markel and WRB and my guess is this will continue in the future.

 

What are analysts expecting for net earnings in 2023?

• Fairfax = $2.5 billion
• WRB = $1.3 billion
• Markel = $1 billion

Analysts expect Fairfax to earn more than WRB and Markel combined.

 

What is the learning from all of this? Fairfax's market cap / earnings does not make any sense when compared to Markel and WR Berkley. Same market cap for 2 times the earnings? That only makes sense if you think earnings for Fairfax are inflated. Or not durable. This suggests to me that investors still do not appreciate what has happened with Fairfax's investment portfolio over the past couple of years:

1. Share of profit of associates: delivering close to $1 billion per year moving forward
2. Interest and dividend income delivering more than $1.5 billion in 2023, 2024 and 2025. 

As a result, Fairfax's stock continues to be very undervalued when compared to peers.

 

 

Note: share count is basic (easier to find). The table above is meant to be directional (not precise) to allow very top line comparisons to be made for the three companies.

——————

Notes:

• WRB and Markel have better quality insurance businesses (much lower CR)
• Fairfax’s fixed income portfolio is much larger and looks better positioned today.
• Fairfax’s net debt is likely higher (interest costs are included in net earnings estimate).
• Fairfax’s insurance business is much more international.
• WRB has been a very consistent performer over the years (by far, the most consistent of the three).

also viking I think we can say the reinsurance hard market conditions IMHO are a bigger tailwind for Fairfax's underwriting profitability than they are for  Markel or WR Berkley which I believe have smaller reinsurance businesses.

 

Take Allied World for example, its insurance business wrote an 86.2% combined ratio(CR) in 2022 but the 102% combined ratio from its reinsurance business took its overall CR to 90.9% (see below)

 

Higher reinsurance pricing provides opportunity for Allied to bring down its reinsurance CR & derive  more underwriting profit. 

 

2022

 

2021

 

 

 

 

 

 

 

 

 

 

Edited May 9, 2023 by glider3834

[Viking]

55 minutes ago, glider3834 said:

also viking I think we can say the reinsurance hard market conditions IMHO are a bigger tailwind for Fairfax's underwriting profitability than they are for  Markel or WR Berkley which I believe have smaller reinsurance businesses.

 

Take Allied World for example, its insurance business wrote an 86.2% combined ratio(CR) in 2022 but the 102% combined ratio from its reinsurance business took its overall CR to 90.9% (see below)

 

Higher reinsurance pricing provides opportunity for Allied to bring down its reinsurance CR & derive  more underwriting profit. 

 

2022

 

2021

 

 

@glider3834 Great catch. What happens if Fairfax's insurance business (CR) moves a little closer to Markel and WR Berkley's in the coming years? Much higher re-insurance rates should help Allied and especially Odyssey. And those two are the big dogs at Fairfax. Cat exposure has been the big issue at Brit and Fairfax has said they are looking to reduce Brit's exposure to cat. Small iterative changes.

 

I also wonder how much WRB's results the past few years have benefitted from super low reinsurance pricing (below cost). Now that reinsurance pricing is spiking... maybe WRB's results get a little more lumpy. If that happens the P/BV multiple on the stock will likely come down a little. Something to watch moving forward.  

 

I have listened to Tom Gaynor at Markel for years. Great stories. I keep hearing "ignore our results this year... we are focussed on the long term." It kind of reminds me of 'old Fairfax'. Here are Markel's 5 year results (see table below) - and I don't think Markel pays a dividend:

• 5 year CAGR in book value per common share of 6%
• 5 year CAGR in closing stock price per share of 3%

As a reminder, we have been in a hard market for insurance since late 2019. And interest rates are the highest they have been in +15 years. As an insurance company, if you aren't hitting the ball out of the park right now when will you?

----------

Investing is like driving on the freeway. Sometimes you get boxed in on your lane and can't get out. Meanwhile, traffic two lanes over is motoring. It gets really frustrating as an investor when you get boxed in - it can last for years (cough - Fairfax - cough, cough).

 

It looks to me like the lane has just opened up for Fairfax. They have no one in front of them for miles and they are putting the pedal to the metal and making up for lost time. At the same time, others are now stuck in traffic a few lanes over... 

  

Leadership sometimes changes. 

----------

The table below is from Markel's 2022AR. 

 

Edited May 9, 2023 by Viking

[Parsad]

You guys have to remember that Fairfax writes far more long-tail insurance than WRB or MKL...thus the higher volatility and CR's.  But long-tail insurance business has the benefit of long-term float.  By writing more long-tail business, Fairfax benefits from the winds when insurance pricing is good, but gets hit harder when you do have a massive catastrophe year.  

 

Over the last few years, by acquiring Allied and changing up their business a bit, FFH has become a little more diversified...but they still remain a long-tail insurance company.  

 

Is FFH underpriced compared to WRB and MKL...yes.  But should it trade at the premiums those two trade at compared to FFH...not yet.  FFH should trade at 1.2-1.3 times book.  The more diversified and consistent they become...the higher you can increase that price to book valuation.

 

All that being said, there is nothing wrong with owning some MKL, some WRB and lots of FFH.  You then don't have to worry about how FFH compares, but simply enjoy the ride while benefiting from the other two quality insurers as well.  Throw some BRK in there too, since that should be carrying the highest price to book of any of them...and it isn't right now!  Cheers!

[MMM20]

9 hours ago, Xerxes said:

There must be a correlation between number of podcast Markel folks do every three months and Markel’s premium to book. 
 

Wait till Prem gets on that bandwagon

keep hoovering up shares instead!

 

Edited May 9, 2023 by MMM20

[dealraker]

Hmm...I'll just plug in a tad of "it ain't this easy" to the who-will-do-the-best case closed discussion.  Been around a while in this business, bunches of variables involved that sneak in endlessly.  Too many to mention, the ones that end up counting probably wouldn't be the ones mentioned.  

 

Owner of Fairfax and Markel for many decades.   Small owner of Berkley for 15 or so years.  

[Spekulatius]

Markel is vastly overrated for the results they have been generating. WRB is a much better business, imo. I think even BRK is likely to get better returns going forward than MKL despite their size.

[dealraker]

1 hour ago, Spekulatius said:

Markel is vastly overrated for the results they have been generating. WRB is a much better business, imo. I think even BRK is likely to get better returns going forward than MKL despite their size.

While I think Markel will do relatively better in the future than it has recently (not sure how long) I considered Markel the most over-rated value investor obsession for many years.  I didn't sell the stock based on that, but naive investors simply extrapolated aged and irrational figures to get their story and they held to it like a cult.

 

Worked exactly as it should have, not well.  That said, I messed a bit recently buying a bit in the $1250 average price range.  I originally bought MKL at the IPO in 86 or 87 or somewhere in there.  My wife worked for Markel when she lived in Richmond where she grew up. 

03/10/2023

Buy

12  MKLPopup MARKEL CORP @ $1,273.6999

-$15,284.40

03/22/2023	Buy	3  MKLPopup MARKEL CORP @ $1,238.8799	-$3,716.64
03/22/2023	Buy	15  MKLPopup MARKEL CORP @ $1,231.7390	-$18,476.09

Edited May 9, 2023 by dealraker
clarification of wording

[Crip1]

2 hours ago, Spekulatius said:

Markel is vastly overrated for the results they have been generating. WRB is a much better business, imo. I think even BRK is likely to get better returns going forward than MKL despite their size.

I think MKL gets the premium to BV based on consistency. True may not have done much outstanding over the past decade but they’ve not done much stupid either…that’s a big reason that they’re priced at higher metric than FFH. The MKL investor is concerned more than the average investor with return OF my capital rather than return ON my capital.

 

The thing I can’t get my head around on MKL is Markel Ventures, specifically, what it is worth. Berkshire morphed from primarily an insurance company to an operating company. Markel is still mainly insurance, but operations are starting to be a bigger piece of the pie and, generally, operating companies are going to be valued at higher multiples to BV than Insurance Companies. 

 

-Crip
 

[Spekulatius]

1 hour ago, Crip1 said:

I think MKL gets the premium to BV based on consistency. True may not have done much outstanding over the past decade but they’ve not done much stupid either…that’s a big reason that they’re priced at higher metric than FFH. The MKL investor is concerned more than the average investor with return OF my capital rather than return ON my capital.

 

The thing I can’t get my head around on MKL is Markel Ventures, specifically, what it is worth. Berkshire morphed from primarily an insurance company to an operating company. Markel is still mainly insurance, but operations are starting to be a bigger piece of the pie and, generally, operating companies are going to be valued at higher multiples to BV than Insurance Companies. 

 

-Crip
 

Markel ventures might have hurt them during COVID-19 because it does not get a favorable treatment as far as regulatory capital is concerned. BRK for example does seem to get favroable treatment for the BHE and BNSF equity because they are regulated with stable earnings unlike anything "venture". Markel got caught with their pants down a little during COVID-19 forcing them to sell some equities as I recall.

 

Again a case where the original is better designed and performs better than the imitation, so to speak. Overall I agree with yo, MKL is an unexciting but consistent business that is just marching ahead. The only question to me is why own this rather than an index fund. Even boring TRV ( a sensibly run insurer that has little or no equity exposure) has outperformed MKL over various time periods).

Edited May 9, 2023 by Spekulatius

[Xerxes]

Would Markel have its current multiple to BV if it did not do all the promotional stuff, being dubbed mini-BRK, brunch in Omaha, podcasts, buy-us-is-like-buying-BRK-in-1990 etc 
 

Let’s say Markel was providing a NVR level of promotional stuff, which means close to nil, what would be it’s premium to BV ?
 

What @Parsad says about reinsurance makes sense as an explanation between FFH and Markel on multiple to BV, but I think the promotional stuff has helped it a lot. 

[backtothebeach]

From 2009 to 2019 MKL stock had a whole decade of a very smooth 15% CAGR. Sligthly more than the S+P500. I think that gave it the reputation of being a solid compounder.

[Xerxes]

2 hours ago, Spekulatius said:

Markel got caught with their pants down a little during COVID-19 forcing them to sell some equities as I recall.

https://www.fitchratings.com/research/insurance/fitch-rates-markel-preferred-share-issuance-bbb-28-05-2020

[Parsad]

8 hours ago, Spekulatius said:

Markel is vastly overrated for the results they have been generating. WRB is a much better business, imo. I think even BRK is likely to get better returns going forward than MKL despite their size.

 

Markel's results were excellent when Steve Markel was CEO and Tom Gaynor was CIO.  In the last decade, they've struggled a bit under Gaynor, but I suspect that had more to do with the environment for value investing than anything else.  Let's see what Gaynor does the next decade.  Cheers!

[Parsad]

6 hours ago, Crip1 said:

I think MKL gets the premium to BV based on consistency. True may not have done much outstanding over the past decade but they’ve not done much stupid either…that’s a big reason that they’re priced at higher metric than FFH. The MKL investor is concerned more than the average investor with return OF my capital rather than return ON my capital.

 

The thing I can’t get my head around on MKL is Markel Ventures, specifically, what it is worth. Berkshire morphed from primarily an insurance company to an operating company. Markel is still mainly insurance, but operations are starting to be a bigger piece of the pie and, generally, operating companies are going to be valued at higher multiples to BV than Insurance Companies. 

 

-Crip
 

 

Markel Ventures I think suffers from a similar problem as FFH's wholly-owned businesses...they just aren't top tier companies!  Berkshire generally bought huge, cash flow businesses with competitive advantages that were generally #1,2 or 3 in their industry.  While maybe a notch above Fairfax's non-insurance businesses, MV's businesses aren't exactly lighting a fire!  Cheers!

[Parsad]

5 hours ago, Xerxes said:

Would Markel have its current multiple to BV if it did not do all the promotional stuff, being dubbed mini-BRK, brunch in Omaha, podcasts, buy-us-is-like-buying-BRK-in-1990 etc 
 

Let’s say Markel was providing a NVR level of promotional stuff, which means close to nil, what would be it’s premium to BV ?
 

What @Parsad says about reinsurance makes sense as an explanation between FFH and Markel on multiple to BV, but I think the promotional stuff has helped it a lot. 

 

MKL had a much higher valuation a long time ago, so nothing new.  It was an excellent insurance company under Steve and Tom.  Now that Steve is gone, maybe there's too much on Tom's plate, and he hasn't had as much time focusing solely on investments.  Regardless, even solely under Tom, it still has a pretty consistent CR and ROE over every time period...thus the confident valuation by the market. 

 

And again, this comes back to less leverage, a diversified book of short-tail, long-tail, general and specialty insurance, and a steady three legged stool approach of insurance income, investment income and non-insurance operating income.  Cheers!

[Spekulatius]

13 hours ago, Parsad said:

 

Markel Ventures I think suffers from a similar problem as FFH's wholly-owned businesses...they just aren't top tier companies!  Berkshire generally bought huge, cash flow businesses with competitive advantages that were generally #1,2 or 3 in their industry.  While maybe a notch above Fairfax's non-insurance businesses, MV's businesses aren't exactly lighting a fire!  Cheers!

I think the structure may be wrong to have these under an insurance umbrella. MKL needs favorable regulatory treatment for the money invested in this entities otherwise it's just a private equity fund and they can't use float to finance it.

 

Berkshire did this well with regulated business (Railroad, BNSF) and there is a reason that those are held within their insurance co's because they can use float to finance them.

[bluedevil]

My own thoughts on Markel versus Fairfax, of which i own both.

 

Both have the same essential building blocks for success -- honest management that puts the focus on increasing intrinsic value per share, a very long-term orientation, good insurance operations, and retention of earnings and thoughtful, long-term oriented capital allocation across a large menu of options.  I own both because my thesis is these ingredients will produce good results over the long term.

 

Fairfax today trades more cheaply than Markel on a book per share basis, notwithstanding that it has much more float per share which gives Fairfax the potential for higher returns.  Seems like the better buy today in my opinion.

 

That said, Fairfax has a lot higher risk tolerance than Markel.  I feel quite confident that Markel will compound in high single digits over longer periods of time so long as Gaynor is at the helm.  With Fairfax, i think they will do well, but i also think there is a chance they run into troubles, as they have in the past.  Some of the uncertainty has been taken out because they are no longer acquiring big insurance companies and hedging, but they still have much higher risk tolerance than Gaynor, on both the equity side and the fixed income side.  On equities, Fairfax is adventuresome (Greece, Africa, India, turnarounds, etc.), and they have home runs and they strike out sometimes too.  Gaynor looks for long-term compounders based in developed counties, and dollar costs averages into positions.  On fixed income, they take no credit risk and duration match.  Fairfax has a huge fixed income portfolio and takes big swings with it.  Much of it is based on top-down macro outlooks about macro interest rates and marco credit risk that they have (over the full course of time) a good record on, but that are extremely hard to get right consistently in my opinion.  It introduces the potential for large outperformance or underperformance.  

 

I like having both!

 

 

 

 

[kab60]

If you ever get bored, Viking, maybe you could add AIG to the bunch. That's one ugly duckling trading even worse than $FFH despite putting up great improvements in CR since current management took over and overhauled the operation. I prefer Fairfax' credit exposure, but AIG has been putting up 90% CR's in recent years and trades at like 2/3 of 'adjusted' TBV (adjusted for HTM losses) while gobbling up shares. I understand why investors stay away from AIG due to the number of headfakes since the GFC, but it does look a little different this time (or perhaps they're just benefitting from the hard market...). It really does seem like AIG turned the corner on underwriting (famous last words?), and they'll be taking cost out over the coming years as they simplify the business to focus entirely on general insurance. They already IPO'd part of their life insurance-business, which they're looking to fully divest over time, and as that gets off the book they'll run a much simpler and leaner operation.

Edited May 19, 2023 by kab60

[Spekulatius]

If rates remain higher for longer, the long tail insurers ( life, annuity etc) should disproportionally benefit. In the short term, they are taking a hit to book via AOCI losses, but over the long term, the income from investments is much more important and should be higher with structurally higher interest rates. Think MET, PRU, maybe JXN, BHF etc.

 

On another note what drives the hard market and why should it persist. On the past COVID-19 , lower interest rates catastrophe frequency have been mentioned and at least the first two really should it be factor any more.

 

I think inflation is another one. Higher inflation ties into higher premiums as well, but even that factor seems to be reversing slowly. So why should be continue to have a hard market in insurance past 2023?

[CorpRaider]

The only one I own is a little Markel for Grandmother and for the firstborn.  I wonder how much of the recent travails are to be pinned upon Richard R. Whitt.  He gone.

[ValueMaven]

WRB is very well run ... investors have bid-up the stock to over 2x BV purely due to the companies frequent special dividends ... FFH is super cheap (7x earnings) with a lot of optionaility and float-leverage.  MKL is a boring compounder.