Berkshire's a Good Insurance Operator but a Bad Role Model
Markel's 'mini-Berkshire' premium is unwarranted, and W.R. Berkley is a better choice.
While we don't dispute the value Berkshire Hathaway (BRK.A)/(BRK.B) has created through its insurance operations, we think investors draw two incorrect conclusions from its success. First, we think many are drawn to insurers that attempt to generate alpha on the investment side, while we believe the only sustainable competitive advantages are on the underwriting side. Second, we think many investors' view of reinsurance is too favorable, which is dangerous, given current reinsurance trends. While a number of insurance companies have drawn comparisons with Berkshire over time, we believe Markel (MKL) enjoys the strongest reputation as a "mini-Berkshire." We think the comparison is inaccurate and the premium the market appears to be willing to pay is unwarranted and likely to disappear, given the company's potential headwinds. We think W.R. Berkley (WRB) is the closest comparable to Markel--and more attractive, given better underwriting results and a much more favorable multiple.
P&C Insurers Have Two Sources of Income, but Only One Moat Source
Insurers have two potential sources of income: investment income and underwriting profits. Combined, these two streams determine the return on equity a company generates. Berkshire Hathaway has outperformed on both sides, thanks largely to its competitive advantages, disciplined underwriting, and Warren Buffett's investing skills. Hypothetically, other insurers could have advantages on either or both sides, and we think Berkshire's success leads many investors and companies to believe that attempting to generate alpha on the investment side is a legitimate long-term path to success in insurance. But in practice, we believe it is highly unlikely that any other insurance company can replicate Berkshire's investment results, and we also believe the attempt to do so can actually distract management from more reliable paths. We focus exclusively on underwriting profitability to separate out quality companies in the sector, as we think that is the only sustainable source of advantage.
Brett Horn does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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