Of the guru companies discussed, Tom Gayner of Markel (MKL) is the last one of the series. Previously I have written about Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (BRK.A), Carl Icahn (Trades, Portfolio)’s Icahn Enterprises (IEP), Ian Cumming (Trades, Portfolio)’s Leucadia National (LUK), Prem Watsa (Trades, Portfolio)’s Fairfax Financial (TSX:FFH)(FRFHF), and Jim Tisch’s Loews Corp (L).
The Guru
Tom Gayner (Trades, Portfolio) is the executive vice president and chief investment officer of Markel Corp. He has been president since 2010 and CIO since 2001. He has also been the president of the investment subsidiary Markel Gayner Asset Management Corp. since 1990.
He started out as a CPA at Price Waterhouse after graduating from the University of Virginia. As he got into accounting, he realized that he was more interested in dollars than numbers. He later became a stock broker at a local investment firm called Davenport and Company of Virginia. As a research analyst, he covered local companies in Virginia and North Carolina. Gayner met Steve Markel while covering his company from 1986 to 1990. Steve Markel was managing the investments himself and decided that he would like to have Gayner help him out. Gayner has been helping out ever since.
When it comes to books that influenced him, at the top of the list is Graham and Dodd’s “Security Analysis” and Graham’s “The Intelligent Investor.” His next tier of books is what he calls human nature books. What makes people tick? Why do people do things they do? His favorite author is Mark Twain. He says that you should read it with the sense that Mark Twain was broke and rich, and broke and rich, several times in his life, so there’s a subtext of money, finance, investing and behavior that underlies Mark Twain’s work.
In Markel’s 2005 letter to shareholders, Gayner gave the following statement on his investment philosophy:
“We have invested for many years following a four-part though process to select and manage our equity positions. Namely, we look for profitable businesses with good returns on capital, management teams with equal measures of talent and integrity, reinvestment opportunities and capital discipline, and reasonable prices.”
You can read GuruFocus’ interview with Tom Gayner at GuruFocus.
The Company
Markel Corporation (MKL, Financial) was founded in 1930 by Samuel A Markel. He had two sets of twin brothers that join him in the venture. Currently the company underwrites customized insurance products. The insurance segments include Markel Wholesale, Global Insurance, Markel Specialty, Global Reinsurance and Markel International. In 2013 Markel nearly doubled the size of its insurance operations by acquiring Alterra. Markel insurance business had a combined ratio of 97 percent, including 8 points of underwriting loss from Alterra in 2013. The industry average was 98 percent for 2013. A combined ratio of less than 100 percent indicates an underwriting profit. The combined ratio is of big importance to Markel. If it is below 100, the float essentially becomes an interest free loan to invest with.
The subsidiary, Markel Ventures, makes strategic investments in companies outside of the insurance marketplace. It currently includes 14 different businesses in the sectors of manufacturing, consumer, healthcare, business services, and financial services. These companies are all private.
The company currently has a $2 billion insurance float. According to GuruFocus’ interview with Gayner in 2012, Markel does not invest as much of its float into equities as Berkshire Hathaway does. Tom Gayner (Trades, Portfolio) gave the following comment:
“Berkshire has a much bigger balance sheet than Markel and a much bigger base of equity compared to its insurance liabilities than we do. As such, they can allocate more of the investment portfolio towards equities. Over time, if we continue to grow and build up our equity capital we should be able to move in the same direction as Berkshire.”
Top 5 Holdings
| Company | Value ($Thousands) |
| Berkshire Hathaway (BRK.A, BRK.B) | $375,693 |
| CarMax (KMX) | $236,336 |
| Diageo (DEO) | $160,337 |
| Walgreen Company (WAG) | $123,350 |
| Brookfield Asset Management (BAM) | $124,938 |
| Berkshire Hathaway holding includes both "A" and "B" shares | |
Conclusion
Of the guru companies, Markel seems to be the most similar to Berkshire Hathaway in structure. Markel has a market cap of only $8.6 billion and has much more room to grow than Berkshire with a market cap of $302 billion. Since Markel’s IPO in 1986 it has grown its book value at a faster rate than Berkshire. Berkshire said the following in its most recent 10-K:
“Because of the large size of our capital base (shareholders’ equity of approximately $222 billion as of December 31, 2013), our book value per share will very likely not increase in the future at a rate even close to its past rate.”
While Markel book value per share is increasing at a high rate, the stock is still trading at a 6.5 percent discount to Berkshire Hathaway’s price-to-book value. Historically Markel has traded at a median P/B of 1.7. Over the past 10 years its median P/B has been slightly higher than 1.5. The P/B is currently at 1.30. The stock would be valued at $728.80 if it traded at it 10-year median P/B. The stock closed at $606.53 today, April 11, 2014. Therefore, the stock is undervalued by 16.8 percent.
