BREAKINGVIEWS-Mini-Berkshire shows it's hard to beat the master

Thu Dec 20, 2012 2:21am IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Robert Cyran

NEW YORK, Dec 19 (Reuters Breakingviews) - Markel (MKL.N) models itself after Warren Buffett's Berkshire Hathaway (BRKa.N). The $4 billion insurer aims for smart underwriting, picking stocks and adding long-term value. It has even got into reinsurance and owning whole businesses. But performance, while good, isn’t as impressive as it could be compared to Berkshire, given its far smaller size.

Buffett’s recipe isn’t complex. Write insurance policies when prices are good, capture the float and invest capital wisely when the market miscalculates. Markel has copied this strategy. It has largely stuck to underwriting niche markets, in everything from dude ranches to livestock, where limited competition ensures high premiums. And its equity holdings are concentrated in long-term bets on the likes of Diageo (DGE.L) and Berkshire Hathaway itself, and have outperformed the S&P 500 over the past five, 10 and 20 years.

Now the firm is expanding in reinsurance by purchasing Alterra Capital ALTE.O for about $3 billion in stock and cash. Buffett increased his holdings in the sector during and following the financial crisis by investing billions in Swiss Re (SRENH.VX) and Munich Re (MUVGn.DE). While fire-sale valuations may have come and gone, companies in this corner of the financial industry still look relatively cheap. Even with a 34 percent takeover premium, Markel is only paying slightly above book value. If Markel can invest Alterra’s conservative book with its customary skill, good returns should follow.

Yet investors aren’t enamored with the deal, sending Markel’s market value down close to 10 percent. While diversification helps insurers, investors worry Markel is expanding in an inferior business – and perhaps becoming too much like a bloated Berkshire, where Buffett admits the firm’s increasing size has made it harder and harder to outperform rivals.

Moreover, Markel’s stock has largely tracked its larger rival, and the S&P 500, over the past five years. Sure, by both companies' preferred metric – growth in book value per share – Markel has outperformed. But growth has drifted downwards to a respectable 9 percent per annum over the past five years. That’s only about 1.5 percentage points higher than Berkshire. All things being equal, Markel should be doing far better than Berkshire given its far smaller size – Buffett's behemoth is 50 times larger by market value. This mini-Berkshire shows it’s hard to beat the master.

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CONTEXT NEWS

- U.S. insurer Markel on Dec. 19 said it had agreed to buy Alterra Capital for about $3 billion, or $31 per share, in cash and stock. Markel is paying a 34 percent premium to the closing price of the reinsurer’s stock on Dec. 18.

- In exchange for each Alterra common share, investors will receive 0.04315 share of Markel and a cash payment of $10. Following closure of the deal, Markel’s existing investors will own approximately 69 percent of the combined company and Alterra’s investors will own 31 percent.

- Company statement: link.reuters.com/meq74t

- Reuters: Markel expands into reinsurance with $3 bln Alterra buy [ ID:n L4N09T647]

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- For previous columns by the author, Reuters customers can click on [CYRAN/]

(Editing by Antony Currie and Martin Langfield)

((robert.cyran@thomsonreuters.com)(Reuters messaging robert.cyran.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS BUFFETT/MARKEL

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