As is all too often the case, Warren Buffett nailed it. In his 2011 letter to Berkshire Hathaway Inc. (NYSE:BRK.B) shareholders, the Oracle of Omaha wrote:
The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly … you are hurt when stocks rise. You benefit when stocks swoon.
For that reason, the always-up market we seem to be in at the current moment doesn’t make me terribly happy. Year to date, the S&P 500 is up nearly 17%. In July alone, the index tacked on more than 4%.
But while I prefer to have a market that’s falling — and thereby discounting a wide variety of stocks — I also know that even in a bull market, it’s still possible to find attractively (or at least fairly) valued stocks that are worth buying. Today, I’m ready to buy two of them.
Special(ty) is good
Markel Corporation (NYSE:MKL) is a specialty insurer. That means the company underwrites risks that many well-known, larger insurers don’t. For example, Markel Corporation (NYSE:MKL) provides insurance coverage for:
Tourist railroads
Environmental consultants’ professional liability
Warehousemans’ legal liability
Horse theft
Small fishing ventures
Mortality risks at zoos
Classic cars
Specialty reinsurance creates both opportunity and risk for the companies that go after the business. On the opportunity side, because there may be less competition in some under-served areas, there’s the possibility of receiving higher rates for the coverage. And to the extent that a level of expertise can be built in a niche area, one specialty insurer can dominate a smaller risk category the way they couldn’t in, say, standard retail auto insurance.
At the same time though, because these are smaller risk categories, there may not be as much data available to base underwriting on, and unforeseen risks could crop up. There’s also a smaller overall market opportunity, so any specialty insurer that hopes to grow and expand will have to build expertise in a lot of these small, focused areas.
Markel Corporation (NYSE:MKL) has done a truly superb job leveraging the opportunity in specialty insurance while avoiding the risk pitfalls. The company has a commendable underwriting track record and a conservative approach to the business that has led to the kind of results shareholders can appreciate. Over the past decade, Markel Corporation (NYSE:MKL)’s tangible book value per share has grown at an average annual rate of roughly 12%.
If you’re wondering what tangible actions the company takes to drive these business results, consider the following from its 2012 annual report:
Inherent in the Company’s reserving practices is the desire to establish loss reserves that are more likely redundant than deficient. As such, the Company seeks to establish loss reserves that will ultimately prove to be adequate. Furthermore, the Company’s philosophy is to price its insurance products to make an underwriting profit.
There are two things worth highlighting, here. First, that Markel Corporation (NYSE:MKL)’s management would rather take larger reserves up front to make sure they’re prepared for large losses — that’s conservative to an extent that you just don’t see at most insurers. Second, Markel Corporation (NYSE:MKL) is more focused on writing insurance policies that will be profitable rather than simply writing any policy that will grow the revenue line. Day traders may not care about details like this, but these are practices that long-term shareholders should stand up and cheer about.
