If the first half of the Markel investment thesis is the solid insurance business and underwriting, the other half is the company’s stellar investment results. Often known as “Baby Berkshire,” Markel’s investment operations mimic Berkshire Hathaway Inc. (NYSE:BRK.B) in that the company invests excess liquidity in the stock market in order to earn additional returns for its shareholders. Piloted by the highly respected Tom Gayner, Markel’s investment arm has excelled. Overall, the insurer’s portfolio returned 6.2% per year for the decade ending in 2012. Its equity portfolio by itself averaged a 9.2% annual return over that period. For comparison, the S&P gave investors a paltry 2% per year over that 10-year stretch.
Finally, in another nod to its Berkshire-esque ambitions, Markel is growing an arm that it calls Markel Ventures. This part of the business buys smaller companies in their entirety, giving Gayner another way to redeploy shareholder capital and providing another profit source for investors. Currently, Markel Ventures is a relatively small contributor to Markel’s overall bottom line, but it’s a huge opportunity for the future.
Another Platinum insurer
The story behind Platinum Underwriters Holdings, Ltd. (NYSE:PTP) is similar to Markel’s in that it’s a very conservative and high-quality insurer with a great management team. The specifics of the opportunity diverge from there, though.
While Markel is primary insurer, offering insurance coverage directly to end users, Platinum Underwriters Holdings, Ltd. (NYSE:PTP) is a reinsurer, offering insurance for insurers. If that sounds odd, it’s really not — primary insurers, Markel included, often decide that they only want to take a certain, defined amount of risk on some policies or groups of policies. In those case, they can work with a reinsurer to offload some of the excess risk they don’t want to hold onto.
And if a key selling point for Markel is the fact that it has outstanding investment operations, at Platinum Underwriters Holdings, Ltd. (NYSE:PTP), it’s a more broad capital allocation skill. Under the leadership of CEO Michael D. Price, Platinum Underwriters Holdings, Ltd. (NYSE:PTP) deftly chooses where to allocate shareholder capital based on where it can achieve the best returns. When the reinsurance market cycle is attractive, the company obviously looks at that market as a prime place to commit capital. But when that’s less attractive, it has the option to choose other investments, buying back stock, and delivering special dividends. The bottom line is that the focus is always on where long-term, risk-adjusted returns look best.
That focus has worked out well for investors. Between 2003 and June of 2013, Platinum Underwriters Holdings, Ltd. (NYSE:PTP)’s tangible book value per share has more than doubled, delivering near-10% annual growth. And that’s even as the company paid a modest annual dividend.
The price is right
While I think both Markel and Platinum Underwriters Holdings, Ltd. (NYSE:PTP) are admirable, well-run companies, I wouldn’t be inclined to buy their stocks at any price. But with the two trading at respective tangible-book-value multiples of 1.6 and 0.97, I think now is a good time to buy, and I will be making these two insurers the first two additions to my Real-Money Stock Picks portfolio.
The article 2 Great Stocks I’m Buying originally appeared on Fool.com and is written by Matt Koppenheffer.
Matt Koppenheffer owns shares of Berkshire Hathaway and Markel. The Motley Fool recommends Berkshire Hathaway and Markel. The Motley Fool owns shares of Berkshire Hathaway and Markel.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
