Why Is Everyone Talking About Markel Group Stock?

Markel Group Inc. (NYSE: MKL) may not be a household name, but it has been well regarded by a small group of investors due to its sustainable long-term track record. In the last five years alone, the stock has delivered a solid 125% (as of writing).

While some investors have referred to it as a "mini Berkshire Hathaway," it remains an under-the-radar company that deserves to be on investors' radar. This article will explore further the company's business model and its prospects.

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A mini-Berkshire Hathaway

Founded in 1930 as a small insurance company, Markel has evolved over the decades into a diversified conglomerate with businesses spanning multiple industries beyond its insurance roots.

At its core, Markel is a world-class insurance operator focusing on specialty insurance -- things like horse farms and shipping tankers, which the bigger players often overlook. By focusing on small niches, the insurance operator becomes an expert in this area, which allows it to underwrite profitable insurance policies.

Like any insurance business, customers will pay a premium upfront to Markel before making a loss claim in the future. If the total premium collected outweighs the total claims and operating costs, the company will make an underwriting profit. That's the first source of income. Given the timing difference between premium collection and claim payment, Markel will invest the premium (also known as float) in profit-generating investments, generally bonds and also longer-term assets like equities, generating its second source of income.

Most insurance companies aim to break even (or even make a slight loss) in their underwriting business but make up for it through their investment activities. But that's not the case for Markel. By being an expert in its niches, the insurance company has delivered a solid track record of profitable underwriting of policies; it has been profitable in the last three years. In 2024, for example, it generated $601 million in profit from insurance underwriting and another $920 million from investment income.

But that's just part of the story. Markel has also been an astute investor, holding stocks in public companies and also owning private business ventures (Market Ventures). The former generates capital gains over time, while the latter diversifies its income beyond the insurance business. For perspective, the company generated $1.8 billion in capital gains from its stock investment and $520 million in operating profit from its business ventures.

In short, Markel's business models center on a three-engine compounding machine that generates cash from insurance, invests in securities for income and capital gains, and acquires high-quality private businesses.

A compounding machine well positioned to grow.

Markel's success has made it a giant in its own right, generating $17 billion in revenue and $3.7 billion in operating income in 2024. Despite its size, there are good reasons to expect the company to keep compounding its value over time.

One thing is that Markel has proven to be a disciplined underwriter of insurance policies. It has only incurred underwriting losses in three years over the last two decades, and even in those years, the losses have been minimal (less than 5%). While the insurance industry is always uncertain and evolving -- there's just no guarantee of recurring income -- Markel's focus on specialty lines still gives it an edge in generating profits over time. Besides, as interest rates are unlikely to return to the lows seen in the last decade, interest income will likely remain at current levels (if not higher).

As the insurance business continues to generate float (and interest income), Markel can redirect them into public stocks or buy new private businesses. To this end, the company has a proven capital allocator, CEO Tom Gayner, who will continue to invest prudently to build up the company's value over time.

Additionally, Markel Ventures is likely to grow significantly over time, both as existing businesses expand and through future acquisitions. Unlike insurance or stock portfolios, these businesses generally generate steady cash flow, which reduces Markel's earnings volatility and extends the window of opportunity for future capital allocation.

Above all, with the company's long-term focus and conservative culture, Markel is well positioned to build a much bigger business in the coming years (if not decades).

What it means for investors?

Markel Group may not be as famous as Berkshire Hathaway, but it shares similar DNA: conservative underwriting, smart investing, and the patient acquisition of quality businesses.

With its three-engine compounding model and Tom Gayner at the helm, Markel should keep delivering shareholder value over the next decade and beyond.

It is a company that investors should closely monitor.

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Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Markel Group. The Motley Fool has a disclosure policy.