More thoughts on Markel, Berkshire, Greenlight and Third Point… Plus a new “Maybe” for the portfolio

More Blatheration for the Irregulars in this week's Friday File

By Travis Johnson, Stock Gumshoe, January 9, 2015

Insurance is one of the fairly large sectors in my personal portfolio, and several of the stocks I talk about often are in that business, so I wanted to take a quick look at those ideas and the state of the industry for you today — then I’ve got another interesting new name to kick around a little. I’ll be getting into my annual review of every stock in the “Gumshoe universe” in the weeks to come, but insurance has bumped up to the top in part because the underlying business environment continues to be so crummy thanks to soft pricing.

The sector started percolating in my head earlier this week because I was making travel arrangements for “Berkshire Week” in Omaha, but the pricing in both reinsurance and insurance is so weak right now that it is keeping the prices of these stocks pretty low — so should I be buying more?

Weakness in the sector is no joke — to a great extent, insurance is a fungible commodity… that makes it a competitive business, because you don’t care whether the insurance for your office building comes from Hartford or Berkshire Hathaway or Prudential or whoever. That’s not always 100% true, of course — there are relationships, there are reputations that impact buyer confidence, and some insurance companies are worse at selling or don’t have that bedrock long history of safe claims payment that reassures policyholders — but to a large extent, when there’s room for competition then insurance companies compete aggressively and drive down rates, which makes it a worse business for everyone. That’s what’s called a “soft market”, and it’s certainly been hitting Greenlight Re (GLRE) and Third Point Re (TPRE) and Lancashire Holdings (LRE.L, LCSHF), but it’s not really having an impact on the share price of Markel (MKL) or Berkshire Hathaway (BRK-B). I still own all five of those, and BRK-B, MKL and GLRE are among my top ten holdings, but the soft market is a concern.

(If you remember, I’ve written several times over the past couple years about my broad “insurance strategy” when it comes to stocks: That is, with interest rates low and rising the market should harden because firms can’t easily make money on investing and will have to push to be more profitable in underwrtiing, which will benefit all the insurers but will particularly benefit ...

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