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What's amazing at this point in Markel's lifecycle is that the meeting's not better attended: Markel, for all intents and purposes, is a mini-Berkshire. It's carefully refined a unique underwriting model and culture, and it skillfully deploys its insurance profits into best-of-breed companies at value prices. Better, it's managed to fly under the radar -- the company has a middling $4.3 billion market cap. It's more of a value cognoscenti favorite than mainstream dish. But don't mistake its potential: It's an organization that over time appears truly built to last.
What follows is my rendering of the best of the breakfast, to the best of my recollection. For longtime Markel followers, some of this will be old news. But as a shareholder myself (or for prospective shareholders), it's all good news.
On culture: Tom Gayner talking, on Steve [Markel] being interviewed on the organization: What's the best thing about Markel? The ability to call [bovine excrement what it is]. We do something, and Steve proceeds to tell why it's worst idea he's ever heard in his life."
Hiring and retaining the right people are essential to most any organization. But in insurance, it's perhaps more relevant than any: Insurers rely on people, the models they build, and their art and science interpretation of data to determine whether it's worthwhile to take a little bit of money in exchange for a much-larger risk. Allowing people to speak freely, and fostering an organization that entertains contrarian opinions is essential.
On alignment of interest: Tom: If you were to call the receptionist at the 800 number at MKL, she'd say the first thing we try to do is make an underwriting profit. And that's it. There is no other way for us to make things work.
Steve: And that's absolutely right. We build incentives around that. All of the incentives are based on five-year rolling averages.
Stop right there. A lot of companies talk the talk: a long-term mindset to managing the business, a focus on stakeholders, blah, blah, blah. But the trick is living it, creating incentives that align employees' efforts around them. And at Markel, it works: Incentive compensation is paid to underwriters based on the five-year rolling profitability of their book. For a company that lives and dies with the next catastrophe, it also makes a whole lot of sense.
On what Markel shares are worth: Steve: Well, we think Markel should trade somewhere between 1.5 and 2 times book.
And that, to me, makes a lot of sense. Markel should, roughly speaking, be able to compound and grow its book value at about a 10%-15% annualized rate, given a long-term view. The math goes like this: It should earn about a 95% combined ratio, its investment portfolio is 3 times its book value (in absolute size), and investment returns should approximate 5%-10% on a long-term basis. Roughly speaking, that corresponds to a multiple of 1.5 to 2 times book value, or a present value of $530 to $710 a stub. Not bad, when you consider that Markel, theoretically speaking, can continuously compound and grow that value -- increasing its intrinsic value each year.
On where they're investing: Tom: Berkshire is the largest, and Buffett's been as explicit as ever about the discount to intrinsic value. Carmax is a great growth story. Brookfield Asset Management is an incredible asset manager. Diageo
For Markel's many Berkshire-like qualities, Tom Gayner's investment style is no exception. His commitment to finding companies with enduring growth characteristics, unwavering competitive advantages, and great valuations is unparalleled. In the words of Chuck Akre, permanently compounding investments are borne of high real returns on equity. Gayner, for his part, is obsessed with finding and owning these organizations, but he's not inflexible. He'll go after pico-caps and dirty values if he thinks the opportunity is there. Value rules here. It shows in his track record: Markel's equity portfolio has earned 253%, versus 124% for the S&P over a 15-year period.
On insurance pricing: Steve: "Very generically, in virtually every area, there's a relative improvement. The breeze is more at our backs than in our face. Magnitude varies."
I've said this before, and I'll say it again: The softness in insurance markets is categorically unsustainable. It's been a long, hard underwriting cycle for folks in the P&C business, but seven years of flat pricing ends pretty predictably -- insurers lose a lot of money, prices go up, or both. And after a pretty nasty string of catastrophes, leading indicators point to rising prices.
On buying private businesses: Tom: The vision was always that we would use our underwriting profits to move from equity investments to owning an operating company. It took us 15 years, but here we are.
In recent years, Markel has started a venture that's somewhat appropriately called Markel Ventures. For Berkshire lovers, this should be a very attractive proposition. It opens a class of investments (which should be fairly inefficiently priced), prospective cash generation, and a source of new investment capital previously unavailable.
All told, it was an hour and a half very well-spent. You can rest assured I'll be back next year.
