I have been attending the Markel annual brunch in Omaha since about seven years ago. When I first started going, there were maybe 50-60 people in a small room like you might have for a regional sales meeting. Not so much any more, now its in the many hundreds. The investing world seems to have caught on to what they are doing.
The meeting is the day after the Berkshire meeting in Omaha. Mohnish Pabrai mentioned that when he got started investing he was surprised that in an industry with thousands of funds, no one was copying Buffett and Berkshire. Likewise, Steve Markel, Tom Gayner, and the gang at Markel noticed that you could clone not just the investment approach, but the overall business model.
To recap, Berkshire is a three legged stool that starts with cash coming from insurance. Buffett really made his name by reinvesting the float intelligently into stocks (not just bonds like most insurers). The third leg is wholly owned businesses like See's Candy, Burlington Northern and many others, which now eclipse the stock part of Berkshire.
Markel has been successfully cloning the first two parts of this model for many years. The insurance operation regularly turns in excellent performance. Over on the investment side, the past 15 years, Tom Gayner's stock portfolio has returned 11.3% versus the S&P 500's 4.2% performance. Really just those two legs of the stool comprise a fundamentally quality operation. However, recently Markel has added the third leg - wholly owned businesses - through Markel Ventures. This collection of varied companies (everything from channel dredging to Belgian waffle makers) has been very interesting to watch unfold. From the Annual Letter:
"From the start in 2005 when we purchased 80% of AMF with its roughly $60 million in revenue, Markel Ventures ended 2014 with revenues of $838.1 million and Adjusted EBITDA of $95.1 million. Markel Ventures now stands as a real, and meaningful contributor to the wealth creation underway at Markel Corporation.
Markel Ventures does two things for Markel. One, it gives us another option for capital allocation decisions. Secondly, it makes a bunch of money. As one frame of reference for that statement, consider Markel Corporation 10 short years ago. In 2004, we earned underwriting premiums of just over $2 billion and underwriting profits of $72 million. While the language used to describe underwriting profits from insurance operations, and cash flows from non-financial businesses, are different, it’s not that hard to translate. Underwriting earnings are generally comparable to Earnings Before Interest Expense, Taxes, Depreciation, and Amortization. They equal the acronym EBITDA. In 2014, the Adjusted EBITDA of Markel Ventures, which also excludes a non-cash goodwill impairment charge of $13.7 million, totaled $95.1 million. This stuff is starting to add up."
There is a more complete set of notes from the annual brunch meeting here, but I wanted to share my observations as well:
* The last question of the day was the best and most insightful. The question was - "what do you want Markel to become." Tom Gayner confirmed what I think a lot of long time Markel followers thought when he said - "we want Markel to be one of the world's great companies. That's what we want to be when we grow up." That's a heady statement and it was a great way to close out the meeting. When you step back from it, it makes sense. After all Markel has in place all three legs of the Berkshire model in place. Berkshire is indisputably one of the world's great companies. Now Markel's own snowball is rolling, why not aim high?
* Commenting on Markel Ventures, Steve Markel said that like Berkshire they want to buy well run businesses. They do not want to parachute in people to fix them. (Makes sense - Hard to imagine insurance people fixing a dredge or waffle making business)
* When Markel bought Alterra, they took on investments that were mainly in bonds. They are working their way towards more stocks, currently the combined portfolio is around 50% stocks, and could trend as high as 80% eventually
* You get a good sense for the culture at these events. Markel CEO Alan Kirshner says its ok to make mistakes, just don't make the same dumbass mistakes. Steve Markel described a key to Markel's strength as - "we don't believe our own bullshit." Steve Markel said that if you were the kind of person to sell off Markel shares when you got them to buy a boat, you probably wouldn't fit in.
* Incentives and metrics came up - Gayner pointed to Exxon's vesting policy which is spread out over ten years as a good model. He also said that rate of book value change is the "Least worst" way to measure management success in Markel's case.
In 2005, Markel's Book value per share was $176/share. Today it is more than triple that at $564. Considering the turbulence of the past decade, the three legged stool not only weathered the storms, Markel thrived.