Monday, March 23, 2015

Markel Annual Letter

The motto of this blog is Safety, Dividends, and Growth, but the overall goal is total return. Safety is a hard and fast rule, and generally dividends are excellent path to total return. But there are exceptions. One is Berkshire Hathaway which offers an excellent profile - about the safest company with exceptional long run returns. So while dividends are a main focus, there is no need to be dogmatic when it comes to a company like Berkshire.

One other exception to the dividends rule is Markel, sometimes called a "baby Berkshire." Like Berkshire, Markel is ostensibly an insurance company in Markel's case a specialty insurance company (see Tom Gayner's cocktail party summary of Markel's business model below(1)).

Like Berkshire, Markel has a three legged stool. Markel generates cash with its core insurance business.

Combined ratio

  • 2010 97%
  • 2011 102%
  • 2012 97%
  • 2013 97%
  • 2014 95%

So Markel has been able to turn a profit on its insurance operations four of last five years.

Next, the second leg of the stool - equities. Like Berkshire Markel chooses to invest a lot more in equities than bonds as most insurers do. Markel CIO Tom Gayner turned in another solid year with 18.6% gains in equities in 2014.


  • 2010 20.8%
  • 2011 3.8%
  • 2012 19.6%
  • 2013 33.3%
  • 2014 18.6%

That amounts to a weighted average 5 yr annual return: 20.4%. Markel completed the acquisition of Alterra, another insurance company whose portfolio is largely in bonds. Given that Markel's five average return from fixed maturities was 4.7%, there is a significant opportunity to convert bond holdings to equities and earn at least double what the bonds do.

The equity portfolio, like Berkshire's, is low turnover and high quality. Top holdings:

  • CarMax - 8.7% of portfolio
  • Berkshire Hathaway - 5.99%
  • Brookfield Asset Management - 4.4%
  • Walgreens - 4.3%
  • Fairfax Financial - 3.9%
  • Walt Disney - 3.8%
  • Diageo - 3.7% 

These first two elements - profitable underwriting and investing - have propelled Markel throughout the last twenty years or so. But there is a third leg of the stool to Berkshire's model - wholly owned businesses. Berkshire now owns many more businesses than it has invested in equities.

Markel is not large enough today to buy up huge companies like Burlington Northern, but they have proven to be quick learners and fast followers in recognizing the efficiency of buying whole companies.

In 2005, Markel started Markel Ventures to buy up whole companies. Like Berkshire, they tend to be on the dowdy, but profitable side. Channel dredging, bakery, waffle maker manufacturers and the like. This third leg of the stool is the one I have been watching for to propel Markel to the next level, and it appears it is starting to:

"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."

Put it all together and Markel has established a good position in each of the Berkshire three legged stool. It has profitable insurance operations, a solid equity investment track record, and now a burgeoning wholly owned group of businesses. So Markel has all three legs of the stool in place and effective.

One question I have for Markel is that Tom Gayner is the face of the investment operation, but what is the bench? Is there a Munger, Simpson, Weschler, Combs at Markel?

Overall, the company has proven its ability to learn from a great example and implement as close as anyone else has - The Berkshire Operating system


1. Markel CIO Tom Gayner (circa 2011):
"Cocktail party definition of Markel if someone asks about Markel, its an insurance company that they've never heard of. Well an easy way to think about that is if you have an insurance policy that you can get easily and quickly, well we wouldn't do that. We do the sorts of insurance where people go 'Oh no. We've got a problem or we've got a situation' This isn't to disparage the other insurance companies, we all have a role in life. What GEICO says yes to is not going to be the same thing that Markel says yes to. What Markel says yes to isn't going to be the same thing that GEICO says yes to. Its a different organization and orientation.

We do 100 different forms of insurance - everything from children's summer camps that are out in the middle of nowhere, that have teenagers supervising teenagers and no fire departments nearby, kids jumping on trampolines and being out in canoes, all the sorts of exposures that go with that.

We would do oil rigs that are out in the Gulf of Mexico (one of the ways we lost some money this year), those sorts of things need insurance and Markel is a company that for decades has been in that business, and its a good business, but there are days when you wake up and read the headlines and go 'Oh no', but that is why people buy insurance.

We do things like bass boats with too big a motor on it, this has always been intriguing to me. Bass boats tend to be flat bottomed, and they come with a 10-15 hp motor or something like that, but if you are really into bass fishing you have to get to the spot in the corner of the lake faster than the other guy. So people put 250 hp engines on their bass boats. I can tell you that every accident or loss report reads the same way, and that is: 'Craft traveling at a high rate of speed, when it hit a submerged object. Occupants hurled from the craft.' When you are trying to buy insurance on your bass boat and you are a State Farm or  GEICO customer, they're going to ask you about how many horsepower you have on your boat and when you answer 250 they're gonna say 'thanks but you need to find somebody else to that.' 

Well, we're the Statue of Liberty, bring us your tired your poor, yearning to be free. Short line railroads, little spur lines with only one customers. We do bars and taverns that are sometimes on the wrong side of town. On and on and on.

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