Thanks to Grizzly Rock Capital for compiling and sharing the following notes from the Markel (MKL) meeting during the Berkshire Hathaway weekend.
2015 Markel Meeting Notes During Berkshire Weekend
- Having LT shareholder base is "critical to what Markel does"
- Organized in 1930 as small insurance agency. Steve joined company 40 years ago in 1975. Company was still a small insurance broker.
- Went public in 1986. Raised $5 million and market cap was $35ish million dollars
- Worked with cousins on growing the business. Wanted the credibility of being a public company. Recruit and develop talented associates around core 4 principles
- Today, over last 28 or 29 years Markel developed a number of businesses and bought many others. Market cap is $10 billion
- Spending time over the past few years making sure the market is "built to last" and managers are in place to continue the success. World of insurance is not limited and Markel should be able to continue to take advantage of opportunities.
Questions & Answers
How have you implemented the "Markel Style"? How do you react with people don't fit?
- Markel style is attempt to describe culture and values.
- Every Company has a culture – whether they say it or not.
- Notion of teamwork and joy of building the company. Some people are just wired to like that.
- Needs all associates to have the same culture to grow. Mathematically harder with scale.
- Other side to story is entropy. “Becomes a flywheel”
- Have formal HR practices – if the person is not “Markel style” they won’t be there long term
- “Believing in teamwork is more important than the individual”
- Disdain for bureaucracy
- Having a focus on shareholders
- Being interested in sharing the results. Meritocracy
- If someone is more interested in building net income than net worth, that isn’t the Markel Style
- Key when doing an acquisition is figuring out who the people who don’t fit and “getting them off the books” (in a kind way)
Question regarding CarMax (KMX) and credit ability thereof? Prospect of moat erosion over time?
- Every business subject to competition
- CarMax treats customers very fairly
- CarMax has data on each car that comes in and customer trusts them
Alternative sources of capital going into the reinsurance market. Number of hedge funds getting into the space. Underwriting secondary? What would it take on the reinsurance market versus Alterra?
- 50k foot level: focus on uncorrelated risk for others without focus on uncorrelated returns.
- "It appears God hates cheap re-insurance."
- 100% of what the new guys into the space are doing yet only 20% of what Markel is doing. Thus, Markel can choose not to participate in reinsurance if the rates aren't profitable.
- 360 degrees of insurance - underwrite, reinsurance, international, etc
- Have other places to put the money
- Challenge to identify one thing
- If growth is strong, maintaining the "fly wheel of Markel style" does get harder with scale
- Bc of success, lot of smiling faces and proud people
- "Don't want to believe our own BS"
- Need to have the most up-to-date information technology and working hard to make that happen
- One thing to focus on insurance side is distribution
- CFO answer: (1) liquidity - very conservative with regard to liquidity. Have to keep an eye on liquidity
- Success can make it easy to say no to new risk even if the pricing is good
- Success that breeds complacence is a dangerous thing
- 3 people that Tom Gayner has tell him if he is out of line: Susan Gayner his wife, COO of Markel Ventures Mike Keegan, and Steve Markel.
Participated in the Fairfax India raise. What are the thoughts around investing in a "cash box"?
- Steve Markel - #1 reason is that they have a high degree of confidence in the management of the venture and track record of investing in India profitably.
- Fairfax India is a handful of Indian companies yet will be 8 or 10 public or private positions in Indian companies.
- Fund hasn't made any investments. Market price moved from $10 to $12 but no change in underlying economics.
- Markel was looking to get into India yet India is somewhat restrictive in terms of allowing foreign control investors
- Markel invested $40 million so modest relative to the size of Fairfax India as well as Markel.
Expand on scalability?
- Working on moving from successful boutique to a strong global entity
- Focus on systems implementation and culture
- "Too hard on the relationships to do these things more often than 10 years!"
- With Alterra, they went full integration day 1. Some previous acquisitions they were less quick on removing people who wouldn't be successful in the Markel culture. Biggest thing was that Alterra was a quality organization.
Incentive compensation? Why is your 12.0% return hurdle for incentive compensation at the current level?
- In an almost ZIRP environment, a double digit rate would be significant.
- On the investment side, the insurance business needs liquidity to pay claims and needs highly liquid securities to do that
- Need to focus on reducing the combined ratio down to ensure profit
- Yet Markel can hold other securities which should help returns
- Biggest focus is on reducing expense ratio including initiatives on getting the expense ratio down. Have plans over a few years to do just that.
Amount of equity securities?
- Markel would hold up to 80% of book capital in equity securities
- Number is probably in the "high 50%s" range currently as Markel has been bying equities weekly since the Great Recession
- Munger talks about focus and concentration. However, top 20 positions account for 70% of portfolio. Reason for 120 companies is that Tom Gayner wants a bench.
- Example is Amazon which Gayner bought and then sold quickly
- Number 1 reason Gayner likes Brookfield Asset Management (BAM) is that the mgmt team have boots on the ground and go where the opportunities are