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The Inoculated Investor 
http://inoculatedinvestor.blogspot.com/
1.
Markel Corp. (MKL): CIO/EVP Tom Gayner
a.How much is their desire to hold short term positions hurting ROE?i.Believes they are giving up 300-400 bps of performance in order to be veryliquidii.Their fixed income assets right now have an average duration of 3.5 yrs1.P&C business usually has a 4-5 yr taila.Would ideally have a portfolio with a 5 year duration
i.
But they feel they need to be more liquidiii.Treasuries are not attractive at all1.Do think some munis are attractive but the rates don’t get that attractiveunless you are willing to accept longer duration paper iv.Finally starting to look at buying common equities againv.Their marching orders are protect capital1.Need to be able to react to volatile markets and do not want their money locked up long term2.They are running the risk of underperforming their competitors by notusing the money to write new businessa.Not at the risk of negative performance though by letting the book run down b.Insurance pricing
i.
Pricing is increasing slower than they would like throughout the industryii.AIG is still in the field and this makes the pricing environment very difficult1.Why would anyone buy from AIG?a.Only based on the low price b.Brokers are pushing the cheaper products to clientsi.Promise to pay issues (especially on contracts that arerenewed yearly) are not a big consideration for cash-strapped consumers and businessesii.No one ever thinks they will have a loss or claim sothey are willing to gamble on AIG
iii.
These are mostly shorter tail policies1.On longer tail policies people worry aboutAIG’s ability to payc.Price movement is largely driven by AIGi.But brokers are afraid too1.They know they are being shopped and theydo not want to push expensive (albeit safer) products and risk that their customers gosomewhere elseiii.The international markets are a lot better than the domestic one in terms of  pricing1.The London office is apparently smilinga.Seeing good pricing on catastrophe, oil rigs, hull coversiv.Believe that the insurance companies still have capital holes to fill1.The full effect of this has yet to be felt2.People are in the denial state3.Loss costs go up during a negative economic cyclea.But some companies are not seeing loss costs go up so theyare not raising prices and therefore no one is b.Does think this could eventually lead to a hard market thoughc.What has been the best environment historically (or best opportunity) to grow book value per share?
i.
1) After a massive, front page catastrophes
ii.
2) When they have had the opportunity to make distressed deals and acquisitions
 
The Inoculated Investor 
http://inoculatedinvestor.blogspot.com/1.In the past have even done deals with larger companies that helpedthem grow substantiallyiii.They are looking to add business and make acquisitions1.But probably not anyone 2x their size anymoreiv.For example: AIG’s Hartford Steam Boiler 1.MKL was not a preferred buyer but this is an example of what they arelooking for 2.Are more likely to do incremental stuff in terms of investmentallocationd.Talk about buying common stocks in this marketi.Gayner is buying equities in his personal portfolio each month
1.
He is in the position where he makes more than he needs so he canafford to invest that money in stocksii.Take Coca Cola (KO) for example1.At $42 and a 4% yield it looks very attractivea.That’s a great price but he can’t guarantee it won’t go to $38i.MKL wants to be in the position to buy more at lower  pricesii.When the insurance business is strong they canshovel the money into the investment portfolio1.They are not seeing this now so they have to be judicious in their purchases of equitiesiii.You have to ask yourself what kind of insurance company you are1.Like a 47 year old with a stream of income and capital to invest?a.When the insurance business is humming you can invest inslightly riskier securities2.Or are you like a 78 year old on a fixed income?a.When the insurance market is soft you have to invest in safer assetse.Compensation and bonuses at MKLi.In the fire line there is a 2 year bonus pool1.You know pretty quickly if there has been a loss on a fire contract2.On other longer tail lines the bonus pool is 3-5 yearsii.People in each line are measured by the compounded annual growth of book value1.Not based on premiums written or earnings2.Is that a problem since if book value per share does not increase thenthe management team gets no bonuses?a.What happens if they have to shrink the book for 4 years?i.Would they go without bonuses the entire time?1.Thought that the board and shareholderswould be willing to adjust those rules if theyhad protected capital prudently b.If they are right and there is significant inflation and risinginterest rates on the horizon, doesn’t that mean that BV/Sharecould be impacted negatively?i.Yes, if they are directionally right and an interest ratespike makes all existing fixed income assets lessattractive, BV/Share could go down1.But they would be better off than everyoneelse in the industry due to their shortduration2.Also, the multiples on their businesses couldcontract as the whole world is worth lesswhen interest rates increase
 
The Inoculated Investor 
http://inoculatedinvestor.blogspot.com/f.How is One Markel progressing?i.Has been going very well but some of the encouraging results are being maskedii.The prototype was the Dallas office1.It worked well from day 12.They tried out selling all the MKL products without silos and includedthe underwriting and marketing3.Worked so well in Dallas they decided to roll it out nationwide asopposed to market by market or incrementallyiii.In early march they turned the switch on for the entire company1.Submission accounts are at record levelsa.Brokers now have all the MKL products to selli.Went from having 6 to sell to 100 b.Even though MKL has kept its price discipline, brokers aredoing more business in MKL productsi.How does that work?1.They have one on one relationships withthese brokers that are driving submissionsii.Remember the AIG book is being shopped1.Anyone who has exposure to AIG is lookingfor other options
iv.
Concerns over potential cultural challenges are fair 1.Will not know for 5 years if the plan works2.It is a very different modela.Their previous model of pods of entrepreneurs was notscalablei.Needed to change this to keep growing3.Technology is very different today than it was in 1995
a.
Don’t need to be as close to the exposure as they had to be back theni.Knowledge travels better now and that should makethe transition easier v.This is not a statistically driven book of business1.Do not have the years of data that GEICO has2.This is more of a relationship-based model so of course there is somerisk therevi.Where could One Markel go wrong?1.Well, it has worked for the last year and a half so they are optimistica.Producers are glad to have the full array of products2.The extra cost of the system build out will add two points to thecombined ratio in 2009-2010 period
a.
Since they are working off a smaller base now this could even be a bit larger impacti.Based on the operational build outg.With AIG and Chubb being the main players in the D&E/E&O space, has MKL thoughtabout entering that business?i.How could anyone want to buy those policies from AIG?ii.MKL has been hesitant to enter this business in the current market environmenth.What is the reason for betting on inflation?i.Deflationists have the right idea about the slack in the system potentially causingshort run deflation1.But Gayner is very concerned about the value of paper moneya.Believes government actions will devalue paper moneyii.Want productive businesses to protect against the inflation risk 1.They are less concerned about the supply and demand issue when itcomes to the dollar 
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