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2014 Markel Meeting Notes

2014 Markel Meeting Notes

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Published by CanadianValue
2014 Markel Meeting Notes
2014 Markel Meeting Notes

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Published by: CanadianValue on May 06, 2014
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Markel Meeting
Tom Gaynor & Steve Markel
Q: (from David Winters). Would you ever do anything that's dilutive.
TG - Markel was a family business. Public offering process (1986) had a lot of layers around that issue. Ultimate goal to set up corp and biz that is more durable than any particular individual. Culture is more determinative of what they do than the comp structure (cash salary plus bonus 50/50 cash and stock). Try to hold onto stock as much as they can. SM - Priority of shareholder's interest over owner's interest. Make sure rewards of owning stock overwhelmed rewards of being an employee. Getting return for shareholders comes first. Want associates of company to become meaningful shareholders over time. Focus is also always on long-term returns. Building net worth takes priority over building net income.
Q: If do pretty good job underwriting and pretty good job investing, you get a superior result. Explain.
TG - Structure of insurance company lends itself to good results in right hands and with right people/approach. Insurance business that makes an underwriting profit - very difficult to accomplish. If you have that, it's better than cash on delivery. Instead, it's cash ahead of delivery. SM - Most insurance execs have grown up on underwriting side of biz and don't understand the investing side, so they outsource it. This leads to the wrong approach, as all you're trying to do is earn average returns and be rehired each year. Focus on short-term earnings is a penalty to earnings over long periods. Deferred tax on security gains is a penalty on earnings - if you sell. Supports the long-term approach.
Q: Where do things stand in terms of the Alterra acquisition.
TG - Good underwriting, good investments but different approach. Just make different choices. 99% of the transition is complete. Markel is heavier investor in equities (normally about 80%) than most other insurance companies. Allows for margin of safety and ability to endure bad days. Can absorb bad days that way. Coming out of financial crisis at 65-68%. At Alterra close were at about 40%. Rebuilding that back toward 80%. Now above 50%. Will move faster if they see the opportunities to do so.
Q: Knowing management teams of companies you invest in. Fruitful and fun, necessary, etc.
SM - Results from Markel ventures are very much inline with expectations. TG - Jockey is key part of the process. Graham described visiting management as cheating. You should be able to do your work and analysis from the numbers. Talking to management violated rules of game. Many Graham and Dodd followers shy away from this. As investors, you can be seduced by charming CEO. Likes to know management as much as possible and likes to like them. It's critically essential to the success of the business. Having a charismatic CEO is an important part of leading the business well - it helps attract talented employees, customers, etc. Need to have people that like them. Companies run by difficult people where CEO accumulates enemies doesn't always end well.
Q: Buying back stock given current P/B why not more aggressive (1.5-2.0 Book).
SM - Trading at significant discount to that. Can reinvest in business, investment portfolio or share repurchase. The opportunity to repurchase shares are somewhat limited - few days after earnings release week or two to a month. Are limited to percentage of daily average trading volume (5k-10k per day). Over long periods, have had much better opportunities to make investments. Will as much as possible offset dilution. If don't see opportunities, will be more aggressive. TG - Restricted stock - 5 years to earn, plus additional three, so it takes eight years. First priority with cash is to put it to work inside organization. Then make good investments. Then may repurchase if trading under intrinsic value. Even if stock looks cheap, will not buy back if options 1 and 2 provide better opportunity to increase Markel intrinsic value.
Q: Use of debt by potential investments
TG - Likes low debt. Prudent use is ok. Buying different businesses is risky. Avoiding businesses that use a lot of debt. If not debt, crooks are only stealing own money (don't want to do that). Having a lot of debt means there's a lot of other people's money in the game. Provides insight into the character of the people. Likes prudent use of debt. Where revenues highly uncertain, prudent level of debt is close to zero. Where revenues are more
assured and supported by assets, prudent use of debt can be higher. Bias though is on low debt. One of lessons learned from financial crisis is that there's much more leverage in the system than you realize. SM - Markel uses prudent amount of debt in its own port, so that extends to its investments.
Q: View on financial equities.
TG - Have done well with insurance. Haven't done as well with banks, so have very limited exposure
Q: Which qualities of other insurance companies are so negative that you would you be short them. Which other two insurance companies in the industry do you admire most.
TG - Admire underwriting profitability and reserve development. Travelers and Chubb are two competitors they think highly of. BRK is also their largest position. SM - Progressive and mindset of identifying and serving niche markets in personal auto space. Geico in terms of marketing. Power of renewals. What allows you to grow from 2%-10% is trying to manage EPS. Increasing marketing cost negatively impacts combined ratio. But, if you keep a client for 10 years, you get a much better return on that investment. Retention of business is really important element of building insurance company, particularly property and casualty. Progressive also were hawks an making sure insurance reserves were more than necessary. P&C insurance companies 25, 10 and five years ago. There have been very few long-term success stories.
Q: What are you seeing in underwriting markets today.
SM - Trend not great. Relative pricing in 2013 was good. Rate increases quarter after quarter for last 2-3 years. Cumulative impact over time is quite good. Level of pricing pretty strong overall throughout industry. Toward end of last year, into 1Q, particularly in property (especially casualty) that is starting to change. Hard at this point to judge magnitude. Have let some business go away because they're not willing to compete at that pricing. If peers want to cut prices and have underwriting losses, then Markel won't try

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