Having said that he thinks Markel is in the best position it has been in years. Why? Markel’s great strength
is its 25 year, long term view. It makes it easy to be optimistic when you have a long term view and can
look past short term issues. The metrics of the business will allow them to generate high rates of return. He
believes that they can write insurance with combined ratios that are profitable. This environment will be
tough for their competitors as well. So, there should be a lot of opportunities on the private equity and
insurance sides. He said that deals are going to happen and they are very enthusiastic about the potential.
They think they have the model in place to take advantage of the stressed environment.

The economic scene is starting to see some recovery but it is not what it was 4-6 years ago. Insurance
premiums often follow economic conditions and since the people they insure are not as active in business,
MKL’s premiums are down.

A lower interest rate environment leads to lower returns on the investment portfolio. They are not in the mood to invest in long terms bonds that could get hammered if interest rates go up (a sentiment that was echoed by Buffett at the BRK Meeting). They are afraid of inflation. They don’t know when it is going to come about but they think it will.

not to be too fearful, but you don’t want to grab a falling knife. It is always tough to call the bottom. In the
insurance business when stocks and bonds are falling, capital levels are falling too. So, to put money to
work you need excess capital. Knowing how it all played out, they were much more conservative than they
needed to be. However, if the bottom had been lower they would have been much less happy with the
benefit of hindsight.

market of the capital accounts [meaning that as stock prices were falling so were their capital levels as
mark to market asset values went down] and the soft market for insurance premiums. He would have fired
both barrels (he said he was firing one barrel) if it had been a hard insurance market. They were buying and
dollar cost averaging their way into a higher equity position and are still doing that today.

working and will work well. You also have to be able to sell what is not working. This beats timing the
market every time. Insurance companies have regular cash flows so they get money all the time.
Accordingly, dollar cost averaging creates a lot of wealth for them.

He mentioned that the #1 mutual fund was run by Ken Heebner (CGM Focus Fund) during the decade last.
The fund made 18% per year. However, the most astonishing fact is that the average shareholder in that
fund actually lost 11% per year. What that means is that people were trying to time the market and lost
money consistently. Thus, it’s better to find partners that share MKL’s beliefs even though you can’t
necessarily control your shareholders. You have to put yourself in position to succeed by avoiding losses
and failures.

Agreed with Buffett that there are three categories of buyers to sell private businesses to:
1. Private equity/LBO: This is a disruptive process that adds a lot of leverage. This is the process to choose
if you want the highest dollar value. But you have to know that you will be sold again soon.
2. Strategic buyer: Someone already in that business. But this buyer can come in and slash headcount and
fold it into their company. If you love your business then this could be very unpleasant.
3. Someone who believes you run a great business: MKL offers permanent capital. Do the same deals as
BRK does--just with fewer zeros.

Where do deals come from? First they bought AMF Bakery in 2005. It was located in Richmond (where
MKL is located) and the CEO did not want to sell to a PE firm because he had been with a firm that had
been bought by a PE firm previously. He threw himself in front of the bulldozer with the intent to sell to
MKL. In 2006-07 they still wanted to do these deals but they did $0 in business. Other people were willing
to pay too much since financial markets were still going wild. In 2007, a lawyer from the AMF deal called
and suggested another client. From that call they linked up with Parkland Ventures, a business that manages
mobile home parks. This company had management capabilities but did not have the necessary capital.
MKL had capital and together they have been growing. There is a long of runway for this business.

Next, they bought PSI, a company in the dorm room furniture business. This is a specific niche and is as
much of a logistics business as a furniture business. This deal came from another Richmond connection.
Finally, was the Ellicott Dredge company deal. This company does business all over the world as the
leading manufacturer of small dredges. They are the ones who dredge the Panama Canal. The family
members needed liquidity, wanted the company to be on permanent footing, and ended up in good hands
with MKL.

When people see that you can do these deals, they begin to understand what you are looking for. MKL
promotes the ideas of love and permanency. This is a good, self reinforcing mechanism in terms of
selection of potential companies. The phone is actually running of the hook now.

severe. Wall Street analysts are often seen as a firm’s actual shareholders by company management teams.
The analysts ask these stupid questions and the management teams waste all of this time catering to sell-
side analysts. But, the ultimate owner of the stock is a mutual or pension fund shareholder. Analysts are not
your shareholders. There is a huge distinction between actual shareholders who make decisions and
analysts.

MKL only raised $5M when they went public, A lot of the people who bought in were employees and
associates of MKL. When you think about who your shareholders are, in this case their shareholders were
their friends and families. Then you have to think about what a manager is entitled to and what a
shareholder is entitled to. They decided early on that the shareholders should get the benefit of the doubt.
They are shareholders as well so the interests are aligned. Building wealth was more important than
building income. Tom always said (quoting the movie The Field of Dreams), if you build it they will come.
So, they decided not to make any promises-- just demonstrate success and investors will buy in. Under-
promise and over-deliver is their motto.

The value of renewal retentions is incredibly important at places like GEICO. The averaged insured stays
around for 8-9 years. For MKL, they want to get customers to stay with them for 3-6 yrs. Retaining existing
customers is certainly better than trying to get new policy holders each year. Along the same lines, why
would you want to go out and cultivate new shareholder each year? It’s a lot smarter to stick with the same
shareholders. The average life expectancy of the Fidelity insurance analyst is only 6 months. They think it
is crazy to have to tell the story over and over again to someone who is either not listening, not going to be
there, or has no interest in owning the stock for a long period of time. The truth is that being in Omaha the
first weekend in May is a great place and time to look for shareholders.

How exactly do they retain customers? They get a customer and they treat him/her well in hopes of keeping
him/her for a long time. For example, MKL has a children’s summer camp business. In fact, they insure
50% of the children’s summer camp businesses in the US. It is not a huge revenue generator but people stay
with them for 10 years. But, for something like earthquake insurance they get renegotiated each year. They
prefer smaller accounts where they know their customers and can keep them loyal.

been re-branded Chartis and appears to be doing $40B worth of premiums each year. This is about a 10% market share. The government was going to spin it off but that has been shelved for now. The truth is that AIG accepts larger accounts and MKL looks for smaller accounts. So, they don’t go head to head each day. But sometimes MKL drifts up and AIG drifts down so they do compete a bit. The truth is that AIG is more disruptive when it comes to larger insurance companies.

companies “would run out of money to run out of.” Well, they eventually did. This will also be true for the various taxpayer funded ventures. MKL will just compete day to day. We can’t forget that UPS and Fed Ex have beaten the post office (USPS) because they have better and more efficient operations. So, MKL should be able to compete with government-influenced businesses as well.

positions and argue the other way. Steve likes arguing and Tom has adapted. They have argued about
financials a lot and they have minimal exposure to these companies (excluding BRK of course). They think
there are some that are OK and that some will do well. But they like companies with no debt. Crooks often
use a lot of debt. If you have a 100% equity company, then you are likely dealing with honorable people
because they are using their own money. Financial institutions are highly leveraged. Tom has been burned