Tom Gayner & Steve Markel Conference Notes

Markel Event – Tom Gayner & Steve Markel

Markel Corporation (NYSE:MKL)

Questions

David Winters – what are regulatory limits of wholly owned subs vs publically traded stocks? Impact of markel to market?
- Markel has $2BN to equities – wholly owned comes from holding co. No regulator limit at holding. Only at insurance sub.
- BRK – National Indemnity – has regulatory trade-off.

Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) is largest holding – Buffett talking about discount of intrinsic value
CarMax, Inc (NYSE:KMX) is major holding – compound and growth expected
Fairfax Financial Holdings Limited (TSE:FFH) , Brookfield Asset Management Inc. (NYSE:BAM), Diageo plc (NYSE:DEO), Wal-Mart Stores, Inc. (NYSE:WMT), – demonstrate shareholding value wheather via dividends, growth , etc

Grep Smicher – repurchase of own shares? Multiple of book value per share to repurchase?
Generally – like to see shares continually declining – restricted stock is used in comp plan .
Want to repuraches enough stock to offset share issuance.
No stated number (such as 1.1x book)
Valuation closer to right valuation more consistently than BRK.A
Unlikely to try to buy back a meaningful amount of stock –
Restricted stock more clear – stock options mirage of real cost – how much spent on comp? Unsure. Restricted stock is clear. Dollar for dollar – treated as expense which flows through business. Markel exemplar of senior execs – 5 years before qualified to earn aand then 5 year vesting period – 10 year window reinforces LT thinking.

Market Ventures flow of opportunities – dog catching car?
First reference was 2005 – LBOs had to much leverage and to short of a time horizon.
AMF Bakery Equipment – guts of commercial equipment.
Knew Chairman did deal
2006 and 2007 did no deals as rest of world was bidding up companies. But got a call from lawyer – Network effects created strong deal flow – pricing on all deals. Half had no investment banker.

Low interest rates – ramp up capital to Markel Ventures?
Yes but can’t force deals – 2006 & 2007 they did nothing .
Troubled business – offered for free – said no. Evidence of discipline.
Substantial FI portfolio to match and collateralize insurance liabilities. See more than 100% of offsetting liabilities in fixed income.

How do you think about risk in fixed income? Bonds as investments?
“Bonds offer return free risk.” Buffett quote yesterday
Match because they have to – insurance liability is 4 years and bond portfolio is 3.25 years.
“not concerned about stretching for yield –inflation big risk”

Growth of intrinsic value of Markel over time?
Investment leverage is 3x capital base – so growth is underwriting profit + growth on
Growth of just under 20% per share since IPO due to underwriting profits, and gains from investments.
Underwriting margins have been thin – growth on pricing is coming and
Expect to earn strong double digit returns on capital.
BV per share is good proxy
Most important factor is “Markel style”

Feast and famine relative to the rest of the industry? Historic cycles in insurance business?
Example – difference is standard and excess insurance markets.
Generalize diff from commodity business and specialty
20% specialty and 8% commodity
Bars and taverns become restaurants in soft markets. When market gets hard, back to bars and taverns
Specialty lines grow faster in hard markets.
“Underwriting and investing are similar business” Both driven by people’s behavior – no fear that bull and bear markets will continue.”

Reinsurance vs insurance?
Geico – auto – “consumer brand” with franchise
Gen Re – catastrophic
National Indemnity – large unusual account (Ajit Jain of Berkshire Hathaway) – reinsurance
Markel – does some re-insurance but not enough
Direct business better than reinsurance.
Right after an event prices spike up – can write big limits at right rates.
Markel doesn’t play in that market