Markel Corporation (NYSE:MKL) 2013 shareholder letters from Tom Gayner

To Our Business Partners

Here is our annual report for 2013. Each year we write this letter to update you on the financial performance of your company and to qualitatively describe what went on at Markel. This is your company. We as managers are stewards of your capital. You’ve entrusted us with the authority to run this business, and this annual report functions as our report card to you. As John Cheever said about a kiss, “You can’t do it alone.” We thank you for your partnership and the opportunity to do this because among other things … it’s fun.

Part of what makes it fun stems from the fact that 2013 was a year of fabulous financial performance. Financial results are a scorecard that measures one dimension of how good we are at doing our jobs. We like to think we are good at what we do, and it is pleasant to be able to report outstanding financial results and good marks.

Here are the headlines for 2013. Total revenues increased 44% to $4.3 billion, we earned comprehensive income of $459 million, and book value per share grew 18% to $477.16. We transformed the company by almost doubling the size of our insurance operations

with the acquisition of Alterra on May 1st and we are pleased with the pace of our integration efforts.


When we announced the Alterra acquisition, we emphasized the idea of “scale enhanced, business as usual.” We said this to give comfort to our insurance customers while we addressed the integration of the two companies, but we also think it is an equally compelling message for our investors.


This is a long letter. It takes a bit of time to update you on how things progress each year. If you just want the Twitter version of less than 140 characters, here it is …


2013 a great year. Doubled insurance business with Alterra acquisition. Rest of Markel grew by double digits. Expect more over time.



tom-gayner Tom Gayner

More important than any one year, is the long-term record of compounding the value of your company over time. As we have for many years we start this letter with a 20 year compilation of our most important financial measures in the table below. As is always the case, the  numbers in this chart stem from the unique financial architecture in place at Markel. We’ve earned wonderful returns on your capital over decades. One reason for that is that each year, and in fact, each day, we get to choose from a varied menu as to how to allocate capital to continue to build the value of your company. Most companies do not enjoy the 360 degree range of choices we do to build value.


Our first and favorite option is to fund organic growth opportunities within our proven, existing line up of insurance and non-insurance businesses. Our next choice is to buy new businesses. Our third choice is to allocate capital to publicly traded equity and fixed income securities, and our final choice is to repurchase shares of our own stock when it is attractively priced and increases the value of each remaining outstanding share.


In 2013 we did all four of those activities just as we have for several years. The execution of our daily business against that framework is what produces the results we’ve earned for you over time and display for you here.


We are proud of this record and we hope that you as the long-term owners of this business are as well.


In the balance of this letter, we’ll organize things by commenting on each of the elements of this table. We hope to give you some sense of how we produce these

excellent financial results over time, as well as providing you with some insights into the non-financial factors that give us confidence we can continue to earn your trust in running this company.


One of the key features that help to produce these results over such long time horizons is the sense of teamwork that exists at Markel. Jim Collins in his book “Good to Great” noted that organizations tend to cluster around two basic models, “teams” or “a genius with a thousand helpers.”


Markel functions as a team. We’ve got a deep and growing roster of skilled players. We know that on a team different players assume different roles and responsibilities. Sometimes it means scoring points, sometimes it means passing the ball to someone else, sometimes it means teaching a new player how to do something, and sometimes it means driving the van to the next game.


Those roles can and do change over time. We believe that teams last longer and produce better, more durable results than the “genius with a thousand helpers” model. We love the team of our colleagues and long-term shareholders, and we hope the following discussion of our key financial measures will provide some insight into that reality and how it works at Markel.

One – Total Operating Revenues and


Comprehensive Income


You might notice that we have two items listed here, revenues and comprehensive income. While we start off the 20 year table just with the label “Total operating revenues,” we believe we should discuss comprehensive income at the same time. It would be a mistake to celebrate one without the other. In the insurance business, revenues can be easily obtained. All you need to do is cut prices and charge less than the ultimate underwriting losses. The world will beat a path to your door to pump up your revenues. You will also soon go broke. Any and all revenue must carry with it the expectation of profitability. In our insurance operations profits are measured by underwriting profitability. In our investment operations profits are shown as total investment returns. And at Markel Ventures operations they are demonstrated by EBITDA and net income.


We are focused on the long-term creation of value at Markel. We therefore focus on bottom line profitability over multiple year periods, not just short term increases in total revenues. Our compensation as senior managers, and our wealth as fellow shareholders of the company, depends on profitable revenues, not just revenues.


That said, when it comes to profitable revenues, more is better.


In 2013, just such a happy thing occurred. Revenues rose 44% to $4.3 billion versus $3.0 billion in 2012. This total comes from earned premiums of $3.2 billion, net investment income of $317 million, net realized investment gains of $63 million and other revenues (primarily from Markel Ventures) of $711 million. This recitation of these amounts sounds so easy to say, and the numbers are so straightforward, that it is easy to forget how much work goes into creating total revenues of $4.3 billion.


In 1930, “Red” Motley said, “Nothing happens until somebody sells something.” Each and every associate of  Markel is a salesman in some form or fashion. We mean

this as high praise and we salute the hard work involved. Each and every one of those $4.3 billion dollars (or pounds, euros, krona, pesos, reais) meant that someone in Markel connected with a customer who needed our products or services. They explained how we could meet their

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