Notes from the 2014 Markel Conference Meeting.
Tom Gaynor & Steve Markel
Q: (from David Winters). Would you ever do anything that’s dilutive.
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TG – Markel Corporation (NYSE:MKL) 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 Corporation (NYSE:MKL) 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 Corporation (NYSE:MKL) intrinsic value.