Markel 2015 Shareholder Meeting Notes – Thanks to a reader for sending this to us.

OMAHA, May 3 — On the weekend of the Berkshire Hathaway 50th anniversary gala that drew visitors from all over the world, Markel celebrated the 25th anniversary of its morning-after brunch much more quietly. There was no movie. Tom Gayner didn’t offer to fight Floyd Mayweather, or even Manny Pacquiao, although he did have some very nice things to say about former Lakers power forward Kurt Rambis.

Also, your humble correspondent got up the nerve to go to the mike and ask the questions he complained were not asked at the 24th brunch a year ago, as you may or may not recall. He also got a chance to follow up with Gayner after the brunch, all of which we will get to in due course. But let’s start at the beginning.

The contingent of Markel executives at the head table was double the size of last year’s, partly by accident and partly by design. There were supposed to be three last year, but Richie Whitt, the president and co-COO, had a conflict, so there were only two: vice chairman Steve Markel and president and chief investment officer Tom Gayner. Whitt made it this year and they also added Anne Waleski to the mix. She’s vice president and chief financial officer. To meet Alan Kirshner, the CEO, you have to go to the annual meeting in Richmond (next week) because he’s “the most camera-shy CEO,” according to Whitt.

Recalling the origins of the Omaha meeting, Gayner said the thinking was, “The people who are most likely to understand what we’re trying to do are people who already own Berkshire.” The brunch meeting, Gayner said, is “the only investor presentation we do all year.”

Markel followed by thanking the several hundred people who filled the main Hilton ballroom for making a special trip to Omaha to hear them and hoped we all found something to occupy our time on Saturday. He also offered the baseline history: Markel was founded by Sam Markel as a small insurance agency in 1930. Steve joined in 1975. The company went public in 1986, raising about $5 million in an initial public offering. It was still a very small enterprise at that point with a market cap of $30-$35 million. Today the market cap is $10.4 billion, “so we’ve come a long way.”

“We’re really just getting started,” Markel said. “The opportunities for us in the world of insurance and the world of other businesses is really unlimited.”

In a tradition I explained in last year’s post, money manager and sometimes-activist-investor David Winters asked the first question. Picking up on introductory remarks by Markel about the “Markel style,” which he said “defines how we do business,” Winters wanted to know what specific characteristics comprise it.

Gayner said it’s a value system and a system of brain wiring. It is a “geometric challenge” to maintain it as the organization grows, he said, but after a while “it’s almost like the organism rejects someone” when they aren’t in sync with Markel’s values.

Markel was more specific. He said people who fit with the Markel style value teamwork over individual achievement; have a disdain for bureaucracy and bureaucratic processes; believe in the primacy of serving shareholders; and prefer a meritocracy to a general sort of egalitarianism.

“If someone is more focused on net income than net worth,” he or she is probably not a fit. A person who cashes stock options after two years to buy a boat would be less likely to fit that someone who still held them 10 years later.

The next question was about CarMax, which allowed Gayner to praise its fixed-price model, an innovation in the used car business. Another questioner later would point out that Warren Buffett and Charlie Munger both opined the day before that people really seem to like negotiating when they buy big-ticket items like houses and cars and they didn’t see much chance of that changing. To that later question, Gayner replied:

“It’s a big world. There’s room for both models . . . Some people like it and some people don’t and it’s a big enough world for both.”

The first CarMax question included a characterization that it was Markel’s biggest position. Gayner said it shows up that way on many lists because Markel’s Berkshire position is bifurcated into A and B shares, but when you combine them, Berkshire is its biggest position.

This is not what dataroma shows as of year-end 2014, when it reported a 75 percent reduction in Berkshire A shares, leaving a combined allocation to Berkshire of about 7.6 percent, compared to 8.7 for CarMax, but Gayner ought to know. I have not looked at the most recent filings to resolve this, but suffice it to say they are Markel’s two largest equity positions, adding up to about 16 percent of the stock portfolio a of the last dataroma report.

The next question came from a woman who said she was glad to see Waleski on the podium, but looking at the corporate officers, they seemed very white and very male and she wondered about encouragement of diversity.

“Well, speaking personally, I’m pretty much stuck as a white male,” Gayner said.

Waleski said she was glad Gayner hadn’t mentioned gender when he introduced her as an addition to the front table because Markel’s “environment is you get rewarded for hard work regardless of ethnicity.”

Gayner said statistically women make up a large portion of No. 1 and No. 2 executives within Markel Ventures and he mentioned Kirshner’s “partnership for the future” program, which mentors minority high school students in the Richmond area.

There was a question about alternative sources of capital moving into the reinsurance business, taking off from a discussion by Buffett and Munger about reinsurance being used as a “beard for asset management” by hedge funds. Both said it was not as attractive a business as it used to be as a result.

The Markel people seemed much less worried about this, although they acknowledged it’s an issue at the moment. The complaint is that hedge funds aren’t as concerned with profitable underwriting because they basically value it as a cover for their asset management business. Markel pointed out that if this new capital generates negative or substandard returns, it will stop being so popular. He suggested “a major event,” insurance-speak for a disaster, natural or otherwise, will cull the herd. “If we’re right, they’ll make substandard returns and disappear,” he said.

Whitt put this more succinctly:

“One thing I’ve noticed: It appears God hates cheap reinsurance. He punishes it relentlessly.”

Because reinsurance is 20 percent of Markel’s business, the company has the flexibility to turn down business when it’s priced poorly, as opposed to a 100 percent reinsurance business, which has no choice about participating in the market.

“We’ve got a 360-degree view of the best thing to do with money,” Gayner said. “Reinsurance is not inherently a good business or a bad business. It’s a tool. If it’s not all you do, you can use it as appropriate.”

Someone asked them to name the greatest threat to their business.

Markel started by saying, “I feel awfully good about our business,” and it’s a challenge to think of one big danger.

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