Tom Gayner Markel’s annual letter to business partners for the year ended December 31, 2014.
To Our Business Partners
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Here is our annual report to you for the year 2014. If you are reading this, it’s probably because you already own Markel. This is your company. You own it and we work for you. In the course of this report we’ll attempt to answer two major questions that we think you would want to know as owners of the business, namely, “How are we doing, and, what’s next?”
If for some reason you are reading this and you don’t own Markel, we hope that you will want to rectify that void by the time you finish.
Our goal at Markel is to build one of the world’s great companies. The markers of success in achieving that goal will be outstanding long-term financial results AND an enduring culture that attracts the best associates, customers, and shareholders. We’ve pursued this dream through three generations of family ownership and over three decades of public ownership and so far…so good.
Question # 1 – How is Markel doing?
This was a watershed year for your company. The financial results only hint at the progress made at Markel in multiple dimensions. The people of this company went from a sprint to hyper-speed in adapting to a changing world. We learned important lessons about how to manage and continue to build an enterprise of increasing scale and complexity. First things first, to the associates of Markel, thank you for your amazing efforts.
2014 was a year of great progress, top to bottom. Total revenues grew 19% to $5.1 billion versus $4.3 billion. In our insurance operations, we wrote $4.8 billion of premium volume compared to $3.9 billion a year ago.
Most importantly, this was profitable volume with a combined ratio of 95% compared to 97% in 2013. We earned 7.4% on our investment portfolio with equity returns of 18.6% and fixed income returns of 6.5%. In our Markel Ventures operations revenues totaled $838.1 million versus $686.4 million a year ago and we earned Adjusted EBITDA of $95.1 million compared to $83.8 million a year ago.
In sum, financially, we earned comprehensive income of $935.9 million and the net change in our book value per share was $66.80. There will be many more numbers and tables in the body of this report but suffice it to say that the people of Markel produced outstanding financial results in 2014.
Our associates enjoyed new challenges and opportunities throughout Markel. We expanded in financial size through organic growth and the ongoing successful integration of the Alterra acquisition. We began operating in new territories around the globe, we introduced new insurance offerings, and we added new services and products in our Markel Ventures operations. Associates at Markel should never be bored. There are ongoing opportunities to learn and build at this company. The combination of ongoing personal growth opportunities along with our consistent values as described in the Markel Style, make Markel a wonderful company in which to build a career.
We served our customers. That is why we are in business. During 2014 we provided for our customers with over $1.9 billion of payments for when the earth shook, winds blew, or other unforeseen events, caused covered insured losses. Within Markel Ventures, among other things, we built equipment which our customers used to bake bread, dredge, and haul cars, general cargo, and industrial supplies. We provided affordable housing and medical needs for thousands. We helped retailers with analytics and data they use to run their businesses. And for our shareholders, the price of each share of Markel rose 18% from $580.35 to $682.84 during the year.
While the short-term annual financial results were great, and the stock price went up, results from any single year do not reliably describe the real accomplishments and progress at your company. It takes longer to make valid judgments.
To begin to correct for this short-term distortion, we as senior managers mechanically use a rolling five-year measurement period to calibrate things like our incentive compensation. The reason we do that is to get a more accurate proxy of measuring our progress in accomplishing the more important long-term goals. We think that time horizon is a bit longer than what most companies use. We also think that orienting ourselves towards long-term thinking offers us a huge advantage. With a long term focus, difficult decisions oftentimes become easier and more obvious.
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