Chit Chat Stocks - Markel Corporation (MKL) with Bill Mann

Episode Date: July 7, 2022

Markel Corporation is a financial holding company that markets and underwrites insurance products. The company offers various specialty insurance products across many different segments. Listen as Brett and Ryan ask Bill questions about the company, its business model, and valuation. Enjoy the show! This episode is sponsored by Quartr, the new way of doing company research. Access conference calls, presentations, transcripts, and more for FREE on your mobile device. Download Quartr on the App Store here: https://apps.apple.com/us/app/quartr-investor-relations/id1552412128  Download Quartr on the Google Play Store here: https://play.google.com/store/apps/details?id=se.quartr.android Subscribe to 7investing with the code "Money" and get $100 off: https://7investing.com/subscribe/aff/4/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested to see more of Bill's work? Find him on Twitter here: https://twitter.com/TMFOtter?s=20&t=iB3yKYkeYyDrDIf8ueByHA Contact us: [e-mail]  Timestamps Markel | (5:45) Who's the Customer | (16:29) Private Equity | (26:59) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. This is our Thursday deep dive episode where we interview analysts or experts on a single stock to help listeners understand the ins and outs of the business and its potential as an investment. Today, we have on Bill Mann. He's the director of small cap research at The Motley Fool. And we discussed Markel, which is a bit of a, I guess you could call it a conglomerate, but really has its roots in the insurance industry. What did you like about the interview? I liked talking about their different insurance initiatives that they're going through. It's not just standard insurance. They got a lot of different things. So Bill explained what they're trying to do, how they're trying to grow their business, what the companies

they've acquired are, and then going through the strategy with Markel Ventures and how it all fits together with the flow from the insurance, how they're using it to buy operating companies, similar to the Berkshire Hathaway model, but smaller, and there are some nuances to it. Yeah, yeah, I do. It gets the Berkshire comparison all the time. And I think listening to Bill, you can understand why. But before we get to the interview, we want to talk about our sponsor for the episode. It's Quarter. They are an investor relations app for your phone. So basically, you've got frictionless access to conference calls, investor presentations, conference call transcripts, and earnings reports from companies all around the world. It's totally free. I am a

I'd call it weekly active user. I use it for conference calls while I'm driving. It's an easy way to listen, especially for companies you're familiar with, or if there aren't any other transcripts, it's an easy place to get them. They've got it up and they've usually got the transcripts up pretty quick. And so I really recommend downloading it. You can also request companies if they don't have them. I think they pretty much have everyone I've looked for lately. So it's a very extensive library and it's Q-U-A-R-T-R. There's no E at the end there. So Q-U-A-R-T-R. They're on Twitter. You can find them on the App Store or you can find them online. So go ahead, check them out. Reminder, it's Q-U-A-R-T-R. Without further ado,

let's get to the interview. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. okay today we are welcomed by bill man he is the director of small cap research at the motley fool he's held various titles at the motley fool let's before we get we're talking about markel today but

before we get into that for anyone that doesn't know bill man kind of give us the thumbnails of your career you've been at the motley fool for a long time kind of when when was the start of that And how what else what else do should listeners know about Bill Mann? It's super nice way of you to describe me as being 364 years old, first of all. So how are you guys doing? Pretty good. Yeah. Great.

Great. So I probably the the the the arc of my life is I've been at the Motley Fool since 1999. Prior to that, I was in telecommunications. I was a partner in a little telecom firm that was providing back office services to a lot of the big carriers. And so by back office, I mean, we were helping them set up networks in the garden spots of the world. So I was working in Lagos, Nigeria, and Karachi, Pakistan. I was in Beijing in 1996, Jakarta, places like that. So, when you're working in places like that, a lot of times when you get into the hotel in the evening after a long day, you're not like,

hey, I'm going to go catch a movie. You're in Karachi, right? So, I was goofing off on the full message port. That was basically what I was doing to entertain myself. I was doing mergers and acquisitions work in telecom, but I didn't love it. I didn't love the industry, but I loved the essence of The Motley Fool, the thought that any person is able to manage their own money, that being a long-term investor is the best way to go about as an individual investor of generating long-term wealth. And so I got the opportunity to come and work for The Motley Fool in 1999, and I jumped at it. And I've done a number of things for The Fool. I worked really with Tom Gardner for most of my time at The Fool. I would describe myself as not a traditional value

investor. I mean, whenever you hear someone say value investor, you think almost instantly to like, okay, they're, you know, they're analyzing like rock companies or, you know, or cigar butts, cigar butts, that type of thing. I, you know, I, I view all investing that isn't momentum investing as some form of value, right? You're just looking, you're looking for anything where you have the opportunity to generate super normal returns over a longer period of time. So that's, that's me ish. And here I am talking to you guys and hope you're doing great. And where in that progression at The Motley Fool or in your career did you come across Markel? How did you come across it? What was sort of the first time? So it's funny. So a lot of people think of Markel. So Markel is based in Richmond, Virginia, $17 billion market cap company. And a lot of people describe it as being a baby Berkshire. And whenever I hear someone describe something as, hey, this is the next X, hey, this company is going to disrupt Disney. I'm instantly much more interested in Disney, right?

So when there are a lot of companies that sort of take on that mantle of having the next Buffett or being the next Berkshire Hathaway, you know, I tend to run as fast as I can away from, you know, from those companies and towards the companies they're being compared to. In this case, I actually came across Markel through an analysis of Berkshire Hathaway in a kind of an indirect way. There was a guy who had been at Berkshire for a number of years named Jack Byrne. And Jack Byrne had run the risk side of Geico for a bunch of years. And he's the father of Patrick Byrne, who's the CEO of Overstock. Jack Byrne passed away about a decade ago. He's a tremendously talented guy. But he left Berkshire and he went on to run a smaller catastrophe insurance company called

White Mountains Insurance. and they in turn owned part of a reinsurer called Montpelier Re. And so I was talking to the CEO of Montpelier Re and I was talking with them about their linkage to Berkshire. Cause I, you know, to me as an outsider, I was like, okay, Buffett owns part, you know, Berkshire owns part of White Mountains. White Mountains owns a big part of Montpelier Re. So obviously there's a flow through and he looked at me like, we don't have anything to do with Berkshire. But if you are interested in Berkshire, you should talk to these guys over at Markel. You should look and see what they were doing. So it was actually a linkage directly from Montpelier Re that had me doing that.

And the super interesting thing about this to me was this was early in 2005. And 2005 became a real watershed year for insurance companies because that was the year that we had the KRW hurricanes. It was Katrina and then Rita and Wilma. And Katrina is the one that people know most intimately. And then after that, you watch the companies within the insurance industry that held on the best, that were immediately pricing risk. And at the top of the list was Markel. So that was basically it. I don't know if you guys just asked me a five-second question i went on for 16 minutes i'm sorry no it's okay it leads right into the next one right okay good good i guess what uh for anyone that doesn't know what is markel and what's allowed

it to be such a great performer over the years i think i think it's more than a hundred bagger it's just it just crossed actually i was checking out the long-term chart for research in this show it's just crossed the 10 000 percent uh all time return so so that's pretty good yeah it's not bad That's not bad. That's not bad. So I don't know if I should talk a little bit about the structure of insurance in general first, but insurance is an industry, has a number of different layers. But the basic insurance company model, you find success as companies that have capital, they have incentives, and they have a culture that are aligned with each other. And there are very few companies that I've seen that are better than Markel at solidifying those things, which is why they've been able to generate returns like they have over a long period of time. The company has actually been around since the 1930s. In 1930, his first name…

Sam. Thank you. It was Sam. I heard this story from a Tom Gainer interview recently, and it's so cool. Yeah, Sam, yes. Yeah. So he started – he was in Norfolk, Virginia, and he began writing insurance for jitneys, which at the time were these probably tremendously dangerous, somewhat not official ways that a lot of people got transported at the time. You move locally from city to city, you would use these jitneys.

And so they couldn't get insurance from anybody else. So he started writing insurance for them and then moved into trucking, which is another area in which none of the big installed insurers were writing policies at all. So this began a theme, and it became known as the Markel way, and it has been entrenched, is that their basic strategy is to write policies, write insurance for parts of the market that are hard to price, where there's not much competition, and where there are potential for huge losses, which sounds a little bit off. But I mean, that's what insurance companies do. I mean, they are insurance companies are a bet against misery, a bet against bad things happening. All right. And that leads us to the next segment here. There are three different parts of Markel's business that they outline insurance investments and Markel Ventures. We're going to hit all three first. Let's just finish up on insurance. I think you already described what a specialty insurer is, but specifically for anyone looking at Markel, what are the key metrics to track? And they recently talked about this ILS thing. I don't know if you want to hit on that as well, because that was a big thing in their annual letter.

It was a big thing in their annual letter. And so maybe I started to talk about the structure of insurance companies before, but this gives a little bit of a sense of who Markel is. Markel specifically writes liability insurance, so excess loss. They're writing insurance against catastrophes from small to massive. And the way insurance companies work is that you've got the mainline insurance companies. But then insurance companies, because they are worried or they need to consider what their exposure is in a larger basis. Let's just say things that they didn't think were correlated or suddenly correlate to one because of some big event, they will have a reinsurers. And then the reinsurers will have a separate reinsurer for the reinsurers

called retrocessionaires. And the retrocessionaires take in a lot of money expecting never, ever, ever to pay out anything because you have to get to like $25 billion in a single event loss before the retrocessionaire will pay, but then they'll pay 60, 70, 80, 90% above that. The KRW, the 2005 event really changed part of the catastrophe industry for insurers because the retrocessionaires failed. One in particular was a company called PXRE. It was based in Hamilton and Bermuda. They just simply weren't prepared for the amount of capital that they were going to have to pay out based on these events hitting one after another after another and the amount of losses that they that they had to take on. So that's, that's a little bit of a primer of the, of, of, of the

insurance industry. Now, anybody who's in this segment right now is like, this cat doesn't know what he's talking about. I'm trying to make this simple, you know, so we can, you know, to, to give an understanding of the basic structure. So one thing that, that, that Markel started doing after they, you know, after really 2005, but they've really gotten into it starting in about 2017, where something called insurance-linked securities. The ones that are most well-known are called catastrophe bonds. But, you know, so a catastrophe bond basically is, you know, I as a financial investor will come in and I will buy a bond against a catastrophe happening, right so basically it's you know basically it's a way of financializing an event that has not yet

happened so you buy you're betting it's not going to happen you can go either way actually okay you can actually go either way right like it you know it's it's it's it's almost like you know it's almost like you're walking into the horse track right and you know and in the first race there's tornado in kansas you know and you know and so you so what ends up happening is that it creates a lot of, it creates a lot of excess capital. Excuse me, let me rephrase that. It creates a way for insurance companies to lay off a little bit more of the risk, right? So they get the capital in for the bonds that they've sold, and it allows that risk to be spread out amongst financial investors. So they figured out, Markel figured out that, you know, that this was a pretty good

business for them and that they felt like they were going to have the capacity to write insurance linked securities in a way that didn't really create, that created a lower level of overall risk for them while they're collecting premium. And so that, you know, so they have done a couple things. One is that they've created kind of a marketplace for, you know, for ILS. And then also, you know, they are, you know, they're writing the policies. So it's like securitizing their liabilities in a sense. And other people's. Exactly. Yeah. But not just theirs, right? It's not just theirs. They've turned it into a bit of a clearinghouse where, you know, it's not just their, uh, policies. It's for you credentials to advance confidence, to stand out in your career

at Regent university, you'll join more than 30,000 world changers, making a difference in high demand fields, pursue your bachelor's masters or doctorate online or on campus in Virginia beach. Your degree from top ranked Regent university is waiting. So is the world you will elevate say yes to your purpose and position yourself for a brighter future. visit regent.edu slash learn more regent.edu slash learn more so how meaningful is that ils segment for markel and then a second question who who are buying these bonds i can't imagine that it's like like an individual investor no no no yeah that's all it it'll it'll be financial investors so um so markel is excited enough about the business that they've gone out and they've

They've actually bought in 2019, I believe they bought an ILS fund manager called Nafila Capital. So Markel believes that this is going to be a really, really, really important business for them. They had revenues of $92 million in 2018. They believe it's going to be much, much, much bigger for them. You know, it's in some ways, you're talking about something that is a perfect Markel business. This is hard to do. It's hard to price these bonds in a way, or these securities, I should say, in a way that you're not creating additional, you know, too much risk on one side or the other. And so it's, this is a multi-year process for them and they've taken it pretty slow,

but they think that this is going to be a massive, massive business for them. And they want to be one of the leaders. When did you say they started doing this? They had, they acquired a company called State National Companies in 2017. And so that was, that was kind of the beginning of it. okay and can they securitize anything like like pretty much anything they're insuring or is there like like i guess like is that regulations or yeah i'm just trying to yeah i'll apply to all the industries like like like almost everything else in finance in in uh the financial world and

insurance companies are very much you should think of them first and foremost as financial companies uh i mean that's pretty pretty heavily regulated but the you know but so i i they're they want to broaden the types of risks that they're that they're underwriting uh with with uh with ils capital but i don't think that they're going to make a single step until they feel like they've got the knowledge base to do so i mean i and i and i say that not having not having really talked with them about this, but that's, that, that, that's been the Markel way that that's been their process. Yeah. That moves slow to move fast. Exactly. They are not a move fast and break things, uh, business, uh, in, you know, in, in the financial industry that could end up

breaking, you know, your entire balance sheet. Yeah. So yeah, yeah. That's a good thing in financials. So with that, so with that float that they generate from their insurance business, say they're they're using that to i guess reinvest in different areas investment or they call it investments but their investment portfolio being one of them it looks like they're required to file a 13f so i kind of looked on the holdings yeah first first of all what do you think of the their investment portfolio broadly and then when i when i see them owning berkshire it feels like this conglomerate inception like it feels like weird to own like another conglomerate does that make sense at all it totally does exactly it it it really does not just not just a conglomerate

but it is on some levels on a lot of levels a competitor right that's like kind of the Aji Jane stuff or no, or am I correct on there? Like that sort of like, okay. Well, I mean, I, I, I would say anywhere within, anywhere within the financialization of insurance, you can assume that, that, that, that Berkshire is, is participating or sniffing around, you know, they're, they, there almost isn't a type of insurance that that some entity at Berkshire

doesn't provide. So, I want to back up and make sure when we talked earlier, I mentioned that when you describe Markel as a baby Berkshire, this discussion is exactly why. Most insurance companies have a philosophy that they are going to get their risk on the insurance side, right? That their risk is, I'm going to write policies and we're going to try and eke out a profit or a breakeven on the policies. But the money that's sitting in our accounts that are other people's money, which is called the float, we're going to use that and we're going to invest in treasuries. We're going to invest in fixed income. Berkshire Hathaway sort of broke this model. There are a couple of others, Fairfax Financial being one.

But Markel, I think, is the other real practitioner where they take that float and they invest it in much more risk assets. And it makes them an entirely different beast from most insurance companies because they are taking on not just more risk, the risk of a permanent loss of capital, but also the risk of volatility, right? They know in an annual basis that they are going to need somewhere X amount of capital to pay out in the form of claims. But they're also saying over time, we are not so worried about the volatility of the assets we hold. We believe that the assets are going to provide more of a return over time, so we are willing to take that risk. And that makes them very different from almost every other insurance company. Okay. And that leads right into Markel Ventures. But I want a quick question here. This might just be a tiny one, but are rising interest rates bad or good for them for the investment portfolio? Because I think there's a lot of give and takes. If they have some of that fixed income, you know, if they're buying more of that now, that could be beneficial. But I don't know if you have any thoughts on that, of whether it's good or bad for kind of their easy investment returns for owning fixed income. So, I mean, I think it's pretty obvious that because stocks in general are valued on their future cash flows, that higher interest rates make future cash flows worth less.

So in the last three months, Markel had a $358 million loss with the line item, the account is called investment gains. So investment losses, they had $358 million in investment losses, which was basically just the change in the value of their portfolio. Like they don't have to take money out of the account. That's not being spent. It's just a loss because this is considered part of their operation. So, obviously, on that regard, having higher interest rates creates a little bit of a drag on their portfolio.

So, it's a little bit of a give and take. They do have another component of their portfolio that is a lot of fixed income, and they will be able to generate higher nominal returns there. So, it balances out. somewhat. Gotcha. All right. Let's move to the third one. That's Markel Ventures. This is another way, I believe, and you can correct me if I'm wrong here, that they're generating cash to make their overall balance sheet less risky. There's a lot of different companies here. Is there a specific strategy on what they're buying or is it just we see good value, we're going to go after it? I think it's a little bit of that. I don't want to dumb it down too much, but they

are looking for companies that have some form of edge be it local and if you look at the companies in their portfolio it really does look like berkshire you know berkshire light so berkshire has uh has acme brick uh you know um markel ventures has havco which is a you know which is a flooring company you know they've got a dredging company they've got home builders they've got building products they've got a handbag company called brahman i saw concrete as well Yes, concrete as well. Exactly. Exactly. Lift cranes. So, you know, try to try to try to contain your excitement. Right. Right. Like you're not talking about you're you're not talking about super cutting edge. But these businesses have some form of either geographic or branding or some other competitive advantage that Tom Gaynor and his team and the team at Ventures have determined that makes them worthy of investment at the prices at which they've invested in them. And these are, by and large, wholly owned companies.

So what's happening is that a company like Brahman, which is a handbag manufacturer based just outside of Boston, Massachusetts, they've been around for – this is their 40th anniversary, so not a fly-by-night brand. And so what Brahman has, what they get from the equation is that they get a payoff in terms of having the company be bought by Markel. Then they also have access to financing based off of Markel's balance sheet instead of their own. So if they want to expand, if they want to modernize, they have a pretty stable source of funding. and the Markel Venture people aren't standing over them going, what happened? What's going on? Why are you down?

Why are sales down? They're just letting them conduct their business. So they want to be a buyer of first resort for companies of this size, of this type. And so that's what they've done. And that's what Ventures is all about. here you are miles from home and ready to start your vacation good thing you're staying at la quinta by windham they have free high-speed wi-fi to stream all your favorite movies and in the morning get fresh waffles with their free bright side breakfast or squeeze in a workout at their

fitness center either way you're ready to conquer the day tonight la quinta tomorrow you triumph Book your stay at LQ.com. Okay. And the competition with private equity kind of, this is not a question we had written down. Given that there's, I don't know, some people are forecasting that the private equity firms are going to have a little bit of a tougher time

given their leverage and all that good stuff during this bear market with rising interest rates. Does that give Markel maybe more opportunities over the next five years? maybe maybe uh you know i would put the i i would say i don't know if you guys have ever spent any time looking at uh constellation software but i would put markel's i would put markel's philosophy very similar to what constellation software is it was fascinating company that you know the ceo is a man named Mark Leonard. Gandalf. What's that? I said Gandalf. Gandalf. Yeah, exactly. You know

what I'm talking about here. They're not really competing with private equity. They are, of course, in the same neighborhood. And so the fact that there's a little bit more scarcity of money out there looking for companies right now might be a good thing for them. But at the same time, Markel isn't looking to go in and become a financial investor of these companies and then send their army of McKinsey consultants in to figure out how to strip out, do we need cheaper bananas in the break room? Can we fire half the people? They are allowing these companies to operate almost unmolested by corporate. And for an entrepreneur who has built a company and it's his or her baby, there's something attractive about that, as opposed to completely maximizing something that you know that you will completely lose control over and that the buyers are looking to maximize every penny of return. They, in effect, are willing to leave a little bit of that return on the table in order to

have a company that they still get to operate without much in the way of input from a corporate headquarters and have access to the balance sheet. They have complete, complete is overstating. If a company really, really screws up, they're not going to have complete autonomy. But they have an autonomy because Markel takes on a decentralized approach. It's funny, like you hear Markel Ventures and you kind of wince because it sounds like, oh, they're running a venture capital arm. Right, right. It's the opposite.

Exactly. It sounds like Bain, right? It sounds like Warburg Benkes or Bain and not to talk crap about either of them because they've got pretty big wallets, but it is an entirely different philosophy. So, I would dare say that at the margin, and it's important to note, Markel, it's not like they own 630 companies. I mean, it's a pretty small roster. And so, they've been very choosy and very patient with the companies that they've bought. So, it might make it a little bit better for them. You know, it might push some, you know, push some operators who maybe wanted to, you know, wanted to hold on for a couple of more years to say, you know, for a lifestyle, I sure would like to have my life's work, you know, valued by someone else. But I don't really want to have to worry about looking for bank lines of credit anymore. And that's what's so attractive about this model for the selling operators.

Do they prioritize allocating capital to any one of these three segments specifically, or is it kind of just a broad-based approach? It's kind of a broad-based approach. They actually have – every tub has its own bottom approach. I mean, there's plenty of crossover, but what they will find, I mean, think about, you know, we just talked about the insurance-linked securities segment where they've gone out and bought companies. That's where they've been allocating capital. But, you know, they are absolutely willing to move from one place to the other to allocate capital where they see best. Right. And to sum things up on the business, and then we're going to move out and close things out with valuation management, gross written premiums and operating revenues are both up around 3X since 2013. They have pretty steady growth, at least generally over five-year periods in the annual letter from the tables I was looking at. What has enabled this growth? And maybe to add on, how do they do that over the next, say, 10 years? Some of it has been purchases of other insurance companies. In 2013, they bought another insurance company called Altera, and it was a point in time in which people hated the transaction and the stock got absolutely walloped. And I just had an opportunity to talk with Tom Gaynor and he said, did people think we got stupid all of a sudden? I mean, have we made all the right moves? And then suddenly yesterday I decided to become an idiot. So I don't think so.

So a lot of it for them has been bolting on additional insurance companies, additional lines. I know in ILS, we talked earlier, they're looking to do a lot more. They are, when we talked about at the beginning, we talked about incentives. And it's one of the most important things to understand about insurance companies in general, because insurance companies are driven by sales, same as anything else. You've got someone out there who's writing policies. If you have your incentives screwed up for your sales staff, you could incentivize them

to go and sell as much as possible without any real responsibility for worrying about whether it's a well-written policy or worrying about whether you are taking on too much risk. So if we are in an environment in which pricing for the lines of insurance that Markel is in, and it's a lot of them at this point, are soft, they're going to write a lot. They will write a lot of policies, and you'll see the policies in force explode. But if it's a hard market where you see money flowing in and trying to write policies and it becomes very, very competitive, they actually create incentives for their salespeople to sit on their hands a little bit. And that's a really hard thing to do because if you're in sales, you would like to get paid. And the primary way of getting paid is selling stuff. So I think it's the exact right philosophy that you want this company to be substantially larger five years from now.

But if it turns out that we've gone through an incredibly hard market where, you know, so, for example, hedge funds just plow money into writing reinsurance, which actually happened after 2005, they'll sit on their hands a little bit more and maybe look more towards building through venture and, you know, and things of that nature. they've they've been compared to berkshire hathaway a lot what do you think are the valid similarities and then what do you think are the differences well so uh the differences i think is i i think it is a very similar uh it's a it's a it's a very similar model uh if if if you think about how Berkshire uh formed it is it it was um Warren Buffett and then Warren Buffett and Charlie Munger and they almost had no real accountability to anybody else which sounds awful right yeah it sounds awful right the board the board very early on just said okay just just do we we trust you we've talked about it before and we're like if we saw berkshire in

like the 80s we'd be like 70s 70s or 70s we'd be like this is a corporate governance mess like it's a mess exactly we can't invest in this that's right that's right his son's on the board right like come on red flags everywhere so so now that i have now that i've i have indicted this model thoroughly uh markel's a family-run business right like so it was started by sam and then his four sons steve markel was the ceo for for a number of years two markels are on the board now tom gainer has been there since 1990 uh i think 1990 yeah 1990 exactly um there you know it is deeply a family-run organization. Richard Witt, who's the co-CEO, took over in 2016 and he's more on the insurance side. He's also a director. He's been in the company since

the 1990s as well. I mean, this is a company that has engendered a long-term loyalty amongst its executives and staff. And when you think about that, when you start to think about the names who are like the second order names at Berkshire Hathaway, it's the same. We mentioned Ajit Jain earlier. There was Tony Nicely and Lou Simpson. And these are people who could have gone off and done something else, but they stayed within the family. So very much the same. The difference between Markell and Berkshire, I would say, number one, Tom Gaynor would strangle you if you said, hey, he is their Warren Buffett. I happen to think that Tom Gaynor is a generational talent, but Warren Buffett is a millennial talent, right? And that is not in any way

denigrating the talents of Tom by saying that. But the other thing that I think is interesting, why Markel remains interesting to me is Warren Buffett has often said that there is no advantage in investing like having a lower amount of money. Having a huge pile of money becomes by itself an impediment to investing returns. In Markel and in Tom Gainer and in Markel Ventures and in their investment portfolio, you are looking at a company and you are looking at a person who has the flexibility of a smaller pool of money. And to me, that's what people who have invested in Berkshire after, say, the year 2000 have missed out on. Right. And an example of that, a company that we actually covered recently is Hagerty. That seems very Berkshire-esque. It would be meaningless

to them. But for Markel, I know the SPAC stuff, it's kind of weird how they're valuing it on the balance sheet uh it seemed super meaningful for them and they got to scoop that up while if buffett saw that business he probably would have identified the same sort of you know long-term opportunity but markel is the only way to make it meaningful no exactly that's and and and that's such an important it's it's such an important thing like i don't think that i don't think that the warren buffett of you know of 1985 not that this is going to make any sense whatsoever would have invested in the Apple of that time, right? Apple was a fat pitch for Berkshire Hathaway, but it was also a place where they could deploy enough capital where it matters. Hagerty, and I have no idea whether

Buffett saw it or not, would not have moved the needle under any circumstances for them. So I think he would have loved to collect it, but it's the kind of thing that means so much more within you know within the auspices of Markel than it would at Berkshire all right and oh go ahead they're also kind of in the sweet spot right now where they're large enough to be able to do the deals they want and have it in like actually have a meaningful impact at the same time yeah I think that I think that they're of a size where they are a meaningful player in whatever in whatever deals they might want to go after and I think you can see this expressed in we talked a little bit about the holdings in their investment portfolio.

But the largest holdings in their portfolio are Google, Amazon, Berkshire, and Brookfield Asset Management. These are big, big, big companies. So I think that they are expressing themselves through venture as far as that goes. They own a huge amount of, you know, they own big, big companies within the investment portfolio. Right. It's almost like they're not, it's not exactly like this, but it's almost like they're just

trying to index and get that, uh, the alpha is almost the, the float, you know, dynamics plus the Markel ventures, that sort of engine. All right, let's move to valuation. It's a tough one for Markel. And I think for anyone that's not really, really in the weeds here, you're like, okay, well, how do I even look at this thing? Um, how do you go about valuating, valuing a company like this, a complicated conglomerate? Is it just book value per share?

What do you do? It's pretty much just book value. And I think with any financial company, really the limit that you would want to put on them is you want to try and buy them for around 1.2 times tangible book value. Now, Markel is currently trading at about 1.9 times tangible book value, which, break out my calculator, is more. That's more than 1.2 times. The difference I would think for a reason why I would still be willing to be a buyer and a holder of Markel at a much higher book value rate is one, because of their capacity to take on risk on the investing side. And two, because their insurance results are unbelievable. So there's an insurance term called the combined

ratio. And so a combined ratio is essentially how much a company is, you know, how much a company is earning from their insurance, you know, from their insurance activities. So their combined ratio this last quarter was 89. So 100 means that all, you know, so 100 means that all of earned premium is taken up by incurred losses and expenses. 89 means that you got an operating margin of 11%. You can look at some other insurance companies and you'll see combined ratios of 120, 130, which means, and they're done on a short-term basis, so it means that they're losing a lot of money. I actually think that Markel with a combined ratio that ranges between 89 and, say, 96 could take on more insurance risk and still be a very profitable

company, right? And that's because of the investments, right? The investment portfolio? A little bit of both. But if you think about, right, like, so there's a limit at which margin becomes great if you are failing to, if you are choosing not to underwrite insurance policies that would be profitable, right? If you've got an 89% combined ratio and you have a policy that comes down the pike and it is massive, but you think, well, I think we'll make 5%, which the reciprocal of that would be a 95% combined ratio, would you write that policy all day long? Right. Do you think that's more the nature of what they're insuring? or the fact that they like want to just keep a certain level of margin?

I think it's a little bit of both. And that's a good, subtle question. I think it's a little bit of both, but it is entirely why I think that you can be a little bit more libertine with your valuation of Markel than you might want to be with an insurance company that has combined ratios that are closer to the line and don't have the same risk profile on their book side. Well, and I mentioned Hagerty again, it's not represented in the shareholder's equity right now properly. So there's also that. Yeah, and that's exactly true, right?

The way gap accounting works, and I know this is going to lose every single viewer and listener that you have. So I apologize for this, but it does not necessarily do a great job at properly valuing assets. And so therefore the tangible book value may be deeply understated for companies that like, for example, buy companies and buy assets and hold onto them for 40 and 50 years. Okay. We've got two more questions. I know we're running a little long, so I'll try to make them quick, but I want to talk about management. You've been to the Markel brunch. You know, Tom, What do you think of the management team over there? And then I'll throw another kind of random one in there.

Your friend, Morgan Housel is now on the board. Yeah. What do you think of that addition? What do you think he brings to the company? Oh, he brings nothing to the company. Morgan?

No. Yeah. So, so first of all, I think it's really important to, to, look at the dichotomy of what Markel is. It's a family-run business, but it has also done a really good job at adding professional support at every level that they need.

So, I'll try and say this without insulting anyone either by name or by grouping, but they've gotten to the point now where the Markel way and the Markel philosophy is more important than almost any one of their actual managers. So Tom Gaynor, he's been there for 32 years. It's as if he's a member of the Markel family at this point. The way that he goes about things, I think, is mutually reinforcing with the way itself. Now, the fact that the company has co-CEOs, neither of whom are named Markel at this point, this is a different point in time than it has been in entirety in the company's history. So these are the kinds of things where where you could see a company go wrong.

I honestly, I have not seen them put a foot forward that was wrong. They have not brought in, you know, in Richard Witt, you're not talking about someone who's come off the street, come from a different company. They know full well what he, you know, how he feels about and how he applies the Markel way. That reminds me of Constellation Software a bit with the, their sort of philosophy and culture as well. Now, last question, Markel seems like

a very foolproof business, hard to lose money given their, uh, margin of safety and all their strategies. What could cause Markel to be a poor investment say over the next decade? Well, I mean, if you think about there, there, there's a very famous story, uh, that, um, that, that Warren Buffett tells about a salesman who wrote a policy in which a company collected about $50,000 in premiums, but what they were insuring against was asbestos liabilities. And it tanked the entire insurer because when you're talking about long tail insurance, there is always this sort of unbound risk. Surprises in insurance are never good. It just doesn't happen that, hey, here's a surprise. It's a whole box of additional money. It doesn't really work that

way. So it bears remembering that insurance companies can and do either get it wrong in terms of assessing risks or that the severity of the outcome of even a well-written policy can cause grievous harm to an insurance company. Now, I spent a little time at the beginning of our conversation talking about the modeling of the layers of the insurance business. None of it is a sure thing. It was very harmful to the the reinsurance companies that the retrocessionaires melted down in 2005. They could write bad policies.

I just I don't want to say I don't I don't see it. I am just willing to give them after after 90 years of what they've done and how they've done it, the benefit of the doubt. Right. I guess for any insurance company, you could always say some catastrophic surprise that they didn't see coming. Yeah, you could say some catastrophic surprise, but you could even talk about how a car insurer, like Progressive, for example, what if there is some localized event that suddenly impacts 500,000 cars? Yeah, right, exactly. it. Right. What if, and they're not properly positioned to handle it. Now, progressive, I think is one of the absolute best in the business, but that doesn't mean that that kind of thing is outside of the realm of possibilities for them. And the same is true

for Markel. All right. I think that's all the questions we have for listeners that want to keep up with you. Where's the best place to do that? So probably the best place to keep up with me is at The Motley Fool, of course, www.fool.com. Morning show, right? The morning show is pretty good, pretty fun. Twitter, I'm TMF Otter, and I drop all sorts of scurrilousness and poorly worded thoughts there. But those are the best places. All right. Well, I think that's going to do it. We want to remind our listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital, so clients may have positions in the securities

discussed in this podcast. Thank you all for listening. Thank you, Bill, for coming on the show. We'll see you guys next time. Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya, and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned.

And today, I'm still figuring it out. Somehow, things usually get worse before they get better. Apparently, that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem.