Markel Annual Meeting 2019 (Transcript)
Tom Gayner’s Opening Remarks
Tom Gayner: Thank you, Richie. Good afternoon. Please allow me to add my welcome to our 2019 annual meeting. Thank you for being here to celebrate another year of successful operations for your company. I’ve gotten just a few things to say today then you all will have the floor to ask questions of us. We’ll do our best to answer them and cover whatever you’d like to talk about as part of the official business of this meeting. Then we’ll follow Q & A with some drinks and some hor d’oeuvres downstairs. When the drinks are finished and the shrimp is gone, I hope we’ll all leave with a renewed sense of confidence and optimism for 2019 and beyond.
Tom Gayner: When I began to prepare for this day, I looked over my notes and comments from previous meetings. Since I have been to every Markel Annual meeting since the IPO in 1986 and been officially on the payroll since 1990, those years are starting to add up. A review of the decades shows meetings full of happiness and joy during the periods of obvious economic progress and meetings full of explanations during the periods where our progress did not seem so obvious. Needless to say, we’ve had both kinds but far more of the good than the bad and the long term story of Markel is one of great progress in financial and human terms. I’m confident that will continue to be the case.
Tom Gayner: Five, four, three, two, one. All right, well, I guess that’s about how many seconds I can go without starting to talk about the UVA National Basketball Team. As they might say on Sesame Street, “Today’s show will be brought to you by the number 5.” So please allow me to take five minutes or so to talk about the UVA Basketball Program and to suggest how their example might indeed relate to our goals at Markel. First, as UVA coach Tony Bennett described several years ago, their program is built on five pillars. One, humility. Two, passion. Three, unity. Four, servanthood and five, thankfulness. Were those five teammates on the floor the best five players in the country? Probably not.
Tom Gayner: But working as a team, guided by those principals, UVA just won the National Championship. With a program built on those five pillars, they’ve consistently been one of the best teams in the country in recent years, and I suspect that will continue to be the case. The path to their National Championship did not take place on a straight, uninterrupted line. I suspect the path forward, with several players moving on to the pros this year, will also involve ups and downs. Does this begin to have resonance for our circumstances at Markel? The UVA has an embarrassing blowup last year with the loss at the UMBC. At Markel, we had an embarrassing loss last year at CATCo. Life does not take place in straight, uninterrupted, ever rising lines.
Tom Gayner: As Tony Bennett said throughout the year and throughout the tournament, the UMBC loss served a greater purpose and acted as a fundamental building block in the path to this year’s National Championship. UVA learned from their experiences and mistakes and so do we. Here’s another set of fives talking about pertaining to Markel. When this year’s end annual report aggregated the discussion of our annual results to a five year aggregate, rather than the standard year by year recap, it did this to provide a tool and a technique to try to help us remain focused on the long term. In the most recent five year period, we reported $29 billion of revenues compared to $14.2 billion in the previous five year period, an increase of over 100%.
Tom Gayner: We earned comprehensive income of $2.6 billion compares to $2.2 billion, an increase of 18%. And the year-end share price rose to $1038 from $580, an increase of 79%. I would expect the percentage increases to be more similar to one another in the future and I’m very optimistic about what the next five years might hold. I thought the five-year numbers provided a better perspective than the traditional year by year descriptions, show how well things are going around here. I’ll also remind that we mean what we say when we talk about five-year time horizons, since our extent of compensation calculations are based on the five-year results. The next set of fives I’ll refer to are the five strategic platforms of Markel that we listed in the annual report letter.
Tom Gayner: They are as follows. One, insurance and reinsurance. Two, insurance-linked securities. Three, investments. Four, Markel ventures; and number five, our mindset. If you remember only one thing that I say today, let it please be this, our mindset is our number one strategic advantage. Our specific businesses will wax and wane over time. The pace of change continues to accelerate. We must always be willing to adapt to change, to embrace what’s new and valuable and to let go of that which is fading away, no matter how lovely or comfortable it once was. Our people will change over time as well. The fact stands that all of us are mortal and that Markel should last long past any one of us personally.
Tom Gayner: What needs to survive in order of us to build one of the world’s great companies, to win championships, to be consistently among the best year after year is for our mindset, the Markel style, to endure over time. I want to thank my colleagues for what you do each day in each part of this company to embrace, build, learn and teach our mindset, the Markel style, every day. Thank you. If we continue to do that and stay true to that idea, we will indeed build one of the world’s great companies. Now, that is not easy. It’s an all-consuming task but it is a life of joy and one worth living. Think about this task with me along the five pillars, laid out by Tony Bennett, the UVA basketball program.
Tom Gayner: One, humility. What we are trying to do is hard. We have and will make mistakes along the way. Arrogance itself causes mistakes and it makes them worse when they do happen. Humility in and of itself helps us to recognize when we’re on the wrong path. An attitude of humility also helps us to deal with the psychological trauma of admitting a mistake and making a change. Let’s remember to always be humble and kind as we do our daily work and with each and every person we meet every day. Two, passion. This stuff’s fun. As a kid, I shot a lot of baskets. I practiced a lot of layups and foul shots. Sadly though, my basketball career came to an end at the conclusion of eight-grade church league after a non-distinguished career as a bench warmer.
Tom Gayner: There was nothing I could have ever done to become a professional basketball player. Trying to find my passion as a basketball player did not work. Today though, at Markel, I’m a professional and so are you. We get to work with our colleagues, our customers, our vendors, our partners, and others and we get paid to do it. That’s fun. What we are building is worth it. When I joined Markel we had about 350 people. Today we are 17,000 plus and more on the way. I find passion and fun in being part of something so good that does so much for so many. Three, unity. We talked about diversification and specialization in the very first annual report in 1986. We have diverse businesses run by diverse people with diverse customers in diverse places all around the world.
Tom Gayner: Those businesses are run by specialists who are experts at what they do. We are united by our values. All of our diverse and specialized skills, personalities, efforts and stories combined to produce the overall results at Markel. We each benefit from being on this team, which combines all of our efforts to produce results that far exceed what we could accomplish as unconnected and disparate individuals. All of us need the best efforts of everyone else in order for this to work. Markel began as a team sport. We all depend on one another. Never forget that. Four, servanthood. The older I get the more I’m able to embrace the idea of servanthood and doing what I do for others, not for myself or solely for my own point of view.
Tom Gayner: By the way, even if you’re trying to do things for others and you completely surrender to yourself to that idea, you’ll end up achieving and accomplishing amazing things for yourself, at the same time, you will not be able to help them. Among the reasons for this outcome is some simple math. I’m only one person. I have only 24 hours in a day and 365 days in a year. If I multiply that out and get some quantifiable number of energy units to represent that, one times 24 times 365 equals 8760 of those energy units, 8784 in a leap. When you serve others though, other people start to serve you too. At that point, the 24 times 365 starts to be multiplied by some number greater than one.
Tom Gayner: There are roughly 7.9 billion people on planet Earth, if you can get any fraction of them to like you, to be rooting for you, to want to see you succeed and to not hate you, you will be amazingly better off. 7.9 billion times 24 times 365 multiplies out to 69,204,000,000,000 of those energy units. You don’t need to get to the max number of those 69 trillion units compared to your personal 8000 to beginning to enjoy the fruits of serving others. Serving others compounds over time. It multiplies, it works. Let’s embrace that idea. And finally, number five, thankfulness. Take a moment. Close your eyes. Imagine all of the people and circumstances that led you to being right here, right now.
Tom Gayner: I, for one, an so thankful. I hope you too enjoy a great sense of thankfulness and of joy for the conditions we find ourselves in right now. I hope you will join me in accepting and embracing the challenges the future holds, that you will do your best to make that future better and that you will be thankful and joyful each moment along the way. Thank you.
Tom: It is a privilege now to ask any questions that you have. All of us are able to address anything you want to talk about. There are microphones set up. I am completely blinded by the light. None of us can see very well, but if anyone makes their way towards one of the microphones and has any question they wish to ask, we’d be delighted to answer them. We’ll pause for a moment. And tell us your name when you ask a question.
Tom: All right, I see somebody coming up. High-color redshirt.
Josh Goulding: Mr. Chairman, my name is Jason Wheeler and I represent a corporate union pension fund that holds chairs in Markel Corporation. Carpenter pension funds collectively add assets of $60 billion and hold 39,000 shares of the company’s common stock.
Jason Wheeler: Mr. Chairman, a topic that has received a growing common interest in the business press and at leading business schools is the growth in the size of the ownership interest settled by mutual funds, particularly passive index funds.
Jason Wheeler: BlackRock and Vanguard each own in excess of 5% of the company’s outstanding shares. Could you speak to your view of the growing concentration of institutional investor ownership and its impact on corporate governance? Specifically, does the increase in concentration of ownership by passive investors aggravate short-termism in the market? Or, alternatively, enable companies to take a longer-term strategic perspective?
Jason Wheeler: Also, are there potential conflicts of interest issues that average shareholders should be concerned about given that these same investment companies are involved with the administration and investment through both corporate retirement funds at companies where they hold large ownership positions? Thank you, Mr. Chairman.
Tom: Thank you. I’ll go ahead and try to respond to that. The nature of the questions regarding the growth in indexing, that is something outside of the walls of Markel. So, it’s not something that we would have any control over whatsoever.
Tom: Your facts are absolutely correct. They are growing shareholders; they own more Markel shares than they used to. We have de minimis communication with them. And that would be at their instigation as opposed to ours. Historically, there was essentially zero communication because we were part of an index, and by definition, that’s what they bought.
Tom: As such, the degree of engagement we have with them is relatively limited and there’s not that many things that they want to talk to us about. We do maintain deep and robust relationships with the active shareholders, who’ve made a conscious choice to own Markel, many of which are associates, employees, retirees, and long-term friends of Markel who are rooting for this business.
Tom: It’s something we’re aware of. I can assure you that we don’t change our long-term views of the business no matter who owns the stock. Whether it’s done passively, whether it’s done through mutual funds, whether it’s done by all of us, collectively, as fellow employees and individuals. Whatever.
Tom: Our goal, which is completely independent of what happens outside us, is to build one of the world’s great companies. And we welcome them as shareholders as we would welcome anybody of any category.
Tom: Thank you for your question.
Josh Goulding: Hello, my name is Josh Goulding. I work with 4J Wealth Management.
Josh Goulding: Thank you. What do you attribute most to the slow down in book value growth over the past five years relative to the previous five year period? Is it an industry-wide effect or something unique to Markel? If it is unique to Markel, what changes do you plan to reignite that book value growth?
Tom: Right. As Jeremy mentioned in his results, book value was a spectacular tool to describe the comprehensive economic performance of Markel for all of our history up until the beginning of Markel Ventures.
Tom: As Markel Ventures becomes part of the company and as it becomes a more robust part of the company, that set of businesses is not well described by book value. It’s really described by the cash-flow that it generates.
Tom: So, we have changed our incentive compensation practices to recognize the fact the stock market, while not perfect at explaining the price every day, over the years gets it right-ish. And we think that is a better measure of what our underlying economic performance is. That’s one point.
Tom: Second point, interest rates, in general, have been trending down for quite some time. And the real rate of economics that we’re producing for our shareholders, basically is whatever the core rate of interest rates are and then whatever we do on top of that.
Tom: So, when Richie and I started at Markel thirty plus years ago, I think the base rate of return in government 10-year bond was eight, nine, ten percent, something like that. Today, it’s two and change. While nominally, the number that represents sort of our annual returns would be lower, I would suggest, as our retiring board member Al brought us, might add, look at things in real terms as opposed to nominal terms. Back out with the base level of interest rates are. We are producing excellent, real returns for our shareholders.
Tom: In terms of going forward, or reigniting, we will do the best we can going forward, as we have in the past. But we would also ask you to track the cash-flows of the business as well as the book value. The book value is part of what is happening at Markel, but there’s more that’s happening these days.
Tom: And the last point I will make is that, as Jeremy mentioned also, there are five pretty major transactions that we’ve done over the last couple of years. And they were paid for with the cash resources of the Markel Corporation without having to get external finances. I am trained as an accountant originally and the cash money, follow the cash. You know, we had the cash to buy those things.
Tom: The way purchase accounting works, in the early years when you buy something, you’re advertising and expensing a lot of things that were related to the transaction and the purchase that don’t relate to the ongoing performance of the business. It takes a couple of years after a deal, before that effect starts to burn off. This is a longstanding feature of Markel in our initial public offering back in 1986. Pretty sure it was thereafter we bought Shand Evanston in 1987. We can show you old analyst reports which talk about how our earnings are depressed by amortization charges. It was a great deal, but the accounting gets obscured in the early years of an acquisition.
Tom: For all of those reasons, and I’ll invite Richie or Jeremy to chime in if they wish-
Richie: You know the other thing I’d add, Tom, is our ILS businesses as well as State National’s program service businesses, you would look at cash-flows on those businesses as opposed to a book value.
Tom: That’s correct. Same mindset as Markel Venture Business.
Nicolas: Hi, my question’s regarding ILS.
Tom: And tell me your name?
Nicolas: My name’s Nicolas. I’d like to thank you for putting this up. We’ve come all the way from Brazil to be here. My question goes towards ILS and cat bonds and the increasing investment that Markel has been doing in this field. And from my understanding, in some way that competes with the traditional reinsurance operations.
Nicolas: If you could point to relative strengths and weaknesses between traditional reinsurance and these new forms of financing reinsurance and how they work well together inside of Markel?
Tom: Thank you for making the journey and I’ll let Richie…
Richie: Nicolas, you’re absolutely right. ILS does compete with the tradition reinsurance and insurance markets more and more. As we saw the growth of ILS over the last several years, we recognize it had a place in the market. I think some people were hoping it would be a fad and go away. But the reality is it just makes way too much sense to transfer certain peak risk further than just the cap of the base of the insurance industry.
Richie: As a result of that, you get more efficient pricing because you’re going to the lowest cost to cap it at. We saw it and recognized that it was here to stay, it’s something that’s going to grow and it’s something that we felt we should have a place in.
Richie: Strengths of it, of course, are just that. It accesses the broader capital markets. You can access lower cost of capital because you’re spreading that peak risk. Some of the, maybe weaknesses, that people have talked about is sometimes there’s not rated paper or a highly rated insurance company in front. But I think for different methods, that’s been addressed.
Richie: The way I’m thinking about it, and Tom can jump in here as well, ILS is going to become a bigger part of risk insurance, risk transfer as we go forward. That doesn’t reduce the importance of our insurance for our reinsurance operations. Each of them has their place in the market as they go forward. But we could see that ILS was going to become more important as we move forward.
Tom: Yeah. Thank you. I will add that everything we at Markel is meant to be additive. What we do does not take away from what we’ve already done. It adds to it. And as we wrote in the annual report, I think this is one of the most important strategic initiatives we’ve ever done.
Tom: The position that your company occupies right now of being able to be a comprehensive provider of risk transfer solutions, and I’m using those words exactly as opposed to just saying insurance. Because we’re already doing some things in weather and climate-related type of risk transfer that you might not think of as traditional insurance that are facilitated by our abilities and skill sets that exist in ILS.
Tom: So, a little rough out of the box. We understand that, but we are long-term people and we are very excited about what the ILS business adds to our insurance business, our reinsurance business, and all of the other businesses that exist at Markel.
Tom: Yep, okay.
Martin: First off, my name is Martin from Chevy Chase, Maryland. Thank you and thank all the Markel associates for having us here to meet the company and ask questions of you all.
Martin: Since this is a UVA themed meeting…
Tom: My partners weren’t aware of that before it started.
Martin: I’m sure.
Tom: I think they smelled something when they saw the orange Brahmin handbag up there.
Martin: I wish I’d known about that last thing before Mother’s Day, but that’s okay.
Tom: You know, it’s for sale. 15% off.
Martin: And I know Tony Bennett learned a lot last year after the loss to UNBC. Since the inception of Markel Ventures, would you let us know as you’ve learned about making acquisitions and how you look at them now versus how you did just a few years ago?
Tom: Thank you. You know, Markel has a history of making acquisitions that long predate when we started on making Markel Ventures. Steve Markel was the primary architect of the deals that built this company. All along the way, the Terra Nova deal, the Alterra deal, and all those small ones that went along the way. I think Steve would be the first to acknowledge, and I use the word acknowledge rather than admit, that all and every one of those had some surprises to them along the way. We did our best to anticipate, do thoughtful due diligence, but at the same time there was always something in each and every situation which we had not anticipated prior to doing the deal itself.
Tom: But I will also say, and I think, Martin, you were in Omaha. I quoted my favorite author, Mark Twain, who says, “A man who picks up a cat by the tail, will learn things about a cat that you can learn in no other way.”
Tom: One of the thing that excites me and is so much fun about being at Markel is the challenges are coming at you. You can either cower and try to avoid them or be in denial. Or you can try to figure it out. The world is coming at you.
Tom: The history of this company is that we try to figure things out and catch things and figure out ways to grow and find an attractive business to buy. What we have learned at Markel Ventures, really is a continuation of everything we’ve learned on the insurance side. It’s the same people, the same mindset, the same sort of diligence process, the same sort of weighing of risk-reward. What good could happen. What bad could happen. And try to make rational, thoughtful decisions to make sure that Markel, in general, Markel overall, Markel in aggregate, becomes a more profitable, more robust, more resilient, more sound company with each and every acquisition that we buy.
Tom: We think that that actually helps both sides and all sides of the business because of the heft and the balance sheet size and the profitability that we’ve accumulated in the insurance business that helps us do ventures deal. As ventures continues to grow and make money, that helps the heft to credibility and market place presence of the insurance side. If we were constructing it in a win-win way, and I promise you we will continue to make mistakes, but please root for us to do that because if don’t that means we’ve stopped trying. That would be a bad outcome.
Richie: Tom’s comments were perfect earlier. One of the big things you learn doing acquisitions over almost thirty years is humility. Some of those didn’t start out as well as they ended up. We had to put a lot of sweat equity into a lot of those acquisitions to get them to where they are today. A number of them are, quite honestly, crown jewels at Markel. So, humility is a big thing cause, as Tom said, you will make mistakes. You’ve got to learn from it and apply it to the next thing you do.
Tom: Yes, we can’t overstate humility. As someone once said, you know, if you use the wrong word you, need to have the humidity to admit that.
Mark Morris: Hi, Mark Morris is my name. I’m from New Orleans and I’m really happy to be here. I notice, before I ask my question, that the bag kinda looks like a bullhead from down here. So, maybe it adds more value being Brahmin.
Mark Morris: My question’s for Jeremy. First of all, congrats on your promotion. You said in the earnings call that two of the UK subsidiaries were treated as USA companies and that’s why the taxes were over 200%. I was just curious what that’s about and why that happened?
Jeremy: Yes, sure. Many of you will know that we went through tax reform in the US the tail end of 2017. One of the opportune, tax reform’s been very positive for us, lowers fetched rate tax rate. Actually allows us to kind of more efficiently move capital amongst the group. Just allowed us to simplify our tax structure.
Jeremy: One of the decisions that we took was just to take two of our UK subsidiaries on the insurance side and treat them as US tax payers. That tax is actually mostly associated with recognizing deferred taxes on gains in our investment portfolio, that we hadn’t previously recognized with book purposes.
Jeremy: We only actually pay that tax from cash tax standpoint, as in when we were to exit those equity positions, we try pay that for long-term. As a result of doing that, it allowed us to take some of the capital that sat in our overseas operations, and move it sort of free of a tax charge to the holding company. That’s a lot of what we try to do in managing our operations is have that capital disciplined to be able to, flexibility to be able to move capital to the holding company, and then deploy that capital in the best way we see fit.
Jeremy: It was actually kind of noise in our financials from a rate standpoint.
Mark Morris: So, you’re saying there was actual money paid out for it?
Jeremy: No, no that was not a cash tax. That’s a book tax. That’s one of these things where we talk about accounting, if you will. It’s accounting noise within our books, but it’s deferred income taxes. So, again, not a cash tax. We’ll only pay that tax, and we held those positions in the equity portfolio, we just were considered to be permanently reinvested in those foreign subs. We had not yet recognized that through book tax purposes. Just an accounting when…
Mark Morris: Tom, can clarify that’s brilliance, but I’m not smart enough.
Tom: Ya know, both Jeremy and Richie and myself all started out as accountants. There’s nothing we love more than talking about accounting. Normally, prefer to have a beer in our hand when doing so. We’ll be downstairs with a beer in our hand and we’ll try to catch up at that point.
Tom: Any other questions?
Michael Patel: Hi Tom. Michael Patel, longtime shareholder. In your letter, you mention certain business alliance being available direct to consumer. I was wondering if you could address how you view the opportunity longer-term and maybe how that fits into your desire to manage the expense base lower?
Tom: Right. Let me direct that to Richie cause, while one can buy that Brahmin handbag online, I think your question predominately relates to the insurance business.
Richie: You know, we have distribution both direct, retail, wholesale, so we work through all the distribution channels today. The reality is probably our smallest amount of distribution today would be direct-to-consumer. As we continue to build out our digital capabilities, particularly in the smaller lines, personal lines, and small commercial lines. I think those are probably more… going direct to consumers, probably more possible there. Better possibility.
Richie: Digital is certainly going to help us in terms of distribution and truck some of the bigger risk. But likely, we will always have distribution through wholesalers and retailers. I don’t think, it doesn’t have to be one or the other. There always are going to be certain lines that lend themselves more to direct, or more to retail, or more to wholesale.
Richie: Certainly, as people know to mark their brand better and as we build out our digital capabilities, I think there will be more opportunities for us to go direct-to-consumer.
Tom: Great. Thank you. I think that finishes up our questions. We thank you for coming. We declare meeting adjourned and now we’re headed downstairs. Thank you.