So while it keeps up a pretty steady newsflow of people appointments and the like, the firm effectively escapes the kind of examination and scrutiny you see with comparably sized public companies like The Hartford, Everest and WR Berkley.
And as result, its distinctiveness to most of the rest of the insurance sector is only dimly appreciated.
With just the thinnest veil of secrecy, and a concomitant willingness to imitate liberally, the company’s ambition is to be Virginia’s Berkshire Hathaway.
That is a bold goal. And Markel is essentially in a category of one now in pursuing a Berkshire-like model following Alleghany’s decision to sell out to Warren Buffett last year.
Stepping back and examining Markel’s track record, the company has maintained a robust but not stellar underwriting track record, with manageable volatility, strong equities-driven investment performance and low double-digit growth. Give or take, it has compounded tangible book value by 10% annually.
It’s a good business.
However, the firm has made repeated missteps in its insurance M&A strategy, with a huge Wrong Side of History Bet on ILS in 2015-18, following on from a so-so deal for Bermudian Alterra and the challenged acquisition of Terra Nova.
Its US E&S business remains strong, but it has arguably lost something intangible that it once had (and Markel is a company that believes in the value of intangibles). Here, Markel chose diversification rather than doubling down just ahead of a Golden Age of US specialty. That choice was reflected in its decision to let Allied World – ultimately sold to Fairfax – go when takeover talks were held in 2016.
Crucially, the firm’s share price has underperformed since the Financial Crisis, lagging the stronger specialty insurers massively and also behind the S&P 500. Some of this likely reflects its desire to walk the Berkshire path of investor relations without the gravitational pull of Buffett, and some of the challenges of getting full value ascribed to its non-insurance “Venture” businesses when it reports as an insurance company.
There is value, too, in the approaches it shares with Berkshire. Most tangibly, the business has built a large retail investor following, which gives management greater latitude to pursue long-term franchise building.
Those with the sharpest suits and the sharpest tongues will continue to mock its shareholder letters in which the company says it loves its shareholders while quoting Paul Simon lyrics, or compares itself to basketball star Bill Russell. But there is a really strong culture running through the company, and there is value in that for stakeholders as well as satirists.
Long-time CIO, then co-CEO and now CEO Tom Gayner has also made a big allocation to equities for decades, and put up highly creditable results that show consistent outperformance versus the S&P 500, consistently generating capital to deploy back into the businesses.
Gayner talks in his shareholder letters about making Markel one of the greatest companies in the world. If it is possible for an insurance-focused firm to achieve that status, it should start with discipline on insurance M&A. And if Markel does choose to make a sizeable acquisition in the soft market when it arrives, it would likely be well served by playing closer to home.
It also ought to accept that one of the evils of being a public company is that you need to court Wall Street. It can – and should – continue with its 2,000-person annual meetings and folksy shareholder letters, but it is wrong to allow the share price to take care of itself. Particularly when you are a complicated story.
Last, it should take advantage of Richie Whitt’s retirement last year and the succession to Gayner and new president of insurance Jeremy Noble to think hard about unwinding the last part of its misplaced bet on ILS by finding a new home for Nephila.
In a category of one
One of the challenges of writing about Markel is that it is difficult to place in a peer group. Historically, the firm was bracketed with the larger US specialty insurers – namely WR Berkley and American Financial Group.
But in 2022, only ~65% of the firm’s revenues came from its insurance segment. It also has a far more international footprint than these businesses, with ~$2bn of London market business and more from other outposts around the world. US specialty is, however, the firm’s heritage, and even if it has diverged from the cohort over time, their performance is always going to be an anchor for Markel.
It could also be bracketed with Bermudians that have large insurance businesses like Axis, Everest or Arch – but it has a much lower weighting to reinsurance and a bigger share of US specialty insurance, and it has remained determinedly onshore.
The other option is to bracket it with conglomerates like Berkshire Hathaway and Alleghany, or to treat it as a kind of insurance-focused investor like White Mountains.
Perhaps the conglomerate is the closest fit, but Berkshire is effectively sui generis, and Alleghany is no longer an independent business. White Mountains also seems a poor fit because it is defined by its willingness to trade in and out of insurance assets – something Markel has not done.
Diversification is the crux
Markel’s strategy has fundamentally rested on the principle of diversification. Its US specialty/E&S-focused insurance earnings were initially bolstered by a total return approach that included an overweight exposure to equities.
This was supplemented from the late 1990s onwards by an M&A-driven expansion from that insurance core into the London and international specialty markets, Bermuda reinsurance, large account retail, ILS and fronting.
From 2005 on, a third leg was added to the stool, with a non-insurance Ventures business built through M&A targeted at family-run value businesses.
The other aspect of the strategy has been a dogged emphasis on building for the long term, with management focusing on multi-year performance periods over quarterly EPS, and preferring metrics like total value creation (TVC).
Closely tied to this long-termism has been a distinctive emphasis on culture – embodied in its 40-year-old value statement the Markel Style – and a non-typical approach to communication and investor relations.
Markel has a commitment to success. We believe in hard work and a zealous pursuit of excellence while keeping a sense of humor. Our creed is honesty and fairness in all our dealings
The need for integrity, an owner’s mentality and a family business-type approach is repeatedly emphasized, with a kind of appeal made to the power of old-fashioned Southern values.
Folksy shareholder letters geared towards retail investors and a ‘til-they-drop Q&A at an annual meeting tie back to this determination to be different.
So how has the firm performed?
Markel’s long-term performance is creditable – it’s a good firm. But its record has not rivalled the best in the business.
Its 10-year TVC narrowly trails its specialty peers on a 10-year basis at 11%, and its 15-year TVC CAGR is 9% – again short of US specialty peers.
Over these two periods, it falls somewhat short of the best Bermuda performers, with RenRe at 11% on a 15-year basis, and Arch at 12% on a 10-year basis.
Underwriting performance has typically bettered the US commercial lines statutory average, with a 10-year simple average combined ratio of 95%, two percentage points better than the market average, and around 3.5 percentage points better for 2018-22.
However, it has narrowly trailed WR Berkley, underperforming its combined ratio in eight of the last 10 years. Similarly, AFG outperformed Markel in seven of the last 10 years. Markel showed more volatility than both firms as well.
The business has grown robustly, increasing its net written premiums 9.7% over the last 10 years to $8.2bn – with NWP used to allow for the distortion of State National’s massive pass-through of premiums to reinsurers. WR Berkley grew only 6.2%, and AFG 6.4%. Much of the difference will reflect the Alterra acquisition, which added $1.9bn of premiums in 2013.
Gayner’s record in “looking after the money” has been impressive, with the company’s equity portfolio outperforming the S&P 500 three-quarters of the time over the last 30 years, often substantially.
When it comes to share price performance, Markel has delivered returns, but it has underperformed on a relative basis.
Its total shareholder return for the last 15 years is 303% versus 658% for WR Berkley and 844% for American Financial Group. It also trails the S&P 500 at 378%.
The last five years have been underwhelming from a share price perspective with the total return at only 27%, most of that driven with a strong year-to-date gain of 17%, with the firm again behind benchmarks over that multi-year period.
It also trails on its trading multiple.
Of course, it matters which companies are used to benchmark Markel. These are the stronger firms in their cohorts. Comparisons with US specialty insurers that have struggled like Argo or James River would tell a different story. But this is Markel – the right benchmark should be high performing peer companies.
Time periods chosen obviously matter, and if you take the longest possible view on the stock, it has performed better. Since going public in 1986, the stock’s total return is almost 13,000%, vs 2,300% for the S&P 500. Those early $8/share investors have done very well indeed.
Drilling down into three key areas
In the next section, I am going to look at three areas in greater detail: 1) The missteps in M&A; 2) E&S and the Road Not Taken; and 3) the attempt to be Berkshire without Buffett.
1. The missteps in M&A
Stretching back over multiple iterations of management, Markel has a weak track record of insurance acquisitions.
The firm’s acquisition of Terra Nova in 1999 for $830mn was a decisive move into the international markets, but the asset was not of comparable pedigree to its US operations.
Underwriting results have improved over time if the Lloyd’s syndicate is used as a proxy for the whole (Markel no longer discloses an international underwriting result). However, based on 10-year trailing performance, Markel’s Lloyd’s syndicate still sits in the red quadrant in the graphic below, indicating that it has been among the less profitable and more volatile performers in the market.
In 2012, it made by far its largest acquisition, acquiring Bermudian carrier Alterra for $3.1bn. Alterra had only existed for two and a half years before Markel bought it, having been formed via the merger of two small platforms Max Capital and Harbor Point.
The reinsurance business has underperformed on underwriting and is also only ~35% bigger now than when Markel bought it. The reinsurance unit only delivered an underwriting profit three years out of the last 10 and delivered combined ratios of 132%, 113%, 109% and 105% in its worst years.
While reinsurance has been a failure, the other main pieces of Alterra – a US large account retail business and Bermuda excess insurance arm – have performed better and grown well. There is no available public disclosure, but sources said Markel’s business through the retail channel has doubled in size in the last four years.
After Alterra, Markel inked three deals over a three-year period with a connecting thread that constituted the largest bet from a traditional player on the long-term prospects of the ILS market. This has proved to be a Wrong Side of History Bet to date.
“We are delighted with the early months of Nephila joining Markel, and we believe that the combined platform of Nephila, along with State National, along with Catco, along with our existing reinsurance operations, gives us the number one market position to meet the needs of buyers and sellers in this arena,” the company said in a shareholder letter in 2018.
It added: “As the number one player in this market, we have the advantage of more flow, and more conversations, about how we can meet the needs of buyers and sellers in this marketplace than anyone else. The ultimate size and scale of this idea could be one of the most important strategic moves we’ve ever made.”
The deal for number one retro player Catco unraveled with significant financial losses, but even more significant reputational damage for the firm that played out through an SEC investigation (in which it was cleared of wrongdoing) and a bruising court battle with investors. Even if the degree of excesses were not widely known, it was common knowledge in the market that Catco’s product was flawed and underpriced, with its investor relations also aggressive in its sales style.
Nephila was and remains a respected ILS franchise. However, at the time Markel acquired it at a significant premium to the cover bid, it had $12bn of AuM and an expectation of doubling in size.
Over the period of its ownership, the AuM shrank to $7.2bn, and this understates the size of the value destruction because of the fee compression that has hit the ILS market.
Rather than disrupting traditional insurers and spreading to an ever-wider range of products, ILS has faced existential challenges as performance nose-dived, investors lost confidence due to weak modelling and climate change, and collateralized structures proved disadvantageous.
Markel’s management team has held its hands up on both Catco and Nephila. On the latter, it acknowledged in its 2022 shareholder letter that returns have been “below expectations” and accepted that “the learning curve of ILS involved some big and painful bumps along the way”. However, it has insisted that it still expects long-term success and believes the ILS strategy future-proofs Markel.
It is no longer talked about in that way, but based on the initial presentation in the 2018 shareholder letter among others, it is clear that the $919mn acquisition of State National was the third part of the major bet on ILS.
As a fronting carrier, State National can act as a transformer for ILS money looking to access primary insurance risk via MGAs, and there were widespread expectations in the mid-2010s that this would become a major growth area.
State National has performed well, but it has been the right deal for the wrong reason. The company has grown rapidly since Markel acquired it because it picked up the business just ahead of a historic boom for MGAs supported by reinsurance capacity.
Since the business was acquired in late 2017, the fronting market has grown broadly 30% per annum. State National has swelled in size, growing from ~$1.5bn premium in the year it was bought to $2.8bn last year. Almost doubling in five years is major growth for the number one in a market – but the firm did hugely undergrow a market that increased manifold from 2017 to 2022, as State National shed share.
AM Best numbers for the size of the fronting market suggest that State National still had 44% of the market in 2020. Based on AM Best’s 2022 numbers, this was down to 27%.
State National is the best-run of the fronting companies, benefits from sheltering under a well-capitalized parent and may be well placed to profit from a post-Vesttoo flight to quality. But I remain a skeptic on the segment because it is impossible to eliminate tail risk, and counterparty credit risk can be sizeable.
All told, this amounts to a weak track record on insurance M&A, although it does seem like over time Markel has been able to improve the underwriting in the insurance platforms it bought.
2. E&S and the Road Not Taken
Veteran sources talk about the Markel US specialty business of the 1980s and 1990s as something really special – a home for the underwriter’s underwriter.
Sources said that it was a firm with star underwriting leaders that were looked to by the broader market. It was suggested that Markel was the E&S spirit distilled, with a willingness to quote any piece of business no matter how difficult or dirty, and a broader risk appetite than any other market – so long as it could get its price and terms.
Senior US specialty sources no longer believe that Markel fits that label. The external perception has shifted at peer companies, with a tendency to talk about firms like Kinsale and RSUI as the real standout performers. Markel does, however, remain widely respected as a strong underwriting franchise. The results also remain impressive with its largest E&S company Evanston putting up an 89.6% combined ratio in 2022, the fifth successive year it has broken 90%.
Markel passed through a project called One Markel to drive greater consistency in its operations and to ensure all its offices offered the breadth of its product set to customers. Some sources believe that this move to unify rather than to encourage a confederacy, as you see in other US specialty insurers, may explain some of the shift. But it may also be a natural evolution of the firm given its scale and breadth – in-and-out opportunism just becomes more difficult, and losing that is the price you pay for growth.
Markel’s US specialty business of the 1980s and1990s was something really special – a home for the underwriter’s underwriter
An example of the firm moving away from the E&S mindset is evident in its recent approach to cat property. Over the last few years, the company has pulled back on its property exposures after being burned by a multi-year period of elevated cat losses. This was most clearly evident in reinsurance, where it ceased writing property on its own balance sheet, transferring the portfolio to Nephila and third-party investors. But the group also went through a bonfire of cat limits on the insurance side and stressed the primacy of tamping down volatility.
Others in E&S – and reinsurance – have looked to lean into rock-hard property conditions this year. The true E&S spirit dictates running into, not away, from burning buildings. Markel, meanwhile, has only grown its property writings in a moderate way in the historic hard market that is the increasing cornerstone of the US specialty Golden Age.
Most importantly, however, in its major 2010s M&A, Markel chose diversification, rather than doubling down on its US specialty core.
Markel held serious talks with Allied World in Fall 2016 about a deal that would have significantly expanded its US specialty insurance and Bermuda excess insurance businesses, but discussions broke down around a culture mismatch. Allied sold to Fairfax later that year for $4.9bn.
Sources at the time also linked Markel with a move for US specialty insurer Ironshore, a deal that ultimately went to Liberty Mutual for $2.9bn.
The Allied World deal in particularly opens up a fascinating Road Not Taken for Markel, in which it bulked up in US/Bermuda insurance just ahead of what we have called the Golden Age of US specialty. (For background see: "US specialty: The shadows lengthen on the Golden Age”)
There is no way to fully grasp how material the change in fortunes of the firm may have been under this counterfactual, but it is clear that the firm would have looked very different today.
Of course, the moment the assessment is made also colors the judgment, and 2023 is still somewhere close to the peak on E&S sentiment. If we enter a brutal soft market and much of the business is repatriated to the admitted market, then expanding retail capabilities will look like a smart hedge. Even if that doesn’t happen, it opens up a much bigger TAM market.
And while wholesale brokers are vexed by Markel’s dual distribution, they have limited true wholesale only capacity – so it’s hard to see who can actually eat their lunch.
3. Berkshire without Buffett
They do not say it explicitly, but it is pretty clear that seeking to emulate what is best about Berkshire is one of Markel’s inspirations.
Kudos to the firm for aiming high when it comes to choosing its exemplars.
As you would imagine, given Berkshire’s remarkable success, there are positives to trying to walk the same road.
These include a long-term time horizon and an owner’s mindset. It also has an ethos that stresses the primacy of integrity, the need to treat all stakeholders fairly and a willingness to admit when it has made mistakes.
The shareholder letters are full of good sense. “Our leaders can make decisions with a consistent north star of doing what is right over the long-term. We’re willing to incur short-term costs and bend over backwards to take care of our customers and our people.
“We think that this constant, enduring, and consistent focus on empowering our people, and remaining focused on the long-term, produces wonderful and durable economic results over time.”
Markel’s work to bring in buy-and-hold retail investors that shared its values has been impressive. In 1991, the firm set up on the fringes of Berkshire’s annual meeting and held a coffee event to tell its story.
It has returned every year since to continue telling it, and in more recent years has built out its own annual meeting in Richmond which attracted 2,000 people last year.
It is not possible to exactly track the retail ownership, but “public and other” shareholders acts as a kind of proxy. Here Markel is at 18%, well ahead of peer companies, albeit still some way short of Berkshire’s 35%.
The greater scope that this provides management to pursue its long-term agenda is value accretive for the company.
Markel – like Berkshire – operates a total return model, with 40% of its assets allocated to equities in a portfolio overseen by its CIO-turned-CEO Gayner.
Gayner’s track record has been strong, and he has outperformed the S&P 500 over time, with enough earnings generated elsewhere in the firm to weather down years comfortably.
Equity markets have been extremely favorable over the last 15 years, so there are likely tougher tests to come for this part of the business.
Like Berkshire, Markel has also used capital generated by its insurance businesses to buy non-insurance businesses, creating a Ventures unit in 2005 when it opportunistically purchased a bakery equipment company based in Virginia.
The thesis behind the build-out of the unit – which typically buys 100% stakes in relatively small family-owned businesses – was that it provides a more diversified stream of earnings, buttressing the firm.
“The ongoing growth and maturity of Markel Ventures represents a valuable pillar of the long-term growth and soundness of the Markel Corporation. The cash flows from our Markel Ventures operations are somewhat independent of insurance cycles, interest rate movements, and public equity volatility.
“As such, the recurring cash flows from the Markel Ventures operations create optionality for Markel to have cash coming in the door from multiple sources on a relatively consistent and recurring basis.”
Maximizing the capital allocation options for Gayner and creating a more diversified portfolio makes sense on paper.
In practice, there are challenges. As the company has flagged publicly, the value of the assets is not marked to market as they grow Ebitda. As a result, the growth does not show on the company’s balance sheet, and it seems likely that there is submerged value here not fully recognized by investors.
Alleghany – which also built out a non-insurance unit – faced the same challenge. Indeed, the public market’s inability to price the portfolio of non-insurance businesses properly likely created the room for Berkshire and Alleghany to come to a landing on price for the deal.
In addition, it is hard based on the public disclosure to gauge the success of Ventures. The unit has grown rapidly, with a five-year revenue CAGR of 20% to reach $4.8bn. But it is not clear how much of this growth over time has been organic and how much has come via M&A, nor is it possible to track the performance of individual assets.
H1 provides some kind of lens on this for the first time, with no M&A distorting the numbers – and revenues up were up a promising 12.5%.
So, there is evidence of positive momentum on growth, but Ebitda margins are weak at just 11%. More detailed disclosure could help create more investor conviction around the segment.
Moreover, the unit’s success again turns on M&A prowess. Here it is a slight concern that the businesses skew heavily to Virginia-based businesses. This may suggest that Markel is not maximizing deal origination, and instead drawing heavily on the personal networks of its leadership team.
Investor relations feels like the aspect of the parallel which is most challenging. Berkshire’s success here reflects Buffett’s unique position as a finance icon and media magnet. That is part made by his results. And that is part made by the combined effect of his remarkable longevity, and the folksy Midwest persona crafted through his shareholder letters and annual meeting Q&As.
This allows the firm to get away with tapping out of typical Wall Street public company requirements like quarterly calls, and to put out comparatively threadbare disclosure.
He gets away with it because he is Buffett – but the firm is not made great by this idiosyncratic approach.
Markel has a clear narrative and strong financials which it could push harder if it chose to. There is no reason to stop the shareholder letters or call off the Berkshire-style annual meetings – but it would likely benefit from courting Wall Street in parallel.
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