Markel Omaha Brunch 2024 Transcript

This post contains the Markel Omaha Brunch 2024 transcript. In it, you can find the Q&A with Tom Gayner and the management of Markel.

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Introduction to the Markel Omaha Brunch 2024

[00:00:10] Tom Gayner: So it is my pleasure to welcome you today to the annual Markel Brunch. And I’m reminded by the fact that you know there were two years when things were virtual in Omaha, so things did not take place here and I missed them entirely. So this is my 34th year but a couple of them were indeed virtual and it reminds me of– At UVA, I was a member of the Beta house and the Beta house had sort of cycles of things going well and not well and losing their charter and gaining it back. And there was one particular event where the Betas got their charter back and we had this lovely black-tie dinner in the dome room of the rotunda.

It was a lovely event and on the program listing it said celebrating the 155th anniversary of Beta Theta Pi at the University of Virginia, and one of my fraternity brothers sitting next to me leaned over and said but not all consecutive. So we’re here for the 34th Annual Markel Brunch, and I very much appreciate you coming. One of the lines, and again, I tried to take notes furiously and accurately from the meeting yesterday and I look forward to watching some reruns and reading transcripts just to let some of the things that happened yesterday soak in more, but one of the quotes that just hit me was, “A celebration is an important part of helping people work together well.” That couldn’t be more right. So this is a celebration. Celebrate. Thank you so much for being part of it.

As for the history, I know a lot of you have been here for a lot of them, so I won’t regurgitate too much history, but I think they’re just a couple of points worth making. The first time we did this was I think 1992. I came here in ‘91 by myself and then in ‘92 I brought Steve Markel with me and you know, we started and we had six people at the first brunch and those were people that I just sort of knew from the investment world because I told Steve, I said the people who are most likely to understand what we’re trying to do are people who already own Berkshire stock. So rather than try to get them to come to Richmond, you and I go to Omaha and just start meeting people and look at what has happened in the foremost of time.

That first brunch, I think this Markel stock was probably $9 a share and we had six people. And if you did a calculation or a chart of the number of attendees and the price per share of Markel, I think the correlation is actually pretty good. So I think we might have 2000 people plus registered. I don’t want to make any forward-looking statements. We have our general counsel there, but you can draw whatever conclusions you want. Not the least of which you should remember the fact that for those who don’t understand the difference between causation and correlation the death rate is 100% either way.

But in that first brunch, and really, what we did was we invited those six people who came and we just said we’ll be here again next year and if you know anybody who might be interested in what we’re doing, please invite them. So it’s just this has been a word-of-mouth thing that has grown. So the six people. The other day somebody asked me, do you remember who those six were? And I could come up with five real quick, but then I did sit and think about it and I do remember the six. So one guy was named Peter Cayman. I met him at that brunch. I’ve not seen him since. I don’t know. If anybody knows Peter Cayman tell him I said hi and come back. I think he was from Boston. Roger Lowenstein. Was it that brunch? Yeah, Roger and I probably talk once every 12 or 18 months or so. Among the things he told me and I hope I’m not disclosing personal information was that for his son’s bar mitzvah, he gifted him some Markel stock. So I hope he’s holding on to that and doing well. And obviously, is a meaningful figure and a great writer of so many books. His cousin, Michael Lowenstein, was here.

John Brandt who many years you’ve seen up in the programme asking questions was here. A gentleman named Steve Farley was here and there’s one guy that was here then and he is here now because I’ve spotted him out of my left eye and that’s Chuck Hockrey. So Chuck, say hi. So any particular questions you have probably should ask Chuck rather than me. He would know. We’re very glad that you are here. We cannot do what we do without long-term committed investors. We have tried to chart our own path and do things outside the traditional ways of what the Wall Street system would have you do. This and our own annual meeting which Tyler would never forgive me if I didn’t plug is May 22nd in Richmond at the University of Richmond, the Robins Centre, www.mklreunion.com to register. You’re not too late. We would love to see you there.

But we need shareholders who are partners and we operate the entire business with that mindset in place that you are the capital providers for this business and you need to be treated well. You need to be treated as partners. We need to communicate with you. Everything we know in appropriate ways and make sure that if our roles were reversed, we would treat each other the same way. So we couldn’t do what we do without you and I deeply appreciate that.

On the panel here with us today, I want to introduce just a couple of people. Brian Costanzo, who’s our Chief Financial Officer, rose through the ranks since a Battlefield promotion and is doing a spectacular job. He’s an Omaha native. So the return of the native here today with Brian. Then Jeremy, Jeremy Noble, runs our insurance operations. Longtime 20-plus-year veteran of Markel also rising through the ranks. Big job on his hands these days and nobody is logging more miles or putting in more effort than Jeremy these days. So thank you for what you’re doing there. Thank you.

Andrew Crowley, to my immediate right as the President of Markel Ventures, has been with us since pretty early days, not the first day, but pretty soon after the first day he came and joined us to help build out Markel Ventures. So glad to have Andrew here and I’ll talk a little bit more about Andrew and his role probably through the course of things. Mike Heaton, who was pretty close to day one, partner in building out of Markel Ventures and is now the chief operating officer, the CEO of the Markel Group and the necessary structure, systems, and ideas that need to be in place for us to operate this business at scale. Mike is the architect and we heard yesterday what that means of how the Markel Group is set up and functioning, and he has my eternal gratitude for that. So that’s your panel upfront. But let me get to the people who are really more important, and that is the Markel associates and Markel Ventures associates who were here with us today.

We got a bunch because this is a great chance for people to feel in a first-hand way what goes on out here and we can tell people about this, but there is no substitute for actual first-hand immersion experiences. So the crowd of Markel associates have been coming year after year and has continued to grow. We have a record crop this year. We have too many to introduce individually. But if all the Markel Associates would stand up, I’d appreciate it. Thank you. They are the ones who do the work and I’ll ask you to hold your applause, and it should just get swept up in emotion for some of the individuals that I want to name. But I’m going to tell just a story or two. I can’t do that with everybody that’s here, so I apologise for those I’m not telling the story about but I’m working on it.

So first off, I’m going to start with Ariana Cabrera and Joche Smith from Costa, so if you would just wave. You don’t have to stand up if you don’t want to. Ariana does everything at Costa. She’s general counsel, HR, consiglieri, whatever needs to be done and Joche represents the fourth generation of the Costa family running the business. So that deal was done in ’17, ‘18 something like that and here it is 2024 people with the name and the blood and the spirit are still there which is an important component of the way things work in Markel. So thank you for coming, to Joche and Ariana. From the insurance business, we have some representing. This is not everybody here, but Wendy Hauser, Henry Gardner, Don Bahr, Ritchie Henry. These are senior leaders in our insurance operation. Wendy runs the US wholesale operations force. Henry is representing Markel International and did a great job. Don Bahr from Markel. Ritchie Henry has taken a new role from an IT background into claims. So they are senior people within the Markel organisation. Wave. Say hi. Just wanted to thank them for coming. I want to thank my partner, Tyler Brown. Tyler, stand up. Yeah, yeah. Tyler is taking ownership. Thank you.

So all the things that happen here require some planning and they also require some follow-up and if it were up to me there would be zero planning and not much more than that in the way of follow-up. But what really happens is Tyler along with a few partners does that and he has my great thanks for doing that. The investment club that has started at UVA in Delaware State, Tyler really is at a point of making the logistics of those. The story of that has been written up in the Wall Street Journal with an article by Jason Zweig. You know, again, at the Berkshire meeting yesterday, the things that start to happen philanthropically because things are going well at Markel are starting to have cascading effects and Tyler plays an important role in that.

He would also be upset with me if I did not mention that there are some barcodes around here, maybe out in the lobby with QR codes. I’m travelling to Singapore in September and I know many people have come from Singapore and Malaysia and CFA Society somebody handed me their card. But if you want information about that trip and would like to attend when I’m in Singapore, I would love to see you. I’ve never been there before, but there are ways to find information about that and to check in. I want to thank Jason Ramirez and Peter Partee who are here from Markel Ventures and let me include Andrew in this. The people who have the daily interaction or whatever interaction is needed daily, monthly, quarterly, whatever these are the people who are doing that and you know, Buffett talked about what Greg Abel is doing and the people on Greg Abel’s team. These are the people within Markel that are performing those analogous roles and they make the machine work and you have my immense gratitude for that.

I want to thank Ken Newsome, the CEO of AMF, who’s here with us and I think in an illustrative way about the spirit of Markel. He bought his bride, Linda. So Ken and Linda are both here with us. Ken has an honoured position in the pantheon of Markel lore because AMF was the first deal Markel Ventures ever did. And if there wasn’t a first one, there couldn’t be a next one and the one after that and the one after the one and I would have been cut off if AMF had not worked and it has worked, has worked beautifully. Ken was the CEO when we did the deal in 2005. He is still the CEO today. Draw your own conclusions but things are working well there. And frankly, Ken had his leadership group for a management meeting just a week ago and he had a dinner. He was kind enough to invite me to. And he said one of the nicest things I’ve ever heard and I want to repeat that because I think it means so much. So when he was introducing and starting off the dinner, what he said about me was, “You can fake caring but you can’t fake showing up.” You know, and he was thanking me for showing up and showing up consistently and that is what needs to happen for true relationships to be built. It doesn’t happen on one visit or one connection or one Zoom call, it happens within-person face-to-face interaction over and over and over and over and over again. So Ken, thank you for that compliment. I deeply appreciate it.

We have Tommy Clements and Dumas Garrett here from VSC, our Fire Protection business and this is the tale of Markel Ventures and one of the ways in which we will be able to put capital to work. And believe me, Tommy needs no encouragement about that but he’s going and going and going and the flames burn brightly no matter how much any of us might try to suppress them with what are words or contracts. But Tommy, thank you so much for doing it. There’s also someone who I want to introduce who has an important role in Markel Ventures or at least she used to but she still sort of does and that is my bride, Susan Gayner, who was the CEO of Parkland Ventures for many years.

Now I know for a fact, for a hard fact, that she would not want me to tell you what I am about to tell you. But I’m going to tell you anyway, and that is, you know, in preparation for the Omaha meeting and this speaks perhaps sometimes to my overreliance on serendipity rather than planning and why I need detailed people around me. So as Shelby Davis pointed out last night and Shelby I don’t know if you’re here. Is Davis here? Shelby here?

[00:14:19] Andrew Crowley: There he is.

[00:14:19] Tom Gayner: Okay, well, there he is. There he is. Okay. Yes. Well, as I’ve written about Shelby in the annual report several times and some of the Council and the help that he’s offered me, well, he had some pretty tough words for me when I shook his hand after us not having seen one another for a year or two. He says he’s gotten big. Well, it’s true, I might have gained a pound or two, so in anticipation of that, I did buy a new suit for this day. So I was in New York City and I walked to a store where I bought things before and tried something on, they take the chalk marks, and the measurements and everything to make sure it fits, it went soon off the rack suit, and then you know they do the alterations and then they mail it to me. So I had that suit, had lined up. This is going to be my Omaha suit. So I tried it on this morning and as I put it in the pants like, oh no. They had not done the alteration step. So, fortunately, Susan hops to it and she has some safety pins, and she’s tried safety pinning some stuff and says, well, that’s better than nothing. It’s not going to hold up. But you know, let’s go with that. And then she said wait, wait, I’ve got a sewing kit. A sewing kit. So my pants were altered this morning by Susan Gayner. She does many things.

Now, on Memorial Day of this year, we will be celebrating our 43rd year of marriage. And this is another thing, I mean this deeply romantically, but she doesn’t sort of hear it this way but I’ll share it with you all and you can judge. For those of you who are fans of the movie The Godfather, this morning’s story illustrates that. I tell her she is the snub nose revolver taped to a toilet in the back of an Italian restaurant of my life, so thank you.

We have some people from CapTech here with us: Tom Krieger, Paul Given, and Bree Basham. We just met this time. But thank you to CapTech for being here. You’ve done very well. Here’s one story I want to tell very, very quickly. So for those of you for many years you know I give the Frederick Wolfe Award. For many years, the recipient of the Frederick Wolfe Award has been Frederick Wolfe, hence the name of the award. The way that all happened was we bought Frederick’s company probably about 15 years ago. It was a German insurance operation and so that deal was done by the people at MINT. I had no part of it. I had never met Frederick but this meeting happened and this guy came up and introduced himself to me and it was Frederick Wolfe. The deal had been done before this meeting. The closing I think was scheduled after it but in that interim, in that time, Frederick Wolfe on his own initiative and on his own dime flew to Omaha to come to this meeting to absorb the Berkshire stuff and to see us and to experience Markel completely of his own initiative. So that’s my kind of person. Well, guess what? We have a current new winner, and a couple of people have done this over the years, of the Frederick Wolfe Award and that is Trey and Trey if you would stand up and want to tell us the story here.

So Trey joined us a couple of years ago. He was in corporate accounting. He moved over to the Markel Ventures team to do accounting work there. And you know, we’re talking about what’s going on and turns out Trey had bought airline tickets, got in the room himself, and said can I come to the, you know, the party and stuff? And I said absolutely. So this is the initiative that you see of people coming. And so Trey Rosettie, thank you so much. And I want to make an illustration and might come back out later as well. Oftentimes, I’m asked the question of how you keep the culture going. So yeah, I understand the special. I understand these values, but how does that keep going? Well, Trey is an example of with no effort from me or any of us. This is completely self-initiative to do this sort of thing and you know I hope he feels welcomed and responded to and that’s how the next Trey and the next Frederick is going to come to this. There is a vibe and a value system that just gets transmitted somehow and it happens over and over again. I’m coming towards the end of things, but I want to we have a couple of our directors here and they play a spectacular role in assuring the continuation of the values and they have a role that’s somewhat interesting in that they don’t really know how to keep it going but they know how to screw it up.

So not doing that is a very important part of what it means to be a director and Charlie Munger talks about that a lot. It’s not seeking brilliance, it’s avoiding stupidity. So they are the guardians of the gate that keep the culture and hold us accountable, that our actions conform and are in the spirit of Markel. So we got Larry Kenningham, Gretchen Harris and Morgan Housel here with us. So thank you all for making the trip. And then as I close out before we turn things over, some of the people that make all this thing happen, all these happen, we call them executive business partners. I think they should be called ninjas instead. Let me introduce them a little bit. So, Lisa Hammersley, if you would stand up and say hi, I know you don’t want to but you’re going to anyway. Lisa worked specifically with Andrew and the ventures team, but Andrew, what’s your phrase for her?

[00:20:32] Andrew Crowley: She’s Markel’s front porch. So there you go.

[00:20:36] Tom Gayner: Thank you. And an extra heart and extra hands. So thank you, Lisa. Christina Matisse, wave and say hi. And we’ll get to the rest of this story in just a second but you might remember my partner Cynthia Federman had, you know, the kidney transplant that we talked about a little bit last year. And Christina, I think started 48 hours before the phone rang that Cynthia is, you know, the kidney’s here and when that phone rings, you don’t say wait a minute. I have to do more training for my replacement. You go now. So with 48 hours of crisp training. Christina picked everything up and gave it to Mr. Bee. So thank you. Shannon Martin. Shannon works primarily with Jeremy but does the things behind the scenes that make all this work and she has my epic gratitude. And now, finally, so remember last year when I did the film and I said get well Cynthia on the selfie. I’ll remember that. Alright, let’s just in the chorus do that again. Get well, Cynthia, right? Again, come on. One, two, three… Get well, Cynthia. Cynthia Federman, stand up. So, among other things, you people are faith healers. It worked. She got better. Thank you. Thank you. Thank you.

With that, let’s start things off with the Q&A and again we’ll go to roughly about noon. I understand when people have to leave that we have a tradition of having a particular person ask the first question. It comes from the fact that you know when this branch was a lot smaller and there maybe were only 20 or 25 people there. There was a friend of mine named David Winters. Some of you may remember David, that’s remember David. He was to my left and apparently, I don’t see that well peripherally out of my left or something. So David was waving his hand at different times. Any questions, anybody, anybody at all? And David over there. So from that point on, we always gave him the first question to make sure he got his question and then a gentleman named Jeff Stacy picked up the baton to carry on. He’s otherwise engaged to it. Although I think he’s coming to Richmond. So you’ll see him there. But my friend Mark Hughes has agreed to pick up the baton of being the first questioner. These are not questions that are planned. I don’t know any of the questions that are that are coming. He asked the first question last year and we’ll start off over there. Can put the lights up a little bit higher if you would. We want to see you talking. So if you ask a question, Mark, if you would grab the mic over there and you will tell us your name, perhaps where you’re from, if you’re a Markel shareholder, that’d be great and we’ll go back and forth between the two microphones. Have the lights up, if you would. So people can see their way to the microphones, but with that, Mark.

Reading recommendations to better understand the insurance industry

[00:23:29] Mark Hughes: Good morning, Tom. Thank you for putting this on. Thank you to all the Markel associates here. Thank you, Susan Gayner, for being Tom’s margin of safety. So that doesn’t go off the rails. My question is, you know, I’ve been a shareholder for 29 years. I’ve been reading Markel’s financials for 30 years, your competitors, et cetera. Still, I find myself with gaps in my knowledge of the insurance industry. Like a lot of people here, I’m a generalist, not an insurance industry specialist. Are there things that you could recommend reading? Is there an intelligent investor in the insurance industry? A podcast? YouTube video? Something that might let us generalist, you know, enhance our knowledge of the broader insurance industry. Anything you could mention to us. Is there anybody we should follow would be appreciated. Thank you.

[00:24:22] Tom Gayner: Well, great. Thank you. The challenge in answering that question is that you presume that we know. And there is an irreducible amount of black box and uncertainty and not knowing that you’re just never going to get beyond. And I don’t mean to single you out for that, I can promise you that is the case for us too. So when somebody says, you know, their combined ratio was 94.3 or 97.2. or 91.1. I said that those are not combined ratios. Those are FM radio stations and their estimates. So I think at a very fundamental level, one of the things to try to just conceptualise the mechanism of insurance is that I call insurance a bucket of money. It’s a bucket of money. And when you make a premium payment as somebody buying an insurance policy. You throw money into the bucket and that bucket accumulates money in it. And then if something untoward happens or something that causes a claim, you put your fist back in that bucket of money and you pull out the money that has been pulled from all the others doing so.

Now here’s my segue in turn from first to second base. I’m talking about the insurance cycle and pricing. When that bucket of money that represents the insurance industry writ large starts overflowing with money and it just starts spilling over the edges, tends to be that insurance prices and rates go down because there’s enough money in the bucket. And when that bucket is getting a little bit thin and we’re scraping the bottle of the barrel and wondering where the money is, that’s when insurance rates are going up. And that has been the case in the last two or three years. We’ve heard about the wildfires in California, the Hurricanes in Florida, Hawaii, places like that, climate change, inflation and all those kinds of things that have been taking money out of the bucket and that’s why, you know, insurance rates writ large are going up rather than and down and has been the case for a while. Point number one.

Point number two. You and I share the fact that we are both ex-accountants, CPAs by training, but both of us got out. When somebody was trying and this is before the days of Markel Ventures, which does indeed create a different set of dynamics within our financial statements and somebody was asking me the kind of question you’re asking whether just trying to understand the insurance business, I would invite them to open the balance sheet. The fact the number one and most important financial statement of any kind of financial company, banker and church, is the balance sheet. And I would say here’s a test, point just with your figure point, you need to do no math at all other than the ability to count. Point to me where the biggest number on the balance sheet is. And if you look at the balance sheet, you’ll see that the biggest number typically is the loss reserves number. That is the number we expect to pay out in claims in the future. That’s the biggest number.

And then I would say I promise you one thing is the CPA, and by the way, the CPA society would find me if I just said that without the asterisk, I am a non-practising CPA. I’m not taking the CPA CPE courses and stuff. And you know when Jeremy was doing accounting and was the Chief Financial Officer, you know, we used to talk about accounting with certainly different points of view sometimes at about 30 seconds after he got his new job and left. I heard him start to say, you know, I used to be an accountant, which is what I say. But someone who used to be an accountant, I will tell you that number, that loss reserve number is wrong. It’s wrong. Now the interesting question is it wrong the right way or wrong the wrong way? And wrong the right way means that it’s more than what the claims will end up being. Wrong in the wrong way is that it’s not enough. We have explicitly committed to a standard that we hold ourselves to where we want that number to be more likely to be redundant than deficient.

You can look at 36 or 37 years of our reporting financial results as a public company and I know some quarters we might have missed it, but have we ever missed it on an annual basis? 2004 which I can’t remember what the circumstances were that caused that to be the case. Oh, asbestos. Yeah. Recognising the big asbestos loss. But let’s say for the vast majority of the time we’ve actually met that standard. And I think what that shows and really that is the test of both sorts of actuarial and financial technical competence that we sort of know enough of what the number is and add a margin of safety and get there and more importantly than that it is a measure of integrity where we are operating in such a way that we are not going to try to deceive you about what our ultimate loss causes and more importantly, we’re not going to try to deceive ourselves.

So we hold ourselves to a pretty tough standard and we’ve got decades of actually meeting or exceeding that standard. So I understand the complexity and the ambiguity of trying to understand insurance but I would encourage you to back out the lens a little bit and do wide open and just look at that kind of sensation of is the number of the combined ratio of less than 100 which means that it’s profitable and in year after year after year after year that number subsequently proved to be enough or not enough. Thanks for the question. Zone two.

Markel’s capital allocation

[00:30:05] Bo Clayton: Hey, good morning. My name is Bo Clayton. I’m from Durham, NC. About half an hour down the road from Buckner Cranes, thanks for having us today. I have a two-part question. Maybe the first part for Tom and the second part for Andrew. Tom, when you think about capital allocation now across public-private equities, fixed income, and buybacks, how does today’s opportunity set compare to what you’ve seen over the last few years? And then for Andrew, can you give an example of an investment you were able to make in adventures business you already owned that competitors who might have a different time horizon probably wouldn’t have made and walk us through the impact that investment had a win, win, win with shareholders, employees, and customers. Please, thank you.

[00:30:57] Tom Gayner: Great. Well, thanks. Thanks for the question. And I’ll take the first part of it. So we have written for many, many years in the annual report that there are four things we can do with capital. I’ll just talk about capital allocation which does presume that you have capital to allocate. It would be a pretty theoretical discussion if you didn’t have some money to allocate. So the good news is we have some money to allocate and so then what do you do with it? So the first thing we look at is we look at our existing businesses. Both in insurance and non-insurance. And do we have people who were already part of the family who have proven their skills and their ability and their capabilities and their integrity? Since it’s not an open question, we know these people. The first order of businesses to fund people like that when they have the opportunity to have some organic growth. So that’s first on the list.

The second thing and these are sort of all ties. It’s like one of those Olympic events, we’re swimming where you know, it’s a hundredth of a second that divides first and fourth place. I don’t know how you rank them between the sets. Investing in new companies and doing a Markel Ventures deal or an add-on within an existing Markel Ventures deal, you know, that’s the second thing we would look for.

The Third, purchasing public securities, be that fixed income or equities or fourth repurchasing our own shares and publicly, you know, I talked about it in the first quarter conference call last week, I’ve written about it in the last couple of years. It was my sensation and doing math as aided by my colleagues. I didn’t just do that in darkness. We talked about it. We talked about our methodology for how we think about what share on Markel is worth. It appeared that a gap was starting to open up between what we thought the share on Markel was worth and what the marketplace was pricing it at. So the rational thing to do we thought was to start buying back some stock and a more meaningful increment than we had in the past and we did. In ‘23, that gap seemed to widen further. So we bought more and in the first quarter of ‘24, we thought the gap was wider yet so we quickened our pace and bought more in the first quarter. So we’ve taken the share count from about 14 million down to 13 million. And what I hope you would have confidence in is that each and every day we look at those four alternatives and we think about what we have in any of those slots and that’s the way we would think about it and I’ll turn it over to Andrew to tell us a story or two about some of the things that might have happened with our friends at VSC of add-on deals.

[00:33:34] Andrew Crowley: Sure. Yeah. There are a couple we could point to. Actually, more than a couple and we talked a lot about VSC last year. So I’ll go in a different direction, but we were talking about this the other night briefly. I had mentioned just some facility expansions going on and things that I think will future-proof several of our businesses that required brief discussion but not 50-page memos to approve. I think our leaders are grateful for that approach when they bring something to us and say something like I want to run a place where my grandkids can work. They can be safe. They can have the latest technology and processes to build whatever products they build in that particular area. That works, you know, and those leaders have done great by the capital they have and I think we expect them to do great by the capital we give them on top of it. One recent example is our friends at Costa Farms here, you’ve got Joche Smith Jr. and Ariana Cabrera. So Costa Farms is run by third and fourth generations. Originally Cuban immigrants. They get mad at me when I say they’re Americans but their family was from Cuba and in the ornamental plant world you have oftentimes the Cubans and the Dutch and they don’t particularly get along that well. No offence to any Dutch in the room. But there’s really been a divide between those two heritages in how they grow. Over time there’s been a friendly-foe relationship between Costa and some of the Dutch growers here in the United States. Well, to start this year, some of you who are keen followers of our businesses may have noted that Costa Farms bought a company called Battlefield. Battlefield is located in Virginia. They’re a meaningful grower of bulbs and perennials, if I’ve got that right, Joche, and they’re Dutch.

And by the way, the last couple of years in the ornamental plant business haven’t been the easiest. For those of you that follow, Scott. Publicly you can see that you know in the pandemic era business was fantastic. I mean, everybody wanted stuff for their outdoor garden and their indoor house plants. What happened on the back end of that is people grew too much. You had to throw things away. Our partners did as well as anyone could in that environment but it’s not the easiest time to deploy capital. Costa Farms recently was named the number one grower on Greenhouse Growers Top 100 list. That’s done by square footage. Costa Farms has 51 million square feet under roof. The top ten players have 4 million. That shows you how large that business is.

Well, after some tough years already being ranked number one, Dutch dynamics are all out there. Our friends came to us and said we think this makes sense. We think this future-proofs Costa. It gave us an even stronger position, so we were able to lean in. They got that deal done to start the year and Battlefield is doing fantastic. I would encourage everyone to go to Lowe’s, Home Depot, Walmart and other retailers in your area and buy as many Costa plants as possible because we’re aiming to ship 98 million plants or something this year. So wonderful business, something we’ll talk about for a long time and I think that’s an opportunity to deploy capital that’s going to work well for you all as our shareholders.

Changes in capital allocation

[00:36:33] Tom Gayner: Come on people do your part. Get the Costa plan. Zone one.

[00:36:38] Joey Opekan: Hello, my name is Joey Opekan. I’m from Richmond, VA and I’ve been a shareholder since 2019. Thank you for holding this event and I really look forward to seeing you guys at the reunion in a few weeks. My question also has to do somewhat with capital allocation. Tom, you’ve been soul CEO now for a little bit more than a year now and I’m curious, what has changed and has any capital allocation maybe principles or ideas shifted over that time? Thank you.

[00:37:19] Tom Gayner: Thank you. There are three directors here and I can remember writing a memo to them recently talking about some of the changes that have happened. And I said I think it’s good to have one throat to choke. So instead of having two throats, it’s one throat. So the accountability is there in that sense. It was primarily my responsibility for capital allocation while I was co-CEO. But obviously, Richie supervised the insurance business and would have had the primary vote on things that were related to insurance. So it’s now my primary responsibility to make those decisions for the organisation as a whole but the principles by which those are made hasn’t changed a bit and they’re not going to change either. Thank you. Zone two.

Managing the Markel team

[00:38:07] Speaker 4: Thank you for hosting and for having us and thank you for showing up with such a deep bench this weekend. Been lucky enough to visit with members of the three engines. Been able to speak with Pete, Lisa, and Amy from Ventures, met Richie from Insurance, and was able to meet the team from Costa Farms and it’s been great. It’s clearly a congenial talented group. As I think about the job of knitting together a group three engines and making it in one firm or making people really work well together, can’t help but go in my mind to the thought that as capital allocators, there’s competition for the capital and how do you think about the importance of knitting the group together? Is it worth the time and the energy, and if so, how are you doing it and why?

[00:38:56] Tom Gayner: Well, the question of capital allocation does end up on my desk. So yes, you’re right and the good news about that statement, there is competition for capital. There’s sure as hell it is and there’s a lot of type A people running these businesses and they want to win. And they want to be the ones, they want to be the horse that won the Kentucky Derby yesterday. And that’s good. That is a good dynamic. But for the Markel Group, making that decision of who gets the money or who doesn’t sometimes the fact of not getting what you want is helpful. It’s a discipline. There was one time many, many years ago, I had moved to a new town and I was going around with Susan and we were, you know, trying to find a new church to go to and there was a church we went to and there was a sermon that will stay with me for the rest of my life. And what the guy said was he talked about post-world, I mean, during World War 2 in the US, when there was rationing of so many things, including sugar and some guy was at a diner and he had ordered a meal and ordered a cup of coffee. At one point, he asked if he could have some more sugar. And the waitress said stir what you’ve got. So that line burned in for a long time. It was a 40-year-old story. But that story has been told around the halls of Markel. From time to time we do have people who are very anxious to keep going. But there are times when it’s my job to say stir what you’ve got and we do. Generally speaking, it’s my observation that those people go back and refine the plan, rejigger things, and sort of demonstrate that they indeed should be allocated more sugar, and they do. And that’s a robust process, and everybody is pretty wide-eyed about how that all works in such a way that I think that makes the organisation knitted together and stronger like he speaks of. Someone?

Inflation and new technology

[00:41:03] Mariya Messerli: Good morning. I’m Mariya Messerli. I’m a private investor coming from Switzerland. Special thanks for putting my picture on the website of this registration of the brunch. I got slightly more famous among my fellow value investors, so I guess it’s win-win lived life. So today I have a question for you and here it is. Yesterday, we heard Ajit Jain saying, “Climate change is much like inflation. If done right, it can be a friend of a risk bearer.” My question is, if and when will social inflation and economic inflation turn to be Markel’s friends, what is the role of new technology to get there? Any example of application cases would be highly appreciated. Thank you.

[00:41:54] Tom Gayner: Sure. I’ll take the first stab at this and then ask Jeremy to speak to it as well. So what Ajit was speaking of in particular, I think were the mechanics of how insurance policies work. So every single day that goes by, roughly speaking 1/365th of all the risks we have get repriced because insurance policies are sold largely one year at a time. So you take on a certain amount of risk to the policy limit you’re exposed to that risk for a year and the effects of climate change that have happened so far have happened day by day, by day, by day, by day, such that day by day, by day, by day we also respond in tandem with the repricing of that risk. And then in the marketplace, people see the renewal prices for their insurance quotes that factor into their decision as do we still want to live here or not? Should I go somewhere else? Do I need to improve the fire safety within my structure compared to what it is right now?

There are measures and countermeasures that exist all the time and the insurance mechanism sends a signal to the marketplace that, hey, more bad things can happen than used to. And if that’s true, we need to charge more for it and we need to maintain profitability for the insurance company. So that if you have a claim, we are financially solvent to pay that claim and it helps inform your decisions of how much you can start to do things that would improve climate outcomes. So he was speaking to the technical matters and that would apply to inflation and social inflexion. Every single thing that goes into making up loss, we try to stay as quick on understanding that and use that as a feedback loop to change and alter our pricing day by day, by day, by day. And if we get it wrong, typically within the context of a year, our bell gets rung and we know that we got it wrong, such that when we reprice that policy next year, we have the opportunity to charge a different price for it. Jeremy, do you have anything to add?

[00:44:05] Jeremy Noble: Yeah. Good morning, everyone. Maybe a few things. So building off what Tom just said. So at the end of the day from a speciality insurance standpoint, you know our job is to absorb other’s volatility and uncertainty. So to a certain degree, I think that might have been what Ajit was commenting on as well. If there wasn’t a volatility, there was no uncertainty. You start to minimalize the value proposition. I think of insurance. So we have to do that thoughtfully and efficiently and well. And if we can do that and when we do that well, we earn appropriate returns on capital and that’s the name of the game. And that builds off some of what Tom was sharing, how do you go about managing that effectively? If we think about taking, for example, you know climate change as an aspect and when we think about a business that we would have within our insurance engine with Nephila, their value proposition longer term is the fact that they sit, I think, at the intersection of we’re in a world with elevating level of volatility and risk and uncertainty. There’s a value to associate with that risk, and there is an uncorrelated aspect of natural catastrophe risk relative to a lot of other things that move markets.

So if you think there is that uncorrelated aspect and you believe that the world is a bit sort of more risky and you are concerned about sort of, let’s say, climate risk, well then investing in an uncorrelated way at that intersection with somebody that’s driving our thought leadership around the science of risk. So back to the tools, technology, data insights that’s I think, an example of that. The same would be true for wider economic inflation or social inflation in those products. So Tom’s point. We can reprice the product each year, but it’s also our job to manage that thoughtfully over the long term and be leaders. So complement that with data insights and that’s certainly what we’re investing in with the insurance platform as well. Thank you.

The Asia expansion

[00:46:01] Tom Gayner: Zone 2.

[00:46:04] Stephen Chen: Hi Tom and Jeremy. I’m Stephen Chen, a shareholder from Singapore. First of all, thank you for hosting this event. I have a question related to your Asia insurance expansion. You have a scale and successful speciality operation in the US however, in other regions such as Asia, your insurance operation is relatively small. And may just focus on one or two lines. I would like to get your thoughts on how you would balance growth and profitability for the Asia expansion. Specifically what you try to build scale in expanding into additional lines of business knowingly that it could have a negative impact on the combined ratio in the short-term. Lastly, Tom, a big welcome in advance to your upcoming trip to Singapore. Charlie Munger says Singapore has one of the best government systems in the world and really looks forward to meeting you there. Thank you.

[00:46:58] Tom Gayner: Well, thank you so much. I look forward to being there. It will be my first trip and I am indeed excited about it. I’m going to turn it over to Jeremy for his thoughts in just a second. But I can tell you that he’s just been in Asia and logged some of those miles and been to a lot of places. But before he responds to the specifics, let me share with you that while everything you just said is true, we were in Asia and Singapore, a relatively small operation right now and limited lines of business and individual losses can have outsize effects on the combined ratio of that operation. I’ll remind you that was also true of Markel when it operated in Richmond, VA or even before that when it operated in Norfolk, VA, as a small local regional company. So what did we do? Well, we expanded geographically, we expanded our product lines and we bought reinsurance all along the way. So there is a capital opportunity to backstop ourselves as we begin to do things and we’re on the frontline and we’re learning. Typically we do so with reinsurance partners who enable us to absorb some of the volatility and offer larger limits on policies than we could on our own but just as was the case if expanding from Virginia, as we learned, as we added capital, we expanded the size and scale of what we were doing in every dimension, terms of product lines, regional and policy limits. They were able to offer without using quite so much reinsurance. So expect that crawl, walk, run approach in Asia as was the case with Markel Ventures, as was the case with Markel Insurance from the very beginning. This is a movie that was played before.

[00:48:42] Jeremy Noble: Yeah. Thanks, Tom, and thanks for the question too. In that example, you know crawl, walk, run. I don’t know exactly where we are but we’ll say we’re in the walking and thinking about maybe what it looks like to run. So we’ve been in Asia for about 15 years but only in the last few years, I think have we had increased confidence in and reached enough scale in our platform across the wider Asia Pacific region to feel quite confident. So under Christian Stubb’s leadership, we opened offices. Actually, at the end of last year in the Australian insurance marketplace, we’re in India, we’re in Singapore, and that’s where we hub our operations from a bit of presence in Malaysia, Hong Kong, and mainland China. Our focus, as with everything in our insurance platform, is on speciality products and expertise. And actually to the question part of what we’ve been doing is bringing in exceptional talent and we’re now able to have the size and scale that we can bring really market-leading talent into our organisation, benefited and supported by the wider Markel brand in our global operations.

We have the product and thought leadership around speciality lines that we partner with through our London market operations and we’re expanding our product set. So we have professional lines offerings, trade credit, cyber, marine and energy, political violence and terrorism. So any number of sort of product lines. Now in the wider Asia Pacific market, it’s still specially products are still sort of more nascent but when we look at population trends, when we look at GDP growth trends and projections and when we think about the need for specialist products, being long-standing on the ground, demonstrating a firm commitment to the region that’s going to help us grow. So we’re, you know, a hundred million platform out there and that can grow and our intention would be to grow that meaningfully over the course of the next several years but thoughtfully, it earns a profit now, so the investment that’s required shouldn’t change that significantly.

[00:50:44] Tom Gayner: And for additional context, that a hundred million is within the context of 8 billion-ish of total insurance premiums for the–

[00:50:52] Jeremy Noble: 10 billion.

Debt and China

[00:50:54] Tom Gayner: Zone 1.

[00:50:56] Ken: Hello, Tom. This is Ken from Singapore. I’ve been an investor for over 10 years and this is my second time in Nebraska, Omaha. My question is in regard to safe investing. So when you think about safe investing when you buy companies that have a lot of debt, how do we know if the debt is good debt or bad debt? For example, if you look at Starbucks, McDonald’s and Apple, they have a lot of debt, but they’re great companies. That’s my first question. My second question is, would you ever buy Chinese, China companies? Thank you.

[00:51:33] Tom Gayner: Certainly. Thank you for the question. I think the debt question, in particular, is fascinating and if you read our annual report, which I encourage you to do, I talked about our investing process and it’s consistent year after year after year and the things we look for, you know we talked, I think the very first screen and philtre and thought process that we have is good companies that earn good returns on capital without using too much debt. It’s the first sentence in there. Now that phrase, too much debt, does it give you a quantified number? What is too much? Is it 10%? Is it 80%? Is it three times EBITDA? Whatever. Each kind of business has a reasonably appropriate amount of debt that is comfortable and that also changes with interest rates.

So for instance, I’ll tell you this story. This is probably a 15 or 20-year-old story. I came into work one day and I read the Wall Street Journal as I do every day, among other papers and place to start the day, and there was a little announcement news article about the Walt Disney Company which had just done an issuance of a 100-year debt at 5 and 5/8 or something like that. I looked at that and I said that is nuts. So I said and then I even got a little curious about it. So I dug into it and I said to myself, I’ll bet they’re refinancing a previous 100-year issue that had a five-year call at 5 and 7/8th and had to re-click that ratchet wrench quarter of a point down. That’s exactly what they what they were doing. So I tried it into the office of our chief financial officer, who was neither Jeremy nor Brian at the time or was before them. And I said to him, I said we got to see if we can do something like this. I mean, we have to do this and a 100-year debt with a year call that’s not really debt it’s equity with the fixed price to it. We ought to be able to do better than that.

So I floated the idea that we should do that and he didn’t really jump at the idea and I said, no, no, no, we really need to do that. So reluctantly, I twisted his arm and he called our bankers. And by the way, I wasn’t the CEO at that time. I was the chief investment officer. But in that case, as well as many others over the years, until my actual title is director of unsolicited opinion. So this was one of those times. So the banker, he called one or two and I think I almost stood in the office while he did it because he was reluctant in doing so because he knew it was unrealistic. The banker said, look, Markel, people have never heard of it. Disney is a consumer name people know and love Disney so they can do that, and so I grunted and went away. And then maybe a week later, just by accident, a company called Eskimo Pie and everybody knows the Eskimo pie desserts wrapped in aluminium foil? Well, as it turns out, Eskimo Pie is started out by some entrepreneur. It’s wrapped in aluminium. His vendor was Reynolds Metals which happened to be headquartered in Richmond. They hit a hard time, and ended up he couldn’t pay his bills. Reynolds Metals ended up with the company. Now I know we get accused of having a hodgepodge of different businesses. But Reynolds Metals and Eskimo Pies, you got to build a little bit of a bridge between those two.

So they spun it out and it became this independently publicly traded company called Eskimo Pie. And the market cap of the whole thing was about $25 million. And so having been shot down at the idea of issuing the 100-year bonds because they were not a consumer name. I propose, hey, let’s buy Eskimo Pie. Change our name to Eskimo pie and then call up people and say, hey, you want some Eskimo pie? Who can say no to that? But again, that’s a flight of a fancy exercise, but it illustrates the point that there’s not a point number point estimate. It is a qualitative slash quantitative amount that is appropriate for the business that’s involved and that’s one of the reasons we go to work every day is because you can’t write that number down at one point in time or for one business and think it applies at all points in time and for all businesses. So we’re very thoughtful about what the appropriate amount of debt is. We will err on the side of having less than I think most people would think is comfortable. We will more lightly lever businesses than most people would. So that’s the comment on that.

In China, we invest and Andrew’s on brand there with his Coke can. We invest in companies that do business in China. I have been to China on a visit but I’m not an expert and I think Buffett gave you a very good answer yesterday when he talked about both his and Charlie’s level of expertise and their age and the other opportunity set that they looked at. So he did not rule it out. And there were issues of the rule of law to which he, which he talked about. So he didn’t rule it out. And I won’t rule it out either. My level of expertise, if anything, is less than Buffett’s. I am younger than Buffett. So I got some more time and perhaps, you know, some of the energy levels that he alluded to and talked about but it will require a different level of expertise than what we have. And I think to the point that Jeremy made about you know we have a $100 million book of insurance business within Asia now that will lead to other things in the same way that in the US that we started it as an insurance organisation taking insurance risk and it was really not until the 3rd generation of the Markel family when Steve was at the financial controls of the business that pivoted and morphed into trying to build an investment arm on top of that. So the first way in which we will gain expertise is operating in those markets on the ground with insurance risks. And I think it would be logical to assume we will meet people we will form relationships, and we will gain expertise that probably will have spillover effects into the investment world over time. Zone 2.

Insurance pricing and risks

[00:57:46] Jackson: Hi, good morning, everyone. I’m Jackson from Singapore. It’s the first time I’m attending the Markel Brunch and I brought along a few families and friends and I’m hoping to convert them into Markel shareholders, but if you will, let’s see how this goes. OK. I have a two-part question.

[00:58:02] Tom Gayner: We thank you for doing your part. We’ll try to do our part too. Thank you.

[00:58:05] Jackson: Thank you. So I have a two-part question. Number one, how does Markel manage the insurance business in terms of repricing underwriting discipline and premium rate adjustment during an unfavourable premium pricing environment? And number two, how does Markel stay ahead of emerging risks like geopolitical, cyber, and climate risk and are there any active initiatives and strategies that you guys are taking to pre-empt the impact of this risk?

[00:58:31] Tom Gayner: Great. Well, let me let me attempt to answer some of those questions. First is how do we operate the insurance business in an era where you know its premium rates are declining, which will typically referred to as a soft market. Well, I’ve been to Markel 34 years now and I sometimes joke that while I’ve been there 34 years, it seems like we’ve been in a soft market about 37 out of those 34 years. Soft markets tend to be the pervasive conditions of things and it’s only brief periods that we would say, you know, we just need to sit there and answer the phone because things are coming in over the transom as opposed to going out and hustling for business. I’m exaggerating to make a point but that notion of hard and soft markets is something we’ve operated with forever.

In our annual report as an example, I think one of the things that Markel does very differently than other people and this is very much on purpose, we give you 21 years of financial data at the bottom of the first page of the shareholders’ letter. So it tries to reemphasize the long-term nature of the way we do things. If you sort of dredged up some of the old Markel annual reports and you got into the period of the, I guess, the 1990s, early 2000, there would be decades, decades, literally decades where the top line didn’t really grow that much. But the equity value of the company went up 3X, 4X over those decades. Well, how did you pull that off? Well, we restrained ourselves and disciplined to only write insurance where we thought it could be profitable. And if you can’t write as much of it, don’t try to rate more insurance and take on underwriting losses. That’s just foolish and we’re disciplined enough that we always get it perfectly, but that is the way the dials are set and the way we try to do things.

So we’re comfortable not having top-line growth and you as our partners as our shareholders, don’t worry about that because the good news is we’re committed to profitability, and we can do investments, we can do more ventures, acquisitions, we can repurchase our own shares such that in as you go through periods like that even though the top-line growth may be diminished, the bottom line value creation per share seems to continue to persist. And you don’t just have to take my word for it. Look at the 10, 20, 30 years’ worth of data and you will see periods of rapid growth and not so much growth at all and measured over five and 10-year periods and that’s why we report that way as opposed to much quarter by quarter, you’ll see that the I think the shareholders of this organisation have done very well over time. And we will continue to operate the business in the same way. Jeremy, do you want to add anything to that?

[01:01:23] Jeremy Noble: Yeah, I think it’s a great question then maybe a few things that I would talk about. So one, I want to tie that question back from an insurance lens to the wider architecture of the Markel Group. So there are these long-standing principles that you’ll hear us talk about all the time like being conservative, the margin of safety, more likely redundant than deficient, and taking a long-term time horizon. Additionally, with the three-engine architecture, the reality is we don’t have to feel compelled to put in capital or work if it’s not going to earn an appropriate return within the insurance. I can and I gladly will give the money back to Tom and the colleagues across the Markel Group. So it’s just another way that we can act with discipline. So to that point, we talk about the fact that we only want to be writing business that we think is going to meet our appropriate return on capital and we want to act with discipline. To Tom’s point, you’ll see what that looks like over time. We’re talking about, right now, current examples where we face changes, external and internal circumstances that have caused us to revisit portfolio health, portfolio management take actions and remix, right?

And we’re talking about right now the insurance. The top line volume is a little is growing at a more modest rate, more temper grade because we’re doing just that. We’re taking those actions. I think that the other thing that helps us is, again, the architecture on the insurance side is diversification. So we have over a hundred major product lines, but we think about our product diversification. We think about customer segmentation. We think about geography. We gave an example earlier of Asia. We can think about that in the UK or we can think about that in continental Europe. At any point in time, the trends are sort of different sometimes and depending on where in the world we’re talking about, how we distribute the product. So there are a lot of different ways we can segment our portfolios that also allow us to sort of act with discipline in any place that we’re concerned about. The last point I’ll make is the point around how you think about sort of risk management and developing and expanding trends. And I’ll give a good example where I think of purpose and profitability match if we think about within our insurance operations.

So let’s think about the events around the war in Ukraine and the grain corridor. Let’s think about right now the Red Sea. I mean cargo and shipping are incredibly vital to the global economy. And you know, I’m proud of the fact that I think Markel is a leader in marine war haul cargo. Has been able to step up along with others in the insurance industry to provide solutions, to support ongoing shipments to keep the global economy going, and that addresses, you know, starvation and hunger and those sorts of things as well. But in order to do so, we have incredibly increased sort of the technology, the risk management, the tools, the work that we do, our precision and advancement in the technology and the science of underwriting risk in that space has never rapidly evolved as much as it has in the last couple of years. So we’re able to earn good returns on capital appropriate returns while demonstrating, really I think, the noble purpose within society that insurance serves. So that is at the core and the heart of what we’re trying to do within our speciality insurance operations.

[01:04:48] Jackson: Thank you.

Details on the insurance business

[01:04:49] Tom Gayner: Zone 1.

[01:04:51] Tom: Hi Tom, I’m from Dallas. This is my first time for Berkshire and Markel and I initially got to know about Markel from the book called Richer, Wiser, Happier and I got through the shareholder letters. They are really good and honest. I appreciate that. And also one thing I want to mention is I like the approach of a customer first where they can bring more business to Markel again and again. So here are my questions like two questions. One is excess and surplus market is expected to grow higher single digits and the PNC market is in the lower 5 like +5. So Markel has a prior experience across the market in, you know, excess and surplus. So are they going to take any advantage of the new catastrophes given that? And also the other one is, with respect to the combined ratio, we have seen some kind of like the combined ratio went a bit higher, so is it like we have to look at it as a short-term trend or is the Markel team looking at how this is going to evolve? So I want a comment on that as well.

[01:05:53] Tom Gayner: All right. Let me summarise these two quick question points if you would. It’s combined which had a little trouble understanding. Okay, E&S market trends of the percentage growth of that. I would suspect that the E&S market which has been in the sort of golden era as many describe it. Growing faster than the standard markets. I don’t really have a point of view as to whether that continues or not, but my guess is that it does only because the world is more dynamic and the ability to plan ahead as opposed to react is becoming less and less and the sort of risks that are coming that are new for which there’s not tonnes and tonnes of actuarial data that needs E&S flexibility to do that. I think the wind will continue to be in our sales there. And one of the reasons I don’t have much precision about that answer is because we don’t really think about the question in that way very much. We are happy to pursue the opportunities that exist and then just see how it works out rather than set a specific bar or target or goal to do that, but we think we are operating in a favourable business environment and we think we will continue to be able to operate in a favourable business environment.

As our combined ratio, you know, we’ve been public and talked about this, there were some mistakes that we made over the last several years that are our own fault. And we did not execute as well as we would have liked to have done. We’ve made some meaningful changes within the organisation as we’ve learned some of that and thought about why some of those things happen and I would expect and you’ve already seen evidence of it in the first quarter, the combined ratio is starting to improve, and I think that will continue to be the case. The second thing is when you are looking at our combined ratio versus another combined ratio versus another combined ratio, you’re not looking at a strict apples-to-apples number. Different companies allocate costs differently. Different companies have different mixes of business that tend to perhaps have different cycles have different levels of profitability.

So for instance, as an example from the non-insurance world, in ventures, we have some businesses where the profit margin is very high. So you think, wow, that’s a really profitable business. We have some other businesses where the profit margin is very, very low and those tend to be distribution kind of businesses but the turnover is very high. So what makes them apples to apples is the return on capital. How much capital did it take to run this business that has 40% gross margins? How much capital did it take to run this business that has 9% gross margins and what are we earning on each of them per dollar of capital that we were allocating to those things? So what I hang my hat on for the Markel Group is that when you look and distil things to the return on capital, for things we’re pursuing in the insurance business, for things we’re pursuing in the ventures businesses, we have a return on capital threshold that we will allocate capital when we think it gets a return better than that.

Even within the insurance business, if you look at something like surety as an example, the combined ratio there comes where the losses would tend to be not that much, but the work that is involved in making sure that all the contracts are performing, the promises they made in surety when the expensive handling that is relatively high, so the expense ratio might be high, the loss ratio low and it varies all across the book of the different kinds of insurance we have. So it’s an aggregate number. It’s an imprecise number. But it speaks to the way we use it as a tool to make sure we’re earning good returns on capital wherever we make the capital allocation decision. Thank you. Zone 2.

Talent development and retention & innovation and creativity

[01:09:46] Dr Malcolm Adams: Good morning and thank you for hosting. I’m Dr Malcolm Adams. I am a shareholder, economist, and startup founder. I have a two-part business economics question that never gets answered anywhere and I’m pretty sure you have a great answer here. Firstly, what strategies do you have in place for talent development and retention and would you ever consider apprenticeship programming of any kind? Secondly, how do you foster innovation and creativity among your current employees?

[01:10:21] Tom Gayner: Thank you. Well, you said nobody’s ever answered that question satisfactorily. We’ll give it a whack and I hope you give us a better grade than never. Our chief strategy for talent development is to treat the people who are already here very well and to build deep relationships with the people we have. I mean we pay competitive salaries and wages and benefits and all the things that are table stakes. But I would say that the extra, the bonus which is intangible is the spirit in which people were treated around here and one of our creedal statements that our late former chair and Alan Kirshner wrote down, in 1986, as preparation for our IPO is a document we call the Markel style. And if you look at the annual report, if you go around any offices of Markel out anywhere in the world, you’ll see loose sites and posters and things on people’s desks that have the Markel style there and it talks about our people and we wish for them to operate with the zealous pursuit of excellence, yet retaining a sense of humour where they can reach their highest potential. That is the ethos and to the extent we do that well, what we have found is that attracts people and to make a Buffet analogy to that, so yesterday he talked about Ajit and the value that Ajit has brought into to that organisation. We’ll dial that back. Well, apparently Ajit was in his office on a Saturday. Hmm, that’s interesting.

And they’ve met, having not known one another. Ajit having no experience in the insurance industry, and Buffett hired him that day. I think you should work backwards from that circumstance and say, well, what possibly caused that to happen? Well, I’m not sure that I’m getting this exactly correct. Some people with more institutional knowledge than me can speak to it, but I think Ajit had a friend named Mike Goldberg who already worked at Berkshire and knew Ajit through some professional associations to just say this guy is wicked smart. And so because Mike Goldberg was already part of Berkshire and because Mike Goldberg had done well and was trusted and valued as a person, and whose voice would be heard and listened to by Buffett, when that an opportunity came up, Mike Goldberg said, hey, I know a guy and that’s how Ajit got to Berkshire.

And I think we tried to do much the same thing. If we treat the people who are already part of the family, well, they will refer friends, families, and smart people that they see. I’ve seen it happen over and over and over and over and over again. So I think that’s really the number one thing I would cite, specifically the apprenticeships we do things of that nature. Alan Kirshner, again started something called Partnership for the Future, which Ken Newsom was an early supporter of, and that’s to take high school kids from disadvantaged backgrounds and give them an opportunity to participate in the work world. And it did it in an industrial setting like Ken’s business did it in an office setting like our business. So we do that. We’re also involved in the cost of sorts involved in Christo Rey which is a spectacular programme. They do it in Miami. We do it in Richmond. I think we probably do it in some other offices as well where it’s high school kids who spend one day a week roughly in some employment situation. We just try to meet these people halfway with education and experience and role modeling to give people a chance. So we are actively involved in all those dimensions and it works. So it’s a fun place. Thank you.

[01:14:07] Michael Heaton: So I’m going to ask permission to sneak in on this one a little bit and I’m still simmering on two really important questions that were asked early on, perhaps two of the most important questions you could ask in this company today and it relates to the question about talent, talent development and innovation. So to get at it, let me come out backwards a little bit. I met a young woman, Thursday afternoon, walking around the Berkshire showcase, which I’m sure many of you did and enjoyed. She was working within one of the Marmon subsidiaries and she’s an engineer. She was talking about an innovative product that she was very excited about, which relates to charging the superchargers that, you know, we hear all about and see. She had recently left an 8-year job where she’d been incredibly unhappy for a variety of reasons to come to a Marmon subsidiary, and now you could just see the glow in her face and the pride in the work that she was doing. And she’s a happier person. Then it sounds like she was a year or two ago.

So you contrast that or you set that experience alongside what you experienced the next day or the day after that sitting and listening to Warren and others talk about Berkshire and you wonder what’s the connection between a couple of people sitting here in Omaha in a very small office, a couple of dozen people and then 350, 60000 people, hopefully, many of whom have the same experience of that young woman. And it’s a really interesting relationship. And I think I would assert that what Warren and Charlie have done over the years is facilitated that type of thing across hundreds of thousands of people. Take that and back it up into two questions that were asked earlier, one of which Tom characteristically responded very modestly too so. I’ll expand upon that if you’ll allow me, the question was what’s been different since Tom took the realm of the CEO, and I think it was narrowed specifically to capital allocation. I’ll take the liberty to broaden that to what’s been different overall.

The second question was a question about knitting together and is it important to knit together the business? I think Tom, decades ago, decades ago, saw what we saw in Berkshire and didn’t think that we could copy it with exactness, but saw the potential of that idea within Markel and doing it our own way. I believe that we’re in the very beginning of a third chapter of this business and it’s subtle and easy to miss, but if we do it right and if we show up every day, I think we have the same potential to unleash mass amounts of talent development and innovation. What are those three chapters? Chapter 1, which you’re all familiar with. For those of you, we had a 10-year shareholder here earlier. Many have owned it longer than that. Chapter 1, world-class speciality insurance business. Steve, Tony and Allen started by buying up broken businesses and stealing the same underwriting discipline that we just talked about a minute ago. And that worked unbelievably well for a decade. Chapter 2 is a chapter on transition, dual transition, and we see some of that transition happening yesterday at Berkshire. We’re figuring out how to transition leadership and I think it easy to underestimate how difficult that may ultimately prove to be in any company, let alone for those who’ve had world-class leaders at the helm for a long time. So we’re going through both that. So you have three individuals who ran the company very successfully for decades and at the same time, we’re going through a transition of the underlying business model. And I think Chapter 2 and hard to put bookends on it exactly. Maybe it’s four years, maybe it’s five years, six years, something like that. We spent the last handful of years working our way through both of those transitions, both the transition of leadership from decades of history and the transition of the underlying fundamental model or architecture as Tom called it.

And if we have time today, we can get into the nuts and bolts of that. But I would say it is the most exciting thing that’s going on inside of this company today and it’s an idea, it was the seed of an idea inside Tom’s head for 20 years and we’ve been preparing and planning for that transition for decades. And so what has changed under Tom’s leadership in the last year and a half, we’re really just at the beginning of seeing the flowering of those ideas and those seeds that were planted decades ago.

A great company culture

[01:19:14] Tom Gayner: Thank you, Mike. I appreciate that. Zone 1.

[01:19:22] Amy: Good morning. My name is Amy from Toronto. You started today’s session speaking about culture, and the saying is culture eats strategy for breakfast. Every company states that they offer a great culture. Is there a way that you quantify or measure culture? Can you comment on that?

[01:19:41] Tom Gayner: Sure. Yeah, it’s Peter Drucker who was the author of that famous quote of Red Drucker repeatedly for decades, and I think he’s exactly right. And I think if you read Drucker, one of the things that he would point you to is that it is almost impossible to quantify that. It is a qualitative statement and a qualitative approach of thoughtfulness and humanity that captures culture. Now, that being said, I think if you have a culture and you have this great culture but you’re not operating at a profit, you’re not going to last because you can’t keep the lights on. You can’t make the payroll. You can’t do well. So it does go hand in hand with that over the long run a great culture will not continue to persist and will not have the opportunity to grow if it is not accompanied by reasonable financial performance. I think one of the things you should take some comfort in, as a Markel shareholder, in a way to sense that the culture is indeed real and it’s vibrant and it’s persistent is to look at the long-term record of financial performance and look at places where perhaps it flattened out a bit or accelerated a bit and study a bit why it flattened out a bit and perhaps why it accelerated a bit. I think you would draw comfort from just looking at decades of data to say that I can’t quantify it, but that sure looks like it is passing the test of something that is indeed enduring and profitable at the same time.

At the next level, you can think about things like turnover. So here we are in Nebraska and my friend Judd Norman is over there. He was kind enough to take me to a Nebraska volleyball game, and if you’ve not been to a Nebraska women’s volleyball team, I can tell you right now, you’re not going to be able to get tickets. You’re missing something. It’s a spectacular experience. And I think they’ve sold out every game for the last 25,30 years. Something like that. And that’s the coach, John Cook, I think is in his 24th year of being the coach. There was one coach before him that’s 20-plus years. So since the modern era, post title 9 of women’s volleyball being a meaningful sport at the University of Nebraska, they had the one coach that was just sort of dragooned into it on an emergency basis on day one, but then in 50 years, they’ve essentially had two coaches, two coaches. That durability in the role that long tenure that tells you something. So if the University of Nebraska women’s volleyball coach was only there for 18 months or two years, I don’t think you can tell. And if there was high turnover in that, you can’t say it’s a bad culture, but you don’t know. But when you see people last in those kinds of jobs for 20-plus years and be as successful as they are pretty good odds that they have a good culture, so that’s turnover and endurance would be markers of a good culture. Thank you. Zone 2.

Selling a stock

[01:22:50] Ankit: Hi. Ankit from California here. Shareholder for almost five years. My question is at the Berkshire meeting when talking about exiting businesses, Warren commented that they exited their position in Markel. As someone who respects Buffett and Berkshire, how should we long-term shareholders, think about that?

[01:23:11] Tom Gayner: Great. I’ll take that. Well, you know, here’s the bottom line I found out about purchasing Markel in the same way that you did either the release of the 13 F holding the position. That was a good day. It’s cool. Has to be blunt about that, and I found out about him selling it in the same way that you did, IE the 13 F filing and they sold it and I, dang it, you know, it was definitely a good housekeeping seal of endorsement. Now there are other things going on that sort of not at liberty to talk about, but personally, as a Markel shareholder, I’ve not sold any stock. So if you’re worried about Markel stock from that signal the only thing I can tell you is I have not sold any stock and in fact, I have purchased more stock, not just through what I’m receiving compensation but taking money out of my pocket to buy it because that would sort of add depth and reality. The statement I made about thinking that Markel stock was undervalued relative to my estimate of intrinsic value. I mean, if I think that I should put some money down to back that up and I have. We enjoyed Berkshire’s presence in Markel. We regret its absence, but that’s in their control, not ours.

Secondly, we continue to have very warm relationships. I’ve had the very good fortune of serving on the Washington Post Board with Buffett for six or seven years, overlap. So we were at board dinners four times a year. We sat in the board room together. I started coming here in 1991 and believe it or not, that year there were only 700 people and that was in an era where you could just go up to him and introduce yourself and shake hands and talk to him, and I did, starting in 1991. So I’ve had the very good fortune of being in his presence and able to talk to him and he continues to have very warm relationships with me personally and Markel. So he has his own reasons for doing what he does, but as a shareholder worried about Markel, we continue to buy Markel stock.

And someday, I think about this sometimes that’s a bit too go too far into this. But for instance, if you lived in Omaha and you lived in Nebraska and you’re a successful business person and you’ve lived here 20, 30, 40 years, I’d be sort of embarrassed not to own Berkshire stock. I mean, how could you miss it? How could you not get on board sometimes? And one of my goals in life is, you know, if you’ve been around Richmond, VA, and you’ve been there 10, 20, 30 years and you have exposure and experience to Markel. I went there to come with a time where you kind of be embarrassed to be from Richmond and not own some Markel stock. It won’t affect him, I promise you. But someday, I hope, you know, at the annual meeting 10 years from now when Buffett’s up there, people say, hey, aren’t you embarrassed about selling that Markel stock, but we’ll do the best we can. Zone 1.

Potential future insurance acquistions

[01:26:21] James Keeler: Hi, Mr. Gaynor. My name is James Keeler from Great Falls, VA. My question is, what do you think about the potential future insurance acquisitions or the value of existing operations? What variables do you consider to be the most important, the size and growth of float, the profitability of float expressed in the combined ratio, or is it a much more qualitative consideration of the manager to price into the market the way the flow of any operating arm of the acquirer is invested or the product category? Thank you.

[01:26:54] Tom Gayner: Absolutely. Thanks for the question. I will take the first pass and then I’ll ask Jeremy to chime in. So for instance, the IPO of Markel itself back in 1986. Markel was a tiny little regional insurance company at the time. We had very little capital. We needed some in order to grow. We also needed to sell some stock and get it publicly listed so that different members of the Markel family could have liquidity for their stake and there could be a sorting and separation between what members of the family were continuing to work in the business versus those that were not and they could have liquid stock and liquidity for their ownership interest. So from that start, the first major acquisition we did was the Shand Evanston in Chicago, and it was a two-step deal because we didn’t have much money. So we started our leg our way into it ‘87 and ‘90. Two steps. Well, that took us from being a national, I mean, a regional company to a national company.

And by the way, Shand had some challenges. That’s one of the reasons it was for sale. And one of the reasons we could afford it was because, you know, we were capital-constrained and didn’t have much money at the time. In the first couple of years of our ownership of Shand, A) fixing the challenges that existed there already and layering on our conservative accounting and financial practises where we had to get the reserve levels up so that they could develop more likely to be redundant and deficient. That created the J curve where for two or three years people were scratching their heads and saying guys, why did you do that? And then subsequently, things went well. And for the next decade, we’ve made smaller tuck-in acquisitions or different speciality books for all the factors and things that you would have cited but not that much top-line growth.

Then came the opportunity to buy Terra Nova, which also had some challenges and troubles which were well-known. The deal was renegotiated once to reprice because of some of the things we found out during our due diligence process. But in the early days of turnover for the first year or two, that also created a J curve where earnings were diminished by the activities and the corrective actions we had to take place at Terra Nova before it subsequently really earned its position as it has now of being, you know, a crown jewel in the realm of Markel. But people got nervous because they saw that J curve and then I would tell people look, we’ve already gone from being a regional company to a national company and a national company to an international company so unless we’re going to go from an international company to an intergalactic company the era of us doing these more than double the size of the company, complete game changer acquisition has diminished. So it’s okay. We’re not going to surprise you with one of these big projects that have some short-term cost. Well, then we started Markel Ventures just to create some angst and uncertainty of people thinking we were doing things that we didn’t know what we were getting into it, but in the fullness of time Markel Ventures has developed beautifully and I think people were growing increasingly comfortable with what we’re doing there.

Well, then we do things like the insurance-linked securities and the insurance services because there were opportunities there. But in the realm and world of insurance, we have a pretty robust set of companies products offering services that cover the waterfront both product terms and geographically, so things we would tend to do in the realm of insurance going forward would probably not be transformational in the ways that things we’ve already done have. I think we, we got a pretty good team on the field now that being said, we’re always looking for opportunities and we’re looking for them all around the world. And when you’re leaning in on your front foot and you’re looking for these, you do find things, but it probably won’t be double the size of the company. Jeremy, any thoughts?

[01:30:55] Jeremy Noble: Maybe just quickly. It acts as if you can come in many different forms too. So Tom gave the lustre of examples of doubling the size of the company and going from a smaller player to a U.S. National to an international, but we look at talent, we look at teams, we look at bits of books of business and we also look at like smaller sort of MGA-type operations. So Tom shared his story earlier about Frederick Wolfe who had an MGA within the family in Germany. Well, Frederick, now overseas, our Continental European operations, our solution to Brexit when that occurred was the formation of an insurance entity based in Germany and Frederick overseas that. So it was a small MGA and it is now a large business that we organically grew. So acquisitions can come in many forms. I think it wouldn’t be transformational like Tom says, but for the most part, what we’d be looking for is how we continue to build out capabilities and how we complement the existing platform that we have. I love the teams we have. I love the books of businesses and offerings that we have. We have a lot of ways to drive that organically. But if there are ways to just add capability, we’re always open and looking.

[01:32:06] Tom Gayner: And for those of you, I don’t know, some friends of Frederick are in the room here. So when you go back to Germany and Germany overrepresented in the questions yesterday in Berkshire, please tell Frederick all the nice things we said about him and tell him that we meant them. Zone 2.

Using EBITDA

[01:32:22] Tino Moskowitz: Yeah. Good morning. My name is Tino Moskowitz. I’m from Germany.

[01:32:29] Tom Gayner: I love it when a plan comes together. Yeah, yeah.

[01:32:34] Tino Moskowitz: Most of us saw the movie yesterday, especially regarding Charlie. That’s why I have questions, especially in remembrance of Charlie as well, because they were also mentioned in the movie. Why do you still stick to the EBITDA number while Charlie also showed yesterday specially mentioned EBITDA as bullshit earnings? And the second question is if I read your proxy statement correctly then I’ve seen some spending on compensation consulting for $180,000 or even more. And also Charlie mentioned in his talks about the misjudgement that consulting companies are also something– I just want to know what for this money was spent. If you are so sure that you have great people in your business and you are able to get great people to your business, what for this money was spent? Thank you very much.

[01:33:50] Tom Gayner: Now let me take both of those questions and they’re very good questions and they’re very fair. First is the question about EBITDA and in the movie, I had one of the snippets about Charlie’s statements over the years and in a Charlie-esque way, he says anytime you see the phrase EBITDA, you should call, you substitute bullshit for that. And that is true to a certain degree. But it is not 100% true, and in fact, recently Mike led a gathering of the Markel Group and tried to again the process of knitting people together from different parts of the organisation. And in one of those moments within that time and the time that was allotted to me to talk about stuff, we talked about the concept of truth. Making a true statement. So for Charlie, Charlie can say things because he’s Charlie, he says EBITDA is bullshit earnings. As Stephen Colbert would say that’s truethy. But not since they see the truth. So Andrew, take your prop here. Got a can of Coke. And obviously, we have a rooting interest in Coca-Cola on the Board of Directors there, which is a lot of fun. And so I opposed this question to try to get to the concept of capital T, truth, and truth that perhaps we should hold a little more lightly.

So if you worked inside the Coca-Cola Company, if you were an employee of the Coca-Cola Company and I asked you what is the book value per share of the Coca-Cola Company? That is a question which can be answered. So if you go to the annual report of the Coca-Cola Company and as an accountant you look at the shareholders equity account and you see that number and you divide that by the number of shares outstanding. You get a number which is the book value per share of Coca-Cola. And I don’t remember this number exactly, but in rough measure, I think it’s about $6 a share. If you looked at the Coca-Cola financial statement. Now the market value of Coca-Cola is 60-ish dollars a share. So when you take that one share of Coca-Cola that you owned because you’re inside Coca-Cola and you’re looking at their financial statements, what’s the book value of a share of Coca-Cola? You come up with the answer $6 and you can show me the documents of the trail that that’s correct. But if you’re a Berkshire shareholder, what is the book value of Berkshire that relates to a share of Coca-Cola? Well, the answer to that is when it’s presented on the financial statements of Berkshire, it is presented at the market price, $60.00 a share. So mean that’s the market close. So something that one way of looking at it is $6 and that’s the truth. Looking at it in another way as a shareholder of Berkshire you see $60. Well, that’s true too, the one is $6 and one is $60. Wait a minute. It gets even weirder than that.

Markel owns shares in Berkshire. And Berkshire trades roughly 1 1/2 times book in the market right now, in rough, rough, rough terms. So that’s $60.00 of book value at Berkshire related to that one share of Coke becomes on our books $90.00 one and 1/2 times to $60. So I ask you, what is the book value of Coca-Cola, $6, %60 or $90, all of the above, none of the above, or something else? And I can argue for any one of those answers. And if I was taking a test and I gave my answer and the teacher graded it incorrectly, I would argue with them about why I was right with whatever answer I would have come up with. So what I want to point out in that statement and translate EBITDA is that EBITDA is one of those terms of language that is getting at a fundamental truth. So just like $6, $60 or $90 is true about the book value of Coca-Cola. You need to take the next step. I mean, you could almost say, well, what is it really? Well, what I would say is that the economic value of Coca-Cola is what really matters. That’s an income statement business, not so much a balance sheet. They have income statements. They have balance sheets. They have statements of cash flow, and all come to have those three, but in different businesses, different ones of those statements are more important than the other.

So to describe the economic value of Coca-Cola, it’s the income saving and the cash flows that really create the value, not so much the balance sheet. So I would say the market price of $60. If you told me I only had to give you one number, I would say the market is the closest approximation to the truth. So when we’re looking at businesses within Markel Ventures in particular and many of the sellers of these businesses think in terms of EBITDA and certainly their investment bankers do, we would not be serving your interest if we went into the seller and said, look, I know this is how you looked at your business. Let me explain how you look at it differently. You know what? They’re on to the next buyer. So our job is to take the number they give us and say, what is it really and we and Andrew and Jason and Peter and Mike, myself, we look at that number, we look at EBITDA and we adjust that to what we think the real earnings are and the real cash flows and what the real depreciation is and what the amortisation is.

And the amortisation if you really think about it in economic terms, sometimes it’s a negative, sometimes it actually should be a positive. So we do think about that and the last statement I’ll make and I’ll, again, I’ll drag poor Susan into this. So she retired about a year and a half ago and she has been pursuing some interests that she had that she didn’t have time to tend to when she was raising three kids and running a business and being married to me, that’s full-time. That’s several full-time jobs. So he’s been able to read and study some things and so she’s gone down this rabbit hole of physics and sort of the borderland between physics and quantum physics, and there’s a book called When We Cease to Understand the World and Hell-Go-Land and The Rigor of Angels is sort of the series that she’s been reading. It doesn’t really do you too much good, at least for me to get into the math. But as I try to read and I try to keep up with her, the number one takeaway I would have about a layman’s understanding between sort of the world of Newtonian physics and quantum physics is that things that are true in one dimension are not true in the other and be comfortable with the borderland and the ambiguity and the interpretation that is involved, because if you’re really just trying to get to the truth of things and you’re only using one side of it and not all of it, you won’t get there.

So in the world in which we live, EBITDA is a measure which a lot of agents and a lot of people transact. And in order for us to continue to grow and get to real cash money, which is my old accountant’s term for what we’re really looking for, we have to be able to translate EBITDA to cash and we don’t take EBITDA at face value. We do the work and translate it into cash to try to make good decisions. Thank you.

[01:41:09] Michael Heaton: Tom, on the compensation committee question if I can offer a thought on that. My guess would be what Charlie was pointing to is that compensation committees are often, I mean, it’s a pretend game, is what he’s saying, that it’s held up to pretend like the function and purpose of the compensation consultants is to keep management compensation fair when the reality is, is that the management team just uses those consultants as pawns in their hands to get leverage and to push for more and more compensation. I think that’s probably what he’s pointing to. I can promise you as one who’s very involved in that process that is not how our compensation committee uses the consultants. They’re there to provide data which is necessary and useful in the decisions that they make, but it doesn’t go beyond that.

As a real-life example, you might have noticed this very subtle change that was made in the last few months for our executive compensation, this management team felt it was important even it was just it was just symbolic as we move into this sort of Chapter 3 that I talked about ago that we that we mirror the commitment that we’re asking from all of you. We said it over and over again we don’t get to do this without you. This is a big team effort and the biggest thing we ask from you is permission to make long-term decisions in a world where most shareholders encourage management to make short-term decisions. That’s our ask of you. We wanted, again, to have even if it was a smaller token a symbolic reflection of the fact that we’re in it the same way. So we changed a portion of our long-term stock-based compensation from a three-year hold to an 8-year hold. So we add an additional five-year hold even post-retirement for members of the management team. When we suggested that of our own accord to the comp committee, they took it to the comp consultants and you know the comp consultant said, well, you can’t do that, nobody else does that. That’s a bad idea. You’re not going to be able to recruit talent. We said our comp committee said great, thanks for the data. Thanks for letting us know how other companies behave. That’s not how we behave. We’re in a long-term game. We’re going to go ahead and do it anyway.

Portfolio diversification

[01:43:43] Tom Gayner: Mike, yeah. Thank you. Thank you, Mike, for catching my omission of not getting to the second point, but he’s exactly right. Zone 1.

[01:43:55] Jonathan: Hi, I’m Jonathan from Hong Kong. So thank you for hosting this event. So I have two questions. The first question is about the Circle of Competence. So, Charlie said that we should fish where the fish are, but we should also stay within our circle of competence. How should we balance that? How do we know what we don’t need to know in different markets? So for example, Berkshire bought this car with this deal distribution thing a few years ago. Clearly, they did not understand that perhaps there were radiant governments and all that. And the Japanese bets as well and the BYD bet as well. So how do bands between fishing where the fish are and staying within your circle of competence? And my second question is about diversification. So I think 15% of your investment portfolio is in Berkshire, which is quite concentrated, but the other stuff is actually quite, you know, 2%, 3% bets or even like 1% bets. So is there a case for diversification like this or should we really concentrate on our 20 or 10 best ideas like occupy 80, 90% of our portfolio. Thanks.

[01:45:03] Tom Gayner: Right. Well, thanks for the question. And first, the two quotes, fish where the fish are and stay within your circle of competence. I agree with that 100%, but that is a static statement. And life is not static. It doesn’t stand still. So the fish are here now, but sometimes they move to different ponds. Sometimes ponds get overfished. So fishing where the fish are to me also implies the dynamic sense of you always got to see where the fish are cause they don’t stay in the same place. So you got to keep moving. Similarly, circle of competence, Charlie is the beautiful model of a lifelong learner. So at age 62, whatever circle of competence I have if it’s the same one I had when I was 14. Shame on me. That’s stupid. So at age 62, do I think I’m done? Do I think I have firm boundaries in my circle of competence? No, no. Just like Susan’s studying physics now. And I won’t tell you what age she is, but I’ll let that go.

You know, you should always be expanding that and learning new things. So the interaction between both your circle of competence moving and where the fish are moving I think allows for the dynamic nature of the world we actually live in, and you’re making a mistake if you ever, if you ever pin it down to any one circumstance or time. So that implies the willingness to do different things as time goes by. Berkshire has certainly been a great model of that. Markel, I believe is on the path of being a great model of that as well. Your second question related to diversification and number of holdings in the portfolio. You’re correct in that our position in Berkshire is oversized and it’s one that probably is disproportionate to the way most people own it institutionally. Although people individually do. And by the way, this little fun fact. We bought our first share of Berkshire in December of 1990. It was the first stock I bought when I joined the company, and as of the most recent quarter, our unrealized gain, our unrealized gain on our Berkshire holdings is now over a billion dollars. One stop.

The portfolio as a whole as of the end of the first quarter, I think the unrealized gain went over $7 billion which is a new record level. And a couple of things about that, I mean, we are a full taxpayer. So by virtue of the fact that we tend to buy and hold things for all kinds of reasons, one of the side benefits of that is that we get to defer the tax liability and we have roughly a billion and a half dollars that if we were to turn over the portfolio, we would have to write a cheque and pay that in the form of taxes whereas we still get to use and have that money working for you as shareholders. And we think that’s very important and we think it helps us frame and support long-term decision making.

The third point, this is just mechanics, but I think it’s very important. So that idea of 20 punches that Buffett talked about and you should have a big concentration in your top 20. Well, we sort of do and that I think roughly 60% of our equity portfolio is in the top 20. Secondly, there is a mechanical precise tide-out way of counting, but there’s also a more thoughtful way of counting. So as an example, and this is publicly disclosed, if you look at our 13 F, you can see it. We own both Home Depot and Lowe’s. Is that 2 holdings? Is that one holding? Is that 1.3 holdings, or is it 1.7 holdings? My assertion would be it’s not one and it’s not two, it’s somewhere in between and if you look at our owning of some other things they kind of cluster. We have John Deere and Caterpillar as examples in size and big numbers. So I think there’s probably more concentration among the best holdings than you might think mathematically, and if you looked at the list of holdings and you kind of did sort of the where 1 + 1 + 1 is not three, but something less than three, you would probably come to a conclusion that this is a little more concentrated and perhaps a little more active than you might think at first glance. Thank you. Zone 2.

Executive incentives

[01:49:16] Michael: Michael from Dallas, TX. I am a shareholder. I was thrilled to learn today that I got in at a lower cost basis than Berkshire actually. So that’s great news. I guess my question is related to what was asked earlier, I didn’t know was going to ask that question and I’ll try and ask it in a slightly different way. I am interested in incentive compensation for your executives and not the named executives in the proxy. We can see that there. I’m talking more about either the heads of business groups not naming the proxy or the heads of businesses at Markel Ventures. Can you share any thoughts on how you think about their incentive compensation other than what you already shared? That was very helpful what you shared, your example is helpful, but anything else you can share would be great learning for me.

[01:49:57] Tom Gayner: I’ll make sure I’ll make one comment and then I’ll turn it over to Mike and Jeremy to talk about their, you know, their thoughts on this. So in general, it’s long-term. We want people who are running businesses not to have compensation that’s based on ringing a bell in any one-year thing. You have to spread it out over three or five years. We think that fosters an ownership mentality and we’ve done that consistently for the long-term and we don’t change it with that. Mike and Jeremy, you can add details.

[01:50:27] Michael Heaton: See if I make you regret handing this question over to me by wading into some tricky, pretty tricky water here. Before turning to the specifics, I think how you come at compensation, whether it’s executive level or whatever else in the company is the most important question Tom talked about long-term. There’s an interesting contrast that has really bubbled up maybe a little less so now, but we heard a lot of it a few years ago. And that was this movement towards including in financial compensation cultural behaviours as I would describe them and I think we thought that was absurd. So the idea of if the company performs financially at this level, you get part of your bonus and if you live the company’s culture really well, then you get this much more, more of a bonus. We don’t believe that if you live the culture 70% or 80% of the way there, you should get 80% of a bonus.

I mean, you should leave the company. You either live the culture or you don’t live the culture. Financial compensation is not a tool to directly influence that type of behaviour. We want people who are here because they love to be here. They love what they’re building. They love the good that we’re doing. They love the fight. They love to win. They love to compete where the case may be. That’s the people we want, wherever they are in the company. You can’t create that. You can’t really get that out of financial compensation that comes from so many other things in ways. What does financial compensation do? We are a business. We’re a for-profit company. We need to earn good returns. We need to do that to deserve your capital. So we acknowledge that and we say look that’s a part of getting to play the game. We love to play and if we’re earning good returns, we should share that. The shareholders should get some. The employees should get some. And that’s all financial compensation is and it keeps one attuned to whether or not we’re doing justice with the resources we’re provided.

So whether it’s the executive level, whether it’s the leaders of the ventures businesses, whether it’s within insurance, we start with that philosophy and it’s fundamentally about like, hey, we got to earn a lot of money. We like making money and let’s make sure we’re sharing it reasonably, which usually amounts to some sort of a return on capital-based mentality. You got a pot of capital and if you do a good job with that capital then we’ll have some sharing above and beyond that is the underlying philosophy.

[01:53:08] Tom Gaynor: Anything you want to add, Jeremy?

[01:53:09] Jeremy Noble: I would just add that the point that was made, I mean our most senior leaders will have meaningful amounts of their total compensation that are tied up in the long-term

dynamics. If you were within, let’s say, on the insurance side, you’re going to have a mix of those metrics that are aligned with the sort of Markel Group metrics that you would see in the proxy. You have some that would be specific to the insurance engine, but the most and we incentivize on total performance, total returns, total profitability, not growth and those sorts of things. That’s not sort of an inherent part of it. But to Mike’s point, I mean, we want people that are truly invested in building something that’s remarkable and that they want to be part of what we’re doing here at Markel and that they align well with our culture. Win, win, win that Tom talks about all the time, long-term mentality, thinking about how you treat your employees, how your customers, your shareholders, the commitment to the communities of which we reside, those things create, you know, great people want to be part of that and those will drive value creation over time.

Improving the insurance business

[01:54:08] Tom Gayner: Thank you. Zone one.

[01:54:10] Brendan Wolfe: Hi, I’m Brendan Wolfe. I’m from Austin, TX. Thank you for taking my question. I’m going to bail awkwardly after this question. I got to catch my ride. But I was curious to know, I have an insurance question when you guys are evaluating new prospects and existing insureds, what are some things that have worked well the past three or five years? And what are some things that have not worked as well that you’re thinking about changing or have changed? Thank you.

[01:54:36] Tom Gayner: Absolutely. Jeremy, want to take it back to that?

[01:54:40] Jeremy Noble: Sure. You know, the reality is, is that at any point in time, I talked about a sort of a large portfolio and growth. We’ve talked about acquisitions over a long period of time and there are things that have gone well and there are things that haven’t gone well and we learned from those. So Tom will have the quote and they used to come from Alan Kirshner, that it’s okay to make mistakes, but don’t make the same damn ass mistake. And we live by that. So we recognise that over time. So any number of things go into evaluating prospects. I touched on some of that earlier. We think about sorts of capabilities. We think about people. We think about cultural fit. We think about customer segmentation, geographic segmentation, and product segmentation. All those go into our mindset there.

[01:55:25] Tom Gayner: Thank you. Zone 2. And I know we’re coming up at noon. We’ll probably stay here till 12:15. Cynthia is giving me the hook here. So we’re going to push just so I can get to say no to her about something and then we’ll hang around for a little bit.

[01:55:41] Mark Hammonds: Yeah. Mark Hammonds from London. Firstly, thank you for your generosity in hosting this event and in the annual report last year you talked about carrying out a review of your loss reserves because you found them to be deficient in some areas. Just wondered if you could talk more about what the process looked like and what you learned from it. Thank you.

[01:56:02] Tom Gayner: Jeremy?

[01:56:02] Jeremy Noble: Yeah, sure. So we’ve been highlighting for a couple of years and again, this wasn’t really necessarily unique to Markel. We were seeing, you know, actual loss experience above what we expected within our actual models, particularly the long tail lines, casualty, and professional liability. And we were reacting to that along the way. I was convinced we needed to not get out of 2023 without taking a much more extensive look at our reserves. So we got our best leaders across underwriting and claims and actuarial. We supplemented those efforts with third-party industry experts and industry data and we looked at in excess of I think $4 billion of reserves in our US speciality, casualty, and professional lines and we just unpacked a lot of what we were seeing from trends. So that would be it underlying sort of mix of business. If we were thinking about construction, you know looking at the contractor’s book, how do we split the construction defect from the non-construction defect, how do we think about project work or practise work just taking really data-driven insight-led initiative to understand what we were seeing over the last couple of years.

So we took pretty significant action in the portfolio on those reserves and commented on that at year-end as part of our 2023 results and then off the back of that, we started to modify and take underwriting action to drive prospective portfolio health considerations. So talked about that as far as even in the first quarter and we can see it in the lines of business. So we’re a bit more challenged. We’re taking action and we’re also contracting those total writings and in the areas of the portfolio, they’re performing really well. We’re meaningfully growing and we see a lot of opportunities across a lot of products in that space. And that was really the tail of the first quarter. I think that’s going to be the tail over the course of the year. So I feel much better positioned about where we are now as we move forward.

[01:58:00] Tom Gayner: Let me add to that. So yeah, it was a tough year last year and Jeremy spoke the definition about some things we did. But here’s what I am proud of and here’s what I think you as fellow shareholders and partners should take comfort in even with those actions and scrub it extra hard and facing some challenges we still developed with redundancy last year, full calendar year, fourth quarter we didn’t but for the full year we did. So I think that speaks to the culture and the idea of operating with a margin of safety such that even if you get surprised and you’re disappointed with stuff you did put up enough reserves on day one that you had the ability to absorb that and answer the bell for the next round of the fight so that I’m very proud of. Zone 1.

Artificial intelligence

[01:58:46] Neil Kumar: Hi, my name is Neil Kumar. I am a private investor and student in Boston. I first want to say thank you for hosting this event. It’s my first time in Omaha and my first time at a Markel event. I’ve enjoyed it so much. My question is related to AI. Do you have any plans or have already implemented the use of AI in your work?

[01:59:07] Tom Gayner: The question is about AI. AI is pervasive. The simple fact of the matter is like every technology, we would be idiotic not to embrace it and understand that the genie is out of the bottle, as Buffett said, and it’s going to affect business. We are already using it in bits and pieces and we will continue to be receptive, open-minded, and curious to try to figure out how to use it. I would say that we have a lot of veteran investors and veteran observers of life around here. So AI has become almost a frenzied word. Many years ago in the late 90s when the .com 1.0 came around in the distorted investment markets. Sort of AI is real, but the sensation of it, AI may have a bit of a fever pitch to it. And the way I would illustrate this is that so a couple weeks ago, when the Masters Tournament was on TV, our four-year-old grandson was at our home at that point and we had the Masters on and you know the Masters has a very limited number of commercials, but IBM’s one of the sponsors and all those commercials were about AI because that’s just the fever pitch thing that’s going. So my grandson was playing with some toys and whatnot, and at one point he goes AI, AI, AI. So it’s real. And I get it. And then we will embrace it and make sure that we’re not left behind on this. But also there are different levels of marketing that are not quite as real as we have seen before. Thank you. Zone 2.

[02:00:48] Ira Holtzman: Hi, my name is Ira Holtzman from Glenview, IL. I became a shareholder after I attended the crunch last year, for the first time.

[02:00:55] Tom Gayner: And you’re up 17% so far. Not that I’m counting, but go ahead.

Tesla insurance

[02:00:57] Ira Holtzman: I keep. I keep adding along the way by the way. My question relates to Tesla Insurance. I have a Tesla and I have Tesla insurance and I saw that it’s underwritten by State National. So I have a question and a comment. One is how is that going and is that something that you’re looking at expanding maybe to others, I don’t know if other auto companies are going to want to offer that or have it underwritten. Am I correct in my assumption?

[02:01:27] Tom Gayner: Yeah, thank you. I’ll let everybody speak to this in just a moment. But I do want to make the point. When I talked about us going from a national company to an international company, but probably not going to an intergalactic company. We’re not doing the intergalactic work that Mr. Musk is doing. So good luck to him. But I wanted to frame it at that point. Secondly, it actually highlights something very important that is largely done through the insurance services products and services that we offer. So we facilitated his ability to provide that form of insurance not by using our own balance sheet, but by using our own skills and charging the fees for service in order to enable that. And with that, let me turn it over to Jim if he wants to say anything about it.

[02:02:09] Jeremy Noble: Yeah. I mean, for the most part, I’m not going to comment on specific customers or clients within Markel, but it is reported that State National has a relationship with Tesla. Overall, what I would say is the State National and that service that Tom was alluding to is going extremely well. And that is the nature of State National’s business. They efficiently help risk, match risk and capital and they don’t take underwriting risk. So it’s not an underwriting shop, it’s actually a credit risk management shop and over 40 years we’ve built the leading entity in that space. But that business model is performing extremely, extremely well.

[02:02:49] Andrew Crowley: And I’ll add one thing from ventures, just because we are a little intergalactic, I guess, in the sense that so you’ve got Buckner is a heavy lift crane provider and actually leases out cranes for those that are involved in space exploration. So we do have a business that’s servicing that. We also have Weldship which leases out tube trailers for speciality and industrial gases and we lease out helium and other trailers to those that are focused in the same area. So we have found a way to make money on it along the way without having to go to outer space ourselves.

Returns on capital

[02:03:20] Tom Gayner: And I think we have one other business that does some business with Tesla, but we’re current on all things, all accounts. Zone 1.

[02:03:28] Matthew Vogel: Hi, I’m Matthew Vogel, a teenager from Las Vegas. So I want to ask you in your letters, you’ve always stressed the importance of businesses that have attractive returns on capital with reinvestment opportunities or capital discipline. So when the reinvestment incrementally is into projects outside of the core high-return business like Alphabet, how do you evaluate that business’s prospects?

[02:03:49] Tom Gayner: OK, tell me that again. I’m sorry you spoke a little quickly. I got that. You were a teenage boy from Las Vegas, and I really couldn’t connect after that. I got distracted.

[02:04:02] Matthew Vogel: I get it. So I was saying in your letters you’ve always said the importance of returns on capital and business and having reinvestment opportunities. So when you have a business where the incremental reinvestment is to projects outside of the core high-return business like in Google or Alphabet, how do you evaluate that business’s prospects?

[02:04:20] Tom Gayner: With most businesses, including Google that you mentioned and as they move into things that are different than what they did do, you have to trust the management. And how do you come to trust the management? Well, you look at what they’ve already done over a longer period of time. There’s a famous Virginian named Patrick Henry who among the things he said is, I know of no way to judge the future but by the past. So even if there’s a new activity, the people who are doing the new activity do have some track record. And they do have an intellectual case to make for why it is that they’re doing what they’re doing. So that’s some of what we do every day is to think about that, see opportunities, and just try to be thoughtful. And again, you’re never going to bat 100%, but you just try to exercise your own muscles of logic and reasonability and common sense and track record to draw reasonable conclusions about what is yet to be. Thank you. Zone 2.

Managing people at Markel

[02:05:23] Roland: Hi, good afternoon. I’m Roland. I’m from Vancouver and I’m here as a potential investor. I’d like to ask a question that relates to how you manage people within Markel Group, specifically, when we had a period like the last few years when the combined ratio has been rising and then you mentioned that, you know, you have identified some of those areas that the mistakes were being made. So how did you kind of manage the situations whereby you hold the team accountable for those decisions versus having to encourage them to take on calculated risk when necessary? How do you balance between taking a long-term view on decision making versus you know short-term kind of mistakes being made? Yeah. Thank you.

[02:06:08] Tom Gayner: Thank you. Well, to repeat the question as best I can. The gist of it is how we balance between perhaps some short-term negative results and not over-penalising somebody who did that for the possible returns in the future. So it is a balancing process and the short answer to how do we balance that is imperfectly. People who sometimes are, yeah, unhappy about the way in which we would balance that. But I know exactly what you’re saying and what it means is there are numbers on a piece of paper. And if you look at numbers on a piece of paper and you stop there, you are only doing half your work. They need to do that work first, but then you need to pick your head up. And say, why did those numbers play out that way? Is it likely that will continue to be the case next year, two years, three years, five years and or is there some reason why it’s likely to be different?

I’ll tell one story. I know we’re in the lightning round of the last couple of minutes, but it relates perhaps to the difficulties we had with the intellectual property book of business and I was very frustrated and very disappointed with how that played. And I have told this story about a bazillion times around the halls of Markel to illustrate some of the things that were frustrating to me about that and what we need to focus on going forward. And that I was travelling somewhere randomly and I met someone randomly and we’re just having a conversation. This is very turns out that was a very successful businessman. He’s from Brazil and chatted. He had recently bought his nine-year-old daughter a new horse and turns out he had ensured that with Markel. And I said to our people, coming back to tell the story, I love that form of insurance as straight as much of that as we possibly can. Because if you think about it, that 9-year-old girl didn’t want anything bad to happen to that horse. That dad didn’t want anything bad to happen to that horse. That horse did not want anything bad to happen to the horse. And we, as the insurer didn’t want anything bad to happen. We are perfectly aligned.

So if I saw somebody writing that kind of business and they had a bad result but those were the dynamics, I would say this is a soluble problem. We can figure this out. It’s going to be okay. So I’ve used my judgement to come to that point of view. If I look at something and the facts don’t line up that way. And by the way, I wish we could sell 100% of our insurance with those kinds of alignments. There’s not enough insurance risk in the world that meets that test, but you have to use your judgment to think about the things that you did do and where the alignments were and what the motivations were to see if it seems reasonable and judge accordingly. It’s an imperfect art, but that again is what we do every day. I think we have time for two more questions, so one and two. Last two.

Mental models

[02:09:01] Arv: Hello, Mr Gaynor I am Arv. I’m an 18-year-old shareholder from Connecticut and my question is in light of poor Charlie’s Almanack being the only book sold at the Berkshire Hathaway annual meeting this year, what are your favourite mental models and how do you apply them within Markel or through running the investment portfolio?

[02:09:19] Tom Gayner: Well, thank you. And the list of books that we talked about and we’ll be having some at the Markel broader set and I’m a constant reader, if you ever in my office, all you will see are books overflowing. If you come to my home, you’ll see books, books, books, books. So I share that passion with Charlie and I’ll tell two stories about sort of the interaction. I was lucky enough to have with Charlie about books and the list is endless. So one time I was very fortunate. I was lucky enough to be having dinner with him and of course, one of the topics you would always talk about with Charlie would be books. And so there was a book I had read recently that I was deeply impressed with and that’s sort of what I brought to the table, and the book was how Genghis Khan invented the modern world. So, Genghis Khan, you know, he gets a bad wrap. He did some things very, very well. And this book sort of was about the positive things that Genghis Khan had done. So Charlie sort of, in his own way with his arms like that said that book is so good. I don’t even know if it’s true. He did not like to be one up on books that were dangerously close. The other book story I’ll tell is about Charlie and this relates to Susan and her study of physics and my great friend, Chris Davis. There was there was a book that Susan recently gave Chris and he told him about a book that Charlie had given him at one point in time. He described it to Chris, and he says I hope you like this book if you don’t give it to a smarter friend. So all I can tell you is read, read, read, read and any name or two that I would give you would be an unnecessary truncation. Keep going. Zone two, last question. Thank you.

Cyber security insurance

[02:11:03] Tom Seymour: Tom Seymour, West Hartford, CT and a shareholder. Ajit yesterday had some I thought interesting comments about cyber insurance and I got the sense that you guys actually write cyber insurance. So how much cyber insurance do you write? And if you do write cyber insurance has Ajit’s comments made you rethink whether you should write it.

[02:11:32] Tom Gayner: Well, you should always listen to it. You’d be idiotic not to. But we do write cyber insurance and we do it differently than the way Ajit would and we have a different set of opportunities in front of us than what Ajit would do. Ajit would write a very big ticket, big limit gross aggregate stuff and it would be willing to write it…