“It really helps if you know which hunting ground to look in. In fact, we all do better hunting where the hunting is easy. I have a friend who’s a fisherman. He says, ‘I have a simple rule for success in fishing. Fish where the fish are.’”
Let’s imagine that you are running a small insurance company that was family owned and operated for many decades until it went public five years ago. As a newly public company, you are relatively unknown in the investing community. You hope to attract shareholders who have a long term mindset and will allow management to focus on years and decades rather than quarters. How can you attract such shareholders?
Many investors claim to have a long term mindset but few actually do. It might be an exaggeration to say it is like searching for a needle in a haystack, but perhaps not by much. What if you could look for such investors in a location where they are known to congregate? Your odds of attracting a solid shareholder base would be much higher. This is precisely what Markel Corporation has been doing since 1991 by hosting a brunch in Omaha on the day after the Berkshire Hathaway annual meeting.
This year, the Markel brunch took place on Sunday, May 7. CEO Tom Gayner and his management team answered questions covering a wide range of topics for two hours. I did not attend the Berkshire meeting and was not at the Markel event. However, Markel recently posted a video of the Q&A session which appears below. It is well worth taking the time to watch the entire video if you are interested in how a smaller company has taken the Berkshire playbook and emulated many aspects of it.
With shareholders’ equity of $505 billion and a market capitalization of just over $700 billion, Berkshire Hathaway’s immense size is an inherent constraint on its future growth. In contrast, Markel has shareholders’ equity of $13.7 billion and a market capitalization of $17.7 billion. There are a greater number of opportunities for Markel when it comes to allocating capital toward marketable securities or acquisitions.
It is interesting to note that Markel has allocated a large percentage of its equity portfolio to Berkshire Hathaway for many decades. As of March 31, 2023, Berkshire’s Class A and B shares accounted for 12.6% of Markel’s equity portfolio. Tom Gayner is not only a longtime admirer of Warren Buffett and Charlie Munger, but he has also chosen to make Berkshire the cornerstone of Markel’s equity portfolio.
What does Berkshire’s management think of Markel Corporation? Would Warren Buffett consider Markel to be a potential acquisition target?
Markel is not that much larger than Alleghany, an insurer that Berkshire acquired last year. Shortly after the Alleghany acquisition was announced, I wrote an article speculating that Markel might be Berkshire’s next acquisition. Has Mr. Buffett ever offered to acquire Markel? There has never been any public announcement, but we do know that Berkshire acquired 420,293 shares of Markel during the first quarter of 2022 and modestly increased the investment during the second quarter. Berkshire now owns approximately 3.5% of Markel’s outstanding shares.
There seems to be mutual admiration between the two companies, but my guess is that Markel will remain independent. If that is the case, Berkshire shareholders might consider whether they should also invest in Markel. The question is whether Markel offers higher expected returns compared to Berkshire sufficient to account for the greater level of risk involved in owning a smaller and less diversified company.
In this article, I have highlighted four points of discussion that came up during the Markel brunch Q&A session:
- Fixed Maturity Portfolio
- Interest Rates and Inflation
- Use and Limitations of EBITDA
- Loss Reserves and Trust in Management
I have not attempted to transcribe the meeting or to cover every single topic that came up during the discussion. Instead, my focus is mostly on exploring how Markel might resemble Berkshire Hathaway at an earlier stage of development. How should Berkshire shareholders think about a potential investment in Markel?
For readers who are not familiar with Markel, I suggest reviewing my article posted in April 2022, Does it Make Sense for Berkshire Hathaway to acquire Markel Corporation?. This article provides background information on the “mini Berkshire” concept in general and how it might apply to Markel specifically. There are also several articles related to Markel that have been published on The Rational Walk in recent years. Also, readers may want to check out the Berkshire Hathaway Resources page.
Fixed Maturity Portfolio
Markel has long maintained a large fixed maturity portfolio that is designed to match the projected amount and timing of insurance liabilities. Markel has a far higher allocation to bonds compared to Berkshire. As of March 31, 2023, Markel’s fixed maturity portfolio had an amortized cost of $13.1 billion and estimated market value of $12.4 billion. Markel carries its fixed maturity portfolio on its balance sheet at market value. The following exhibits show the composition of the portfolio:
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