Markel Meeting

Tom Gaynor & Steve Markel
Q: (from David Winters). Would you ever do anything that's dilutive.
TG - Markel was a family business. Public offering process (1986) had a lot
of layers around that issue. Ultimate goal to set up corp and biz that is more
durable than any particular individual. Culture is more determinative of what
they do than the comp structure (cash salary plus bonus 50/50 cash and
stock). Try to hold onto stock as much as they can.
SM - Priority of shareholder's interest over owner's interest. Make sure
rewards of owning stock overwhelmed rewards of being an employee.
Getting return for shareholders comes first. Want associates of company to
become meaningful shareholders over time. Focus is also always on long-
term returns. Building net worth takes priority over building net income.
Q: If do pretty good job underwriting and pretty good job investing,
you get a superior result. Explain.
TG - Structure of insurance company lends itself to good results in right
hands and with right people/approach. Insurance business that makes an
underwriting profit - very difficult to accomplish. If you have that, it's better
than cash on delivery. Instead, it's cash ahead of delivery.
SM - Most insurance execs have grown up on underwriting side of biz and
don't understand the investing side, so they outsource it. This leads to the
wrong approach, as all you're trying to do is earn average returns and be
rehired each year. Focus on short-term earnings is a penalty to earnings
over long periods. Deferred tax on security gains is a penalty on earnings - if
you sell. Supports the long-term approach.
Q: Where do things stand in terms of the Alterra acquisition.
TG - Good underwriting, good investments but different approach. Just make
different choices. 99% of the transition is complete. Markel is heavier
investor in equities (normally about 80%) than most other insurance
companies. Allows for margin of safety and ability to endure bad days. Can
absorb bad days that way. Coming out of financial crisis at 65-68%. At
Alterra close were at about 40%. Rebuilding that back toward 80%. Now
above 50%. Will move faster if they see the opportunities to do so.

Q: Knowing management teams of companies you invest in. Fruitful
and fun, necessary, etc.
SM - Results from Markel ventures are very much inline with expectations.
TG - Jockey is key part of the process. Graham described visiting
management as cheating. You should be able to do your work and analysis
from the numbers. Talking to management violated rules of game. Many
Graham and Dodd followers shy away from this. As investors, you can be
seduced by charming CEO. Likes to know management as much as possible
and likes to like them. It's critically essential to the success of the business.
Having a charismatic CEO is an important part of leading the business well -
it helps attract talented employees, customers, etc. Need to have people
that like them. Companies run by difficult people where CEO accumulates
enemies doesn't always end well.
Q: Buying back stock given current P/B why not more aggressive
(1.5-2.0 Book).
SM - Trading at significant discount to that. Can reinvest in business,
investment portfolio or share repurchase. The opportunity to repurchase
shares are somewhat limited - few days after earnings release week or two
to a month. Are limited to percentage of daily average trading volume (5k-
10k per day). Over long periods, have had much better opportunities to
make investments. Will as much as possible offset dilution. If don't see
opportunities, will be more aggressive.
TG - Restricted stock - 5 years to earn, plus additional three, so it takes
eight years. First priority with cash is to put it to work inside organization.
Then make good investments. Then may repurchase if trading under intrinsic
value. Even if stock looks cheap, will not buy back if options 1 and 2 provide
better opportunity to increase Markel intrinsic value.
Q: Use of debt by potential investments
TG - Likes low debt. Prudent use is ok. Buying different businesses is risky.
Avoiding businesses that use a lot of debt. If not debt, crooks are only
stealing own money (don't want to do that). Having a lot of debt means
there's a lot of other people's money in the game. Provides insight into the
character of the people. Likes prudent use of debt. Where revenues highly
uncertain, prudent level of debt is close to zero. Where revenues are more

assured and supported by assets, prudent use of debt can be higher. Bias
though is on low debt. One of lessons learned from financial crisis is that
there's much more leverage in the system than you realize.
SM - Markel uses prudent amount of debt in its own port, so that extends to
its investments.
Q: View on financial equities.
TG - Have done well with insurance. Haven't done as well with banks, so
have very limited exposure
Q: Which qualities of other insurance companies are so negative that
you would you be short them. Which other two insurance companies
in the industry do you admire most.
TG - Admire underwriting profitability and reserve development. Travelers
and Chubb are two competitors they think highly of. BRK is also their largest
SM - Progressive and mindset of identifying and serving niche markets in
personal auto space. Geico in terms of marketing. Power of renewals. What
allows you to grow from 2%-10% is trying to manage EPS. Increasing
marketing cost negatively impacts combined ratio. But, if you keep a client
for 10 years, you get a much better return on that investment. Retention of
business is really important element of building insurance company,
particularly property and casualty. Progressive also were hawks an making
sure insurance reserves were more than necessary. P&C insurance
companies 25, 10 and five years ago. There have been very few long-term
success stories.
Q: What are you seeing in underwriting markets today.
SM - Trend not great. Relative pricing in 2013 was good. Rate increases
quarter after quarter for last 2-3 years. Cumulative impact over time is quite
good. Level of pricing pretty strong overall throughout industry. Toward end
of last year, into 1Q, particularly in property (especially casualty) that is
starting to change. Hard at this point to judge magnitude. Have let some
business go away because they're not willing to compete at that pricing. If
peers want to cut prices and have underwriting losses, then Markel won't try

and compete and won't lose sleep over it. In general, more recently, pricing
is moving in the wrong direction in casualty.
TG - Companies that produce underwriting profit are liked by Markel. That's
rational business practice.
Q: What's your opinion about stock today.
TG - Short answer is I don't know. When it comes to general market
conditions and what will happen in market, there are those that don't know
and those that don't know they don't know. In long run (next 10, 20, and
more years) is wildly optimistic. There are billions of people around the
world that are becoming more and more interconnected. Winnows out the
bad things and improves the environment.
Q: What was rationale for acquiring Alterra last year.
SM - Combination of factors. Expanding lines of business and expanding
insurance skills was driving force. Brought Markel into reinsurance world in
much more important way. Brought company more meaningfully into large
account world as well. Alterra had division doing business with Fortune 1000
companies that had higher coverage. This was well above where Markel
played (typically up to $1 mm vs up to $50 mm).. In existing businesses
that Markel was very good at, the scope was broadened. Thought the
purchase was at a very fair price and economics will be quite attractive over
time. Plus, from investment perspective, the size of the opportunity set
increased due to having more capital to invest.
Q: Expense ratio. At what level are you running as efficiently as
possible. Commercial insurance business for AIG - formidable
competitor or not.
SM - Ideal expense ratio is as low as possible. Function of business mix and
how you structure your reinsurance business. Writing smaller policies makes
acquisition costs higher. When buy reinsurance, the way that it's structured
can impact the expense ratio. Commissions can exceed actual costs. You can
manipulate that to make it look better. Markel looks to do as little
reinsurance business as possible. New entrants in specialty arena. Hard to
judge how relevant they are. When they want business and offer right
prices, they can get the business. Disruptive but not worried about it.

Q: How do you think about ratio of investments to equity. Book value
growth. How you view adjustments to book value in regards to float.
Even with long-term deferred taxes on capital gains for long-term
positions. How do they think about that.
SM - Investment leverage. Port was about 4x shareholders equity at one
time. Those days are gone forever. Having runoff business embedded in an
acquisition also impacted this. Dropped below 3:1 and below. About 2.8
today. Normal level, depending on how fast they can grow equity. Have to
assume it's about where it's going to be. When they can earn 6-7% on US
Governments, high returns on equity are much easier with modest
underwriting profits. In today's environment, underwriting profits have to be
much stronger. How do you value float and deferred tax assets and
liabilities. Do not go through any specific analysis in this regard. If you can
make underwriting profits in perpetuity, float is equivalent to 100% equity.
Common stocks should earn 10% or more. But, it's very subjective. It's all
about your opportunity cost. What's your choice. How does it compare to
TG - Investment leverage is just one factor. Trying to make the value of the
business grow. Car Max has been very successful investment. Has financial
operation embedded in the retail operation. Respects skills of management
and ways in which it executes those levers.
Q: How did they get comfortable with Alterra book of business.
SM - Underlying companies in Alterra (one was Max RE) new start-up 10
years ago. Wrote very low risk, finite reinsurance. Short tail. Known policy
limits. All had happened in fairly near term. Also did merger in which they
bought Sun insurance operations (originally from Chubb). Also, had short
operating history and short tail risk. Much smaller and easier to
analyze/assess. Alterra people also had very little loyalty to brand as it
hadn't been around that long. Also, over last 5-6 years, reorg in Markel IT
were largely complete, making transition much easier. Alterra also had
strong IT.
TG - Alterra was well run company. Good due diligence team. Familiarity.
Companies were in similar lines of business.
Q: What are the signals that lead to decision to buy another
insurance business.

TG - Red flag issues revolve around integrity. How conservative are the
decisions. In terms of valuation, lower combined ratio, higher ROE and
persistence. What you look at relates to the past. What you're buying relates
to the future. Be careful of being overprecise. It is an iterative process.
SM - Broadly looking for specialty property and casualty coverages. How
they're priced, how claims are handled. How sustainable. What are their
Q: Impact of QE on process.
TG - Think about inflation, rates of inflation or deflation and impact on the
operations of their investments.
SM - It will change some day but try not to worry too much about when it
will happen.
Q: What is attraction to bakery industry. Social vs. Business brain.
TG - Both Social and Business brain can benefit business success. Culture of
long-term stewardship. Wish to pay reasonable salaries for roles and
responsibilities people have. Want people with ability to do extraordinarily
SM - important part of value system is really want people to be very
community minded where they operate. Very strong obligation to support
community. Get involved in local non-profits and activities that will help
build their communities.
TG - Like food businesses and agricultural things in terms of rising standard
of living. Leads to eating better. Don't expect that to change.
Q: What is max transaction size Markel ventures looks at.
TG - Pledge they will act rationally. Do what's best for Markel over time.
Harder to buy businesses as you grow. Sometimes there is the possibility to
write as much business as you can at a good price. In other cases, overall
size opportunity may not be as large, just write as much as you can that will
allow for requisite profitability. Not aggressively pursuing deals today. Too
much leverage in system and prices aren't attractive. Not scared of paying a
premium if the deal is below intrinsic value
Q: Preferred economics of insurance industry

SM - Nice to be able to collect money a year ahead of time. Not many other
industries like that.
Q: Abbey Protection acquisition in UK
SM - Specialist insurance company writing legal protection insurance in UK
against audit on your tax returns. Working very well to date. High volume of
small transactions. Policy limits on each transaction are very small. Often
sold through association membership. Also a servicing industry that provides
very nice margins. Opens door for Markel into a lot of other retail businesses
- selling other insurance into UK small business market.
TG - Brought to Markel by Markel international people that have been with
company for 10 years. Akin to BRK See's deal. They bring expertise that
others within Markel don't see.
Q: Status of pension funding ratios and accounting implications.
TG - Has gotten meaningfully better over last year. Not solved but getting
better day-by-day right now.
Q: Culture. What are some threats to it as make more acquisitions.
SM - Have to emphasize important elements every day and work on
incorporating them. Repetitive process. Bringing it into the discussion
regularly. Principles of shareholder value, shareholders come first. Pay for
performance not for showing up. Culture in Lloyd's 10 years ago was very
different. Now Markel International is very similar to Markel US. Repetitive
process. Talking it and living it day after day. Understanding long- versus
short-term rewards.
TG - It's fun. Not a negative activity but a positive one.
Q: Corporate governance thoughts.
TG - Relatively decentralized organization. Give people a long leash. Better
organization and people than if they'd micromanaged. Cost of it not working
is very explicit. Benefits of having everyone do the right thing every day are
implicit. Hard to quantify the value, but despite specific costly failures of
being decentralized it works well.
SM - Part of having systems work is making sure everything is transparency.
Be open and honest about everything. This makes you more likely to not

have a problem. That is a cultural thing that's important. Allows people to
talk to one another.

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