The Dichotomy Of Markel's Strategy and Results
Companies attract the shareholders they deserve.
As a long-term investor, I am drawn to companies I don’t have to worry about. This happens when messaging from management and their performance align for extended periods of time. Particularly, when management teams are tenacious about consistent improvement while not taking on excessive risk to build returns, pair this with a long-term focus and that generally outlines a company that is not of high concern at any given period. However, this does not alter the intensity or comprehension of research associated with the holding. The benefit is sleeping better at night from my trust and faith in the business and management team. Markel is a prime example of a holding like this. Berkshire is an even more fortified example.
Companies attract the shareholders they deserve.
When management shows integrity, long-term focus, and transparency with investors, they generally attract a high-quality investor base. Markel highlighted in its most recent annual report that Berkshire is the only company with lower investor turnover. This is a massive achievement and a huge vote of confidence by shareholders in the quality of the underlying assets and management team.
Markel is relentlessly focused on the long-term. They have often said they only like to own businesses that they would hold forever. Additionally, they work to align interests of customers, colleagues, and shareholders (win-win-win philosophy).
Markel measures itself on long-term value creation, but understands that those results stem from day to day decisions and actions. This dichotomy of focus is crucial. Some years will be better than others, but long-term focus is fueled by period/period improvement. Therefore, a long horizon is not an excuse for short-term underperformance.
This bifurcated mindset is continued in how they approach their three engines (insurance, investments, and ventures). Diversification and specialization. Diversification is not a new approach to risk management, but the quality of what provides diversity is key. This is where specialization comes in. Markel works to have unique expertise in each venture. If they weren’t good at it, why would they do it? This mentality stems from the insurance core of the business that punishes those who don’t specialize well.
The next core of Markel is a fortress balance sheet. Having a strong capital position and low debt levels gives the peace of mind to be opportunistic and mitigate overextending the business. There’s no reason to put yourself under unnecessary and excessive pressure with debt. It may boost short term results, but increases long-term risk exponentially.
Insurance
The company improved its combined ratio to 95.2% in 2024 from 98.4% in 2023. The main driver in this was the international insurance business, which produced a sub-80% combined ratio. International accounts for a third of insurance revenues in 2024. This area previously saw some turbulence during the pandemic, however, new management members for the segment have proven to be valuable additions.
The core of Markel insurance is the US Specialty business. They often insure what others won’t. This has high associated pay outs, but also high premiums. Specialty is constantly evolving. While many business lines are similar, the company has recently exited multiple lines including casualty retail, business owner’s policy, risk-managed excess construction, and intellectual property collateral protection insurance. This is part of a continued effort, started 2 years ago, to focus the business and continually improve. This has already shown positive results for 2024 and management is confident that results will be even better in 2025.
Investments
Investments returned 20.1% in 2024, trailing the S&P 500 which yielded 25%. Management still sees this as a strong return as it also contributes to the 12.8% average return over the last 5 years.
The investments are focused around four principles:
Good return on capital and low debt
Management teams with equal parts talent and integrity
Reinvestment opportunities to grow and/or capital discipline
All while paying a reasonable price
The purpose of investments and the overall company is on long-term capital protection as opposed to short-term performance. By maintaining long holding periods, there is a compounding effect of deferred tax liability which acts as a low cost funding method. For example, in 2024 the investments saw an unrealized gain of $7.9bn, meaning a $2bn deferred tax liability. Continuous strong unrealized gains over significant periods compound and show strong perspective by management.
A portion of investments is fixed-income assets. This income is meant to offset the cost of the float. In 2024, fixed income contributed to an insurance spread of $1.18bn based on a combination of underwriting profits of $402mm and net interest income of $778mm. 98% of the fixed income portfolio are AA rated or better. This segment is focused on resilience through cycles. The strategy is not overly complex, assets are generally aligned in duration and currency with accompanying liabilities.
Ventures
Revenues for Ventures increased from $5bn in 2023 to $5.1bn in 2024. Some businesses experienced tailwinds from the pandemic, which began to subside in 2024, while others began to re-emerge or grow organically. This led to operating income staying flat at $520mm year/year.
Acquisitions have been limited for ventures as management “waits on the sidelines” for attractive opportunities to present themselves. This has been the case in recent years and as long as acquisitions continue to appear expensive, this will remain the case. One exception to this was the 2024 acquisition of Valor Environmental, an erosion control business.
I am looking forward to an exciting deep dive, I will be posting next Sunday. Stay tuned for the analysis.
Until Sunday,
Soren