Markel 2Q17 Earnings Call Notes

Richard R. Whitt, III – Markel Corp.

Insurtech space

Sure. Couple; just quick examples. We, like a lot of people, are starting to look at the Insurtech space. And the State National, I think they are ideally situated to sort of be the go between the Insurtech folks and sort of your standard insurance carrier types. It’s a clash of cultures there, I would say. The Insurtech folks are used to things happening lightening fast and with minimal regulatory issues and all that and that’s not insurance. So there almost needs to be a translator between Insurtech folks and standard insurance folks. And that is a role that State National plays wonderfully. And we see them helping us with our Insurtech initiatives sort of being that translator between us and those folks, and we think a lot of other people do that as well.

Markel 1Q17 Earnings Call Notes

Thomas Gayner – Co-Chief Executive Officer

Prices in this world are high

“Prices in this world are high and there is a lot of capital sloshing around, trying to find deals. We will continue to focus on organic growth opportunities at our existing businesses and we’ll opportunity respond when we see the chance to do so.”

Starting to see loss cost trend move up a bit

“As just as people start to talk about rates potentially moving up and inflation maybe starting to move a little bit, you’re starting to see loss cost trend, which makes sense. So there it’s a mixed bag depending on which line of business of ours we’re talking about. But we’re seeing a little bit of a trend and that’s driven some of those rate increases and we also just had some one-off things in the first quarter that drove some of that increase.”

Richard Witt

Reinsurance combined ratio hit 132%

“The combined ratio for the reinsurance segment was 132% compared to 82% in 2016. As Anne just discussed, the significant increase in the combined ratio this quarter is due to adverse development on prior year loss reserves, driven by the $85 million or 38 points of reserve strengthening in U.K. motor reinsurance. It’s worth pointing out that this London written business was discontinued in 2014.”

Markel 3Q16 Earnings Call Notes

Markel (MKL) Q3 2016 Results
Thomas S. Gayner

We’ve beaten the index for three decades and indexes aren’t that passive anyways

“As headline after headline proclaims these days, active management has a tough time outperforming passive approaches like indexing. Our three decades of outperformance stands in ongoing contrast to those headlines though. Additionally, our costs are so low that we really wouldn’t pick up any cost savings by switching the index. Also, indexes are not as passive as you think. Turnover within an index causes taxes to be incurred, while we also regularly realized gainings over the years on our equity holdings.”

It remains a sellers market out there in Markel ventures

“We continue to look for additional opportunities to grow our Markel Ventures operations, but it remains a sellers’ market out there and we remain disciplined in the prices we are willing to pay for acquisitions. Our reputation at Markel Ventures continues to grow along with our success, and we are seeing interesting opportunities that we would’ve never seen in prior years. We’re hard at work meeting people and reviewing opportunities, and I have every confidence that we will find appropriate opportunities to continue to build value as time goes by.

Been changes in the way that healthcare is delivered

” there has been tremendous change. I think, as everybody’s aware in just sort of how healthcare is being delivered, the smaller practices, the two, three, four doctors, they’ve been forming bigger practices, been joining hospital groups, so the landscape has changed.”

Markel (MKL) Q2 2016 Earnings Call

Markel (MKL) Co-CEO Tom Gayner on the macroeconomic environment being perplexing as a result of low interest rates

“There are no practical long-term historical precedence to study and use as guides for what comes next. As such, our number one objective is to remain agile and flexible, so that we can adapt to different circumstances as they develop.”

Markel (MKL) Co-CEO Tom Gayner said they’re focused on building one of the world’s great companies

“We’ve got some good short-term news from the first half of 2016 to report to you this morning, and that’s always fun. More importantly though, this call was a check-in and an update on the long-term story of building the Markel Corporation. Building one of the world’s great companies is what motivates us and we’re excited to share with you the details of how that’s going.”

Markel (MKL) CFO Anne Waleski said they are remaining disciplined when writing new insurance

“Market conditions remained very competitive. Consistent with our historical practices, we will not write business, when we believe prevailing market rates will not support our underwriting profit targets.”

Markel (MKL) President Michael Crowley said they’re continuing to enhance their online capabilities

“We continue to make strides with our client facing technology, as evidenced by the successful rollout of our new express renewal program. And each quarter, we’re enhancing our Markel online portal with greater functionality and additional products.”

Insurance market pricing may be bottoming

“Just a few other items regarding competition. Market conditions remain particularly challenging in London and in the large accounts segments. Competition also remained strong in the reinsurance market. However, as I think I stated last quarter the rates have declined and slowed and even in a few cases we’ve seen some stabilization.”

Markel 1Q16 Earnings Call Notes

Thomas S. Gayner – Co-Chief Executive Officer

The pace of change in business has accelerated

“The pace of change in business continues to accelerate and I can assure you that we are working harder than ever in the several new and appropriate initiatives to power Markel forward. Financial results from any one quarter or any one year are inherently volatile. Things like weather, financial market volatility and competitive behavior are beyond our control and can highly influence short-term results.”

It’s led to an increase in turnover

“Historically, we’ve invested between 50% and 80% of our shareholders’ equity in equities. Over the last year, we’ve had a higher degree of turnover in the portfolio than normal, which reflects our view that the landscape for business is changing at a faster pace than historically was the case.”

We accumulate gradually and persistently over time. We sell quickly

“When we buy, we tend to accumulate gradually and persistently over time. We use dollar-cost averaging and periodic and regular purchasing to gradually build positions in line with our understanding of the businesses involved and the prices at which they are available. When we exit a position, we tend to sell it relatively quickly. The net of this behavior is that, despite our buying, our overall equity exposure remains relatively unchanged during the quarter.”

I’m finding it hard to understand negative numbers

“I remember that it was hard learning about negative numbers in fifth grade, I’m finding it even harder to understand them as a grown up as they pertain to interest rates. Fortunately, I figured out negative numbers and made it to the sixth grade eventually, and we will all do so as well with negative interest rates.”

Prices too high for M&A

“In general prices are high across the board. (46:08) looking at insurance deals or ventures deals, we do see a flow. Fortunately, we’re well known enough to be aware of a lot of transactions and we are anxious to add to the Markel family but not at these prices.”

Saltzberg Miscellaneous Notes 3.31.2016

Source: United Technologies 2015 Annual Report

United Technologies (UTX) CEO Greg Hayes said the company benefits from the global trend of urbanization towards the cities

“We are well-positioned to benefit from three megatrends that are shaping the world— urbanization, an expanding middle class and extraordinary growth in commercial aviation. Every day 180,000 people move to urban areas. By 2050 cities will be home to 2.5 billion more people than today, generating a need for more apartment buildings, airports and mass-transit systems —all of which will be equipped with elevators and escalators, climate systems, and fire and security systems.”


Source: Aflac 2015 Annual Report

Aflac (AFL) CEO Dan Amos explains the power of the company’s brand

“Maintaining our powerful and respected brand is essential because it represents who we are – the spirit of our people in Japan and the United States who represent the face of our products and who build trust with businesses, policyholders, consumers, our field force and brokers. We’re pleased that the Aflac brand is also both well known and well respected. Having a trusted and compassionate brand has opened many doors for Aflac. Our brand represents who we are as a company and reflects how our constituents see us, so we’re very protective of maintaining our reputation.”


Source: ABB 2015 Annual Report

Swedish Industrical congolmerate ABB CEO Ulrich Speishoffer highlighted several trends in renewable energy affecting his industry

“There is a shift towards renewables, which is accelerating despite the low oil price – 2015 was a strong year for investment in renewables, with 121 gigawatts of capacity added. This results in unprecedented demands to manage the complexity of the “digital grid” of the future. In power generation, renewables are transforming the energy mix, putting pressure on traditional producers to rethink their business models while lessening environmental impact and dramatically increasing grid complexity. The future grid will be far more complex with multiple feed-in points from traditional power plants to large-scale renewables on the supply side, and a coexistence of traditional demand patterns and microgrids and nanogrids on the demand side. Managing this complexity will require intelligently automated, digital power grids that can anticipate demand and supply patterns, while routing and transporting power to the ever-increasing number of consumption points of electricity.”

Geographically, he expects India to be a driver of growth

“Our markets remain challenging, with slower growth in China and steady conditions in Europe and the United States. We expect India to invest in power infrastructure and industrial development, but see continuing weakness in other emerging markets.”


Source: Markel 2015 Annual Report

Markel (MKL) Co-CEO Tom Gaynor explains the company’s flexible culture and ability to adapt to the operating environment

“We are encouraged to look for a better way to do things…to challenge management. We have the ability to make decisions or alter a course quickly. The Markel approach is one of spontaneity and flexibility. This requires a respect for authority but a disdain of bureaucracy.”

Big data and analytics continue to be an area of increased emphasis to drive improved decision making in their insurance operations

“The tools and techniques of big data continue to increase in affordability and utility. Simply put, information is king. Every transaction and data point continues to become more robust and informative about what the ultimate risk and outcome will be. Technology and digitization change the tools used in the task, not the task itself.”


Source: Accenture 2015 Annual Report

Accenture (ACN) CEO Pierre Nanterme said they have long term relationships with their top clients so they focus on making the business relationship mutually beneficial

“We serve more than 80 percent of the Fortune Global 500 and 94 of the top 100. We also continue to build strong and enduring client relationships. All of our top 100 clients have been clients for at least five years, and 97 have been clients for at least 10 years. Quite simply, our client relationships are second to none, and our continued success underscores our ability to address our clients’ most complex and strategic issues.”


Source: Suncor 2015 Annual Report

Suncor (SU) CEO Steve Williams said 2915 will be the year that energy companies focused on reducing their costs in order to be able to survive the downturn in the oil sector

“Without question, 2015 was one of the most dramatic years in recent memory. It was a year of managing challenges and capturing opportunities. We were well positioned to take immediate action as oil prices fell to their lowest levels in over a decade. We responded swiftly to reduce capital and operating costs. We looked for efficiencies in every corner of our organization.”

Suncor (SU) CEO Steve Williams said the best companies are often strengthened through downturns in the industry

“The market downturn may continue to present opportunities – ones that we’re able to take advantage of because of the strong foundation we’ve built in recent years. Seeking these types of opportunities are strategic and another way we’re building shareholder value for the long term. In fact, I believe that strong companies are often built during downturns and our approach is to view this difficult period as an opportunity and a challenge.”


Source: Campbell 2015 Annual Report

Campbell (CPB) CEO Denise Morrison wants consumers to know exactly what goes into all of their products

“Our purpose has created the conditions for Campbell to become increasingly open about our food with the goal of setting the standard for transparency in the food industry. In fiscal 2015, we initiated an important project to increase consumer trust by providing greater access to information about our products, especially in our core U.S. soups, sauces and beverages.”

Intend to grow their online presence meaningfully

“Over the past several years, we have built stronger digital, social and mobile capabilities and have steadily increased our digital budget. In fiscal 2016, we plan to spend nearly 40 percent of our overall media budget on digital media. We also remain focused on growing our e-commerce capabilities, as this is becoming increasingly important to our consumers and our customers.”


Source: Torchmark 2015 Annual Report

Torchmark (TMK) CEO Gary Coleman said they have been repurchasing their own shares for nearly 30 consecutive years now

“We have been conducting our share repurchase program for thirty years now. During that time, the only year we didn’t repurchase stock was in 1995 due to the acquisition of American Income. Since 1986 we have spent $6.5 billion to repurchase 78% of the outstanding shares of the Company.”

Torchmark (TMK) CEO Gary Coleman said that as a result of “industry experts,” they expect oil to rebound to $45 per barrel

“Based on a consensus of industry expert views, we believe oil is more likely to increase to over $45 a barrel during the next 12 to 24 months than remain at the $30 a barrel level we saw in 2015. We believe the companies in our portfolio can continue to operate for a very long time with oil prices at $45 to $50 a barrel. However, even if oil was around $30 a barrel for the next 12 to 24 months, we wouldn’t expect to have significant defaults during that period.”


Source: ICICI Bank Annual Report

ICICI Bank(IBN) CEO Chanda Kochhar reiterated India’s strong demographics and strengthening growth trajectory

“As I had mentioned last year, the decisive mandate in the general elections was a very positive development for the economy. The immediate impact was felt in the form of a strong improvement in sentiment. India’s inherent strengths are well-known – the demographic dividend and the vast potential for investment. It is these strengths that propelled us on a high growth path for several years.”

The Indian government is fostering a more pro-investment environment

“Over the last year, the Government has taken a number of important steps. There has been a focus on improving governance; enhancing the ease of doing business; creating a conducive environment for investment by both international and domestic participants; and adopting a stable and prudent fiscal policy. At the same time, the Government has sought to bring about the engagement of more and more people in the economic mainstream. While the impact of these measures will be seen over the medium term, the steps taken are clearly in the right direction.”

ICICI Bank(IBN) CEO Chanda Kochhar said effectively utilizing technology allows them to reduce their cost of serving customers

“ICICI Bank has been at the forefront in leveraging technology including the current and emerging transformational trends of mobility, digitisation and rapid growth of social media, to bring value to our customers. We have leveraged our technology capabilities to facilitate faster and convenient processes, create best-in-class technology platforms and reduce transaction costs. Over 50% of all banking transactions are now done over mobile phone or on the internet.”

Markel 4Q15 Earnings Call Notes

Thomas S. Gayner – Co-Chief Executive Officer

We emphasized defense in our investment operations last year

“In 2015, we emphasized defense in our investment operations as well. We did so through the following specific actions. First, we maintained our high credit quality profile in our fixed income operations. Secondly, we kept our equity exposure at the low end of our range for equity investments over the last 25 years. Thirdly, we maintained a strong and highly liquid balance sheet in order to be ready to actively deploy the funds when conditions warrant doing so.”

Given low interest rates you have to emphasize underwriting profitability

“So, first off, given the overall low interest rate environment that exists, no matter where you are, the need for underwriting profitability to earn any sort of return at all, goes up. You saw excellent underwriting results around here last year, and the targets that would be set, the hurdle rates for people to earn the incentive compensation that they’ve earned, those have been coming down over the last several years to reflect the business environment that we operate in.”

You’re not seeing wild cowboys operating with huge underwriting losses

“there is a reasonably rational basis of competition out there. You’re not seeing wild cowboys that are operating with huge underwriting losses thinking they can make it up on investment income, because, nobody, I think, is under that delusion and that is indeed different than what might have been the case 10 years, 20 years ago.”

There’s a bunch of capital everywhere and that’s pressuring rates

“I think those interest rates are a symptom of the excess capital that exists, again, not just in the insurance business, but in general. There’s just a bunch of capital everywhere, so the central banks may have opinions about what interest rates should be, but there’s also the fundamental laws of supply and demand, and interest rates are hugely influenced by market factors as much as what central banks might do.”

Been extending maturity of the bond portfolio

“And on the investment side, for a while, for a couple of years, we had been having a shorter maturity of the investment portfolio than our insurance liabilities, because I was worried about interest rates going up. About mid-year last year, I decided that I was wrong and that as the phrase goes, rates were likely lower for longer. And we started to extend the maturity of the bond portfolio a bit. And in this environment until further notice, we’ll operate in a more (39:39) than we were a couple of years before that.”

Markel 3Q15 Earnings Call Notes

Markel’s (MKL) Q3 2015 Results

No longer going to bring duration in

“after several years where we left the duration of the fixed income portfolio decrease due to our concern about the possibility of higher overall levels of interest rates, we now are at the point where we expect to keep our duration from coming in anymore.”

Dry powder on the balance sheet is a big advantage

“As you can see, we have got some dry powder on our balance sheet. I think the option value of having quickly available capital to deploy as opportunities present themselves is a big advantage for Markel going forward. I would also add that we incur very little in the way of opportunity costs in doing so, given the low overall level of yields and investment returns all along the curve.”

Having trouble finding acquisitions that are fairly priced

“the things we would look for when we – when we are doing acquisitions is that culture has to be a fit, it’s number one. It needs to be a great strategic fit, good reason for it. And then obviously, it’s got be at a fair price and that’s probably the one we are having the most trouble with right now.”

Competition is more disciplined than in previous cycles

” while everything is competitive, I don’t think anybody is under the delusion that they can operate on a sloppy fashion on the underwriting side and make it up on investments. So the nature and tone of competition and where that bar is set in terms of underwriting profitability is lower this time around than what it would have been in previous cycles, so that’s somewhat good news.’

Markel 2Q15 Earnings Call Notes

Small loss in investment portfolio due to marks on foreign holdings

“The investing message is short and straightforward: we made modest returns of 1.5% in our equity portfolio for the first six months; and we were flat on our fixed income portfolio, as a slight rise in interest rates offset the modest coupon income from the portfolio. After the effects of foreign currency exchange rates are taken into account, we show a small loss of 0.5% for the entire portfolio, due to our holdings of foreign currency bonds.”

Foreign holdings to offset foreign currency liabilities

“As a reminder, foreign holdings exist largely to match against our foreign currency interest liabilities. The net effect to Markel from swings in the value of the dollar is as close to zero as we can possibly make it. Our longstanding policy of matching our foreign liabilities to foreign assets remains in place and it has functioned well over many years. That will continue to be our approach. But given the large moves in the dollar recently and the low level of interest rates, the relative contribution of that line item is bigger than normal. As such, I thought it was worthwhile to call it to your attention.”

This market is bizarre to me

“This market is bizarre to me. We’ve got a disproportionate number of names at the top and a disproportionate number of names at the bottom at the same times, with very few companies in the middle of the range. To me, this illustrates the volatility and somewhat topsy-turvy nature of things right now. I apologize for my use of such technical terms. More importantly, my point – and I do have one – is that I believe this represents a real opportunity for us.”

Increased our equity holdings in energy, finance and consumer products

“During the first six months of the year, we increased our equity holdings as a percentage of our shareholders’ equity from 54% to 56%, with our steady and unrelenting program of regular additions to the equity portfolio. With the price volatility present in the markets, I believe we’ve been able to purchase shares in high-quality companies at very reasonable prices as they go on sale and that we’re stocking the pipeline for attractive future returns. Specifically, we continue to acquire holdings in energy, finance and consumer products businesses that meet all of our four-point tests. And I’m optimistic about the future returns we’ll see from doing so. Expect us to continue this approach.’

In the current marketplace see more opportunities in publicly traded securities than private

“In the current marketplace, we see more opportunities to buy attractively priced, publicly traded securities than private businesses so we are allocating our capital more towards public markets.”

Our strength is that we have a 360 degree view of capital markets

“We continue to actively hunt for opportunities in both arenas, and I’m optimistic we’ll find treasures in both markets. That’s one of the true beauties of Markel and that we are able to pursue the highest and best returns no matter where they might be. We have a full 360-degree view of insurance, industrial and public and private debt and equity markets, and we’re comfortable in deploying capital into any and all of them as circumstances arise. “