Markel Group Inc【MKL】株式ニュース

Markel Reports 2015 Financial Results (2/10/16)

RICHMOND, Va., Feb. 10, 2016 /PRNewswire/ -- Markel Corporation (NYSE: MKL) reported book value per common share outstanding of $561.23 at December 31, 2015, up 3% from $543.96 at December 31, 2014. Over the five-year period ended December 31, 2015, compound annual growth in book value per common share outstanding was 11%. Comprehensive income to shareholders was $232.7 million for the year ended December 31, 2015 compared to $935.9 million in 2014. The combined ratio was 89% in 2015 compared to 95% in 2014. Diluted net income per share was $41.74 for the year ended December 31, 2015 compared to $22.27 in 2014.

Alan I. Kirshner, Executive Chairman, commented, "2015 was a tremendous year for our underwriting operations, which made substantial contributions to profitability despite challenging market conditions. We celebrated the 10 year anniversary of our Markel Ventures operations this year, which surpassed $1.0 billion in revenues, and welcomed the addition of CapTech in late 2015. We continue to pursue growth opportunities in both our Markel Ventures and insurance operations. We are excited about the recent Markel CATCo transaction, which expands our presence in the insurance-linked securities space and provides us with a platform to bring new insurance and investment products to the market. Overall, we are pleased with our 2015 results. We continue to drive shareholder value and want to thank our associates for their significant contributions in 2015."

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Comprehensive income to shareholders for 2015 was $232.7 million compared to $935.9 million in 2014. The decrease was due to a decrease in net unrealized gains on investments, net of taxes, of $320.5 million in 2015 compared to an increase in net unrealized gains on investments, net of taxes, of $661.7 million in 2014, partially offset by higher net income to shareholders in 2015 compared to 2014. The decrease in net unrealized gains on investments, net of taxes, in 2015 was attributable to a decrease in the fair value of our fixed maturity and equity portfolios as of December 31, 2015 compared to December 31, 2014. Net income to shareholders was $582.8 million in 2015 and $321.2 million in 2014. The increase in net income to shareholders and diluted net income per share during 2015 was driven by more favorable underwriting results and higher net realized investment gains, partially offset by higher income tax expense compared to 2014.

On December 8, 2015, we completed the acquisition of substantially all of the assets of CATCo Investment Management, Ltd. (CATCo IM) and CATCo-Re Ltd. CATCo IM was a leading insurance-linked securities investment fund manager and reinsurance manager headquartered in Bermuda focused on building and managing highly diversified, collateralized retrocession and reinsurance portfolios covering global property catastrophe risks. Results attributable to the acquisition are included within our non-insurance operations, which are not included in a reportable segment.

The consolidated combined ratio was 89% in 2015 compared to 95% in 2014. The decrease in the consolidated combined ratio was driven by more favorable development on prior years' loss reserves in each of our underwriting segments in 2015 compared to 2014, as well as a lower current accident year loss ratio in 2015 compared to 2014. The decrease in the current accident year loss ratio in 2015 was due in part to lower attritional losses across several product lines in our Reinsurance segment in 2015 compared to 2014.

The 2015 combined ratio included $627.8 million of favorable development on prior years' loss reserves compared to $435.5 million in 2014. The increase in prior year redundancies in 2015 compared to 2014 was due in part to a decrease in the estimated volatility of our consolidated net reserves for unpaid losses and loss adjustment expenses as a result of ceding a significant portion of our asbestos and environmental exposures to a third party during the first and fourth quarters of 2015. As a result of this decrease in estimated volatility, our level of confidence in our net reserves for unpaid losses and loss adjustment expenses increased. Therefore, management reduced prior years' loss reserves by $82.7 million, or approximately two points on the consolidated combined ratio, in order to maintain a consolidated confidence level in a range consistent with our historic levels. This reduction in prior years' loss reserves occurred across all three of our ongoing underwriting segments. We also experienced more favorable development in 2015 compared to 2014 as management had more confidence in the actuarial projections for product lines previously written by Alterra Capital Holdings Limited (Alterra) during 2015 compared to 2014.

U.S. Insurance Segment

The combined ratio for the U.S. Insurance segment for 2015 was 89% compared to 95% in 2014. The decrease in the 2015 combined ratio was due to more favorable development of prior years' loss reserves and a lower expense ratio compared to 2014. The U.S. Insurance segment's 2015 combined ratio included $299.0 million of favorable development on prior years' loss reserves compared to $216.6 million of favorable development in 2014. The increase in prior year redundancies in 2015 was due in part to the increase in the confidence level of our consolidated net loss reserves, as previously discussed, which resulted in an $82.7 million reduction to consolidated prior years' loss reserves, of which $35.2 million was in the U.S. Insurance segment (approximately two points on the segment combined ratio). We also experienced favorable development on prior years' loss reserves in our Global Insurance division in 2015, primarily on our inland marine product line, compared to adverse development in 2014. Favorable development on prior years' loss reserves experienced within the U.S. Insurance segment during 2015 was most significant on our general liability product line and on our brokerage property and workers' compensation product lines. In 2014, the redundancies on prior years' loss reserves were most significant on our general liability and professional liability product lines. Favorable development on our professional liability lines in 2014 was partially offset by adverse development on our architects and engineers product line. The improvement in the U.S. Insurance segment's expense ratio was primarily due to higher earned premiums and lower general expenses.

International Insurance Segment

The combined ratio for the International Insurance segment was 86% for 2015 compared to 93% for 2014. The decrease in the 2015 combined ratio was driven by more favorable development of prior years' loss reserves, partially offset by a higher expense ratio. The International Insurance segment's 2015 combined ratio included $248.8 million of favorable development on prior years' loss reserves compared to $166.6 million of favorable development in 2014. The increase in prior year redundancies in 2015 was due in part to the increase in the confidence level of our consolidated net loss reserves, as previously discussed, which resulted in an $82.7 million reduction to consolidated prior years' loss reserves, of which $32.3 million was in the International Insurance segment (approximately four points on the segment combined ratio). We also experienced more favorable prior year development on our marine and energy and general liability product lines in 2015 compared to 2014. Prior year redundancies in both 2015 and 2014 were most significant on our marine and energy, professional liability and general liability product lines. The increase in the expense ratio was due to higher profit sharing costs, higher general expenses and lower earned premiums in 2015 compared to 2014.

Reinsurance Segment

The combined ratio for the Reinsurance segment was 90% for 2015 compared to 96% for 2014. The decrease in the 2015 combined ratio was driven by a lower current accident year loss ratio and more favorable development on prior years' loss reserves. The decrease in the current accident year loss ratio was driven by lower attritional losses across several product lines in 2015 compared to 2014. The Reinsurance segment's 2015 combined ratio included $97.9 million of favorable development on prior years' loss reserves compared to $80.0 million in 2014. The increase in prior year redundancies in 2015 was due in part to the increase in the confidence level of our consolidated net loss reserves, as previously discussed, which resulted in an $82.7 million reduction to consolidated prior years' loss reserves, of which $15.2 million was in the Reinsurance segment (approximately two points on the segment combined ratio). The favorable development on prior years' loss reserves in 2015 was most significant on our casualty and property lines of business. The favorable development on prior years' loss reserves in 2014 was primarily on our property lines.

Other Insurance (Discontinued Lines) Segment

The Other Insurance (Discontinued Lines) segment produced an underwriting loss of $20.4 million for the year ended December 31, 2015 compared to an underwriting loss of $28.0 million in 2014. The underwriting loss in 2014 included $27.2 million of loss reserve development on asbestos and environmental (A&E) exposures resulting from our annual review of these exposures. During our 2015 annual review, which occurred in the third quarter, we determined that no adjustment to loss reserves was required. During our 2014 annual review, we increased our expectation of the severity of the outcome of certain claims subject to litigation. As the ultimate outcome of known claims increases, our expected ultimate closure value on unreported claims also increases. As a result of these developments, we increased prior years' loss reserves accordingly. A&E loss reserves are subject to significant uncertainty due to potential loss severity and frequency resulting from an uncertain and unfavorable legal climate.

In March and October 2015, we completed two retroactive reinsurance transactions through which we ceded a significant portion of our A&E exposures to a third party. Reserves for unpaid losses and loss adjustment expenses ceded by these transactions that were attributable to A&E exposures represented approximately 55% of our A&E reserves for unpaid losses and loss adjustment expenses as of December 31, 2014. The first transaction resulted in a gain of $5.1 million, which was deferred and will be recognized in earnings in proportion to actual reinsurance recoveries received pursuant to the transaction. The second transaction resulted in an underwriting loss of $10.1 million, which was recognized during the fourth quarter of 2015. Following the October 2015 retroactive reinsurance transaction, our actuaries increased their estimate of the ultimate losses on the remaining A&E claims and management increased prior years' loss reserves by $15.0 million. Without the diversification of a larger portfolio of loss reserves, there is greater uncertainty around the potential outcomes of the remaining claims, and management strengthened reserves accordingly.

The Other Insurance (Discontinued Lines) segment also included other revenues of $0.6 million and other expenses of $29.1 million for the year ended December 31, 2015 and other revenues of $1.6 million and other expenses of $37.1 million for the year ended December 31, 2014 related to the life and annuity reinsurance business which was acquired as part of the Alterra transaction on May 1, 2013 (the Acquisition Date). This business is in run-off, and we are not writing any new life and annuity reinsurance contracts. The life and annuity benefit reserves on existing obligations are recorded on a net present value basis using assumptions that were determined at the Acquisition Date. The accretion of this discount is included in other expenses. The decrease in other expenses in 2015 compared to 2014 is primarily attributable to lower accretion expense, as a result of a favorable impact from changes in foreign currency exchange rates in 2015 compared to 2014. Other revenues attributable to the life and annuity book included in this segment represent ongoing premium adjustments on existing contracts.

Premiums and Net Retentions

We monitor the effect of movements in foreign currency exchange rates on gross premium volume and earned premiums. To the extent there are significant variations in foreign currency exchange rates between the U.S. dollar and the foreign currencies in which our insurance business is transacted, management uses the change in gross premium volume and earned premiums at a constant rate of exchange to evaluate trends in premium volume. The impact of foreign currency translation is excluded, when significant, as the effect of fluctuations in exchange rates could distort the analysis of trends. When excluding the effect of foreign currency translation on changes in premium, management uses the current period average exchange rates to translate both the current period and the prior period foreign currency denominated gross premiums written and earned premiums.

Gross Premium Volume

Gross premium volume decreased 4% in 2015 compared to 2014. At a constant rate of exchange, gross premium volume would have decreased 2% in 2015 compared to 2014. The change is primarily attributable to a 13% decrease in gross premium volume in the Reinsurance segment, or a 10% decrease at a constant rate of exchange. The decrease in gross premium volume in our Reinsurance segment was driven by changes in our auto reinsurance book. During 2014, we ceased writing auto reinsurance in the United Kingdom and decreased our quota share percentage on our non-standard auto reinsurance business in the United States. Additionally, lower gross premium volume in our general liability and property lines within the Reinsurance segment was partially offset by higher gross premium volume in our professional liability line. Gross premium volume in our International Insurance segment decreased 3% in 2015 compared to 2014. At a constant rate of exchange, gross premium volume in the International Insurance segment would have increased 2% in 2015 compared to 2014.

We have continued to see small price increases across many of our product lines during 2015. However, beginning in 2013 and continuing through 2015, we have experienced softening prices across most of our property product lines, as well as on our marine and energy lines. Our large account business is also subject to more pricing pressure. When we believe the prevailing market price will not support our underwriting profit targets, the business is not written. As a result of our underwriting discipline, gross premium volume may vary when we alter our product offerings to maintain or improve underwriting profitability.

Net Retention

Net retention of gross premium volume was 82% for 2015 and 2014. Higher retention in the U.S. Insurance and International Insurance segments was offset by lower retention in the Reinsurance segment in 2015 compared to 2014. Retention rate changes in 2015 were driven by changes in our mix of business when compared to 2014. We purchase reinsurance and retrocessional reinsurance in order to manage our net retention on individual risks and enable us to write policies with sufficient limits to meet policyholder needs.

Earned Premiums

Earned premiums for 2015 decreased slightly compared to 2014. Higher earned premiums in our U.S. Insurance segment were offset by lower earned premiums in the Reinsurance segment and the effects of foreign currency exchange rate movements in our International Insurance and Reinsurance segments. The increase in earned premiums in our U.S. Insurance segment in 2015 was primarily due to higher earned premiums in our program business, general liability lines and personal lines compared to 2014. Lower earned premiums in the Reinsurance segment were due to lower gross premium volume. At a constant rate of exchange, consolidated earned premiums would have increased 2% in 2015 compared to 2014.

Investing Results

Net investment income for 2015 was $353.2 million compared to $363.2 million in 2014. Net investment income in 2015 included lower bond income on our fixed maturity portfolio primarily due to the unfavorable impact of foreign currency exchange rate changes compared to 2014. Net investment income in 2015 also included higher dividend income on our equity portfolio due to higher equity security holdings during 2015 compared to 2014.

Net realized investment gains for 2015 were $106.5 million compared to $46.0 million in 2014. Net realized investment gains for 2015 were net of $44.5 million of write downs for other-than-temporary declines in the estimated fair value of investments compared to $4.8 million of write downs in 2014. The 2015 write downs were all attributable to equity securities. Net realized gains from the sale of equity securities in 2015 were $155.8 million compared to $50.6 million in 2014. During 2015, we liquidated certain equity securities in our portfolio in light of our outlook on the economic and competitive environment facing those companies.

Markel Ventures Operations

The results of Markel Ventures, a diverse portfolio of industrial and service companies in which we have a controlling interest, are included in other revenues and other expenses. In 2015, other revenues from our Markel Ventures operations were $1.0 billion compared to $838.1 million in 2014. Other expenses from our Markel Ventures operations were $978.1 million in 2015 compared to $775.2 million in 2014. Net income to shareholders from our Markel Ventures operations was $11.0 million in 2015 compared to $9.6 million in 2014 and earnings before interest, income taxes, depreciation and amortization (EBITDA) was $91.3 million in 2015 compared to $81.3 million in 2014.

The increase in revenues from our Markel Ventures operations in 2015 compared to 2014 was primarily driven by our acquisition of Cottrell in July 2014 and higher revenues within certain of our other manufacturing operations due in part to higher sales volumes in 2015 compared to 2014. Revenues for the year ended December 31, 2015 also included growth in certain of our non-manufacturing operations.

Net income to shareholders and EBITDA from our Markel Ventures operations increased in 2015 compared to 2014 due to more favorable results in our manufacturing operations in 2015, partially offset by less favorable results in our non-manufacturing operations in 2015. The increase in net income to shareholders and EBITDA in our manufacturing operations in 2015 was due to increased revenues, as described above, partially offset by an increase in our estimate of the fair value of the contingent consideration obligation related to the acquisition of Cottrell. A portion of the purchase consideration for Cottrell was based on Cottrell's post-acquisition earnings through 2015, as defined in the purchase agreement. During 2015, our estimate of Cottrell's 2015 earnings increased beyond our initial projection. As a result, our estimate of the fair value of the contingent consideration increased by $31.2 million during 2015. The decrease in net income to shareholders and EBITDA in our non-manufacturing operations was primarily attributable to increased expenses at certain of our non-manufacturing operations. Net income to shareholders and EBITDA in our non-manufacturing operations was net of a $14.9 million and $13.7 million non-cash goodwill impairment charge in the fourth quarter of 2015 and 2014, respectively, related to the Diamond Healthcare reporting unit. See below for a reconciliation of Markel Ventures EBITDA to net income to shareholders.

In December 2015, we completed the acquisition of CapTech Ventures, Inc. (CapTech). CapTech is a leading management and IT consulting firm, providing services and solutions to a wide array of customers. Due to the one month lag in consolidating the results of our Markel Ventures operations, the financial results for CapTech will be included in our consolidated statements of income and comprehensive income beginning in January 2016.

Financial Condition

Invested assets were $18.2 billion at December 31, 2015 compared to $18.6 billion at December 31, 2014. Equity securities were $4.1 billion, or 22% of invested assets, at both December 31, 2015 and December 31, 2014. Net unrealized gains on investments, net of taxes, were $1.5 billion at December 31, 2015 compared to $1.8 billion at December 31, 2014. At December 31, 2015, we held securities with gross unrealized losses of $95.9 million, or less than 1% of invested assets. During 2015, we increased our holdings of cash and cash equivalents and short-term investments and reduced our holdings of fixed maturities. At December 31, 2015 short-term investments, cash and cash equivalents and restricted cash represented 26% of our invested assets compared to 22% at December 31, 2014. Fixed maturities at December 31, 2015 represented 52% of our invested assets compared to 56% at December 31, 2014.

At December 31, 2015, our holding company had $1.6 billion of invested assets compared to $1.5 billion of invested assets at December 31, 2014. The increase in holding company invested assets is primarily due to dividends received from our subsidiaries, partially offset by a decrease in unrealized gains on our investment portfolio at December 31, 2015 compared to December 31, 2014.

Net cash provided by operating activities was $651.2 million in 2015 compared to $716.8 million in 2014. Net cash provided by operating activities in 2015 was net of cash payments totaling $156.4 million made in connection with two retroactive reinsurance transactions completed in 2015, in which we ceded two portfolios of policies comprised of liabilities arising from A&E exposures to a third party. Net cash provided by operating activities in 2015 was also net of a $29.0 million cash payment made to transfer our obligations under a reinsurance contract for life and annuity benefits to a third party. Also in 2015, higher cash flows attributable to our Markel Ventures operations were partially offset by higher payments for income taxes compared to the same period of 2014.

Interest Expense and Income Taxes

Interest expense for 2015 was $118.3 million compared to $117.4 million in 2014.

Income tax expense for 2015 was 21% of our income before income taxes compared to 26% in 2014. The decrease in the effective tax rate in 2015 compared to 2014 was primarily due to the impact of foreign tax credits. This decrease was partially offset by the impact of anticipating a smaller tax benefit related to tax-exempt investment income which resulted from having higher estimated income before income taxes in 2015 compared to 2014.

For 2015, the effective tax rate differs from the statutory rate of 35% primarily as a result of credits for foreign taxes paid and tax-exempt investment income. In previous periods, foreign taxes paid were not available for use as tax credits against our U.S. provision for income taxes. Based on our earnings from our foreign operations in 2015, significant foreign taxes paid in both the current period and prior periods have been used as credits against our U.S. provision for income taxes in 2015. Our recognition of these tax credits in 2015 had a favorable impact on our 2015 effective tax rate of approximately 8%. We caution readers that a similar benefit may not be recognizable in future years. For 2014, the effective tax rate differs from the U.S. statutory tax rate of 35% primarily as a result of tax-exempt investment income.

Safe Harbor and Cautionary Statement

This release contains statements concerning or incorporating our expectations, assumptions, plans, objectives, future financial or operating performance and other statements that are not historical facts. These statements are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may use words such as "anticipate," "believe," "estimate," "expect," "intend," "predict," "project" and similar expressions as they relate to us or our management.

There are risks and uncertainties that may cause actual results to differ materially from predicted results in forward-looking statements. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Additional factors that could cause actual results to differ from those predicted are set forth under "Risk Factors" and "Safe Harbor and Cautionary Statement" in our 2014 Annual Report on Form 10-K and most recent Quarterly Report on Form 10-Q or are included in the items listed below:

•our anticipated premium volume is based on current knowledge and assumes no significant man-made or natural catastrophes, no significant changes in products or personnel and no adverse changes in market conditions;

•the effect of cyclical trends, including demand and pricing in the insurance and reinsurance markets;

•actions by competitors, including consolidation, and the effect of competition on market trends and pricing;

•we offer insurance and reinsurance coverage against terrorist acts in connection with some of our programs, and in other instances we are legally required to offer terrorism insurance; in both circumstances, we actively manage our exposure, but if there is a covered terrorist attack, we could sustain material losses;

•the frequency and severity of man-made and natural catastrophes (including earthquakes and weather-related catastrophes) may exceed expectations, are unpredictable and, in the case of weather-related catastrophes, may be exacerbated if, as many forecast, conditions in the oceans and atmosphere result in increased hurricane, flood, drought or other adverse weather-related activity;

•emerging claim and coverage issues, changing legal and social trends, and inherent uncertainties (including but not limited to those uncertainties associated with our A&E reserves) in the loss estimation process can adversely impact the adequacy of our loss reserves and our allowance for reinsurance recoverables;

•reinsurance reserves are subject to greater uncertainty than insurance reserves, primarily because of reliance upon the original underwriting decisions made by ceding companies and the longer lapse of time from the occurrence of loss events to their reporting to the reinsurer for ultimate resolution;

•changes in the assumptions and estimates used in establishing reserves for our life and annuity reinsurance book (which is in runoff), for example, changes in assumptions and estimates of mortality, longevity, morbidity and interest rates, could result in material increases in our estimated loss reserves for such business;

•adverse developments in insurance coverage litigation or other legal or administrative proceedings could result in material increases in our estimates of loss reserves;
•the failure or inadequacy of any loss limitation methods we employ;

•changes in the availability, costs and quality of reinsurance coverage, which may impact our ability to write or continue to write certain lines of business;

•industry and economic conditions, deterioration in reinsurer credit quality and coverage disputes can affect the ability or willingness of reinsurers to pay balances due;

•after the commutation of ceded reinsurance contracts, any subsequent adverse development in the re-assumed loss reserves will result in a charge to earnings;

•regulatory actions can impede our ability to charge adequate rates and efficiently allocate capital;

•general economic and market conditions and industry specific conditions, including extended economic recessions or expansions; prolonged periods of slow economic growth; inflation or deflation; fluctuations in foreign currency exchange rates, commodity and energy prices and interest rates; volatility in the credit and capital markets; and other factors;

•economic conditions, actual or potential defaults in municipal bonds or sovereign debt obligations, volatility in interest and foreign currency exchange rates and changes in market value of concentrated investments can have a significant impact on the fair value of our fixed maturities and equity securities, as well as the carrying value of our other assets and liabilities, and this impact may be heightened by market volatility;

•economic conditions may adversely affect our access to capital and credit markets;

•the effects of government intervention, including material changes in the monetary policies of central banks, to address financial downturns and economic and currency concerns;

•the impacts that political and civil unrest and regional conflicts may have on our businesses and the markets they serve or that any disruptions in regional or worldwide economic conditions generally arising from these situations may have on our businesses, industries or investments;

•the impacts that health epidemics and pandemics may have on our business operations and claims activity;

•the impact of the implementation of U.S. health care reform legislation and regulations under that legislation on our businesses;
•we are dependent upon the successful functioning and security of our computer systems; if our information technology systems fail or suffer a security breach, our businesses or reputation could be adversely impacted;

•our acquisition of insurance and non-insurance businesses may increase our operational and control risks for a period of time;

•we may not realize the contemplated benefits, including cost savings and synergies, of our acquisitions;

•any determination requiring the write-off of a significant portion of our goodwill and intangible assets;

•the loss of services of any executive officer or other key personnel could adversely impact one or more of our operations;

•our expanding international operations expose us to increased investment, political and economic risks, including foreign currency exchange rate and credit risk;

•our ability to raise third-party capital for existing or new investment vehicles and risks related to our management of third-party capital;

•the effectiveness of our procedures for compliance with existing and ever increasing guidelines, policies and legal and regulatory standards, rules, laws and regulations;

•the impact of economic and trade sanctions and embargo programs on our businesses, including instances in which the requirements and limitations applicable to the global operations of U.S. companies and their affiliates are more restrictive than those applicable to non-U.S. companies and their affiliates;

•a number of additional factors may adversely affect our Markel Ventures operations, and the markets they serve, and negatively impact their revenues and profitability, including, among others: changes in government support for education, healthcare and infrastructure projects; changes in capital spending levels; changes in the housing market; and volatility in interest and foreign currency exchange rates; and

•adverse changes in our assigned financial strength or debt ratings could adversely impact our ability to attract and retain business or obtain capital.

Our premium volume, underwriting and investment results and results from our non-insurance operations have been and will continue to be potentially materially affected by these factors. By making forward-looking statements, we do not intend to become obligated to publicly update or revise any such statements whether as a result of new information, future events or other changes. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as at their dates.

Our previously announced conference call, which will involve discussion of our financial results and business developments and may include forward-looking information, will be held Thursday, February 11, 2016, beginning at 9:30 a.m. (Eastern Time). Any person interested in listening to the call should contact Markel's Investor Relations Department at 804-747-0136. Investors, analysts and the general public also may listen to the call free over the Internet through Markel Corporation's web site, www.markelcorp.com. A replay of the call will also be available on this web site from approximately two hours after the conclusion of the call until Monday, February 22, 2016.

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Markel Corporation is a diverse financial holding company serving a variety of niche markets. The Company's principal business markets and underwrites specialty insurance products. In each of the Company's businesses, it seeks to provide quality products and excellent customer service so that it can be a market leader. The financial goals of the Company are to earn consistent underwriting and operating profits and superior investment returns to build shareholder value. Visit Markel Corporation on the web at www.markelcorp.com.

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An Interview with Markel's Tom Gayner (7/25/14)

Tom Gayner is the President and Chief Investment Officer of Markel, a specialty insurer located 102 miles south of Motley Fool HQ. Mr. Gayner kindly invited me and three other Fools to have lunch with him this past Tuesday.

Markel is regularly mentioned in speculative discussions around which company could be the "next Berkshire Hathaway." As Chief Investment Officer, Gayner manages the company's equity portfolio which has generated returns of 12.4% per year over the past decade – handily beating the S&P 500. In addition to that sterling performance, Gayner is one of the most quotable investors out there. The video below is our full conversation. A full transcript follows the video.

Matt Koppenheffer: I'm here today with the CIO and President of Markel, Tom Gayner. Tom, thank you so much for joining us. This is a really exciting opportunity to get to chat with you.

Tom Gayner: My pleasure, thanks for coming.

Koppenheffer: Let me start out with a nice easy question, here. I know that you are a voracious reader. What are some books that you've recently read?

Gayner: Funny you should ask; last week I happened to be on vacation and it was a great treat because essentially I got to sit and read a book a day, and that's a great luxury, to have that much time.

One of the books that I read through the course of that week was a book called Once in Golconda, by John Brooks. I don't know if you saw it, but recently Buffett and Bill Gates were talking about a John Brooks book called Business Adventures, and just by coincidence I'd read Once in Golconda earlier in that week.

It's the story of the 1920s and 1930s, written from the perspective of Richard Whitney, who was the President of the New York Stock Exchange at that time. It's a fun book. It's extraordinarily well-written. There's thousands of books to talk about, but that one is fresh in my mind, being very recent.

Koppenheffer: Sounds like a good beach read.

Gayner: It is that!

Koppenheffer: Switching gears, circle of competence. This is something that we hear Warren Buffett talk about so much. What would you consider that your circle of competence is, in terms of investing?

Gayner: "Sugar, money, and dirt" are the three catchwords that I use to describe my circle of competence over the years.

One is the sense that, in sugar, you're talking about food, candy, chocolate, alcohol, things of that nature. Those are things that human beings, in general, like very much; understandable businesses, businesses that produce cash flows that you can make sense of. You can think about what they did the last five years, and what they're likely to do the next five years. That makes a lot of sense to me.

Money -- financial intermediation, banks, brokerage firms, insurance companies, financial advisory businesses, investment management -- things that deal in the inventory of money naturally resonate and make sense to me. I feel very comfortable operating in those worlds.

Dirt are real estate or businesses that you can touch and feel, and have tangible assets to them, and again the cash flows from those businesses tend to be relatively predictable, compared to many others, and reasonable people can make reasonable judgments about those kinds of businesses.

That would tend to define the circle of competence as I would define it right now.

It's also important to never be satisfied with anything, including your circle of competence. One of the things you should always be doing with your circles of competence is see if you can push it a little bit more, because the world changes. It keeps spinning, and things don't stay the same, so you always need to be working and learning and studying to make sure that your circles of competence are relevant.

Koppenheffer: It's nice to have some of those like sugar, where ... I'm pretty confident the chocolate bar is going to do well.

Gayner: It was popular yesterday, it was popular last year, it was popular 100 years ago, it'll be popular 100 years from now as well, probably.

Koppenheffer: Sure.

Now, some people watching this may hear Tom Gayner talking about sugar, money, and dirt, and say, "That should be my circle of competence, because Tom Gayner is a fantastic investor." Is that the right takeaway from that?

Gayner: No, I think that oversimplifies things, and I think anybody who's watching this really should figure out what their circles of competence are.

Different people have different skills and abilities. If they happen to be particularly knowledgeable about medical things, or technological things, or entertainment, or sports -- anything that's their skill and their ability -- those should be defined by them, rather than thinking, "Somebody else does that, so I should do that too."

For instance, I like to play golf so I was sitting there watching the British Open and Rory McIlroy wins that wire-to-wire. I think about myself when I go play golf, and I think, "There's Rory, and he's got a golf shirt. I've got a golf shirt. He's got a golf glove, and I've got a golf glove. He's got a golf club. I've got a golf club. I see him swing like that, and I think I swing like that" -- but it turns out I don't!

His circle of competence is very different than mine. Even if I try to pretend and put on the uniform and the attributes of what his circle of competence is, my results are not going to be as good as his because we're just two different people, and have two different sets of gifts.

Koppenheffer: Got you.

Now in your investing, management -- evaluating management -- is a big part of the process. From a retail investor's perspective, obviously Tom Gayner pays a visit or calls somebody and it's a different reception than John Smith calling them up.

For that retail investor, what's a good way to get a sense for management; their trustworthiness, their capabilities?

Gayner: For instance in the course of the last week or two, I don't remember where I read it, but there was an article that profiled Bill Marriott. I believe he's roughly 82 years of age, and it was his life story and how he started out working in the root beer stand, but then morphed into the hotel business. It was talking about what Marriott is doing now, with some of the newer designs.

Well, we're Marriott investors. I've never spent any time with Bill Marriott. I don't think I've even had the chance to shake his hand, although I'd very much like to do so. But we've owned that stock probably for the better part of 20 years.

I'm a Marriott customer. I can see and understand what they do, as a customer, as well as reading their financial statements and the annual report. So, even though I don't know him, I can see and taste and touch and feel the product and the service.

I can read the financial statements. I can read profiles about him, and I can get as good a sense as possible without actually having a personal relationship with him, that enables me to make some judgment about the company that would not be wildly different than what any retail investor would have the opportunity to do.

Koppenheffer: I would say that another -- you just mentioned how long Marriott has been in the portfolio -- a key aspect of the investing at Markel is the long-term ownership. It can be such a huge advantage, to own stocks for that long.

How do you deal with ... we'll say the "dedication." I could also maybe say the potential boredom; some people might think of it as boring! What is it that allows you to own a stock for 10 years, for 20 years, and just say, "I'm going to own this. I'm not going to worry about everybody else buying and selling and turning things over"?

Gayner: Well, there's a variety of factors that would go into that. First off, I never buy something and say, "I'm done." Although we've owned Marriott for well over a decade, and probably two decades, that doesn't necessarily mean we will own Marriott tomorrow.

Things could change, and in fact one of the things I like about Marriott as an example was Bill Marriott, in this interview, was talking about the way in which the hotel business is changing; Airbnb, the sharing economy, all those sorts of things which are opening up new competitors that you would have never thought of 20 years ago, but that exist now.

The Marriott Corporation, not just Bill Marriott but other people within that company, are aware of those shifting changes, so part of my job as an investor is to monitor and stay on top of what Marriott themselves are doing, in response to the fact that the world is changing.

It's not boring because there are developments to be kept track of, and things to stay on top of, and things to make sure that your thinking is appropriate for today, just as it was 10 years ago or 20 years ago. And, most importantly, what will be the case 10 years or 20 years from now.

But there are businesses that tend to remain more relevant or less relevant, as time goes by. To the extent that you can find those that remain relevant, and that have good businesses, and that their customer bases can expand over time, and you can own them for a long time, that tends to be a very exciting thing to me. Some may find it boring. I think it's wonderful.

One other point I would say about that is, we're very lucky to be alive now, in the sense that the amount of progress that is, and I think will continue to happen all around the world, is faster and more dramatic right now than it has ever been before.

You take a company like Marriott as an example. How many hotel rooms will they be adding to their portfolio in the U.S. versus the rest of the world over the next 10 or 20 years? Well, just as if you were to go into a Wayback Machine and think about 30 years ago, when Marriott was just starting out, roughly, in the U.S. -- there were a lot of potential hotel rooms in the U.S. that they could build that company on the basis of.

Well, now it's the rest of the world.

Koppenheffer: It's a pretty big place!

Gayner: It's a big place. I don't know of one that's bigger that we can operate in!

Things like that; it's some leading companies and things that you think of as very established, dominant brands. Well, that may be true, but the addressable market that they've worked with before is much smaller than what it can potentially be over the next 10 or 20 or 30 years. You have proven winners that you can invest with and back, as they go about the task of trying to be successful in other parts of the world.

Koppenheffer: In addition to Marriott, CarMax, Disney, Berkshire Hathaway among the long-term positions that have been in the portfolio a decade or more. In addition, I've heard you talk about the tax advantages of holding a stock. CarMax is an example that Markel has a rather large profit, sitting on.

This may be a little bit different for retail investors that have tax-advantaged accounts, but from a tax perspective I know you also have some thoughts on holding onto stocks, rather than selling them or turning them over.

Gayner: Sure. The math, for us -- we're a full corporate taxpayer, so 35% tax rate, roughly, is what we would incur any time we sold something and recognize a gain. If you've got a big gain in something, a dollar's worth of gain, in effect if you sold that to buy something else with it, you've only got $0.65 to invest in the second idea, after you've sold and recognized the dollar gain.

It's a lot more productive for us, and a better use of our time and limited areas under our circle of competence, to buy something that we think we're going to be able to hold this, not just for the next 10 points, but for the next 100 points or the next 500 points.

There are very compelling investment ideas where a stock may be $20 a share and somebody argues a dramatically correct and compelling case as to why this is going to be $30 -- and it works. It goes from $20 to $30, but it's not the kind of company that's going to continue to compound in value over a long period of time.

So the smart thing to do, if you're trading those kinds of securities is, if you're right and it goes from $20 to $30, you should sell it and recognize the gain. But then you have to figure out what you're going to do next.

My bias, and the way I spend my time, is to try to buy something at $20 that I think is going to go to $30 -- and then $40, and then $50, and then $90, and then $150, and $300 -- over long periods of time, because it's just a much more efficient way for me to spend my time.

Koppenheffer: Looking at the big picture here, we've had a very nice bull market run and valuations, by some people's calculations, are now looking a little bit loftier -- 18x, 19x P/E ratios kind of level.

What is your thought on the current state of the market, and what we might see over the next five years? I know speculating on the market is not really your bag, but I've got to go there just a little bit!

Gayner: Well, you asked me about that book, Once in Golconda, and one of the central characters in that book was J. P. Morgan -- the original J. P. Morgan that you think of -- and his son, who subsequently ran that bank. J. P. Morgan's famous quote, when asked about the market and what it was going to do, he says, "It will fluctuate."

Koppenheffer: That's a great answer.

Gayner: It's an accurate answer. It was true 100 years ago, it's true today.

Similarly, going back 100 years ago, if we talk about the Dow -- and the Dow roughly at 17,000 -- what was it 100 years ago? It was probably closer to 17.

Koppenheffer: And still fluctuating.

Gayner: I don't know what the number was, but it's up a lot in the course of the last 100 years. I've been in the investment business close to 30 years now. I hope to be in it for another 30 years. I think it'll be massively higher 30 years from now than it is today -- and that's really the kind of time frame that I think about.

I have no short-term predictions. It's not an extraordinarily cheap market, it's not an extraordinarily expensive market, but it's certainly one in which I think you can find productive investment ideas.

Koppenheffer: Pushing you outside of your circle of competence a little bit more ...

Gayner: I thought we were talking about that when we talked about golf!

Koppenheffer: Yes!

Social networks. Social networks -- LinkedIn, Facebook, Twitter -- these are companies that we see, we're using all the time. They're on the lips of a lot of retail investors and everyday folks getting into the market. Do you have a view on the value of these, where they could be headed? What's your thought on the businesses?

Gayner: In general, we know the ones which have been spectacularly successful. There are others that have flitted into view, and are no longer with us, or certainly no longer held in the same esteem as what they might have been, potentially. I recognize completely that some of these are, and will continue to be, of immense value. But it's not my field of expertise to be able to opine on them.

One of the things that I do think about, and that I am responsible for within my circle of competence, is the things that we do own and how are their businesses affected by the growing power of a Google or a Facebook?

For instance, in the late 90s as an example, I tended not to own some of the dot-com companies that were very popular at the time, and I would be criticized for not being "current" with technology.

I always would say to people, "Actually, I own shares in the most successful technology company in the world."

People who knew me well would look at me quite quizzically and say, "What do you mean? You don't own any of that."

I said, "Yes, I do. I own Walmart." If you think about Walmart, it was their brilliant use of technology, as much as anything else, that enabled them to scale the size of that business. While you would not necessarily have "Walmart" fall off your lips as an example of what's a great technology company, they were great users of technology.

Marriott, which we spoke of earlier -- the reservation system, the pervasiveness -- it started out with 800 phone numbers, and now marriott.com or the Expedias and Pricelines of which they would be a part of. It's my responsibility and within my circle of competence to decide and to stay on top of whether I think they are effectively adapting to the new environment they have to operate in.

Koppenheffer: I would say in the past few years, maybe the past 5 or 10 years, there's been an increased focus on behavioral investing; the ways that our brain can get in the way of good investing results. For you, what are some of the most difficult biases that you have to face, and how do you deal with them?

Gayner: Great question. I hadn't thought about it in exactly those phrases. Where it really makes sense to me, and where things clicked, was the Thinking, Fast and Slow book that Daniel Kahneman wrote.

I try to think about where I have thought quickly, and instantly reacted to something and made the decision -- whether you want to call it the reptilian brain, the Type 1 thinking, Type 2 -- all the language around those sorts of things. Where are you making simplifying assumptions, and where are you not?

I don't have a broad, generic category to answer your question with, but I do try to stay cognizant, personally, of where I might have jumped to a conclusion and where I should slow down ... and similarly, where sometimes jumping to a conclusion is very helpful, and those kinds of decisions are more likely to be correct than not.

Koppenheffer: Fortunately, I would imagine having stocks in your portfolio for 10 years plus helps avoid making split-second decisions.

Gayner: Well, let's put it this way. It helps split-second decisions to be more accurate than they used to be.

Charlie Munger talks about this quite a bit; accumulated wisdom, and having been in the business and studied companies, and studied business, and studied people, and studied history for years and years and years and years and years, you ought to be better at it the longer you've been doing it and the older you get.

Koppenheffer: Like the muscle memory of an athlete.

Gayner: Exactly.

Koppenheffer: We put a call out to Motley Fool readers, to see if they had questions that they wanted us to bring to you, and I've got a couple of them that we could potentially close with, here.

The first one is from Christ W. His question was, "Does Markel Ventures look outside the U.S. for acquisitions, and if so does the process change when looking internationally?"

Gayner: We do. The first several Markel Ventures acquisitions that we did, tended to be pretty close to home -- some of which were right here in Richmond -- because it was a new activity for us, and we were stretching and expanding our circle of competence.

We thought it was quite important to make sure that we increased the odds of knowing what we were doing, which was helped by the fact that we knew people in this community as we did our first couple of acquisitions.

Since that time, and we're 10 years into the program now, we have indeed bought some non-U.S.-based businesses. They have tended to be businesses that the companies that we already operate, were already in. It wasn't that we got into a new business that was outside the U.S., and this was the first step in that world that we ever did.

The first company we bought in Markel Ventures was AMF Bakery equipment, so we have a decade's worth of experience in baking equipment, food supplies, and things of that nature, so some of the international deals we have done have been through AMF and in the food world -- again, connected to that "Sugar" chain.

Koppenheffer: And circle of competence is big in that.

Gayner: Circle of competence, that's exactly right. We've also done some international deals in our Ellicott Dredging operation. Ellicott, while it's headquartered in Baltimore, Maryland, actually does the vast majority of their sales outside the U.S., and has for a long time, so the people who run that business are experienced and skilled, and proven winners at doing business all around the globe, so they really were leading the transaction to buy the things that we bought outside the U.S.

Koppenheffer: Great.

The second question I have here comes from Andy S. The question is, "You get five companies, excluding Markel, to hold forever. Which companies, and why?"

Gayner: I hesitate to answer that, only because that answer might change tomorrow. So, Andy S., you can look at our public filings and you can see what we own.

You've mentioned some of the names. They are subject to change, so before we memorialize something on a stone, let's defer to another question!

Koppenheffer: We'll stick to the 13Fs for that.

Gayner: Right.

Koppenheffer: Tom, I really appreciate you joining us today. This has been a lot of fun.

Gayner: My great pleasure, thanks.

Matt Koppenheffer owns shares of Berkshire Hathaway, Markel, and Wal-Mart Stores. The Motley Fool recommends Berkshire Hathaway, CarMax, Google (A shares), Google (C shares), LinkedIn, Markel, Priceline Group, Twitter, and Walt Disney. The Motley Fool owns shares of Berkshire Hathaway, CarMax, Google (A shares), Google (C shares), LinkedIn, Markel, Priceline Group, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

http://www.fool.com/investing/general/2014/07/25/an-interview-with-markels-tom-gayner.aspx

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