Thomas S. Gayner, CEO of Markel Group (NYSE: MKL), provided a masterclass on building a corporate architecture designed for one purpose: “relentless compounding”. He detailed the three interconnected engines that drive Markel’s value creation and the unique culture, known as the “Markel Style,” that underpins the entire enterprise.
The Three Engines of the Markel Compounding Machine
Specialty Insurance: The foundation of Markel is its specialty insurance operation. By focusing on complex, niche risks that require deep intellectual capital—such as equine insurance—Markel builds durable competitive advantages. As Tom explained, it is far more effective to recruit “horse people” and teach them the discipline of insurance than it is to try and teach financial experts to care about horses. This engine’s primary output is low-cost, long-duration float—the premiums collected upfront that can be invested for Markel’s benefit before claims are paid out.
Investments: The second engine is the investment portfolio, which puts the insurance float to work. This began with a public equity portfolio managed with a long-term, ownership mentality. This strategy has resulted in a massive, tax-deferred unrealized gain of approximately $9 billion, which Tom describes as a “zero-cost loan from the government” that helps finance the group’s growth. Over time, this philosophy of ownership naturally evolved from buying minority stakes in public companies to acquiring majority stakes in private ones.
Markel Ventures: This is the third engine and the logical culmination of Markel’s evolution. Markel Ventures acquires high-quality private businesses with the intent to own them permanently. Tom draws little distinction between owning a public or private business; the key criteria are the quality of the business, the integrity of its management, and the ability to acquire it at a price that promises an attractive long-term return on capital. This structure provides a powerful solution to the classic investor’s dilemma of when to sell a great business. By having the capacity to own businesses forever, Markel avoids the forced realization of gains and the subsequent tax friction, allowing capital to compound on a pre-tax basis for far longer—the mathematical key to superior long-term returns.
Culture, Decentralization, and Capital Allocation
The entire system is held together by the “Markel Style,” a cultural statement that emphasizes a long-term perspective, discipline, and integrity. Operationally, Markel has been moving to decentralize authority and accountability to the front lines, empowering the experts in each of its 150 product lines to make decisions. This is supported by compensation systems that are tied to multi-year results, ensuring alignment with the group’s long-term compounding goal.
Capital allocation is a conscious and disciplined process. The first call on capital is always to reinvest in existing, high-return businesses. Subsequent options, in order of preference, are acquiring new businesses (public or private), repurchasing Markel’s own stock, and, finally, paying a dividend. Capital is always directed to its perceived highest and best use across the entire Markel ecosystem.
A Case Study in Curiosity: Brookfield
Tom illustrated his investment process with the story of how Markel came to be a long-term owner of Brookfield Corporation (NYSE: BN). It began nearly 25 years ago not with a stock screen, but with curiosity about an unusual Canadian tax structure. By working backward to see who had engineered this structure, he discovered the predecessor to Brookfield. He found a culture of intelligent, creative, and opportunistic capital allocators who were building a business by acquiring and operating essential, long-duration assets like hydroelectric dams. The investment was a bet on the people and their process. A quarter-century later, Markel remains a shareholder, demonstrating the power of finding the right partners and sticking with them for the long haul.
Let’s go deeper.
Transcript
The following transcript has been lightly edited for readability.
John Mihaljevic: Tom, tell us how you see the platform today as a basis for strong compounding into the future.
Tom Gayner: Endurance. One word. What Markel is all about is that we started out with the specialty insurance business, responding to a market need. When you have a specialty insurance business or any insurance business, that, by definition, creates an investment pool because insurance companies take in money today in the form of premiums and pay it out later in the form of claims. During the time lag that you’re holding that money, you get to invest it. We invested more of that money in equity securities than most insurance companies do, with an ownership mentality.
That has compounded over the years. As taught by following the Buffett example, those minority interests in public companies morphed and adapted into majority ownership positions in private companies. The whole point of Markel Group writ large is to relentlessly compound the capital and keep doing it over and over again.
Where we are is pursuing the same journey we have pursued since the beginning of the IPO era of Markel in 1986. The company is 100 years old, but let’s call modern Markel—in NASDAQ terms, when they changed the carburation, they changed the record keeping and calibration of records—we’ll start calling that 1986. We’re doing the same things and operating under the same principles that we have ever since the beginning.
John: And you are constantly evolving the group and the structure to enable that continued compounding going forward by focusing even more on your specialty insurance businesses, for example, with Markel Ventures and so forth. Tell us how you see the platform today as a basis for strong compounding into the future.
Tom: Specifically, for instance, with the focus on specialty insurance today, over the 40 years—or 39—that we’ve been a public company, we’ve clearly made mistakes and not done everything right. No question about that whatsoever. Now, it’s a pretty good record, but it has had fallow periods along the way. Through the late teens and early 20s, we had a somewhat fallow period in our insurance operations where we remained profitable and enjoyed underwriting profitability, but not to the level and extent that we should have. We had made some missteps and made some bad decisions.
For the last couple of years, we have been about the business of fixing that, of changing that. We’ve had some changes in leadership in that part of our business in order to try to tighten up the focus there.
We’ve also, in a systemic way, decentralized the business more. There was an era where more and more of the decisions became centralized in Richmond, and there was the idea of trying to connect our different businesses and operate as a big unified piece. We just didn’t do that as well as we should have. One of the fixes to that is to restore authority and accountability to the lowest possible level so that each and every product that we have—and this is true for our insurance businesses, for our industrial businesses, for our consumer businesses—you want the people at the front line to be as empowered and accountable and able to make decisions as possible.
One of the ways in which the world has changed is that your front-line people are better than they used to be. They’re more highly trained, they have more resources, and they have more ability to know what the right thing to do is. So home office, get out of their way. Now, hold them accountable for the results they have. That has been one of the descriptors of what we’ve been doing in insurance over the last two years to restore that.
John: And what have you seen work on the compensation side in terms of structuring that to align the incentives with the goals of the group?
Tom: The number one tool in terms of compensation structures is a multi-year time frame. Generally speaking, if you’re running a business, if you have a participation of any sort in a P&L, that is almost never a one-year thing because businesses are longer term, so you need to stretch that out. For instance, my own compensation is over a five-year rolling average, and most of the senior people have that kind of time frame attached to things.
So one, the time frame, and then second, the specifics. If you’re specifically running a business based in Milwaukee, Wisconsin that does personal lines—and that example comes to mind because we do have a business based in Milwaukee, Wisconsin that does personal lines, and I’m picturing the gentleman who does that very well—the bulk of his compensation would be tied to the results of that business, and then a lesser degree to Markel as a whole.
John: And how do you think about your distinct advantages in some of the insurance segments you play in?
Tom: Yes, I think there are a couple of points there. One, to the extent that the insurance product in and of itself requires intellectual capital, that’s where we have the opportunity to shine. For instance, one of the lines of insurance that Markel has been in for a long time, and it’s a signature line, is equine. So, horses and things that are in the horse world. And if you—not Longmire, but Yellowstone. If you remember the TV show Yellowstone—anybody here watch Yellowstone at all? Okay.
I had not been watching Yellowstone, but somebody called me up and said, “You have to watch this program.” I said, “Why?” And they said, “Well, if you look at the arena in Yellowstone in season five, when they switched to quarter horses, there’s Markel signage in the arena.” That’s because Taylor Sheridan, the producer, is very knowledgeable about these sorts of things, and the details were extraordinarily good. He knew Markel was such a part of and so connected to the equine world that for him to film that and show it, and for that arena not to have Markel signs, would be inauthentic in some way. Our signs were placed in that show, Yellowstone.
Now, in Yellowstone, they drank a very specific kind of beer, they had a very specific kind of bourbon, they wore very specific kinds of clothes. Those were all product placements. Those companies paid in a marketing sense to be in that show, and it was worth it. We were invited and not charged. We were authentic, and that’s an interesting tell.
Let me connect a couple of dots here. One time I was traveling, and I happened to be seated next to a gentleman who’s a successful businessman, and he happened to have a nine-year-old daughter. He had recently bought this nine-year-old daughter a dressage kind of horse. I’m not a horse expert. I don’t know anything about horses. That horse is the kind of thing we would insure. We would not be insuring racehorses who need to win races to be economically justified. We love insuring the horses that some dad bought for his daughter.
I’ve told the story a million times around the halls of Markel about what I love so much about hearing that we did that: that nine-year-old girl didn’t want anything to happen to her horse. That dad didn’t want anything to happen to that horse. That horse didn’t want anything to happen to that horse. And we didn’t want anything to happen to that horse. We’re completely aligned. I love that. That is a spectacular form of insurance. I wish we could write nothing but that kind of business. The closer we get to that kind of business, the better we do.
Now, the piece that I wanted to speak to is where our advantage lies. As a business, trying to have the culture and what we call the Markel Style, which is our cultural statement, we can take somebody who is a horse person who loves horses. Believe me, I had a sister who was a horse person. That horse needs to be taken care of seven days a week, 365 days a year. I, by contrast, had a motorcycle when I was a kid. I’d put 50 cents worth of gas in it, and that would be a weekend, and then I’d just lean it up against the garage when I walked away. Much lower maintenance to have a motorcycle than a horse. But horse people love horses.
We take horse people—we recruit horse people—and we teach them the disciplines of insurance. It doesn’t work the other way. You can’t take people who are financially sound and teach them about horses because they don’t have the love. They don’t care in the same way that somebody who loves horses does. That’s one small example. We have about 150 product lines, and it’s almost most extreme in the equine line.
I would also talk about surety, just to give one more example and texture to that. We bought a company called SureTec out of Houston, Texas, 8 or 10 years ago, something like that. That’s a deal that has gone very well. They’ve done spectacularly well. A guy named John Knox, who was the founder of that company, approached Markel because he wanted the culture for his people to land there. Surety is a business where John would say it takes 10 years to make a good surety underwriter because you really need to be embedded in the process of construction and bidding and municipalities and who is a good contractor and who’s not a good contractor and all those things that go into the craftsmanship of being a good surety underwriter. You just can’t do that automatically overnight.
What we do is provide a home for people who are oriented and interested in long-term ways, and we try to make sure that we celebrate that, we thank them, we have incentive systems that match up those time horizons, and we just keep doing it over and over and over again relentlessly to create the compounding that you can witness over four decades.
John: How do you think about the capital allocation side of all the options?
Tom: Capital goes to its highest and best use. Start there. We have a beautiful system in that we have a 360-degree range of opportunities to allocate the next dollar of capital. What can we do with it? Here are the options that sit on my desk when there’s incremental capital coming in. And this is not necessarily in rank order, but some things get a little ahead of the others.
If we are already in a business, we have an existing business, we have people who are running that business, they are doing well, they are earning good returns on capital, and they have an idea to expand it somehow—they’re first in line. They get capital first. Next, the idea of acquiring, whether it’s a public security or another business, is a capital allocation choice for us. The third would be repurchases of our own stock, which we’ve done a fair amount of over the last several years. The payment of a dividend somewhere along the line is on the list of things that are capital allocation opportunities.
But in each and every sense, no capital is funded to something by autopilot. That is a conscious decision we would make. What is the highest and best use of capital, whether it’s organic growth and funding organic growth of the business, whether it’s acquiring something public or private, buying more of what we have—i.e., repurchasing our stock—or getting the capital back to shareholders through dividends. That’s the way capital allocation works.
John: Help us understand how Markel Ventures fits in, how big of a piece of the pie is it today, and where do you expect it to go in the future?
Tom: There’s no religious belief about what it should be as a percentage of the total. Our industrial commercial businesses really started out—we’ve owned industrial and commercial businesses for a long time. We owned minority fractional shares of publicly traded businesses, but we never thought of them as stocks to be traded. We thought of them as businesses to be owned which could be purchased at a fair price and which produced good returns.
It’s like a friend of mine who runs a charity business in Richmond. Her statement is, “Nonprofit isn’t a business plan; it’s a tax status.” Publicly traded is not a description of a business itself; it’s just the way the securities are traded. I really don’t draw that much of a distinction between whether a business is publicly traded or privately traded. It’s a question of: Is that business a good fit within the Markel group? Can we acquire it at an attractive price? Can we acquire it at a price where the business in and of itself, over a long period of time, would likely intrinsically produce good returns on that capital that we allocate? It’s been an organic growth in that sense.
The other thing that I would point out, and I think it’s worth noting, is the advantage of having unrealized gains. Our unrealized gain on the public portfolio is measurable, and you can see that. Every day at 4:00, we can tell you what that is. In round numbers, it’s up to $9 billion now. I’m guessing that other than Berkshire, I’m not aware of any other public company that has an unrealized gain that big on their investment portfolio that’s just been accumulated and built over the years. Multiply that $9 billion by the tax rate—22%, 24%, whatever percent you want—that is, in essence, a zero-cost loan from the government that we use to finance our operations. That in and of itself, as part of the strategy, has been very helpful in producing the relentless compounding of capital.
The Markel Ventures set of businesses, across the spread—we started buying them in 2005, and they’re worth more than what we paid for them. We don’t have a mark on that at 4:00 every day like we do on the public portfolio, but it is real nonetheless, and it’s the sort of thing that continues to create the system and the architecture and the design which helps compounding continue.
John: Could you talk a little bit about the public investing side, how your own approach has evolved over the years, and how you see the landscape today when you evaluate public versus private, for example?
Tom: One of the reasons you saw the passion of Bob in his presentation, and the reason all of you are here, is that this is a fascinating business to be in. And Ed Wachenheim’s endurance and decade, decade, decade-long career, and Tom Russo—I’m teasing him, he’s not a spring chicken anymore either. It is the greatest game in the world. I do not know anybody who is a serious practitioner of this who thinks they have it solved and who doesn’t wake up every morning with a mixture of joy and trepidation of, “How am I going to figure it out now? It sure seems more challenging or different, or things that I don’t understand.” You have the opportunity to challenge that every day in a unique way.
My own particular path, not to dwell on things: I started out, and my formal training was that of an accountant. I worked as a CPA for Coopers & Lybrand, which became PricewaterhouseCoopers, and did that for a couple of years. My dad was an accountant and also an active investor. So I approached things from the language of accounting, which is the language of business, which I think is a helpful understanding. Accounting is a story. It’s a map. It’s not the territory, but accounting is the map that describes the territory of what’s really going on in a business. You don’t need to be the PhD accountant, but you need a familiarity with accounting to get the sense of things.
Like most younger participants in the business, accounting, doing the math, having the ratios, the quantitative side of things, and having things that are statistically cheap was attractive to me. What I have learned, and what has been my experience over the years—and where that $9 billion of unrealized gain comes from; again, the discussion was brought up of the professor’s study that if you bought everything and just held on to all of it, there’s a small set that’s going to power all your returns—is that it comes from owning the quality businesses, the ones that compound over time. The older I have gotten, the more I have appreciated the quality businesses that are able to continue to compound over and over and over again, year after year after year.
I would also tie that to the comments Bob and Ed made about being a director and our own experiences in running not only our insurance businesses but the industrial and consumer businesses as well. As Buffett said, being an investor made him a better businessman, and being a businessman made him a better investor. To be connected to the business and the actual operations of the business itself, both within Markel and what you see as a director, is of value, and that has been part of the journey that causes me to not ignore the fundamentals, the math, and the basic stuff that I started with, but to add on the qualitative factors.
It could be described as: “Okay, I see this, I see the snapshot of how that might be inexpensive today, but what is the rate of return, and how long is that likely to last?” If you have a positive rate of return and you think it lasts a long time, then you get into exponential math. It’s the percentage, and then the N factor is: Is that one year, two years, five years, 10 years, 20 years? The big difference-maker is the N, the exponential math part. If you have something that makes 25% but it’s going to disappear in six months, then you have to do all that work all over again and find the next thing. That’s hard. If you have something that makes double-digit returns—and again, I think we’ve been spoiled over the last few years. We’ve been spoiled since the great financial crisis in that people don’t know how hard it is to make double-digit returns for a generation. It’s super hard to do.
Audience member: I would appreciate your insight about one of your largest holdings, Brookfield. In your opinion, does Brookfield have an engineering culture that can compete with China on a global basis in the global market?
Tom: I don’t think about it in that way because I don’t think of Brookfield as a manufacturer, so that’s not the game they’re playing. I’ll just share a story with you because this might be illustrative of how you can continue to compound. You go to work every day with curiosity and an open mind, and by being in the flow, you’ll figure things out.
This goes back maybe to around the year 2000. There was a particular tax structure in Canada that enabled what I would call normal operating businesses to be taxed as if they were REITs. They could pass through their income and eliminate the double level of taxation. Somebody called me and they were pitching some Canadian company that might have been peat moss or something. I don’t remember. It didn’t strike me as something that I thought was a great idea, but the tax structure intrigued me. I tried to figure out, “Wait a minute, if I work backwards from that, who set up that company? Who’s the GP in that LP that’s being pitched to me?”
Working backwards, it was the predecessor of Brookfield, which was called Brascan. Brascan stood for Brazilian Canadian Tractor Company. Bruce Flatt, who was there, had worked for Jack Cockrell, who was the consigliere/family office guy for them. It was a place where they were insanely curious, and they did things that made sense. At that particular moment, in addition to setting up the GP and taking advantage of those Canadian tax structure things, they would do things like this: say you had a nickel mill in Canada. A nickel mill might have a hydroelectric dam attached to it. The nickel mill would have epic periods of prosperity and then challenges. If there were a thousand people who worked for the nickel mill company, 990 worked inside the mill and 10 might have worked for the hydroelectric dam that supplied the power. When the nickel mill got in trouble, Brookfield provided financing where they sort of kept the mill going but they got the long-term supply contract to operate the dam. They did that over and over and over again, all around the world.
Their core strategy is not out-competing China in manufacturing things. Their core advantage is being thoughtful and creative and trying to find ways in which to participate and earn fee income in something that logically should be done. That’s how that came to be. And we continue to own it 25 years later. There are even more layers and contours and texture to that story. I won’t bore you with them, but that’s what we keep being curious about. That’s what we keep trying to find over and over again.
Audience member: Could you talk about today’s capital requirements for insurers? Do you think it would be plausible at all for someone to take an insurance company and turn it into a diversified conglomerate like Markel or Berkshire Hathaway today with the kind of velocity and effectiveness with which it was done originally?
Tom: Yes, I think it can be done. It takes time, but it can be done. And it amazes me, forget Markel, but look at Berkshire over the years. I can remember, this is a story that goes back 15, 20 years, there was an analyst who came and visited us. He was curious about Markel and he was trying to do his work. At the end of the day, he sort of looked at me and gave me a little bit of a sneer and said, “The trouble with you guys is you’re trying to be like Berkshire.” My response was, “Who would you rather us be like?” Doesn’t it amaze you that more people haven’t even tried to do it?
Now, there’s diversity within the idea of what Berkshire is and how it is that you could learn from them. Nobody’s ever going to do exactly what Berkshire does. It’s unique, and Buffett deserves the praise he has earned. He’s in the pantheon of superstars, and we should study him and learn from him. I think he’s sui generis, so it’s not going to be done exactly. But why not take those learnings and have them as aspirational goals for yourself? Because there are certain things that seem pretty logical and pretty common sense and pretty thoughtful.
Two things. One, it takes time. The earlier speakers all, in their own ways, talked about the value of time and the value of being long-term and unconstraining yourself from the 24-hour cycle. That is really hard to do. It is hard to adopt a long-term time horizon and be able to endure fallow periods where you look dumber than you really are. A friend of mine named Chad Roy used to say, in his Texas way, “At any given point in time in the investment business, you look either smarter or dumber than you really are.” And it’s really hard to get through the periods of time when you look dumber. So that makes it hard.
Secondly, even running the business after you’ve said, “This is what I want to do, this is how we’re going to do it, this is how you’re going to set things up,” the idea you raised about how the incentive compensation system works—that’s hard. That’s hard because you need to build a culture of people who also want to do it and also are long-term minded and will stay with it, even when there are periods of time where FOMO, fear of missing out, is strong. There is somebody who’s going to run faster than you at any given point in time, almost always. You can always find people who are doing better than you are right now. Do you have the character, the compunction, the wiring, the value set that you are able to... what is it Gore Vidal said? “It is not enough to succeed. Others must fail.” That’s human nature. It’s just really, really hard to stay true to what you are when it looks like you are underachieving what your idiot neighbor is doing.
Audience member: On that point, are there not fewer assets from the general account that you can put into public securities today than there were in the past?
Tom: In terms of the actual ratios, yes, it’s a tighter regulatory environment than what it used to be when Markel was going down that path or Berkshire was doing it even before we did. But at the same time, our public equity portfolio and allocating things just to the public side, that total number in rough numbers is $12 billion. We only paid $3 billion for it. There’s the $9 billion of unrealized gain. So if you have the room to put in $3 billion, well, if you do it long enough and you do it well enough, it will become $12 billion. And there isn’t a very different regulatory response when the value of what you already own is going up than allocating fresh capital to that dollar for dollar. Once it gets to be 25-cent dollars, you have more room.
I think it is accurate to say there are constraints, but those constraints are not insurmountable, and they are a function of will, skill, and time to be able to do it. You’re not going to start doing it and in 5 or 10 years be able to declare success. It’ll take more than 10 years before you can start to say... it’s like that old joke about when Henry Kissinger was talking to Zhou Enlai during the Vietnamese peace talks. They were just trying to establish a relationship and have a dialogue, and Henry Kissinger reportedly asked Zhou Enlai what he thought of the French Revolution, and Zhou Enlai replied, “Too soon to tell.” The time horizons that different people bring to things are a challenge and an opportunity. Time is just a magic thing if you can get it working for you rather than against you.
Audience member: As a follow-up, one of the Fed branches put out a study that private credit as a percentage of general accounts has roughly doubled from 2019 to 2023. I’m just curious about your take on that.
Tom: We are not participating in that.
Audience member: Does it spook you? Do you think it gets to a point where it’s too far?
Tom: I think actions speak louder than words. We’re not allocating our portfolio in that direction.
Audience member: Following your thinking process, when would you consider selling a position in your public security portfolio, realizing those unrealized gains? What is your thinking process on that?
Tom: When I conclude I’m wrong. There’s a theory that I had as to why I bought something and a theory of what the expected returns were going to be. And in time, sometimes things come along where I was just wrong in my theory or the world changed. While we are low turnover, it’s not zero turnover. It would be in the single-digit percent per year. That would imply an average holding period of 12, 13, 14 years on average over the portfolio when you just do that math. Turnover does take place, and it’s when I’m wrong. I can be accused appropriately of sometimes holding on to things too long. Sometimes there’s a big gain somewhere and you give a chunk of that back, and that’s painful. But if I still believe in the underlying fundamentals of the business, I tend to hold on to it and absorb that. The 25% tax cushion as it comes down is very helpful because we’ve already provided for the tax liability against the gain. It’s an imperfect process, but the first step would be if I’m wrong, if my fundamental thesis has changed, then admit it and move on.
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