The Miny Berskshire Following Buffett’s Playbook

1. Markel: The Miny Berskshire Following Buffett’s Playbook I’ve always wanted to take a closer look at Markel Group and the company’s recent buyback announcement prompted me to do so. Unfortunately, despite approaching the idea with a positive bias, I was left unimpressed. Doing the work to understand a company but then passing on the idea is not necessarily a bad thing. It leaves you prepared to act quickly if the situation changes. I recollect the first time I looked at the flooring company Mohawk (MHK) in 2019 and decided to pass on it. The stock eventually dropped by more than 50% early in the pandemic, providing an excellent opportunity to profit from an investment that I had already done work on. Markel Group has evolved over the last 90 years from a regional transportation insurer to a global insurance and investment company. Founded in 1930 and based in Glen Allen, Virginia, Markel joined the Fortune 500 list of companies in 2016 and has more than 20,000 associates supporting its family of businesses and investments. It is the company that hosts an annual breakfast gathering for its shareholders, scheduled the day following Berkshire Hathaway’s shareholder meeting in Omaha. Read More Info @ https://www.insidearbitrage.com/2024/01/markel-the-miny-berskshire-following- buffetts-playbook-buyback-wednesdays/ Morgan Housel, author of the book ‘The Psychology of Money’, joined Markel’s Board in November 2021. He was a columnist and senior analyst at The Motley Fool and a columnist for The Wall Street Journal before joining Markel. In 2005, Tom Gayner, the current CEO of Markel, heard about AMF Bakery Systems, which was up for sale and also located in Virginia. Gayner assessed the potential and chose to diversify Markel from its primary insurance business. Thus, by following Warren Buffett’s strategy of investing a portion of insurance float into alternative businesses, Gayner laid the foundation for Markel’s three-engine structure. Key Insights  Markel Group is a diversified financial holding company with over 20,000 employees powered by three distinct engines: Insurance, Investments, and Markel Ventures with Insurance being its core segment.  Insurance has been the best-performing segment of the business, with an average premium growth of 14.5% over the last 6 years.  While the average combined ratio for the property and casualty insurance industry between 2013 and 2022 was 99.4%, Markel had an exceptional average combined ratio of 95%, highlighting its underwriting profits. The lower the combined ratio the better.  The company’s shares have risen by 146% over the last decade and almost sevenfold since the company started trading on NYSE in 1997.

2.  Markel’s Q3 earnings report showed mixed results, reporting slow growth and a combined ratio of 99%.  However, its fixed-income portfolio is profiting from higher interest rates, with recurring interest and dividend income growing 70% during Q3.  Insiders have shown their optimism by constantly buying the company’s shares in the open market. On the other hand, Berkshire Hathaway recently reduced its stake in Markel by selling 312,946 shares, marking a significant 66.35% decrease in its holdings. Markel Group (MKL) is a diverse family of companies that includes insurance, bakery equipment, building supplies, houseplants, and more. Additionally, the company operates as an investment fund manager offering a range of investment products, including insurance-linked securities, catastrophe bonds, insurance swaps, weather derivatives and program services. Through decades of sound underwriting, its specialty insurance business has provided the capital base to build a system of businesses and investments that collectively increase Markel’s durability and adaptability. Get access to premium merger arbitrage content. Subscribe today Insurance The insurance operations include Markel Specialty, Markel International, and Global Reinsurance divisions, as well as State National, a portfolio protection and program services company, and Nephila, an insurance-linked securities investment manager. Markel’s growth in the insurance segment has been characterized by a combination of organic expansion and strategic acquisitions. Markel’s acquisition of Terra Nova Holdings Ltd. (Bermuda) in 2000, SureTec Financial Corp. and State National in 2017 and Nephila in 2018 are some of its successful acquisitions. The acquisition of CATCo in 2015 was a mistake as it did not produce acceptable returns and was put into run off in 2019. Investments To enhance its profitability, Markel utilizes the cash generated from its insurance operations to invest in both equities and fixed-income securities, ensuring a balanced mix to cover future claims. The investment portfolio comprises 50% fixed income, 28% publicly traded equities, 14% cash, and 8% Markel Ventures. The fixed income segment involves 12% of assets maturing in under 12 months, 43% between one and five years, 31% between five and ten years, and the remaining portion over ten years. Notably, 99% of the fixed-income portfolio has a rating of “AA” or higher. Markel reported $329 million in investment income in the first half of 2023, up from $189 million in the same period last year. This investment income is further expected to rise over the next few years as low- yielding bonds will mature and be replaced by higher-yielding ones. In the past five years, its equity portfolio has yielded an annual return of 9.5%, while over the last decade, it has delivered an annual return of 13.2%.

3. The portfolio currently holds 133 positions with a value of $8.28 billion. Markel Ventures Markel Ventures, a subsidiary of the Markel Group, was founded in 2005 to diversify beyond insurance into sectors like construction, manufacturing, consumer products, and healthcare. It seeks profitable businesses with strong management, fostering long-term growth. This diversification creates additional revenue streams beyond insurance. Share Repurchases Markel does not currently pay a dividend. It has resorted to share repurchases as a means to return capital to shareholders. The company has been buying back its stock gradually, retiring around 4% of shares outstanding in the last four years. But last year, Markel increased the pace of its share buybacks, reducing the share count by 1.83% during the last twelve months, higher than the average annual decrease of 0.5% observed over the last seven years. The company repurchased $269 million of its stock so far in 2023 compared to $208 million in the first nine months of last year. Management and Recent C-Suite Changes Markel has experienced significant shifts in its leadership recently. A notable change was the abrupt departure of its CFO, Teri Gendron, who held the position for a brief period from March to December 2023. Gendron previously served as Chief Financial Officer at Jefferies Financial Group and held senior finance roles at Gannett Co. and NII Holdings. The exact reason behind her departure remains undisclosed. This sudden change in the C-suite is unusual for Markel, known for its stable and long- serving management team.