But tomorrow afternoon at the Jefferson Hotel in Richmond, Va., quite a different scene will unfold. There, at the Markel Corporation’s annual meeting, some of the nation’s most contented shareholders will convivially convene. Owners will hear from managers, managers will hear from owners and the wealth creation that capitalism can bring to small and big investors alike will be celebrated.
Unlike executives at other companies who approach their annual meetings with dread, the Markel managers who will stand before their owners tomorrow have little to fear. Their financial results are stellar, and their shareholders know that they are on their side.
It isn’t Omaha, it isn’t Warren Buffett and it isn’t Berkshire Hathaway — but it’s mighty close. Markel, a 77-year-old specialty insurance company in Glen Allen, Va., has a superb record of conducting business properly and profitably, of encouraging its employees to create wealth for themselves and their company and of treating its shareholders like owners — not bag holders.
A family company that first issued stock to the public 20 years ago, Markel has patterned itself after Berkshire Hathaway’s insurance companies. It is much smaller, of course; premiums earned last year were $2.2 billion versus Berkshire’s $24 billion, and Markel’s net worth of $2.3 billion pales next to Berkshire’s $108 billion.
A niche underwriter, Markel specializes in insuring complicated risks that larger, cookie-cutter companies avoid. It is the leading provider of insurance to summer camps, for example, and also insures horses, day care centers, dance clubs and vacant property. “Any area that gives standard insurance companies heartburn we want to figure out how to get actively involved in,” said Steven A. Markel, a vice chairman at the company and a grandson of the founder.
That said, Markel is conservative when it comes to loss reserves, choosing to keep them at levels that are redundant, not deficient. Sometimes that crimps profits and upsets quarterly earnings obsessed Wall Street, but Markel is convinced that its shareholders ultimately benefit from a more cautious approach. The company does not provide earnings guidance to Wall Street, thereby avoiding the quarterly “beat the number” charade.
Markel’s method — handling its shareholders as partners, its customers with esteem and its investment portfolio with care — has produced results. From 1986 to 2006, the company’s book value, the best measure of wealth creation, has increased at a compounded rate of 23 percent annually. And over the last 10 years, the returns on Markel’s stock investments have averaged 14.3 percent annually.
The company’s shares trade at $466, twice its book value. They have more than doubled over the last five years.
The man in charge of Markel’s investment portfolio is Thomas S. Gayner, a value investor who started out as an accountant but then became a broker and analyst at a small brokerage firm in Richmond. In 1990, he joined Markel and began burning up the track; he has generated average annual returns of 17 percent since then. Mr. Gayner, 45, is also a director at the Washington Post Company.
At the end of last year, Mr. Gayner oversaw $5 billion in fixed income securities and $1.8 billion in equities. He owns no subprime mortgages, no alternative investments, no hedge funds.
“We’re uncomfortable in crowds,” Mr. Gayner said. “Back in 1999, we owned no tech stocks and no telecom. When the market environment gets caught up in things, generally speaking we’re not there.”
He looks for companies with four characteristics: profitability; management integrity and smarts; an ability to reinvest returns on capital; and a fair price. His largest holdings are Berkshire Hathaway; CarMax, a used-car seller; and Diageo, maker of Johnnie Walker Scotch, José Cuervo tequila and Tanqueray gin, among other spirits.
In addition to its investing style, Markel declines to join the crowd in other ways. On the issue of executive pay, for example, Markel’s board uses no compensation consultant and no phony benchmarking process meant to justify higher pay. “A compensation consultant would say we could comfortably double our salaries and not offend anybody, but what’s the point of that?” Mr. Markel asked.
Last year, Markel’s top three executives made around $600,000 each in salary, unchanged from the previous year. Cash bonuses based on the company’s performance roughly equaled the salaries; three of the six named executives received relatively modest restricted stock awards while the three others received none.
Another unusual aspect of Markel’s compensation structure shows up in the employment agreements with its executive officers. None include the payment of tax gross-ups to cover the bills generated by “parachute payments” that are initiated when a change in control occurs at a company. Such provisions are deplorably common across corporate America.
Neither do Markel’s shareholders have to worry about options backdating scandals at the company. After all, it’s hard to have these problems at a company that declines to dispense stock options.
“We did have some stock options in the late ’80s,” Mr. Markel said. “But we discontinued them. We felt a stock option was a gift that didn’t really create an ownership mentality.”
Instead, the company provides low-interest loans to help employees buy Markel stock. “What we prefer to do is recruit employees who have a desire to build wealth and who understand benefits of stock ownership,” Mr. Markel said. “It has enabled us to avoid a big part of what has gone wrong at a lot of companies.”
So it is not surprising that Mr. Markel said he and the other executives look forward to tomorrow’s meeting with shareholders. This year the company is trying something new, he said, inviting its top independent insurance agents to mingle with shareholders. Investors will also be able to interview Markel’s product line managers one on one after the meeting, during the cocktail hour.
“We’ll have about 400 people,” Mr. Markel said. “Half of them will be employees who own stock, another quarter of them will be shareholders who bought the stock 15 to 20 years ago, and another 50 to 100 will be long-term shareholders who come to town for the event.”
Mr. Gayner said that the company has been blessed with stockholders who are not obsessed with immediate gratification. “We’ve done reasonably well,” he said, “but when we’ve had a bad year, we’ve been pretty explicit about saying what the problem was and how we’re trying to fix it rather than trying to gloss it over. There are no filters, and that has helped build credibility and trust with shareholders over the years.”
Markel’s past performance may not be prologue, of course. And if this year’s hurricane season turns out to be as bad as some in the industry fear, Markel will not emerge unscathed. But at least its investors know that the company, its managers and its board are in their corner. And today that’s saying a lot.