No. of Recommendations: 13
Thanks for posting the letter.
A couple of things trouble me about it. Tom Gayner has tried to emulate Warren Buffett in writing this annual letter for many years now. Like Mr. Buffett, he is an able writer and communicator. Unlike Mr. Buffett, he is prone to self-congratulation and self-generated jargon.
Mr. Buffett offered his five groves valuation method a couple of times, but he does not ceaselessly repeat it. Mr. Gayner became enamored of referring to Markel's three main operations -- insurance, investments and ventures -- as "engines," and uses that word 28 times in the latest letter. Perhaps I'm nitpicking, but to my mind calling a division or operation an engine takes a neutral description and makes it inherently dynamic and positive. It's self-promotional in a way I can imagine the late Charlie Munger making fun of.
Mr. Gayner doesn't get to the most concerning issues of Markel's 2023 performance until the bottom of page 4, after enumerating pretty much every positive he can think of. Unless I missed it, he never mentions the 106.9% combined ratio in Q4, up from 99% in Q3 and 90.8% in Q2. That's a disturbing trend. Referring only to the 98% full-year number masks this trend.
He does a decent job delving into some of the disappointing specifics, including noting a change in management teams for one product, but he never addresses the underlying question that personnel change suggests, which is management competence within the insurance operation.
Unlike Berkshire Hathaway, where no one ever seems to retire, Markel has seen significant management turnover in recent years. (They just announced a new COO today!) Richie Whitt ran the insurance operation for many successful years. In the summer of 2022, the company announced Mr. Whitt would retire by March 2023 and would work on the transition to Jeremy Noble, then the CFO, in the intervening time.
In a year that has been almost universally characterized as very strong for insurers, including Berkshire, Fairfax, Progressive, Chubb, etc., Markel's sub-par performance is concerning. Mr. Gayner offers several excuses/explanations, but he does not address the effect of Mr. Whitt's departure. I'm guessing this is due to his policy of always praising the Markel team in public, but for all his exposition, Mr. Gayner's background is not on the insurance side. So where is the expertise to outperform in that arena?
One theme Mr. Whitt returned to time and again at Markel's Omaha brunches was that the company was not addicted to growing premiums written. When they were not able to write policies profitably, they would not write them, even if it meant surrendering business. Has Mr. Gayner's evident frustration with the share price encouraged revenue growth at the expense of this conservatism?
It is true, as Mr. Gayner has repeatedly pointed out, that the share price has lagged book value growth in recent years, implying it will catch up at some point and is therefore a good investment today. That might be true, but the company keeps stubbing its toe in ways that prevent Mr. Market from hopping aboard. To listen to Mr. Gayner, each failure has been idiosyncratic and fixable, but at some point these toe stubs become a pattern.
I believe Mr. Gayner when he says they are determined to fix the latest problems, but I also have a sneaking suspicion that Mr. Whitt's retirement affected the insurance operation in ways that Mr. Gayner has not publicly acknowledged.
I am far from an insurance expert and would be interested in other takes.
No. of Recommendations: 1
Mr. Spinach-
A very well thought out argument. Well written as well.
Thanks…appreciated.
m
No. of Recommendations: 3
Can’t disagree with any of your post. My antenna are especially elevated by Tom promoting style. Moreover, scheduling MKL Annual Meeting coinciding with it he same weekend as Berk’s in Omaha too, smacks of promotion. I survived a considerable opportunity loss on GE stock trusting promoting style former CEO Jeff Immelt.
“Tom Gayner: Invest Like the Best [The Knowledge Project Ep. 186] during podcast I found he strikes me as yes, a promoter but, with a solid Pedigree and solid conservative roots which match his outward brand projection.
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MKL’s Insurance arm losses are fairly well known. The question one has to answer-does Tom and their sr management team have their arms around it? Their underwriting profit significantly decreased compared to 2022, dropping by 79%. This means the company paid out more in claims than they collected in premiums.
Some specific factors contributing to these losses include:
Natural disasters: The Hawaiian wildfires and Hurricane Idalia resulted in $40.1 million in net losses and loss adjustment expenses.
Other events: Losses from Hurricane Ian and the Russia-Ukraine conflict in 2022 also impacted their 2023 results.
Increased attritional losses: This refers to a general rise in the average cost of claims across their insurance portfolio.
2. Fraudulent reinsurance:
Markel identified and booked $65 million in credit losses related to fraudulent letters of credit used as reinsurance collateral by an affiliate of a reinsurer (Vesttoo). While they believe this represents their full exposure to this specific fraud, it still contributed to their financial losses.
MKL’s recent turnover being a little elevated COULD speak to Gayner’s lack of tolerance for poor performance. I dunno Ultimate, I’m easy fooled.
Despite Insurance Group’s poor performance, MKL remains a financially stable company. Being enamored with Berkshire Hathaway model, I’d read many times MKL a baby BRK. Have checked out Fairfax Financial for being such also. Prem Watsa’s stake in Blackberry Ltd has me scratching my head. Blackberry own many patents and is trying to pivot their model into EV auto drive and cyber security. Like all great Investors- appears wrong until he’s right. May take four or five years.
Thank you again Ultimatespinnach for your thoughtful response.
No. of Recommendations: 3
Being enamored with Berkshire Hathaway model, I’d read many times MKL a baby BRK. Have checked out Fairfax Financial for being such also. Prem Watsa’s stake in Blackberry Ltd has me scratching my head. Blackberry own many patents and is trying to pivot their model into EV auto drive and cyber security. Like all great Investors- appears wrong until he’s right. May take four or five years.
Blackberry is clearly an error - and 4-5 years more is unlikely to change this, and surely Fairfax investors are not really expecting anything positive out of Blackberry.
However, it is worth noting that Blackberry, while it was once a $500m investment in a now represents 0.2% of Fairfax's $60b in investments, so while this investment can be legitimately held up as an example of a Watsa mistake, and was a big bet in 2012, when it was made, Fairfax has reduced its debenture position, the share holdings have withered in value, and Fairfax has far more assets overall now, so Blackberry will not be a drag on Fairfax's results going forward.
dtb
No. of Recommendations: 1
https://fintel.io/i/fairfax-financial-holdings-ltd... Must be outdated as it’s listing BB as 11.6% of portfolio.
Thank for correcting my mistake.
Grateful Always,
paulIt is not outdated- it is correct that BB represents 11.6% of Fairfax’s holdings of public companies traded on US exchanges. But as your link indicates at the top, these have a total value of $1.469b, whereas Fairfax has total equity investments (including international equities) of $18b and total investments (including fixed income) of about $60b, so there is no contradiction.
