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Corporate Growth - Richmond Chapter
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Risky Niches
Markel Corporation has built itself into a $2.5 billion company by insuring risks for often-obscure activities and groups that no one else is willing to cover.
by Peter Galuszka
On any given Sunday morning, corporate executives from across the nation nervously finger the front page of the New York Times’ business section. They are hunting for the weekly column of Gretchen Morgenson, whose journalistic guillotine has lopped off the heads of CEOs she considers hubristic, wayward or shamefully greedy.
But on May 13, Morgenson was looking for some good news. Scouring the United States coast to coast for a company she considered decent, she hit upon Markel Corporation, a specialty insurance firm that was founded in Richmond in 1930 and now operates out of its global headquarters in nearby Glen Allen.
Markel “has a superb record of conducting business properly and profitably,” Morgenson wrote. Among the positives: The company keeps executive compensation relatively modest and focuses on the long term partly by refusing to give stock analysts quarterly earnings guidance. Meanwhile, the firm has sidestepped the scandals engulfing more than 125 companies that backdated stock options to benefit top company officials. How? The company doesn’t even have stock options.
Accoutered in a burgundy polo shirt and seated in a modern, art-bedecked office in Markel’s Henrico County headquarters complex, Vice Chairman Steven A. Markel chuckles quietly when he considers escaping Morgenson’s chop. “That’s what building a corporate culture is all about,” says the grandson of company founder Samuel Markel. “We spend a lot of time getting people to focus on long-term results.”
The long-term perspective comes naturally to a company that has been associated with three generations of the same family for the better part of a century. Samuel Markel moved to Norfolk after emigrating from Russia around the turn of the 20th century and set up the firm in Richmond. The second-generation leadership consisted of two sets of twin brothers. Now the firm is run by Anthony F. Markel, president and chief operating officer, cousin Steven who is vice chairman, and CEO Alan I. Kirshner. Family members still hold significant shares in the company.
A one-time insurance brokerage, Markel Corporation branched into specialty niche insurance when it went public in the 1980s. It specializes in insuring high-risk clients, such as ships sailing in war zones, children’s summer camps, the legs of race horses and human athletes, and alcoholic surgeons, among other clients. It runs reinsurance businesses and is a major player on London’s insurance market, which issues policies globally, largely through Lloyd’s of London.
Markel has long been contrarian, in the mold of Berkshire Hathaway's Warren Buffet, who became the world's second wealthiest man by investing for the long haul instead of catering to Wall Street's obsession with next quarter's earnings.
The growth has been eye-catching with a book value that compounded at a 23 percent annual rate from 1986 to last year. Like Berkshire Hathaway, Markel doesn't split its stock every time the price increases 50 points. It cost around $460 in late July to acquire a single share of the company. Some analysts believe the stock is undervalued and should be commanding $560/share.
Steve Markel says the real issue is whether shareholders are getting a fair price, and he believes they are. That goes to the core of what the company advertises as “The Markel Style," a creed the company endeavors to live by: honesty and fairness, respect for suppliers, commitment to community, creating an atmosphere where employees can reach their full potential. Plus, Markel emphasizes, taking a long view.
If that, too, sounds like Warren Buffet, the so-called sage of Omaha, it's no coincidence. “We have looked at a lot of role models and we read a lot of books,” says Markel. “We copy smart people -- or try to.”
Omaha and Richmond share no-nonsense philosophies when it comes to business and values. Berkshire and Markel shun hyped investing fashions such as the dot.com bubble that popped in 2000, erasing billions in equity. They go for firms with long-term growth potential and are very smart when it comes to making investment choices.
Steve Markel doesn’t know Buffet intimately but he and top staff visit Omaha annually for a shareholder’s meeting and to shake the great man's hand.
There are other curious links. Markel’s investment war chest of $1.8 billion, for example, is masterminded by Thomas Gayner, Markel’s chief investment officer, who also is a director of The Washington Post Co. In a recent article, the Wall Street Journal praised Gayner for his investment success and listed him as being on the short list of possible successors to Buffet as head of Berkshire Hathaway. Gayner has denied the possibility.
“It’s a huge compliment,” says Markel. “I certainly hope he (Gayner) stays here.” Living in a smaller place such as Richmond has its rewards. It’s close enough to Wall Street for a day trip but far enough away that "you don’t get wrapped up in the noise."
Air travel to and from Richmond has been a problem but is getting better. Greater Richmond’s lifestyle options are good enough, he says, “that we don’t have a problem recruiting.”
In addition to the Richmond area, Markel's 1,800 employees work in London, Los Angeles, Chicago, New Jersey and Atlanta. As part of its international expansion, the company has recently opened offices in Toronto, Madrid and Singapore.
Financial analysts are very high on Markel. “Their approach is very classic specialty insurance and they are willing to apply intellectual capital to pricing those risks,” says Mark Dwelle, an equity analyst with the Richmond office of Ferris, Baker Watts, Inc.
Adds Eric Fitzwater, a senior analyst at SNL Financial in Charlottesville: “Their lines are so special,” he says. “They are one of the few companies who will figure out how to price certain risks. They have almost a monopoly in some ways.”
Pricing risk takes work but can be worth it, says Markel. He cites an example of what is called “special needs” insurance for medical doctors. The company will consider insuring a doctor who suffers from alcohol or drug abuse after regular malpractice insurers drop him. The company will offer the physician a policy, at a higher rate, provided that he go through rehabilitation and get accepted back on the staff of a hospital. If the doctor is a surgeon, he will be forbidden from performing surgery, but he can still give second opinions. He’ll be watched closely by his medical partners and the hospital, Markel says, but “we’ll provide a home for these poor guys.”
Markel’s ability to spot niche markets and develop suitable products has worked well, but it doesn’t preclude competition. In the risk management marketplace, the company often bumps into huge firms such as American International Group and Chubb, which have specialty insurance lines of their own.
A pressing problem this year is declining insurance rates, which typically move in cyclical patterns. In the Directors & Officers line, for instance, rates skyrocketed after the Enron and WorldCom scandals but dropped after the punitive Sarbanes-Oxley Law of 2002 took effect.
But Markel doesn’t give Wall Street a whip with which to beat it –- namely quarterly earnings guidance –- so the company can concentrate on the long term. In the process, and along with its family-based corporate philosophy, it can continue to devise innovative ways to insure special cases and build wealth for employees and shareholders. -- August 10, 2007
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Vice Chairman Steven Markel
Useful Links Recent News Markel Reports 32% Growth in Book Value Per Share (Jan. 24, 2007) First Market Bank and Markel Corporation Announce New Relationship (Oct. 27, 2005) Markel Estimates Hurricane Katrina Losses (Sept. 27, 2005) Markel Reports Strong Underwriting Performance and Announces Filing of Form 10-Q (May 3, 2005)
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