Focus On Underwriting Fits Markel's Extended Family

"I knew them. I knew the culture. And I subscribed to the way they did business," he said, adding that during the years when he left to run a competing company–Colony Insurance–the experience helped to solidify his confidence in "The Markel Style."

"I tried to duplicate what I came to appreciate at Markel," he said, noting that after a "fairly successful" run of "proving the concept" in a smaller environment with people at Colony that embraced a Markel-like vision, the sale of Colony (to Argonaut) marked a point when his job was done there.

"I came back to Markel with a better appreciation for our commitment to how we do business–the integrity, the focus on underwriting profitability, which are the core of our existence," he said.

"Commitment to success," a belief in "hard work," a creed of "honesty and fairness" are a few phrases from a six-paragraph description of the "Markel Style" that is branded on all the company literature.

But there's more to the "Style," which becomes clear when you ask Mr. Latham how it is that after a career that included stints working for a wholesale broker and a reinsurer, he now deals with the unfamiliar territory of technology on a daily basis.

At that point, Mr. Markel will jump in to answer the question for him. "He took one for the team," Mr. Markel said, noting that Mr. Latham voluntarily moved from heading up Markel Re–an umbrella and reinsurance unit–to IT in order to bridge the gap between operations and technology experts. "We needed to get somebody who understood our business–more than technology–running this."

So "Style" is all about teamwork?

Not exactly. In fact, when Mr. Latham describes his biggest challenges as CIO–leading one of the few functions performed at a corporate level over "a seriously decentralized organization"–it becomes clear that a strategy of allowing eight separate business units to run autonomously is another component of the "Markel Style."

The strategy "makes decision-making [and] responsiveness easier," Mr. Latham said. "We have the ability to make decisions and alter course quickly," the Style statement says.

Mr. Springman said there is only one common thread across the eight units–they're all involved in specialty insurance. The units together write 80-to-90 different products, and each has dedicated underwriters, claims professionals and its own marketing department.

Managing one big company might be easier–and fit better into the comfort zone of Wall Street analysts, Mr. Springman said. But having eight units allows Markel to be sure all front-end services are as close to customers as possible, he said.

Style Points

After Mr. Springman and Mr. Latham described some elements of "Style," Mr. Markel explained how the credo came to be.

About 20 years ago, Mr. Markel said, he sat with Alan Kirshner, Markel's chairman and CEO (related to the Markel family by marriage), and Steven Markel, vice chairman, and the group talked "about what…makes us tick," jotting down ideas as they talked.

What emerged was a document describing "not what we aspired to be" but a "retrospective look at what we had become." Since then, it's been memorialized so that the culture is perpetuated throughout the company–beyond immediate family to the extended family of employees, known to the executives as "associates."

Enabling people to achieve their potential and creating an environment where people enjoy coming to work are some commitments in the "Style" statement that Mr. Markel chose to highlight for NU. His colleagues also pointed to phrases about "keeping a sense of humor" and a "pledge to… shareholders [to] build financial value."

Only Underwriters Need Apply

According to the executives, the way to build value is simple. "Everything begins and ends with underwriting profits," said Mr. Springman.

He went on to explain that no one is compensated on growth in market share, but that each of Markel's 1,800 associates has part of his or her compensation impacted by underwriting profit. "If you are a true underwriter, you love this environment," he said. "We empower underwriters on the line to say no–quickly, professionally and politely–and at the same time, ask for the next opportunity."

Saying no is impossible at other publicly-traded insurers, where annual bonuses depend on meeting growth targets, he said.

Letha Heaton–senior vice president of marketing services for Markel's Shand Morahan operation, who joined Markel eight years ago after working at a Fortune 500 health care firm–understands that pressure. At her prior job, "we responded to whatever Wall Street was doing that quarter, and that meant cutbacks in headcount," she said. "We don't talk about that quarter at Markel. It's just not part of the vocabulary."

Mr. Springman said Markel has this luxury because a large portion–25-to-30 percent–of the company is owned by the associates. He explained that each employee participates in the company's 401(k) saving program after a year of service, becoming the owner of a piece of the company. Another large chunk of stock is owned by "long-term institutional shareholders who share our value system," he added.

"When you've got 70-to-75 percent of the company owned by people who think long-term, you don't have to make decisions with guns held to your head"–and you don't have to meet quarterly estimates, he said.

Mr. Markel said the focus on underwriting profits and the company's diversity of products "go hand in glove." Having more than 80 products, with no single one providing more than 6 percent of total revenue, "is a great position to be in," he said.

Companies that do not have a breadth of offerings "are forced to be less independent in terms of their risk selection and pricing because they can't afford to have volume erode," he said. "We can afford to be more cavalier about our commitment to underwriting profitability."

Still, underwriting profits eluded Markel for a number of years. Indeed, 2003 marked the first full-year underwriting profit since acquiring Gryphon, a New York-based excess and surplus lines insurer, in 1999 and Terra Nova Holdings (Bermuda) Ltd. in 2000.

"They were short-term blips," Mr. Markel said, referring to reserve charges from the two acquisitions that severely damaged underwriting results until 2003, when the overall combined ratio inched under breakeven to 99. In 2004, the full-year combined ratio improved to 96.

"We anticipated a lot of the adverse development" at Terra Nova, Mr. Markel said, noting that the deal price was renegotiated before closing–"right out of the chute." Still, there were later surprises, he admitted. More often than not, however, Markel has successfully assimilated acquisitions, he said.

That's a view long held by analysts who follow Markel. Back in 1998, when Markel was negotiating the Gryphon acquisition, analysts told NU about Markel's proven deal-making strategies. In some cases, like the 1995 acquisition of Lincoln Insurance, Markel kept the invested assets, while letting a lot of unprofitable business go. In others, such as the 1996 deal for Investors, Markel boosted reserve levels and reported profitable results in subsequent years.

Mr. Markel has no regrets about the Terra Nova deal. The London operations are the base of a platform for international growth, he said.

No Trucks Please

Acquisitions have helped Markel amass its wide array of products–ranging from environmental at the Investors unit in Red Bank, N.J., to a bed-and-breakfast program at Markel Insurance Company (a product of the firm's acquisition of the Rhulen Agency in 1989), and to jet skis written by Markel American Insurance (acquired in the 1980s).

Still, there are coverages Markel will not write: "Long-haul trucking and workers' compensation. Anything else is fair game," according to Mr. Markel.

"I grew up in the long-haul business. That's all we did early on," he said. The experience revealed that truckers, operating on slim margins, "look to cut costs at any measure, and insurance is one of those areas where…they'll leave you for a nickel," he recalled, adding that few, if any insurers, have made money in the line.

As for workers' comp, he said, "We don't have a lot of experience, and it's a tough class historically."

Product Innovation

"There is excitement at Markel…that comes from innovating," according to the "Style" document. But the executives are quick to dispel the idea–reported in some articles about the company–that Markel wrote the first employment practices policy.

"We believe we revolutionized the way EPL has been delivered to the customer," said Mr. Springman, referring to loss control services delivered by the Shand Morahan unit that support the product and 50 broker educational seminars each year.

Offering an example of a different type of innovation, Ms. Heaton said Shand's EPL product doesn't define "discriminatory practice." When the Title VII discrimination statute passed, "we knew right away that the courts were going to determine what is discriminatory practice." If a court says it's discriminatory, the policy responds, she said, noting that other insurers put specific definitions in their forms.

Mr. Springman also noted that products that are cutting-edge one year are mundane the next. Shand, for example, was the first medical malpractice provider to cover mobile chemotherapy and kidney dialysis, air ambulances and home hospices–at a time when others ran from these new risks. "Today, these are part of our regular life."

A Relationship Business

In many cases, innovation is the product of wholesaler relationships, Mr. Latham said. "We work together to find solutions to problems," he noted.

The executives said they also work hard to maintain relationships with wholesale partners. "We like to think that we can out-service our competition. We know we can out-relationship them," Mr. Springman said.

Nurturing relationships means visiting wholesalers several times per year and hosting seminars, he said. "It's hard to do, and expensive. It's easier to sit in the office and tell underwriters to cut prices."

"We try to let the shoppers, or brokers, dictate how they want products to be serviced," he added, noting that while some units are set up geographically, others are based on one-on-one relationships. Through a process called OneSource in place at Shand, for example, the broker has one point of contact for all professional liability needs.

Beyond that, service involves the basics. "From the moment the phone rings, you're picking it up, [recognizing] it might be an opportunity," and trying to determine when the broker partner needs a quote in order to meet the timetable, Mr. Springman said.

"That's not to say there aren't some competitors that do a good job," Mr. Markel said. But Markel's name recognition within the wholesale community "clearly stems from the fact that company leaders have been vitally involved with wholesalers," he added, noting that this is evidenced by the fact that Mr. Markel, Mr. Springman and Mr. Latham have all been presidents of the National Association of Professional Surplus Lines Offices, Ltd.

Ms. Heaton is on the NAPSLO board, he added, predicting that she, too, will one day lead the organization that all three men praised as "the dominant voice in the specialty market"–distinguished from other trade groups by the fact that brokers and underwriters work side-by-side as equals.

Markel Corp. has roots in the wholesale business. Mr. Markel started up an E&S insurer, Essex, in the 1980s from a wholesaler/MGA called Markel Service.

"We became responsive immediately because we had walked a mile in the shoes of wholesale brokers," he said, noting that other operations–Markel American, Markel Insurance Company and Shand Morahan–also started as managing general agencies.

Sidebar:

Flag: Giving Back To The Community

If you ask Markel's president, Anthony Markel, for an example of the "Markel Style," he'll talk with pride about the Richmond, Va.-based company's commitment to communities.

Through a 12-year-old program called "Partnership of the Future," Markel gives opportunities to inner-city youngsters. "We recognized that many of these kids are not exposed to anything other than the very difficult environment they are in," he said.

The program, recently expanded to Chicago, has 130 students in Richmond, where 50 other employers also participate in giving summer jobs to selected students. "We follow them all the way through high school, helping them get into college–with applications and everything else," he noted.

The "everything else" can involve anything from job skills to table manners, Executive Vice President Paul Springman explained. Four days a week are on the job, and one consists of college-prep and life-prep training, he said. Explaining the latter, he said Markel hosted a luncheon in Chicago last month at which Shand Marketing Director Letha Heaton gave instruction in the finer points of restaurant dining. "The whole purpose is to stretch these kids to reach the best colleges," he said, noting that using the right fork on a college interview can be important.

College graduates are the target of a separate Markel initiative–Markel University–that aims to train the next generation of insurance professionals. Mr. Springman said Markel, with its own interests in sight, stepped in to fill a void in insurance training once handled by the nation's biggest standard insurers.

"We're not just looking for underwriters. We're looking for future company leaders," Mr. Markel said, noting that selected graduates are also exposed to claims and accounting in their year of training.

"Everything begins and ends with underwriting profits."

Paul Springman, EVP, Markel

"We don't talk about the quarter at Markel. It's just not part of the vocabulary."

Letha Heaton, SVP, Shand

"I subscribed to the way they did business."

John Latham, CIO, Markel

Infobox:

Flag: Breakdown

Head: Markel's Eight Operations

o Essex Ins. Co., Glen Allen, Va. Products: E&S casualty, property, inland, ocean, railroad, commercial physical damage. Distribution: Most business generated by 190 GAs.

o Markel Ins. Co., Glen Allen, Va. Products: Specialty programs for camps, bed-and-breakfasts, child care, equine, health & fitness, student accident & health written on specialty admitted basis. Distribution: 3,500 retailers.

o Markel American Ins. Co., Pewaukee, Wis. Products: Motorcycles, all-terrain vehicles, watercraft, yachts, mobile homes written on specialty admitted basis. Distribution: Wholesale/ retail/ direct.

o Markel Re, Glen Allen, Va. Products: Facultative reinsurance, excess & umbrella, alternative risk. Distribution: Umbrella through 120 GAs; reinsurance through reinsurance brokers.

o Markel Southwest Underwriters, Scottsdale, Ariz. Products: Casualty, property, inland on E&S basis. Distribution: 80 contracted GAs.

o Investors Underwriting Managers, Red Bank, N.J., Roswell, Ga. Products: Primary casualty, property, excess/umbrella, products, environmental, taxicab liability, on an E&S basis. Distribution: 225 wholesalers

o Shand Morahan & Co., Deerfield, Ill. Products: Professional liability for architects/engineers, lawyers, med mal, misc. E&O, allied health care, EPLI–E&S and admitted. Distribution: Developed through roughly 325 wholesalers.

o Markel International, London Products: Marine & energy, reinsurance, professional liability, property, specialty written through Lloyd's/Markel International Insurance Company.

Source: Markel 2004 Annual Report