Markel's Third-Generation Motivator Recalls Humble Start, And Sounds Off

Mr. Markel–well-known for his candor and, in particular, for a dynamic speech he delivered at the Institute of London in 2002 criticizing archaic business practices at Lloyd's–talked to NU about Markel's history, "the speech" and his views on challenges facing U.S. insurers.

Q: What are some milestones in the history of Markel?

A: Mr. Markel said the first Markel insurance company–a mutual started by his grandfather, then an agent–provided coverage for "jitney bus" operators.

After WWI, when veterans returned home, they bought cars and turned them into cabs, charging nickel fares. Jitney was slang for a nickel, he said.

"No one would insure them," he recalled, noting that the mutual specialized in transportation for the next 25 years, broadening to include trucking by the 1950s.

In the mid-1950s, "underwriting results were marginal." The family sold the insurance company "and took on the ilk of an MGA, placing the same business with now unaffiliated carriers."

"Trucking is not one of my favorite things," Mr. Markel said, noting that when he and other members of the third generation got involved in the 1970s, they decided that being totally dependent on insuring trucks was "suicide." The MGA diversified into specialty p-c lines.

Believing that an MGA's future depends on solid underwriting results, the family later decided to go back into the underwriting business–as a risk-bearing insurer. "We sold one-third of our company for $2.5 million in 1980," putting the capital into Essex Insurance Company.

In 1986, Markel also became a public company. A string of domestic acquisitions followed, culminating with the acquisition of Terra Nova in March 2000.

Q: The holding company, Terra Nova, was based in Bermuda. Do you have operations in Bermuda now?

A: No, they don't. "We decided early that it didn't make sense to run a branch there." Bermuda underwriters "were seeing what was coming to London anyway," he said, adding that Markel executives also thought that laws providing tax advantages to firms that re-domesticated might ultimately change. "And frankly, we all liked our quality of life. Nobody wanted to move."

Q: Have conditions improved at Lloyd's since "the speech?"

A: "I've been very vocal, justifiably, in complimenting the marketplace there. In a few years, they've moved a lot closer to a true business acumen."

"There are very few things still undone. They've still got some wording issues, expense issues [and] processing issues," which were subjects of the speech, he noted, going on to praise the "overriding solid oversight of underwriting" that's taken hold, and attention to some reinsurance issues.

Q: In the speech, you said that "fundamental, gut-wrenching change" would be needed for Lloyd's to survive. What survival issues might you highlight in a similar speech to U.S. insurers?

A: "Clearly, I'm frustrated now…with the inability of this industry to perpetuate prosperity. We went through what was 12, 13, 14 years of a soft environment, starting in the mid-80s and turning around somewhere in early 2000. We had a brief window where rates really could justifiably produce reasonable returns, and now all of a sudden competition seems to be re-entering with a vengeance. And the lessons learned from the past seem to have been forgotten."

"It just blows my mind that we continue, as an industry, to shoot ourselves in the foot," he said, calling the fact that the industry just "eeked out" a combined ratio under 100 last year–the first time since 1978–"abominable."

"Returns on equity, resulting from the lack of underwriting profit, have been ridiculous. As an industry, we compete for capital…and our returns don't justify a particularly serious look-see" from capital providers.

Q: What are your goals for Markel in 2005, and beyond?

A: "To continue to be a leader in any marketplace. That doesn't mean to be the biggest, but to be a provider of solid coverages that fill needs."

"To drive shareholder value–which is absolutely dependent upon producing an underwriting profit. It doesn't bother us that it looks like '05 is going to be flat volume compared to '04 given the state of the market. I think anyone that's growing in this marketplace to a great extent is doing it at the risk of producing some red numbers."

(In 2004, Markel's gross written premiums fell 9 percent to $2.5 billion.)

"We're continuing to expand geographically"–opening in Toronto, Scotland and Madrid, and adding two new branches in England. "We're starting with classic coverages…we're solid in, and then moving to fill needs" in each market.

Q: What about acquisitions?

A: Mr. Markel said that the company looked at four or five opportunities this year, but deals were rejected for reasons ranging from the fact that the people involved didn't seem disciplined and self-motivated, to the fact that the profits for the products involved didn't seem sustainable.

"But we're absolutely looking," he said. "We're not particularly interested in insuring legal entities We're interested in products and people, and a lot of those come out of MGAs as opposed to existing insurers."

Q: At some point you will retire. Will there be another generation of Markels leading the business?

A: No. "We have groomed fabulous non- family successors and you're looking at three," he said, referring to executives Paul Springman, John Latham and Letha Heaton. And with them "doing the heavy-lifting, I can't see myself fully retired."

Q: How would you like to be remembered?

A: "As having built a high-quality organization that was built to last–where we treated everybody with the respect they deserved and created an environment where it became more than just a job."