GREENLEA LANE Private Investment Partnership

Presentation for Best Ideas 2013

Josh Tarasoff – General Partner

THIS DOCUMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE

SOLICITATION OF ANY OFFER TO BUY. NO PART OF THIS DOCUMENT IS

A RECOMMENDATION OR A SOLICITATION. THE INFORMATION AND

BELIEFS CONTAINED HEREIN ARE BELIEVED TO BE CORRECT, BUT

THERE IS NO GUARANTEE.

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Markel Corporation (MKL)

• MKL is a financial holding company, the primary business of

which is specialty property and casualty insurance

• Has compounded book value per share at ~20% annualized since

its IPO in 1986

• Founded in 1930; run by three generations of the Markel family; in

2010, passed day-to-day operations to the next generation of senior

management

• Key statistics:

– $440 stock price (as of 01/04/13)

– $4.3 billion market cap

– $3.8 billion book value

– Recently announced agreement to acquire Alterra (ALTE) for $3.1

billion in cash and stock

– MKL trading for a slight premium pro-forma book value per share

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Insurance: Generally Mediocre

• Insurers make (or lose) money in two ways

– Underwriting

– Investing

• Most underwriting operations lose money

– Highly commoditized product, so competition is based primarily on price

– Cyclical business, most of the time “soft market” (excess capacity, low prices)

prevails

– We have been in a soft market since 2005

• The insurance industry makes up for underwriting losses through

investments

– Insurers run large investment portfolios

– “Float”—policyholder funds that are held before claims must be paid—is normally

the single largest source of funds

• Not surprisingly, the industry earns single-digit ROEs on average

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Insurance: Can Be Wonderful

The intrinsic value of our insurance business will always be far more

difficult to calculate than the value of, say, our candy or newspaper

companies. By any measure, however, the business is worth far more

than its carrying value. Furthermore, despite the problems this

operation has periodically handed to us, it is the one—among all the

fine businesses we own—that has the greatest potential.

~Warren Buffett, 1990 Letter to Shareholders

(emphasis added)

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MKL’s Value-Creation Track Record

• 20% annualized BVPS compounding since the IPO in 1986

• BVPS declined in only 4 years since the IPO

– In each case a new high was reached within 12 months

• Minimum trailing 5-yr BVPS growth = 9% annualized

– This occurred over the 5 years through 2011, during which there was a “perfect

storm” of a soft insurance market, low interest rates, and low equity returns

• MKL’s incredible record begs the question: What are the

competitive advantages that have allowed it to defy the dismal

economics of its industry?

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#1. Niche Insurance Markets

• MKL underwrites only “specialty” insurance: niches where specialized knowledge and experience are necessary to properly assess risk

• For decades, MKL has built up institutional expertise and knowledge in its chosen niches

If you can think of some insurance product that you need, and you could get a policy for it quickly and easily, well Markel doesn’t do that. On the other hand, if you were to answer “no” two or three times to an insurance questionnaire,

now that’s getting closer to what we like to do. What we do is insure things that are rather complicated and unusual, like children’s summer camps, bass boats

with overpowered engines, weddings and event cancellations, vacant properties, new medical devices, new technology, or the red slippers Judy

Garland wore in the Wizard of Oz.

~Steven Markel, 2008 Value Investing Conference

at Darden Business School

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• MKL is one of a relatively small class of insurers that maintains a disciplined underwriting culture, which means turning away unprofitable business

• This is harder than it may sound: – There is pressure from brokers and Wall Street to book business

– Employees may put their own jobs at risk by shrinking their operations

– The adverse consequences of poor underwriting decisions often do not appear for years, as claims develop

– The culture of short-term mindedness is entrenched in the industry

• MKL was built from the ground up to achieve underwriting profits and has carefully cultivated its disciplined culture for decades

• Underwriters’ bonuses are based on the actual profitability of their own business; therefore, paid out over multi-year periods

• MKL has the deserved trust of its employees that when premium volume is shrinking, the expense structure will be managed with a long-term view

#2. Underwriting Discipline

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#2. Underwriting Discipline (continued) P&C P&C

MKL Industry MKL Industry

1986 78% 108% 26-year average combined ratio 96% 106%

1987 85% 105% % of years profitable 69% 12%

1988 84% 105%

1989 78% 109%

1990 81% 110%

1991 106% 109%

1992 97% 116%

1993 97% 107%

1994 97% 108%

1995 99% 107%

1996 100% 106%

1997 99% 102%

1998 98% 106%

1999 101% 108%

2000 114% 110%

2001 124% 116%

2002 103% 108%

2003 99% 100%

2004 96% 98%

2005 101% 101%

2006 87% 92%

2007 88% 96%

2008 99% 105%

2009 95% 101%

2010 97% 101%

2011 102% 108%

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#3. Equity Investing

• MKL makes a substantial allocation to equities in its portfolio

– The vast majority of insurance investment portfolios are in fixed income

– MKL allocates an amount equal to 50-80% of its shareholders’ equity to equities

– The rationale is that it is appropriate to match infinite-duration funding (equity) with

infinite duration securities (equities), and that equities will yield long-term returns

that are superior to those of fixed income instruments

• Conventional thinking does not reward this policy

– Owning equities increases volatility and is sometimes perceived as risky

– Unrealized gains that build up in the investment portfolio bypass the income

statement, thereby also bypassing the analysis of many analysts

• Tom Gayner is responsible for MKL’s investments

– Pursues a disciplined, long-term value investing strategy

– 22-year record (1990-2011) at MKL of compounding 10.9% annualized, 2.6% better

than the S&P 500 including dividends

– Extremely low portfolio turnover (tax efficient)

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#4. Private Equity Investing

• In 2005 , MKL began to acquire businesses through Markel

Ventures

– Currently comprised of 13 businesses

– Aggregate run-rate revenue of $500 million

– Still a small part of MKL, but in hyper-growth

– Same investment criteria as for stocks: good businesses (high return on capital),

honest and able management, double-digit implied returns

• Advantages of owning businesses outright:

– MKL can dictate capital allocation

– No tax leakage

– Source of unregulated cash flow

• MKL’s competitive advantages in private equity

– Ideal home for business owners who wish their businesses to survive and flourish

after the transaction

– Private equity and strategic buyers are unattractive to such owners; MKL will not

cut staff, leverage the company, or “flip” it

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#5. Culture

The Markel Style

Markel has a Commitment to Success. We believe in hard work and a zealous pursuit of excellence while keeping a sense of humor. Our creed is honesty and fairness in all our dealings.

The Markel way is to seek to be a market leader in each of our pursuits. We seek to know our customers’ needs and to provide

our customers with quality products and service.

Our pledge to our shareholders is that we will build the financial value of our Company. We respect our relationship with our

suppliers and have a commitment to our communities.

We are encouraged to look for a better way to do things…to challenge management. We have the ability to make decisions or alter a course quickly. The Markel approach is one of spontaneity

and flexibility. This requires a respect for authority but a disdain of bureaucracy.

At Markel, we hold the individual’s right to self-determination in the highest light, providing an atmosphere in which people can

reach their personal potential. Being results-oriented, we are

willing to put aside individual concerns in the spirit of teamwork

to achieve success.

Above all, we enjoy what we are doing. There is excitement at Markel, one that comes from innovating, creating, striving for a

better way, sharing success with others…winning.

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#5. Culture (continued)

• Culture is often considered a “soft”—as opposed to a

“structural”—competitive advantage

– Culture is, nonetheless, critically important in certain businesses

– If properly managed, can also be one of the most durable competitive advantages

• Insurance and investing are two businesses in which culture is

indisputably critical to long-term success

– Successful organizations must attract talented employees, permit them to operate

free from short-term constraints, and incent them to manifest a long-term mindset

For us the underwriting of our specialty insurance risk is really the same

process as the fundamental analysis necessary to make sound

investment decisions.

~Steven Markel, 2008 Value Investing Conference

at Darden Business School

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#5. Culture (continued)

• Talented, success-driven people, who enjoy their work

– Impossible to convey in this presentation, but obvious upon examination

• Performance-based compensation

– Senior executive bonuses based on trailing 5-year compounding of book value per

share

– Underwriter bonuses based on actual profitability of their own business (multi-year)

• Employee stock ownership

– Major commitments of personal net worth by senior executives

– Pervasive employee ownership (including over 260,000 shares in 401K and stock

loan programs)

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Digression: Self-Reinforcing Business Models

• Well-performing businesses are often priced for mean-reversion

– This is a natural analytical tendency—and a rational one, because mean-reversion is

the rule, rather than the exception

• In such cases, great results can be obtained by owning a non-mean-

reverting business over the long term

• I think the business models that are most likely to defy mean-

reversion are self-reinforcing business models

– The likelihood of future success increases as time goes on

• Self-reinforcing dynamics are often qualitative—as opposed to

quantitative—in nature

– They do not directly present themselves in the financials

• MKL has self-reinforcing dynamics—virtuous circles—which I

believe will propel continued above-average performance over the

long term

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Virtuous Circle #1: Insurance

Book value per

share growth

Talent Skilled

Honest

Success-driven

Culture Disciplined

Long-term minded

Performance-based

Longevity Accumulated expertise

Reputation

Customer relationships

Employee

Ownership Aligns long-term

interests

Underwriting UW profit

Free float

Risk management

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Virtuous Circle #2: Investing

Book value per

share growth

Talent Skilled

Honest

Success-driven

Culture Disciplined

Long-term minded

Performance-based

Longevity Accumulated knowledge

Idea network

Reputation / deal flow

Employee

Ownership Aligns long-term

interests

Investing Capital appreciation

Investment income

Operating income

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Virtuous Circle #3: Structure

Optionality Multiple opportunity sets

Opportunistic capital allocation

Capitalize on turbulence

Insurance Underwriting profits

Free float

Public Securities Fixed income

Equities

Markel Ventures Internal investment

Free cash flow

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Virtuous Circles = Momentum

• The concept of a virtuous circle is simple, but deceivingly powerful

• It means that momentum builds, every day

And so having started out as Grahamites, which, by the way, worked fine—

we gradually got what I would call better insights. And we realized that

some company that was selling at 2 or 3 times book value could still be a

hell of a bargain because of momentums implicit in its position, sometimes

combined with unusual managerial skill plainly present in some individual

or other, or some system or other.

~Charlie Munger

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Alterra Acquisition

• This past December 19th, MKL announced its acquisition of Alterra

Capital Holdings Limited

– Alterra is a publicly traded specialty insurer (ALTE) that had been trading at 80% of

book value

– Deal value is $3.1 billion in 1/3rd cash and 2/3rd stock; 1.1x Alterra’s book value

– Major acquisition for MKL: Alterra’s gross premiums and book value are equal to

80% and 77%, respectively, of its own

– Modestly accretive to MKL’s book value per share ($395 $415)

• Rationale on the insurance side:

– Alterra is a high-quality company with a disciplined culture

• History of favorable reserve developments and sub-100% combined ratios

– Complementary insurance operations will produce a diversification of insurance

risks, economies of scale, and business opportunities

• Trailing-12-month gross premiums written will increase by 80% to $4.4 billion

• I believe the main attraction for MKL is the investing side:

– MKL’s unique capability will be applied to Alterra’s portfolio

– The deal is nearly 30% accretive to investments per share, net of debt

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Alterra (continued)

• Following the announcement of the acquisition, MKL stock traded down by ~10% ($486 to current $440)

• I believe this is the result of two factors: – Arbitrage-related selling

– Concern that Alterra is under-reserved (the liability on its balance sheet representing the estimate of future claims is understated)

• Investors have unpleasant memories of MKL’s last major acquisition, that of Terra Nova in 2000 – Terra Nova entailed several years of adverse reserve developments and underwriting

losses, before reaching profitability

• Simply stated: the situations are different – Terra Nova was known to be a troubled company that would require a challenging

period of integration

– Alterra is a well-performing operation with a disciplined culture and a profitable underwriting record

• Admittedly, the operational outlook for the next few years is far from clear – (But this is always the case!)

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Valuation MKL’s historical price / book

value ratio (1986 – 2012)

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Valuation (continued)

• Current MKL stock price of $440 represents ~105% of pro-forma

book value per share—one of its lowest valuations ever

– MKL is priced not merely for mean-reversion, but for an immediate end to its ability

to generate high returns on capital

• Historical average P/B = 2x

• Pro-forma net investments per share = 2.45x PF BVPS

• MKL has enormous momentum to propel further compounding of

intrinsic value

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Another Way To Look At It

• MKL is not and insurance company but an investment vehicle

• What are the desirable attributes of an investment vehicle?

– Patient, disciplined value investing approach

– Skilled, experienced investors at the helm

– Ownership mentality, aligned interests

– Permanent capital, with inflows

– Structural advantages in allocating capital

– Cheap, stable leverage (float)

• All of these factors working in combination should produce

extraordinary results (and they have for over 2 decades)

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Thank You