In a recent article, I briefly mentioned Markel Corp (NYSE: MKL). Seeing as how the market is losing its confidence in Markel, I've decided to revisit Markel.

The stock has been dropping over 1% everyday for the past few days. This is largely due to lower premium volume announced in its latest quarter release. The insurance industry is very competitive and there isn't much barrier to entry. As such, insurers are constantly fighting a pricing war. Markel attributes this to its lower premium volume.

Mar-Who?
Markel began writing non-standard and specialty insurance policies since the 1920s. The company operates in the property and casualty insurance niche. This is a niche where standard insurance companies are not willing to write insurance for high risk coverages. Hence, non-standard insurance companies get to charge higher premiums in exchange for higher risks.

With a market cap of $3.09 billion, Markel is one of the smaller players in the industry. The company is comprised of three segments: the Excess and Surplus Lines Market, the Specialty Admitted Market, and the London Insurance Market. The Excess and Surplus segment writes non-standard property and casualty insurance. The Specialty Admitted Market insures unique special properties such as expensive superbikes, luxury yachts, Lamborghinis and such. The London Insurance Market, as you'd suspect, writes insurance primarily in the London market.

Now, before I proceed to explain why I like Markel, let's try to understand how an insurance company makes money. The primary source of income for an insurance company is of course the underwriting of insurance premiums. However, if you observe an insurance company carefully, you'll realize that the insurance company is very much like a mutual fund. The difference is the insurance company gets its funds for investment from insurance premiums instead of from mutual fund investors. The advantage of getting investment funds via insurance premiums is the funds could be free money. On the contrary, the funds invested in mutual funds really belong to the investors. Unless something bad happens, the insurance company gets to keep the premium. And what better way to put this load of cash to good use than invest? Therefore, an insurance company makes money from its underwritings and investments.

Why I Love Markel
What's interesting about Markel is the management not only admires Berkshire, they try very hard to be like Berkshire. They run the company like Berkshire and they invest like Berkshire. As a matter of fact, their biggest holding is Berkshire. I quote from Robert Miles' book, "Warren Buffett Wealth":

Warren Buffett studies the best in every field of endeavor and from every country. He plays golf with Tiger Woods, tennis with Martina Navratilova, and bridge with two-time world champion Sharon Osberg. He’ll talk body- building and politics with Arnold Schwarzenegger, music with Jimmy Buf- fett, movie-making with Debbie Reynolds, and dance with Michael Flatley. Good friend Bill Gates discusses the latest and future world of technology.

Apparently, the management at Markel has taken this to heart. If you look at Markel's investments, you'll see that it owns most of the securities that Berkshire's invested in. Even the annual and quarterly reports are almost in the same format. Markel aims to increase book value by 20% annually. Their investments have returned a healthy 15% annually for the past five years.

Trading at $313.60 per share as of this writing, Markel is selling at a discount of 17% off its estimated intrinsic value. With a 5-year annual growth of 27%, I am confident that Markel is on its way to become a mini Berkshire. As I have previously mentioned in my article, I believe stocks that don't split are great. And Markel has never split its stocks.

Into The Naked Portfolio You Go
As of this writing, I'm adding a share of Markel at $313.60 to the Naked Portfolio. The Naked Portfolio was created yesterday. Hmm... a little too much buying, don't you think? :) But if it's a good buying opportunity, the hell with it. So with the assumption of $500 available for investing this month, I've used up a chunk buying this Markel share. I'll be posting a report on the Naked Portfolio at the beginning of next month.

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