Want The Inside Scoop? Watch The Guys That Invest for a Living

Investing is an essential part of an insurance company's operations. While the primary revenue generator will always be premiums, investing their capital allows insurance firms to expand business operations, return capital to investors, and buffer against losses. One insurer that is particularly adept at investing is Markel (NYSE: MKL  ) .

Standing alone
The niche-market policy purveyor distinguishes itself from its peers with its investment philosophy: While others will put most of their eggs in the bond-market basket, Markel focuses heavily on corporate equities, which makes its investments inherently riskier, but can provide much higher returns.

Often called the mini Berkshire Hathaway (NYSE: BRK-B  ) , Markel's investment philosophy is lead by CIO Tom Gayner. Much like Buffet's track record with Berkshire, Gayner has impressed the Street since his start with the company in 1990. During his time with Markel, the company's become a 20-bagger thanks to Gayner's cumulative return of almost 102% return over the past 10 years. One of our CAPS members has even equated an investment in Markel to an investment in a well-managed hedge fund.

The importance of being earnest
Based on the company's 2012 results, it's $282 million in net investment income is equivalent to 56% of the company's comprehensive income to shareholders of $503.8 million. With investments playing such a large roll in the company's business, it's clear that the choices Gayner and his team make have to be great ones. So for investors in need of some direction or ideas, taking a gander at how Gayner invests Markel's capital may not be a bad place to start.

Lucky for us, the recent release of buying and selling data for Markel's portfolio paints a pretty clear picture of the company's direction.

Power on
Receiving the most attention from Markel in the fourth quarter was the energy sector -- from mining operations, suppliers, and producers.

Company Sept. 30, 2012 Change in Shares Dec, 31, 2012    Change in Shares
Alpha Natural Resources (NYSE: ANR  ) 186,000 56,500
Arch Coal  (NYSE: ACI  ) - 56,000
Norfolk Southern (NYSE: NSC  ) 21,400 50,700
Natural Resource Partners  (NYSE: NRP  ) 55,000 46,400
Peabody Energy (NYSE: BTU  ) 135,000 45,000
National Oilwell Varco  (NYSE: NOV  ) 20,000 18,000
CARBO Ceramics (NYSE: CRR  ) 86,000 18,000
CONSOL Energy (NYSE: CNX  )
15,000 15,000

Source: S&P Capital IQ.

With the developments made over the past year in domestic natural gas and oil production, most energy related companies have seen an uptick in investor interest. Coupled with the prospect of being energy independent in the next 20 years, it's no wonder that Markel would be interested in joining the party.

As you can see from the table above, Markel has been racking up shares of the energy companies over the past few quarters. What is not included in the table is telling -- the majority of companies represented above received no love from Markel before September. This shows that the push toward the energy sector is a growing trend -- something our energy analysts could talk about for days.

At the other end of the spectrum
Heavy cuts hit the financial sector's share of Markel's portfolio, though it is mostly attributable to a 880,000 sale of Union First Market Bankshares Corp. (NASDAQ: UBSH  ) . Markel is a 10% owner of the company and has been steadily selling shares for the past few quarters. Gayner has continued this trend, with a reported 1.69% decrease in Markel's holdings on Feb. 15.

The fourth quarter did hold some positive investment trends for several other financials:

Company Sept. 30, 2012 Change in Shares Dec. 31, 2012 Change in Shares
Calamos Asset Management (NASDAQ: CLMS  ) 10,000 100,000
Alliance Holdings (NASDAQ: AHGP  ) 81,500 85,000
Moody's (NYSE: MCO  ) 30,000 65,400

Source: S&P Capital IQ.

The increase in Moody's shares may be a clever move on Markel's behalf. The ratings agency has come under fire (along with Standard & Poor and others) for spurring on the bad behavior that fueled the financial crisis, but it remains an important part of the financial sector and is unlikely to fall a great deal permanently. Moody's has recently implemented tougher practices for rating residential mortgage-bonds, with less issuer-friendly terms -- something likely to drive away some business, but ultimately a sign to Main Street that it's cleaning up its operations.

The more you know
Gayner, Buffet, Berkowitz, and others are great resources that you can tap into for ideas and for advice, but as always, make sure you're doing your homework and vetting out any investment options. Though we don't know all of the factors that Gayner and his team analyzed before investing, the trends discernible from their activity is very informative. This is just one more opportunity to educate yourself before jumping in with both feet. 

Warren Buffett's long track record of success has made him one of the best investors of all time. With the Buffett at the helm, Berkshire Hathaway has grown book value per share at a compounded annual rate of 19.8% for nearly 50 years! Despite an incredible historical track record, investors have to understand the key issues to watch moving forward. To help investors, the Fool's resident Berkshire Hathaway expert Joe Magyer has created this premium research report on the company. Inside, you'll receive ongoing updates as key news hits, as well as reasons to both buy and sell the stock. Claim a copy by clicking here now.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 28, 2013, at 2:20 PM, Mikey925 wrote:

    Your analysis is sloppy. Every single position by Markel that you show in the Coal names (NSC railroad notwithstanding) shows a LOWER SHARE POSITION for the 4th quarter; not higher as you have claimed.

  • Report this Comment On February 28, 2013, at 3:48 PM, TMFKopp wrote:

    @Mikey925

    WOW! Did you even bother to read the headings on the table? Those numbers are "Change in Shares", not the total share holdings.

    Matt

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