Markel Muscles Its Way Forward

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Whereas I nominated Fairfax Financial (NYSE: FFH) for the Overall Most Foolish category in our recent Fool Awards, Markel (NYSE: MKL) was the insurer/investor to ultimately take home the statue. Since then, I've committed to digging deeper into both of these businesses, and I intend to give them fuller Foolish coverage going forward. That task begins today, with Markel's fourth-quarter and full-year results.

For the full year, Markel's combined ratio was nominally positive at 99% (sub-100% results indicate profitable underwriting). Just as with Chubb (NYSE: CB), Hurricanes Ike and Gustav caused a five-point drag on this ratio. Still, you can't wave away the effects of catastrophes in this business. As they say on The Wire: all in the game. That 99% combined ratio isn't great, but it's comparable to that reported by Allstate (NYSE: ALL) and others, and tolerable in a soft market.

As for the insurance outlook, there are forces that may eventually work in Markel's favor. The economic recession will drive down premium dollars, as businesses have lower coverage needs. Markel thinks it can make up for this decline with higher rates, driving rates per unit of exposure -- and by extension, underwriting margins -- higher.

Competitors may undercut Markel on rates in the near term, but that's their loss -- literally. They risk underestimating the coming rise in claims, if Steve Markel is correct that people are "more likely to make claims and be unhappy" in this environment.

On the investment side, Markel's equity portfolio shed 34%, so it outpaced the market slightly. The largest realized losses in stocks stemmed from positions in General Electric (NYSE: GE), Citigroup (NYSE: C), and Bank of America (NYSE: BAC). Fortunately, the firm has been scaling back its equity exposure since 2006. In sum, the total investment portfolio lost 6.9%. In that light, Markel's performance in 2008 was rock solid, especially compared to those aforementioned portfolio companies.

Resident Markel investing genius Tom Gayner noted that he's modestly buying stocks for the first time in 18 months. He cautions that this isn't a bottom call on the market by any means, but he does believe that the stock market is pricing in "depression-like conditions." On that assessment, he's happy to ratchet up Markel's exposure to quality stocks, as long as the insurance market firms from here.