Today's Buy Opportunity: Markel

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The insurance industry may be a little on the boring side. But an investment in Markel (NYSE: MKL  ) should add some excitement to your portfolio.

Markel's fast facts

Market Cap

$3.4 billion

Revenue (TTM)

$2.1 billion

Earnings (TTM)

$216 million

Cash/Debt

$1.0 billion / $1.0 billion

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Specialty insurer Markel models its philosophy and corporate culture after a prosperous little business you may have heard of -- that darling of the Fool, Berkshire Hathaway (NYSE: BRK-B  ) . Like Berkshire, Markel has a disciplined management team that underwrites insurance contracts and skillfully invests the proceeds. Over the years, its culture and performance have earned it the nickname mini-Berkshire.

Whether you operate a dance studio or a dude ranch, Markel has you covered. The range of insurance programs is impressive -- jujitsu school or Jewish community center? No problem! Fitness club or folk art museum? There's a plan for you, too.

Why invest in Markel?

The insurance model
The insurance model, when done right, is a thing of beauty. Think about it. Insurance companies write you a policy, and you pay your premium now and every year thereafter. It then takes those premiums and invests them to earn (hopefully) a nice rate of return. Then, at some future date or perhaps never, the company will pay out a claim if you submit one. As long as the company is disciplined in what policies it underwrites (and Markel is) the model should work nicely.

Specialty niche
Markel has an interesting niche in that it writes insurance policies for very specialized circumstances: everything from earthquake insurance to horseback riding accidents. In contrast to the standard insurance market, the specialty market provides coverage for hard-to-place risks that generally do not fit the typical underwriting criteria of the industry. This is where Markel can differentiate itself through product offerings and service, rather than just on price. The company excels because of the time and effort it puts into researching the 90-odd niches it covers, developing a unique, extensive knowledge base in the process.

Strong operating discipline
A little-known fact about the insurance industry is that insurance companies often don't make any money from selling insurance. Their expenses and the losses they incur from poorly written policies are just too high to turn a profit. They make their money from the investment side of the business. Markel, on the other hand, actually makes money (usually) on its insurance business as well as from its investments. This comes from having disciplined underwriting standards and a proper cost structure for the company.

Impressive operators and investors
Warren Buffett says that the insurance business magnifies managerial talent -- or a lack thereof. Co-directors Anthony and Steven Markel, descendants of Sam Markel, serve as president and vice chairman, respectively, and are complemented by Chairman and CEO Alan Kirshner, who's been at the helm for more than 22 years. Together, this group has been critical in expanding Markel's reach into new markets and strengthening the brand through an intense focus on customer relationships and service.

Much like Warren Buffett (and Lou Simpson at Geico) is the backbone behind Berkshire Hathaway's investment success, the real highlight for Markel is its investment chief, Tom Gayner, who has amassed an impressive investment track record over the years.

Foolish bottom line
Don't let Markel's high share price scare you. Much like Berkshire back in the old days, Markel isn't a big fan of splitting its stock to lower the stock price. But it shouldn't matter at all to you. Think about your investment in terms of dollars and not the number of shares you own. I think Markel will continue to operate its insurance business in a conservative manner and its investments will drive book value higher. As a result, the stock could see appreciation of 30% to 40%.

Interested in reading more about Markel? Add it to My Watchlist, which will find all of our Foolish analysis on this stock.

Previous recommendations (Click here for full list of recommendations and performance):

Come back to Fool.com tomorrow for another great stock pick. There's plenty more great stock advice, and you can find video of each day's recommendation as well!

"11 O'Clock Stock" is sponsored by Motley Fool Stock Advisor. The Motley Fool will wait at least 24 hours after this publication before purchasing shares of Markel. To see an FAQ on "11 O'Clock Stock," click here.

Berkshire Hathaway and Markel are Motley Fool Inside Value choices. Berkshire Hathaway is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Berkshire Hathaway and Markel. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (33)

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  • Report this Comment On September 27, 2010, at 12:18 PM, johnnypajamas wrote:

    Are you sure you know what your talking about with Markel... I purchased this stock several years ago from the guidence of the Motley Fool... I'm down about 1/3 of my investment... I have never been in the green with this stock and if I ever get back near my original investment dollars I'm going to SELL...SELL...SELL...

  • Report this Comment On October 02, 2010, at 10:09 PM, dep226 wrote:

    i agree with johnnypajamas. i too bought on your strong recommendation that this stock would be the next berkshire hathaway. i have been down as much as 55%. i have never been in the black so far. i am still holding on.

  • Report this Comment On October 13, 2010, at 8:44 PM, Ozcutty wrote:

    In the same boat, started buying MKL at 460, then 350 so my average is 399. I've learned these insurance stocks, whilst performing well over 20 years can have long periods of underperformance. They are probably a good sector to rotate into when your risky tech stocks top out!

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