The only stock you need to get into your portfolio right now!

The stock is Markel (NYSE: MKL). And I believe it deserves a spot as a core holding in your portfolio because it's one of the few insurance companies that exhibit the kind of underwriting discipline, and some of the investment acumen, found at Warren Buffett's Berkshire Hathaway (NYSE: BRKa)(NYSE: BRKb).

The best way to determine an insurance company's ability to generate shareholder value is by checking the increase in book value per share (BV/S). Since going public in 1986, Markel has compounded BV/S at a rate of 24% per year.

I believe that the company will continue to increase BV/S by at least 13% to 15% over the next 10 years, a performance that would result in share-price appreciation far above that of the S&P 500 index. In a recent interview, Steve Markel stated that the company could reach 19% BV/S growth over the next few years. 

Markel differentiates itself from larger property and casualty insurers by concentrating on more than 90 specialty lines of insurance, generally accepting risks that the large companies are unwilling to cover. Its key competitive advantages are the expertise and experience of its specialist underwriters and the relationships it has built with brokers and specific trade and other groups covered.

The diversity of product lines means that no one line is responsible for more than 7% of the gross premiums written. In many of the lines, Markel has an incredible retention rate in the 90%-plus range -- a result of long-term relationships and niche expertise. Although the company does face price competition in many of its lines, it is considerably less than that found in standard insurance. For 2005, the overall customer retention rate was 85%, up from 81% in 2004.

The secret sauce of a well-run insurance company is its ability to use float to produce investment income. Through Markel Gayner Asset Management, headed by Chief Investment Officer Tom Gayner, the company has produced some stellar returns on the equity portion of its investment portfolio.

Over the last five years, the equity portion of the portfolio returned just over 10%, while the S&P 500 returned -1.1%. The fixed-income portion returned 5.9% over that time period. At the end of June, equities were 21% ($1.56 billion) of the $6.6 billion portfolio. According to the June 30, 2006, SEC 13-F filing, the top ten holdings include:

• $170 million in Berkshire Hathaway
• $96 million in CarMax (NYSE: KMX)
• $86 million in Diageo PLC (NYSE: DEO)
• $79 million in Fairfax Financial Holdings (NYSE: FFH)
• $73 million in General Electric (NYSE: GE)
• $72 million in Anheuser-Busch (NYSE: BUD)
• $70 million in White Mountains Insurance (NYSE: WTM)
• $52 million in Citigroup (NYSE: C)
• $44 million in Brookfield Asset Management (NYSE: BAM)
• $41 million in Forest City Enterprises (NYSE: FCE)

According to my spreadsheet calculations, the equity portfolio has grown to over $1.7 billion as of early October. Gayner and his staff stick with what they know best, so the portfolio has a very high concentration in insurance companies. The company has also acquired a 40% stake in supermarket bank First Market Bank. The other 60% is owned by Ukrops, a family-owned grocery chain. Markel intends to make similar private investments over the next few years.

Markel has a management team that should get investors excited. It holds approximately 10% of shares, and their bonuses are based on the trailing five-year annual increase in BV/S, with no bonus being paid below 11% -- clearly aligning its interests with those of the shareholders. It is conservative and has cultivated a culture that focuses on underwriting discipline and improving long-term shareholder value rather than focusing on growth at all costs. A testament to its discipline is that the company has not had to resort to the capital markets to shore up the balance sheet, following losses from the recent hurricanes.

I strongly believe that Markel is a superior long-term investment that is set to compound absolute shareholder value at rates that will significantly outperform the S&P 500 index. As an added bonus, the shares are trading at a discount to my estimation of intrinsic value. Which brings me to...

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