Markel is a one hundred year old specialty property and casualty insurance company that entered the growth phase of the business under the third generation of family management. The company completed its transition from family run to professionally managed with Alan Kirshner, Tom Gayner and Richard Whitt at the helm and went public in 1986.  Since 2007, Markel has made a number of acquisitions, which have helped grow the company’s book value from $5.13 billion in 1994 to $8.53 billion as of the last quarter end.  The company also operates non-insurance businesses through Markel Ventures, which has interest in a variety of companies competing in the manufacturing, consumer, healthcare and financial service industries.  We view Markel as a mini-Berkshire Hathaway as it strives to build long-term shareholder value through accretive insurance and non-insurance acquisitions coupled by strong underwriting discipline.
Markel has been on Anchor’s watch list for over a year but the stock has been trading at a high price-to-book value, well above what we thought would be a prudent entry point. Given a 10% drop in the stock price over the last six months, we pulled out our original research report and went to work.  Our initial thesis in June of 2015 was centered around quality, evidenced by growth in compounded book value over time, above market investment returns and a combined ratio consistently below 100%.  From 1994-2014, Markel has increased book value per share at a 16% compound rate with only two declines over that time period and its investment portfolio has produced strong returns with a 6% return from 2001 through 2011, compared to the S&P 500 at 2.9%. 
Confirmation through research
We believe that the recent pressure in the stock price is from an underwriting hiccup, which resulted in lower than expected revenue and earnings per share and a higher combined ratio in the third quarter.  Management noted that the underwriting results were adversely impacted by an unfavorable development on the company’s medical malpractice and specified medical product lines, which had about a $2 impact on earnings per share and contributed to the increased combined ratio.  While the earnings impact was significant, we believe that the hit is nonrecurring and that the business is still strong. The combined ratio, while ten points higher, has remained below 100% and revenue growth persists in the mid-single digit range.  Strong performance in the equity and fixed income portfolios has helped drive book value per share from $555 at the time of our original report to $609 per share at the last quarter end. 
Once we were fully updated on the company, we felt that our original thesis was still intact and that the stock price declines were not warranted, creating a dislocation between the price and our estimate of intrinsic value. Given the growth in book value and the pullback in the stock, we believe that the risk/reward is favorable at these levels.