As I highlighted in a previous article, bad management teams can destroy shareholder wealth. Yet exemplary management teams can compound wealth for decades and make shareholders rich along the way.

The 2008-2009 crisis showed us that in no other industry does management skill and discipline matter more than the financial sector. When financial companies make the news, it’s usually for the wrong reasons. I’ve found a pair of great companies that have stayed under the radar and are great stocks to own for decades. 

The Travelers Companies, Inc. (NYSE: TRV) is a property and casualty insurer primarily focused on a commercial client base. Nonetheless, a third of its business is home and auto insurance for individuals. What makes Travelers special is its tremendous performance in the most important metric for evaluating insurance companies, the combined ratio.

The combined ratio answers whether the company is adequately compensated for the risk it is taking and whether the company is operating efficiently. The ratio measures how much income generated from insurance premiums goes to pay operating expenses and customer claims.

A combined ratio under 100% indicates an underwriting profit, and a ratio over 100% indicates an underwriting loss. Insurance companies can still earn positive overall profits even with an underwriting loss, because it can invest the premiums collected for the benefit of the company before paying claims. But an underwriting profit means it keeps the premium income and the investment gains.

Travelers has turned in a combined ratio below 100% in eight of the past ten years, with seven of the years below 95%. This incredible record of profitability is a testament to the management and culture of Travelers. Due to its success, the company is rewarding shareholders handsomely with all that cash it’s bringing in.

Over the past ten years, Travelers has undertaken a massive share repurchase effort and managed to cut shares outstanding in half. And in that time, it has nearly tripled the dividend. An impressive feat considering it took place during the biggest financial crisis since the Great Depression.

Travelers isn’t flashy, it doesn’t have a product that’s changing the world, but it’s fantastic at what it does and the returns have been special. Travelers’ total return since 2005 is more than double the S&P 500.

Markel Corp. (NYSE: MKL) is another company in the insurance sector that has the benefit of tremendous, long-term focused management. That has resulted in great returns to shareholders. Like Travelers, Markel has only had two years out of the past 10 when the combined ratio exceeded100%.

Unlike Travelers, which operates in competitive insurance markets, like business property, Markel is a specialty insurer. It doesn’t sell standard life, auto or homeowner’s insurance. Instead, it looks for overlooked and hard-to-price risks where it will have a competitive advantage. Businesses like sports camps and dude ranches are the types of unique businesses that Markel targets.

#-ad_banner-#Another unique aspect of Markel’s business is how it handles its insurance “float,” or the premiums received from customers that may need to eventually be repaid in the form of claims. Most insurers invest this money almost exclusively in fixed income.

But Markel has renowned investor Tom Gayner at the helm of a large investment portfolio that is split between stocks and bonds. Over the past 15 years, the equity portfolio Gayner manages has averaged 11.3% annual returns, trouncing the market and helping deliver tremendous gains to shareholders.

Unlike most insurers (including The Travelers), which plow profits into dividends and buybacks,  Markel either turns the profits back over to Tom Gayner to invest in equities, or it invests in a business called Markel Ventures, which is starting to build up a portfolio of wholly-owned subsidiaries in a number of different industries where it can earn high returns on capital.

The result of all this reinvestment: Markel is boosting book value at a 14% compounded annual rate over the past five years. Its long-term performance is even more amazing. Over the past 21 years, book value has compounded 16% annually, while the stock price has compounded 15% annually, nearly double the long-term rate of the S&P 500.

Risks To Consider: Insurance companies are leveraged financial institutions that are vulnerable to natural disasters. However, these companies have been in business for decades, through hurricanes and debt crises and always end up stronger than ever. The risk with these companies is low.

Action To Take –> Both companies are poised to achieve superior long term results and would make a fantastic addition to any portfolio. Travelers, which is trading for just 1.2 times its book value and a price-to-earnings ratio hovering near 10, is the better buy today. Markel currently trades at 1.4 times its book value which is fair, but keep it on your watch list and buy aggressively on a pullback. My target entry price is 1.25 times its book value or around $705 per share.

Share repurchases are such a powerful tool that StreetAuthority devoted an entire newsletter to identifying shareholder-friendly firms that pay dividends and buy back shares. These stocks, which we call Total Yield stocks, have proven to beat the market — even during the 2008 financial crisis and the dot-com bubble — and serve as reliable income investments. To find out more about Total Yield investing, click here.