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A Berkshire Hathaway Inc. (BRK.A)-Worthy Performance

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Matching a stable of strong insurance businesses with intelligent investing is one of the key formulas Warren Buffett used to turn Berkshire Hathaway Inc. (NYSE:BRK.A) into one of the greatest investments of the past half-century. Fortunately for investors who weren’t able to ride Buffett’s market-crushing train, there are several smaller companies that have embraced Berkshire Hathaway Inc. (NYSE:BRK.A)’s formula with great success. One of those is Alleghany Corporation (NYSE:Y), a multi-line insurance company whose objective is “to create value through owning and managing operating subsidiaries and investments, anchored by a core position in property and casualty reinsurance and insurance.” Sound familiar?

Berkshire Hathaway Inc. (NYSE:BRK.A)Alleghany Corporation (NYSE:Y)’s market cap of under $7 billion is but a tiny fraction of Berkshire Hathaway Inc. (NYSE:BRK.A)’s $280 billion. Yet it’s making many of the same early moves that eventually turned Berkshire Hathaway Inc. (NYSE:BRK.A) into the giant conglomerate it is today. That makes it a potentially very compelling investment for those who are looking to find an investment that has a shot at replicating at least some of Buffett’s extraordinary success.

My Foolish colleague Paul Chi and I purchased Alleghany Corporation (NYSE:Y) for our real-money portfolio last year, and we’re already enjoying some nice early gains. After Alleghany’s latest results, we’re going back for more and intend to purchase shares this week.

A Berkshire-worthy performance
As CEO Weston Hicks put it in Alleghany’s first-quarter results, the company is off to a solid start to 2013. An uneventful quarter in terms of catastrophes helped Alleghany’s insurance subsidiaries report favorable results, including a combined ratio of 83.1% (a number below 100% means an insurance company was profitable in its insurance underwriting).

Benefiting the results was a full quarter of Transatlantic Holdings’ (TransRe) results. Alleghany acquired Transatlantic (from the jaws of Warren Buffett and Berkshire Hathaway Inc. (NYSE:BRK.A) in fact) in late 2011, adding a leading global reinsurance franchise to Alleghany’s already strong stable of property and casualty insurance companies. Thanks mostly to TransRe, Alleghany’s underwrote $1.1 billion in net insurance premiums in the quarter, a 152% jump over last year’s first quarter, which only included 25 days of TrasRe operations as an Alleghany subsidiary. Alleghany’s underwriting profit hit $181.4 million, up 81% from a year ago.

All signs point to these favorable insurance trends continuing. Hicks mentioned in the press release that the property and casualty insurance market is “gradually improving .” This follows comments he made in his recent annual letter to shareholders that Alleghany’s underwriting profitability would likely improve in 2013.

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