However, the only copycat to come anywhere close to matching Buffett’s success is Tom Gayner’s Markel Corporation (NYSE:MKL). Markel has compounded book value per share at a 20% annualized rate since its 1986 initial public offering — a feat only a handful of other companies can boast.
Moreover, Markel Corporation (NYSE:MKL) has only recently begun to acquire non-insurance businesses. As the company becomes more and more like Berkshire, expect shareholder returns to rapidly increase.
Not just any insurer
Most insurance businesses lose money underwriting policies and make up for it by investing the float. It is extremely difficult to make money underwriting insurance because policies are differentiated based on price.
Markel Corporation (NYSE:MKL) gets around the heavy competition by focusing on specialty insurance — insurance that requires highly specialized knowledge to gauge the risk associated with each policy. It turns out that not many actuaries can do the job, but Markel seems to have a monopoly on actuarial talent.
Markel Corporation (NYSE:MKL) has averaged a 96% combined ratio since its IPO — meaning that, on average, Markel earns a profit on policies it underwrites. Few other insurance operations are profitable underwriters, and those that are tend to be special cases.
For instance, The Progressive Corporation (NYSE:PGR) has a history of sub-100% combined ratios. The Progressive Corporation (NYSE:PGR) is a plain-vanilla P&C insurer, but it is extremely good at segmenting risks. That is, its actuaries are better than most at determining which customers are riskier and which are less risky. This allows it to offer lower prices to less risky customers.
The Progressive Corporation (NYSE:PGR)’s direct-to-consumer model, instead of relying on agents to sell policies, is also a key part of its success. Only GEICO has made a similar commitment to marketing directly to customers. Both of these companies figured out the same thing that Markel Corporation (NYSE:MKL) did — that you have to be special if you want to earn outsized profits.
Markel has a Buffett too
Berkshire Hathaway Inc. (NYSE:BRK.B)’s success is not due to its ability to profitably underwrite insurance policies; most of its success is due to the shrewd capital allocation of Warren Buffett.
Markel Corporation (NYSE:MKL) is no different. Its insurance profit would be worthless if the company did not invest the float well. Luckily, Markel has its own Buffett in the form of Tom Gayner. Gayner has been Chief Investment Officer of Markel since 1990 and has compound annual returns of nearly 11%.
In addition, Gayner began acquiring non-insurance businesses in 2005. Although Markel is still overwhelmingly an insurance operation, it is not difficult to envision the company’s future given its growing similarities to Berkshire.
Is it a buy?
Markel’s market capitalization is only $5 billion, whereas Berkshire Hathaway Inc. (NYSE:BRK.B)’s is over $260 billion. While Markel will likely never match Berkshire Hathaway Inc. (NYSE:BRK.B)’s size, it clearly has room to grow.
As a result of its shrewd underwriting, intelligent capital allocation, and strong growth prospects, Markel Corporation (NYSE:MKL) deserves to trade at 1.5x book value — or about $650 per share. At a recent price of $515, the stock is available at about 80% of its intrinsic value — a good price for long-term investors to jump aboard.
The article Is This Company the Next Berkshire? originally appeared on Fool.com and is written by Ted Cooper.
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