Did you know that the price of Berkshire Hathaway's Class A shares, which have never split, are worth around 3,633,000% more now than they were when Warren Buffett took over the struggling textile business way back in 1965?
Buffett's and Berkshire's returns are legendary, but now that the holding company is already one of America's largest, with a book value of around $505 billion, expecting it to continue growing at its previous pace in the decades ahead seems unreasonable.
Image source: The Motley Fool.
Luckily for everyday investors like us, there's a "baby" Berkshire you can invest in called Markel Group (MKL +1.03%). It's running the same playbook that's worked out so well for Buffett and his holding company. With its book value of just $13.6 billion, though, moving Markel's needle forward in the decades to come will be relatively easy.
How Berkshire and Markel help their shareholders get rich
Berkshire's insurance operation, which includes GEICO, is arguably the company's most important, because it provides a free source of capital to invest elsewhere. The difference between premiums collected and claims paid, or Berkshire's insurance float, reached $164 billion in 2022.
Markel Group's insurance operation isn't as large as Berkshire Hathaway's, and it doesn't boast about the size of its float. That said, Markel's source of essentially free capital is already significant and getting larger. Earned premiums grew 11% year over year in the first half of 2023 to $4 billion.
Buffett's stock market purchases get a lot of attention, but Berkshire also invests in businesses it controls, including Duracell, See's Candies, and the Acme Brick Company. None of these businesses is going to take over the world, but they generally produce steadily growing profits or they get trimmed from the portfolio.
The Markel Ventures operating segment is made up of controlling interests in a diverse portfolio of increasingly profitable businesses, too. In the first half, operating income from this segment rose 42% year over year to $223 million.
Of course, Berkshire and Markel buy non-controlling stakes in publicly traded stocks, too. In fact, they both hold shares of each other. Markel's stock portfolio fell a long way in 2022, but the company reported an encouraging $857 million net investment gain during the first half of 2023.
NYSE: MKL
Key Data Points
Why Markel Group looks like a screaming buy right now
Markel's insurance operation writes a lot of specialty policies that most insurers consider too risky. Specialty insurance is hard to do, but Markel's experienced staff does it exceptionally well. Markel Group also boasts a reinsurance operation, which is essentially insurance for insurers.
The combined ratio adds up all the premiums an insurance company receives in a given period and divides it by claims plus expenses. Most insurers are happy to maintain a combined ratio near 100% because they can invest the float.
Markel's combined ratio of 93% in the first half of 2023 means it was able to retain around 7% of all premiums received. That number isn't quite as high as that of Kinsale Capital, another specialty insurer with an even lower combined ratio. That said, Markel's underwriting prowess is a strong advantage that could allow its share price to outperform over the long run.
Despite a solid performance in the first half of 2023, Markel stock is trading for the relatively low price of just 7.9 times trailing free cash flow. From this low multiple, patient investors could realize market-beating gains over the long run even if profits never grow.
Markel's equity portfolio will rise and fall along with overall market sentiment. Over the long run, though, investors can expect profits to continue their long steady ascent on the back of its niche insurance business and disciplined investment of the capital it provides.
