3 Contenders for the Title of 'The Next Berkshire Hathaway'
There have been several attempts to mimic Warren Buffett's Berkshire Hathaway over the years. Buffett uses cheap leverage in the form of insurance float -- that is, the cash from insurance premiums that don't have to be paid out yet -- to buy undervalued businesses. One study claims that his entire performance can be explained by those value and leverage factors.
Some value managers have tried to duplicate Buffett's feat by starting their own insurance company to utilize the float. It's a sound model if you run the insurance business well, building up low-priced leverage -- but much less so if the insurance business struggles and you have to come up with the cash to keep it afloat. That's why most of his imitators have failed.
Let's look at three potential Berkshire heirs: Fairfax Financial Holdings (OTC: FRFHF), Markel (NYSE: MKL), and Alleghany (NYSE: Y). We'll evaluate which is the superior mini-Berkshire based on two factors: investment returns and combined ratio. Combined ratio compares premiums coming in to overhead and claim payouts. A combined ratio under 100% means the insurance operations are profitable.
Source Fool.com
