ALLEGHANY CORP (Y)

[Guest swf83]

I have never really followed Alleghany Corp. in the past and was hoping someone on here could give me an overview of this company. How does it stack up to Berkshire and Fairfax? Cheaper or more expensive? Good capital allocators?

 

Thanks

[twacowfca]

I have never really followed Alleghany Corp. in the past and was hoping someone on here could give me an overview of this company. How does it stack up to Berkshire and Fairfax? Cheaper or more expensive? Good capital allocators?

 

Thanks

 

 

Well above average, I think.  Barron's had a good feature article on them about three years ago, I believe.  You may want to read it.

[Guest kawikaho]

I bought Y about 5 years ago at $240/sh.  It's interesting to note that had I held on, that capital would have return zilch after inflation.  I ended up selling that one after I read their annual report and saw their only holding in their investment float was Burlington Rail.  Not the ideal capital allocators I thought they would be--at the time, I did not think Burlington rail was a great investment.

 

They are trading about .8x book, but the problem with stocks like this is that you can have good management, good financials, and a good business, but no interest.  The volume is low, return on equity is about 7%, and growth rates are pretty low.  Not bad, not great, but stable. 

[Guest hellsten]

Bumping this thread because I like and own Alleghany:

http://brooklyninvestor.blogspot.com/2011/11/alleghany-transatlantic-merger.html

http://www.marketfolly.com/2012/05/goodhaven-capitals-presentation-on.html

 

For some reason WTM and Y do not get as much love as e.g. MKL. I guess they are not as sexy as MKL…

 

Alleghany's goal is to grow book value at 7-10% per year in current market conditions. The stock has gone up ~190% vs. ~200% for MKL since 2000.

 

P/B is ~0.9 vs 1.2 for MKL.

 

Morningstar has Weston Hicks, Alleghany's CEO, on their list of Ultimate Stock Pickers:

http://news.morningstar.com/USPNet/LandingPage.aspx?authorid=1358

 

I think Y is a good replacement for cash :)

[racemize]

Bumping this thread because I like and own Alleghany:

http://brooklyninvestor.blogspot.com/2011/11/alleghany-transatlantic-merger.html

http://www.marketfolly.com/2012/05/goodhaven-capitals-presentation-on.html

 

For some reason WTM and Y do not get as much love as e.g. MKL. I guess they are not as sexy as MKL…

 

Alleghany's goal is to grow book value at 7-10% per year in current market conditions. The stock has gone up ~190% vs. ~200% for MKL since 2000.

 

P/B is ~0.9 vs 1.2 for MKL.

 

Morningstar has Weston Hicks, Alleghany's CEO, on their list of Ultimate Stock Pickers:

http://news.morningstar.com/USPNet/LandingPage.aspx?authorid=1358

 

I think Y is a good replacement for cash :)

 

Full Disclosure: I have not looked at this one in a lot of detail.

 

Regarding comparison to MKL, MKL has a much longer history and was able to compound book at 12% over the same period as Y, and at much higher rates overall.  7-10% is fine, but that's a bit below my threshold on returns, so I'd rather just go off on my own or buy a different compounder.

[ShahKhezri]

I would just look at their investing post Burlington Northern.  It hasn't been that impressive.  They are doing the same as Markel Ventures with less ramp up.    TG gets criticism because he's not Prem and didn't load up in 2008 and Prem gets criticism because he'll rather buy RIMM than IBM and DISH or whatever BRK is buying.  However, with Y, I never really figured out their investment portfolio...they are deflationsits now (based on the '11 letter) and I already have 30% in FFH. 

 

Y is cheap and I think Joe Brandon and is good jockey.  I sold my position to increase MKL in Dec because while I like Y, I was able to build a large position in MKL and my avg is around $390 now. 

[Guest hellsten]

Full Disclosure: I have not looked at this one in a lot of detail.

 

Regarding comparison to MKL, MKL has a much longer history and was able to compound book at 12% over the same period as Y, and at much higher rates overall.  7-10% is fine, but that's a bit below my threshold on returns, so I'd rather just go off on my own or buy a different compounder.

 

Alleghany was actually founded in 1929, 1 year before Markel.

 

I recommend reading the annual letters which are short:

http://www.alleghany.com/annual-letters/

 

Here's a link to the 2012 annual letter:

http://www.alleghany.com/annual-letters/2012/02/22/.pdf

 

Regarding their investment returns, they have both beaten the S&P and the investment returns of Alleghany are quite similar to Markel. Markel has a diversified portfolio (>50 stocks?), while Alleghany seems to like a very concentrated portfolio (XOM, BNSF). That's not the only difference. Anyway, also note the following:

Y P/B: ~0.9

MKL P/B: ~1.2

 

Tangible book value (according to Gurufocus):

Y: $374

MKL: $291

 

Investments per share are basically the same for Y and MKL.

 

I own both MKL and Y.

[Shane]

Investments per share might be similar, but I believe MKL has more equity investments per share and a willingness to invest proportionally more in equities.  MKL is a better deal IMO at the same valuation.  .9 vs 1.2 maybe not.

[racemize]

Well, I guess I mean public history, unless they have a record before 2000?  Thats all I saw in the 2012 letter yesterday, and I don't see any letters before 2005.  Am I missing something?

 

Still though, 7-10% returns using a leveraged structure just seems too low to me.

 

Ok, another question--the chart shows 7%compound investment gains, but book didn't increase by more?  What's going on there?

 

 

[link01]

Full Disclosure: I have not looked at this one in a lot of detail.

 

Regarding comparison to MKL, MKL has a much longer history and was able to compound book at 12% over the same period as Y, and at much higher rates overall.  7-10% is fine, but that's a bit below my threshold on returns, so I'd rather just go off on my own or buy a different compounder.

 

Alleghany was actually founded in 1929, 1 year before Markel.

 

I recommend reading the annual letters which are short:

http://www.alleghany.com/annual-letters/

 

Here's a link to the 2012 annual letter:

http://www.alleghany.com/annual-letters/2012/02/22/.pdf

 

Regarding their investment returns, they have both beaten the S&P and the investment returns of Alleghany are quite similar to Markel. Markel has a diversified portfolio (>50 stocks?), while Alleghany seems to like a very concentrated portfolio (XOM, BNSF). That's not the only difference. Anyway, also note the following:

Y P/B: ~0.9

MKL P/B: ~1.2

 

Tangible book value (according to Gurufocus):

Y: $374

MKL: $291

 

Investments per share are basically the same for Y and MKL.

 

I own both MKL and Y.

 

the 1 wildcard for me is the recent hiring of joe brandon as pres of alleghany holdings (the insurance group). if he's as good as WEB seemed to think, at least from his praises of brandon (along with tad montross who stayed on at gen re, it should be noted), then Y's underwriting stands to benefit, possibly alot. and thats on on greatly enlarged insurance op over all.

[ScottHall]

I haven't looked in depth at Alleghany, but one thing I'll note is that when comparing book values of insurers, it's important to remember that not all book values are created equally. Markel's has a lot of intangibles, but its reserving has been nothing short of phenomenal - Markel has, as of FY 2011, released 19.5% of initial 2002 accident year loss reserves, 37% of initial 2003 accident year loss reserves, 35% of 2004's, 23% of 2005's, 24% of 2006's, etc.

 

I don't know how Alleghany stacks up compared to that, but it'd be interesting to check out to see if its book value is as substantially understated as Markel's is, or if the discount is justified from a history of inadequate reserving.

[ERICOPOLY]

 

Still though, 7-10% returns using a leveraged structure just seems too low to me.

 

Ok, another question--the chart shows 7%compound investment gains, but book didn't increase by more?  What's going on there?

 

7-10%?  Why do they even go into work every day?  Why not just shut down the operations and put the equity in Berkshire stock?

 

[Guest hellsten]

Still though, 7-10% returns using a leveraged structure just seems too low to me.

 

Ok, another question--the chart shows 7%compound investment gains, but book didn't increase by more?  What's going on there?

 

Sorry, I don't know. With the TRH acquisition the investment leverage is larger than before (3.0 vs 1.7).

 

7-10%?  Why do they even go into work every day?  Why not just shut down the operations and put the equity in Berkshire stock?

 

I guess this would be considered a big risk by some people. Anyway, they are very good equity investors if your benchmark is the S&P 500, not if your benchmark is Ericopoly ;)

 

By the way, Berkshire was also bidding for TRH (and Joe Brandon). We all know what happened to BNSF, which Alleghany owned for a very long time.

 

I haven't looked in depth at Alleghany, but one thing I'll note is that when comparing book values of insurers, it's important to remember that not all book values are created equally. Markel's has a lot of intangibles, but its reserving has been nothing short of phenomenal - Markel has, as of FY 2011, released 19.5% of initial 2002 accident year loss reserves, 37% of initial 2003 accident year loss reserves, 35% of 2004's, 23% of 2005's, 24% of 2006's, etc.

 

I don't know how Alleghany stacks up compared to that, but it'd be interesting to check out to see if its book value is as substantially understated as Markel's is, or if the discount is justified from a history of inadequate reserving.

 

Yes, good point. Slide 41 of the GoodHaven presentation shows the historical reserves. TRH could be a problem. It was part of AIG. Markel could have the same issue with their acquisition?

 

13Fs for the interested:

http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000775368&type=13f

 

 

IMHO, the "mini-berkshires" MKL, LUK, Y and WTM are all good stocks at the right price. Following them on a regular basis has been a great way of learning new things about investing and history.

[ERICOPOLY]

7-10%?  Why do they even go into work every day?  Why not just shut down the operations and put the equity in Berkshire stock?

 

I guess this would be considered a big risk by some people. Anyway, they are very good equity investors if your benchmark is the S&P 500, not if your benchmark is Ericopoly ;)

 

Why would an equity investor determine that Y is a better risk than Berkshire for the same expected returns? 

 

A "Baby Berkshire" ought to deliver substantially better rewards, otherwise... why not just own Berkshire?  That's how I think anyhow.

[racemize]

Why would an equity investor determine that Y is a better risk than Berkshire for the same expected returns? 

 

A "Baby Berkshire" ought to deliver substantially better rewards, otherwise... why not just own Berkshire?  That's how I think anyhow.

 

I agree, for BRK, I'm expecting/hoping for 10-15% BVPS increases, and for baby berkshires, 13%-20% BVPS increases, over long periods of time. 

[Guest wellmont]

Over the last 10 years Y has handily outperformed brk over that time. that seems to be a good reason to go into work everyday.  ;D

[ERICOPOLY]

Over the last 10 years Y has handily outperformed brk over that time. that seems to be a good reason to go into work everyday.  ;D

 

I'm surprised at that, I thought BRK had done better than Y over that period.

 

Alleghany reports:

For the ten years ended December 31, 2011, Alleghany’s common

stockholders’ equity per share increased at a compound annual rate of 7.8%,

 

 

There is something else to consider:  Berkshire's IV has grown faster than BV in past 10 years.  The result of the large operating company weightings at Berkshire.

[ERICOPOLY]

Berkshire looks to have done a bit better than 10% annualized growth in BV (and more in IV), versus the 7.8% growth in BV for Alleghany.  Unless there was a special dividend that I'm missing, Berkshire smoked 'em.

[racemize]

Berkshire looks to have done a bit better than 10% annualized growth in BV (and more in IV), versus the 7.8% growth in BV for Alleghany.  Unless there was a special dividend that I'm missing, Berkshire smoked 'em.

 

I think there's been a few instances in this thread where people are discussing price performance, and that may be what happened above.  I personally don't care about price performance, since I wouldn't have bought it at inflated BVPS, so I'm only paying attention to underlying growth.

[Guest wellmont]

over ten years I care a lot about price performance. :) and especially since Y is trading below book and brk is trading above book I like the odds of continuing out performance by the Y management team. Since Buffett will tell you that there is more to out performance than bv growth. So I definitely hope they continue to go to work in the morning. :) Not to mention that Y just made a trans-formative acquisition that dramatically improves the growth profile going forward, something they could not have done had they decided to stay home and play golf.

[ERICOPOLY]

over ten years I care a lot about price performance. :)

 

Yes, however price performance of Y wasn't what I was referring to.

 

I was referring to whether management is beating themselves up for nothing when instead they could play golf.

 

The Alleghany management could have wound up it's operations ten years ago and instead put all of it's equity into Berkshire stock.  BV at Alleghany would have compounded at 8% annualized (Berkshire's stock price performance).  This despite the contraction of P/BV for Berkshire over the same period.  The "look through" performance of Alleghany would be far superior of course -- not only because the "look through" BV would have grown at 10%, but because IV grew even more.

 

This was even during a period when Berkshire's equities did relatively poorly (high valuations for the big blue chips).

 

This isn't to say that Y can't do better, but if their goal is 7% to 10% and they merely achieve that, I'll reassert that they are wasting their efforts.

 

[Guest wellmont]

over the last 10 years Y shareholders would be way worse off if they had done that. So I am quite sure these shareholders are very happy that the team did not quit and play golf. :) Y management has the very good habit of under promising and over delivering, which makes going to work every morning very exciting for them indeed. of course winding up it's operations would effect employees and customers in a negative way and Y management surely does not want to negatively impact the community when it is obviously adding lots of value in every way.  cheers!

[ERICOPOLY]

over the last 10 years Y shareholders would be way worse off if they had done that. So I am quite sure these shareholders are very happy that the team did not quit and play golf. :)

 

Okay, I think you are saying it would have hurt the Y stock price.  How about if we go farther back in time then to take the sting out of the Berkshire valuation compression.

 

Going back 20 years the stock price of Y has delivered a shade under 10% annualized.  Is that phenomenal?

[Guest wellmont]

how about going forward? because that's what management teams and investors focus on. Unless you can offer a guarantee that brk will outperform going forward, I suspect that Y management won't take your advice and quit. :) Nor should they. Not sure why the focus on Y? what about Fairfax? Do you suggest that Prem Wasta liquidate Fairfax and put his money in Alleghany simply because Y outperformed  FF at least since 1999? In fact it looks like FFX has under performed the snp tsx index. perhaps Prem should take Bogle's advice, liquidate and move to index funds? Cheers!

[ERICOPOLY]

how about going forward? because that's what management teams and investors focus on. Unless you can offer a guarantee that brk will outperform going forward, I suspect that Y management won't take your advice and quit. Nor should they. Not sure why the focus on Y? what about Fairfax? Do you suggest that Prem Wasta liquidate Fairfax and put his money in Alleghany simply because Y outperformed  FF at least since 1999? In fact it looks like FFX has under performed the snp tsx index. perhaps Prem should take Bogle's advice, liquidate and move to index funds? Cheers!

 

Now I've got the guy who pulled out the stock price of Y over 10 years (instead of the BV growth)  lecturing me on forward looking results  :o

 

 

Prem's stated goal is 15% annualized.  Buffett's is a couple of percentage points above the S&P500, measured over long stretches of time.

 

And Buffett's goal is pretty darn close to what Alleghany aspires to.  How about, risk adjusted, which is the more impressive result even if they turn out to be exactly the same?  I just don't see the allure of Y with the other option available.