More on Alleghany Corp

Alleghany Corp Y

is a holding company with subsidiaries that provide property and casualty, and surety insurance, commercial and residential land management in Sacramento and as well engages in long term deep value investments, including private and public businesses at deep discount to fair market value. It has been a solid performer for shareholders ever since 1929. At a 3 Billion dollar market cap, its conservative management and investment style has lead many in the industry to compare it to Berkshire Hathaway at a much earlier stage (remember, BRK has a 200 B $ market cap!).

The market is leery of insurance companies now because of the general deterioration of the economy world wide and also because of the reversion to the mean phenomenon that Buffett referred to in his annual shareholder letter I posted earlier: the party is nearly over for insurances companies who haven't had big claims since Katrina... as it's inevitable that some sort of disaster is right around the corner. As well, the insurance products have become less profitable due to competitive pressure on insurance pricing.

Bull case:

1. great long term record. Share price has increased 26 fold in the last 25 years.
2. Y has increased book value by 16% yoy for the last 20 years! This is not sustainable even at Alleghany's relatively small size but it's very impressive nonetheless.
3. Despite above, Y is only trading at 1.1 times book value. This may actually be a gross underestimate of the company's true book value as the real estate holdings in Sacramento are being marked down far below historic values.
4. Attractive fundamentals P/E 11 P/CF 11 ROE 15%
5. Virtually NO debt, very well capitalized
6. high insider ownership. The Kirby family owns 35% of share float. Senior management each own about 1% or more of outstanding shares. Compensation is indexed to a watermark of increasing book value of 7% y-o-y---> very shareholder friendly IMHO.
7. Deep value investing approach that is conservative and long term in scope. One dramatic example is the large stake Y took in Burlington Northern (railway) some time in the 90's, long before Berkshire got its hooks into the company. Y made 5x it's original investment.
8. Share buybacks are underway with $300 Million authorized (about 10% of the float).
9. 5 star Morningstar status. FMV estimated at $475/share and trading as low as $330 (my entry point for my RRSP). This 31% discount provides an acceptable margin of safety for my investment.
10. being debt free and a large pool of liquidity available, the management has indicated that it is interested in buying private businesses in distress for the "right prices" (which the company's cheapskate track record shows would be bargain basement or no deal, lol).
11. conservative underwriting policy at the RSUI subsidiary has kept them out of trouble and is likely to do so by avoiding high risk deals.

Bear Case:

1. Recent S & P downgrade from BBB+ to BBB status. This move has mystified the analysts and CEO of Alleghany. Apparently S&P didn't even talk to any officers of the company prior to the downgrade.
2. no dividend
3. Narrow moat. Y's performance is highly dependent on management's expertise which is not ideal. I believe it was Charlie Munger who said that the best business to invest in is one that any idiot can run because sooner or later one will be.

I think that this stock will be an excellent and safe long term performer, best kept in an RRSP or tax free savings account. As mentioned above, I own a few shares in my RRSP and I think that any price less than $340 is an opportunity to increase the position.

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