Before I start, I came across this great quote in a totally unrelated book so let me start this post with that:
“Obstacles are those frightful things you see when you take your eyes off the goal.”
– Hannah More, British writer/novelist (1745 – 1833)
With the market tanking and people obviously wondering what they should do (“Should I sell?!”), I thought it’s a great quote. Someone asked me about a stock; what should they do? The stock is tanking! I asked them if they are in for a quick trade or as a long term investment. They said it’s a long term investment. So I asked them if what is happening in the market today will change your view of how the company will be doing in five years.
Back to Alleghany (Y)
OK, so this is kind of old, but I stumbled upon the Alleghany Corp investor day presentation that happened a while back, in November 2013, actually.
Here’s the link: Alleghany Investor Day Presentation
And I noticed that they are killing insurance stocks now and Y is trading at 0.9x BPS. Well, OK, it’s September 2013 BPS but BPS should be up by year-end, and even the current stock market decline leaves the market higher than it was back then.
Y has been a pretty quiet company in the past, but due to the Transatlantic merger last year, it is becoming a more transparent company.
Y is one of the Berk-alikes, like Markel and some others. But these guys have been around for a long, long time.
Here are some snips from the presentation:
I like the fact that they are focused investors. Some may feel it is risky, but I lean towards the Buffett/Munger, Greenblatt school of focusing investments. It’s better to really know businesses well and when it’s attractively priced, piling in instead of buying a little of this and a little of that. There are managers that perform well with big, diversified portfolios, but I think those portfolios are filled with smaller cap names.
I don’t think it’s possible to outperform the indices by much with a diversified portfolio of large cap stocks.
As we’ve seen before, they have done pretty well over time:
Y has often said that they structure their equity portfolio to hedge against inflation risk as they have inflation risk on the insurance side and large fixed income portfolio.
I often run into people who are worried about inflation so want to sell their stocks or homes. They think about the short-term, immediate effect of inflation; inflation goes up -> interest rates go up -> asset prices go down. But they don’t think about the long term. In the short term, selling stocks and homes might look smart when interest rates go up. But over time, there is no guarantee they will be able to get back in when asset prices readjust to the higher price level.
All you need to look at are New York City property prices in the 1970s and now. Sorry, I don’t have any data handy, but ask the guy sitting next to you what a brownstone on the Upper West Side sold for in the 1970s and what it is selling for now (or ask Jim Rogers; he made a killing like that).
Anyway, Y uses their equity and private equity portfolio as an inflation hedge because they think about the long term. It’s important to keep that in mind.
In this environment, if Y can grow book at 7-10%/year, that would be great. They can obviously do better if an opportunity comes up along the way as they do have a lot of balance sheet fire power.
A 7-10% book value grower at 0.9x book sounds good to me.
Y, like Berkshire Hathaway, focuses on profitability and won’t write business just to grow premiums. It’s important that the employees are incentivized in that way instead of the CEO just talking the talk. There seems to be a lot of pressure in the reinsurance business (capital market solutions depressing prices, new hedge fund reinsurers coming in, Berkshire Hathaway expanding (but they will not write underpriced business)), so it is really important to know that Y will not get caught up in price wars and write business for the sake of writing business.
Their history of underwriting shows that they do walk the walk.
This is cool how they break down the investment operation of Alleghany. Just like at Markel, they have a private capital group that they hope will grow over time (this combined with Public Equity):
There are some new names here on the chart. Jack Liebau seems to be the new guy in charge of public equities. A quick googling shows that he started at the Capital Group, then PRIMECAP, and then eight years running his own firm (Liebau Asset Management; the 13F’s are available at the SEC website. It looks like his fund was a portfolio of 50-60 blue chip names (mostly)). He shut his firm in September 2011 and worked at Davis Advisors for two years before joining Y in July 2013. So he will be doing something a little different than he used to; going from diversified to a more focused approach. Let’s hope it works out!
I wonder what the incentive pay structure is for the portfolio managers. Since they’re not NEO’s, they probably don’t have to disclose that in the proxy.
This is an interesting way of illustrating their portfolio strategy, which applies to similarly structured companies (like MKL and BRK):
Their $2.0 billion equity portfolio comes to around 30% of their shareholders equity (of $6.7 billion). That’s a little lower than close to 50% at Markel. In the past, I think it was higher at Y; on a year-end basis it was as high as 52% in 2010 and 42% in 2007 while dipping into the low 20% in 2008 and 2009 (partly from equity price declines). I thought they would bump this up more after the merger with Transatlantic, but as we know from reading the annual reports in recent years, they are not particularly bullish on equities. But still, 30% is not too far out of range and is far higher than other insurance companies.
I like “intense fundamental research, concentrated positions, and long-term holding periods”!
I did see Apple stock in their filings before and was kind of surprised. To me, Apple is the sort of business that really long term guys would avoid since it is impossible to see what the industry would look like in ten years (or I would argue even five years).
I am familiar with the other names, but haven’t looked at American Homes (AMH); I will have to look at that. I just noticed that Blue Ridge Capital owns a big piece of it too. Hmm… this may be a future post here.
Here is a description of their private capital business. This is good because if the insurance market really doesn’t improve and the market stays soft for a long time, Y will be able to reallocate capital into their public or private equities. This gives them an advantage over other insurance companies (that may feel pressured to write business to stay in business).
I have been following this company for many years and really like it and I have owned a stake for a while, but a small one. I’ve never had a big position here even at book value as they seemed to be a bit too conservative for my taste.
Reading the annual reports gave me a feeling that they won’t be out doing much due to their bearish view. I do think they will make decent returns and won’t lose money in bad times, so it’s certainly a safe, conservative investment. But it just wasn’t something that I wanted to pile into.
But at 0.9x book (well, 0.9x outdated book; we will get 4Q and 2013 earnings soon), I think it is getting interesting.
They actually did the Transatlantic deal last year and some of the equity portfolio liquidation was related to that, so I guess it’s not fair to say that they aren’t doing anything.
Anyway, let’s see how this plays out.