Y - Alleghany

[link01]

alleghany holdingds has their 2011 letter to shareholders out:

 

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

 

a few snippets of interest:

 

<<RSUI ended 2011 with cash and invested assets of $2.6 billion and $1.4 billion of

stockholder’s equity, after providing Alleghany with a $100 million dividend in 2011.

Alleghany’s initial investment in RSUI in 2003 was approximately $0.6 billion. At the end of

2011, RSUI had a book value of $1.4 billion, and the company has provided Alleghany with

dividends (net of capital contributions) of $0.3 billion. In short, our investment including

dividends now stands at $1.7 billion on a $0.6 billion initial investment, or almost triple.>>

 

<<PacificComp has cost us a lot of money. We acquired its predecessor company, Employers

Direct, for approximately $198 million in 2007. We subsequently contributed $90 million of

capital to the company, bringing our total investment to $288 million. At the end of 2011, our

investment in PacificComp was approximately $130 million. In short, we’ve lost $158

million, an outcome that was not in our strategic plan.

What went wrong? When we purchased the company, we knew that the California workers’

compensation market had seen peak profitability, but we thought the industry was on a

smooth glide path to more normal and sustainable profit margins. After all, several

responsible companies had solid, leading market positions in the industry, and legislative

reforms had curtailed runaway growth in claims costs. Soon after our acquisition, however, it

became clear that new entrants were aggressively cutting prices, and claims costs—which

had been well behaved for several years — began escalating relentlessly. Moreover, the

severe economic recession in 2008 made the situation worse. Finally, the market set prices

too optimistically, with Employers Direct being more optimistic than most, amplifying the

impact of these trends.

In 2009, the company exited the direct distribution model, and in 2010 we launched a brokers

distribution model under the “PacificComp” brand. Having found religion, PacificComp’s

prices were not competitive in the marketplace during most of 2010 and 2011. However, in

late 2011, this began to change. PacificComp, which previously was 25-30% above industry

pricing, found itself newly competitive, as capacity began to contract and competitors’ prices

rose. We are optimistic that market conditions in California workers’ compensation will

continue to improve, and that PacificComp will be able to write an increasing amount of

adequately-priced business in 2012.>>

 

<<Alleghany Capital Partners

A key part of Alleghany’s strategy is to create opportunities to invest capital in high potential

businesses with prospects that are unrelated to the broad commercial property and casualty

industry pricing cycle. We think we made a lot of progress in this regard in 2011.

Alleghany Capital Partners (“ACP”) has for several years produced returns on Alleghany’s

public equity portfolio that have exceeded the unmanaged return on the S&P 500. This alone

would justify its existence. However, in addition to producing market-beating returns, ACP

has identified and oversees a number of private investment opportunities for Alleghany. To

date, none of these investments has added to Alleghany’s earnings or book value, but we are

optimistic that they will as each company executes on its long-term plan. A brief summary of

key investments follows.

• Homesite is a fast-growing, technologically proficient homeowners insurance

company, of which we own 33%. Since our original investment in 2006 it has more

than doubled its premium volume. Equally impressive, Homesite has gained

considerable expense efficiencies, moving from an expense position that was

5%-points above industry averages to 5%-points below the average. Homesite has a

unique operating model, providing personal auto insurance companies with a

private-label homeowners product that improves their auto renewal retention with

no homeowners underwriting risk.

Homesite’s results were disappointing in 2011, primarily due to significantly

higher-than-average hail, tornado, and other weather-related claims. The company

is adjusting its pricing to reflect its recent claims cost experience and making a

number of underwriting changes as well. We are hopeful that these actions will

return the company to profitability in 2012.

7

• ORX Exploration is a Louisiana-based oil and gas exploration company in which

Alleghany owns a 38% interest. The company has secured and developed a number

of oil and gas resource opportunities. ORX has assembled a number of on-shore,

sub-salt drilling opportunities, called “the Louisiana Heritage Play,” that if

successful, could result in significant oil and gas production. In 2012, the company

will, in connection with a drilling partner, spud its second sub-salt opportunity.

• Stranded Oil Resources Corporation is a recently-established wholly-owned

subsidiary that will acquire mature, shallow oil fields and attempt to improve the

ultimate oil recovery through innovative oil recovery techniques.

• Article One Partners provides patent validation solutions to high technology

companies, among others, by using a crowd-sourcing model. Alleghany owns

roughly 33% of the company.>>

 

<<Investment Outlook

Investors are faced with an unattractive array of investment options today, ranging from no

return on short-term investments to a likely mid-single-digit long-term return on equities.

Moreover, the equity markets have been characterized by unusually high correlations of

returns for most stocks, with a handful of large companies producing double-digit returns to

their shareholders. If the returns on these large companies are excluded from the S&P 500

total return in 2011, equity returns were negative.

If we are correct in projecting that equities will return only mid-single digits over the next

5-10 years, it is unlikely that “buy and hold” investing will produce satisfactory returns.

Moreover, in today’s economy, there are very few companies whose securities are capable of

producing 10+% returns for their shareholders on a sustained basis; either competitive

pressure will erode returns, or the external environment will throw them a curve ball. Our

approach in this environment is to be more willing to take short-term profits, especially if

they appear to be largely macro-induced. In addition, we have an increasingly healthy respect

for the option-value of cash.>>

 

<<The financial crisis of 2008 marked the end of a roughly 25-year period of expanding credit

in the U.S., Europe, and Japan. Since 2008, governments have tried to offset the significant

deflationary pressures from widespread credit problems by propping up financial institutions

and expanding central bank and government balance sheets. Interest rates have been cut to

extremely low levels in an attempt to encourage borrowing and risk taking. It is not clear that

this will work— moreover, it will only work if the marginal propensity to consume by

borrowers is greater than that of savers. These dynamics create a much riskier investment

market; not only are expected returns low, but the “tails” of the return distribution have

widened.

Our investment strategy also reflects our view that the world has for all practical purposes

reached the point of “peak oil.” Although it is likely that there are plenty of hydrocarbon

resources left in the world, the cost of exploiting them is increasing due to complexity and an

increase in the amount of energy required to produce energy. As a consequence, global

liquids production has not increased materially since 2005. In economic cycles before peak

oil, economic contractions led to much lower oil prices, which acted as a tax cut and

stimulated economic growth. Now, because the marginal cost of oil supply is increasing each

year, the economy expands until oil prices reach a level that causes the economy to stall, but

then do not fall enough to reignite significant growth.

Finally, it is worth noting that China, which has been a major source of world economic

growth over the past decade, appears to be facing a less robust outlook. China’s international

reserves have begun to decline, reflecting declining exports to Europe and the U.S. Since

2008, much of China’s growth has been due to a massive real estate spending spree.

As if sovereign debt problems weren’t enough, investors must also consider the rising

tensions in the Middle East and their potential impact on global economic growth. In early

2012, tensions with Iran appear to be rising, and Syria is increasingly unstable. Moreover, the

move by most of the international community to ban the import of Iranian oil may result in

unintended consequences — including encouraging trade in other currencies or gold.

Perhaps the only positive news in the outlook is that the U.S. economy appears to be

improving, with moderate employment growth, gradually expanding manufacturing, and

expanding bank credit. However, the stock market appears to have already largely discounted

this, rebounding sharply from depressed levels in the third quarter of 2011. In order for

equities to produce significantly higher returns from current levels, global economic growth

would need to accelerate, an outlook that seems unlikely (but not impossible) given sovereign

balance sheet problems, the low quality of Chinese economic growth, and instability in the

Middle East.

We continue to conduct extensive research on a number of high quality companies in

industries with solid long-term fundamentals. Our overall equity exposure, however, is quite

low at present — something that we feel is appropriate given all of the above.

We maintain a significant overweight position in energy stocks, with large positions in

several largely domestic oil and gas producers. There are several reasons for this portfolio

construction. First, as a company with mostly financial assets on its balance sheet, we believe

that it is prudent to have some capital exposed to companies whose fortunes are tied to

commodity prices. Second, while difficult to quantify, geopolitical risks related to the Middle

East appear to be rising. Finally, our research has led us to the conclusion that “peak oil” is

real and the marginal cost of incremental hydrocarbon supply is rising globally, a trend that

we believe will continue for the foreseeable future.>>

 

<<Outlook

The acquisition of Transatlantic will significantly change Alleghany’s earnings and growth

prospects. Prior to this acquisition, Alleghany had just over $500 a share of invested assets,

net of corporate debt. This figure will double with the acquisition of Transatlantic. With over

$1,000 per share of cash and invested assets, net of debt, each 1%-point of return after-tax

equates to $10 of earnings per share. Although low market interest rates will continue to

pressure our earnings, from a longer-term point of view the earnings leverage from invested

assets is clearly significant.

Additionally, Alleghany and Transatlantic will have approximately $4.5 billion of net

premiums earned once the merger is completed. Each percentage-point in underwriting

margin equates to roughly $1.75 per share of earnings after-tax.>>

 

and finally, it appears that joe brandon will play a big role in alleghany's post trans-atlantic merger future:

 

<<Effective with the closing of the Transatlantic merger, Joe Brandon will join Alleghany as

Executive Vice President, and will hold the positions of Chairman of Transatlantic Holdings,

Inc. and President of Alleghany Insurance Holdings LLC, our downstream insurance holding

company. Having known Joe for over 15 years, I am extremely pleased that he has decided to

join the Alleghany team as my partner. Joe will be primarily responsible for the oversight of

Alleghany’s insurance and reinsurance subsidiaries and will work with me and the Alleghany

board in the strategic development of the company.>.

 

 

[link01]

i've recently seen some signs pointing up in the beleaguered workers comp industry. if so that would give some much welcomed tailwind to several pc insurers that have bought w/c subs in the last couple of years like alleghany (a lot too early compared to the others), as well as ffh w/ zenith, & mkl w/ mercury.

 

of course, there's still p/c & p/c re to worry about. the size & frequency of natural disasters still seems to be on a confoundingly sharp rise. and thats a worry for all unless you're brk or lre.

 

i'm especially curious to see how big joe brandons role will be in fine tuning Y's insurance ops as new chairman/president of the combined insurance division, & how agressively he puts his imprint on it.

[Guest hellsten]

Alleghany's first quarter results:

http://www.alleghany.com/media/pdf/pressreleases/Releasefinal.pdf

 

Stockholders’ equity increased to approximately $6.2 billion as

of March 31, 2012, compared with approximately $2.9 billion as of December 31, 2011, reflecting both

the merger and Alleghany’s net earnings in the 2012 first quarter.

On a consolidated basis including Transatlantic, Alleghany ended the 2012 first quarter with cash

and invested assets of approximately $18.0 billion, compared with $4.9 billion at December 31, 2011. 

 

The total return on the investment portfolio, excluding other invested assets, for the 2012 first quarter was

2.4%, including returns of 1.0% on the fixed income portfolio and 9.7% on the equity portfolio.

 

Alleghany’s consolidated combined ratio for the 2012 first quarter was 76.9%, compared with

76.0% during the corresponding 2011 period.

 

10-Q:

http://www.alleghany.com/sec-documents/10-q-reports/2012/05/7/2012-first-quarter-report-10176.pdf

[Guest hellsten]

Michael Price and MFP Investors initiated a 4% position in Alleghany in Q1, 2012:

http://www.dataroma.com/m/holdings.php?m=MFP

 

I think it's interesting to see him buy such a big position in Alleghany, and Transatlantic Holdings; formerly a subsidiary of AIG.

 

He also has small positions in BAC and ABH, and used to own AIG. All three seem to be a lot more popular on this board than Alleghany.

 

Michael Price's publicly stated goal is to achieve 15% returns, this plus the merger with Transatlantic Holdings, is my guess why he bought Alleghany.

[ShahKhezri]

I own it, I think bright days are ahead.

[Guest hellsten]

GoodHaven Capital's presentation from Value Investing Congress on Alleghany and White Mountains:

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

 

On Alleghany (Y)

•    Strong capital allocators. Main business is transatlantic holdings, RSUI, Capitol Transamerica, Pacific Compensation, Alleghany Capital Partners, and Alleghany Properties.

•    Alleghany – acquisition of Transatlantic Holdings

•    Board change and estate and concentration of ownership.

•    Normalized earnings are at least $35 per share and may be as much as $60 per share.

•    Risks: potential Transatlantic reserve inadequate, large property cat loss, raid rise in interest rates before repositioning.

 

On White Mountains Insurance (WTM)

•    Strong capital allocators. Have 75% of OneBeacon, 100% of Sirius Group, 20% of Symetra, 100% of White Mountain Advisors.

•    White Mountains sold esurance

•    Last 3 years good but not great exposure (profitable underwriting)

•    Buybacks are hard to ignore from $500 down to 425.

•    Shares declining over last 5 years from over 10MM now to just under 7MM.

•    Singleton and Teledyne – “largest share shrink in Wall Street history”

•    Franklin Mutual is 26.4% of firm, ex CEO controls 10%

•    Est. of normalized earnings power is $65 to $85 per share.

•    Risks: Foolish capital allocation, larger than expected reinsurance exposure

 

Comments on BAC and AIG:

Have you looked at financials? Stayed away from unknowable factors at the large companies (AIG & BAC).  No opinion on AIG.

[link01]

thx for posting the goodhaven presentation, btw.

i'm mildly surprised that no mention was made of joe brandon's role as a significant potential value driver going forward in the combined insurance ops, tho

[james22]

... at 0.9x book (well, 0.9x outdated book; we will get 4Q and 2013 earnings soon), I think it is getting interesting.

 

http://brooklyninvestor.blogspot.de/2014/02/alleghany-corp-investor-day.html

[txlaw]

Alleghany recently presented at BofA's Insurance Conference:

http://www.alleghany.com/eventsandpresentations/

 

It's well worth listening to the call if you're invested in them. 

 

 

[Guest wellmont]

Michael Price and MFP Investors initiated a 4% position in Alleghany in Q1, 2012:

http://www.dataroma.com/m/holdings.php?m=MFP

 

I think it's interesting to see him buy such a big position in Alleghany, and Transatlantic Holdings; formerly a subsidiary of AIG.

 

He also has small positions in BAC and ABH, and used to own AIG. All three seem to be a lot more popular on this board than Alleghany.

 

Michael Price's publicly stated goal is to achieve 15% returns, this plus the merger with Transatlantic Holdings, is my guess why he bought Alleghany.

 

my guess is he bought TRH. you recall it was "in play".  they ended up doing a stock deal with Y.

[james22]

Kind of surprised they haven't been hurt by their energy portfolio.

 

Keep hoping they'll drop to an attractive entry point.

[frommi]

Kind of surprised they haven't been hurt by their energy portfolio.

 

How do you know that?

[james22]

+18% YTD

[frommi]

+18% YTD

 

Oh, i see. I thought you were talking about bookvalue/intrinsic value.

But with 10y interest rates down from 3% to 2.2% its not really a surprise to see a lot of insurance companies with a bondportfolio beating the market this year. Their equity securities are only a small part of the bookvalue and the energy exposure is only a small part of that.

 

 

[james22]

You are correct, of course.

 

I just remember Alleghany being thought of as a way to play the energy boom several years back and so tend to think it more correlated than it obviously is.

[kab60]

Do any of you guys know the average bond duration of Alleghanys holdings? I've been looking at adding either Markel or Alleghany to my portfolio as a permanent holding, but whereas Markels bonds have a short duration I'm not sure about Alleghany and I don't remember I've seen it anywhere. Just wondering how it'll fare in an environment with increasing rates.

 

Also, I came across this from Goodhavens analysis: "Risks: potential Transatlantic reserve inadequate, large property cat loss, raid rise in interest rates before repositioning." (but that was back in 2012 - any idea if that concern is still valid?)

 

As James I was looking for a better entry point que to their O&G exposure (and hoping it would be reflected in a lower price), but as frommi noted their equity holdings are just a minor part of their total portfolio so that might be wishful thinking.

[frommi]

I think it was 2-4 years average duration. They added around 400 million $ in long term bonds at the start of the year as a hedge for the equity portfolio, that was a smart move in hindsight. (its in the 2013 annual letter)

 

Just found it here http://www.alleghany.com/files/doc_presentations/Y_Investor_Presentation_10_Jun_14.pdf : Average duration 4.2 years.

[A_Hamilton]

I think it was 2-4 years average duration. They added around 400 million $ in long term bonds at the start of the year as a hedge for the equity portfolio, that was a smart move in hindsight. (its in the 2013 annual letter)

 

Just found it here http://www.alleghany.com/files/doc_presentations/Y_Investor_Presentation_10_Jun_14.pdf : Average duration 4.2 years.

 

They dumped the long bonds early. Deflation tourists.

[frommi]

They dumped the long bonds early. Deflation tourists.

 

Thanks, i missed that.

[Nnejad]

I think it was 2-4 years average duration. They added around 400 million $ in long term bonds at the start of the year as a hedge for the equity portfolio, that was a smart move in hindsight. (its in the 2013 annual letter)

 

Just found it here http://www.alleghany.com/files/doc_presentations/Y_Investor_Presentation_10_Jun_14.pdf : Average duration 4.2 years.

 

They dumped the long bonds early. Deflation tourists.

 

Favorite phrase of 2014.

[A_Hamilton]

I think it was 2-4 years average duration. They added around 400 million $ in long term bonds at the start of the year as a hedge for the equity portfolio, that was a smart move in hindsight. (its in the 2013 annual letter)

 

Just found it here http://www.alleghany.com/files/doc_presentations/Y_Investor_Presentation_10_Jun_14.pdf : Average duration 4.2 years.

 

They dumped the long bonds early. Deflation tourists.

 

Favorite phrase of 2014.

 

Happy to have snuck it in before the year is up!

[benbuffett]

It looks like he initiated that TRH position between 2nd and 3rd quarters of 2009 and exited the position as Alleghaney (Y) between 2nd and 3rd quarters 2014.

[benbuffett]

Seems like they (Stranded Oil Resources) an Alleghany Company bought this for a song... paying 45 million for 9500 acres. 

 

http://www.prnewswire.com/news-releases/alleghany-capital-corporation-announces-acquisition-of-teapot-dome-oilfield-by-stranded-oil-resources-corporation-300028515.html

 

The Teapot Dome field has produced 28.5 million barrels of oil and has an estimated 300 million barrels still in place underground.

Stranded Oil specializes in enhanced recovery, or recharging depleted fields with techniques such as injecting carbon dioxide underground.

 

Any thoughts on this?

 

Ben Buffett

[Txvestor]

It seems too small to make a material difference to Y, considering the relative sizes involved. But on paper it sure does seem to be a nice deal.

[benbuffett]

Alleghany  exits CVX which was one of their largest equity positions. Takes a third off the table on WMB another large holding. Also reducing some of their other energy holdings.

Adding to Boeing and Hershey.

Ups Google.