Warren Buffett turned Berkshire Hathaway into a juggernaut by taking profits from the conglomerate’s insurance operations and buying dozens of companies, including the Burlington Northern Santa Fe railroad.
Under CEO Weston Hicks, Alleghany (ticker: Y) has used a similar strategy to create an attractive, smaller-scale version of Berkshire.
Alleghany has well-run property and casualty insurance businesses that are capitalizing on widespread industry pricing gains. It has also accumulated a diverse group of increasingly profitable noninsurance divisions, including steel fabrication, toys, and funeral products.
Hicks, who turns 65 later this month, plans to retire at year end after 17 years as CEO. He will be succeeded by Joe Brandon, 62, an experienced insurance executive who headed Berkshire’s General Re division from 2001 to 2008.
Alleghany shares, at about $674, trade cheaply, at just a small premium to third-quarter book value of $644. That is a discount to rival Markel (MKL), which has a bigger group of noninsurance businesses. Markel trades for 1.3 times book value, and Berkshire (BRK.B), at 1.4 times.
“Alleghany is undervalued; it’s certainly worth more than book value,” says Matthew Carletti, an analyst at JMP Securities who has an Outperform rating and a price target of $800.
Carletti calls Alleghany’s largest division, TransRe, a “top-quartile reinsurer” and notes that companies similar to RSUI Group, Alleghany’s specialty insurer, trade for ample premiums to book value. One example: W.R. Berkley (WRB). Reinsurers absorb risks from primary insurers like Chubb (CB) and Travelers (TRV).
Alleghany Capital, the collection of noninsurance units, has generated $175 million of net income over the past 12 months. Alleghany Capital is probably worth more than $2 billion, or double its carrying value. Carletti derives his price target from a sum-of-the-parts analysis and values the stock at a modest 1.1 times his year-end 2022 book value estimate.
Like Berkshire, Alleghany has a conservative balance sheet and maintains a low public profile. It doesn’t hold quarterly earnings conference calls. Over the years, Hicks has written a wide-ranging and insightful annual shareholder letter, sending his final missive with the company’s third-quarter earnings on Thursday.
Alleghany doesn’t pay regular dividends, preferring buybacks and occasional special cash dividends, including a $15-a-share payment in 2020. The company has bought back about 2% of its stock in 2021.
Its shares are inexpensive as a result of losses from hurricanes and other catastrophes in recent years that have depressed results at its insurance units, particularly TransRe. With Hurricane Ida, European summer flooding, and other natural disasters, this year could be one of the five most costly for global reinsurers in this century, says Fitch Ratings.
Alleghany is expected to earn $46.25 a share this year, up from $15.89 in 2020, excluding gains on its equity portfolio and other adjustments. Next year is expected to be better, thanks to widespread insurance price increases. Carletti is projecting $70 a share.
The company aims to deliver 7% to 10% annual growth in book value. In the past five years, however, it has fallen short, at 6% annually. Still, it has averaged 8% during Hicks’ tenure as CEO. “We can do a better job than we’ve done over the past five years, and we will,” Hicks tells Barron’s. “We have a shot at growing book value 10%-plus next year.”
Brandon notes that investors have “left the reinsurance industry for dead” after years of large catastrophe losses. That has depressed Alleghany’s valuation, which Brandon sees as an opportunity, given a better outlook at TransRe as it cuts catastrophe risk and gets higher rates.
On the Alleghany Trail
How Alleghany's key metrics compare.
| Company / Ticker | Recent Price | YTD Change | Market Value (bil) | 2021E EPS | 2021E P/E | 2022E P/E | Price/Book Ratio |
|---|---|---|---|---|---|---|---|
| Alleghany / Y | $653.75 | 8.3% | $9.0 | $46.25 | 14.1 | 9.7 | 1.0 |
| Markel / MKL | 1,300.76 | 25.9 | 17.8 | 57.68 | 22.6 | 18.1 | 1.3 |
| W.R. Berkeley / WRB | 79.39 | 20.4 | 14.0 | 4.81 | 16.5 | 15.2 | 2.1 |
E=estimate
Sources: Bloomberg; company reports
Property and casualty insurance pricing is improving widely, as insurers seek to offset higher weather-related losses and low interest rates. Pricing is strong particularly for RSUI, a provider of excess and surplus insurance, which involves nonstandard policies covering such clients as multifamily property owners in the Southeast and nonprofit organizations. RSUI, for instance, issues liability coverage to a New York construction company for protection against accidents like a crane collapse.
The reinsurance market has also been robust, with Fitch recently projecting double-digit increases in property premiums for 2022. Alleghany has reduced its exposure to property losses to mitigate the impact of weather. TransRe’s premium income rose 20% in the third quarter, relative to the year earlier, and by a similar amount in the first nine months of 2021.
One of the two most important businesses within Alleghany Capital is Jazwares, a top 10 toy maker with owned and licensed brands including Fortnite and Squishmallows. Revenue this year should top $800 million, more than double the 2019 level.
The other is W&W/AFCO Steel, a leading steel fabricator and erector for large and often complex construction projects, like the Sphere entertainment venue in Las Vegas, the Hudson Yards development in Manhattan, and Tesla’s Nevada Gigafactory. It’s also the No 1. steel fabricator for U.S. bridges.
With a better insurance market, an overlooked Alleghany looks set to start compounding book value at about 10% annually and regain investor favor.
Write to Andrew Bary at andrew.bary@barrons.com
Alleghany Is a Miniature Berkshire Hathaway. Its Stock Is a Buy. - Barron's
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