Alleghany Is a Miniature Berkshire Hathaway. Its Inventory Is a Purchase.

7 mins read

Warren Buffett turned


Berkshire Hathaway

right into a juggernaut by taking earnings from the conglomerate’s insurance coverage operations and shopping for dozens of firms, together with the Burlington Northern Santa Fe railroad.

Below CEO Weston Hicks,


Alleghany

(ticker: Y) has used an analogous technique to create a sexy, smaller-scale model of Berkshire.

Alleghany has well-run property and casualty insurance coverage companies which are capitalizing on widespread business pricing positive factors. It has additionally accrued a various group of more and more worthwhile noninsurance divisions, together with metal fabrication, toys, and funeral merchandise.

Hicks, who turns 65 later this month, plans to retire at yr finish after 17 years as CEO. He will likely be succeeded by Joe Brandon, 62, an skilled insurance coverage govt who headed Berkshire’s Basic Re division from 2001 to 2008.

Alleghany shares, at about $674, commerce cheaply, at only a small premium to third-quarter e book worth of $644. That may be a low cost to rival


Markel

(MKL), which has an even bigger group of noninsurance companies. Markel trades for 1.3 occasions e book worth, and Berkshire (BRK.B), at 1.4 occasions.

“Alleghany is undervalued; it’s definitely price greater than e book worth,” says Matthew Carletti, an analyst at JMP Securities who has an Outperform ranking and a value goal of $800.

Carletti calls Alleghany’s largest division, TransRe, a “top-quartile reinsurer” and notes that firms just like RSUI Group, Alleghany’s specialty insurer, commerce for ample premiums to e book worth. One instance:


W.R. Berkley

(WRB). Reinsurers soak up dangers from major insurers like


Chubb

(CB) and


Vacationers

(TRV).

Alleghany Capital, the gathering of noninsurance models, has generated $175 million of web revenue over the previous 12 months. Alleghany Capital might be price greater than $2 billion, or double its carrying worth. Carletti derives his value goal from a sum-of-the-parts evaluation and values the inventory at a modest 1.1 occasions his year-end 2022 e book worth estimate.

Like Berkshire, Alleghany has a conservative steadiness sheet and maintains a low public profile. It doesn’t maintain quarterly earnings convention calls. Over time, Hicks has written a wide-ranging and insightful annual shareholder letter, sending his closing missive with the corporate’s third-quarter earnings on Thursday.

Alleghany doesn’t pay common dividends, preferring buybacks and occasional particular money dividends, together with a $15-a-share fee in 2020. The corporate has purchased again about 2% of its inventory in 2021.

Its shares are cheap on account of losses from hurricanes and different catastrophes in recent times which have depressed outcomes at its insurance coverage models, significantly TransRe. With Hurricane Ida, European summer time flooding, and different pure disasters, this yr might be one of many 5 costliest for international reinsurers on this century, says Fitch Rankings.

Alleghany is predicted to earn $46.25 a share this yr, up from $15.89 in 2020, excluding positive factors on its fairness portfolio and different changes. Subsequent yr is predicted to be higher, due to widespread insurance coverage value will increase. Carletti is projecting $70 a share.

The corporate goals to ship 7% to 10% annual development in e book worth. Previously 5 years, nevertheless, it has fallen quick, at 6% yearly. Nonetheless, it has averaged 8% throughout Hicks’ tenure as CEO. “We will do a greater job than we’ve completed over the previous 5 years, and we are going to,” Hicks tells Barron’s. “We’ve got a shot at rising e book worth 10%-plus subsequent yr.”

Brandon notes that traders have “left the reinsurance business for lifeless” after years of huge disaster losses. That has depressed Alleghany’s valuation, which Brandon sees as a possibility, given a greater outlook at TransRe because it cuts disaster threat and will get larger charges.

Firm / Ticker Latest Worth YTD Change Market Worth (bil) 2021E EPS 2021E P/E 2022E P/E Worth/Guide 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; firm studies

Property and casualty insurance coverage pricing is enhancing extensively, as insurers search to offset larger weather-related losses and low rates of interest. Pricing is powerful significantly for RSUI, a supplier of extra and surplus insurance coverage, which includes nonstandard insurance policies protecting such purchasers as multifamily property homeowners within the Southeast and nonprofit organizations. RSUI, as an illustration, points legal responsibility protection to a New York development firm for cover in opposition to accidents like a crane collapse.

The reinsurance market has additionally been sturdy, with Fitch just lately projecting double-digit will increase in property premiums for 2022. Alleghany has lowered its publicity to property losses to mitigate the impression of climate. TransRe’s premium revenue rose 20% within the third quarter, relative to the yr earlier, and by an analogous quantity within the first 9 months of 2021.

One of many two most essential companies inside Alleghany Capital is Jazwares, a prime 10 toy maker with owned and licensed manufacturers together with Fortnite and Squishmallows. Income this yr ought to prime $800 million, greater than double the 2019 stage.

The opposite is W&W/AFCO Metal, a number one metal fabricator and erector for big and infrequently complicated development initiatives, just like the Sphere leisure venue in Las Vegas, the Hudson Yards improvement in Manhattan, and Tesla’s Nevada Gigafactory. It’s additionally the No 1. metal fabricator for U.S. bridges.

With a greater insurance coverage market, an missed Alleghany appears to be like set to begin compounding e book worth at about 10% yearly and regain investor favor.

Write to Andrew Bary at andrew.bary@barrons.com

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