Alleghany (Y) just recently posted their 2012 annual report. The past year was transformational for Alleghany as it acquired TransRe on March 6, 2012, for approximately $3.5 billion at a discount to book value. With the transaction, Alleghany more than doubled shareholder’s equity and investments per share increased by about 86%.
To summarize Alleghany’s performance:
Alleghany’s common stockholders’ equity per share at year-end 2012 was $379.13, an increase of 10.8% from common stockholders’ equity per share of $342.12 at year-end 2011.… For the five years ended December 31, 2012, Alleghany’s common stockholders’ equity per share increased at a compound annual rate of 6.1%, compared with a compound annual rate of return of 1.6% for the S&P 500 over the same time period.…
For the ten years ended December 31, 2012, Alleghany’s common stockholders’ equity per share increased at a compound annual rate of 8.8%, compared to a compound annual rate of return of 7.1% for the S&P 500 over the same time period. Alleghany’s share price appreciated at an 8.5% compound annual rate of return over the past decade (adjusted for stock dividends).
What’s always interesting in the annual report is CEO Weston Hicks’ commentary. This year, Hicks talks a little about the difference between negative-skew business that is Alleghany’s insurance operations and the positive-skew side of Alleghany, which is the investment operations (whether it’s public equities or private companies).
As primarily an insurance and reinsurance holding company, most of our capital is invested in financial businesses where the best case is that we collect premium and are able to make an underwriting profit. The worst case is that we lose a lot of money if we fail to control risk properly. This is what Nassim Nicholas Taleb refers to as a “negative-skew business.”
Because this is the essential nature of financial businesses, they must be approached with a conservative mindset and an emphasis on underwriting profit, not growth, as the only viable long-term objective.
A key part of Alleghany’s strategy is to combine this (re)insurance chassis with “positive-skew” businesses. Such businesses may operate at a loss in the near-term, but have the possibility to make large amounts if the business is successful.
Hicks then goes to summarize his investment outlook, which is unclear due to central banks purchasing assets around the world at a furious pace. The stock market looks expensive based on historical standards, but is less overvalued than the bond market. Hicks then goes on to explain Alleghany’s heavy preference for oil an gas companies in its investment portfolio.
The last topic of the letter is on Alleghany’s philosophy on compensation for executives at the holding company and the executives of the operating subs.
The whole letter is definitely worth a read. Alleghany is a great insurance company that can be purchased at book value and which ought to more than double over the next ten years.