Saturday, February 27, 2010

Operating like Berkshire Hathaway: Alleghany Corporation

While most eyes have been on Berkshire Hathaway ($BRKA), ($BRKB) lately and rightly so. Their are other companies that operate in a similar fashion to Berkshire one being Alleghany Corp. ($Y) . Alleghany is one of those companies that fly under the radar. Alleghany is an insurance company that takes the "float" (which is money that doesn't belong to the company, but are premiums taken in from policy holders and paid out to policy holders). Alleghany's principal business is insurance, however with the access to this float (or cash) they reinvest the money in other businesses, much like Berkshire does. Alleghany has over 60 publicly traded company's amongst its investment portfolio.

"Alleghany's objective is to create stockholder value through the ownership and management of a small group of operating businesses and investments, anchored by a core position in property and casualty insurance. Alleghany is managed by a select company staff which seeks out attractive investment opportunities, delegates responsibilities to competent and motivated managers, defines risk parameters, sets management goals for its operating businesses, ensures that managers are provided with incentives to meet these goals, and monitors their progress.

The operating businesses function in an entrepreneurial climate as quasi-autonomous enterprises.

Conservatism dominates Alleghany's management philosophy. Alleghany's philosophy shuns investment fads and fashions in favor of acquiring relatively few interests in basic financial and industrial enterprises that offer the potential to deliver long-term value to the investor."

An interesting fact is that these guys at Alleghany were in Burlington Northern Santa Fe long before Buffett & Co. They have since divested their shares in Burlington and now hold over $825 million in cash in which they can use for future investments. Also they have NO debt and have managed to weather the last couple years quite well. They like Buffett use book value as their yard stick and not the actual price of the stock. The stock ($Y) trades at a discount to its current book value of $306.71.

We shun investment fads and fashions in favor of acquiring relatively few interests in basic financial and industrial enterprises that offer the potential to deliver long—term value to the investor... Alleghany Corporation

Author currently long $Y


  1. What do you make of the low return on equity? Are there hidden assets here that don't get captured well by the tangible book value?

  2. David,

    Their low ROE could be due to several factors. For one the insurance underwriting business as a whole has fallen off due to the competitiveness and the economics. Also their operating companies.

    Berkshire and Markel who operate in similar fashion also currently have low ROE's.

    They do have part ownership in several private concerns and some mixed use Real Estate on the west coast.

  3. Both Companies maintain much higher cash positions then some investors would consider prudent; however in down markets where cash is king it makes sense. When equities can be bought at a bargain and you don't have to sell-off losing stocks in your portfolio; You position yourself to buy low and sell high. Investing 101, the reason that both Berkshire and Alleghany are so successful they adhere to simplistic investment principles. Alleghany sold off Burlington Northern and now is seeking undervalued stocks that enable them to reap huge rewards for their stockholders.

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