I have to say, my Seven-One Insurance Cherry was popped recently and with increased work assignments, blogging became "Cleaning out the Garage" type of work. For that, I sincerely apologize.
Now onto more topics of substance and less self-sorrow.
Insurance businesses are Cheap. Not just cheap, but utterly cheap. From a long-term perspective, you have to love the prices offered for certain insurance businesses. And make no mistake, this is not an endorsement for the plain-vanilla shops like XL or AIG, readers of this blog can use the search function to understand my distaste on the two.
As we look back 3-years ago, XL had a market cap of 10.4B and at 1.34 P/Book and AIG has a market cap of 142B and a P/Book of 1.77- my have the mighty fallen.
Today, AIG has a market cap of 65B and .84 P/Book, making comparisons worse, XL has a market cap of 3.56B and .41 P/Book.
Some vulture buyers in the insurance industry are about to go on a feast soon. The best part is some of these blood-smelling sharks are flush with cash and are trading at book. Cost of capital is the oxygen to an insurance business, with swift credit rating downgrades, cost of capital has the same type of damage as pulling a boat on a Miata. Even better, it's not insurance losses that is destroying the cost of capital structure, it is their investment portfolios. Which means, most insurance company's with valuable franchises are very much profitable as stand-alone shops.
Usually, the vulture buyers buy an under performing insurance franchise/sub because of their belief that having the right management could turnaround the operations. With the most recent investment portfolio problems of certain company's, some profitable insurance franchises look rather unprofitable.
Take for example, Alleghany Corp. (Y), last Monday a purchase was made in the unknown-untold-unreported section, Allied made a purchase for Darwin Professional. Alleghany owns 55% equity position in Darwin worth approximately 300million based on the Allied purchase price. The terms were fair (P/Book 2) and in a market where a bird in a hand is worth two in the bushes, I was pleased to see Alleghany with extra bullets.
These guys were purchasing Burlington Northern in the teen's and have started to sell their position in the last two years. The chances of Alleghany making an imprudent capital allocation decision are low. Not zero, just low. They were already well capitalized and based on the Darwin sell, now over-capitalized in a market full of purchase potential. Needless to say, the 55% Darwin position at the beginning of the year was a little more that 45% less than the 300million Alleghany will receive once the deal closes.
Another reason why I have a favorable view of Alleghany is the tax/shareholder friendly dividend. For every 50 shares you own, you get 1 share. Wall Street doesn't know anything about Alleghany conference calls, management doesn't like them. And our other friend Uncle Sam, the worst capital allocating pseudo hedge fund doesn't need to know.
With that in mind, I think you have to evaluate and make your own decisions based on what works best for you. Alleghany makes a lot of sense to me and most recently I've increased my position. There's a funny story actually, a few weeks ago, I was talking to a friend about how I missed a fat-pitch. Earlier this year, I purchased a 1/10th position at 340. For four months, I wasn't willing to pay a higher price than my estimated book value (345) at the time. Why?
Simply because valuable insurance franchises with equity centered investment portfolios and outstanding qualified management at book is a damn good deal.
Take for example the paragraph you see when you go to the company website:
"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."
(Emphasis mine)
If that statement doesn't peak your interest in any way, I'm sorry to have disappointed you.
I don't think there is a 50% margin of safety here, however I also don't think there is zero margin of safety. Once they report their latest results, I'm all ears.
That's it for today. Next week, I'll take a shot at looking over some highlighting/underlining marks I made for the most recently reported numbers by insurance company's (of interest).
Until then, hopefully everyone had a safe 4th of July weekend. We live in a great country. Although I'm not the owner of patriotic boxers, I share with you a story that rings loud to the great tradition of this country.
I moved to the states at the age of 7 from overseas. My first language was Farsi, some now confuse Farsi being my second language. In fifth-grade, one morning, after saying the Pledge, my teacher asked me to stand up.
When I did, I was asked: "Are you a citizen?"
The answer at the time: "No"
Next question was: "Do you have a green card?"
Again, the answer was: "No"
My teacher then proceeded onto making a comment I have come to love and respect throughout the years: "Well Shahin, every morning you are the first one stand up for the pledge, and I respect that very much."
Fast forward to now, and I share a great affection for this country and the people whom have greeted me with open arms.
And so it goes, we live in a great country. Happy 4th.
S.K.
