Alleghany Annual Report 2013

Alleghany (Y) just put out their annual report for 2013, but before that let's take a quick look at something else.

Not long after my post on Alleghany's (Y) investor day, Weston Hicks presented at a Merrill Lynch conference.  I think it's the first time I've ever heard him speak so it was pretty interesting (I wasn't there; I just listened to the replay).

You can get a link to the presentation at Y's website:  Presentation

For anyone interested in Y, it's definitely worth a listen.  It's pretty short too (unlike, say, the JP Morgan investor day; not complaining about that.  The more info there is, the better!).

Hicks talked about the history of Y.  I guess it sort of shows us why they are so conservative (they survived this long because of that conservatism).

Here are some interesting slides from the presentation:

Y CEO's tend to be CEO's for a long, long time.  This obviously is important as it leads to CEO actions that are long term in nature.

...and they have been in various businesses over the years according to what made sense at the time:

...and here are the keys to Y's success:

Burns is right, there is nothing wrong with getting rich slowly.  I suppose that was thrown in there to counter views that Y is too boring and conservative (who said they are boring and too conservative?  Did I say that?).  But yes, there is nothing wrong with being a tortoise.  As Buffett says, to finish first, one must first finish.

And here is the value proposition of Y which applies to other Berk-alikes:

And here's an interesting quote that he showed during the presentation which went into the annual report too:

And the evolution of Y over the past decade (pretty much since Hicks took over):

As I mentioned in my last recent post, the investment team has been regrouped and renamed (Roundwood is a new name; Roundwood is named after Roundwood Manor, the home of the Alleghany Corp founders).

One year doesn't prove anything, but the equity portfolio performed well in a big year for the stock market despite being only 80% or so invested.   I do like that they will keep the number of positions below 25 with low turnover.  That seems to me a good idea.  It did say in the annual report that Y has invested with Jack Liebau before with good results.

...and here's the private business group:

Here's an interesting chart.  There is more in the annual report which I'll talk about later, but in the presentation he showed the rolling five year returns of Y's book value compared to the S&P 500 index.  Berkshire Hathaway (BRK) showed a similar thing in a table a while back.

Hicks jokingly said "no comment" about the last time Y underperformed the S&P 500 index on a five-year basis (which was in 2007).  Y underperformed dramatically in the five years through 2013.  I don't think too many rational investors care about that since the five year return on the S&P 500 index is obviously a result of the financial crisis low and quick recovery thanks to the Fed and not representative of what the S&P 500 index can do going forward.

Y's stock price has barely outperformed the S&P 500 index over the past decade, and their book value outperformed by only 1.1%/year.  That's not that exciting, but as Y explains later in the annual report, they have achieved this with a much lower risk profile.


2013 Annual Report
Y grew book value per share +8.9% to $412.96/share in 2013.  The five year increase in BPS was +9.1%/year versus +17.9%/year for the S&P 500.  But we'll get to the discussion about this a little later.

But first, some interesting cut and pastes from the letter to shareholders:

I like the way they present change in shareholders' equity.  It's easy to understand what drove the change in net worth in the past year:

And here's a new table that breaks out ROE and book value growth contribution by group.  This is a nice way to present it.  We can see the investment return figures separately too so we get a good idea on what is driving the growth at Y.

Whale Trade!?
OK, I'm kidding about a whale trade, but you'll see what I mean in a second.  There was a very interesting change in this year's annual report.  As I've said in other posts (unrelated even to Y), Y has over the years explained that they seek equity and private business investments to sort of hedge their interest rate exposure as they saw inflation as inevitable.

But this year, I think for the first time, they said they are worried about deflation.   There is talk about demographics, world trade, possible spike in energy prices causing a recession, robots and other deflationary forces (not to mention too much debt around the world).

So they have an equity portfolio as they worried about inflation (well, that's not the only reason why they own equities).  The equity portfolio was sort of an inflation/interest rate hedge.  And now, they are worried about deflation, so they went out and bought zeroes to hedge against deflation.  So that's kind of like hedging your hedge, isn't it?   Isn't this how J.P. Morgan got into trouble?  They had a hedge on, but then they had too much of a hedge so they put on a hedge against their hedge.  And it turned out their hedge against their hedge wasn't really a good hedge, and that sort of blew them up.

I wrote about the risk of increasing complexity in a portfolio; it happens all the time.  I called it the Rube Goldberg portfolio (read here).

In situations like this, sometimes what happens is that you get surprise inflation and the stock market tanks along with the zeroes.  What can go wrong usually does in the financial markets!  Inflation driven by economic recovery would be OK, but it can also be driven by exogenous events. Who knows what that might be.

But OK.  The whale trade comparison is overkill here.  Insurance companies routinely manage their duration according to interest rate expectations (as do banks with their ALM) so this is just a part of that, I suppose.  Let's call it a tail hedge (hedge against fat tail events).

I wonder what out-of-the-money, long dated call options on zeroes are trading at?  Maybe that would've been a low cost tail hedge.  With so much expectation of rate normalization, I can't imagine them being overpriced.

Anyway, moving on.


Equity Valuations
I talk about equity valuations here every now and then, but I don't really obsess over it.  I actually don't care as those things are only meaningful at the extremes.   If I see extreme valuations and many signs of speculation/bubble, then of course I get a little worried.  But I still focus on individual companies so don't worry too much about it.

Having said that, I am interested in what others have to say about valuation, and Hicks does mention it in his letter:

I too worry about unsustainable profit margins sometimes, but I notice that a lot of companies have exited commodity businesses and are moving more into specialty, higher margin areas.   This is why I think it's really important to look at this stuff on a company by company basis.

Y's equity portfolio did well:

Risk-Adjusted Return of Y
So here's an interesting take on Y's performance over the past decade:

This is an interesting analysis.  I think much of Y's book is marked to market unlike, say, BRK, which has a large portfolio of businesses that is not.  In that sense, this may be a fair analysis, at least in terms of comparing Y to the S&P 500 index.  But then this would invite similar comparisons to other companies; how does Y fair against them using the same metric?  I bet Markel would look pretty good.  JP Morgan would probably look pretty good too.

The letter concludes:

Conclusion

So, just within the past few weeks, we get to see much more of Y.  I think the 2013 letter is one of the best for Y, and the presentation material from the investor day and Merrill Lynch conference is really good too. 

Stanley Druckenmiller ranted about how hedge funds these days talk about "risk-adjusted" returns.  He thinks that's really pathetic; in his day, they were expected to earn 20-30% or more year in and year out no matter what the markets did.  These days, high fee funds earn single digit returns and tell people that the returns are good on a "risk-adjusted" basis.   He calls that nonsense. 

So looking at it that way, it looks sort of like Y pulled out this "risk-adjusted" thing to set itself apart from the S&P 500 index.  So if some people criticize that, it's understandable. 

But I also do get Y's point of view.  They are and have been very conservative in their management over the years (read their letters to shareholders).  So it's true that it is not bad that they kept up with the market (over ten years) despite what I would call an overly conservative stance. 

And to illustrate the value of their conservatism, Hicks reached back into the history of Y; they have survived for so long because of it.  If that's too boring, too bad.  Better boring than dead.

I really like what is happening there, though.  I have argued in the past that companies that don't earn a ROE higher than 10% isn't worth much more than book value and I still sort of feel that way. But if the ROE is close to 10% conservatively managed with upside according to normalization of interest rates and other things, then maybe it's not so bad.  We are not talking about a business that is taking a lot of risk and reaching for a 10% ROE.  It's a conservatively managed 7-10% in a 3% interest rate world with possible upside depending on how things develop.  That's a big difference.  In the fixed income world, you would have to dip down into the lower credit ratings to get a 7-10% return. 

So in that sense, Y is not a bad idea at under BPS. 

Pzena Quarterly Newsletter: Record Profit Margins?

I just listened to the fourth quarter earnings conference call for Pzena (PZN) and Richard Pzena said something interesting.  He does a lot of work on deep value cycles and things like that so even if you don't own the stock, it's a good conference call to listen to.   He is the only pure value investing asset manager out there so he has an interesting view of things both in terms of what is going on in the markets and what institutional investors are doing/thinking.

Midpoint of Value Cycle
He said that he thinks we are at the mid-point of the value cycle that average almost ten years peak-to-peak.  He notes that we are five years past the 2008 low (actually, wouldn't a midpoint then be five years after the previous peak which might be 2007?  OK, let's not split hairs).  He says in these cycles, in the first half, the companies that had problems take time to resolve them.  And after the problems are fixed, it takes another few years for the stock market to start to acknowledge that.

He mentions banks as having fixed their problems since the crisis over the past few years, and suggests that the market has not reflected that yet.

Record-High Profit Margin:  Sustainable?
He also talked about the record high profit margin as being one of the hottest debates going on now.  I also addressed it here before, but never thought about it the way he presents it.

He explains it in the fourth quarter newsletter which you can read here:  Fourth Quarter Newsletter

Here's some cut and paste from that:

Pzena points out that although profit margins are at all time highs, ROEs are only average.  In mature economies, capital replaces labor, so even as profit margins rise, ROE remains stable as more capital is required.  So the margin expansion is showing that more profit is needed to earn an adequate return on capital.

This chart shows that capital intensity increases over time.  If this is the case and businesses continue to require returns on their capital, then the profit margins may be sustainable:

Financials Still Cheap
He also points out that it's more important to look at the components rather than the whole.  Where are the ROE's too high and unsustainable?  Where are returns below normal with potential to come back up?

Pzena says:

In general we would seek to avoid areas where conditions have been too rosy, favoring those where a return to long-term norms and low valuations provides opportunity. Figure 3 indicates that healthcare, energy, financials and utilities are sectors where today's profitability is lower than what history would suggest. Financials are an obvious example. Figure 4 shows the 30 year history of developed market financial ROE's.

ROE's for developed market financials are 8.9% today, below their 30-year average of 10.7%. In the U.S., the picture is quite similar with ROE's at 8.8%, versus their long-term history of 11.6%. Some of this gap is attributable to cyclical conditions (e.g., low interest rates), but much is due to greatly increased capital, driven by changes in regulatory requirements following the events of 2008. The large bank sector, in particular, is in the midst of a substantial adjustment of its business model to fit the new regulatory regime. We believe the path to normalization of returns in the sector will likely include widening of net interest margins, recovery of global fixed income trading volumes, greater fee income, additional cost rationalization, and more optimal capital deployment. Though institutions are also feeling the effects of elevated operating costs and legacy legal settlements in an evolving regulatory environment, history indicates that as regulations become more certain and past issues resolved, the industry adapts and adjusts its business model to restore profitability. Coupled with low valuations, financials represent opportunity.

In other sectors, utility ROE's have followed interest rates lower, and health care returns have fallen off the unsustainably high levels experienced during the 1990's and early 2000's, yet valuations are generally elevated in both sectors.

I agree with that; I still do like financials even though I have lightened up a lot since they are much more popular now than they used to be.  When I first started blogging about financials (and blogging in general), it was the fall of 2011, in the middle of the "Occupy Wall Street" movement.  Everyone hated financials.  Traders hated them, investors hated them.   The public hated them.  Bank employees were ashamed to confess that they worked for a bank in social situations.   That is certainly not the case now with almost every CNBC guru loving financials.

BUT, the story is still good, I think.  Valuations are still reasonable.   And as Dimon said, all this talk about regulation lowering ROE's is true, but all the analysis is based on static analysis.  If all else equal, capital requirements are raised, then yes, ROE will go down.   And Dimon keeps trying to tell people, all else won't be equal.  Banks will reprice loans to reflect higher capital requirements.  Fees will be adjusted so various businesses will earn a decent return on investment.  Banks will exit some businesses and enter new ones that make more sense in the new regulatory environment.   But he complains that all of the analysis he sees doesn't take any of that into account; it's all straight math, a direct lowering of ROE in proportion to raised capital standards.

And my favorite analogy (my analogy, not Dimon's) is the big bang in the 1970s.  People thought investment banks/broker dealers were finished when they deregulated commissions.  If you just did the straight math and ignored the fact that broker-dealers were active, organic entities that can change and adjust, then yes, it would have been the end of broker-dealers.  But we all know that's not what happened!  Banks too have come through many regulatory changes over the years (interest rate regulation has changed over the years (look up Reg Q)).

Well, having said that, I'm not calling for a 1980s-like super-great times for banks going forward.  I just mention it to say that it won't be so horrible as most people seem to think.

Housing
Speaking of banks, one area that has not recovered much is housing.  I just read the most recent annual report of Toll Brothers (TOL) and found page 18 to be very interesting.  It is not new at all; I've seen this argument made by Jamie Dimon, Warren Buffett and many others about housing.  But it's the most recent, updated iteration of the "housing will recover" argument and thought it was very interesting.

I don't own housing stocks and never owned TOL, but I've always thought of them as a high quality organization, and their annual reports are really great. I've been reading their annual reports for years.

They explain things in detail and provide historical financial figures going all the way back to the 1980s.  I think that's really good and honest.  Some companies just want to show historical financials when it looks really good, and then stop showing it when things don't look so good.  But TOL (like BRK and the old LUK and some others) always shows the same historical figures going all the way back.  I love that.

Why don't I own any?  Well, for most of the time I've been reading their reports, we've been in a housing bubble and after the collapse, I didn't think they were super-cheap.  And when they were cheap, I felt more comfortable owning the banks and other stocks.  So the stars never quite lined up for me to want to buy.

Anyway, this is the same story that has been told about housing over the past couple of years, but it's worth refreshing:

So maybe times have changed and we won't ever completely fill in this underproduction; maybe multigenerational households is the wave of the future.

But I wouldn't be surprised if there was at least some catch up at some point in the future.

Housing figures can go up and down in the short term due to mortgage rates and things like that, but I think some of these large trends (of underdevelopment) are so big that they will at some point correct.

And what's the point?  I think this would be really good for the banks (and many other areas in the economy/markets).

Graham Holdings Split-Off

So Berkshire Hathaway (BRK) made an interesting 13D/A filing:

The Issuer is discussing with Berkshire the possibility of Berkshire acquiring an as yet unformed subsidiary of the Issuer, which would own a business and would own certain other assets to be determined but which may include shares of Berkshire common stock owned by the Issuer, in exchange for all of the Reporting Persons’ shares of Class B Stock in a transaction that would be structured to be a tax-free split-off. Berkshire and the Issuer have not agreed on any terms for such a transaction, and may not reach any such agreement. In particular, while Berkshire believes that such a transaction could be viable based on a valuation of Class B Stock and Berkshire’s common stock at prices prevailing on the date of this Amendment No. 8, a change in such prices may cause such a transaction to no longer be viable. Substantial other issues would also need to be resolved to proceed with such a transaction. If Berkshire and the Issuer do determine to enter into such a transaction, Berkshire believes that the transaction and related definitive agreement would be subject to approval by the Issuer’s board of directors, which to Berkshire’s knowledge has not yet considered any such transaction. Berkshire does not expect any transaction to be agreed upon unless the transaction will be of substantial economic benefit to both parties. 

This Malone-like move is a great idea as it will save in tax and simplify BRK's balance sheet not to mention make it more efficient.

This line from GHC's press release seems to indicate that this move was initiated by BRK.

WASHINGTON--(BUSINESS WIRE)--Feb. 12, 2014-- Graham Holdings Company (NYSE: GHC) is aware of the 13D/A filing made today by Berkshire Hathaway, Inc. regarding a potential split-off transaction with the Company. As indicated in the filing, the parties are in discussions and have not reached an agreement on terms of a potential transaction, and the parties may not reach such agreement. No transaction will be consummated unless it is in the interest of both parties.

This is interesting to me because I have been looking at Washington Post / Graham Holdings for years and could never really figure it out.  It is one of those things that I really wanted to like and own a lot of.  It is an owner-operator business with Buffett as the largest shareholder, and Don Graham ran the company very much in the style of Berkshire Hathaway.

But year after year of reading the annual reports, it just seemed to me that he wrote annual reports in the style of Buffett (honest, straight-talk) but I really couldn't find where he was operating under Buffett's values.  He sort of seemed more like a caretaker of the family business.  He wrote extensively about what he won't do (stupid things), but rarely wrote about anything that he actually did.    Year after year, nothing seemed to happen.  Of course, if you own a collection of very good assets, then you really don't have to do anything but we'll see that this was not the right way to go.

Anyway, when Washington Post sold the newspaper business and changed into Graham Holdings, it looked interesting because it was a major corporate action that changes the nature of the business.   It may yet turn out to be a good buy for the long term.  Maybe that will be another post at a later date.

But first, let's take a quick look at Don Graham's performance.  He became CEO of Washington Post back in May 1991, so I will use that as the start date for his performance.


Don Graham Performance
According to Yahoo Finance, the adjusted price (which includes splits and dividends) of GHC stock in May 1991 was $132.85/share.  It is now trading at $660/share.  That's a five-bagger, so pretty nice.  But the problem is that's over close to 23 years.   That's only 7.3%/year.   We don't have to go look at the outsider CEO performance table to see that this is not so great.

The S&P 500 index back then was 389.83 and it's now 1823; that's 7%/year excluding dividends.   So that's pretty dreadful.  No wonder Buffett wants out.  It makes you think that Buffett's loyalty was with the newspaper and not with Don Graham.

Buffett's Other Long Term Holds
So I thought this might be a good time to look at Buffett's other holdings over the same time period. There aren't that many big holdings that he has held for the entire period from 1991 to now.    He owned Capital Cities and Gillette back in 1991.  Capital Cities is now part of Disney and Gillette is Procter and Gamble, so I'll use DIS and PG as proxies (even though Buffett doesn't own DIS; maybe he should have held on).   His other large holdings were Coca Cola (KO) and Wells Fargo (WFC).

So here is how these stocks have done from May 1991 through now:

DIS:        +10.4%/year   ($7.66 -> $71.82)
PG:         +11.7%/year   ($6.35 -> $77.7)
KO:        +9.9%/year     ($4.54 -> $38.66)
WFC:     +14.8%/year   ($1.99 -> $46.00)
BRK/A:  +14.0%/year  ($8,750 -> $171,000)

S&P 500: +7.0%/year, excluding dividends! (389.83 -> 1823)

So the above is very interesting.  It tells us what we already know, I guess:

• BRK has done pretty darn well over the past 23 years
• Buffett is a pretty darn good stock picker
• Don Graham is not such a great capital allocator/manager and clearly lags; it's no wonder Buffett wants to clean up the portfolio (especially with new managers able to allocate capital better than Graham (even though this deal doesn't raise cash)).

Other Berk-alikes?

Since I sat here looking at these long term return figures, of course I got curious about the Berk-alikes that I talk about here all the time.  Many of those guys have been around for a long time.

Let's look at some of them (May 1991 through Feb 2014):

Alleghany (Y):       +10.3%/year  ($40.76 -> $376)
Markel (MKL):     +16.6%/year  ($17.25 -> $564)
Loews (L):              +9.0%/year   ($6.15 -> $43.80)
Leucadia (LUK)*: +15.2%/year  ($1.10 -> $28.24)
  *For LUK, I used year-end 1990 and 23 years since the Yahoo Finance price seemed off.

So we see that the good capital allocators do perform well over long periods of time.

Back to GHC
So if you want to evaluate GHC going forward, you have to start with how the CEO has done in the past.  According to this measure, the answer is obviously not good.  23 years is a pretty long time. It just shows us how hard it is to perform well even with all the right values and good guidance; it's easy to talk the talk, but not many can actually walk the walk.

Implications for Berkshire Hathaway
This is actually great news for BRK.  Not just because of the share buyback and dumping of a nonperforming asset, which of course is good.   It sort of shows that there are no sacred cows. Buffett's sentimentality has it's limits.  If you don't perform, out you go.  Gimme back my shares!

I'm sure I'm not the only one noticing this but I do sense a big change going on over at Berkshire Hathaway.

And this leads to another topic that is related to this; another great book.

A Great Book!
I just finished reading Double Your Profits in 6 Months or Less by Bob Fifer.   I read in an article related to the BRK/3G acquisition of Heinz that this book is handed out to 3G company managers and it is sort of a bible there.   I put it on order at the local library and didn't really think much of it. I just thought it's another cost cutting book like many others.   For whatever reason, I finally decided to read it and it is a really great book.

I thought it was just about cost cutting and things like that, but it is much more than that.  For example, Fifer tells you to cut costs that don't produce anything but increase spending on things that do bring in business.  He talks about how paying the high producers well may upset the non-producers, but it's better to keep the producers happy and non-producers unhappy than vice versa.  I have seen this happen first hand.

Some things may seem a bit aggressive, like not paying bills until they are demanded multiple times and things like that.  But there is plenty of really good stuff in here too.

I have never been a manager so don't spend too much time reading "how to" books on management so maybe this is not such a great book compared to others, but I have to say I was impressed.  This is a well-known classic in the management world (an Amazon reviewer noted that Sandy Weill handed this book out after taking over Travelers in 1993).

Back to Berkshire Hathaway
So, how does this relate to Berkshire Hathaway?    There has been a lot of press lately on the twenty-something Berkshire employee, Tracy Britt Cool.  I found this to be very interesting.  One of Cool's early projects was to learn how 3G turned around Burger King.  So you can be sure that Cool read this book.  If she is going to be working with folks at 3G, I don't have any doubt that she has read the book.  Maybe she even carries it around (and extra copies of it) wherever she goes.

And here's the interesting part.  Cool is seen now as sort of the fixer of Berkshire businesses, kind of like what David Sokol used to do.

Buffett has been known to purchase owner-operated businesses and just let them run the business.  He never got involved in the various businesses, and he never bought turnaround situations.  But we do know that Buffett will intervene to fix problems.  As passive as he likes to be, he was very involved in Coca-Cola, for example, when they ran into trouble.  He sent David Sokol in to fix NetJets when they couldn't stop losing money.   Buffett used to be active in his younger days too; of course, BRK itself was an activist situation.

But now, BRK bought Heinz with 3G, folks that run businesses as described in the above book.

I think Cool was sent to Burger King to learn how 3G turned around the business partly to learn how 3G operates as BRK was going into business with them, but also partly for Tracy to learn how to turn a business around (so she can do it at BRK!).

So this is a bit different than the image of BRK buying stuff forever (he is trying to sell GHC now) and letting wholly owned businesses run independently (Sokol was sent to fix NetJets, Cool is sent to fix Benjamin Moore and possibly some other businesses).

Well, this is not to say that fixing up hasn't happened before; it probably has happened but out of the spotlight.  We don't know what goes on in the various businesses.  Buffett hates to lose money,  so I'm sure similar things have happened in the past.

But now it seems to be happening out in the open.  And the message is clear.

On the one hand, we can argue that BRK's private businesses are already highly efficient, or else Buffett wouldn't have bought them.  And he wouldn't buy into businesses run by people who would create a lot of waste.  But on the other hand, many businesses may not have been scrutinized closely in a long time; maybe there has been some waste built up over the years.

If that is the case, there can be a lot of value created from tightening things up.

Conclusion
I know the above doesn't sound very Buffett-like (having someone run around with a cost-cutting book micro-managing expenses), but times do change.  Not too long ago we couldn't have imagined Buffett buying a tech stock or a capital intensive business.  We couldn't imagine him hiring portfolio managers to manage BRK money.  We couldn't imagine him splitting his stock.  There are a lot of things that we couldn't imagine happening that did happen.  So things do change.

And that's actually really good news, I think, for BRK.   I know 3G and other private equity people are controversial; people tend not to like them.  But as readers here know, I am not one of those.  Of course there are good private equity people and bad ones, but I don't think there is anything categorically wrong with what they do (I know Buffett/Munger don't agree, but that's OK).

So I have no problem with this as long as it is fair and reasonable.   Of course, there is such a thing as going too far, destroying morale and things like that.   But I do think that sometimes a fresh set of eyes looking at stuff can be really good for an organization.

And of course, I have to say that this is all just speculation on my part.  I am probably reading too much into these various things, but you know, that's what I do.  We try to read between the lines to see how things may change going forward.

Alleghany Corp Investor Day

Before I start, I came across this great quote in a totally unrelated book so let me start this post with that:

     "Obstacles are those frightful things you see when you take your eyes off the goal."
            -  Hannah More,  British writer/novelist (1745 - 1833)

With the market tanking and people obviously wondering what they should do ("Should I sell?!"), I thought it's a great quote.  Someone asked me about a stock; what should they do?  The stock is tanking!   I asked them if they are in for a quick trade or as a long term investment.  They said it's a long term investment.  So I asked them if what is happening in the market today will change your view of how the company will be doing in five years.


Back to Alleghany (Y)
OK, so this is kind of old, but I stumbled upon the Alleghany Corp investor day presentation that happened a while back, in November 2013, actually.

Here's the link:   Alleghany Investor Day Presentation

And I noticed that they are killing insurance stocks now and Y is trading at 0.9x BPS.  Well, OK, it's September 2013 BPS but BPS should be up by year-end, and even the current stock market decline leaves the market higher than it was back then.

Y has been a pretty quiet company in the past, but due to the Transatlantic merger last year, it is becoming a more transparent company.

Y is one of the Berk-alikes, like Markel and some others.  But these guys have been around for a long, long time.

Here are some snips from the presentation:

I like the fact that they are focused investors.  Some may feel it is risky, but I lean towards the Buffett/Munger, Greenblatt school of focusing investments.  It's better to really know businesses well and when it's attractively priced, piling in instead of buying a little of this and a little of that.  There are managers that perform well with big, diversified portfolios, but I think those portfolios are filled with smaller cap names.

I don't think it's possible to outperform the indices by much with a diversified portfolio of large cap stocks.

As we've seen before, they have done pretty well over time:

Y has often said that they structure their equity portfolio to hedge against inflation risk as they have inflation risk on the insurance side and large fixed income portfolio.

I often run into people who are worried about inflation so want to sell their stocks or homes.  They think about the short-term, immediate effect of inflation;  inflation goes up -> interest rates go up -> asset prices go down.  But they don't think about the long term.  In the short term, selling stocks and homes might look smart when interest rates go up.  But over time, there is no guarantee they will be able to get back in when asset prices readjust to the higher price level.

All you need to look at are New York City property prices in the 1970s and now.  Sorry, I don't have any data handy, but ask the guy sitting next to you what a brownstone on the Upper West Side sold for in the 1970s and what it is selling for now (or ask Jim Rogers; he made a killing like that).

Anyway, Y uses their equity and private equity portfolio as an inflation hedge because they think about the long term.  It's important to keep that in mind.

In this environment, if Y can grow book at 7-10%/year, that would be great.  They can obviously do better if an opportunity comes up along the way as they do have a lot of balance sheet fire power.

A 7-10% book value grower at 0.9x book sounds good to me.

Y, like Berkshire Hathaway, focuses on profitability and won't write business just to grow premiums.  It's important that the employees are incentivized in that way instead of the CEO just talking the talk.  There seems to be a lot of pressure in the reinsurance business (capital market solutions depressing prices, new hedge fund reinsurers coming in, Berkshire Hathaway expanding (but they will not write underpriced business)), so it is really important to know that Y will not get caught up in price wars and write business for the sake of writing business.

Their history of underwriting shows that they do walk the walk.

This is cool how they break down the investment operation of Alleghany.   Just like at Markel, they have a private capital group that they hope will grow over time (this combined with Public Equity):

There are some new names here on the chart.  Jack Liebau seems to be the new guy in charge of public equities.  A quick googling shows that he started at the Capital Group, then PRIMECAP, and then eight years running his own firm (Liebau Asset Management; the 13F's are available at the SEC website.  It looks like his fund was a portfolio of 50-60 blue chip names (mostly)).   He shut his firm in September 2011 and worked at Davis Advisors for two years before joining Y in July 2013.    So he will be doing something a little different than he used to; going from diversified to a more focused approach.  Let's hope it works out!

I wonder what the incentive pay structure is for the portfolio managers.  Since they're not NEO's, they probably don't have to disclose that in the proxy.

This is an interesting way of illustrating their portfolio strategy, which applies to similarly structured companies (like MKL and BRK):

Their $2.0 billion equity portfolio comes to around 30% of their shareholders equity (of $6.7 billion).  That's a little lower than close to 50% at Markel.  In the past, I think it was higher at Y; on a year-end basis it was as high as 52% in 2010 and 42% in 2007 while dipping into the low 20% in 2008 and 2009 (partly from equity price declines).   I thought they would bump this up more after the merger with Transatlantic, but as we know from reading the annual reports in recent years, they are not particularly bullish on equities.    But still, 30% is not too far out of range and is far higher than other insurance companies.

I like "intense fundamental research, concentrated positions, and long-term holding periods"!

I did see Apple stock in their filings before and was kind of surprised.  To me, Apple is the sort of business that really long term guys would avoid since it is impossible to see what the industry would look like in ten years (or I would argue even five years).

I am familiar with the other names, but haven't looked at American Homes (AMH); I will have to look at that. I just noticed that Blue Ridge Capital owns a big piece of it too.  Hmm... this may be a future post here.

Here is a description of their private capital business.  This is good because if the insurance market really doesn't improve and the market stays soft for a long time, Y will be able to reallocate capital into their public or private equities.  This gives them an advantage over other insurance companies (that may feel pressured to write business to stay in business).

Conclusion
I have been following this company for many years and really like it and I have owned a stake for a while, but a small one.  I've never had a big position here even at book value as they seemed to be a bit too conservative for my taste.

Reading the annual reports gave me a feeling that they won't be out doing much due to their bearish view.  I do think they will make decent returns and won't lose money in bad times, so it's certainly a safe, conservative investment.  But it just wasn't something that I wanted to pile into.

But at 0.9x book (well, 0.9x outdated book; we will get 4Q and 2013 earnings soon), I think it is getting interesting.

They actually did the Transatlantic deal last year and some of the equity portfolio liquidation was related to that, so I guess it's not fair to say that they aren't doing anything.

Anyway, let's see how this plays out.