Insurance is arguably the best business on the planet.  You take in money for future claims (and if you did it right you took in more than you needed) and get to invest the money in the interim.  This is leverage with a negative interest rate.  Some of the greatest fortunes of all time were built with insurance.  Warren Buffet is the premier example worth some 56 billion clams thanks largely to investing insurance float from GEICO and his captive reinsurance companies.  I am going to look at my six favorite insurance companies for new money right now, one per day.

Number six  on my list of favorite insurers is Alleghany Corporation (Y).  The first number you want to pay attention to with insurance companies is the “combined ratio.”  This is a measure of underwriting performance.  That is, are they charging more in premiums than they pay out in claims.  Numbers under 100 represent an underwriting profit.  I like to look at the ten year average to weed out companies that lose discipline during soft markets.  The 10 year average combined ratio for Y is 90.4, very good.

Alleghany is attractive on a price to sales basis (1.04) but a little pricey out of the six on price to book terms ( 1.48).  Y is the only company out of my top six that pays no dividend.

Alleghany does a good job with the float it invests.  Over the past 10 years, its investments have grown 967%.   That is an impressive 25.47% compounded annual growth rate.  This is a company that can compound an enormous amount of wealth for you if you buy and hold.  I know raptors love options, and they are available here if you want to write out of the money covered calls to pick up a few extra percent of cash yield per year.

Devour your prey raptors!

Insurance part 1 of 6 Alleghany Corporation (Y)

Never miss another opportunity to devour prey!

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2 thoughts on “Insurance part 1 of 6 Alleghany Corporation (Y)

  • April 21, 2015 at 8:41 pm

    I think Y is very conservatively managed.. to the point where its long-term results might end up lagging a diversified portfolio of dividend paying stocks.

    Are you going to look at CB, AFL, MKL and BRK (A or B) ? I can’t wait for 5 more articles, i need answers today 😉

    • April 22, 2015 at 12:04 am

      Conservative management is a good thing with insurance companies! Really, the key metric is combined ratio. If you can invest on margin with a negative interest rate, you can beat the market just by putting float into bonds. And we are getting Y at a fair price. Some of the more aggressive insurance companies trade dearly. CB, AFL, MKL, BRK are all fine insurance companies (and I currently hold two) and successful entry depends on price. I love BRK but wouldn’t touch it at 1.4 times book. It’s ability to continue growing at 20 percent per annum is in doubt due to scale so the premium is no longer justified. A great bargain might become available when Buffet finally steps down so keep a close watch.

      Thanks for reading!


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