Third Avenue Management Comments on Alleghany Corp
We initiated a position in Alleghany Common (Y), which was purchased in TASCX and discussed in last quarter's TASCX shareholder letter. Curtis Jensen and I attended a lunch with a small group of investors and Alleghany's CEO, Weston Hicks, in April. Weston seems to be our type of CEO: he is non-promotional and focused on generating shareholder value by growing book value per share. The company has no dedicated investor relations person and does not do quarterly earnings calls, but instead provides comprehensive financial disclosures aimed at enabling long-term investors, as opposed to short-term speculators, to make informed investment decisions. Weston's presentation to investors consisted of a one page Excel spreadsheet showing the company's performance since 2002, when he joined the company. Over this period, the company's average combined ratio was 90% (i.e., a 10% underwriting profit margin), and book value per share increased at a 9% compounded annual growth rate ("CAGR"). This growth was particularly impressive given the difficult underwriting environment over the period with competitive pricing and an elevated level of insured losses.
Future book value growth should be partially driven by the company's 2012 purchase of Transatlantic, a leading global reinsurer. This transaction appears to have been well timed, as it was completed at a significant discount to tangible book value and reinsurance rates are improving in 2012. Alleghany also recently announced a small acquisition of Bourn & Koch, Inc., an Illinois-based manufacturer of precision machine tools. This company will join several other noninsurance investments in Alleghany's portfolio and is representative of management's opportunistic approach and willingness to look outside the insurance industry to enhance shareholder value. Shares of Alleghany Common were purchased at a discount to tangible book value.