Alleghany, which was "accidentally" acquired by Buffett, has Berkshire's "shadow" in its foreign investment layout

 　　At the Berkshire shareholder meeting held on the evening of April 30, Beijing time, Buffett, the "stock god", revealed in answering questions from investors that because of a small note, he paid a premium of 22% and spent $11.6 billion to acquire the insurance company. Alleghany Corporation ("Alleghany"). But an in-depth analysis of Alleghany's financial report shows that the reason why it can get the "stock god" is that the company's manager, Joseph Brandon, once led Berkshire's General Reinsurance (General Reinsurance) The company came out of the crisis and gained enough trust from Buffett.

　　The more important reason is that in the past 20 years, it has continued to increase the book value per share, and the company's book is very "clean", and the key information in the financial report is fully disclosed. Its investment method and holding target are similar to Berkshire's: it does not invest in companies with complex businesses, and the business and profit models of all holding companies are clear at a glance. Of course, in terms of timing, the third potential logic of Buffett's purchase is that after Berkshire's capital empowerment, the company's business situation is expected to usher in a reversal.

Three elements that attracted Buffett to "order" Alleghany

　　Let's first understand what the company Alleghany does. From the company's balance sheet, the company's $9.19 billion is shareholder equity and $1.68 billion is parent company liabilities. And of that $9.19 billion in shareholder equity, about 60% is a reinsurer, TransRe. The remaining 16% is owned by three insurance subsidiaries, namely the wholesale special insurance company RSUI, the special insurance company CapSpecialty and AIHL reinsurance company. The last remaining 10% of the equity is a series of subsidiaries invested by Alleghany’s major insurance companies that are similar to Buffett’s wholly-owned purchases. The business ranges from toys to funerals, from steel to trailers. They are all enterprises with simple and clear business and clear business models.

　　Reinsurers do not issue policies directly to policyholders, and their clients are mainly insurance companies. That is, some insurance companies reinsure some large underwriting units to another insurance company in order to spread the risk, and the company that accepts this policy is the reinsurance company. Such companies are more common in property insurance. General Reinsurance, which Buffett bought for $22 billion in mid-1998, is another type of company.

　　After understanding the business composition of Alleghany, I further analyze the reasons for Buffett's acquisition. The author believes that there are mainly three aspects: First, Buffett is familiar with the company's managers and business model, which may be the most important; Second, the The company has been a compound interest machine for the past two decades, and its investment methods and holding targets are similar to Berkshire’s; third, due to the operational challenges in the past two years, the company’s valuation is relatively low. With strong capital for empowerment, there is a possibility of reversal.

Brandon, who left a note for the "stock god", once led General Reinsurance company to "return from the dead"

　　At this year's shareholders meeting, someone asked Buffett, you wrote in your annual report that you couldn't find a particularly good investment opportunity in the market. Why are there mergers and acquisitions and secondary market purchases in the past few months? Buffett explained that Brandon left him a small note when Alleghany published its annual report, telling him that he was now running Alleghany and giving him the general situation. Buffett was immediately interested.

　　On the one hand, the reason is that Buffett has been tracking Alleghany for more than 60 years, and the annual report has not been pulled down every year. At the annual meeting, he said, "I have installed four archives for Alleghany's annual report." On the other hand, he knew and admired the company's managers very well, so Buffett asked Brandon to meet in New York right away. After some exchanges, he paid a premium of 22% and placed a "buy order" of $11.6 billion.

　　From the public information, starting in April 2021, Brandon became the CEO and chairman of Alleghany. However, Buffett and Brandon's bond goes back to Buffett's acquisition of General Re. From 2001 to 2008, Brandon was Chairman and CEO of General Reinsurance Company.

　　Although the acquisition of General Reinsurance Company is a "disaster for Berkshire's investment." In order to acquire General Reinsurance Company, Buffett used, not cash, but additionally issued more than 10% of Berkshire's outstanding shares! According to Berkshire's current share price, the purchase price is more than $100 billion, but General Re's float is now less than $20 billion.

　　What's more, General Re insured underwritten a large number of insurance policies for which they could not calculate the odds. As a result, it hit the "9.11" terrorist attack and suffered heavy losses. The most terrible thing is that General Reinsurance and American International Group (AIG) made a series of transactions with questionable compliance to help AIG hide book losses, increase its loss reserves, and even lead to Buffett being subpoenaed.

　　In this context, Buffett couldn't bear it anymore and replaced the management of General Reinsurance Company. The new management is Brandon, Brandon spent 7 years helping Buffett solve this mess.

　　It is worth noting that Brandon and Buffett have similar habits, and both like to explain the company's operations in plain language to shareholders.

'Compounding machine' Alleghany likes to invest in businesses with 'simple' business models

　　Although Alleghany can't match Berkshire's investment ability, it is also an uncompromising compounding machine. If you read Alleghany's annual report, you will find that it is a very "clean" company with full disclosure of key information, allowing investors to know what it is.

　　In the past 20 years, Alleghany has continuously increased its book value per share at an annual rate of 7.6%, and only two years of book value drawdown occurred in 2008 and 2018. Although this annualized growth rate is not as good as the 9.5% of the S&P 500 in the past 20 years, considering that the annualized growth rate of traditional industries (excluding technology giants) in the past 20 years has not been as good as that of the technology industry, which is now heavily weighted in the S&P, therefore The compound interest performance across the bulls and bears is also remarkable. It's worth noting that the above compounding does not include the company's $36.9 billion worth of special dividends (equivalent to more than 3% of its current market value) paid in 2018 and 2020.

　　Investors familiar with Buffett's investing style know that when he acquires a business, he emphasizes cultural synergy. As can be seen from Figure 1, most of the main businesses of these enterprises under Alleghany are unpretentious. For example, Jazwares is a company that produces toys and dolls. Some dolls in Roblox are sold in Jazwares. From 2020 to 2021, the company's revenue doubled, jumping directly from $500 million to $1 billion. Wilbert mainly provides products and services related to cemeteries and funerals. The company's revenue in 2021 will also increase by 44% year-on-year. Those who are familiar with value investing can easily think that legendary investor Peter Lynch is particularly fond of such companies - everyone thinks it is unlucky and does not like to cover, but its pricing power is very strong.

　　Other businesses, such as AFCO Steel, are mainly engaged in the design, manufacture and sales of steel products; Kentucky Trailer Company mainly produces a variety of trailers; IPS is a technical consulting supplier, through the process of design, procurement, construction, management, etc., Provide customers with a one-stop integrated way to design, build, verify technically complex scientific research, manufacturing, packaging and warehouse facilities and more.

　　Careful investors will find that Alleghany, like Berkshire, does not invest in technology stocks or companies with complex businesses. The business and profit models of all holding companies are clear at a glance.

　　Are these companies making money? The answer is yes. In 2021, these companies collectively have a shareholders' equity value of $1.3 billion, generate operating cash flow of $200 million and free cash flow of $150 million, a double-digit free cash flow return on equity.

The fundamentals of Alleghany, empowered by Buffett Capital, may be "reversed"

　　For property insurance companies, there are two other indicators that deserve our attention, one is the company's absolute debt, and the other is the company's combined ratio (CombinedRatio). The former reflects whether the company operates conservatively, and the latter is the addition of cost ratio and loss ratio, reflecting whether the company has high operating efficiency.

　　In the attached picture, we can see that Alleghany's total liabilities have increased by about 50% in the past ten years. Compared with the book value that has nearly doubled, the company's operation is relatively conservative. We have also seen before that the ratio of total debt to total capital is only 15%. The company's comprehensive ratio was low from 2012 to 2017, but has been rising in recent years. From this, we introduce the third Buffett's potential buying logic - reversal.

　　As mentioned above, Brandon's management of General Reinsurance showed that in addition to his excellent business ability, the "mess" can be sorted out in an orderly manner, not to mention Alleghany, which is of good quality.

　　Buffett's bid was 1.3 times Alleghany's book value. If we compare the charts of Alleghany and its two competitors, Chubb and WR Berkeley over the past year, we will be pleasantly surprised to find that, when we factor in the premium of about 20%+ paid by Buffett, Alleghany's growth over the past year is exactly the same as that of WR Berkeley. Competitors are similar. On top of that, WR Berkeley is trading at 1.72 times book value and Chubb is at 1.55 times book value, so as long as Brandon can successfully turn Alleghany around, even though Buffett seems to be paying a 20% premium, the sideways In comparison, the purchase price is still low.

　　In addition, after adjusting the fair value of the non-insurance business, analysts at Barron's can find that the actual price-to-book ratio that Buffett paid for the insurance business is 1.1 times, which is lower than the 1.3 times mentioned above, which is close to 20% . The market's pessimism about Alleghany's poor management and Buffett's better understanding of Brandon's capabilities and past performance have created a perception gap -- which may be the source of the acquisition's excess returns.

　　Finally, the author would like to emphasize that the strong capital of Buffett's insurance companies can empower Alleghany, reduce its financing costs, provide more information channels, and have stronger bargaining power. Increase profitability. This potential synergy will take Alleghany's true value to the next level.

　　Of course, there are also speculations on Wall Street about this acquisition. Considering that Ajit Jain, the insurance board responsible for Berkshire, is 70 years old and his health is deteriorating, the acquisition of Alleghany may also be Ajit's successor. People, foreshadowing. (The individual stocks mentioned in this article are only for analysis, not for investment advice.