This article is about the investment holding company that invests in insurance companies. For other uses of Allegeny, see Alleghany (disambiguation).
Alleghany Corporation is an investment holding company that has traditionally invested in financial services firms. These companies include Alleghany Insurance Holdings LLC (AIHL), RSUI Group, Inc., Capitol Transamerica Corporation (CATA), Darwin Professional Underwriters, Inc. (Darwin) and Employers Direct Corporation (EDC). Alleghany Corp also directly owns parcels in Sacramento through Alleghany Properties Holdings LLC.  Recently, Alleghany has looked to expand its investment horizons and has made investments in the energy industry. The company owns its own insurance subsidiaries, which means that it can treat its equity as insurance capital, essentially using its equity capital twice. Alleghany prides itself as a “conservative” investment corporation that doesn’t invest on swings in the market but looks to invest in a few solid industries for long-term value.  Yet, falling insurance prices could mean that Alleghany’s stock will decline as a result of lower prices on current contracts.  However, higher interest rates could benefit Alleghany’s investments and the appreciation of equity should be expected to promote the company’s growth and worth.
Alleghany's main business objective is ownership and management of a small group of operating businesses and investments; mainly in property and casualty insurance. Alleghany are value investors, and they tend to make investments for the long term; backed by its ownership of three insurance companies: RSUI Holdings, Capitol Transamerica, and Darwin Underwriters.
Growth: The book value per share of Alleghany has increased by approximately 12% annually since 2000. This growth outperformed the manager's expected 7% target, and it also outperformed the S&P 500's total return over the same time frame.
Profitability: Alleghany's underwriting profitability was strong in 2007, with the firm's combined ratio coming in at a solid 75%. Return on equity was 11%, roughly the same as 2006. We doubt Alleghany can keep up this enviable pace over the next five years. The increase in the earnings is attributed to the growth of RSUI, CATA, and Darwin; as well as EDC.fair value estimate. Although the company reported declining premium rates due to the current soft insurance market we think the company is still a good value. Return on equity in the quarter was 14%, slightly below the 15% recorded in the first quarter last year. Alleghany trades at 1.1 times book value per common share--a bargain, in our view.
Alleghany Insurance Holdings LLC (AIHC) is a wholly owned subsidary of Alleghany Corporation. AIHC serves as the holding company for Alleghany Corporation's property and casualty and surety insurance operations, which are conducted through a number of special purpose entities (SPE): RSUI, headquartered in Atlanta, Georgia, CATA, headquartered in Middleton, Wisconsin, Darwin, headquartered in Farmington, Connecticut, and EDC, headquartered in Agoura Hills, California. As of December 31, 2006, AIHL owns about a 32.9% stake in Homesite, a national, full-service, monoline provider of homeowner's insurance. In 2007, approximately 36.6% and 60.7% of AIHL's gross premiums come from property insurance and casualty insurance, respectively. The other 3% is accounted for by surety bonds.
RSUI underwrites specialty insurance coverages for property, umbrella/excess, general liability, directors and officers (D&O) liability, and professional liability. RSUI conducts its insurance business through approximately 151 independent wholesale insurance brokers located throughout the United States, and nineteen managing general agents. RSUI only underwrites products which their underwriters have a strong background in; they specialize on higher severity, lower frequency specialty risks that can be effectively underwritten with minimal due diligence.
CATA operates through its wholly-owned subsidiaries: Capitol Indemnity Corporation (Capitol Indemnity) and Capitol Specialty Insurance Corporation (CSIC). Capitol Indemnity writes property and casualty insurance, on an admitted basis except in California where it operates as an approved, non-admitted insurer, and surety products such as commercial surety bonds and contract surety bonds on a national basis. CSIC underwrites primarily specialty lines of property and casualty insurance for certain types of businesses or activities, including barber and beauty shops, bowling alleys, contractors, restaurants and taverns, on an approved, non-admitted basis. The property and casualty business of CATA accounted for approximately 74 percent of its gross premiums written in 2007, while the surety business accounted for the remainder.
CATA conducts its insurance business through approximately 309 independent agents and 60 general agents licensed to write property and casualty and surety coverages, as well as approximately 289 independent agents licensed only to write surety coverages. CATA underwrites to gain maximum profitability by adhering to strategies of prudent risk selection, appropriate pricing, and coverage customization.
In the spring of 2003, Darwin was created as an underwriting manager for CATA. Today, Darwin operates in the specialty property and casualty insurance business; mainly on three broad professional liability market lines of business: D&O, errors and omissions liability (E&O), and medical malpractice liability. Darwin also underwrites general liability (GL) policies, with a small book of short-line railroad liability business; however, the business is relatively young (founded 2007).
On May 24, 2006, Darwin closed the initial public offering of its common stock and used all of the proceeds to reduce Alleghany’s equity interests in Darwin by redeeming Darwin preferred stock held by Alleghany. Alleghany continues to own approximately 55 percent of the total outstanding shares of common stock of Darwin, with no preferred stock outstanding.
Darwin sells its products through approximately 180 distribution partners, including brokers, agents and five program administrators. Darwin’s selection criteria for distribution partners and program administrators include profitability, reputation, and shared values with Darwin. Darwin’s underwriting approach focuses on disciplined analysis, appropriate pricing based on the actual risk and attachment level and the granting of appropriate coverage, accompanied by underwriting and actuarial reviews of accounts. Formal rating strategies and plans have been adopted for each line of business.
EDC underwrites workers’ compensation insurance through its wholly-owned subsidiary, Employers Direct Insurance Company (EDIC). EDIC's sales effort is mostly concentrated in California; however, they are licensed by the states of Arizona and Nevada. Workers’ compensation insurance provides coverage for the statutorily prescribed benefits that employers are obligated to provide for their employees who are injured in the course of employment.
EDIC markets and sells its products through a direct sales force, which it believes has several important advantages over the independent agent-broker system by significantly reducing policy acquisition expenses, providing greater control over the risk selection process, leading to a high persistency rate, and accelerating premium collection lead times.
EDIC employs a broad-based and strict underwriting process, with underwriting standards that contain minimum sizes, retention levels and prohibited risk classes. Aggregate exposures are limited with respect to risk classifications and any individual insured. Exposure is managed by generally avoiding industries and businesses considered to involve the potential for severe losses or high exposure to multiple injuries resulting from a single occurrence. Target employers include those who have a firm commitment to safety, returning injured workers to modified duty, and a genuine interest in lowering their insurance costs by partnering with EDIC.
EDIC develops individual pricing plans and customizes loss control and claims programs to help its customers achieve EDIC’s targeted loss ratio. The underwriting process focuses on each individual risk involving a detailed and disciplined analysis. Each potential insured is evaluated for its acceptability, risk and loss exposures, and EDIC’s ability to offer a competitive price consistent with its targeted loss ratio. The underwriting department monitors the performance of each account throughout the coverage period, and upon renewal, the profitability of each account is reviewed and integrated into the terms and conditions of any coverage going forward.
Alleghany faces uncertainties and risks in the following areas: weather related catastrophes, natural or man-made catastrophes, the cyclical nature of the property and casualty industry, exposure to terrorist attacks, changes in ratings assigned to Alleghany's operating units, and legal and regulatory change to name a few.
The insurance industry is a cyclical industry and faces "significant fluctuations" in the operating results due to the competitive nature of the industry. The business cycle of the insurance industry is correlated to the return on investments (ROI) earned by the insurance industry. The ROI determines the level of capital that is available in the industry and the prevailing prices of insurance, which directly affects the supply of insurance. The intensity of the price competition in the insurance industry tends to be greater during periods of excessive underwriting capacity. 
In recent weeks, we have experienced unprecedented turbulence in the fixed-income and equity markets; this has the potential to significantly diminish the investment portfolios of many insurance enterprises. Financial markets have led to historic fluctuations in the value of the assets standing behind insurance obligations. Consequently, we think it is appropriate to demand a greater margin of safety for many of the insurance underwriters we follow, and we are raising our fair value uncertainty ratings.
The sub-prime mortgage crisis has affected the property division of Alleghany even though the real estate division generated a reported net earnings of 7.4 million dollars. Recent legislation regarding flood control in North Natomas, a region in Sacramento where Alleghany owns land, has made development opportunities of land in that region grim.
Alleghany faces the risk of being damaged by a large hurricane or earthquake. Alleghany needs to buy enough reinsurance so that losses from natural forces don’t lessen the company’s liquidity. This occurred during Katrina in 2005, as Alleghany wasn’t prepared for the damage to properties that fell victim to the hurricane. However, having learned from their losses from the natural disaster, Alleghany has restructured its portfolio to prepare for another natural disaster.
In 2007, the property and casualty insurance industry experienced record profits, increasing competition in the industry and driving down prices. Competition is predicted to increase in 2008 and into the future.
Alleghany competes in both the property and casualty insurance industry and the real estate industry. Depending on their subsidiary and the type of business, Alleghany competes both in the regional and national level. Alleghany's property and casualty businesses, operated through RSUI and Darwin, competes on the national level; however, their property and casualty business, operated through CATA, competes on the regional level. The surety business, operated through CATA, competes on the national level.
|'||Alleghany Corp.||American International Group, Inc.||The Chubb Corp.||The Travelers Companies, Inc.||Industry-Property and Casulty Insurance|
|Qtrly Rev Growth (yoy)||-10.10%||-36.00%||-4.80%||-4.20%||2.70%|
|Gross Margin (ttm)||33.92%||-16.89%||30.70%||37.22%||30.46%|
|Oper Margins (ttm)||27.28%||-16.89%||26.76%||23.93%||12.41%|
|Net Income (ttm)||229.33M||-15.37B||2.52B||4.17B||N/A|
|PEG (5 yr expected)||N/A||N/A||0.81||0.72||0.73|