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Alleghany’s (Y) Top-Line Growth Impresses, Cat Loss a Woe


Alleghany Corporation Y, which engages in property and casualty (P&C) reinsurance and insurance businesses, has been experiencing consistent improvement in revenues. This upside is mainly driven by higher investment income and noninsurance revenues. We expect this momentum to continue in the upcoming quarters, which in turn, will further accelerate the company’s growth.

With gradual rise in interest rates, the insurer has been able to witness higher investment income in the past few quarters and we anticipate this trend to sustain in the near future. Apart from a slow and steady progress in interest rates, higher dividend as well as interest income is likely to aid investment results in the near term.

Also, the company relies on strategic buyouts as one of its key tactics to boost growth. The insurer, through its subsidiaries, will constantly pursue prudent acquisitions in the future that will help it expand its operations and further strengthen its portfolio via substantial value addition.

Alleghany’s balance sheet strength has allowed it to lend support to its units for indulging in growth-driving projects. Additionally, the company has been able to increase its book value per share over a considerable period of time and is estimated to achieve its 7-10% long-term growth target.

This apart, the company has been able to add shareholder value through share buybacks. Even though the insurer does not pay any dividends, it approved a special dividend in March 2018, thereby evolving as an attractive pick for yield-seeking investors.

Shares of this Zacks Rank #3 (Hold) P&C insurer have rallied 18.8% in a year’s time, outperforming the industry's increase of 14.3%. We expect the aforementioned strengths to drive the stock higher in the near term.

However, being a P&C insurer, the company has been suffering catastrophe loss for a considerable period of time, rendering volatility to its underwriting results.

Nonetheless, the Zacks Consensus Estimate for current-year earnings per share is pegged at $38, representing whopping year-over-year growth of 1762.8%.

Moreover, Alleghany’s surprise history represents its sustained operational performance with the company having delivered positive surprises in all the last four quarters, the average beat being 26.02%.

Shares of Alleghany are trading at a price-to-book multiple of 1.14, somewhat lower than the industry average of 1.52. Price to book value ratio is the best multiple for valuing life insurers because of large variations in their earnings results from one quarter to the next. This ratio essentially measures a P&C insurer’s current market value, relative to what it would be worth if it chooses to shut down. Underpriced shares with solid fundamentals are lucrative bets.

Stocks to Consider

Some better-ranked stocks from the insurance industry are Markel Corporation MKL, Primerca, Inc. PRI and The Navigators Group, Inc. NAVG, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Markel markets and underwrites specialty insurance products in the United States, the United Kingdom, Canada and internationally. The company delivered positive surprises in two of the trailing four quarters with an average beat of 34.72%.

Primerica distributes financial products to middle-income households in the United States and Canada. The company pulled off positive surprises in three of the previous four quarters with an average positive surprise of 5.89%.

Navigators Group underwrites marine, property and casualty plus professional liability insurance products and services in the United States as well as globally. The company came up with positive surprises in three of the preceding four quarters with an average earnings surprise of 19.54%.

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