A Berkshire Hathaway Inc. (BRK.A)-Worthy Performance

Powerful leverage
On the investment side, Alleghany managed a total return on its investment portfolio of just 1% in the first quarter. That might not seem all that grand, but you have to remember that the bulk of Alleghany’s investment portfolio — as is the case for most insurance companies — is composed of fixed-income investments (read: bonds). The fixed income side of Alleghany’s portfolio actually dipped slightly in the quarter, down 0.2%. Fortunately, however, Alleghany’s equity portfolio was up a solid 11.5%, beating the total return of the S&P 500.

And thanks to Alleghany’s insurance model, even small returns can add up to solid gains in the company’s book value. According to Hicks, at the end of 2012, Alleghany’s investment portfolio was roughly 2.6 times the size of its shareholders’ equity. Assuming Alleghany breaks even on its insurance underwriting and holds the line on other expenses, every 1% gain in Alleghany’s investment portfolio should translate to nearly a 3% gain in its book value.

In the first quarter, Alleghany’s 1% investment gain combined with its underwriting profits to generate a 4.1% increase in Alleghany’s per share book value to $394.71.

A bargain price
Right now, Alleghany’s stock price trades right around its $394.71 book value, which we view as quite a bargain considering the strength of Alleghany’s insurance franchises, its shareholder-minded management team, and its investment pedigree. If Alleghany merely replicates its first-quarter performance over the next three quarters — not a stretch, especially if Alleghany’s energy-concentrated investment portfolio picks up a little steam — then its book value will climb to around $445 by year-end 2013.

If Alleghany’s share price merely tracks its book value per share (we think it deserves to be much higher), then investors are looking at close to a 13% gain over the next seven months. If the market starts to recognize the strength of Alleghany’s business and awards it a multiple to its book value, then we’re looking at even bigger returns.

The article We’re Buying More of This Berkshire Hathaway Lookalike originally appeared on Fool.com.

Fool contributor Matthew Argersinger owns shares of Berkshire Hathaway and Alleghany. Matthew Argersinger has the following options: Long Jan 2014 $80 Calls on Berkshire Hathaway and Short Jan 2014 $80 Puts on Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Alleghany and Berkshire Hathaway.

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