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Alleghany (Y) Declines 30.9% YTD: Whats's Behind The Drop?

Alleghany Corporation Y is adversely impacted by higher catastrophic events, weak underwriting results and declines in interest income.

Shares of this Zacks Rank #3 (Hold) property and casualty (P&C) insurer have lost 30.9% on a year-to-date basis compared with the industry’s 8.1% decline.


The Zacks Consensus Estimate for 2020 earnings is pegged at $7.65 per share, which indicates a plunge of 67.8% from the year-ago quarter’s reported figure.

What’s Behind the Drop?

Alleghany’s reinsurance and insurance subsidiaries remains exposed to unpredictable cat occurrences that have resulted in significant losses, adversely affected the financial condition and causes volatility in underwriting results. In the first half of 2020, combined ratio deteriorated 980 basis points. Apart from weather-related events, such catastrophe losses are mainly due to the global pandemic, impact of which will be reflected in future results, including third quarter 2020 results as well.

While the insurance industry remains safely capitalized, the insurer faces potentially significant unknown coronavirus liability exposures as well as political and regulatory threats of mandated retroactive and prospective COVID-19 coverage. Since then, the COVID-19 pandemic has continued to affect the insurer and will likely impact underwriting results through the year.

Net investment income, an important driver of the company’s revenues, declined in the first half of 2020 mainly due to lower partnership income owing to the impact of the pandemic on lower-quality debt securities held by certain of investment partnerships. Further, declines in interest income arising from the impact of low reinvestment yields on debt securities and lower yields on short term investments and floating-rate debt securities have been exerting pressure on the company’s overall investment income. Also, the prevailing low-interest-rate environment is likely to keep investment yields under pressure.

The property and casualty insurer experienced quarterly surplus decline as the stock market suffered its largest drop since 1987, interest rates reached a record low and also due to unstable investment markets. Unrealized capital losses drove the largest-ever quarterly surplus decline for the property and casualty insurer.

Lack of purchase of new vehicles, low claims on existing policies due to reduction of vehicular movement due to the global pandemic has affected the entire automobile sector. This is turn has affected the premium growth.

As of Jun 30, 2020, the debt level increased 15.2% from 2019-end level, with total debt to capital deteriorating 270 basis points (bps) from 2019-end level. The P&C insurer’s interest coverage ratio of 0.5 is poor when compared with the 2019-end figure of 12.2, which implies that its earnings are not sufficient to cover interest obligations.

The company has a poor earnings surprise history. It came up with average trailing four-quarter negative surprise of 8.60%.

Additionally, Alleghany’s trailing 12-month negative return on equity (ROE) of 1.3% is lower than the industry’s ROE of 6.2%. This reflects the company’s inability to utilize its shareholders’ funds.

Stocks to Consider

Some better-ranked stocks in the insurance space are Hallmark Financial Services Inc HALL, Fidelity National Financial Inc. FNF and First American Financial Corp. FAF, each presently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Hallmark Financial surpassed estimates in two of the last four quarters. The company has a trailing four-quarter earnings surprise of 93.03%, on average.

Fidelity National surpassed estimates in each of the last four quarters. The company has a trailing four-quarter earnings surprise of 32.13%, on average.

First American Financial surpassed estimates in each of the last four quarters. It has a trailing four-quarter earnings surprise of 20.84%, on average.

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