The Long and Short

Buffett’s position in Chubb helps Alleghany

| May 17, 2024

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

Berkshire Hathaway (BRK: Aa2/AA/AA-) recently disclosed a growing position in property and casualty insurance bellwether Chubb Corp (CB: A/A+). BRK now holds a $6.7 billion stake in Chubb, which makes it one of the investment conglomerate’s 10 largest positions. The news caused CB’s share price to spike on the perceived endorsement of the company by Warren Buffett. But stakeholders of Berkshire’s most recent foray into the insurance space, Alleghany Corp (Y: A1/AA), are also benefitting, improving the relative value of Alleghany’s debt.

The CB stake indicates BRK’s commitment to Alleghany. While the relationship has tightened over time, Y bonds still trade at an attractive discount to BRK bonds, offering investors a compelling carry trade for what is essentially strong credit backing by BRK (Exhibit 1). This includes the legacy Transatlantic Holdings notes that were legally assumed by Y more than a decade ago. Y benefits from both implicit and explicit support from the parent company, and its P&C and reinsurance operations appear to be even more strategically important to BRK than ever.

Exhibit 1: Y bonds compared to parent BRK and CB

Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications

Alleghany is owned by BRK in a deal that closed in October of 2022. Transatlantic holdings is an intermediate holding company and has been a wholly-owned subsidiary of Y since 2012. Transatlantic represents the core reinsurance operations of Y and is a leading global reinsurer in the broker market. The $11.6 billion purchase of Y was BRK’s first big foray into the insurance space in a long time and was the conglomerate’s largest scale acquisition in roughly six years. BRK legally assumed the existing debt of Y, but did not provide an explicit guarantee, nor did they dissolve the legacy debt ticker of the new operating subsidiary. BRK has a lengthy and storied track record of demonstrating financial support for the operating entities that fall under its conglomerate umbrella.

On the closing of the transaction, S&P equalized the ratings of Alleghany with those of the parent, raising the senior unsecured rating to ‘AA’ from ‘BBB+’ and assigning a stable outlook. The insurance financial strength (IFS) ratings of the operating subsidiaries at Y were also raised to ‘AA+’ from ‘A+’. S&P views Y as a core operation of BRK’s insurance group. In addition to the implicit support that the parent is likely to provide, the rating agency also highlights the explicit support that comes in the form of internal reinsurance agreements. S&P also believes that the existing external reinsurance agreements of Y could be replaced with additional internal support from National Indemnity or other group affiliates in the future.

Moody’s took a slightly different approach, raising the senior debt rating on Y to ‘A1’ from ‘Baa1’, and taking the insurance financial strength rating of TransRe to ‘Aa2’ from ‘A1’ and the IFS ratings of RSUI Indemnity and Landmark American Insurance to ‘Aa3’ from ‘A2’. Stable outlooks were assigned to all the ratings. Moody’s also acknowledged the high likelihood of both implicit and explicit support from the parent and highlighted that the IFS ratings of the insurance subsidiaries incorporate two notches of uplift from their standalone rating profiles. Both agencies appeared to compress the typical notching between the parent and IFS ratings (typically 3 notches) to reflect the broad support provided by Berkshire. Fitch does not rate standalone Alleghany.

Standalone Alleghany is a hybrid reinsurance and P&C operator, traditionally seen as a close operating comp to XL Group (XL: A3/BBB+/A-) and Arch Capital (ACGL: Baa1/A-/BBB+). Alleghany significantly expanded its reinsurance operations through the 2012 purchase of Transatlantic Holdings (TransRe) for $3.8 billion. Reinsurance and Excess & Surplus (E&S) are its two core business lines. The company’s risk profile is similar to that of a more traditional P&C operator with exposure to earnings volatility as a result of catastrophe losses. They are extremely well capitalized and a strong operator in their core markets. Much was made about BRK’s more recent foray into the P&C space, as it demonstrates optimism amidst rising cat losses in recent years for many of the industry’s top operators.

Dan Bruzzo, CFA
dan.bruzzo@santander.us
1 (646) 776-7749

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