May 27, 2009 - 3:36pm EST by
2009 2010
Price: 215.00 EPS $11.82 N/A
Shares Out. (in M): 1 P/E 21.7x N/A
Market Cap (in $M): 243 P/FCF 10.1x N/A
Net Debt (in $M): 0 EBIT 62 0
TEV ($): 2,400 TEV/EBIT 38.7x N/A

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Although illiquid, I couldn't resist letting VIC members know of this 300%+ IRR opportunity, that is easily hedged.  The big assumption is being able to buy a position near today's price.  Alleghany Corporation (Y) is a NYC based $2BB market cap P&C insurer.  The common stock Y trades for $260/share.  There is a 1.13mm share preferred issue that last traded at $215 and mandatorily converts on 6/15 this year at a variable convert ratio somewhere between a minimum of .8994:1 and a maximum of 1.0613:1.  In addition, the last dividend of $3.8036 goes ex tomorrow. 


The convert ratio is the average of the 20 trading days prior to 6/15 convert date.  Today is the 8th day and 12 more trading days before conversion.  The average so far assuming a $260/share close today is $264.30.  The threshold appreciation is $249.34, so the ratio is currently at .9433, or $245.28 parity ($260 * .9433).  With the preferred at $215, that is $34.08 gain on $215 cost, 15.8% return in 18 days or over a 300% IRR. 


The borrow on Y is available to create an excellent arbitrage opportunity.  Y is a well managed, underleveraged insurer that trades below book so perhaps a hedge is not necessary but I would rather not risk it. 


I realize liquidity is pitiful and this trades spotty so not expecting a great rating, but I was able to get a little stock today.  Just another indication that the market still offers inefficient, compelling investment opportunities.


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