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Are Insurance Companies Cheap?


Viking
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What is everyone thinking about insurance companies in general?

 

1.) It appears we are in a soft pricing environment and it could remain this way for a couple of years

2.) Most well respected insurers are shrinking their business; underwriting results will likely continue to deteriorate (as CR's increase)

3.) Interest & Dividend income likely has peaked (as interest rates are low and stocks are now more fully valued)

4.) Investment gains have likely peaked (as stocks and bonds look to be fully valued)

 

The big picture is not good. Having said all that, insurers and re-insurers are trading at historically low metrics (i.e. price to book).

 

Here is my take on three that we all follow quite closely:

BRK: solid returns to be expected going forward.

FFH: higher risk but also much higher return potential; still needs to re-establish track record and investor trust.

MKL: somewhere in between the other two. Better future returns than BRK but less than FFH; management more trusted than FFH.

 

Does this mean that insurance companies are cheap, offer a good margin of safety at current prices, and should be purchased by conservative investors (and held for the long term)? Especially if a couple are purchased? Near term risks are pretty clear (large catastrophe hits, market softens further etc). I am having a problem seeing any near term catalysts (other than consolidation or share re-purchases)?

 

What do people think? time to get aggressive? Or are they not as cheap as they appear?

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Guest dealraker

The statement was made that:  "MKL: somewhere in between the other two. Better future returns than BRK but less than FFH; management more trusted than FFH."

 

I own MKL, BRK, and FFH.  I'll take a 10 year bet against MKL having better future returns than BRK.  Berkshire is better priced today and has a far, far, far, far, far better business.

 

 

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Let's rephrase the question.  Are insurance companies that are prepared for the huge increase in interest rates that is certain to kick in within another year or two cheap?  WFC is giving up $1-2B in interest per year to keep their portfolio short duration, certainly through WEB's influence.  They are a bank, but I mention them to highlight the importance WEB attaches to this.  As for insurance companies, BRK certainly qualifies, HCC also qualifies because Gen Re manages their portfolio.  Who else qualifies?

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