WRB & PRE

[Viking]

I would like board members to help me understand something. Are a number of insurance companies not crazy cheap right now (I am looking out 3 to 5 years, not the next 6 months)?

 

I will not be discussing FFH or BRK (covered already).

 

I have followed WR Berkley for a couple of years now, but have never purchased. They just released results today. BV = US$22.97. Stock is trading at US$24.25. Price to BV = 1.05 which is multi-year low (ingoring how low all stocks went in March 09 which in my mind is an anomaly). The company should earn $2.50 to $3.00 this year in a very solf pricing enviroment. Their underwriting is very conservative. Investments are reasonably conservative. VERY GOOD long term track record.

 

Upside: as AIG shrinks, companies such as WRB will grow. The insurance market will firm at some point in the next year or two and WRB has excess capital and will grow like stink. They have repurchased 5% of outstanding shares in the past 4 months (best use for excess capital).

 

WRB looks to me to have the ability to double in price the next 3 to 5 years due to earnings and the market attaching a higher multiple to those earnings (something Lynch looked for). Reasonable risk and very high return. What am I missing?

 

A second stock I am also looking at is Partner Re. Similar story to WRB; higher risk by also a very high potential return. Would a basket of these sorts of companies not make sense?

 

 

[Ballinvarosig Investors]

I have followed WR Berkley for a couple of years now, but have never purchased. They just released results today. BV = US$22.97. Stock is trading at US$24.25. Price to BV = 1.05 which is multi-year low (ingoring how low all stocks went in March 09 which in my mind is an anomaly).

Did you strip out goodwill when calculating book value? That should raise the ratio to 1.11, still cheap.

[Uccmal]

Hi Viking, I will qualify this by saying that I have not looked at your two companies in any detail. 

 

With regards to AIG, do we have any evidence that they are shrinking?

 

Do we have any evidence that there will be a hard market.  If you recall a few months ago, Cardboard posted a synopsis showing the duration and times of hard markets in the past 40 years or so.  It amounted to a couple of years every decade with ever decreasing lengths of time.  I figure there eventually will be a hard market but we will probably be able to buy every single P&C insurer below book in the months preceding it, after the requisite disaster of course.

 

So, without looking at your prospects in great detail: Without the investment skill of HWIC or Buffett's operating businesses where are you going to get your increase in book value? 

 

Just a few thoughts. 

[SharperDingaan]

 

You might want to reconsider AIG. Selling the parts puts them into stronger hands & increases the competition. Keeping the parts ensures that we continue to get stupid policy pricing for a couple more years yet. At best, constrained top line growth.

 

Costs continue to escalate at inflation+, there is stronger incentive to defraud, & little prospect of industry consolidation. Short-term assets are earning minimal returns, business is not stable enough to warrant mismatching asset/liability terms, & for many (net of investment writedowns) - reserves are on the 'light' side.

 

Yes they are cheap, but cheap enough ? unlikely.

Worth writing out-of-the-money puts on ? possibly

 

SD

[Guest misterstockwell]

I was fortunate enough to get a number of quality insurers below an artificially depressed book during the crash. WRB is one, plus FFH, HCC, Y, and AHL. I'll have to wait longer for that hard market than I expected, but eventually it shall come. I have a nice cushion to wait it out. I would urge people to listen to WRB's conference call at 10AM ET this morning. William Berklet knows his stuff.

[benhacker]

Are a number of insurance companies not crazy cheap right now (I am looking out 3 to 5 years, not the next 6 months)?

 

Viking, the answer is YES.  WRB is a fantastic company, so is MKL. I did some work on HCC which seemed to be excellent as well, but the insider ownership was a turn off to me (especially in this sector).

 

Lots of solid players trading for near or below book.  Lots of marginal players trading for much less.  I don't know PRE well...

 

We'll see how it shakes out, it will be interesting.

 

Ben

[mranski]

I find myself gravitating toward insurance and financials, BRK, MKL, FFH, EFL, MFC, POW, CDN banks to the point that I am concentrated alot. I look at cdn resource companies, and find it hard to pull the trigger due to pricing and unknows.  WRB is another great one, but how many can you have. Add WFC and AXP and I might as well put the whole portfolio in financials?

[biaggio]

would FFH, BRK-b not be better buys? vs buying a basket of companies in same industry

 

 

[Viking]

Biaggio, I think that FFH and BRK are solid companies. My question with this post was whether or not a basket of 3 or 4 other insurers would not make an attractive long term purchase (for perhaps 10% to 20% of ones portfolio).

 

My goal is to purchase stuff in my circle of competence that is trading at an attractive margin of safety. WRB looks to be dirt cheap right now and a quality company (even though they come across as being quite arrogant). MKL is also on my radar as well as PRE. I am trying to cycle through as many companies as possible to find a couple to add to my portfolio and appreciate the suggestions people are thowing forward. If people also want to get into more detail on any of the names I am all for sharing what I think and would look forward to seeing what others think. 

[oldye]

I don't understand insurers that don't know how to invest, if their CR's are that good why wouldn't competition undercut them next year on the same policies?

[Viking]

oldye, I think your answer is quite simple. We all know three things drive insurance earnings:

1.) underwriting

2.) interest and div income

3.) investment gains / losses

 

Each company out there has a competency in one or two areas. I see none today, except perhaps BRK when it was smaller, that excells in all three areas. FFH has for sure underperformed in #1 (check out C&F or Northbridge CR's the past few years..).

 

WRB, as another example, excells at #1 and does OK at #2 (and my guess is, given the short tail nature of its business, does OK at #3). They have a skill set and business model that is very different than FFH and appear to be doing a very good job (delivering on their stated ROE target of 15% per year... sound familiar?).

 

FFH can make the bets it does with equities because it has some longer tail business which means it can wait 5 or more years for Mr Market to catch up to their appraisal.

 

Someone please correct me if I am wrong. Thanks!

[Packer16]

Has anyone looked at the underwriting triangles for WRB?  It apperas they have some deficiencies versus redundacies for other good underwriter like Lancashire.  I don't know if the magintude of the deficiences should cause alarm.  How are these deficiences reflected in the loss ratios? Can any other of the insurance experts provide insight?  TIA

 

Packer