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WRBerkley reports


omagh
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http://finance.yahoo.com/news/W-R-Berkley-Corporation-bw-3224250850.html?x=0&.v=1

First quarter highlights included:

 

   * Return on equity was 13.2%.

   * Book value per share increased 3.6% to $23.80.

   * GAAP combined ratio was 94.1%.

   * Repurchased 3.8 million shares of common stock at an average cost of $24.78 per share and an aggregate cost of $95 million.

Commenting on the Company’s performance, William R. Berkley, chairman and chief executive officer, said: “We continue to be pleased with our results, especially given the current competitive environment. Our insurance rates remain generally flat, and the pace of the decline in our written premiums has slowed over the past twelve months. We were able to selectively increase prices, although the overall insurance market momentum has not yet turned positive. We are maintaining underwriting discipline and continue to obtain adequately-priced business with customers who value the strengths of our enterprise.

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Bargainman, WRB is one of my top three holdings so let me give you what I like and I also would like to hear what omagn says...

 

Summary: very cheap; solid long term track record; trust management; shareholder oriented; set to grow rapidly when insurance markets harden.

 

1.) the stock is cheap: my guess is they will earn $3.00 this year, in a very soft market. With the stock trading at $28 this gives us a PE of under 10. BV = $23.80. P/BV = 1.18 which is FAR below their long run average.

2.) I think they understand insurance. They have been in business since 1967 and have what looks to me to be a pretty decent track record.

3.) I trust management. Yes, the father / son routine is a red flag for me. However, as long a Bill Sr is there I am happy. 

4.) They appear to be very focused on making an underwriting profit; I believe their people are paid bonus over multiple years based on what their policies actually earn (not by the volume they write).

5.) They are poised for near term and long term growth. They are sitting on excess capital; currently they are buying back large numbers of shares. Last year they invested in starting up some new ventures they feel will do well when the insurance market turns. 

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WRB is a <5% holding in a basket of 3 insurers which represent ~35% of portfolio.  Buying a 15% ROCE at book value is better than other options being considered at the moment and better than holding cash, although cash weighting is rising in the portfolio overall.  Bill Berkley's comments on the catalysts for a hard market are compelling and actors positioned to play that hand will do well.

 

Some more points for the checklist:

  • CEO holds majority of personal wealth here - 5.9M shares
  • focuses on niche insurance markets with less competition
  • CEO understands insurance pricing and implements a pricing/capacity optimization strategy which has outperformed over previous cycles
  • currently shrinking capacity while remaining profitable
  • better underwriters than industry peers and demonstrated over multiple cycles
  • average investors, much worse than BRK or FFH
  • currently using excess capital to buy in shares -- Book value continued to increase due to a combination of our earnings and the improvement in the value of our investmentportfolio. Given our already well-capitalized position, we elected to use most of the earnings generated this quarter to repurchase our shares at prices that we perceived to be attractive. In the long run, we recognize that creating value for our shareholders occurs when we build a better business that has good predictability, high risk-adjusted returns and the right
    amount of capital,
     

 

-O

 

Bargainman, WRB is one of my top three holdings so let me give you what I like and I also would like to hear what omagn says...

 

Summary: very cheap; solid long term track record; trust management; shareholder oriented; set to grow rapidly when insurance markets harden.

 

1.) the stock is cheap: my guess is they will earn $3.00 this year, in a very soft market. With the stock trading at $28 this gives us a PE of under 10. BV = $23.80. P/BV = 1.18 which is FAR below their long run average.

2.) I think they understand insurance. They have been in business since 1967 and have what looks to me to be a pretty decent track record.

3.) I trust management. Yes, the father / son routine is a red flag for me. However, as long a Bill Sr is there I am happy.  

4.) They appear to be very focused on making an underwriting profit; I believe their people are paid bonus over multiple years based on what their policies actually earn (not by the volume they write).

5.) They are poised for near term and long term growth. They are sitting on excess capital; currently they are buying back large numbers of shares. Last year they invested in starting up some new ventures they feel will do well when the insurance market turns.  

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The only reason why I've never own any WRB shares is because of the investment side of the business. Nothing to compare with FFH and BRK indeed.

 

That being said, they are still disciplined capital allocators and I like the fact that they are buying shares back. Makes a lot of sense to me.

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Partner, the primary reason why I like WRB is because of their exceptional underwriting. That alone (they write a CR about 10% better than the industry) allows them to deliver a very good long term ROE. I consider their approach to provide me with some level of diversification versus FFH (within the insurance segment).

 

I just listened to the converence call:

1.) still expect cycle to turn at year end with "price increases of a substantial amount in the 4th quarter". Expects redundancies to shrink and unfavourable development to increase. Longer tail businesses (casualty) will continue to report more reserve releases than shorter tail business (property). Insurance market pricing is driven by emotion, not logic. Those walking from business today are feeling short term pain in their quarterly results (as expense ratios climb); those writing business over 100 are still able to report what look to be solid quarterly numbers. Fear will eventually hit the market as those underpricing will eventually have to pay the piper. When fear hits, market pricing will harden. 

2.) 15% ROE still expected this year; on the hook for $5 million in Q2 as a result of the oil platform sinking in the Gulf of Mexico

3.) Q1 CR (accident year) = 100%; with conservative reserving

- feels industry (commercial lines) = 110%

4.) favourable development = 7% (bringing reported CR to below 95%)

- this is the piece that is missing from FFH. Prem says they are running at 100% CR with conservative reserving. If this is true, and the issue is pre 2002 development, then we should see FFH start to report more favourable development or hold at the 100% level (versus creaping towards 105%).

5.) Portfolio yield is 4.3% (was 4.5% in Q1 09)

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Guest swf83

A few questions...

 

1) Do we know specific company securities help within the investment portfolios (other than US Treasuries)?

 

2) In your opinion, is the $27/share a good long-term entry level?

 

 

Thanks for all the great thoughts.

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As I understand, WRB doesn't file a 13f-hr because it manages less than $100 million in qualifying securities. Most of their equity exposure seems to be in the form of convertible debt and/or preferreds, which may explain the $0 cost available for sale holdings.

 

I'm no expert on WRB so corrections are welcome.

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swf83

 

1.) I do not have much detail regarding the investment portfolio other than it is skewed to fixed income with a short duration (very much more traditional insurance co holdings).

2.) regarding price, you will need to make the call on that. WRB bought back 3.8 million shares at about US$25.00 and I would expect the company to be a buyer in the US$25 to $26 range going forward so I would be surprised if it went much below this price. If you wait, insurers may sell off as we are getting close to hurricane season. If you wait, the key risk is if it appears the market is hardening and Mr. Market decides it is time to buy insurers and they run away on you.

 

I also suggest you listen to the conference call, if you have not, to get a feel for management. Each quarter you can then start to paint a picture of if you trust them etc...

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Nice call, thanks for the heads up!

 

I found this part interesting about new international markets:

 

"A couple of sound bytes on the five different segments maybe cutting right through to the chase as far as the one particularly noteworthy outlier that would be our international segment. It came in with a combined ratio of a [111]. This was in part driven by an expense ratio of 44. and this was really due to some of the fact that we have a significant number of start ups in that segment including our new Lloyd’s syndicate, our operations in Australia, our effort to build our business in Brazil as well as a few branches that we have created in Western Europe as part of WR Berkley, Europe, our FSA company."

 

 

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Love these lines--after describing the process by which the cycle turns to a hard market:

 

Berkley: "So, we’ll have to see how that comes out and when do people major players starts to say we can’t live with prices at this level. But to make that decision you have to be willing to lose business. And that’s a hard thing for an insurance company executive to say, that we are prepared to have our insurance volumes go down and either fire people or have a bad expense ratio...

 

So that’s the best I can do to tell you that we are bunch of irrational people with a huge marketplace that respond to our emotions more than the economic reality."

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