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Soft Market Over?


nwoodman

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William Berkley, at GS conference yesterday:

 

"We think – in light – in the current cycle we think we are just at the beginning of price increases.

 

Two years ago – actually two and a half years ago, I thought the cycle was going to change because I expected AIG not to get the degree of help from the government that it did. I was incorrect, the government, as we all know – in fact we bailed out AIG which delayed the inevitable. It wasn’t that prices were bad two years ago, they were. But by allowing AIG to hold on, AIG continued to be able to cut prices and held the market in check.

 

Prices started to turn the end of last year, the beginning of this year and we are definitively in a hardening market. The beginning of this year I told people that I expected 5% to 8% price increases by the end of the year, I would still expect that to be the case. But we are really just at the beginning of that happening and along with price hardening, terms and conditions are changing which lets the business you write become more profitable.

 

So the industry is in a tough shape. No real returns by and large most companies are not making any profits other than from what they carry forward from prior years. There are a few exceptions, but if you look at the industry average, you choose the number for what you think new money yields are depending on duration of their portfolio, but by and large the industry has negative to 1% or 2% returns. "

 

 

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I like Peter Lynch's line about how doctors like to invest in resource plays and miners like to invest in pharmaceuticals... we tend to invest in stuff we do not understand. Having followed BRK & FFH for many years many people on this board understand insurance co's pretty well. Do many investors on this board hold insurance investments today?

 

It is clear the insurance market is in the process of shifting from a soft to a hard pricing environment. It has been happening over the past year. Insurance stocks are starting to reflect this fact and look to be one of the top performing groups over this time. As pricing continues to improve, earnings grow and P/BV multiples expand (what the market is willing to pay) insurance stocks look to be set to continue to outperform.

 

My favourite picks are BRK, WRB and ACE (gives me some diversity). And yes, there are many more well run insurers (FFH etc). This is one sector I am hoping to increase exposure to over the next few months and then hang on for the ride.

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I like Peter Lynch's line about how doctors like to invest in resource plays and miners like to invest in pharmaceuticals... we tend to invest in stuff we do not understand. Having followed BRK & FFH for many years many people on this board understand insurance co's pretty well. Do many investors on this board hold insurance investments today?

 

It is clear the insurance market is in the process of shifting from a soft to a hard pricing environment. It has been happening over the past year. Insurance stocks are starting to reflect this fact and look to be one of the top performing groups over this time. As pricing continues to improve, earnings grow and P/BV multiples expand (what the market is willing to pay) insurance stocks look to be set to continue to outperform.

 

My favourite picks are BRK, WRB and ACE (gives me some diversity). And yes, there are many more well run insurers (FFH etc). This is one sector I am hoping to increase exposure to over the next few months and then hang on for the ride.

 

Would you mind explaining why you picked WRB and ACE over FFH?  I've been considering establishing a position in FFH relatively soon.

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Racemize, I have followed FFH for years and it has been as high as 70% of my portfolio (2007 & 2008). The reason I held it in the past was becuase it was dirt cheap (selling at less at P/BV of less than 0.8) and their investment portfolio was positioned perfectly to benefit from the 2007/2008 credit crisis (via their holdings of CDS). I have never held FFH because I think they are great underwriters. I do not follow FFH as closely now as I have in the past. I do not own them today because:

1.) stock is not crazy cheap

2.) investment portfolio has increased in complexity and looks positioned for breakeven should things get ugly again

3.) underwriting, while not terrible, is not yet in the same league as others

I am not saying FFH will not deliver solid to great returns for investors moving forward. But more than other insurers FFH looks to me to be a 'bet on the jockey' type stock with outperformance (of other insurance companies) tied more to investment results more so than underwriting results. 

 

Given how defensive the FFH investment portfolio is I would rather, in my portfolio, sit on cash and deploy myself during market sell offs directly in companies like WFC, DELL etc.

 

FFH will benefit from an improving insurance pricing environment moving forward but I would expect the better underwriters to improve their results more than FFH (who relies more on investment gains to drive earnings).

 

I like BRK, WRB and ACE as I have followed for years I think they are all well run insurers, leaders in their respective markets and their insurance businesses should do very well as insurance markets improve. I don't think the stocks are crazy cheap today (like they were a year ago). And I am not looking to back up the truck. I am just trying to identify sectors and companies that I like that I will target should markets sell off aggressively again in the coming weeks and months (should Europe disappoint and/or the US look like it is going into a recession).

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Viking, I think possible premium growth for fairfax in a hardening market could be significant. At Zenith for example, expense ratio exceeds loss ratio as premium volumes more than halved in 6 years ($1.1b to $450m). The potential is there if the market turns, they are waiting for it to happen. You already see them writing more business and it seems likely the trend will continue in the coming quarters.

 

It will take some time before it will be reflected in CR's but it will happen and it will have a significant impact on underlying performance imo.

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  • 2 weeks later...

Another perspective...

 

For every 1 percent drop in investment returns, underwriting pricing has got to improve an average of 3.5 percent, "but that is not happening," Hartwig said.

 

"As we look forward, where is the industry going to grow? The answer is in emerging markets ¿ China, the Middle East, and parts of South America," Hartwig said. "But that's also the places where there is the most political risk. So incremental growth is going to be achieved with greater risk; that's the unfortunate nexus."

 

http://www.axisinsurance.ca/news/despite-record-catastrophe-losses-a-hard-market-remains-elusive/

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  • 4 weeks later...

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