Viking Posted November 3, 2010 Share Posted November 3, 2010 I just listened to the WRB quarterly call and all was pretty boring (not much change or new happening since Q2). Bill gave a pretty good summary of why he feels a turn in the market (for the better) is coming: WRB loss ratios have historically been 8 to 10 points better than the industry; today WRB loss ratios are 6 points worse. This is a 14 point swing. Bill said either WRB has become incredibly stupid or competitors will experience large reserve deficiencies in the future (and lower capital will force them to write less business). At the same time these companies will not be able to raise traditional capital as easily (given current state of capital markets). He is sticking with his 'prices will start turning in Q4' but he is also says that he could be wrong on timing (and that WRB does not run its business by predicting thses sorts of things). The company had net earnings of $94 million in Q3 and bought back $88 million in common stock. The company in past conference calls has said that it is flush with capital and will be happy to buy back stock given current prices. Many good insurers are trading at around book value. To purchase another company the takeout price would likely need to be 1.3 or 1.4x BV (i.e. FFH purchase of Zenith). I really like the fact that WRB is buying its own stock back for about 1x BV. Year to date they have repurchased 12 million shares (8% outstanding). Today they just announced they have increased the buyback amount to 10 million and they increased the dividend from $0.05 to $0.07/share. Book value is $26.36 and the stock closed today around $27.50/share. The insurance market looks to have stabilized so I would expect them to earn $0.60/share per quarter in the current environment. Should a hard market come and prices increase (and volume grow) earnings would increase dramatically. Looks to me to be a pretty good reasonable risk high return potential looking out a few years. Link to comment Share on other sites More sharing options...
Myth465 Posted November 3, 2010 Share Posted November 3, 2010 I like these guys. Just wish they were cheaper. I am starting to see the reserve releases fall and assets are rolling over to lower yields. Something has to give. My issue with insurers is you can just wait till something gives and buy then. When something gives things get cheap. Its why i havent bought back FFH but I will at some point. I really liked his explanation on why they arent buying companies. I think its good for FFH though. They want and need float, underwriting doesnt help them too much. WRB already has a great underwriting culture. So it doesnt make sense to add another culture. Link to comment Share on other sites More sharing options...
Carvel46 Posted November 3, 2010 Share Posted November 3, 2010 What do think of compensation at the company? Link to comment Share on other sites More sharing options...
Viking Posted November 4, 2010 Author Share Posted November 4, 2010 Carvel, if you are referencing their underwriters, I think they are compensated over the cycle and not to hit quarterly volume numbers; I like this. If you are referencing senior management, I do not have a handle (but would expect it is high). Regarding senior management, I do like Bill (he sounds quite arrogant, but he also has earned his stripes). His son, to be perfectly honest, has not impressed me (how he answers questions on conference calls); however, he is young and as long as pop is around I am not concerned. Link to comment Share on other sites More sharing options...
Viking Posted November 4, 2010 Author Share Posted November 4, 2010 Myth, you mentioned that you wish they were cheaper... my read is most insurers are trading at historic lows. We are now through hurricane season and profitability for the next two quarters will likely chug along (and BV should continue to grow). My concern is being out of the sector as it begins its next multi-year run so I am now re-establishing a base position in my favourite names. Link to comment Share on other sites More sharing options...
Viking Posted November 5, 2010 Author Share Posted November 5, 2010 Here is a nice summary of Berkley's call for prices to harden at some point in the near term: www.insurancejournal.com/news/national/2010/11/04/114589.htm Link to comment Share on other sites More sharing options...
biaggio Posted December 21, 2010 Share Posted December 21, 2010 Viking, agree with you Looks like a good candidate as a owner/jockey stock Management owns 20% CEO + co have excellent 10 year record of 16% growth in BV and 25 year record of 15% growth, with good performance despite soft market. They sound conservative. Have not written as much business as price was not right. They have ~$17 billion in invested assets, market cap of $4 Billion and have only written ~ $4 B in business this year I think it would be ok to buy at BV. I would not mind holding for 25 years and earn 15% per year. I am thinking of adding a position. Link to comment Share on other sites More sharing options...
Liberty Posted February 2, 2011 Share Posted February 2, 2011 Q4 conference call is tonight at 5:30 pm ET: http://ir.wrberkley.com/events.cfm WRB calls are usually pretty instructive (at least, the couple that I've heard were). Link to comment Share on other sites More sharing options...
Myth465 Posted February 2, 2011 Share Posted February 2, 2011 These guys are a one track record. One day they will be right. Link to comment Share on other sites More sharing options...
Liberty Posted February 2, 2011 Share Posted February 2, 2011 These guys are a one track record. One day they will be right. IMO the important thing is that they don't change how their business is run based on their predictions, so that if they don't come true, there's no real negative impact, they just have to be more patient. I like corps with a good defense like that. Link to comment Share on other sites More sharing options...
Myth465 Posted February 2, 2011 Share Posted February 2, 2011 I agree. I just prefer deeper value in Insurance. I like AHL and the options have worked out well thus far. I am hoping they are bought for book by June, its unlikely though. Link to comment Share on other sites More sharing options...
Viking Posted February 2, 2011 Author Share Posted February 2, 2011 WRB just released Q4 results: http://files.shareholder.com/downloads/BER/1154683497x0x438657/4ed2eedf-562c-404d-8169-3fb68de93b29/WRB_News_2011_2_2_General_Releases.pdf Q4 net income increased $0.85/share BV = $26.36 (was $26.26 at end of Q2) Questions I have: 1.) impact of muni bonds on BV (given Q4 muni bond sell off): a non-event, likely given duration of muni holdings is only 4.1 yrs 2.) size of reserve releases in Q4: TBA Bottom line is it looks to me that we are still in a soft pricing environment with no end in sight. I will be watching the trend in reserve releases as insurers release results as this should give some clarity as to when we will start to see a market turn. Myth465, yes, the timing around B Berkley's prediction has not been right; I do buy into his logic and am appreciative he lays out his thoughts so well. Berkley is simply saying that the current pricing environment is not sustainable. He also understands that nobody can predict timing (yes, he seems to have fun trying). Well run insurers are trading at very attractive levels, especially compared to the poorly run companies (not much of a multiple difference). At some point we will get a hard market and the well run insurers will be ideally positioned. Investors will then get growing earnings and growing PE multiples. J Grantham in his Q4 report makes a great comment about Bubbles: "saving your big bets for the outlying extremes is, in my opinion, easily the best way for a large pool of money to add value and reduce risk." My guess is we are getting close to one of those outlying extremes in insurance that only comes along once every 10 years or so... Link to comment Share on other sites More sharing options...
omagh Posted February 2, 2011 Share Posted February 2, 2011 Thanks Viking. Interesting comments on the Australian catastrophes in the Q&A on the conference call. WRB has no dog in that fight, but Berkley indicates that there will be substantial, but not market-changing, losses to reinsurers. Also, the typhoon will likely be considered a second event. Not quite enough capital destruction to cause significant pricing changes. WRB just released Q4 results: http://files.shareholder.com/downloads/BER/1154683497x0x438657/4ed2eedf-562c-404d-8169-3fb68de93b29/WRB_News_2011_2_2_General_Releases.pdf Q4 net income increased $0.85/share BV = $26.36 (was $26.26 at end of Q2) Questions I have: 1.) impact of muni bonds on BV (given Q4 muni bond sell off): a non-event, likely given duration of muni holdings is only 4.1 yrs 2.) size of reserve releases in Q4: TBA Bottom line is it looks to me that we are still in a soft pricing environment with no end in sight. I will be watching the trend in reserve releases as insurers release results as this should give some clarity as to when we will start to see a market turn. Myth465, yes, the timing around B Berkley's prediction has not been right; I do buy into his logic and am appreciative he lays out his thoughts so well. Berkley is simply saying that the current pricing environment is not sustainable. He also understands that nobody can predict timing (yes, he seems to have fun trying). Well run insurers are trading at very attractive levels, especially compared to the poorly run companies (not much of a multiple difference). At some point we will get a hard market and the well run insurers will be ideally positioned. Investors will then get growing earnings and growing PE multiples. J Grantham in his Q4 report makes a great comment about Bubbles: "saving your big bets for the outlying extremes is, in my opinion, easily the best way for a large pool of money to add value and reduce risk." My guess is we are getting close to one of those outlying extremes in insurance that only comes along once every 10 years or so... Link to comment Share on other sites More sharing options...
onyx1 Posted February 2, 2011 Share Posted February 2, 2011 Q4 net income increased $0.85/share BV = $26.36 (was $26.26 at end of Q2) Looks to me like BV dropped to $26.26 from $26.36 despite earning .85. Hasn't been addressed on the CC, but unrealized gains dropped $116mm from last quarter ($451mm to $335mm) so that is probably MTM losses on the muni portfolio and what caused the lower BV. Link to comment Share on other sites More sharing options...
Viking Posted February 2, 2011 Author Share Posted February 2, 2011 Just finished listening to the conference call. Comments: 1.) will likely use quarterly earnings to buy back stock; not interested in increasing buyback beyond this amount as they want to keep enough excess capital to fund growth (when it eventually happens). 2.) What will cause the market to turn? Losses. A shift from greed to fear. Driven by declining surplus or operating losses etc, as fear enters psyche of management. 3.) Pricing: no question market is turning. 4.) Accident year CR = 100. Feel their underwriting is more conservative than majority of competitors = larger future year reserve releases. 5.) Reserve releases: Q4 2010 = $55 million; FY 2010 = $235 and FY 2009 = $191 6.) Investments: currently buying some mispriced municipals It will be very interesting to hear what other insurers are saying and doing. My guess is if we see a bad year for catastrophes we could get the shift into a hard market (particularly for reinsurers). Link to comment Share on other sites More sharing options...
beerbaron Posted February 3, 2011 Share Posted February 3, 2011 Could the muni market be the catalyst for a hard market? BeerBaron Link to comment Share on other sites More sharing options...
Myth465 Posted February 3, 2011 Share Posted February 3, 2011 Could the muni market be the catalyst for a hard market? BeerBaron I think the focus on the hard market is a bit misguided. I love insurance and this will be my first time playing the cycle. If losses cause a hard market (investments or cat) then I will wait for losses. Losses also cause stock prices to fall.I prefer to spend my time figuring out which ones to bet on so that when the time comes I am ready to push my chips in. Whatever causes a hard market will cause stock prices to fall with BV giving us time to get in. Link to comment Share on other sites More sharing options...
Liberty Posted February 11, 2011 Share Posted February 11, 2011 There's some interesting stuff in this presentation that Bill gave recently: http://files.shareholder.com/downloads/BER/1102439904x6155673x425342/35d81438-9559-406c-988b-2a1d6ad4ba9c/Merrill%20Lynch%20Lunch%2012-2-2010.pdf Interesting slide about the market cycle in the P-C business. Link to comment Share on other sites More sharing options...
onyx1 Posted February 16, 2011 Share Posted February 16, 2011 Some highlights from Berkley’s presentation yesterday, where he said: AIG will need to raise prices as they added 4% to reserves last quarter. Although this has been report in the media, most gloss over the fact that the reserve deficiencies were from 2006 and prior accident years. With “very aggressive” pricing over the past several years, Berkley believes more reserve additions at AIG are forthcoming. Muni portfolio is creditworthy and properly marked, and reserves are conservative. Catalysts for a hardening market are in place, including: current industry accident year CRs are running 108%-109%; commercial lines pricing is as tight as he has seen in his career; low fixed income rates requires better underwriting to achieve adequate ROEs; reserve redundancies are giving way to deficiencies; companies discontinuing lines of business; and, standard carriers are beginning to move out of E&S market. He continues to assert that industry surplus is a lagging indicator of a hard market. He reviewed WRB’s performance in prior hard markets by showing how explosive the share price has reacted to increased net income and expansion of multiples/P-to-BV. From 1982 to 1985, share price went from $.62 to $2.02 (P-to-BV went from .88 to 2.77), from 1999 to 2005 $4.12 to $31.75 (P-to-BV went from .90 to 2.37). He strongly suggested that this can happen in the next hard market as they have widened their footprint over the last 3-4 years through geographic expansion and opening of new units with new hires. Won’t pinpoint when, but believes more than ever that hard market will soon be in place. He owns 20% of WRB outstanding common stock. The entire presentation can be accessed here: http://ir.wrberkley.com/events.cfm Link to comment Share on other sites More sharing options...
Liberty Posted February 16, 2011 Share Posted February 16, 2011 Thanks for posting, Onyx. I hope he's right, but not too soon. I want quality insurers to stay cheap for a while longer so I can load up ;D Link to comment Share on other sites More sharing options...
onyx1 Posted February 24, 2011 Share Posted February 24, 2011 Here is a good write up on WRB from the VIC (it's available to non-members after a 45-day delay). http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/42754 The author's thesis is that WRB is among the best (if not, The Best) positioned to benefit from a cycle turn due to the way Bill Berkley operates in soft markets (pulling in underwriting but not capacity, buying back stock, etc.) and hard markets (using pentup capacity to re-lever the firm). WRB can lever more than most P&C's because they are diversified by geography, line of business, end market and they have no Cat risk as they reinsure individual risk over $5mm. This has been a very successful strategy over the 30 year operating history of WRB and has made Bill Berkley a rich man (he owns 18% of the company worth $780mm). If you are a member, you can view the Q&A that follows the write up. It is equally good and I learned several things about WRB including: They have $60mm in real estate asset booked at cost on the BS purchased decades ago. They have grown staff actuaries from 10 to 80 in the last decade and employ them at both the sub and parent level. The author believes Bill Berkley would sell the company at cycle peak and with a robust valuation. Enjoy! Link to comment Share on other sites More sharing options...
Guest Bronco Posted February 24, 2011 Share Posted February 24, 2011 I seem to remember a few years back that this guy was making tons of $$ in executive salary. Maybe 50m or so? If true, he makes Biglari look like WEB. Link to comment Share on other sites More sharing options...
benhacker Posted February 24, 2011 Share Posted February 24, 2011 I seem to remember a few years back that this guy was making tons of $$ in executive salary. Maybe 50m or so? If true, he makes Biglari look like WEB. A quick summary of Mr. Berkeley's comp (may be some errors, I just pulled this real quick... don't have my notes handy). Total comp: '01 - ~$3-4m '02 - ~$6.5m '03 - ~$20m '04 - ~$11m '05 - ~$18m '06 - ~$30m '07 - ~$27m '08 - ~$15m '09 - ~$17m Ben Link to comment Share on other sites More sharing options...
onyx1 Posted February 24, 2011 Share Posted February 24, 2011 His total comp has been running around $20mm per year. This is my biggest beef with WRB, and probably the biggest reason the firm has not attracted a more robust following among the value investment community. If he paid himself $100k he would certainly attract a cult following, as there aren't many other insurance owner/operators with as good a long term record as Bill Berkley. He is shareholder friendly, passionate about risk, a very good capital allocator, and a leading thinker in the industry. When the firm is valued by the market again at a significant multiple to BV (it closed at 2.9xBV in March 2006), I can only hope he will cap his compensation and reap the benefit of immediate appreciation of his (and my!) stockholdings. In the meantime, I can only ask myself "Is he worth it?" In my opinion, yes. I'm getting an owner/operator who started the business in 1967 with years of experience in bull-bear-soft-hard-inflation-deflation markets. He is solely responsible for the performance of WRB, and the bottom line is that he has grown Tangible Equity (adjusted for capital transactions and dividends) at 21% for the last 10 years, and 21% for the last 25 years. Link to comment Share on other sites More sharing options...
Guest Bronco Posted February 24, 2011 Share Posted February 24, 2011 Ben - thanks for the more accurate #'s. Certainly no WEB with compensation, but I guess not a reason to dismiss the stock. Still, I'm passing on this. Link to comment Share on other sites More sharing options...
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