WRB - WR Berkley

[Liberty]

WRB increasing share buybacks:

 

http://www.zacks.com/stock/news/48323/W.R.+Berkley+Ramps+Buyback+

 

Yesterday, property and casualty insurer W.R. Berkley Corp. (WRB - Analyst Report) announced an increase in repurchase authorization to 10 million shares. The increased authorization represents nearly 7% of the company’s 155.1 million outstanding shares as of December 31, 2010.

 

[biaggio]

Mr Berkley's compensation certainly seems generous.

 

How does one determine if pay is out of line? Is there a general rule of thumb?

 

$20 million per year to me is obviously dear.

 

What is a reasonable pay for  a company with  $1-2 billion market cap?

 

Proxy's I read always have the standard line that the amount paid is in line with what is paid to other executives at similar organization. Should we just go with that.

[Guest Bronco]

My criteria - and Myth knows this b/c he is the only one to read my book (not just on the board, but in the world) - is what is the incremental value added.

 

If you pay Michael Jordan 20 million and he will generate 40 million in marginal profits, it is a no brainer.

 

If you pay Steve Jobs 100 million it would be tough to argue that he isn't worth it.  His marginal value on an annual basis is probably much higher to Apple shareholders.

 

So at $20m, is Mr. Berkley adding more value than someone that can do the job for $10 million?  I can't speak intelligently to that (or anything else for that matter).  But I think that is what s/h's could look at.

 

Buffett compensation is often where the bar is set - since he is paid essentially nothing and has provided so much.  But the same logic is applying - big bang for the $$. 

 

 

[stahleyp]

To me, the problem with huge compensation is not whether or not someone is worth it. It's more to do with love. What do they love more: running the business or the money?

[Myth465]

To me, the problem with huge compensation is not whether or not someone is worth it. It's more to do with love. What do they love more: running the business or the money?

 

I think this will cause you to leave alot of money on the table. Many skipped out on CHK and SD due to compensation. I think Bronco has the right idea. I used to think everyone was simply overpaid, but I am slowly realizing that these guys can add incremental value. Sokol, Ward, and CHK CEO have all added billions of value which has nothing to do with just clocking in.

 

 

[Guest Bronco]

I guess I combined 2 concepts in 1, but in short

 

1) Adding value to SH's that exceeds (by a decent amount) the compensation

2) Can someone add the same value to SH's at a lower compensation?

[S2S]

To me, the problem with huge compensation is not whether or not someone is worth it. It's more to do with love. What do they love more: running the business or the money?

 

Why not both? Maybe it's just me, but most on this board seem to love both (1) money and (2) the game of investing. :D

[onyx1]

I think Berkley provides lots of incremental return because of the nature of the industry he is in.  This isn't KO.  To be effective in P&C, you must be really good at underwriting, reserving, cycle management, investments, risk, capital allocation, new business, and more.  He is involved in every detail of his business.

 

Regarding the buybacks it wouldn't surprise me to see them slow down.  I get the sense from the CC's they are conserving capital for a hard market in the near term.

[Liberty]

2010 annual report is out:

 

http://ir.wrberkley.com/financials.cfm

[Liberty]

http://www.businesswire.com/news/home/20110425006250/en/W.-R.-Berkley-Corporation-Reports-Quarter-Results

 

"W. R. Berkley Corporation (NYSE: WRB) today reported net income for the first quarter of 2011 of $116 million, or 79 cents per share, compared with $119 million, or 74 cents per share, for the first quarter of 2010."

 

Net premiums written increased 10%.

GAAP combined ratio was 96.3%.

Return on equity was 12.6%.

Book value per share was $26.78.

[Liberty]

http://www.businesswire.com/news/home/20110517007044/en/W.-R.-Berkley-Corporation-Increases-Dividend-14

 

W. R. Berkley Corporation (NYSE: WRB) announced today that its Board of Directors has voted to increase the cash dividend to an annual rate of 32 cents per share, representing a 14% increase from the present rate. The first quarterly dividend at the new rate of eight cents per share will be paid on July 1, 2011 to stockholders of record at the close of business on June 14, 2011.

[Liberty]

http://ir.wrberkley.com/releasedetail.cfm?ReleaseID=586605

 

W. R. Berkley Corporation (NYSE: WRB) today reported estimated pre-tax losses of approximately $65 million from the numerous severe U.S. storms that occurred in April and May 2011. The Company's loss estimate is net of reinsurance and includes reinstatement premiums. Today's preliminary estimate of pre-tax storm losses for April and May exceeds the losses contemplated in the Company's budget for the full second quarter by approximately $35 million.

[Liberty]

Q2 numbers are out:

 

http://ir.wrberkley.com/releasedetail.cfm?ReleaseID=593885

[onyx1]

WRB now offered at BV.

[Liberty]

http://www.insurancejournal.com/news/national/2011/10/12/219657.htm

[onyx1]

More signs of a hardening market in the P/C & WC business, from the Q3 press release:

 

 

"The visibility of a cycle change is even more evident, with prices for the quarter up three percent over last year. We believe that price increases and premium volume growth will continue. "

 

"While some industry observers suggest that excess capital is a major restraint on pricing levels, history does not support their perception. Capital has never been the primary driver of cyclical change in the business; it has merely added impetus or restraint. Given the current interest rate environment, the industry needs significant price increases in nearly all lines of business in order to achieve even minimally adequate returns.

 

http://ir.wrberkley.com/releasedetail.cfm?ReleaseID=618266

 

 

[Liberty]

http://www.marketwatch.com/story/w-r-berkley-corporation-declares-dividend-and-increases-share-repurchase-authorization-2011-11-03

[PlanMaestro]

 

W. Robert Berkley, Jr.

 

Okay, thank you. Good morning. Market conditions continue to improve during the first quarter. While our cycle term may not appear visible during any 90-day period when one reflects back and where we were a year ago, it is clear there has been significant improvement. Evidence of the change can be seen in many ways, including the increasing number of carriers publicly announcing significant rate increases.

 

Additionally, we are seeing many market participants adjusting their risk appetite resulting in a gradually increasing flow of submissions into the Specialty markets. This increase in flow predominantly tends to be [risk] with poor loss experience or other competitions.

 

Furthermore, the distribution system seems to have recognized and accepted that we are generally exiting the soft market. Consequently, they are becoming ever more successful and selling the rate increases that many carriers are required.

 

Lastly, the continued accelerating growth of the state defined risk plan populations clearly supports the notion that market discipline is returning. Having said this, life is not perfect and that includes the insurance industry. There are a few carriers in both the standard and specialty insurance market, as well as the reinsurance market that don’t seem to fully appreciate that things are changing. As a result of this circumstance, there is somewhat a lopsided barbell in the marketplace between those that are seeking late adequacy and those that don’t get it.

 

Having said this, the market is turning in spite of this limited number of irresponsible companies that are serving as a hindrance, not a barrier. Primary workers’ compensation and cat exposed property continues to lead other lines with regard rate increases. the reality of increasing loss costs combined with cat activity over the past several years have clearly caught peoples’ attention.

 

Additionally, the impact of recent revisions to cat models as well as the growing consequence of lower new money rates continues to apply added pressure. While change in behavior may vary by territory and product lines, clearly the general trend is definitively upward.

 

Having said this, for the moment, there are certain lines such as excess workers’ compensation and parts of the professional liability market that it remains more resistant to increase the prices. fortunately however, it would seem as though pricing has bottomed out in even these lines and is generally no longer deteriorating.

 

As we have suggested in the past, there is a correlation between the duration of the tale – excuse me, and the time it takes market participants to recognize a change in behavior is required. Additionally, the lack of frequency can also experience a similar delay in recognition of underwriting issues.

 

However, even longer tail lines in business that has become exceptionally competitive can overshadow these rules of thumb. As our Chairman says, even long-tail lines of business can become short-tail if they are sufficiently underpriced.

[Liberty]

Thanks, always interesting to hear what Bill has to say.

[PlanMaestro]

http://www.propertycasualty360.com/2012/04/24/wr-berkley-stupid-cos-may-not-be-able-to-make-hard

 

Declaring that a turn to a hard market cycle is more visible, the chief executive of W.R. Berkley Corp. says a company somewhere is in for major trouble because they are “stupid” not to increase rates. “Hard markets always start this way and then something happens,” which leads to "dire financial difficulties," says William R. Berkley, the CEO of the Greenwich, Conn.-based insurer during a conference call to discuss first quarter earnings today.

 

The “something” happens when companies have to begin to pay for their underpriced past. It occurs every time the market begins an upward cycle, Berkley says. “It happened to AIG [American International Group Inc.] but AIG got bailed out by the government,” Berkley says. "Look at all the billions of dollars of deficiencies they had to make up for."

 

No one knows “where and what is sitting out there,” but “usually someone doesn’t have the ability to make it through” the cycle turn, Berkley continues. "I don't know who that's going to be and I can't tell you for sure."

.....

 

But again, the environment varies in specific lines. In excess workers compensation, for example, one company remains aggressive, pricing business 20-to-40 percent less than W.R. Berkley. “That’s one place where we lost substantial business,” Berkley says. Parts of the professional liability market also remains resistant to price increases.

 

 

 

[PlanMaestro]

Bill Berkley at the recent Goldman Sachs insurance symposium

http://cc.talkpoint.com/gold006/051512a_lr/

 

pdf: http://files.shareholder.com/downloads/BER/1823801850x0x569627/f0a2f4f1-4aba-40ac-80a0-1081ff4fa3e0/Goldman%205-15-2012.pdf

[Liberty]

Bill Berkley at the recent Goldman Sachs insurance symposium

http://cc.talkpoint.com/gold006/051512a_lr/

 

pdf: http://files.shareholder.com/downloads/BER/1823801850x0x569627/f0a2f4f1-4aba-40ac-80a0-1081ff4fa3e0/Goldman%205-15-2012.pdf

 

Thanks!

[onyx1]

http://www.propertycasualty360.com/2012/04/24/wr-berkley-stupid-cos-may-not-be-able-to-make-hard

 

 

But again, the environment varies in specific lines. In excess workers compensation, for example, one company remains aggressive, pricing business 20-to-40 percent less than W.R. Berkley. “That’s one place where we lost substantial business,” Berkley says. Parts of the professional liability market also remains resistant to price increases.

 

 

Interesting, Fairfax made a similar comment in the 2010 annual report re why Zenith has not been writing a lot of business.  Wonder who that aggressive company is.

 

At the UBS conference in April, Berkley say that there is an insurance company writing excess WC based on portfolio yields (rather than new money yields) and the result is a 20%-40% discount on this long tail business.  He added that the company is in the process of being sold, and he hoped their new owners would stop the practice.

 

Based on that information, the culprit is probably Delphi Financial.

 

http://finance.yahoo.com/news/acquisition-delphi-financial-tokio-marine-185600552.html

[onyx1]

http://ir.wrberkley.com/events.cfm

 

For those not familiar with WRB here is a new presentation on this gem of a company.    In a nutshell, this 20% owner operated, casualty underwriter has compunded TBV at 17% over the last 25 years. William Berkley is a superstar within insurance circles, but relatively unknown outside of the industry.  WRB emphasizes underwriting income, as opposed to investment income, and has built a wonderfully diverse roster of underwriting teams in order to reduce volatility and enjoy the ROE benefits of underwriting leverage.  They have an excellent historical record of ramping up during periods where pricing is attractive and down when competition has driven prices to unattractive levels. 

 

I have owned this company for 3 years and I learn something new on every CC.  Although I don't see any sign of WRB wanting to sell, seems like this would be a great fit for BRK.

[JBird]

In my view, the intrinsic value of this company is the sum of two parts: 1) The value of the net assets to a private owner and 2) The value of their float

 

1) What are the net assets worth to a private owner? I want to know how much capital I can immediately pull out of this business if I bought the whole thing today. WRB has about $14.5 billion in investment assets, and $9.1 billion of that is funded through float. There's an excess there of $5.4 billion. After you subtract out all the liabilities you have a net asset figure of hypothetically "freely distributable" capital. But it isn't all freely distributable. The insurance regulators have a formula that determines what they call Risk-Based Capital (statutory capital). This capital must stay in the business not only to satisfy regulators but to continue writing the same policy volume.

 

In the 2012 10-K they wrote, The National Association of Insurance Commissioners (“NAIC”) has risk-based capital (“RBC”) requirements that require insurance companies to calculate and report information under a risk-based formula which measures statutory capital and surplus needs based on a regulatory definition of risk in a company’s mix of products and its balance sheet. As of December 31, 2012, the RBC Total Adjusted Capital of the Company's U.S. insurance companies was 459% of the RBC Authorized Control Level and 230% of the RBC Company Action Level. The total adjusted capital of each of the Company’s U.S. insurance subsidiaries exceeded the minimum required RBC levels. The use of the permitted practice described above does not impact RBC calculations."

 

As of 2012 year-end they had a net asset value of $4.3 billion. And the preceding paragraph translates to this: their net asset value was 4.59 times the minimum regulatory requirement, and 2.3 times the maximum regulatory requirement. Therefore, of the $4.6 billion in net asset value, $2.6 billion of that is freely distributable to owners.

 

If you bought all of Berkley today you could immediately pocket ~$2.6 billion. You would then be left with a insurer run by able and honest management who are heavily invested alongside you. And the value of that entity is based on the float valuation.

 

2) What is the value of their float? In my view, the intrinsic value of float is the present value of the future investment income the float will produce over its remaining life, plus the present value of the float's future underwriting losses/profits.

 

I've attached a spreadsheet that illustrates what I think WRB's float is likely to produce over time. They are currently achieving about a 4% pre-tax return on investments in a very low interest rate environment, so I stuck with 4% over the next 5 years to be conservative. Sooner or later normal rates will return, so after the 5th year I project 5% investment returns.

 

But you won't be interested in WRB for its investment prowess. As Bill (their CEO) has said, they're always going to be very conservative on the balance sheet side and try to make their money on the underwriting. They've done a wonderful job of that. Their combined ratio has averaged 97.2% over the past five years; quite impressive considering that was achieved through a soft market.

 

My float valuation includes a combined ratio of 97% over time with earned premiums rising at 2% a year. And since I'm looking at high quality float managed by higher quality management, my valuation goes out 20 years. If you find this to be unconservative, adjust accordingly.

 

-Side note- Cost-free float that cannot generate investment income is valueless. If you can't invest it, it doesn't matter how long you can hold it.

Berkley_Float_valuation.xlsx