AWH - Allied World Assurance Co Holdings, AG.

[Liberty]

What are your thoughts about this one?

 

I've been watching it for a while, and a lot about it seems attractive: Low P/E, selling under book, low tax rates (used to be HQ'ed in Bermuda, now Switzerland), doing share repurchases at the right time, worldwide operations in both insurance and reinsurance, conservative bond investments, good combined ratios and what looks like good reserving.

 

What keeps me from investing is I'm not sure about the quality of management, and they don't seem to how that many shares that haven't come from stock options. I really like it when management eats its own cooking... And they are also a relatively young company, without a real long-term history.

 

What do you guys & gals think? Anybody knows of fundamental reasons why this should be so cheap, or is it just one of Mr. Market's moods?

[Liberty]

Combined ratio of AWH for the past 9 years = 89%, but for past 10 years it's 101 because of the terrible year in 2001... the company seems to have changed a lot since then and reduced its exposure to cats and diversified to more countries and lines, so the predictive value of this record is probably not as great as for another company with a more stable and mature operation.

 

I'm keeping it on my watchlist, but I'm still not sure if I like it enough to invest...

[Myth465]

I think you are on the right path. I have looked at it in the past, and we have discussed it on the board as well. I went with FFH, LRE, and AHL for my basket of insurers though. Most insurance companies are weak right now and ones which typically trade at 1.5 book value are underbook value. If the cream of the crop is below book then ones like these get pushed below that. I dont think there is anything wrong per say, but also believe insurance will a leap of faith and bet on Management.

 

I still own LRE, and hope to buy back FFH at some point.

[Liberty]

Couple of articles about AWH:

 

http://seekingalpha.com/article/257081-allied-world-holdings-cheap-and-profitable-mid-cap-insurance-company

 

http://seekingalpha.com/article/265304-profitable-net-net-mid-cap-allied-world-assurance

 

 

[Guest Schwab711]

This is my favorite insurance company. With interest rates seemingly destined to increase this might be the time to look at AWH again. They are selling at book value and make 12-15% ROE. Management are conservative underwriters with excellent results as mentioned by Liberty and are very opportunistic capital allocators. If I recall, their Achilles Heel is a major earthquake in California. They bought back a significant number of shares when AWH was selling well below book and instituted a dividend when underwriting and investment opportunities dried-up. If they would ever consider dropping the dividend if/when underwriting and investment opportunities were plentiful then I think we'd be looking at a future Outsider. Excellent long-term investment opportunity.

[sys]

This is my favorite insurance company. With interest rates seemingly destined to increase this might be the time to look at AWH again. They are selling at book value and make 12-15% ROE. Management are conservative underwriters with excellent results as mentioned by Liberty and are very opportunistic capital allocators. If I recall, their Achilles Heel is a major earthquake in California. They bought back a significant number of shares when AWH was selling well below book and instituted a dividend when underwriting and investment opportunities dried-up. If they would ever consider dropping the dividend if/when underwriting and investment opportunities were plentiful then I think we'd be looking at a future Outsider. Excellent long-term investment opportunity.

 

i've just started looking at partner re.  also at near book and around 12% roe long term.  i'd like to find out why david merkel sold them.

[Jurgis]

I have invested in a number of insurance and reinsurance companies since they fell below book couple years ago (AXS, RE, RGA), as well as our favorites (FFH, MKL, BRK) and the new kids (GLRE, TPRE).

 

Overall, I don't see how insurance company can grow book at 15% a year - which is my hurdle - in current environment without having equity holdings. The fixed income rates are way too low even if they start increasing a bit, which is not guaranteed. And the insurance (and reinsurance) pricing is too soft. Neither of these two are fixable by management. And I don't see either of these changing any time soon. (I guess insurance/reinsurance pricing could go up if we have a huge cat, but then that would hit book values of the companies first.)

 

Share repurchases below book was one way to get higher book growth. But this no longer works once the price is above book.

 

So I guess I'll ask the bulls: what is your bull scenario here? Or are you happy with returns to shareholders lower than 15%?

 

Personally, I have shifted my money to FFH. Unfortunately MKL/BRKA are getting expensive and GLRE/TPRE are unproven. But these are for other threads. :)

[Guest Schwab711]

I have invested in a number of insurance and reinsurance companies since they fell below book couple years ago (AXS, RE, RGA), as well as our favorites (FFH, MKL, BRK) and the new kids (GLRE, TPRE).

 

Overall, I don't see how insurance company can grow book at 15% a year - which is my hurdle - in current environment without having equity holdings. The fixed income rates are way too low even if they start increasing a bit, which is not guaranteed. And the insurance (and reinsurance) pricing is too soft. Neither of these two are fixable by management. And I don't see either of these changing any time soon. (I guess insurance/reinsurance pricing could go up if we have a huge cat, but then that would hit book values of the companies first.)

 

Share repurchases below book was one way to get higher book growth. But this no longer works once the price is above book.

 

So I guess I'll ask the bulls: what is your bull scenario here? Or are you happy with returns to shareholders lower than 15%?

 

Personally, I have shifted my money to FFH. Unfortunately MKL/BRKA are getting expensive and GLRE/TPRE are unproven. But these are for other threads. :)

 

Buffett somewhat hit on this at the AGM when he said that insurance is no longer the great industry it used to be for [equity] investing. Now with SIFI designations and more oversight than ever within the industry, I think the days of equity holdings above 10%-15% are gone. I wouldn't be surprised to see insurers pushed towards banking-like portfolios. Earnings estimates for insurers [from Wall St] obviously do not help the situation. Insurers will have to find value in junk bonds or complex securities (MBS/ABS/ect).

 

Also, I think AWH is more interesting than the other re's mentioned because they also have a large specialty segment that does extremely well. These are probably the only two areas of insurance that have even decent future prospects and it diversifies them away from California earthquake risk (even if just marginally). AWH has also grown quite a bit over the last few years, meaning most of their investment portfolio have been invested recently with a 'rising rates' outlook. This may end up being significant since insurers who have declined in total operations over the past few years stand to be significantly impacted by a sudden increase in rates (since their portfolio is likely more long-term and difficult to re-balance).

 

As always, I love management. Maybe "The Outsiders" just isn't that relevant for investing since mgmt here looks like a shoo-in for the next version but we are all passing (myself included). They have created shareholder value and not just stock returns from multiple expansion. They have consistently shown outstanding aptitude for both the operational and capital management portions of their job. This is one of the few calls I listen to annually (generally a waste of time otherwise in my view) and yet somehow I don't own this.

 

From my understanding, they are still greatly at risk of a major earthquake in California which may be a large factor driving the low combined ratios for years. Either way, they are still 1000-1500 bps (avg over 10 years) below industry average from what I can tell.

 

Thoughts on AWH or insurance? Reinsurance (as Buffett/Munger mentioned at AGM) is extremely competitive lately because of new [dumb?] capital from the coolest portfolio managers around.

 

The market probably should be ~20% lower and it will eventually converge toward bond yields (jury's still out on whether that's higher/same/lower). I really can't picture rates at 2% for my whole life (income disparity will only widen) so this kind of fits with my thoughts on SELF (completely unrelated industry) in that I should be able to get 10% returns regardless of market action. In general I'm pretty bearish at the moment and I'm generally an eternal optimist.

 

@Jurgis: I also have a 15%+ hurdle but an absolute hurdle might not make sense in the current environment. Do you really expect 15% annual returns from all your current holdings? Are you assuming multiple expansion?

[Jurgis]

Thoughts on AWH or insurance? Reinsurance (as Buffett/Munger mentioned at AGM) is extremely competitive lately because of new [dumb?] capital from the coolest portfolio managers around.

 

@Jurgis: I also have a 15%+ hurdle but an absolute hurdle might not make sense in the current environment. Do you really expect 15% annual returns from all your current holdings? Are you assuming multiple expansion?

 

I don't think I have much additional to say on AWH or insurance. I sold my GLRE position and might sell TPRE, since I think they are not very good on the (re)insurance side and I am not sure they can outperform with their float cost + hedgie fees.

 

I still hold a lot of FFH, BRK, MKL. I really liked RE in the past and might still like it, but I don't hold it. I have not looked at AWH lately. I'll see if I have time to look at it and get back.

 

Regarding 15% hurdle: this is a buy hurdle, it is not a hold hurdle. I'm not sure if I have posted this on CoBF, but I believe in rather large hold range where stocks are not buys, but not sells either. That's possibly expected-15% to expected-10% range - which is quite large actually. I think most of my portfolio (>90% of stock positions) are at least in the hold range, i.e. will return at least 10% annually, but hopefully 15%.

 

I believe that FFH and BRK at current prices have a chance to return 15% without multiple expansion, but not easily. MKL - possibly not. I won't fight over these opinions - they are rather soft. :)

 

I just looked through my portfolio and I believe about 6% of it can conservatively be called overvalued (i.e. with significant chance not to return 10% annually). Most of these are stocks that I can't value precisely like FRMO, LBRDA, DISH.

 

From the same review, about 26% of my portfolio likely is in "buy" range, i.e. expected to return 15%+.

Edit: this portfolio includes about 28% of cash+fixed income securities. Perhaps I should have posted percentages after subtracting these...

 

Hope this helps. :)

[villainx]

Can someone give some help on how to evaluate the Fairfax purchase?  What would I, as an USA citizen, be getting?  Recent shareholder, and I'm just trying to understand what is happening.  I don't own any Fairfax, though it's long been on my watchlist.  I was hoping to take the lazy way out to back into Fairfax, but would I be getting Canadian shares? 

 

I was going to add FRFHF to bring it to a reasonable position when it was closer to book value, but I'm back to waiting after the recent run up.