WRB and ACGL - Two Great Insurance Companies

WRIt was a happy coincidence that two of my favorite insurance companies reported today. W.R. Berkley (WRB) is an exceptionally well-run (if somewhat "quirky") specialty insurance company, while Arch Capital (ACGL) is a player in the reinsurance segment of the market.

I'm not at all surprised to see that WRB posted slightly lower-than-expected revenue, but better-than-expected earnings. WRB is an efficient operator and a very disciplined underwriter -- if the prices aren't up to their standards, the company walks away. When you hear Berkshire Hathaway's (BRK.A) Warren Buffett talk about how most insurance companies lose money on their underwriting, that's why -- they feel like they have to "stay in the game" no matter what the cost. WRB doesn't play that game; if they don't like the terms, they take their money and go home.

So, as a result, gross premiums were down about 2% and net premiums were down about 4%. Operating income was down about 4% as well, though the bottom line result was still about $0.10 better than the average analyst guess. Along the way, book value rose almost 4% from December, and the ROE came in at 13.2%.

Admittedly those don't sound like numbers to do handstands over, but they should be kept in the context of a pretty soft insurance market - rates aren't very good, a lot of companies still have turbulence in their investment portfolios, and analysts aren't too keen on the sector as whole. But that's the point where I get interested in buying -- and I think WRB is an excellent insurance stock to buy in a soft market.

Similar to WRB, Arch Capital posted a beat on earnings and a miss on revenue and it was largely for the same reasons I talked about before; namely, that Arch won't write business that doesn't meet it standards. Right now, that's a problem ... but soft markets have a way of turning into hard markets and Arch Capital will reap the benefits when that turn comes.

Here too, the details don't look spectacular -- gross premiums were down 7%, operating income was down from last year, and the posted ROE of just under 10% isn't all that remarkable. Once again, though, the bottom-line results were better than conservative estimates and this is a company where there can be a lot of operating leverage when pricing firms up.

Arch might be a stock where you want to wait a bit before buying ... namely, until the hurricane season is underway. Major catastrophes like hurricanes are the risk factor for Arch, though experience and history suggests that the company has spread its risks around in such a way that a single major storm (or even several) wouldn't represent a devastating economic loss to the company. Still, by the time the "all clear" has sounded, it may be too late. So investors willing to absorb a little risk might just want to look at these shares now and trust that management's underwriting standards will continue to make this a top idea in the insurance space.