Seeking Alpha: ACE Puts Its Excess Capital To Work In A Big Way

With iffy near-term prospects for premium rate growth in the property & casualty insurance market and plenty of under-earning surplus capital on the balance sheet, I expected ACE Limited (NYSE:ACE) to continue looking for deals as a way of creating long-term value for shareholders. In that same piece back in April, I speculated that either Hartford (NYSE:HIG) or Chubb (NYSE:CB) could be an attractive target for ACE and that is what has happened - ACE has announced its intention to acquire Chubb in a $28 billion deal that makes ACE the largest P&C insurance company in the world.

ACE is not getting Chubb at a bargain price, but then I wouldn't expect that it would, as Chubb is a well-run and well-regarded insurance business with a very strong, high net worth personal lines business. I'm a little concerned that ACE may be overselling the revenue synergy potential from this combination, but I do think that expense reductions seem reasonable. For now, I'm only increasing my fair value on ACE by $3/share, but that still leaves ACE as one of the more attractive options in the insurance space, and it likewise may be leaving upside from deal-related synergies.

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ACE Puts Its Excess Capital To Work In A Big Way

Seeking Alpha: Allied World Offers A Healthy Balance Sheet, But Market Conditions Are Tough

Allied World Assurance (NYSE:AWH) has done pretty well since last I wrote about this small specialty insurance company. The shares have risen more than 20% since that late April 2014 article, basically matching fellow specialty underwriter W.R. Berkley (NYSE:WRB) and surpassing the likes of Arch Capital (NASDAQ:ACGL), ACE (NYSE:ACE), and Aspen (NYSE:AHL) that have all seen sub-10% returns over that time.

Every insurance story offers its own little twists. Arch Capital is looking to grow its mortgage insurance business, while ACE is looking to overseas markets and Aspen is looking forward to achieving the benefits of scale as numerous relatively new business lines reach scale. For Allied World, there would still seem to be many attractive market entry/share expansion opportunities (even as rates weaken) and the company's balance sheet appears to be in very good shape.

I do have some concerns that the business that Allied World is writing today won't be as profitable as the business it wrote over the last few years and the sizable reserve releases will start to shrink, but that's a common industry concern now. That said, I like the company's leverage to specialty lines and overseas markets and the shares do look undervalued now.

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Allied World Offers A Healthy Balance Sheet, But Market Conditions Are Tough

Seeking Alpha: Arch Capital Keeps Going While The Going Gets Tougher

I like MetLife (NYSE:MET), ACE (NYSE:ACE), and W.R. Berkley (NYSE:WRB) quite a bit as insurance companies, but Arch Capital (NASDAQ:ACGL) has long been at the top of my list as a well-run insurance company with an uncanny knack for profitable allocating and reallocating of capital across multiple lines of business. That skill is increasingly valuable as P&C and reinsurance rates continue to fall and the industry looks to be heading into a tough multiyear stretch.

I don't believe that Arch Capital needs to join into the recent upswing in M&A activity, but the company does have the capital to get involved if the right opportunity should show up. Failing that, I expect the company to continue looking to mortgage insurance and selective alternative markets and excess and surplus lines as a source of growth and adequate returns.

Arch Capital has been something of a middle-of-the-road performer over the past year, but it's not yet particularly cheap even with long-range ROE estimates in the low teens. Buying into a part of the cycle where rates are falling, reserves are shrinking, and earnings are likely to come under pressure for many players is a risk on its own and given that backdrop I'd wait in the hopes of being able to buy Arch Capital's shares at a better price down the line.

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Arch Capital Keeps Going While The Going Gets Tougher

Seeking Alpha: W.R. Berkley Pushing On Through A Tough Market

Tougher times are in the property and casualty insurance market, as insurers like ACE Limited (NYSE:ACE), Chubb (NYSE:CB), Hartford (NYSE:HIG), Travelers (NYSE:TRV), and W.R. Berkley (NYSE:WRB) are finding it harder to push rate increases and weak interest rates limit returns on conventional investment options. With loss trends having been pretty benign in recent years, there are worries among some investors and analysts that the industry is setting itself up for a string of weak performance as losses bite into capital and push down returns.

I'm really not that concerned about W.R. Berkley in that context. I am worried about limited premium growth potential and the year-to-year risks of the company's more aggressive investment philosophy, but I think the company's underwriting quality has shown itself over time and I still see opportunities for the company to grow its underwriting operations organically. I'm still not crazy about the valuation, but bargains in the P&C are hard to find these days.

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W.R. Berkley Pushing On Through A Tough Market

Seeking Alpha: ACE Limited Earns Its Premium, But Excess Capital Weighs On Returns

P&C insurance company ACE Limited (NYSE:ACE) is another of those examples of the sometimes-frustrating difference between a company and a stock. As a company, I think anybody who follows insurance will appreciate and admire how ACE limited runs itself. As a stock, though, the shares didn't look cheap a year ago and they still don't look all that cheap today. While ACE arguably still merits a place in a long-term portfolio and has ample capital with which to build the business, it's hard for me to work up a lot of enthusiasm for buying shares today.

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ACE Limited Earns Its Premium, But Excess Capital Weighs On Returns

Seeking Alpha: Everest Re Managing Through A Tough Environment

The reinsurance markets remain quite challenging today, as companies like Everest Re (NYSE:RE) find themselves sandwiched between double-digit price declines in many reinsurance lines and low rates of return on their investment portfolio. Everest Re has been doing a good job of managing through this tough period, using new products and revised strategies to grow despite the pricing pressures and maintaining a solid balance sheet.

I liked Everest Re six months ago as something of a relative value play in the sector and the shares have done alright since then. I do still think that there are opportunities for Everest Re to turn the changes in the industry to its favor (including managing/advising third-party capital), but rate pressure is going to take a toll on returns and the shares aren't quite as interesting to me now. I still like Everest Re as a company, but I just happen to think that there are more interesting risk-reward opportunities in areas like life and P&C insurance.

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Everest Re Managing Through A Tough Environment

Seeking Alpha: Arch Capital Getting Attractive As Its Markets Get Less So

Arch Capital (NASDAQ:ACGL) is often lauded as a well-run insurance and reinsurance company and a good stock to own for those seeking more defensive exposure to insurance. Interestingly, while Arch Capital may be labeled as defensive because of management's disciplined underwriting and strong capital management, Arch Capital's shares have underperformed peers like ACE Limited (NYSE:ACE), RenRe (NYSE:RNR), and XL Group (NYSE:XL) by more than 10% on a year-to-date basis.

I didn't like the valuation all that much six months ago, but down another 5% from then I'm starting to warm up to the stock. I like the potential for Arch to be a share-taker in the mortgage insurance industry, and I expect the company's specialty insurance business to be stickier through this tough pricing cycle than others apparently expect. The reinsurance business is a risk and I do worry about an overall downward shift in valuation and sentiment for insurance stocks, but these shares are starting to look tempting.

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Arch Capital Getting Attractive As Its Markets Get Less So

Seeking Alpha: Hartford Financial Services Offers Self-Improvement And Takeover Potential

Although The Hartford Financial Services Group (NYSE:HIG) (or "The Hartford") has taken several significant steps to reposition itself as a quality P&C operator, the Street hasn't fully bought into the story. While the shares have appreciated about 50% over the last three years, ACE Limited (NYSE:ACE) and Travelers (NYSE:TRV) have done even better (up more than 60% each) and there's little differentiation among them over the past year despite ongoing self-improvement efforts at The Hartford.

To be sure, there are some reasons for The Hartford to lag. The company's expense ratio is a little higher than its peer group (or at least the better-run members) and investors worry that the variable annuity run-off process will tie-up capital with poor returns and that the group benefits business won't improve as much as management hopes. Although the shares are near a 52-week high, that skepticism still creates a window of opportunity for investors; The Hartford is perhaps not the cheapest stock in the space today, but it is cheap enough to merit interest and it could be an acquisition target.

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Hartford Financial Services Offers Self-Improvement And Takeover Potential

Seeking Alpha: Good Progress At Argo Group

Argo Group (AGII) has a good platform of excess & surplus and commercial specialty insurance, and the company's premium growth, loss ratios, and reserve developments have been typically been as good or better than peers over the last five years. The sticking point has been the company's uncommonly high expense ratio and its impact on reported returns. These shares have headed about 10% higher since I last wrote on them, and Monday's earnings suggest that optimism about better expense control and higher reported income is the correct position for now.

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Good Progress At Argo Group

Seeking Alpha: XL Group Plc Is Over-Reserved, But Not That Undervalued

XL Group plc (XL) may have nearly gone out of business during the worst of the credit crisis, but in the time since the company has done a pretty decent job of repairing its capital situation, even if at a high cost in terms of dilution. The bigger question today is whether the company can generate substantially better results for the long-term - while the company looks over-reserved and over-capitalized, the nature of its underwriting may well limit the upside.

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XL Group Plc Is Over-Reserved, But Not That Undervalued

Seeking Alpha: Everest Re Looks To Surmount A More Competitive Environment

The talk in insurance and reinsurance these days is almost always about pricing. A lack of major catastrophes, higher retention rates from insurance companies, and an influx of new capital has led to a lot of money chasing the business that's out there, leading to double-digit declines in prices. Everest Re (RE) seemed to withstand that in 2013, in part through new products and expanding outside peak areas.

Investors seem to doubt that the company will be able to keep up double-digit premium growth and double-digit returns on equity. It is probably true that the rate of premium increases in areas like workers comp has to slow, and likewise true that pricing will remain soft in reinsurance without an event that destroys capital. Even so, the company's underwriting history is pretty good and a long-term ROE of 11% suggests a fair value close to $175, or roughly 15% above today's price.

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Everest Re Looks To Surmount A More Competitive Environment

Seeking Alpha: It's Hard To See How W.R. Berkley Gets A Higher Multiple From Here

When investors look at high-quality insurance names like Arch Capital (ACGL), RenRe (RNR), and W.R. Berkley (WRB), they shouldn't expect to find big bargains very often. These companies have all shown themselves to be quite adapt at pricing risk, allocating capital, and maneuvering themselves into lines of business that can maximize their returns, and the Street is typically happy to pay for that quality and consistency.

While I don't expect to pick up W.R. Berkley on the cheap, I'm worried that the valuation on this specialty insurer has overshot the mark. Berkley's management may be right that weak underwriting profitability across the sector will serve as a tailwind for rate increases, but I'm concerned that the influx of competition and capital into specialty insurance could create some limits. At the same time, I'm a little nervous about company's reserves and the large amount of leverage put to work here. W.R. Berkley has been a top-notch performer for years and management deserves the benefit of the doubt. Even so, I'm not going to pay up to this extent to own the shares.

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It's Hard To See How W.R. Berkley Gets A Higher Multiple From Here

Seeking Alpha: Aspen Insurance Building Tomorrow's Growth At The Cost Of Today's Margins

Few bargains remain in the insurance sector, what with these companies having recovered significantly from the post-credit crisis lows. Valuations have moved up in conjunction with higher pricing across multiple sectors, but it is now starting to look like pricing is topping out in many (if not most) markets. Couple that with a still-weak investment environment and growing loss severity and I'm not surprised that many sell-side analysts are pulling back a bit from their bullish calls on the sector.

Aspen Insurance (AHL) finds itself in an interesting position amidst these changes. The company has followed a clear and stepwise transition towards becoming more of a primary insurance underwriter (versus a balanced insurance/reinsurance company), and the management believes that the insurance platform has matured to a point where it can retain more risk. Margins and returns have taken a hit in the course of building out the primary insurance business, and the Street is quite skeptical about Aspen's near-term ROE prospects, but the shares do seem modestly undervalued and could offer growth-driven upside.

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Aspen Insurance Building Tomorrow's Growth At The Cost Of Today's Margins

Seeking Alpha: Endurance Delivers A Solid Result, But There's Plenty Still To Do

Endurance Specialty Holdings (ENH) has long been a pretty solid mid-tier insurance company, with operations split across both insurance and reinsurance operations. The company has had to deal with the same premium, catastrophe, and portfolio investment challenges as everybody else (to the detriment of returns), but has largely avoided the big mistakes.

Even so, the board was not content to just leave well enough alone and the addition of a new CEO earlier this year seems as though it will lead to some extensive changes for Endurance. On the basis of what I believe to be relatively conservative expectations Endurance still looks undervalued, and I think that makes it at least a name worth watching.

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Endurance Delivers A Solid Result, But There's Plenty Still To Do

Seeking Alpha: Tower Group Goes From Bad To Worse To Almost Unbelievable

When I last wrote about small insurance company Tower Group (TWGP) back in January of this year, my faith in management was wavering after management chose to compound the poorly-executed acquisition of OneBeacon and successive reserve charges (that essentially revealed that prior earnings and returns on equity had been overstated) with a risky transformative merger. In the interim I lost what remaining faith I had in management and sold my shares, and the company's ongoing issues with reserves certainly erodes confidence in the company's future prospects

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Tower Group Goes From Bad To Worse To Almost Unbelievable

Investopedia: Arch Capital Is Excellent, But No Bargain

It feels as though it was a very long time ago when Arch Capital (Nasdaq:ACGL) last traded at a meaningful discount to fair value. But then, that's the price of excellence – there are few insurance management teams I'd rather invest with and the market is not shy about rewarding the shares for the skill of the team here. While there's always a chance that an active storm season could create an investment opportunity in Arch Capital, investors shouldn't this stock to offer many opportunities to buy at significant discounts to fair value.

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Seeking Alpha: Confusing Tower Group Offers Potential Value And Near-Certain Risk

By and large, I'm a big advocate of the KISS rule in investing (Keep It Simple, Stupid). More often than not, if an investment idea takes a lot of explanation, it's not worth the trouble. While Tower Group (TWGP) was once a relatively straightforward P&C insurance play, the company's proposed merger with Canopius makes this a much more complicated investment idea. While the reasons for the merger are sound and the potential value here is high, investors need to weigh that carefully against the risks and increasing complexity of the company.

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Confusing Tower Group Offers Potential Value And Near-Certain Risk

Investopedia: Everest Re Trying To Balance Risk And Opportunity

Plenty has been written over the last few months about the hardening market in many insurance markets. With companies forced to pay out for major disasters across the globe, including major earthquakes and floods, companies are now pushing through policy price increases for the first time in quite a while.

When it comes to Everest Re (NYSE:RE), though, there appears to be some limit to how much this hardening market will help. Everest Re is a quality insurance company, and one with substantial property reinsurance exposure, but the company's decision to prudently manage its risk exposure could limit some of the growth potential from these market developments.

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Investopedia: ACE Looks Like A Card Worth Playing In The Insurance Sector

The insurance sector has largely outperformed the S&P 500 over the past year, but that doesn't mean that there still aren't some stocks worth considering as buys today. Among the more interesting names is ACE Limited (NYSE:ACE). Not only is ACE leveraged to hardening markets, but the company's less cyclical mix of business, strong underwriting reputation, good international exposure and strong capital position make this name a good balance of quality and value at today's prices.

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Investopedia: Can Arch Capital Keep Pulling Rabbits Out Of Its Hat?

Years of superior performance have established quite a reputation for the management of Arch Capital (Nasdaq:ACGL). In good times and bad, this seems to be one of the best-run Bermuda-based insurance companies. The question investors have to ask, though, is whether there is enough leeway in the present valuation to really make this one of the best-performing stocks out there over the coming year or two.

Fourth Quarter Results  
Arch Capital reported that gross written premiums rose more than 5% for the fourth quarter, with particular strength (up 17%) in reinsurance. Net written premium growth was a little stronger, coming in at nearly 6%, while net investment income was down 11%.

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