Hartford Defies The Market And Announces A $2.1 Billion Deal For Navigators

Wall Street has a one-size-fits-all answer for what insurance companies should do with any extra capital - buy back shares. Hartford Financial (HIG) had frustrated the Street's push for a buyback all year, and at least some investors and analysts were disappointed that the company didn't announce a buyback with second quarter earnings, and now they've gone and announced a $2.1 billion acquisition of another insurance company (specialty insurer The Navigators Group (NAVG), or Navigators). As you might expect, the shares sold off on the announcement.

I'm not completely sold that Navigators is the right deal at the right price, but I don't believe it is liable to destroy shareholder value to any large extent. As I believed Hartford to be undervalued before the deal announcement, I still believe that to be the case, but sentiment is going to be an even greater obstacle now and it's going to take noticeably better than expected results from Hartford and Navigators to move the shares.

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Hartford Defies The Market And Announces A $2.1 Billion Deal For Navigators

Another Potential Masterstroke For Arch Capital

About as close as I'll probably ever get to gushing over a company is when I talk about Arch Capital (NASDAQ:ACGL). I have followed this insurance company for a long time now (selling the shares a long, long time ago deserves an entry for me in the Great Moments In Idiocy hall of fame), and have always been impressed by the company's keen focus on disciplined, profitable underwriting and unrelenting pursuit of good returns on shareholder capital. That's not always so easy to do in the insurance business, as the ongoing price erosion in property & casualty and reinsurance shows.

Arch Capital has generally avoided M&A, arguing that there are few companies out there with the cultural and quality fit worth buying, and those that are out there tend to be expensive. Arch Capital found a big exception in August, though, when it agreed to acquire United Guaranty from AIG (NYSE:AIG) and vault itself to the top of the list in mortgage insurance. This deal substantially improves the long-term prospects for earnings growth and good returns on equity, and while I don't think Arch Capital is particularly cheap (a familiar problem), it's worth keeping a careful eye on in case a sell-off creates an opportunity.

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Another Potential Masterstroke For Arch Capital

Seeking Alpha: Chubb Ltd - Bigger And Better In A Soft Market

Insurance companies have a problem right now with what to do with their capital. Years of relatively benign losses and good premiums have built up their capital positions, but the options to deploy that capital are limited. Underwriting more business at soft rates is an option, but one that risks future underwriting profits. Investing in securities is an option, but rates are unimpressive, and returning cash to shareholders doesn't build the business. That leaves M&A, but even here there's a problem as insurance industry valuations haven't really been in bargain territory for most of the past year or so.

I do not believe that ACE Ltd.'s (NYSE:ACE) acquisition of Chubb, now known as Chubb Ltd. (NYSE:CB), was a case of having no better options for capital. Instead, I believe this is a merger that creates real opportunities for long-term synergy, as the companies combine ACE's strong broker-based business with Chubb's strong agency business and ACE's strong international business with Chubb's U.S. middle-market commercial and high net worth businesses.

In terms of what is likely to be achieved in cash earnings growth over the next five years, Chubb is probably not that cheap today. Over the longer term, though, I think there are meaningful high-quality opportunities to grow this business and I think fair value lies in the low to mid $120s.

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Chubb Ltd - Bigger And Better In A Soft Market

Seeking Alpha: AerCap Making The Best Of A Good Situation

These are good days to be in the aircraft leasing business, and even if AerCap's (NYSE:AER) performance hasn't exactly set the world on fire since my last update it has at least beaten the market and its closest peer Air Lease (NYSE:AL).

Looking ahead, the numerous projections out there of a decade-plus of 5% annual global air passenger growth should be supportive of the leasing industry. That said, I do worry that high margins and low rates could lead to an influx of capital into the industry. What's more, I'd note that this is an industry that has never really shown an ability to generate positive economic returns across a full cycle. While I still believe that AerCap is undervalued, and one of the best-run lessors in the industry, I'd at least keep an eye on the entry of new players and the trends in margins and ROE across the sector.

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AerCap Making The Best Of A Good Situation

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: After A Transformative Deal, Can AerCap Holdings Climb Higher?

Take a very skilled management team and give them more than four times the assets to work with and very good things might happen. That's a quick summary of what I believe will happen now that AerCap Holdings (NYSE:AER) has closed its acquisition of AIG's (NYSE:AIG) huge ILFC aircraft leasing business. AerCap is now hugely leveraged to the global commercial airline sector, with a large in-the-money order book and the potential to generate substantial cash not only from core leasing activities, but also more effective receivables collection and significant aircraft sales.

But how much do you want to pay for this? I'm comfortable with the general idea that the substantially larger asset base at AerCap and the fundamental changes in the global airline business (particularly growth in emerging markets) renders historical multiples moot. At a 1.25x premium to estimated 2015 book value I believe these shares are undervalued, but I wouldn't completely ignore the risk that commercial aerospace companies are building toward oversupply.

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After A Transformative Deal, Can AerCap Holdings Climb Higher?

Seeking Alpha: Uncertainties Weighing A Little Too Heavily On MetLife

For a company that has been either a group leader or solidly above peer averages for quite some time, MetLife (MET) doesn't get a lot of benefit of the doubt these days. Some of that can be tied to the weak rate environment as well as uncertainties as to how large insurance companies like MetLife will be regulated in the future. I believe investors are too worried about the negatives on this name and are underrating the growth potential of the company's overseas businesses and the value of its strategic shift toward more protection-oriented and less capital-intensive business. These shares could be as much as 25% undervalued today, making it a very worthwhile name to consider at these levels.

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Uncertainties Weighing A Little Too Heavily On MetLife

Seeking Alpha: ACE Still The Place For Reasonable Insurance Returns

Despite worries to the contrary, this earnings cycle has shown that well-run P&C insurance companies are still finding opportunities to grow their business and generate respectable returns. One of the large commercial insurers, ACE Ltd (ACE) has used its significant global footprint and its relatively low property exposure to continue generating good premium growth and underwriting profits. The P&C market is likely to soften further, likely shrinking management's ability to generate such favorable reserve developments down the line, but ACE shares still appear to offer some upside at these levels.

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ACE Still The Place For Reasonable Insurance Returns

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: Arch Capital Seldom Looks Cheap, But Mortgage Insurance Should Spur Growth

I've never made any secrets of the respect I have for Arch Capital (ACGL) management. Many company executives talk about the importance of creating shareholder value and making decisions to maximize value, but it is my opinion that Arch Capital lives up to that to a much higher degree than most other companies. When the management sees attractive return-generating opportunities, they deploy capital. When management does not see those opportunities, they conserve and/or return capital.

Investors had a rare opportunity to acquire Arch Capital shares at attractive valuations, but only when it seemed like the U.S. financial system was melting down. Since then, the shares have regained their luster and their high-end multiples. I do believe that Arch Capital's foray into mortgage insurance will prove a good move, and quality companies have a knack for exceeding long-term expectations (and price targets), but the short-term opportunity is not to compelling.

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Arch Capital Seldom Looks Cheap, But Mortgage Insurance Should Spur Growth

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: AerCap Holdings At A Good Cruising Altitude

With commercial aviation demand continuing to grow quite well in developing markets and the funding environment in developed markets getting better with each quarter, this is a pretty good time to be an aircraft leasing company. It's not so surprising, then, that AerCap Holdings (AER) shares are up more than 65% over the past year.

As for the future, I would argue that AerCap is still looking at a multi-year period of strong operating conditions. AerCap's focus on smaller airlines in developing markets is in tune with where the growth is likely to be, and the company's focus on maintaining a younger fleet and demonstrated skill in managing credit/default risk (as well as selling aircraft to maximize portfolio value) should result in significant cash flows in the coming years. Valuation for leasing companies is trickier and more subjective than for many other types of companies, but I nevertheless maintain that AerCap is still about 10% to 15% undervalued today - not the most appealing bargain out there, but still undervalued and with the potential of a dividend in the coming years.

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AerCap Holdings At A Good Cruising Altitude

Seeking Alpha: Can Argo Group Self-Improve Enough?

I try to spend most of my investment research time on companies that I believe are well-run, or at least run better than the Street believes, but I can't deny that there can be significant rewards from investing in inferior companies in the process of getting better. That brings me to Argo Group (AGII). Argo has just not been a particularly good specialty insurance company, as its combined ratio and underwriting profitability have lagged its peer group for most of the past decade.

Management is trying to fix the situation, and with three straight quarters of underwriting profitability there may be some reasons for hope. The Street certainly thinks so, as the shares are up more than 30% over the past year. I do have my doubts as to whether management can hit the goal of 10% returns on equity, but the shares don't really seem overpriced today and there should be further upside if these self-improvement efforts bear more fruit.

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Can Argo Group Self-Improve Enough?

Investopedia: XL Group Seems To Be Back On The Right Track

While it never got as much attention as AIG (NYSE:AIG), XL Group (NYSE:XL) was also seriously stressed during the global credit crisis and found itself very much on the brink. New management and a new business plan has made a great deal of difference, though, and the company looks like it's back on a believable path. Investors have an interesting dilemma with this company, though, as the book value and near-term return on equity path seem to point in different directions as to the company's fair value.

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http://stocks.investopedia.com/stock-analysis/2012/XL-Group-Seems-To-Be-Back-On-The-Right-Track-XL-AIG-CB-TRV0605.aspx

Investopedia: Berkshire Hathaway Makes An Unusual Bid For Transatlantic

These are strange days in the economy and the financial markets, so perhaps it is fitting that the Transatlantic Holdings (NYSE:TRH) merger saga just got a little stranger. After all, it was odd enough that Transatlantic was the subject of competing bids that both undervalued this rare U.S.-domiciled reinsurance company. Now, Berkshire Hathaway (NYSE:BRK.A) is stepping in with a proposal when the company normally has preferred to act much more subtly in its acquisitions.


The Latest Bid
Berkshire Hathaway, famously led by Warren Buffett, does not traditionally do hostile deals nor engage in public auctions. Typically Buffett's deal terms are "here's our deal, we expect a quick response and discretion". In this case, however, Berkshire's bid for Transatlantic does not seem to be the normal sort of arrangement where the deal is signed, sealed and delivered before the public even gets wind of it.


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Buffett Scandals - Then and Now

This was an interesting piece for me to write. I've long admired Buffett, and I wasn't entirely sure it was a project I wanted when it was first suggested to me. Now that I've written it, though, I find it interesting to see that Mr. Buffett really has kept his nose clean for the most part. What controversies there have been have largely been due to the actions of other people. To his great credit, though, Buffett seems to realize that when you sit in the big chair, you take the credit *AND* the blame when things go wrong, whether you have much to do with matters or not. A lot of CEOs should learn from that example. 

It is a peculiar American trait that we celebrate stories about the "land of opportunity," yet we also take a perverse pleasure in plastering bulls eyes to the backsides of the very wealthy. As one of the wealthiest people in the world, it is no surprise that the much-heralded investor Warren Buffett has had his share of controversies over the years.

The latest PR crisis for the Berkshire Hathaway (NYSE:BRK.A) CEO is his investment in Goldman Sachs (NYSE:GS) and his ongoing public support for the company and its management.

No one has thus far accused Buffett of any wrongdoing, beyond continuing to support a management team that is quite unpopular at present.

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