Seeking Alpha: RenaissanceRe Changes With The Times

Insurance companies like ACE (NYSE:ACE), Arch Capital (NASDAQ:ACGL), and W.R. Berkley (NYSE:WRB) are successful in no small part because they are structured in a way that management can smoothly reallocate capital across business lines as rates and projected returns dictate. That wasn't historically as much of an option for RenaissanceRe (NYSE:RNR), though, as this very well-run property catastrophe reinsurer didn't have the same level of diversification across its operations.

Having closed the deal on Platinum Underwriters, it's a new era for RenRe. Management can, and is planning to, allocate significantly more capital toward casualty and specialty reinsurance, sidestepping some of the rate pressure in prop-cat. While this move should decrease the volatility of the business over the long term, it will likely also temper some of the advantages of what had been arguably the best prop-cat reinsurer out there. Long-term ROEs are likely to be lower with the new business mix, but RenRe looks like a stronger company for the deal. The one hitch is valuation - as I have complained on several occasions lately, there aren't that many bargains in the insurance space, and while RenRe does seem undervalued, it isn't a compelling bargain.

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RenaissanceRe Changes With The Times

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: Allied World Delivers A Good Underwriting Result, Spiked With Reserves And Investments

About four months ago, I pointed out Allied World Assurance (AWH) as a high-quality specialty liability-focused insurance company that was trading a little rich for my tastes. With the stock having lagged the S&P 500 by about 6% since then, due in part to concerns about reserve strengthening in the professional healthcare liability space and overall worries about P&C insurance, now the valuation is starting to look a little more interesting.

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Allied World Delivers A Good Underwriting Result, Spiked With Reserves And Investments

Seeking Alpha: The Going Is Getting Tougher And W.R. Berkley Is Still Going

Four months ago, I was not too keen on paying up for W.R. Berkley (WRB) shares in the face of an increasingly difficult insurance environment, higher leverage, and a rich valuation. Since that late December piece, WRB shares are basically flat, while my preferred choice, RenRe (RNR), is up around 10%. On a positive note, W.R. Berkley continues to execute at an above-average level, and that makes it a little harder to fret as much about the valuation.

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The Going Is Getting Tougher And W.R. Berkley Is Still Going

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: Assurant Seems To Be Baking In Much Tougher Times

There can be a lot of money in targeting specialized insurance markets, as there's often less competition and substantial rewards for building up expertise in underwriting. It's a strategy that has served companies like Berkshire Hathaway (NYSE:BRK-A, BRK-B) and W.R. Berkley (NYSE:WRB) pretty well. In the case of Assurant (NYSE:AIZ), though, analysts are taking a generally dim view of this company's ability to continue growing premiums and maintaining a profitable combined ratio. While the stock is not especially interesting if the bearish predictions are in fact accurate, financial outperformance could power a strong recovery in these shares.

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http://www.investopedia.com/stock-analysis/2012/Assurant-Seems-To-Be-Baking-In-Much-Tougher-Times-AIZ-WRB-CB-UNH0919.aspx

Investopedia: Argo Group Is A Confounding, But Potentially Undervalued, Stock

The world of insurance stocks can be simultaneously quite simple and quite complex. Actuarial science is by no means easy, and it can be difficult-to-impossible to really evaluate a company's underwriting risks or investment strategy from outside of the company. On the other hand, watching metrics like book value growth, return on equity, premium growth, combined ratio and prior year development can usually point investors towards successful insurance stock picks.

Argo Group (Nasdaq:AGII) stands out as something of a challenging case. Book value growth and return on equity have both been unimpressive, but the company's low valuation may represent a real bargain if the company can improve its operating results.

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http://stocks.investopedia.com/stock-analysis/2012/Argo-Group-Is-A-Confounding-But-Potentially-Undervalued-Stock-AGII-WRB-XL-ACGL0615.aspx

Investopedia: Berkley Looking Unloved

Insurance companies have largely missed out on a lot of the recent stock market rally. True, reinsurance companies like Arch Capital (Nasdaq:ACGL) and RenRe (NYSE:RNR) have done well as these markets have started to harden and company-specific risk and capital models have shown their quality. But in the P&C and specialty insurance markets, times have been tougher and that has kept a lid on W.R. Berkley's (NYSE:WRB) stock.

There is nothing in the numbers from Berkley's first quarter to promise an immediate turnaround, but patient investors should give this name a long look. This is not Berkshire Hathaway (NYSE:BRK.A), but insurance companies that consistently earn better than their cost of capital are valuable wealth-building enterprises, and Berkley has a very good track record on that score. (For more, see Intro To Insurance: Property And Casulty Insurance.)


First Quarter Results a Mixed Bag
Top line results should offer some encouragement. Net premiums grew about 10% this quarter, and the company reported that pricing improved by about 1%, while renewal retention rose to about 80%. There was a fair bit of turbulence on the individual unit level, but four of the five units showed net premium growth. The alternative markets unit was the lone decliner (down almost 5%), while specialty grew almost 19% and international jumped almost 38%.

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http://stocks.investopedia.com/stock-analysis/2011/Berkley-Looking-Unloved-WRB-ACGL-RNR-BRK-A-ALL-TRV-XL0427.aspx

Is Tower Group Leaning A Bit?

Interesting results from Tower Group (Nasdaq: TWGP) tonight. Although the company beat estimates for the quarter, the company's guidance for next year is pretty uninspiring. Barring a good explanation or abject conservatism on the call (a nicer way of saying “sandbagging”), I expect this stock will be weak.

Tower announced that gross premiums rose almost 33% in the fourth quarter, while the combined ratio was below 92%. Even more impressive is the company's 31.8% expense ratio – a slight improvement from the third quarter and the lowest level Tower has seen in years. It is also interesting to see that the company has a significantly lower loss ratio in its personal segment (48.1%) than in its commercial segment (66.5%). It seems to be an unfortunately reality that the company's acquisitions have lead to a higher loss ratio than in the past.

Insurance markets are still not particularly healthy for the company. To that end, the company saw rates rise 3% overall on its renewal business (5.2% in personal, 1% in commercial), with an overall retention ratio of 82%. That tells me that insurance companies are happy to compete on price and are likely pricing business for a loss. Any veteran reader of Berkshire Hathaway's (NYSE: BRK.A) annual reports will know that Warren Buffett often talks about how most insurance companies operate with underwriting losses and this is part of the reason why – losing discipline on price to get business.

Making matters worse, this is not a great investment environment for insurance companies. Although recognized investment income jumped 40%, the yield declined to 4.7% from 5.5% a year ago.

Turning back to the guidance issue, the company is looking for earnings of $2.70 to $2.90 next year. Taking the midpoint, that means about 10% growth. That does not bother me as much as the implied ROE – something on the order of 10% or so and well below what the company has offered before as a target of 13-15%.

To an extent, I can see how the company gets at this number. The pricing environment gives the company the losing choice of either refusing to write bad policies or seeing customers walk away from fair prices and buy their insurance from less disciplined companies. Moreover, the investment environment is doing them no favors now and it wouldn't seem that there's obvious leverage left on the expense side.

Factoring in a new lower ROE (13%) and maintaining a discount rate of 11%, I get a price target of $32.25 for these shares. That's not a terrifically exciting target price, particularly in this kind of insurance market. I might be wishy-washy on holding a stock with such modest appreciation potential, but I think there is a lot of quality in Tower Group and I think the company can lever its recent acquisitions over time. Moreover, I do think that, over time, mid-teens ROEs are certainly possible.

I always keep an eye on the insurance sector, but there is not a lot that excites me today. MetLife (NYSE: MET) and Aviva (NYSE: AV) look kind of interesting, and Ace (NYSE: ACE) and Arch Capital (Nasdaq: ACGL) are kind of cheap. Beyond that, though, W R Berkley (NYSE: WRB) is the only intriguingly cheap insurance company on my list.

So, I'll sit tight for now but I can't deny a bit of an itch to switch over from Tower Group into WRB at today's relative valuations.

I would HOLD shares of Tower Group

Disclosure: I own shares of Tower Group