W. R. Berkley Reaping The Rewards Of Other Insurers' Mistakes

Premium companies deserve premium valuations, and I believe it is beyond argument that W. R. Berkley (WRB) is an exceptionally-run insurance company. With a remarkably strong historical track record of underwriting profits and a more aggressive (but successful) approach to investments, W. R. Berkley ("Berkley") has consistently generated above-average returns from its core specialty insurance business without needing to take on undue risk in underwriting.

While it's easy to say that premium companies deserve premium valuations, dealing with that as an investor isn't easy. A 2.1x multiple to book value doesn't seem unreasonable now relative to where other insurers trade (and would support a fair value around $75), but that's quite bit higher than the long-term average for an insurer with a 10% to 12% ROE and I am concerned about what happens when multiples eventually normalize in the sector.

 

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W. R. Berkley Reaping The Rewards Of Other Insurers' Mistakes

It's Tough To Reconcile W.R. Berkley's Valuation With The Business

W.R. Berkley (WRB) has earned a good reputation, with long-term core earnings and book value growth trends well above the average, as well as a strong underwriting history. Even so, while I can understand a “flight to safety” preference for this more specialty-oriented insurer, it’s tough to reconcile the current and likely near-term trends with the valuation.

While lower rates do support a higher valuation, all other things being equal, lower rates also undermine W.R. Berkley’s investment yields. I’m likewise concerned about the risk of ongoing “social inflation” in claims costs and the impact that will have on the company’s reserves. Although I expect W.R. Berkley to generate a still-attractive core earnings growth rate of around 6%, the annualized total return seems too low (mid-to-high single digits) to get very excited about the shares now.

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It's Tough To Reconcile W.R. Berkley's Valuation With The Business

Improving Pricing And Good Investment Returns Supporting W.R. Berkley

Given the historical returns that W.R. Berkley (WRB) has generated, betting against management is not something to be undertaken lightly. I'm not exactly doing that, but I do believe the company is facing a tough combination of claims inflation, smaller surplus reserves, and a more challenging investment environment that improving pricing can't completely offset. W.R. Berkley's historical performance arguably deserves the premium it gets, but I can't really see much value in the shares at today's level.

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Improving Pricing And Good Investment Returns Supporting W.R. Berkley

In A Tougher Market, W.R. Berkley Has Outperformed

Insurance stocks are not in favor, with well-run companies like Arch Capital Group (NASDAQ:ACGL) and Chubb (NYSE:CB) looking at double-digit year-over-year price declines in their stocks, while Hartford Financial Services Group (NYSE:HIG) and Travelers (NYSE:TRV) are down more modestly. W.R. Berkley (NYSE:WRB), though, keeps on keeping on, with the shares up about 5% over the past year - weaker than the S&P 500, certainly, but above the sector averages for insurance in general and P&C insurance in particular.

This is a tough stock to recommend. While management has put up a very strong track record, and I like the company’s diverse specialty and small-client exposure, as well as its closer-to-the-client decentralized model, I’m concerned about the long-term impact of claims inflation and today’s valuation. I’ve learned over the years not to bet against W.R. Berkley, and the company’s strong investment operations can generate income growth at a time when underwriting profit growth is more challenging, but it’s hard to favor this pricey-looking name when there are rivals trading at what look to be substantial discounts to long-term fair value.

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In A Tougher Market, W.R. Berkley Has Outperformed

Argo's Top-Line Growth Is Exciting, But ROEs Remain Lackluster

Argo Group (ARGO) has been a frustrating insurance stock to follow for some time, as the company's strong niche underwriting capabilities and meaningful earnings potential have been held back by persistently high expenses. Reinvesting in the business has started to pay off in terms of premium growth, but solid book value growth and ROE improvement have remained elusive.

Even so, Argo has been a strong performer this year, with a roughly 15% year-to-date gain that leaves comps like AIG (AIG), Alleghany (Y), Chubb (CB), Hartford (HIG), and W.R. Berkley (WRB) well in the dust. While stronger than expected first quarter results helped fuel the surge, and I'm bullish on the prospects for technology investments to yield more premium growth, I'm not yet sold on the company's ability to drop that growth down through to the bottom line, and so I'm not seeing a significant amount of undervaluation in the shares now.

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Argo's Top-Line Growth Is Exciting, But ROEs Remain Lackluster

Everest Re's Strong Reinsurance, And Improved Insurance, Operations Are Building Value

Everest Re (NYSE:RE) has long had a very good reinsurance business - although skewed toward property-catastrophe, the company’s focus on specialty/smaller lines and low overhead costs have helped generate pretty good returns even through recent weakness in pricing. What has been more impressive, though, has been the improvements in the insurance business - a business that management had elected to continue growing aggressively despite a pretty poor history of underwriting losses.

Everest Re management has done a lot to repair investors’ opinion of the insurance operations, and the company has also managed to benefit from M&A-driven dislocations in the market. Now, with insurance prices showing a little strength and higher rates supporting better investment returns, it’s not a bad set-up for the company. Between the too-high highs of last summer and the too-low lows of this past winter, I think Everest Re is more reasonably priced now, but “reasonable” in this case still suggests a total expected annual return in the low double digits.

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Everest Re's Strong Reinsurance, And Improved Insurance, Operations Are Building Value

Argo Growing Its Business, But Profitability Remains A Concern

Argo Group (AGII) has been an interesting, albeit frustrating, stock to follow for a number of years. There are a lot of positives, including strong underwriting quality, dividend growth, and recently reinvigorated premium growth, but there are also ongoing concerns related to issues like persistently sluggish tangible book value growth and weak returns on earnings. To that end, the shares are only up about 10% from my last write-up in early 2016, and investors would have done better with other insurers like Arch Capital (ACGL), Chubb (CB), Travelers (TRV), or W.R. Berkley (WRB).

I can't say that I really like the valuation on Argo today. I do think the company's efforts to grow its premiums will eventually help its expense leverage (a long-sought goal), and I likewise think that expanding its Lloyds business through M&A should help long-term leverage there. Offsetting that are worries about industry loss trends and the company's persistent issues with generating attractive operating leverage. While I do believe that Argo can generate double-digit EPS growth over the long term and eventually get its return on tangible equity above 10% on a consistent basis, I think the valuation amply reflects that.

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Argo Growing Its Business, But Profitability Remains A Concern

Arch Capital's Cycle-Management Capabilities Serving It Well

Arch Capital (NASDAQ:ACGL) continues to demonstrate why I regard it as among the best of the best insurance companies in the market. While the company's acquisition of AIG's (NYSE:AIG) mortgage insurance business (United Guaranty) was perhaps not universally lauded, I believe investors who understand the dynamics of the mortgage insurance and Arch Capital's strategy here will appreciate the value that it will add in the coming years - particularly as available returns in the primary insurance and reinsurance market are pretty lousy.

Arch Capital shares are up another 20% or so from when I last wrote about the company, beating broader insurance stock indices (like the Dow Jones U.S. Select Insurance Index) and other quality insurers like Chubb (NYSE:CB) and W.R. Berkley (NYSE:WRB) (XL Group (NYSE:XL) has done a fair bit better). The shares certainly aren't cheap on a conventional book value multiple basis, but I do believe and expect that Arch Capital's diversification into mortgage insurance and careful management of its insurance and reinsurance businesses can support high single-digit to low double-digit growth at a time when many other insurers are going to be hard-pressed. Granted, I don't think these shares are undervalued on a discounted earnings basis either, but they're not out of line if you believe in management's guidance and this management team has given investors few reasons for persistent pessimism.

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Arch Capital's Cycle-Management Capabilities Serving It Well

Seeking Alpha: Endurance Specialty Pushing On Through Soft Markets

Endurance Specialty Holdings (NYSE:ENH) hasn't emerged as a leader of the insurance pack, but it has done okay since my last write-up on the company in June of 2015. With the shares up around 5% (excluding dividends), Endurance has outdone the likes of Aspen (NYSE:AHL) and XL Group (NYSE:XL), but hasn't quite kept up with top-notch players like Arch Capital (NASDAQ:ACGL), RenRe (NYSE:RNR), W. R. Berkley (NYSE:WRB), or Hartford (NYSE:HIG).

In my opinion, Endurance has gotten itself off to a good start with the integration of Montpelier Re (NYSE:MRH), and I like how the company has been repositioning its business and risk exposures in the reinsurance segment. On the insurance side, the company is writing a lot of business and looking to grow in markets like aviation and international casualty. While a drive for scale is understandable, expanding the business in a period of soft rates carries with it some risks to future profits.

The market has established an undesirable trade-off for me within the insurance sector - the stocks I like best aren't very cheap (if cheap at all), and the ones that are undervalued have some risks and "yeah, but..." attached to them. Such is the case with Endurance. I don't think my expectations are all that ambitious (long-term earnings growth around 5%, with a 10% ROE) and the fair value of $67 to $70 holds some appeal, but I can't muster together a rousing Buy case for the stock right now.

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Endurance Specialty Pushing On Through Soft Markets

Seeking Alpha: Allied World A Confounding Mix Of Risk And Opportunity

Even with the concerns over softening premiums, rising claim inflation, and weaker-for-longer interest rates, the insurance sector hasn't had too bad a time of it. Quality names like Arch Capital (NASDAQ:ACGL), Chubb (NYSE:CB), and W. R. Berkley (NYSE:WRB) have managed to outperform the S&P 500 by 10% to 15% since the time of my last article on Allied World (NYSE:AWH). It hasn't been such a good time for AWH, though, as concerns about weaker underwriting, weaker market returns, and increased reserves have pushed the shares down about 17% since that last article and well below the level of returns of many of its peers.

I have to admit some frustration as to what to do with these shares. I wasn't all that enthusiastic on them back in May, and I do think weak core underwriting results and softening markets are a concern. On the other hand, Allied World has an enviable track record of tangible book value growth and meaningful opportunities to grow both its U.S. specialty and global primary insurance businesses in the coming years. I think $36 to $40 is a reasonable fair value range right now, but these shares could merit a fair value in the mid-$40s if the reserving issues are truly behind them and if management can really maximize the opportunities of its expanded global and domestic primary insurance businesses.

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Allied World A Confounding Mix Of Risk And Opportunity

Seeking Alpha: Aspen Insurance Trying To Defy Expectations And Tough Markets

This isn't an easy market for an insurance and reinsurance company that wants to grow, but Aspen Insurance (NYSE:AHL) continues to push a story that calls for above-average premium growth, driving above-average operating leverage. The Street still isn't buying it, as the shares are down a bit from my last article and not particularly well-loved in terms of "Buy" ratings.

It's always fair to question the compromises a company has to make to grow when its peers are struggling to do so, and that's a concern as Aspen looks to grow in a declining market. What's more, I'm a little disappointed in the company's progress with its underwriting profitability. This is still a story where growth could drive impressive performance, but I see more risk to that idea given what's going on in the sector as a whole. I've trimmed back my expectations, particularly for the next couple of years, but if the company can manage mid-single-digit cash earnings growth, a fair value in the high-$40s still makes sense.

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Aspen Insurance Trying To Defy Expectations And Tough Markets

Seeking Alpha: Arch Capital's Superior Model Continuing To Pay Off

Arch Capital (NASDAQ:ACGL) has been one of my favorite insurance companies for a long time, and I greatly admire the company's focus and discipline when it comes to underwriting and capital management. Arch Capital has shown time and again that it will prioritize/deprioritize business units as expected returns dictate and will expand/shrink the business in conjunction with its view of the landscape. I believe that will be a critical differentiating factor as the property & casualty insurance and reinsurance sectors go through what could prove to be a multi-year process of too much capital and weak pricing.

I've generally believed that investors can do better holding somewhat overvalued shares of great companies than cheap shares of lesser companies, and I still believe that about Arch Capital. I can't really get comfortable with Arch Capital as a great idea for new money given the valuation, but I wouldn't recommend investors flee the shares if they already own them.

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Arch Capital's Superior Model Continuing To Pay Off

Seeking Alpha: Argo Group Making Steady Progress In Improving Its Business

On the whole, insurance is a pretty boring industry for most investors. It's the type of sector where surprises tend to skew to the negative and where management can't really change the business for the better in the scope of a year or two - there's no "one more thing" moment where a company introduces a new product that shifts market share almost overnight and changes the industry. That said, good management and steady self-improvement can do a lot, and the five-year stock returns of Argo Group (NASDAQ:AGII), Arch Capital (NASDAQ:ACGL), and W.R. Berkley (NYSE:WRB) are nothing to apologize for, as all of these well-run insurers have outdone the Nasdaq over that time period.

In my view, the story at Argo remains one of steady improvement. The company still needs to "grow into" its expense structure, but the company's underwriting performance remains strong. Weak pricing is a challenge within the property and casualty insurance sector, but Argo's focus on smaller clients helps shield it a bit from pricing pressure, while low reinsurance prices give the company the option to offload some risk at attractive prices.

I've liked Argo for a while now and the shares have done pretty well. I'm not as excited about the valuation, though, as I think it already incorporates a jump to 10% returns on equity in the coming years. To that end, while Argo does trade at a discount to many peers on a price/book value basis, it also generates lower returns and deserves at least some of that discount. I still like this business and the long-term prospects, but I'd probably rather buy Chubb (NYSE:CB) at a discount today than pay full value for Argo.

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Argo Group Making Steady Progress In Improving Its Business

Seeking Alpha: W.R. Berkley Continues To Navigate Tricky Waters

I can't say that I feel like I've missed out on much since thinking W.R. Berkley (NYSE:WRB) didn't look like a terrific bargain back in May of 2015. While the shares did rise close to 20% from that article at one point on takeover speculation, the net movement of 3% is more in keeping with what I'd expected given the challenging conditions in the commercial P&C market and W.R. Berkley's already-healthy valuation.

My basic sentiment on W.R. Berkley today is "same as it ever was." The company has done a very good job of finding growth in a challenging market, helped by niche/specialty market focus, good underwriting, and its investment portfolio. I still believe that W.R. Berkley can generate good earnings growth over the next five years, but the stock looks like it is already priced for that sort of performance.

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W.R. Berkley Continues To Navigate Tricky Waters

Seeking Alpha: Argo Group Coming Along, But The Going's Tougher

Argo Group (NASDAQ:AGII) is taking a page from Aspen's (NYSE:AHL) book; trying to leverage strong core underwriting across a somewhat disjointed and sub-scale collection of operations. So far, it hasn't been a bad plan as the company has seen its shares climb more than 100% over the past three years, outdistancing larger players like Aspen, Allied World (NYSE:AWH), ACE (NYSE:ACE), and W. R. Berkley (NYSE:WRB) by rather healthy margins.

I am starting to wonder, though, if it is going to get harder for Argo to continue its path toward higher returns. The excess and surplus, specialty, and reinsurance markets have gotten a lot more challenging of late, with companies finding it more and more difficult to push higher rates - an important part of Argo's drive to write more profitable business upon renewal. I do still think that Argo can get its adjusted ROE above 10% over the next five years, and there is about $5/share of upside for every 1% improvement to long-term ROE, but the roughly 17% move since my last update has captured a lot of the undervaluation that I saw at the time.

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Argo Group Coming Along, But The Going's Tougher

Seeking Alpha: Skepticism Can Still Benefit Aspen Insurance Shareholders

Aspen Insurance (NYSE:AHL) continues to look like an opportunity within the insurance sector for a management team to drive better-than-expected results and positive re-ratings on the shares. More than a few sell-side analysts remain convinced that Aspen is going to see slower-than-expected premium growth (due largely to price pressure), higher losses, and lower than expected investment income. For its part, Aspen management believes that it is approaching a point of significant operating leverage for the insurance business and that a focus on more specialized segments within reinsurance can preserve pricing.

These shares are up about 10% from my last update on the company, and I believe they can go higher from here. I'm still not quite as bullish as management on its long-term ROE potential, but I don't think a low-to-mid $50's fair value is unreasonable today and if management can outperform the ultimate value will be higher. I'd also note that while Aspen management has been consistent regarding its views of Aspen's ability to gain share in the market and generate stronger than expected ROEs, the current move toward more M&A in the insurance sector could have suitors approaching the company once again.

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Skepticism Can Still Benefit Aspen Insurance Shareholders

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: Tower Group Manages To Preserve Some Value

The long nightmare that is Tower Group (TWGP) now has an end in sight. Assuming that a sufficient number of Tower shareholders approve, and that the company doesn't go insolvent before the deal closes, Tower will be selling itself to ACP Re, a privately-held insurance company controlled by the founder of AmTrust Financial Services (AFSI). As huge reserve charges had severely depleted the company's capital and led to downgrades that essentially excluded it from the market, I believe this is the best outcome that shareholders could reasonably ask for or expect.

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Tower Group Manages To Preserve Some Value

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: 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