Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: Viking on November 03, 2010, 02:36:40 PM

Title: WRB - WR Berkley
Post by: Viking on November 03, 2010, 02:36:40 PM
I just listened to the WRB quarterly call and all was pretty boring (not much change or new happening since Q2).

Bill gave a pretty good summary of why he feels a turn in the market (for the better) is coming: WRB loss ratios have historically been 8 to 10 points better than the industry; today WRB loss ratios are 6 points worse. This is a 14 point swing. Bill said either WRB has become incredibly stupid or competitors will experience large reserve deficiencies in the future (and lower capital will force them to write less business). At the same time these companies will not be able to raise traditional capital as easily (given current state of capital markets).

He is sticking with his 'prices will start turning in Q4' but he is also says that he could be wrong on timing (and that WRB does not run its business by predicting thses sorts of things).

The company had net earnings of $94 million in Q3 and bought back $88 million in common stock. The company in past conference calls has said that it is flush with capital and will be happy to buy back stock given current prices. Many good insurers are trading at around book value. To purchase another company the takeout price would likely need to be 1.3 or 1.4x BV (i.e. FFH purchase of Zenith). I really like the fact that WRB is buying its own stock back for about 1x BV. Year to date they have repurchased 12 million shares (8% outstanding). Today they just announced they have increased the buyback amount to 10 million and they increased the dividend from $0.05 to $0.07/share.

Book value is $26.36 and the stock closed today around $27.50/share. The insurance market looks to have stabilized so I would expect them to earn $0.60/share per quarter in the current environment. Should a hard market come and prices increase (and volume grow) earnings would increase dramatically. Looks to me to be a pretty good reasonable risk high return potential looking out a few years.   

Title: Re: WRB - WR Berkley
Post by: Myth465 on November 03, 2010, 03:18:15 PM
I like these guys. Just wish they were cheaper. I am starting to see the reserve releases fall and assets are rolling over to lower yields. Something has to give. My issue with insurers is you can just wait till something gives and buy then. When something gives things get cheap. Its why i havent bought back FFH but I will at some point.

I really liked his explanation on why they arent buying companies. I think its good for FFH though. They want and need float, underwriting doesnt help them too much. WRB already has a great underwriting culture. So it doesnt make sense to add another culture.
Title: Re: WRB - WR Berkley
Post by: Carvel46 on November 03, 2010, 03:36:45 PM
What do think of compensation at the company?
Title: Re: WRB - WR Berkley
Post by: Viking on November 03, 2010, 10:25:17 PM
Carvel, if you are referencing their underwriters, I think they are compensated over the cycle and not to hit quarterly volume numbers; I like this. If you are referencing senior management, I do not have a handle (but would expect it is high).

Regarding senior management, I do like Bill (he sounds quite arrogant, but he also has earned his stripes). His son, to be perfectly honest, has not impressed me (how he answers questions on conference calls); however, he is young and as long as pop is around I am not concerned.
Title: Re: WRB - WR Berkley
Post by: Viking on November 03, 2010, 10:31:49 PM
Myth, you mentioned that you wish they were cheaper... my read is most insurers are trading at historic lows. We are now through hurricane season and profitability for the next two quarters will likely chug along (and BV should continue to grow). My concern is being out of the sector as it begins its next multi-year run so I am now re-establishing a base position in my favourite names.
Title: Re: WRB - WR Berkley
Post by: Viking on November 05, 2010, 04:49:55 PM
Here is a nice summary of Berkley's call for prices to harden at some point in the near term: www.insurancejournal.com/news/national/2010/11/04/114589.htm (http://www.insurancejournal.com/news/national/2010/11/04/114589.htm)
Title: Re: WRB - WR Berkley
Post by: biaggio on December 20, 2010, 08:03:59 PM
Viking, agree with you

Looks like a good candidate as a owner/jockey stock

Management owns 20%

CEO + co have excellent 10 year record of 16% growth in BV and 25 year record of 15% growth, with good performance despite soft market.

They sound conservative. Have not written as much business as price was not right. They have ~$17 billion in invested assets, market cap of $4 Billion and have only written ~ $4 B in business this year

I think it would be ok to buy at BV. I would not mind holding for 25 years and earn 15% per year. I am thinking of adding a position.

Title: Re: WRB - WR Berkley
Post by: Liberty on February 02, 2011, 11:39:32 AM
Q4 conference call is tonight at 5:30 pm ET:

http://ir.wrberkley.com/events.cfm

WRB calls are usually pretty instructive (at least, the couple that I've heard were).
Title: Re: WRB - WR Berkley
Post by: Myth465 on February 02, 2011, 11:41:43 AM
These guys are a one track record. One day they will be right.
Title: Re: WRB - WR Berkley
Post by: Liberty on February 02, 2011, 11:47:22 AM
These guys are a one track record. One day they will be right.

IMO the important thing is that they don't change how their business is run based on their predictions, so that if they don't come true, there's no real negative impact, they just have to be more patient. I like corps with a good defense like that.
Title: Re: WRB - WR Berkley
Post by: Myth465 on February 02, 2011, 12:32:46 PM
I agree. I just prefer deeper value in Insurance. I like AHL and the options have worked out well thus far. I am hoping they are bought for book by June, its unlikely though.
Title: Re: WRB - WR Berkley
Post by: Viking on February 02, 2011, 02:25:42 PM
WRB just released Q4 results: http://files.shareholder.com/downloads/BER/1154683497x0x438657/4ed2eedf-562c-404d-8169-3fb68de93b29/WRB_News_2011_2_2_General_Releases.pdf (http://files.shareholder.com/downloads/BER/1154683497x0x438657/4ed2eedf-562c-404d-8169-3fb68de93b29/WRB_News_2011_2_2_General_Releases.pdf)

Q4 net income increased $0.85/share
BV = $26.36 (was $26.26 at end of Q2)

Questions I have:
1.) impact of muni bonds on BV (given Q4 muni bond sell off): a non-event, likely given duration of muni holdings is only 4.1 yrs
2.) size of reserve releases in Q4: TBA

Bottom line is it looks to me that we are still in a soft pricing environment with no end in sight. I will be watching the trend in reserve releases as insurers release results as this should give some clarity as to when we will start to see a market turn.

Myth465, yes, the timing around B Berkley's prediction has not been right; I do buy into his logic and am appreciative he lays out his thoughts so well. Berkley is simply saying that the current pricing environment is not sustainable. He also understands that nobody can predict timing (yes, he seems to have fun trying). Well run insurers are trading at very attractive levels, especially compared to the poorly run companies (not much of a multiple difference). At some point we will get a hard market and the well run insurers will be ideally positioned. Investors will then get growing earnings and growing PE multiples.

J Grantham in his Q4 report makes a great comment about Bubbles: "saving your big bets for the outlying extremes is, in my opinion, easily the best way for a large pool of money to add value and reduce risk." My guess is we are getting close to one of those outlying extremes in insurance that only comes along once every 10 years or so...
Title: Re: WRB - WR Berkley
Post by: omagh on February 02, 2011, 03:00:41 PM
Thanks Viking.  Interesting comments on the Australian catastrophes in the Q&A on the conference call.  WRB has no dog in that fight, but Berkley indicates that there will be substantial, but not market-changing, losses to reinsurers.  Also, the typhoon will likely be considered a second event.  Not quite enough capital destruction to cause significant pricing changes.

WRB just released Q4 results: http://files.shareholder.com/downloads/BER/1154683497x0x438657/4ed2eedf-562c-404d-8169-3fb68de93b29/WRB_News_2011_2_2_General_Releases.pdf (http://files.shareholder.com/downloads/BER/1154683497x0x438657/4ed2eedf-562c-404d-8169-3fb68de93b29/WRB_News_2011_2_2_General_Releases.pdf)

Q4 net income increased $0.85/share
BV = $26.36 (was $26.26 at end of Q2)

Questions I have:
1.) impact of muni bonds on BV (given Q4 muni bond sell off): a non-event, likely given duration of muni holdings is only 4.1 yrs
2.) size of reserve releases in Q4: TBA

Bottom line is it looks to me that we are still in a soft pricing environment with no end in sight. I will be watching the trend in reserve releases as insurers release results as this should give some clarity as to when we will start to see a market turn.

Myth465, yes, the timing around B Berkley's prediction has not been right; I do buy into his logic and am appreciative he lays out his thoughts so well. Berkley is simply saying that the current pricing environment is not sustainable. He also understands that nobody can predict timing (yes, he seems to have fun trying). Well run insurers are trading at very attractive levels, especially compared to the poorly run companies (not much of a multiple difference). At some point we will get a hard market and the well run insurers will be ideally positioned. Investors will then get growing earnings and growing PE multiples.

J Grantham in his Q4 report makes a great comment about Bubbles: "saving your big bets for the outlying extremes is, in my opinion, easily the best way for a large pool of money to add value and reduce risk." My guess is we are getting close to one of those outlying extremes in insurance that only comes along once every 10 years or so...
Title: Re: WRB - WR Berkley
Post by: onyx1 on February 02, 2011, 03:26:20 PM
Q4 net income increased $0.85/share
BV = $26.36 (was $26.26 at end of Q2)

Looks to me like BV dropped to $26.26 from $26.36 despite earning .85.  Hasn't been addressed on the CC, but unrealized gains dropped $116mm from last quarter ($451mm to $335mm) so that is probably MTM losses on the muni portfolio and what caused the lower BV.
Title: Re: WRB - WR Berkley
Post by: Viking on February 02, 2011, 03:48:43 PM
Just finished listening to the conference call. Comments:
1.) will likely use quarterly earnings to buy back stock; not interested in increasing buyback beyond this amount as they want to keep enough excess capital to fund growth (when it eventually happens).
2.) What will cause the market to turn? Losses. A shift from greed to fear. Driven by declining surplus or operating losses etc, as fear enters psyche of management.
3.) Pricing: no question market is turning.
4.) Accident year CR = 100. Feel their underwriting is more conservative than majority of competitors = larger future year reserve releases.
5.) Reserve releases: Q4 2010 = $55 million; FY 2010 = $235 and FY 2009 = $191
6.) Investments: currently buying some mispriced municipals

It will be very interesting to hear what other insurers are saying and doing. My guess is if we see a bad year for catastrophes we could get the shift into a hard market (particularly for reinsurers).
Title: Re: WRB - WR Berkley
Post by: beerbaron on February 02, 2011, 07:25:41 PM
Could the muni market be the catalyst for a hard market?

BeerBaron
Title: Re: WRB - WR Berkley
Post by: Myth465 on February 02, 2011, 07:42:10 PM
Could the muni market be the catalyst for a hard market?

BeerBaron

I think the focus on the hard market is a bit misguided.

I love insurance and this will be my first time playing the cycle. If losses cause a hard market (investments or cat) then I will wait for losses. Losses also cause stock prices to fall.I prefer to spend my time figuring out which ones to bet on so that when the time comes I am ready to push my chips in. Whatever causes a hard market will cause stock prices to fall with BV giving us time to get in.
Title: Re: WRB - WR Berkley
Post by: Liberty on February 10, 2011, 08:13:56 PM
There's some interesting stuff in this presentation that Bill gave recently:

http://files.shareholder.com/downloads/BER/1102439904x6155673x425342/35d81438-9559-406c-988b-2a1d6ad4ba9c/Merrill%20Lynch%20Lunch%2012-2-2010.pdf

Interesting slide about the market cycle in the P-C business.
Title: Re: WRB - WR Berkley
Post by: onyx1 on February 16, 2011, 09:33:45 AM
Some highlights from Berkley’s presentation yesterday, where he said:

AIG will need to raise prices as they added 4% to reserves last quarter.  Although this has been report in the media, most gloss over the fact that the reserve deficiencies were from 2006 and prior accident years.  With “very aggressive” pricing over the past several years, Berkley believes more reserve additions at AIG are forthcoming.

Muni portfolio is creditworthy and properly marked, and reserves are conservative.

Catalysts for a hardening market are in place, including: current industry accident year CRs are running 108%-109%; commercial lines pricing is as tight as he has seen in his career; low fixed income rates requires better underwriting to achieve adequate ROEs; reserve redundancies are giving way to deficiencies; companies discontinuing lines of business; and, standard carriers are beginning to move out of E&S market.  He continues to assert that industry surplus is a lagging indicator of a hard market.

He reviewed WRB’s performance in prior hard markets by showing how explosive the share price has reacted to increased net income and expansion of multiples/P-to-BV.  From 1982 to 1985, share price went from $.62 to $2.02 (P-to-BV went from .88 to 2.77), from 1999 to 2005 $4.12 to $31.75 (P-to-BV went from .90 to 2.37).  He strongly suggested that this can happen in the next hard market as they have widened their footprint over the last 3-4 years through geographic expansion and opening of new units with new hires.   Won’t pinpoint when, but believes more than ever that hard market will soon be in place.

He owns 20% of WRB outstanding common stock.

The entire presentation can be accessed here:
http://ir.wrberkley.com/events.cfm
Title: Re: WRB - WR Berkley
Post by: Liberty on February 16, 2011, 03:13:17 PM
Thanks for posting, Onyx. I hope he's right, but not too soon. I want quality insurers to stay cheap for a while longer so I can load up  ;D
Title: Re: WRB - WR Berkley
Post by: onyx1 on February 24, 2011, 08:20:50 AM
Here is a good write up on WRB from the VIC (it's available to non-members after a 45-day delay).

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/42754

The author's thesis is that WRB is among the best (if not, The Best) positioned to benefit from a cycle turn due to the way Bill Berkley operates in soft markets (pulling in underwriting but not capacity, buying back stock, etc.) and hard markets (using pentup capacity to re-lever the firm).  WRB can lever more than most P&C's because they are diversified by geography, line of business, end market and they have no Cat risk as they reinsure individual risk over $5mm.  This has been a very successful strategy over the 30 year operating history of WRB and has made Bill Berkley a rich man (he owns 18% of the company worth $780mm).

If you are a member, you can view the Q&A that follows the write up.  It is equally good and I learned several things about WRB including:

They have $60mm in real estate asset booked at cost on the BS purchased decades ago.
They have grown staff actuaries from 10 to 80 in the last decade and employ them at both the sub and parent level.
The author believes Bill Berkley would sell the company at cycle peak and with a robust valuation.


Enjoy!
Title: Re: WRB - WR Berkley
Post by: Bronco on February 24, 2011, 08:58:50 AM
I seem to remember a few years back that this guy was making tons of $$ in executive salary.  Maybe 50m or so?

If true, he makes Biglari look like WEB.
Title: Re: WRB - WR Berkley
Post by: benhacker on February 24, 2011, 09:58:51 AM
Quote
I seem to remember a few years back that this guy was making tons of $$ in executive salary.  Maybe 50m or so?

If true, he makes Biglari look like WEB.

A quick summary of Mr. Berkeley's comp (may be some errors, I just pulled this real quick... don't have my notes handy).

Total comp:
'01 - ~$3-4m
'02 - ~$6.5m
'03 - ~$20m
'04 - ~$11m
'05 - ~$18m
'06 - ~$30m
'07 - ~$27m
'08 - ~$15m
'09 - ~$17m

Ben

Title: Re: WRB - WR Berkley
Post by: onyx1 on February 24, 2011, 10:01:52 AM
His total comp has been running around $20mm per year.  This is my biggest beef with WRB, and probably the biggest reason the firm has not attracted a more robust following among the value investment community.  If he paid himself $100k he would certainly attract a cult following, as there aren't many other insurance owner/operators with as good a long term record as Bill Berkley.  He is shareholder friendly, passionate about risk, a very good capital allocator, and a leading thinker in the industry.  When the firm is valued by the market again at a significant multiple to BV (it closed at 2.9xBV in March 2006), I can only hope he will cap his compensation and reap the benefit of immediate appreciation of his (and my!) stockholdings.

In the meantime, I can only ask myself "Is he worth it?"  In my opinion, yes.  I'm getting an owner/operator who started the business in 1967 with years of experience in bull-bear-soft-hard-inflation-deflation markets.  He is solely responsible for the performance of WRB, and the bottom line is that he has grown Tangible Equity (adjusted for capital transactions and dividends) at 21% for the last 10 years, and 21% for the last 25 years.   
Title: Re: WRB - WR Berkley
Post by: Bronco on February 24, 2011, 10:31:10 AM
Ben - thanks for the more accurate #'s.  Certainly no WEB with compensation, but I guess not a reason to dismiss the stock.

Still, I'm passing on this.
Title: Re: WRB - WR Berkley
Post by: Liberty on March 01, 2011, 06:36:31 PM
WRB increasing share buybacks:

http://www.zacks.com/stock/news/48323/W.R.+Berkley+Ramps+Buyback+

Quote
Yesterday, property and casualty insurer W.R. Berkley Corp. (WRB - Analyst Report) announced an increase in repurchase authorization to 10 million shares. The increased authorization represents nearly 7% of the company’s 155.1 million outstanding shares as of December 31, 2010.
Title: Re: WRB - WR Berkley
Post by: biaggio on March 02, 2011, 04:27:40 AM
Mr Berkley's compensation certainly seems generous.

How does one determine if pay is out of line? Is there a general rule of thumb?

$20 million per year to me is obviously dear.

What is a reasonable pay for  a company with  $1-2 billion market cap?

Proxy's I read always have the standard line that the amount paid is in line with what is paid to other executives at similar organization. Should we just go with that.
Title: Re: WRB - WR Berkley
Post by: Bronco on March 02, 2011, 05:58:29 AM
My criteria - and Myth knows this b/c he is the only one to read my book (not just on the board, but in the world) - is what is the incremental value added.

If you pay Michael Jordan 20 million and he will generate 40 million in marginal profits, it is a no brainer.

If you pay Steve Jobs 100 million it would be tough to argue that he isn't worth it.  His marginal value on an annual basis is probably much higher to Apple shareholders.

So at $20m, is Mr. Berkley adding more value than someone that can do the job for $10 million?  I can't speak intelligently to that (or anything else for that matter).  But I think that is what s/h's could look at.

Buffett compensation is often where the bar is set - since he is paid essentially nothing and has provided so much.  But the same logic is applying - big bang for the $$. 

Title: Re: WRB - WR Berkley
Post by: stahleyp on March 02, 2011, 06:09:44 AM
To me, the problem with huge compensation is not whether or not someone is worth it. It's more to do with love. What do they love more: running the business or the money?
Title: Re: WRB - WR Berkley
Post by: Myth465 on March 02, 2011, 06:16:40 AM
To me, the problem with huge compensation is not whether or not someone is worth it. It's more to do with love. What do they love more: running the business or the money?

I think this will cause you to leave alot of money on the table. Many skipped out on CHK and SD due to compensation. I think Bronco has the right idea. I used to think everyone was simply overpaid, but I am slowly realizing that these guys can add incremental value. Sokol, Ward, and CHK CEO have all added billions of value which has nothing to do with just clocking in.

Title: Re: WRB - WR Berkley
Post by: Bronco on March 02, 2011, 06:25:48 AM
I guess I combined 2 concepts in 1, but in short

1) Adding value to SH's that exceeds (by a decent amount) the compensation
2) Can someone add the same value to SH's at a lower compensation?
Title: Re: WRB - WR Berkley
Post by: S2S on March 02, 2011, 06:44:12 AM
To me, the problem with huge compensation is not whether or not someone is worth it. It's more to do with love. What do they love more: running the business or the money?

Why not both? Maybe it's just me, but most on this board seem to love both (1) money and (2) the game of investing. :D
Title: Re: WRB - WR Berkley
Post by: onyx1 on March 02, 2011, 07:09:27 AM
I think Berkley provides lots of incremental return because of the nature of the industry he is in.  This isn't KO.  To be effective in P&C, you must be really good at underwriting, reserving, cycle management, investments, risk, capital allocation, new business, and more.  He is involved in every detail of his business.

Regarding the buybacks it wouldn't surprise me to see them slow down.  I get the sense from the CC's they are conserving capital for a hard market in the near term.
Title: Re: WRB - WR Berkley
Post by: Liberty on April 11, 2011, 08:39:11 AM
2010 annual report is out:

http://ir.wrberkley.com/financials.cfm
Title: Re: WRB - WR Berkley
Post by: Liberty on April 25, 2011, 02:34:06 PM
http://www.businesswire.com/news/home/20110425006250/en/W.-R.-Berkley-Corporation-Reports-Quarter-Results

"W. R. Berkley Corporation (NYSE: WRB) today reported net income for the first quarter of 2011 of $116 million, or 79 cents per share, compared with $119 million, or 74 cents per share, for the first quarter of 2010."

Net premiums written increased 10%.
GAAP combined ratio was 96.3%.
Return on equity was 12.6%.
Book value per share was $26.78.
Title: Re: WRB - WR Berkley
Post by: Liberty on May 17, 2011, 12:18:59 PM
http://www.businesswire.com/news/home/20110517007044/en/W.-R.-Berkley-Corporation-Increases-Dividend-14

Quote
W. R. Berkley Corporation (NYSE: WRB) announced today that its Board of Directors has voted to increase the cash dividend to an annual rate of 32 cents per share, representing a 14% increase from the present rate. The first quarterly dividend at the new rate of eight cents per share will be paid on July 1, 2011 to stockholders of record at the close of business on June 14, 2011.
Title: Re: WRB - WR Berkley
Post by: Liberty on June 22, 2011, 10:52:52 AM
http://ir.wrberkley.com/releasedetail.cfm?ReleaseID=586605

Quote
W. R. Berkley Corporation (NYSE: WRB) today reported estimated pre-tax losses of approximately $65 million from the numerous severe U.S. storms that occurred in April and May 2011. The Company's loss estimate is net of reinsurance and includes reinstatement premiums. Today's preliminary estimate of pre-tax storm losses for April and May exceeds the losses contemplated in the Company's budget for the full second quarter by approximately $35 million.
Title: Re: WRB - WR Berkley
Post by: Liberty on July 25, 2011, 01:46:27 PM
Q2 numbers are out:

http://ir.wrberkley.com/releasedetail.cfm?ReleaseID=593885
Title: Re: WRB - WR Berkley
Post by: onyx1 on August 08, 2011, 11:46:39 AM
WRB now offered at BV.
Title: Re: WRB - WR Berkley
Post by: Liberty on October 12, 2011, 10:28:11 AM
http://www.insurancejournal.com/news/national/2011/10/12/219657.htm
Title: Re: WRB - WR Berkley
Post by: onyx1 on October 26, 2011, 01:10:25 PM
More signs of a hardening market in the P/C & WC business, from the Q3 press release:


"The visibility of a cycle change is even more evident, with prices for the quarter up three percent over last year. We believe that price increases and premium volume growth will continue. "

"While some industry observers suggest that excess capital is a major restraint on pricing levels, history does not support their perception. Capital has never been the primary driver of cyclical change in the business; it has merely added impetus or restraint. Given the current interest rate environment, the industry needs significant price increases in nearly all lines of business in order to achieve even minimally adequate returns.

http://ir.wrberkley.com/releasedetail.cfm?ReleaseID=618266

Title: Re: WRB - WR Berkley
Post by: Liberty on November 03, 2011, 01:16:36 PM
http://www.marketwatch.com/story/w-r-berkley-corporation-declares-dividend-and-increases-share-repurchase-authorization-2011-11-03
Title: Re: WRB - WR Berkley
Post by: PlanMaestro on April 25, 2012, 12:58:44 PM

W. Robert Berkley, Jr.

Okay, thank you. Good morning. Market conditions continue to improve during the first quarter. While our cycle term may not appear visible during any 90-day period when one reflects back and where we were a year ago, it is clear there has been significant improvement. Evidence of the change can be seen in many ways, including the increasing number of carriers publicly announcing significant rate increases.

Additionally, we are seeing many market participants adjusting their risk appetite resulting in a gradually increasing flow of submissions into the Specialty markets. This increase in flow predominantly tends to be [risk] with poor loss experience or other competitions.

Furthermore, the distribution system seems to have recognized and accepted that we are generally exiting the soft market. Consequently, they are becoming ever more successful and selling the rate increases that many carriers are required.

Lastly, the continued accelerating growth of the state defined risk plan populations clearly supports the notion that market discipline is returning. Having said this, life is not perfect and that includes the insurance industry. There are a few carriers in both the standard and specialty insurance market, as well as the reinsurance market that don’t seem to fully appreciate that things are changing. As a result of this circumstance, there is somewhat a lopsided barbell in the marketplace between those that are seeking late adequacy and those that don’t get it.

Having said this, the market is turning in spite of this limited number of irresponsible companies that are serving as a hindrance, not a barrier. Primary workers’ compensation and cat exposed property continues to lead other lines with regard rate increases. the reality of increasing loss costs combined with cat activity over the past several years have clearly caught peoples’ attention.

Additionally, the impact of recent revisions to cat models as well as the growing consequence of lower new money rates continues to apply added pressure. While change in behavior may vary by territory and product lines, clearly the general trend is definitively upward.

Having said this, for the moment, there are certain lines such as excess workers’ compensation and parts of the professional liability market that it remains more resistant to increase the prices. fortunately however, it would seem as though pricing has bottomed out in even these lines and is generally no longer deteriorating.

As we have suggested in the past, there is a correlation between the duration of the tale – excuse me, and the time it takes market participants to recognize a change in behavior is required. Additionally, the lack of frequency can also experience a similar delay in recognition of underwriting issues.

However, even longer tail lines in business that has become exceptionally competitive can overshadow these rules of thumb. As our Chairman says, even long-tail lines of business can become short-tail if they are sufficiently underpriced.
Title: Re: WRB - WR Berkley
Post by: Liberty on April 25, 2012, 01:16:32 PM
Thanks, always interesting to hear what Bill has to say.
Title: Re: WRB - WR Berkley
Post by: PlanMaestro on May 01, 2012, 12:49:32 PM
http://www.propertycasualty360.com/2012/04/24/wr-berkley-stupid-cos-may-not-be-able-to-make-hard

Declaring that a turn to a hard market cycle is more visible, the chief executive of W.R. Berkley Corp. says a company somewhere is in for major trouble because they are “stupid” not to increase rates. “Hard markets always start this way and then something happens,” which leads to "dire financial difficulties," says William R. Berkley, the CEO of the Greenwich, Conn.-based insurer during a conference call to discuss first quarter earnings today.

The “something” happens when companies have to begin to pay for their underpriced past. It occurs every time the market begins an upward cycle, Berkley says. “It happened to AIG [American International Group Inc.] but AIG got bailed out by the government,” Berkley says. "Look at all the billions of dollars of deficiencies they had to make up for."

No one knows “where and what is sitting out there,” but “usually someone doesn’t have the ability to make it through” the cycle turn, Berkley continues. "I don't know who that's going to be and I can't tell you for sure."
.....

But again, the environment varies in specific lines. In excess workers compensation, for example, one company remains aggressive, pricing business 20-to-40 percent less than W.R. Berkley. “That’s one place where we lost substantial business,” Berkley says. Parts of the professional liability market also remains resistant to price increases.


Title: Re: WRB - WR Berkley
Post by: PlanMaestro on May 26, 2012, 06:32:29 PM
Bill Berkley at the recent Goldman Sachs insurance symposium
http://cc.talkpoint.com/gold006/051512a_lr/

pdf: http://files.shareholder.com/downloads/BER/1823801850x0x569627/f0a2f4f1-4aba-40ac-80a0-1081ff4fa3e0/Goldman%205-15-2012.pdf
Title: Re: WRB - WR Berkley
Post by: Liberty on May 26, 2012, 07:47:07 PM
Bill Berkley at the recent Goldman Sachs insurance symposium
http://cc.talkpoint.com/gold006/051512a_lr/

pdf: http://files.shareholder.com/downloads/BER/1823801850x0x569627/f0a2f4f1-4aba-40ac-80a0-1081ff4fa3e0/Goldman%205-15-2012.pdf

Thanks!
Title: Re: WRB - WR Berkley
Post by: onyx1 on May 27, 2012, 02:10:23 PM
http://www.propertycasualty360.com/2012/04/24/wr-berkley-stupid-cos-may-not-be-able-to-make-hard (http://www.propertycasualty360.com/2012/04/24/wr-berkley-stupid-cos-may-not-be-able-to-make-hard)


But again, the environment varies in specific lines. In excess workers compensation, for example, one company remains aggressive, pricing business 20-to-40 percent less than W.R. Berkley. “That’s one place where we lost substantial business,” Berkley says. Parts of the professional liability market also remains resistant to price increases.


Interesting, Fairfax made a similar comment in the 2010 annual report re why Zenith has not been writing a lot of business.  Wonder who that aggressive company is.

At the UBS conference in April, Berkley say that there is an insurance company writing excess WC based on portfolio yields (rather than new money yields) and the result is a 20%-40% discount on this long tail business.  He added that the company is in the process of being sold, and he hoped their new owners would stop the practice.
 
Based on that information, the culprit is probably Delphi Financial.
 
http://finance.yahoo.com/news/acquisition-delphi-financial-tokio-marine-185600552.html (http://finance.yahoo.com/news/acquisition-delphi-financial-tokio-marine-185600552.html)
Title: Re: WRB - WR Berkley
Post by: onyx1 on February 14, 2013, 04:32:24 AM
http://ir.wrberkley.com/events.cfm (http://ir.wrberkley.com/events.cfm)
 
For those not familiar with WRB here is a new presentation on this gem of a company.    In a nutshell, this 20% owner operated, casualty underwriter has compunded TBV at 17% over the last 25 years. William Berkley is a superstar within insurance circles, but relatively unknown outside of the industry.   WRB emphasizes underwriting income, as opposed to investment income, and has built a wonderfully diverse roster of underwriting teams in order to reduce volatility and enjoy the ROE benefits of underwriting leverage.  They have an excellent historical record of ramping up during periods where pricing is attractive and down when competition has driven prices to unattractive levels. 
 
I have owned this company for 3 years and I learn something new on every CC.  Although I don't see any sign of WRB wanting to sell, seems like this would be a great fit for BRK.
Title: Re: WRB - WR Berkley
Post by: JBird on August 12, 2013, 03:56:29 PM
In my view, the intrinsic value of this company is the sum of two parts: 1) The value of the net assets to a private owner and 2) The value of their float

1) What are the net assets worth to a private owner? I want to know how much capital I can immediately pull out of this business if I bought the whole thing today. WRB has about $14.5 billion in investment assets, and $9.1 billion of that is funded through float. There's an excess there of $5.4 billion. After you subtract out all the liabilities you have a net asset figure of hypothetically "freely distributable" capital. But it isn't all freely distributable. The insurance regulators have a formula that determines what they call Risk-Based Capital (statutory capital). This capital must stay in the business not only to satisfy regulators but to continue writing the same policy volume.

In the 2012 10-K they wrote, The National Association of Insurance Commissioners (“NAIC”) has risk-based capital (“RBC”) requirements that require insurance companies to calculate and report information under a risk-based formula which measures statutory capital and surplus needs based on a regulatory definition of risk in a company’s mix of products and its balance sheet. As of December 31, 2012, the RBC Total Adjusted Capital of the Company's U.S. insurance companies was 459% of the RBC Authorized Control Level and 230% of the RBC Company Action Level. The total adjusted capital of each of the Company’s U.S. insurance subsidiaries exceeded the minimum required RBC levels. The use of the permitted practice described above does not impact RBC calculations."

As of 2012 year-end they had a net asset value of $4.3 billion. And the preceding paragraph translates to this: their net asset value was 4.59 times the minimum regulatory requirement, and 2.3 times the maximum regulatory requirement. Therefore, of the $4.6 billion in net asset value, $2.6 billion of that is freely distributable to owners.

If you bought all of Berkley today you could immediately pocket ~$2.6 billion. You would then be left with a insurer run by able and honest management who are heavily invested alongside you. And the value of that entity is based on the float valuation.

2) What is the value of their float? In my view, the intrinsic value of float is the present value of the future investment income the float will produce over its remaining life, plus the present value of the float's future underwriting losses/profits.

I've attached a spreadsheet that illustrates what I think WRB's float is likely to produce over time. They are currently achieving about a 4% pre-tax return on investments in a very low interest rate environment, so I stuck with 4% over the next 5 years to be conservative. Sooner or later normal rates will return, so after the 5th year I project 5% investment returns.

But you won't be interested in WRB for its investment prowess. As Bill (their CEO) has said, they're always going to be very conservative on the balance sheet side and try to make their money on the underwriting. They've done a wonderful job of that. Their combined ratio has averaged 97.2% over the past five years; quite impressive considering that was achieved through a soft market.

My float valuation includes a combined ratio of 97% over time with earned premiums rising at 2% a year. And since I'm looking at high quality float managed by higher quality management, my valuation goes out 20 years. If you find this to be unconservative, adjust accordingly.

-Side note- Cost-free float that cannot generate investment income is valueless. If you can't invest it, it doesn't matter how long you can hold it.
Title: Re: WRB - WR Berkley
Post by: gary17 on September 11, 2013, 07:16:39 AM
JBird
Thanks for the spreadsheet; what you stated make sense to me.

I am wondering though if you've given some thoughts on which of float or underwriting is the better value creation vehicle for P&C Insurers -

for companies like FFH and BRK we have great value investors that is creating above average returns on the float, which comes at low or no cost.  one the other hand we have companies like LRE.L whose underwriting is superior (65% combined ratio), but the float is earning 3% or so return...
Title: Re: WRB - WR Berkley
Post by: JBird on September 12, 2013, 08:18:21 AM
My answer would be to just compare the NPV of investment income to the NPV of the underwriting P/L. In WRB case, the float is worth substantially more than the underwriting profits. In Lancashire's case, it's the opposite.

On a totally differing point- One thing I've had a bit of fun doing is valuing float in hindsight, specifically Berkshire's. If it's 1990 and you were all-knowing about what float would do over the next 23 years, what would you have valued it at? Since 1990 float has grown at 18% compounded annually. I don't know what actual investment returns from their float were, but two years ago Charlie said that Warren would sometimes earn 20-30% on float. Just say on average they earned 7% after tax. Float growing at 18% a year generating 7% investment returns, with a 10% discount rate, creates a valuation of 3.7 times nominal value of float! That boggles my mind.
Title: Re: WRB - WR Berkley
Post by: gary17 on September 12, 2013, 10:06:39 AM
Thanks. That is interesting. 

I am in the process of deciding between FFH and LRE.L - I think the math / NPV analysis is straightforward, but what I am trying to figure out is which model will be most predictable over the next, say, 5 to 10 years. 

FFH is really an investment fund and it's setup as a P&C insurance for the purpose of getting cheaper capital - as long as their combine ratio is not too far off from 100%, they've really achieved this.  Then it's a matter of Prem and his team's ability to grow the investment business.

LRE.L on the other hand is run by a man who knows how to run an insurance business and that is reflected in his track record.   (I wondered for $2B USD Prem should just buy Lancashire and let him run the insurance business while he grow the float...  And quit wasting his time on blackberry. )

I am kind of leaning towards FFH because the ability to produce market beating returns is unique, whereas it may be easier for someone to copy LRE's business model... 


Title: Re: WRB - WR Berkley
Post by: JBird on September 12, 2013, 10:32:39 AM
I am in the process of deciding between FFH and LRE.L - I think the math / NPV analysis is straightforward, but what I am trying to figure out is which model will be most predictable over the next, say, 5 to 10 years.

That is a seriously smart consideration. I don't have the answer for you though.
Title: Re: WRB - WR Berkley
Post by: gary17 on January 25, 2014, 09:19:07 AM
I am in the process of deciding between FFH and LRE.L - I think the math / NPV analysis is straightforward, but what I am trying to figure out is which model will be most predictable over the next, say, 5 to 10 years.

That is a seriously smart consideration. I don't have the answer for you though.

In the end I went with fairfax. I think the investment model is probably easier to pass on if Prem isn't there.
Title: Re: WRB - WR Berkley
Post by: omagh on August 13, 2019, 03:06:51 PM
It has been a good run since March 2010, but $13B market cap is definitely looking inflated.  What a ride!  Thinning out my position here.

- O

I just listened to the WRB quarterly call and all was pretty boring (not much change or new happening since Q2).

Bill gave a pretty good summary of why he feels a turn in the market (for the better) is coming: WRB loss ratios have historically been 8 to 10 points better than the industry; today WRB loss ratios are 6 points worse. This is a 14 point swing. Bill said either WRB has become incredibly stupid or competitors will experience large reserve deficiencies in the future (and lower capital will force them to write less business). At the same time these companies will not be able to raise traditional capital as easily (given current state of capital markets).

He is sticking with his 'prices will start turning in Q4' but he is also says that he could be wrong on timing (and that WRB does not run its business by predicting thses sorts of things).

The company had net earnings of $94 million in Q3 and bought back $88 million in common stock. The company in past conference calls has said that it is flush with capital and will be happy to buy back stock given current prices. Many good insurers are trading at around book value. To purchase another company the takeout price would likely need to be 1.3 or 1.4x BV (i.e. FFH purchase of Zenith). I really like the fact that WRB is buying its own stock back for about 1x BV. Year to date they have repurchased 12 million shares (8% outstanding). Today they just announced they have increased the buyback amount to 10 million and they increased the dividend from $0.05 to $0.07/share.

Book value is $26.36 and the stock closed today around $27.50/share. The insurance market looks to have stabilized so I would expect them to earn $0.60/share per quarter in the current environment. Should a hard market come and prices increase (and volume grow) earnings would increase dramatically. Looks to me to be a pretty good reasonable risk high return potential looking out a few years.