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We all know the multiple sayings that exist which revolve around some variation of "nothing good in life being free," and for the most part, they're true. But as Warren Buffett has pointed out, being in the insurance industry you get something pretty close to it, thanks to the nature of insurance float. The float, or cash received but not yet paid out for any claims or expenses, and therefore able to be invested by the company is a major attraction involved with insurance stocks. While Berkshire Hathaway (BRK.A, BRK.B) of course has a significantly larger amount of this than the much smaller W.R. Berkley (WRB), that doesn't necessarily put them in a better position to generate superior returns for their shareholders. That's not to say Berkshire is necessarily a bad investment, I expect its outperformance of the S&P 500 to continue moving forward, but there might be better options.

As Buffett himself has been quite open about many times, Berkshire is presently being handicapped due to its enormous size. He stated all the way back in the mid 90's that "The giant disadvantage we face is size: In the early years, we needed only good ideas, but now we need good big ideas." With Berkshire's market cap increasing well over 500% since then to approximately $285 billion today, I think it is more accurate to now say they need "good giant ideas."

Therein is an advantage inherent to smaller companies. They can get substantial growth while simply following more standard and traditional methods. Of course if you go too small you run into the risk of coming into contact with all the negative things associated with companies of that speculative nature, which is why as a general rule of thumb I like to look for market caps in potential investments that are at least around $5 billion. You still get excellent growth opportunities while having some more safety with a company that usually has more of a track record and information available to make decisions on.

Per-share book value, while not a perfect indicator, works well for insurance companies as a proxy for intrinsic business value. As you can see over the last 13 years W.R. Berkley has beaten Berkshire Hathaway in each of them, many years substantially. It is important to note how they also do well not only in good economic years, but lousy ones as well.

Year

WRB Per-Share Book Value % Increase, Dividends Included

BRK.A Per-Share Book Value % Increase

2000

17.1%

6.5%

2001

7.6%

-6.2%

2002

31.2%

10.0%

2003

26.7%

21.0%

2004

25.6%

10.5%

2005

21.9%

6.4%

2006

30.1%

18.4%

2007

16.3%

11.0%

2008

-4.1%

-9.6%

2009

23.3%

19.8%

2010

15.4%

13.0%

2011

12.2%

4.6%

2012

14.8%

14.4%

W.R. Berkley operates in five different business segments. Much like in Berkshire's culture, W.R. Berkley operates using a decentralized strategy where each unit has their own niche that requires specialized knowledge about a territory or particular product.

Segment

2012 Revenue

2012 Pre-tax income

Specialty

$1.8 Billion

$262 Million

Regional

$1.2 Billion

$122 Million

Alternative Markets

$931 Million

$194 Million

Reinsurance

$543 Million

$93 Million

International

$866 Million

$62 Million

Overall yearly revenues have increased from $4.7 to $5.8 billion since 2008, while net premiums written has increased from $4.0 to $4.9 billion over that time.

Underwriting

Current ratios for 3 out of the 5 individual segments remain below 100%, while the total combined current ratio was 97.2% for the most recent year. The average for the past 5 years has been 95.6%. Specialty, the segment which contributes the most to revenues and income, remains consistently with the lowest current ratio. Remember over 100% indicates an underwriting loss while under indicates a gain.

Year

Current ratio

2012

97.2%

2011

98.5%

2010

94.6%

2009

94.3%

2008

93.1%

A look at Their Investment Strategy

Their fixed income portfolio has an average rating of AA- and an average duration of 3.4 years. It represents 85% of their investable assets. The company has been diversifying in recent years, as they have been increasing investments in common stocks while also being involved in merger-arbitrage, direct mortgage lending and real estate. They face a stiff challenge due to the low interest rate environment, but are managing it by managing the duration of their portfolio. They've done well in maintaining solid total returns.

All numbers are in thousands:

Year

Avg. Investment at Cost

Net Investment Income

% Earned on Avg. Investment

Investment Gains (losses)

Change in Unrealized Investment Gains (losses)

2012

$14,545,371

$586,763

4.0%

$ 210,465

$ 135,282

2011

$13,631.552

$526,351

3.9%

$ 125,481

$ 147,998

2010

$13,356,380

$530,525

4.0%

$ 56,581

$ 176,588

2009

$12,918,039

$379,008

3.0%

$ (38,408)

$ 557,444

2008

$12,939,843

$533,480

4.2%

$ (356,931)

$ (302,211)

Property and casualty insurance is a very competitive industry. As a result of this there has been some downward pressure on prices at times. However W.R. Berkley are striving to maintain what gives them a competitive advantage by seeking both specialized areas and unique geographic regions, coupled with the decentralized operations which allow them to very quickly respond to changing market conditions. Raising dividends again starting in 2010, W.R. Berkley saw fit to reward shareholders with a special dividend of $1 per share at the end of 2012.

The largest major direct holders are the founder and CEO, William R Berkley, and the COO, his son, William R Berkley Jr. Having the man who founded the company in 1967 at the Harvard Business School with $2,500, and building it into what it is today still involved while his son also joins is a positive sign about the continuity and perpetuation of their unique corporate culture moving forward.

Source: W.R. Berkley: Beating Berkshire In Book Value Growth For Over A Decade