1Q07 Insurance Earnings: What's Working, What's Not (Part VIII)

Before I continue with my review of Insurance earnings (see part I, part II, part III, part IV, part V, part VI and part VII), some additional commentary on M&A items. It was interesting to see Liberty Mutual buy Ohio Casualty (OCAS) for several reasons:

At the premium that they paid, there were better things to buy. I don’t find a 6% return on capital to be that attractive, and I don’t see a lot of synergies.

It implies that there is not that much for sale among stock P&C companies.

Primary Casualty companies buying Bermuda reinsurers makes a lot of sense (like AGII/PXT). This isn’t as cogent.

It lowers my previously high opinion of Liberty Mutual.

On another note, I found the announcement from KMG America (KMA) to be lightweight. After the stock fell so hard, I had a look at it, and concluded that the purchase GAAP accounting adjustments stripped profits out of the old stable blocks of business to hide losses in the LTC block. Now, that’s just a guess on my part. I could be dead wrong. That said, I would not be surprised to see that KBW finds only limited opportunities for capital enhancement.

On to earnings:

Life

KMG America missed, taking a number of charges, and hiring an investment banker. The stock went up. FBL Financial (FFG) beat by a small amount.

Title

Investors Title (ITIC) beat earnings. In a very mixed quarter for title earnings, the smallest of the five did well.

Personal

Mercury General (MCY) and Safety Insurance (SAFT) both beat earnings. Mercury expanded their writings and Safety contracted them slightly. Safety had the bigger beat, though.

Primary Casualty

NYMAGIC (NYM), Amerisafe (AMSF), and Amtrust (AFSI) all beat earnings, with growing revenues. Ameritrust Financial deserves special mention because it came public recently through unusual means; they listed the stock on NASDAQ, and allowed the private equity holders to go “free to trade.” I can think of another example of that, Quanta Holdings, but AFSI lookws more stable than Quanta.

Conglomerates

Berkshire Hathaway (BRK.A) meets earnings, but what can I say? Earnings aren’t very relevant to the way the marginal investor views Berky. The insurance pricing cycle does mean something here, and Buffett was honest enough to inform investors that insurance earnings will likely not be as good next year.

The Bermudans

Max Capital Group (MXGL) beat earnings but on lower written premiums. It will be interesting to see how it fares today.

Full Disclosure: Long SAFT