Insurance is a funny industry -- you don't really know how smart management is until bad news knocks on your door and tests your assumptions and models. Well, I've been a fan of Arch Capital
While many other insurers continue to groan under the losses produced by Hurricanes Katrina, Rita, and Wilma, Arch Capital finished off 2005 with both high single-digit book value growth and a low double-digit return on equity. Normally, 12% return on equity wouldn't be so impressive, but when your competitors are posting losses, I'd say it's pretty good.
Although net income did decline a little bit from last year, analysts and investors in the insurance space typically pay more attention to operating income. There, Arch delivered roughly 21% growth year over year. Net premium growth was also strong at more than 22%, with much of that coming from opportunistic underwriting in the wake of the storms.
Even though the company absorbed close to $57 million in losses from Wilma, the combined ratio was just 87.2% for the period, versus 87.8% a year ago. Again, if you follow other reinsurers like RenaissanceRe
It's hard for me to be pessimistic about Arch Capital's future prospects. For the past couple of years, management didn't like the pricing environment for catastrophe policies, and they didn't write so much business -- a decision that seems exactly correct in retrospect. Now they're seeing more appealing pricing and expecting to write more policies. That's one of the things I like about this story -- it's diversified between primary insurance and reinsurance and across the spectrum of insurance lines (like casualty, property, professional liability, etc.), and that enables the company to move capital around and underwrite the lines that their models suggest are the most appealing.
As for valuation, I don't really have easy answers. Companies that execute and aren't afraid to move away from the beaten path, such as W.R. Berkley
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).