Tag Archive for 'SBX'

Hard-Hit Insurers: SeaBright (SBX) Rode Through Storm, Can Flagstone (FSR) Do the Same?

Posted on March 23, 2011, 11:02 am. Closed

Back in August when shares of SeaBright Holdings tanked due to the need for reserve strengthening, I reflected that shareholders were most likely overreacting and that the company was likely a bargain at $7 per share. Well, since then shares have climbed back up to $10 per share. That’s an annualized return of 64%. It also turned out that other intelligent investors saw the same opportunity—the very capable investors at Alleghany (Y) added to the shares of SBX they had purchased in the first quarter of 2010.

Another company that is currently being hit hard is Flagstone Reinsurance (FSR). The company has published several press releases that have contributed to a very large sell-off in the stock:

  • February 28, 2011. $60-$80 million in loss events due to flooding and storms in Australia. Plus, there was the 6.3 magnitude earthquake in Christchurch, New Zealand, for which the company has not yet provided loss estimates.
  • March 15, 2011. The company reports preliminary loss estimates related to the New Zealand earthquake to be between $60-$90 million.
  • March 21, 2011. FSR reports that Moody’s has placed the ratings of the company under review.

So prior to the Japan earthquake, FSR was set for losses of $120-$170 million. Now, the market appears to be worried whether Flagstone will need to strengthen reserves after the Japan earthquake. In FSR’s 10-k, the company said it does “a significant amount of catastrophe business in Japan.”

I have no idea whether FSR is a good reinsurer or not. They’ve only been public for four years. Management of any insurance company can set reserves to really anything they want, whether its prudent or not, so when investing in the insurance arena, you have assure yourself that management is trustworthy and as conservative about underwriting and reserving as they claim to be.

But with FSR trading at half its book value, it seems that the market is overreacting (once again). Even if it turns out FSR management was not so good, the stock price will likely rebound after all this bad news fades away and the company starts to book new business at more favorable rates.

SeaBright Holdings (SBX)

Posted on August 19, 2010, 5:26 pm. 3 Comments

SBX has been getting dumped by shareholders. According to the company:

“During the second quarter we undertook prudent measures to strengthen our loss reserves to reflect recent adverse claim development we have experienced, primarily in our California book of business,” noted John Pasqualetto, SeaBright’s Chairman, President and Chief Executive Officer. “In California, we encountered increasing medical cost trends and longer average claim durations, made worse by protracted high unemployment levels. SeaBright has instituted rate increases in California over the last 18 months and based on the recent claim data, we filed yesterday for a 15.3% increase in that state.”

The net loss ratio for the second quarter of 2010 was 121.1% compared to 68.2% in the same period of 2009. During the second quarter of 2010, on a pre-tax basis, the Company recognized $30.6 million, net of reinsurance, in adverse development of prior years’ loss reserve estimates, compared to approximately $2.9 million in adverse development of prior years’ loss reserve estimates in the second quarter of 2009. During the second quarter of 2010, we also increased the net expected loss and allocated loss adjustment expense ratio for the 2010 accident year from 61.5% to 64.5%, the quarterly impact of which was approximately $1.9 million.

Right now, the company is trading at a 55% discount to book value. I think this is far too great a discount. I think chances are good that investors are overreacting. I also would bet that SeaBright is a good acquisition target at the moment. Its historic combined ratio is pretty good and it seems to have a competitive niche in the workers’ comp market.