8/12/2019 53241945 the Security I Like Best

1/7

March 1953

Formatted by Max Olsonfrom the blogStableboy Selectio

Warren E. Buffett

The Security I Like BestA continuous forum in which, each week, a different group of expertsin the investment and advisory field from all sections of the country

participate and give their reasons for favoring a particular security

(The articles contained in this forum are not intended to be, nor

are they to be regarded, as an offer to sell the securities discussed.)

WARREN E. BUFFETT

Buffett-Falk & Co., Omaha, Nebr.

Western Insurance Securities

ommon Stock

Again my favorite security is the

equity stock of a young, rapidly grow-ing and ably managed insurance com-pany. Although Government Em-ployees Insur-ance Co., myselection of 15months ago,has had a pricerise of morethan 100%, it

s t i l l appearsvery attractiveas a vehicle forlong-term capi-tal growth.

Rarely is aninvestor offeredthe opportunityto participate inthe growth of two excellently managed

and expanding insurance companieson the grossly undervalued basiswhich appears possible in the case ofthe Western Insurance SecuritiesCompany. The two operating subsidi-aries, Western Casualty & Surety andWestern Fire, wrote a premium volumeof $26,009,929 in 1952 on consolidatedadmitted assets of S29,590,142. Now

licensed in 38 states, their impressivegrowth record, both absolutely andrelative to the industry, is summarizedin Table I below.

Western Insurance Securities owns92% of Western Casualty and Surety,

which in turn owns 99.95% of WesternFire Insurance. Other assets of West-ern Insurance Securities are minor,consisting of approximately $180,000in net quick assets. The capitalizationconsists of 7,000 shares of $100 par 6%preferred, callable at $125; 35,000shares of Class A preferred, callable at$60, which is entitled to a $2.50 regu-lar dividend and participates further

up to a maximum total of $4 per share;and 50,000 shares of common stock.The arrears on the Class A presentlyamount to $36.75.

The management headed by RayDuBoc is of the highest grade. Mr.DuBoc has ably steered the companysince its inception in 1924 and has areputation in the insurance industry ofbeing a man of outstanding integrity

and ability. The second tier of execu-tives is also of top caliber. During theformative years of the company, seniorcharges were out of line with the earn-ing power of the enterprise. The read-er can clearly perceive why the samesenior charges that caused such greatdifficulty when premium volumeranged about the $3,000,000 mark

http://www.maxcapitalcorp.com/http://stableboyselections.com/2007/08/01/classic-buffett-western-insurance-securities-2/http://stableboyselections.com/2007/08/01/classic-buffett-western-insurance-securities-2/http://www.maxcapitalcorp.com/

8/12/2019 53241945 the Security I Like Best

2/7

March 1953

Formatted by Max Olson from the blog Stableboy Selectio

would cause little trouble upon the at-tainment of premium volume in excessof $26,000,000.

Adjusting for only 25% of the in-crease in the unearned premium re-serve, earnings of $1,367,063 in 1952,

a very depressed year for auto insur-ers, were sufficient to cover total se-nior charges of $129,500 more than 10times over, leaving earnings of $24.74on each share of common stock.

It is quite evident that the commonstock has finally arrived, although in-vestors do not appear to realize itsince the stock is quoted at less thantwice earnings and at a discount of

approximately 55% from the Decem-ber 31, 1952 book value of $86.26 pershare. Table II indicates the postwarrecord of earnings and dramatically il-lustrates the benefits being realized bythe common stock because of the ex-panded earnings base. The book valueis calculated with allowance for a 25%equity in the unearned premium re-serve and is after allowance for call

price plus arrears on the preferreds.Since Western has achieved such anexcellent record in increasing its in-dustry share of premium volume, thereader may well wonder whetherstandards have been compromised.This is definitely not the case. Duringthe past ten years Westerns operatingratios have proved quite superior tothe average multiple line company.The combined loss and expense ratiosfor the two Western companies as re-ported by the Alfred M. Best Co. on acase basis are compared in Table IIIwith similar ratios for all stock fire andcasualty companies.

The careful reader will not overlookthe possibility that Westerns superiorperformance has been due to a con-

centration of writings in unusuallyprofitable lines. Actually the reverse istrue. Although represented in all majorlines, Western is still primarily an au-tomobile insurer with 60% of its vo-lume derived from auto lines. Since

automobile underwriting has provengenerally unsatisfactory in the postwarperiod, and particularly so in the lastthree years, Westerns experience waseven more favorable relative to the in-dustry than the tabular comparisonwould indicate.

Western has always maintained am-ple loss reserves on unsettled claims.Underwriting results in the postwar

period have shown Western to be over-reserved at the end of each year. Tri-ennial examinations conducted by theinsurance commissioners have con-firmed these findings.

Turning to their investment picture,we of course find a growth in investedassets and investment income paral-leling the growth in premium volume.Consolidated net assets have risen

from $5,154,367 in 1940 to theirpresent level of $29,590,142. Westernfollows an extremely conservative in-vestment policy, relying upon growthin premium volume for expansion ininvestment income. Of the year-endportfolio of $21,889,243, governmentsplus a list of well diversified high qual-ity municipals total $20,141,246 or92% and stocks only $1,747,997 or 8%.Net investment income of $474,472 in1952 was equal to $6.14 per share ofWestern Insurance common after mi-nority interest and assuming seniorcharges were covered entirely frominvestment income.

The casualty insurance industryduring the past several years has suf-fered staggering losses on automobile

8/12/2019 53241945 the Security I Like Best

3/7

March 1953

Formatted by Max Olson from the blog Stableboy Selectio

insurance lines. This trend was sharp-ly reversed during late 1952. Substan-tial rate increases in 1951 and 1952 arebeing brought to bear on underwritingresults with increasing force as poli-cies are renewed at much higher pre-

miums. Earnings within the casualtyindustry are expected to be on a verysatisfactory basis in 1953 and 1954.

Western, while operating very prof-itably during the entire trying period,may be expected to report increasedearnings as a result of expanding pre-mium volume, increased assets, andthe higher rate structure. An earnedpremium volume of $30,000,000 may

be conservatively expected by 1954.Normal earning power on this volumeshould average about $30.00 pershare, with investment income contri-buting approximately $8.40 per shareafter deducting all senior charges frominvestment income.

The patient investor in Western In-surance common can be reasonably

assured of a tangible acknowledge-ment of his enormously strengthenedequity position. It is well to bear inmind that the operating companieshave expanded premium volume some550% in the last 12 years. This has re-

quired an increase in surplus of 350%and consequently restricted the pay-ment of dividends. Recent dividend in-creases by Western Casualty shouldpave the way for more prompt pay-ment on arrearages. Any leveling offof premium volume will permit moreliberal dividends while a continuationof the past rate of increase, which inmy opinion is very unlikely, would of

course make for much greater earn-ings.Operating in a stable industry with

an excellent record of growth andprofitability, I believe Western Insur-ance common to be an outstandingvehicle for substantial capital appreci-ation at its present price of about 40.The stock is traded over-the-counter.

8/12/2019 53241945 the Security I Like Best

4/7

1955

"...I found Western Insurance inFort Scott, Kansas. The pricerange in Moody's financialmanual...was $12-$20.Earnings were $16 a share. Iran an ad in the Fort Scottpaper to buy that stock."

8/12/2019 53241945 the Security I Like Best

5/7

8/12/2019 53241945 the Security I Like Best

6/7

1956

8/12/2019 53241945 the Security I Like Best

7/7