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March 1953

The Security I Like Best


A continuous forum in which, each week, a different group of experts
in 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 licensed in 38 states, their impressive


Buffett-Falk & Co., Omaha, Nebr. growth record, both absolutely and
relative to the industry, is summarized
Western Insurance Securities
in Table I below.
Common Stock
Western Insurance Securities owns
Again my favorite security is the 92% of Western Casualty and Surety,
equity stock of a young, rapidly grow- which in turn owns 99.95% of Western
ing and ably managed insurance com- Fire Insurance. Other assets of West-
pany. Although Government Em- ern Insurance Securities are minor,
ployees Insur- consisting of approximately $180,000
ance Co., my in net quick assets. The capitalization
selection of 15 consists of 7,000 shares of $100 par 6%
m o n t h s a g o, preferred, callable at $125; 35,000
has had a price shares of Class A preferred, callable at
rise of more $60, which is entitled to a $2.50 regu-
than 100%, it lar dividend and participates further
still appears up to a maximum total of $4 per share;
very attractive and 50,000 shares of common stock.
as a vehicle for The arrears on the Class A presently
long-term capi- amount to $36.75.
tal growth. The management headed by Ray
Rarely is an DuBoc is of the highest grade. Mr.
investor offered DuBoc has ably steered the company
Warren E. Buffett
the opportunity since its inception in 1924 and has a
to participate in reputation in the insurance industry of
the growth of two excellently managed being a man of outstanding integrity
and expanding insurance companies and ability. The second tier of execu-
on the grossly undervalued basis tives is also of top caliber. During the
which appears possible in the case of formative years of the company, senior
the Western Insurance Securities charges were out of line with the earn-
Company. The two operating subsidi- ing power of the enterprise. The read-
aries, Western Casualty & Surety and er can clearly perceive why the same
Western Fire, wrote a premium volume senior charges that caused such great
of $26,009,929 in 1952 on consolidated difficulty when premium volume
admitted assets of S29,590,142. Now ranged about the $3,000,000 mark

Formatted by Max Olson from the blog Stableboy Selections


March 1953

would cause little trouble upon the at- centration of writings in unusually
tainment of premium volume in excess profitable lines. Actually the reverse is
of $26,000,000. true. Although represented in all major
Adjusting for only 25% of the in- lines, Western is still primarily an au-
crease in the unearned premium re- tomobile insurer with 60% of its vo-
serve, earnings of $1,367,063 in 1952, lume derived from auto lines. Since
a very depressed year for auto insur- automobile underwriting has proven
ers, were sufficient to cover total se- generally unsatisfactory in the postwar
nior charges of $129,500 more than 10 period, and particularly so in the last
times over, leaving earnings of $24.74 three years, Western’s experience was
on each share of common stock. even more favorable relative to the in-
It is quite evident that the common dustry than the tabular comparison
stock has finally arrived, although in- would indicate.
vestors do not appear to realize it Western has always maintained am-
since the stock is quoted at less than ple loss reserves on unsettled claims.
twice earnings and at a discount of Underwriting results in the postwar
approximately 55% from the Decem- period have shown Western to be over-
ber 31, 1952 book value of $86.26 per reserved at the end of each year. Tri-
share. Table II indicates the postwar ennial examinations conducted by the
record of earnings and dramatically il- insurance commissioners have con-
lustrates the benefits being realized by firmed these findings.
the common stock because of the ex- Turning to their investment picture,
panded earnings base. The book value we of course find a growth in invested
is calculated with allowance for a 25% assets and investment income paral-
equity in the unearned premium re- leling the growth in premium volume.
serve and is after allowance for call Consolidated net assets have risen
price plus arrears on the preferreds. from $5,154,367 in 1940 to their
Since Western has achieved such an present level of $29,590,142. Western
excellent record in increasing its in- follows an extremely conservative in-
dustry share of premium volume, the vestment policy, relying upon growth
reader may well wonder whether in premium volume for expansion in
standards have been compromised. investment income. Of the year-end
This is definitely not the case. During portfolio of $21,889,243, governments
the past ten years Western’s operating plus a list of well diversified high qual-
ratios have proved quite superior to ity municipals total $20,141,246 or
the average multiple line company. 92% and stocks only $1,747,997 or 8%.
The combined loss and expense ratios Net investment income of $474,472 in
for the two Western companies as re- 1952 was equal to $6.14 per share of
ported by the Alfred M. Best Co. on a Western Insurance common after mi-
case basis are compared in Table III nority interest and assuming senior
with similar ratios for all stock fire and charges were covered entirely from
casualty companies. investment income.
The careful reader will not overlook The casualty insurance industry
the possibility that Western’s superior during the past several years has suf-
performance has been due to a con- fered staggering losses on automobile

Formatted by Max Olson from the blog Stableboy Selections


March 1953

insurance lines. This trend was sharp- assured of a tangible acknowledge-


ly reversed during late 1952. Substan- ment of his enormously strengthened
tial rate increases in 1951 and 1952 are equity position. It is well to bear in
being brought to bear on underwriting mind that the operating companies
results with increasing force as poli- have expanded premium volume some
cies are renewed at much higher pre- 550% in the last 12 years. This has re-
miums. Earnings within the casualty quired an increase in surplus of 350%
industry are expected to be on a very and consequently restricted the pay-
satisfactory basis in 1953 and 1954. ment of dividends. Recent dividend in-
Western, while operating very prof- creases by Western Casualty should
itably during the entire trying period, pave the way for more prompt pay-
may be expected to report increased ment on arrearages. Any leveling off
earnings as a result of expanding pre- of premium volume will permit more
mium volume, increased assets, and liberal dividends while a continuation
the higher rate structure. An earned of the past rate of increase, which in
premium volume of $30,000,000 may my opinion is very unlikely, would of
be conservatively expected by 1954. course make for much greater earn-
Normal earning power on this volume ings.
should average about $30.00 per Operating in a stable industry with
share, with investment income contri- an excellent record of growth and
buting approximately $8.40 per share profitability, I believe Western Insur-
after deducting all senior charges from ance common to be an outstanding
investment income. vehicle for substantial capital appreci-
The patient investor in Western In- ation at its present price of about 40.
surance common can be reasonably The stock is traded over-the-counter.

Formatted by Max Olson from the blog Stableboy Selections


"...I found Western Insurance in
Fort Scott, Kansas. The price
range in Moody's financial
manual...was $12-$20.
Earnings were $16 a share. I
ran an ad in the Fort Scott
paper to buy that stock."

1955
1956