I am overweight financials, but I don’t own any banks, or entities where the primary business is credit risk.? I own a bunch of insurers, because they are cheap.? The first one to report came Monday after the close, Reinsurance Group of America.? They beat handily on both earnings and revenues.? They are the only pure play life reinsurer remaining.? Competition is reduced because Scottish Re is for all practical purposes dead.? They make their money primarily off of mortality, charging more to reinsure lives than they expect to pay in death claims.
This is a nice niche business, and a quality competitor in the space — well-respected by all.? And, you can buy it for less than book value.? Well, at least you could prior to the close on Monday.
Here are the financial stocks in my portfolio at present:
- Safety Insurance? (Massachusetts personal lines)
- Lincoln National (Life, Annuities, Investments)
- Assurant (Niche lines — best run insurer in the US)
- Hartford (Life, Annuities, Investments, Personal lines, Commercial Lines, Specialty Lines)
- RGA (Life reinsurance)
- Universal American Holdings (Senior Health Insurance — HMO, Medicare, etc.)
- MetLife (Life, Annuities, Investments, Personal lines)
- National Atlantic (waiting for the deal to close)
Now, I do have my worries here:
- Even though asset portfolios are relatively high quality, they still take a decent amount of investment-grade credit risk, and even squeaky-clean portfolios like the one Safety has are exposed to Fannie and Freddie, unlikely as they are to default on senior obligations.
- Those that are in the variable annuity and variable life businesses might have to take some writedowns if the market falls another 10% or so.? For those in investment businesses, fees from assets under management will decline.
- Pricing is weak in most P&C lines.
Away from that, though, the companies are cheap, and I have a reasonable expectation of significant book value growth at all of them.? Also, a number of the names benefit from the drop in the dollar — Assurant, MetLife, Hartford, and RGA.
One final note before I close: diversification is important.? I have Charlotte Russe in the portfolio, and it got whacked 20%+ yesterday.? Yet, my portfolio was ahead of the S&P 500 in spite of it.? If Charlotte Russe falls another 5% or so, i will buy some more.? There is no debt, earnings are unlikely to drop much (young women will likely continue to buy trendy clothes), and there are significant assets here.? I don’t expect a quick snapback, but as with all of my assets, I expect to have something better 3 years from now, at least relative to the market.
Full disclosure: long SAFT LNC AIZ HIG RGA UAM MET NAHC CHIC
do you have an opinion on Genworth Financial?
I don’t like mortgage insurance or long-term care as lines of business. That said, they will survive, while a lot of the pure play mortgage insurers won’t. I would watch this one, and maybe buy some after PMI or Radian fails. The economics of MI will be much better after that.
Then again, Fannie and Freddie may have different needs as well… MI will be a different business.
David,
Any thoughts as to the safety of corporate debt, specifically credit default swaps on investment grades? Primus Guaranty doesn’t have the structured products/RMBS exposures of an MBIA, but you’d never know from the 20% yield on the senior notes… is this shotgun selling, or am I missing something?
I don’t know PRS that well… I have met their management, and know their basic strategy, but I have not followed them. This is what I would look for, though: look for items that would cause them to post more collateral, any loan covenants, and anything that would make financing exit, or non-renew.
David, you’re favorite bullish finanical stock picker has a significant position in Primus. I’ve resisted the urge to even look at that one!