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Recent Portfolio Moves

Since I wrote my last portfolio update two months ago, it is time for a new report.

New Buys

  • PartnerRe
  • Allstate
  • Assurant
  • Nucor
  • Genuine Parts
  • Pepsico
  • CRH
  • Alliant Energy

New Sells

  • Avnet
  • Lincoln National
  • YRC Worldwide
  • CRH
  • Jones Apparel
  • Assurant
  • Group 1 Automotive
  • Smithfield Foods
  • MetLife
  • International Rectifier
  • Cemex
  • Officemax
  • Universal American

Rebalancing Buys

  • Shoe Carnival
  • Charlotte Russe
  • Devon Energy (2)
  • RGA
  • SABESP
  • Ensco International (2)
  • Industrias Bachoco
  • Magna International
  • Valero
  • Kapstone Paper
  • Hartford International (3)
  • Cimarex Energy
  • Lincoln National
  • Smithfield Foods
  • Allstate
  • ConocoPhillips (2)
  • Tsakos Energy Navigation

Rebalancing Sells

  • PartnerRe
  • Safety Insurance
  • Devon Energy
  • Ensco International
  • Hartford Financial (3)
  • Kapstone Paper
  • Cimarex Energy
  • Nam Tai Electronics (2)
  • Honda Motors (2)
  • Lincoln National (2)
  • ConocoPhillips
  • Charlotte Russe
  • Shoe Carnival

I’ve had a lot of trades over the past two months, which is normal for me when volatility rises.

I have been asked by a number of parties why I don’t write about the insurance industry in this environment, given my past experience.  My main reason is that I have left it behind.  When I became a buyside insurance analyst, I had strong opinions about what made a good or bad insurance company.  For the most part, those opinions were correct, but there is a fundamental opaqueness to insurance.  One truly can’t analyze it from outside.  No boss would hear that, even if true.

I benefitted from the cleaning up of insurance assets 2002-3, and thought that the cleanup had persisted.  Largely, it has, but many life companies rely too heavily on variable products for profitability, and as the market has fallen, profits from variable products have fallen harder.  Thus my mistakes with Hartford, MetLife and Lincoln National.

That brings up two other possibilities where things can continue to go wrong in life insurance.  If fees are permanently reduced the companies might have to write down the deferred acquisition costs [DAC] that they capitalized when originally writing the business, if the expected cumulative fees are less than the DAC.  The second issue is hedging the guaranteed living benefits.  I will never forget the look that the CEO of Principal Financial gave me when I asked him how well the futures/options hedges during a month where the S&P 500 is down 20-30%.  It was not a pleasant look.  Not that that scenario could ever happen. ;)

My picks in pure P&C insurance have fared better.  Safety Insurance is a solid company; so is PartnerRe.  Would that I had done more there, and less in life companies, especially the equity sensitive ones.

So what do I hold today among insurers?

  • Allstate
  • Assurant (bought after the marginally bad earnings announcement)
  • Hartford (yes :( )
  • PartnerRe
  • Reinsurance Group of America
  • Safety Insurance

Yes, I am overweight insurance, and I have paid the price, particularly with Hartford.  There is an uncertainty connected with life insurance holding companies about the ability to upstream dividends to service debt.  That uncertainty only appears in bear markets, and all the hubbub over optimizing the capital structure is so much hooey.  Assurant is in better shape because it ceased buying back stock because of the (somewhat bogus) investigation of a few of their executives.

Two final notes to close.  I had a bad October, worse than the S&P 500 by a significant margin.  My exposures in life insurance and emerging markets drove that.  Second, I may have my first equity client, and so I may be curtailing some of my discussion of individual names in my portfolio, and deleting my portfolio at Stockpickr.com.  My clients come first.

Full disclosure: long ALL AIZ HIG PRE RGA SAFT SCVL CHIC COP HMC NTE XEC KPPC ESV DVN TNP VLO MGA SBS CRH LNT PEP GPC NUE (what have I left out?!)






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Accounting, Industry Rotation, Insurance, Portfolio Management, Stocks, Value Investing | RSS 2.0 |

3 Responses to Recent Portfolio Moves

  1. PlanMaestro says:

    Thanks for the analysis David.

    Bought Assurant before earnings announcement (snif) and some more after it. However, management was dissapointing in the conference call. Why you have AIZ also on your sell list?

  2. Perhaps I phrased it wrong on Assurant. When all of the life insurers began to get whacked because of asset issues, I asked myself, “What life companies have not gotten whacked over incremental asset issues?” The two that didn’t seem hurt were Assurant and Universal American. I sold them both.

    It hurt to sell Assurant, but I bought it back 30-40% lower. Their asset problems should be less than those of most life insurers.

  3. Brent says:

    The only life company I currently hold is National Western Life Insurance Company (NWLI).

    A lot of this company is owned by the Moody’s of Galveston who also own the American National P&C company (ANAT). It is conservatively run, well diversified, and has very minimal exposure to risky investments such as subprime mortgages. It does not have the pressure of high dividend payments, has no debt and trades at 70% of book value. It recently had a quarterly loss due to writing down some bad debt, but for the first 9 months of the year still showed a profit of $6.42 per share.

    My only concern is that I keep hearing about the risks tied to companies which issue annuities, which NWLI does, but given their conservative approach to the business, I’m feeling pretty comfortable just holding here and waiting things out and potentially buying more.

    David, if you have the time, I’d appreciate any comments as to whether or not I am completely missing something here.

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.


Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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