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Archive for January, 2013

The Product that Never saw the Light of Day

Thursday, January 31st, 2013

I have never particularly liked individual variable life and annuity products.  But one day, I came up with an individual variable annuity product idea.  I don’t think it has ever been done.  If it has been done, please note it in the comments below.

Most individual variable annuity products offer some hard to price guarantee:

  • Guaranteed Minimum Death Benefit
  • Guaranteed Minimum Accumulation Benefit
  • Guaranteed Minimum Income Benefit
  • Guaranteed Minimum Withdrawal Benefit

This product would have no such guarantees.  It would also be sold by agents inside the mutual fund companies, and carry no commission.  I call it T-shares, for deferred TAX shares.  The insurance company offering this would go to mutual fund companies, and offer to train mutual fund company representatives to be insurance agents.  The T-shares would have the same annual fee as the “no load” C-shares, plus 0.2%/year for the insurance company.  The T-share buyer gets the option of having a tax-deferred mutual fund for the price of 0.2% extra per year.

Considering the ease of not having to track your cost basis on a mutual fund, and the additional growth from compounding what is not taxed, this could be a very attractive proposition.  It would be interesting to have contractual provisions that allow the annuitant to be changed during the deferral period, even after death, so that the tax savings could continue.

There has to be a loser here, but who?

The obvious one is the taxman.  Much of the mutual fund industry could end up issuing T-shares, instead of C-shares.

But the other one is not so obvious.  I pitched this idea to a number of insurers.  One said, “Great idea, but why should we cannibalize our existing block of variable annuity policies to make less?”  That told me I needed to approach large life companies that had no variable products.  So I spoke to one of the few that was like that, and the CEO was interested, but nothing came of it, because he left soon afterward.

As a buy-side analyst of insurers, I tossed the idea out to most of the life insurance CEOs I met that I knew had no individual variable annuity block of policies.  No one bit.  Maybe it would be the complexity of making the policy work across a large number of mutual fund companies.  The IT expertise needed would be considerable.  So would the legal documents.

But no one grabbed the idea and ran with it.  Personally, I think a lot of people would like this product, but it never saw the light of day.  Mmmm… I never talked to Assurant about this one….

On the other hand, maybe the place to start is with the mutual fund companies… they might have the greater interest.

PS — to those who are receiving buyout offers some life insurers on variable annuities with guarantees, turn them down.  They are not offering you what the guarantees are truly worth.  Unless you know something critical that they don’t, don’t take the buyout offer.

Full Disclosure: long AIZ, and many other insurers

Redacted Version of the January 2013 Version of the FOMC Statement

Wednesday, January 30th, 2013
December 2012January 2013Comments
Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions.Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors.Shades GDP view down, finally.

Remember when the FOMC cited the Tsunami in Japan for economic weakness that would soon go away?  More grasping at straws.

Although the unemployment rate has declined somewhat since the summer, it remains elevated.Employment has continued to expand at a moderate pace but the unemployment rate remains elevated.No real change.

So long as discouraged workers increase, this is a meaningless statement.

Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed.Household spending and business fixed investment advanced, and the housing sector has shown further improvement.Shades up their of business investment
Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.No change.  TIPS are showing rising inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is now at 2.86%.

The FOMC is wrong on inflation.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.No change. Any time they mention the “statutory mandate,” it is to excuse bad policy.
The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. Emphasizes that the FOMC will keep doing the same thing and expect a different result than before. Monetary policy is omnipotent on the asset side, right?
Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook.Shades up their views of the financial markets.
The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.No change. CPI is at 1.7% now, yoy, so that is quite a statement.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per monthNo change.

Does not mention how the twist will affect those that have to fund long-dated liabilities.

Wonder how long it will take them to saturate agency RMBS market?

 

The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction.and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.No real change.  Operation Twist continues.  Additional absorption of long Treasuries commences.  Fed will make the empty “monetary base” move from $3 to 4 Trillion by the end of 2013.
Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.No change.
The Committee will closely monitor incoming information on economic and financial developments in coming months.The Committee will closely monitor incoming information on economic and financial developments in coming months.No change. Useless comment.
If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability.If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability.No change.
In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.No change.  The FOMC promises what it cannot know or deliver.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.No change.

Promises that they won’t change until the economy strengthens.  Good luck with that.

In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.Not a time limit but economic limits from inflation and employment.

Just ran the calculation – TIPS implied forward inflation one year forward for one year – i.e., a rough forecast for 2014, is currently 2.41%.  Here’s the graph.  The FOMC has only 0.09% of margin in their calculation if they are being honest, which I doubt.

 

The Committee views these thresholds as consistent with its earlier date-based guidance. The inaccurate sentence is deleted.
In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.New sentence.  Giving yourself an out clause on the hard-and-fast promises made above?
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.No change.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen.No change
Voting against the action was Jeffrey M. Lacker, who opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate.Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.Esther George takes up the thankless task of telling the FOMC that they are doing more harm than good.

 

Comments

  • I really think the FOMC lives in a fantasy world.  The economy is not improving materially, and inflation is rising. Note that the CPI is close their 2.5% line in the sand.  TIPS-implied inflation 1X1 (one year ahead for one year) is 2.41%, and 5X5 is 2.86% annualized.
  • Current proposed policy is an exercise in wishful thinking.  Monetary policy does not work in reducing unemployment, and I think we should end the charade.
  • In my opinion, I don’t think holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself. When this policy doesn’t work, what will they do?
  • Also, the investment in Agency MBS should have limited impact because so many owners are inverted, or ineligible for financing backed by the GSEs, and implicitly the government, even with the recently announced refinancing changes.
  • The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.  As a result, the FOMC ain’t moving rates up, absent increases in employment, or a US Dollar crisis.  Labor employment is the key metric.
  • GDP growth is not improving much if at all, and the unemployment rate improvement comes more from discouraged workers.

A Statement to Dr. Bernanke:

More debt will not get us out of this crisis.  The Great Depression ended when enough debts were compromised, paid off, or cancelled, which from my study is 1941, before World War two started.

Your policies further aid the growth of the budget deficit, and encourage malinvestment in housing and banking, two things in a high degree of oversupply.  The investments in MBS only help solvent borrowers on the low end of housing, who don’t really need the help.  Holding down longer-term rates on the highest-quality debt does not have any impact on lower quality debts, which is where most of the economy finances itself.

The problems with unemployment are structural, not cyclical.  Labor force participation rates continue to decline.  There is greater labor competition around the world, forcing down wages on the low end.  There is nothing that monetary policy can do to change this.  You can create stagflation through your policies, but not prosperity.

When inflation does arrive, the FOMC is going to find it very hard to raise Fed Funds or shrink its balance sheet.  The banks will not react well as you try to shrink, and the long rates that you have held down will react violently.

You haven’t thought through all of the “second order” effects of your policy.  Even the “first order” effects, which favor the rich over the poor, seem to elude you.  Assets rise, helping the rich.  Interest rates fall, helping the rich who can borrow.  Commodity prices rise, harming the poor.

Insanity is doing the same thing over and over, and expecting a different result.  When will you realize that the policies of the Fed aren’t helping, and need to be abandoned?

How to Become Super-Rich?

Wednesday, January 30th, 2013

My main goal this evening is to discredit those who tell you that you can get rich quick by investing in the secondary markets. That won’t work.  It sort of worked for Buffett, but a lot of his success came from creating a holding company, and buying entire businesses, not just fractions of companies that he would not control.

Even the top entertainers and sports stars rarely become super-rich unless they have an iron discipline, and hand over their excess assets to an honest and talented advisor, who shepherds them and grows them, and gives the client personal advice as needed.  That’s what I do, though I have no famous clients.

As with so many things, it comes down to self-control.  Can you defer self-gratification?  Will you seek talented advisors who are honest?  They aren’t easy to find.

Those that become super-rich form their own firms, and use them to further their wealth.  They hire talented people to grow their wealth.  It can be a purely industrial firm.  It can be part industrial and investing, like Loews, Berkshire Hathaway, Leucadia, Icahn, etc.  It can be a private firm, whether private equity, a hedge fund, or an industrial firm.

The main idea here is that great wealth typically comes through running a large firm that is very profitable, which concentrates the efforts of others.  Significant wealth never comes through your own labors or secondary-market investing.  It comes through creating a very profitable firm.

Now, I want to add one more tangential observation here.  It’s easier to make a lot of money by offering investment advice, than by investing your own money yourself.  Why?  In offering advice, your margins are virtually unlimited.  Every new subscriber is gravy.  Your own capital is limited, so your returns are limited.

But the record of newsletters is poor; that’s why I have never considered a newsletter.  I buy no newsletters because they have no value.  I sell no newsletters because my best insights should go to my clients.  I have never seen a newsletter in my life that genuinely offered value.

Far better that you build your own firm with your valuable differential insights, than that you try to make money in the public markets.  Those who are very rich managed large firms that became dominant.

-=-==-=-=–==-=-=-=-=-=-=-=-=-=–==-=-=-=-=-=-=-=-=-

Now, few of us can do that.  That’s the way the world works.  And most who try it will fail. Far better to aim lower and achieve a happy outcome, than strain after riches that never come.

Full Disclosure: long BRK/B, L

On Insurance Investing, Part 3

Saturday, January 26th, 2013

Subtitle: The Value of Momentum and Mean-Reversion

In the extreme short-run, mean-reversion dominates.  Over a year, momentum dominates.  Over a four year period mean-reversion returns.

The same applies to insurance stocks.  This is perhaps more true of insurance stocks, because the accounting is so opaque.  When accounting is opaque, it takes a longer period of time for market prices to catch up with the underlying reality.

I do not trust momentum naively.  I compare it to fundamentals and ask if it has more room to run or fall.  Remember, insurance is a mature industry… there are few sustainable competitive advantages here.  Near turning points, valuations are stretched or in the dumps.

That said, here is my table of momentum for the insurance industry:

companytickerimg_desc

mktcap

prchg_52w
Radian Group Inc.RDN0715 – Insurance (Property & Casualty)               882.0

155%

Homeowners Choice, Inc.HCI0715 – Insurance (Property & Casualty)               241.1

146%

Stewart Information Services CSTC0715 – Insurance (Property & Casualty)               528.1

100%

Imperial Holdings, Inc.IFT0712 – Insurance (Miscellaneous)                 89.7

86%

Kingsway Financial Services InKFS0715 – Insurance (Property & Casualty)                 54.0

68%

Atlantic American CorporationAAME0709 – Insurance (Life)                 69.7

63%

eHealth, Inc.EHTH0712 – Insurance (Miscellaneous)               506.9

59%

Investors Title CompanyITIC0715 – Insurance (Property & Casualty)               135.2

59%

First American Financial CorpFAF0715 – Insurance (Property & Casualty)           2,522.8

58%

Coventry Health Care, Inc.CVH0706 – Insurance (Accident & Health)           6,239.6

57%

Hilltop Holdings Inc.HTH0715 – Insurance (Property & Casualty)               753.0

55%

CNO Financial Group IncCNO0709 – Insurance (Life)           2,315.5

52%

Allstate Corporation, TheALL0715 – Insurance (Property & Casualty)         21,154.9

51%

Symetra Financial CorporationSYA0709 – Insurance (Life)           1,629.6

50%

American International Group,AIG0715 – Insurance (Property & Casualty)         54,180.4

46%

Sun Life Financial Inc. (USA)SLF0709 – Insurance (Life)         17,505.2

46%

Platinum Underwriters HoldingsPTP0715 – Insurance (Property & Casualty)           1,595.2

43%

Hartford Financial Services GrHIG0715 – Insurance (Property & Casualty)         10,829.2

41%

Lincoln National CorporationLNC0709 – Insurance (Life)           8,005.7

41%

Amtrust Financial Services, InAFSI0715 – Insurance (Property & Casualty)           2,232.4

40%

HCC Insurance Holdings, Inc.HCC0715 – Insurance (Property & Casualty)           3,989.2

39%

Fidelity National Financial InFNF0715 – Insurance (Property & Casualty)           5,669.5

38%

Horace Mann Educators CorporatHMN0715 – Insurance (Property & Casualty)               847.4

38%

Montpelier Re Holdings Ltd.MRH0715 – Insurance (Property & Casualty)           1,341.4

37%

Seabright Holdings IncSBX0715 – Insurance (Property & Casualty)               249.3

37%

Verisk Analytics, Inc.VRSK0712 – Insurance (Miscellaneous)           9,172.3

37%

AEGON N.V. (ADR)AEG0709 – Insurance (Life)         13,026.1

36%

Fortegra Financial CorpFRF0712 – Insurance (Miscellaneous)               179.3

35%

XL Group plcXL0715 – Insurance (Property & Casualty)           8,353.8

35%

Primerica, Inc.PRI0709 – Insurance (Life)           1,877.3

34%

Allied World Assurance Co HoldAWH0715 – Insurance (Property & Casualty)           2,946.7

34%

Travelers Companies, Inc., TheTRV0715 – Insurance (Property & Casualty)         29,569.3

33%

Everest Re Group LtdRE0715 – Insurance (Property & Casualty)           5,944.0

33%

Prudential Public Limited CompPUK0709 – Insurance (Life)         38,254.3

33%

CIGNA CorporationCI0706 – Insurance (Accident & Health)         16,718.9

33%

United Insurance Holdings CorpUIHC0715 – Insurance (Property & Casualty)                 91.9

32%

Partnerre LtdPRE0715 – Insurance (Property & Casualty)           5,236.2

32%

Cincinnati Financial CorporatiCINF0715 – Insurance (Property & Casualty)           6,959.7

29%

Protective Life Corp.PL0709 – Insurance (Life)           2,500.8

29%

Argo Group International HoldiAGII0715 – Insurance (Property & Casualty)               926.7

29%

Hallmark Financial Services, IHALL0715 – Insurance (Property & Casualty)               171.6

26%

Aspen Insurance Holdings LimitAHL0715 – Insurance (Property & Casualty)           2,380.3

26%

Alterra Capital Holdings LtdALTE0715 – Insurance (Property & Casualty)           2,911.1

25%

Torchmark CorporationTMK0709 – Insurance (Life)           5,314.2

24%

Alleghany CorporationY0715 – Insurance (Property & Casualty)           6,048.5

24%

Eastern Insurance Holdings IncEIHI0709 – Insurance (Life)               135.2

24%

Berkshire Hathaway Inc.BRK.A0715 – Insurance (Property & Casualty)      242,512.2

23%

Manulife Financial CorporationMFC0709 – Insurance (Life)         26,899.6

23%

Arch Capital Group Ltd.ACGL0715 – Insurance (Property & Casualty)           6,188.5

22%

Enstar Group Ltd.ESGR0715 – Insurance (Property & Casualty)           2,006.2

22%

Axis Capital Holdings LimitedAXS0715 – Insurance (Property & Casualty)           4,664.5

22%

Genworth Financial  IncGNW0709 – Insurance (Life)           4,647.8

21%

Aon PLCAON0712 – Insurance (Miscellaneous)         18,361.6

21%

American Equity Investment LifAEL0709 – Insurance (Life)               862.9

20%

White Mountains Insurance GrouWTM0715 – Insurance (Property & Casualty)           3,585.0

20%

ACE LimitedACE0715 – Insurance (Property & Casualty)         28,999.2

20%

Markel CorporationMKL0715 – Insurance (Property & Casualty)           4,581.2

19%

United Fire Group, Inc.UFCS0715 – Insurance (Property & Casualty)               595.0

19%

Employers Holdings, Inc.EIG0715 – Insurance (Property & Casualty)               658.7

18%

W.R. Berkley CorporationWRB0715 – Insurance (Property & Casualty)           5,643.1

18%

Amerisafe, Inc.AMSF0715 – Insurance (Property & Casualty)               517.4

18%

National Interstate CorporatioNATL0715 – Insurance (Property & Casualty)               592.7

18%

Old Republic International CorORI0715 – Insurance (Property & Casualty)           2,906.0

17%

Kansas City Life Insurance CoKCLI0709 – Insurance (Life)               418.7

17%

Brown & Brown, Inc.BRO0712 – Insurance (Miscellaneous)           3,901.8

17%

Aetna Inc.AET0706 – Insurance (Accident & Health)         16,644.7

17%

Crawford & CompanyCRD.B0712 – Insurance (Miscellaneous)               305.5

16%

Universal Insurance Holdings,UVE0715 – Insurance (Property & Casualty)               182.4

16%

Chubb Corporation, TheCB0715 – Insurance (Property & Casualty)         21,220.1

15%

National Western Life InsurancNWLI0709 – Insurance (Life)               593.0

15%

American Financial GroupAFG0715 – Insurance (Property & Casualty)           3,862.0

15%

Loews CorporationL0715 – Insurance (Property & Casualty)         17,109.9

15%

Endurance Specialty Holdings LENH0715 – Insurance (Property & Casualty)           1,839.7

14%

China Life Insurance Company LLFC0709 – Insurance (Life)         91,295.3

14%

State Auto FinancialSTFC0715 – Insurance (Property & Casualty)               602.7

14%

Principal Financial Group IncPFG0706 – Insurance (Accident & Health)           9,036.6

13%

EMC Insurance Group Inc.EMCI0715 – Insurance (Property & Casualty)               324.6

13%

Maiden Holdings, Ltd.MHLD0715 – Insurance (Property & Casualty)               758.2

13%

RenaissanceRe Holdings Ltd.RNR0715 – Insurance (Property & Casualty)           3,982.5

13%

Validus Holdings, Ltd.VR0709 – Insurance (Life)           3,340.1

12%

Selective Insurance GroupSIGI0715 – Insurance (Property & Casualty)           1,106.6

12%

UnitedHealth Group Inc.UNH0706 – Insurance (Accident & Health)         57,244.5

11%

Hanover Insurance Group, Inc.,THG0715 – Insurance (Property & Casualty)           1,821.7

11%

Cna Financial CorpCNA0715 – Insurance (Property & Casualty)           8,351.3

11%

ProAssurance CorporationPRA0715 – Insurance (Property & Casualty)           2,752.6

11%

Assured Guaranty Ltd.AGO0715 – Insurance (Property & Casualty)           3,264.4

11%

Marsh & McLennan Companies, InMMC0712 – Insurance (Miscellaneous)         19,053.5

10%

Safety Insurance Group, Inc.SAFT0715 – Insurance (Property & Casualty)               728.8

10%

Unico American CorporationUNAM0715 – Insurance (Property & Casualty)                 68.2

10%

Progressive Corporation, ThePGR0715 – Insurance (Property & Casualty)         13,682.1

10%

Independence Holding CompanyIHC0709 – Insurance (Life)               167.3

10%

AFLAC IncorporatedAFL0706 – Insurance (Accident & Health)         25,077.1

10%

Navigators Group, Inc, TheNAVG0715 – Insurance (Property & Casualty)               751.0

10%

Metlife IncMET0709 – Insurance (Life)         41,077.8

9%

Kemper CorpKMPR0715 – Insurance (Property & Casualty)           1,874.3

8%

ING Groep N.V. (ADR)ING0709 – Insurance (Life)         37,707.5

7%

Arthur J. Gallagher & Co.AJG0712 – Insurance (Miscellaneous)           4,502.5

7%

American National Insurance CoANAT0715 – Insurance (Property & Casualty)           2,070.2

7%

Prudential Financial IncPRU0709 – Insurance (Life)         27,417.8

6%

StanCorp Financial Group, Inc.SFG0706 – Insurance (Accident & Health)           1,776.7

4%

Global Indemnity plcGBLI0715 – Insurance (Property & Casualty)               535.1

4%

WellPoint, Inc.WLP0706 – Insurance (Accident & Health)         20,092.9

3%

FBL Financial GroupFFG0709 – Insurance (Life)               902.6

2%

Unum GroupUNM0709 – Insurance (Life)           6,407.6

2%

Infinity Property and CasualtyIPCC0715 – Insurance (Property & Casualty)               684.9

2%

Baldwin & Lyons, Inc.BWINB0715 – Insurance (Property & Casualty)               340.7

1%

Molina Healthcare, Inc.MOH0706 – Insurance (Accident & Health)           1,357.9

-2%

Reinsurance Group of America IRGA0706 – Insurance (Accident & Health)           4,098.1

-2%

Assurant, Inc.AIZ0709 – Insurance (Life)           3,039.7

-3%

RLI Corp.RLI0715 – Insurance (Property & Casualty)           1,439.5

-6%

Erie Indemnity CompanyERIE0715 – Insurance (Property & Casualty)           3,283.2

-7%

Citizens, Inc.CIA0709 – Insurance (Life)               459.8

-8%

American Safety Insurance HoldASI0715 – Insurance (Property & Casualty)               196.8

-8%

Tower Group IncTWGP0715 – Insurance (Property & Casualty)               740.9

-10%

Willis Group Holdings PLCWSH0712 – Insurance (Miscellaneous)           6,032.0

-10%

Mercury General CorporationMCY0715 – Insurance (Property & Casualty)           2,183.3

-11%

OneBeacon Insurance Group, LtdOB0715 – Insurance (Property & Casualty)           1,308.7

-12%

Greenlight Capital Re, Ltd.GLRE0715 – Insurance (Property & Casualty)               835.9

-12%

Donegal Group Inc.DGICA0715 – Insurance (Property & Casualty)               371.4

-12%

Universal American CorporationUAM0706 – Insurance (Accident & Health)               801.3

-13%

Humana Inc.HUM0706 – Insurance (Accident & Health)         11,855.7

-14%

CNinsure Inc. (ADR)CISG0712 – Insurance (Miscellaneous)               330.1

-17%

Health Net, Inc.HNT0706 – Insurance (Accident & Health)           2,204.9

-24%

MGIC Investment Corp.MTG0715 – Insurance (Property & Casualty)               581.9

-26%

MBIA Inc.MBI0715 – Insurance (Property & Casualty)           1,631.2

-30%

Meadowbrook Insurance Group, IMIG0715 – Insurance (Property & Casualty)               318.1

-36%

Phoenix Companies, Inc., ThePNX0709 – Insurance (Life)               156.1

-36%

Life Partners Holdings, Inc.LPHI0712 – Insurance (Miscellaneous)                 50.3

-40%

I note that the basement contains a lot of funky companies with issues.  The penthouse contains a lot of credit-sensitive companies that have rallied off of the strong equity market, and moderately strong housing market.

I do not have much trust in the momentum now, because many are trusting in the rosy scenario where losses have been normalized.  I do not think that is the case, and think that there will be additional losses from credit risk coming soon.

Sorted Weekly Tweets

Saturday, January 26th, 2013

Rest of the World

 

  • Cyprus’s now-certain default http://t.co/H7TO0rQy Cyprus is not substantial to the EU, but it does raise issues as to precedence $$ Jan 26, 2013
  • Jobs At Al Jazeera http://t.co/HzukJDoL Hiring in the USA! Join the Wahabist Ministry of Propaganda; certainly more talented than most! $$ Jan 24, 2013
  • Mali Exposes Flaws in West’s Security Plans http://t.co/yixTdjVP Lack of proper gear, or American assistance, hinder Mali efforts $$ Jan 24, 2013
  • Manpower Sees French Labor-Deal Boon Matching Skills to Jobs http://t.co/OdD7JaGG $MAN helps sclerotic French labor find flexibility $$ Jan 24, 2013
  • Peso Beating Rupee Threatens Call Center Growth http://t.co/EkiG1wBU Phillipines will continue w/loose $$; everyone being forced2 loose $$ Jan 24, 2013
  • Cairo Slum-Dwellers Despair of Mursi on Uprising Anniversary http://t.co/5TlSMPkA What did u expect? Muslim Brotherhood best organized $$ Jan 24, 2013
  • Chavez Ally’s Once-in-Century Debt Exposes Neglect http://t.co/qpZqu0rQ Dumb2lend @ 5% 4 10yrs 2a nation has expropriated 15 companies $$ Jan 24, 2013
  • Merkel hints at European deal for Cameron http://t.co/2ugJjTzA Ever-closer union gives way 2Europe a la carte $$ UK has better deal w/US? $$ Jan 24, 2013
  • Yahoo, Dell Swell Netherlands’ $13 Trillion Tax Haven http://t.co/d78DxoHN Corporations scour the globe 4 tax advantages. Wouldn’t you? $$ Jan 24, 2013
  • Spain’s Lost Generation Spends Salad Days Toiling in UK http://t.co/dBMcRGGw High bad debts & unemployment, yes Mario the worst is past $$ Jan 24, 2013
  • Suicide of Minister Turns Focus on Crash Taking Toll in Ireland http://t.co/8uXbcdNK The more severe the recession, the more suicides $$ Jan 24, 2013
  • Draghi Says ‘Darkest Clouds’ Over Europe Have Subsided http://t.co/hUqda4z7 Tell that2 Slovenia! http://t.co/TJDdbTyT $$ #debtdeflation Jan 24, 2013
  • Spanish Bank Bad Loans: still tending upward http://t.co/LERSIed3 Calling Mario Draghi! Another fire to douse w/your unlimited liquidity $$ Jan 24, 2013

 

China

 

  • Feeding the Dragon: Why China’s Credit System Looks Vulnerable http://t.co/9aFA9Ivk GMO analyzes the mess that is credit in China $$ #danger Jan 25, 2013
  • China Overheating Risk Resurfaces, Ex-PBOC Adviser Says http://t.co/DcjkkslU Total debt levels comparable to dev nations prior 2 crisis $$ Jan 24, 2013
  • China’s Potential growth may slow later in decade- Older population shrinks its labor force http://t.co/Sr6zsqa8 China demographic articles Jan 24, 2013
  • In China, Widening Discontent Among Communist Party Faithful http://t.co/626NiBMR Small cracks emerge in Party loyalty #interestingtimes $$ Jan 21, 2013
  • EU remains a big external challenge to China’s economy http://t.co/YvV52N5n 5-yr plan 2 dom consumption will fail: based on transfer pmts $$ Jan 21, 2013
  • “Gehnen said most crucial for a lasting strengthening of China’s domestic demand…further development of basic systems of social security” Jan 21, 2013

 

Market Dynamics

 

  • “Don’t work on financial crises, don’t work on contagion,” they said, according to Forbes. “There’re not going to be anymore crises.” $$ Jan 26, 2013
  • The last tweet reflected the views of Kristin Forbes’ tenure advisors 10+ years ago http://t.co/X7MhwG9b Economists were complacent $$ Jan 26, 2013
  • The Temptation of Risk http://t.co/BLjgGwye Buying any risk asset @ this juncture feels like succumbing 2 the peer pressure of the market $$ Jan 25, 2013
  • “The fundamental law is we can’t raise debt faster than income from now on,” Dalio said. http://t.co/rTAJfFhf Dalio Sees ‘Game Changer’ $$ Jan 25, 2013
  • “The worst investment decisions have generally been made when dumb money is chasing yield.” Edward Chancellor and Mike Monnelly at GMO $$ Jan 25, 2013
  • Investors See a Way Forward: Buybacks http://t.co/Q8JQHwgs Organic growth is best, but companies w/cheap stock should buyback shares $$ Jan 24, 2013
  • Visual History Of The S&P 500 http://t.co/17rWiDpw 20th birthday for $SPY — Watch how the top 10 companies have varied over last 33 yrs $$ Jan 22, 2013
  • Egan-Jones Faces 18-Month Ban on Sovereign, Asset-Backed Ratings http://t.co/FzPbV2zo Should have stuck w/their expertise in corporates $$ Jan 22, 2013
  • Calpers Buy-Hold Rule Recoups $95B Recession Loss http://t.co/R7Hc02Hm Still short $87B, only 74% funded, asks CA & struggling cities 4 $$ Jan 22, 2013
  • Investors Get a ‘Perpetual’ Headache http://t.co/IM5Y94IM It is usually dumb to give away your principal 4a fixed rate w/no upside $$ Jan 22, 2013
  • Wrong: Money Magic: Bonds Act Like Stocks http://t.co/RNGh92EV This is little different than buying the equity of CDOs & diversifying $$ Jan 22, 2013
  • More on having technical analysis taught in financial classes in academic circles @reformedbroker @ppearlman http://t.co/WCxBcfDo $$ Jan 21, 2013
  • We must fix the broken Western state model http://t.co/L6jxLYQm Liabs, deficits & policy uncertainty lead2 economic gridlock as DC wastes $$ Jan 21, 2013

 

Companies

 

  • It Pays to Own an Energy Pipeline. Thanks, Tax Code http://t.co/2UCSALOo Almost all are set up as MLPs, which pass income to partners $$ Jan 25, 2013
  • Financial Crisis Suit Suggests Bad Behavior @ Morgan Stanley http://t.co/OkML3jhh The buyers did not do due diligence, & were yield hogs $$ Jan 24, 2013
  • Explosive Charge: Morgan Stanley Peddled Security Its Own Employee Called ‘Nuclear Holocaust’ http://t.co/QTelsPmK Untold story: yield hogs Jan 24, 2013
  • Microsoft Risks Strain to PC Partnerships With Dell Investment http://t.co/5t0Eok5k All of $MSFT ‘s relationship’s r strained somewhat $$ Jan 24, 2013
  • Firms Keep Stockpiles of ‘Foreign’ Cash in US http://t.co/r2MAumPL You want they should keep it elsewhere? At least it is safe here $$ Jan 24, 2013
  • #SYMC offers capital allocation program, plans to initiate company’s first cash dividend http://t.co/51H0zECN FD: + $SYMC 2.5% div, nice $$ Jan 23, 2013
  • Western Digital Hits 15-Yr Peak on Talk of Buyout http://t.co/GRk0JucB FD: + $WDC | $WDC more cyclical than $DELL, harder 2take private $$ Jan 22, 2013
  • Loan start-up Prosper raises $20 million, led by Sequoia http://t.co/SJLnKHGa Peer-2-peer lending comes of age, Prosper attracts $$ Jan 22, 2013
  • Microsoft in Talks to Help Finance Dell Buyout http://t.co/xpbAntVf Odd, indicates that $MSFT has more $$ than they know what to do with Jan 22, 2013
  • Schools Hit by Morality of Wal-Mart Guns Funding Charity http://t.co/8KgGKSQe $WMT makes <1% of its profits from guns; >1% from tobacco $$ Jan 22, 2013
  • Inside H-P’s Missed Chance to Avoid a Disastrous Deal http://t.co/tqJ6xsEx Could have walked away after firing Apotheker for ~$100M $$ Jan 22, 2013

 

Other

 

  • Senate Changes Rule on Filibusters, Keeps Supermajority http://t.co/fHOlwYmw Modest good changes made, but the filibuster stands as is $$ Jan 25, 2013
  • Facebook Friends Fronting Debt Collectors Draw US Regulation http://t.co/wZkVpdTu Debt collection harassment goes social, for now $$ Jan 24, 2013
  • Fast-changing social media makes advisers scramble http://t.co/wlZ4Py1P Note to RIAs w/LinkedIn: u may need 2turn off recommendations $$ Jan 24, 2013
  • Who Can Outgrow or Recover From Autism http://t.co/D3H2MrPO Autism is an overused word. Some males take longer to develop $$ Jan 22, 2013

 

Benefits now, Payment with Interest Later

 

  • Backs to the Future http://t.co/RuftcKsF by @agnestcrane | But as interest rates rise, asset values should fall; the gap should remain $$ Jan 24, 2013
  • Big Ben’s Big Bite Out of Corporate Pensions http://t.co/2Ez3PkUJ QE-infinity raises the costs of defined benefit pensions & other liabs $$ Jan 24, 2013
  • The RomneyCare Bill Comes Due http://t.co/eQ2wAqdn Coming soon to a nation (US) near you: pay more for health care or get less of it $$ Jan 24, 2013

 

Comments & Retweets

  • “I’ve always been skeptical of Bremmer & Roubini — too promotional.” — David_Merkel http://t.co/FtmDU3Th $$ Also too bearish on the US. Jan 25, 2013
  • @JackHBarnes @finemrespice I would be surprised if a bunch of Hungarians have better insight than most. Jan 26, 2013
  • @finemrespice @The_Analyst I am proud to know the both of you virtually. To all my followers, please follow. #FF Jan 26, 2013
  • @finemrespice Many apologies, I get what u r going for. Clever. Jan 26, 2013
  • ‘ @finemrespice Personally, I would like 2b more perverse — they have 2 invest their wealth in companies which they have refused 2 favor $$ Jan 26, 2013
  • @jckhewitt as you will note from my last tweet, the economics profession believed in the early 2000s that we had banished financial crises Jan 26, 2013
  • An example of an ETF that buys companies that buy back stock on net $$ $TTFS RT @jvnash1: @AlephBlog $ttfs float shrink Jan 24, 2013
  • Another good example of shrinking shares outstanding $$ RT @dwk24: @AlephBlog $COH Jan 24, 2013
  • RT @DavidBCollum: @AlephBlog Indeed. They also forget the highly complex systems improve by evolution, not human fiat. FOMC suffers “Fat … Jan 24, 2013
  • @BarbarianCap I agree, though I think developed nations should try to co-ordinate tax policy, & suggest 2 tax havens NATO has other uses ;) Jan 24, 2013
  • ‘ @DavidBCollum I think the Fed forgets that every liability is someone else’s asset, but that every asset isn’t someone else’s liability $$ Jan 24, 2013
  • @Skrisiloff You’re welcome, Scott. Keep up the good work! Jan 24, 2013
  • @flounder_MA @smartfootball It’s a valuation question. Price below 1.3x tangible book, buy back stock. Otherwise, special dividends $$ Jan 24, 2013
  • @JMucken @DanSWright I think that’s the only utility I let auto-tweet; nice utility that sums up what I did publicly on Twitter wed-to-wed Jan 24, 2013

·  @djoalpha11 This Dan Dorfman http://t.co/XlQQXj49 ? Or another one, because the famous one is dead… Jan 22, 2013

  • @GaelicTorus @danielckoontz They serve different needs. Main point: Use your specialized knowledge 2 choose ins 2 best serve yr likely needs Jan 21, 2013
  • @danielckoontz But no, I don’t have anything in the archives on LTC, except don’t buy the stock of those whose liabilities r a hi % LTC Jan 21, 2013
  • @GaelicTorus @danielckoontz LTC is for people of in-between health; likely to live but not be so healthy, eases the unpleasantness of aging Jan 21, 2013
  • @danielckoontz also look & compare all of the terms & conditions & compare different specimen policies. Get quotes from a wide # of writers Jan 21, 2013
  • @danielckoontz LTC is useful for someone who thinks they will need lots of care, but is likely to live a long time. Best bought when younger Jan 21, 2013
  • RT @ToddSullivan: RT @Convertbond: RT “@finansakrobat: Milton Friedman (via Morgan Stanley): “nothing is so permanent as a temporary go … Jan 21, 2013
  • “Difficulty: few people, even professionals, are good enough to go against the grain when the masses are panicking” http://t.co/MXrg8o06 $$ Jan 20, 2013

 

FWIW

 

  • My week on twitter: 40 retweets received, 6 new listings, 81 new followers, 58 mentions. Via: http://t.co/SPrAWil0 Jan 24, 2013

 

An Echo, but not Sound

Friday, January 25th, 2013

Time for my penny stock scoreboard:

TickerDate of ArticlePrice @ ArticlePrice @ 1/24/13DeclineAnnualizedSplits
GTXO

5/27/2008

2.45

0.040

-98.4%

-58.6%

BONZ

10/22/2009

0.35

0.019

-94.6%

-59.2%

BONU

10/22/2009

0.89

0.074

-91.7%

-53.4%

UTOG

3/30/2011

1.55

0.009

-99.4%

-94.1%

OBJE

4/29/2011

116.00

1.780

-98.5%

-90.9%

1:40

LSTG

10/5/2011

1.12

0.061

-94.6%

-89.2%

AERN

10/5/2011

0.0770

0.0002

-99.7%

-99.0%

IRYS

3/15/2012

0.261

0.015

-94.3%

-96.4%

NVMN

3/22/2012

1.47

0.070

-95.2%

-97.3%

STVF

3/28/2012

3.24

0.600

-81.5%

-87.0%

CRCL

5/1/2012

2.22

0.350

-84.2%

-91.9%

ORYN

5/30/2012

0.93

0.280

-69.9%

-84.0%

BRFH

5/30/2012

1.16

0.316

-72.8%

-86.3%

LUXR

6/12/2012

1.59

0.018

-98.9%

-99.93%

IMSC

7/9/2012

1.5

1.480

-1.3%

-2.4%

DIDG

7/18/2012

0.65

0.085

-86.9%

-98.0%

GRPH

11/30/2012

0.8715

0.428

-50.9%

-99.1%

IMNG

12/4/2012

0.76

0.747

-1.7%

-11.6%

1/24/2013

Median

-94.4%

-90.1%

You have to admire the consistency of capital destruction among promoted penny stocks.  Tonight’s loser-in-waiting is Echo Automotive.  Here is the bullet points to illustrate the future carnage:

  • Minimal Revenues
  • Negative net worth
  • Negative earnings and getting worse.
  • Management sucking in a lot in salaries.
  • The long list of stock promoters engaged by DH Media LLC.  This is only the email effort.  They paid $1.9 million to disseminate the shiny, colorful 10″ x 14″ “newsletter” via snail mail.    They paid $25,000 to the tout that wrote the copy, or maybe, spiffed up DH Media’s bullet points. Add in disclaimers in 5-6 point type.
  • Risk factors list longer than you can shake a stick at.
  • Predecessor company “Canterbury Resources” was pursuing mining interests in New Zealand.
  • Predecessor acquirer company “Controlled Carbon” was working on solutions to reducing carbon emissions.  They now own 70% of the combined company, paying four cents a share for their stake. (So why does it trade at near 80 cents a share now?
  • Now the combined company has some solutions that will double fuel mileage on vehicles that use gas.  What a wonder.

If you really had a technology that could double gas mileage, you would set up a joint venture, or a licensing agreement with one of the major automakers, and divide the profits  off of their high vehicle sales.  You would make a bundle doing that.  You would not buy a shell company in a different industry and let costs get out of control.  That looks like management does not have a real technology, but is simply trying to “take something off the top” through salaries and benefits, and perhaps rewarding friends.  After all, in the stub of the third quarter, Echo blew threw virtually all of the new capital that it raised, and for what?

The company might or might not be affiliated with the promoters.  The promoters say the company is not affiliated with the promotion.  In one scam, Luxeyard [LUXR] a different set of promoters did reveal that the company was paying the promotion to facilitate sales of stock.  The proof is in the pudding.  If Echo goes and does a PIPE or a secondary IPO, maybe there was some hidden affiliation.

The promoter also says they won’t trade for 90 days.  Now, the economics of this one is tough, because the parties that owned “Controlled Carbon” own 70% of Echo Automotive.  Dilution at low prices does not favor them, and I don’t see how they could easily monetize a large portion of their stake.

That leaves the remaining 30% of the company to be traded.  The promoter has spent over 2 million to promote the stock.  Unless he owns a big chunk, and sells into this wave, I don’t see how he makes money.  And if he does sell into the wave, and a lawsuit is brought later, that would stand against them in court that they violated their disclosure.  Maybe they take that risk anyway — they are working at the edge of the law anyway.

Except, maybe a lot of scammers work together as in this example from the FBI.  I’ve posited that idea before.  Given all of the non-identifiable shell companies involved, that could be going on here also.  It would be interesting to try to prove the existence of and break a ring like that.

Anyway, steer clear.  The company is horrid, and with promoters around, those that buy and hold for any significant length of time (say 1-3 months) are 99% certain to lose money.  Don’t be one of the pockets that gets picked.

On Insurance Investing, Part 2

Thursday, January 24th, 2013

If you grow book value, particularly if your liabilities are short, you will grow market value.  Many reinsurance and insurance companies aim at growing fully convertible book value per share.

Fully convertible book value per share assumes that you invest your dividends in the common stock (without taxation), and thus compound your gains through reinvestment, taking account of dilution.  Hmmm… when will someone dream up the idea of structuring an insurance company as an MLP or a REIT?  I don’t think it is likely, but maybe someone could dream it up.

It also implies that all possible dilution is factored in from convertible preferred stock or convertible bonds.  Now insurance companies tend to trade near book value over the long run, so companies that can grow their book value rapidly and pay dividends can be interesting investments.  Particularly where the liabilities of the company are short — property reinsurance or personal lines insurance, growth in book value plus dividends tends to be a reliable indicator of value creation.

If liabilities are longer, it gets more questionable, because under-reserving becomes more likely — it is very hard to be certain of the reserving of long-dated or volatile coverages.

Anyway, here is a list of insurance companies, and how they have accumulated book value plus dividends over the past seven years.  Note that this is a mathematical calculation off a limited database, and that splits and M&A can throw this calculation off.  With that caveat, here is the list:

companytickersicimg_descmktcapGrowth of FCBV
Life Partners Holdings, Inc.LPHI64110712 – Insurance (Miscellaneous)

50.7

76%

Universal Insurance Holdings,UVE63310715 – Insurance (Property & Casualty)

185.2

75%

CNinsure Inc. (ADR)CISG64110712 – Insurance (Miscellaneous)

337.6

56%

Amtrust Financial Services, InAFSI63310715 – Insurance (Property & Casualty)

2,128.7

38%

Employers Holdings, Inc.EIG63310715 – Insurance (Property & Casualty)

652.6

32%

Enstar Group Ltd.ESGR63310715 – Insurance (Property & Casualty)

1,951.0

26%

Tower Group IncTWGP63310715 – Insurance (Property & Casualty)

734.8

25%

Amerisafe, Inc.AMSF63310715 – Insurance (Property & Casualty)

508.5

23%

Humana Inc.HUM63240706 – Insurance (Accident & Health)

11,297.2

21%

Allied World Assurance Co HoldAWH63310715 – Insurance (Property & Casualty)

2,856.1

21%

Arthur J. Gallagher & Co.AJG64110712 – Insurance (Miscellaneous)

4,441.2

20%

Willis Group Holdings PLCWSH64110712 – Insurance (Miscellaneous)

6,009.5

20%

China Life Insurance Company LLFC63110709 – Insurance (Life)

94,339.3

20%

ProAssurance CorporationPRA63310715 – Insurance (Property & Casualty)

2,698.5

19%

RenaissanceRe Holdings Ltd.RNR63310715 – Insurance (Property & Casualty)

3,949.8

18%

National Interstate CorporatioNATL63310715 – Insurance (Property & Casualty)

576.7

18%

Argo Group International HoldiAGII63310715 – Insurance (Property & Casualty)

910.3

17%

Brown & Brown, Inc.BRO64110712 – Insurance (Miscellaneous)

3,851.4

17%

AFLAC IncorporatedAFL63210706 – Insurance (Accident & Health)

24,134.6

16%

Endurance Specialty Holdings LENH63310715 – Insurance (Property & Casualty)

1,796.8

16%

W.R. Berkley CorporationWRB63310715 – Insurance (Property & Casualty)

5,455.7

15%

American Financial GroupAFG63310715 – Insurance (Property & Casualty)

3,772.7

15%

Horace Mann Educators CorporatHMN63310715 – Insurance (Property & Casualty)

830.9

15%

Eastern Insurance Holdings IncEIHI63110709 – Insurance (Life)

135.5

15%

Validus Holdings, Ltd.VR63310709 – Insurance (Life)

3,296.1

15%

CIGNA CorporationCI63240706 – Insurance (Accident & Health)

16,104.2

14%

Reinsurance Group of America IRGA63210706 – Insurance (Accident & Health)

4,143.2

14%

Safety Insurance Group, Inc.SAFT63310715 – Insurance (Property & Casualty)

715.6

14%

Chubb Corporation, TheCB63310715 – Insurance (Property & Casualty)

20,701.5

13%

Loews CorporationL63310715 – Insurance (Property & Casualty)

16,854.0

13%

ACE LimitedACE63510715 – Insurance (Property & Casualty)

28,285.6

13%

HCC Insurance Holdings, Inc.HCC63310715 – Insurance (Property & Casualty)

3,937.5

13%

Travelers Companies, Inc., TheTRV63310715 – Insurance (Property & Casualty)

29,108.4

13%

Coventry Health Care, Inc.CVH63240706 – Insurance (Accident & Health)

6,080.9

12%

Markel CorporationMKL63310715 – Insurance (Property & Casualty)

4,456.4

12%

Torchmark CorporationTMK63110709 – Insurance (Life)

5,103.5

12%

UnitedHealth Group Inc.UNH63240706 – Insurance (Accident & Health)

55,732.6

12%

Partnerre LtdPRE63310715 – Insurance (Property & Casualty)

5,116.2

12%

Meadowbrook Insurance Group, IMIG63310715 – Insurance (Property & Casualty)

311.6

12%

StanCorp Financial Group, Inc.SFG63210706 – Insurance (Accident & Health)

1,704.1

12%

Prudential Financial IncPRU63110709 – Insurance (Life)

26,777.4

12%

Infinity Property and CasualtyIPCC63310715 – Insurance (Property & Casualty)

688.6

12%

Assurant, Inc.AIZ63110709 – Insurance (Life)

2,935.0

12%

Greenlight Capital Re, Ltd.GLRE63310715 – Insurance (Property & Casualty)

837.4

12%

Progressive Corporation, ThePGR63310715 – Insurance (Property & Casualty)

13,738.8

11%

Protective Life Corp.PL63110709 – Insurance (Life)

2,451.0

11%

Axis Capital Holdings LimitedAXS63310715 – Insurance (Property & Casualty)

4,508.1

11%

Molina Healthcare, Inc.MOH63240706 – Insurance (Accident & Health)

1,300.1

11%

American Equity Investment LifAEL63110709 – Insurance (Life)

834.1

11%

Symetra Financial CorporationSYA63110709 – Insurance (Life)

1,578.3

11%

Aon PLCAON64110712 – Insurance (Miscellaneous)

18,199.1

10%

Mercury General CorporationMCY63310715 – Insurance (Property & Casualty)

2,169.0

10%

Everest Re Group LtdRE63310715 – Insurance (Property & Casualty)

5,843.7

10%

American Safety Insurance HoldASI63310715 – Insurance (Property & Casualty)

197.1

10%

Prudential Public Limited CompPUK63110709 – Insurance (Life)

38,071.4

10%

Aspen Insurance Holdings LimitAHL63310715 – Insurance (Property & Casualty)

2,324.9

10%

Berkshire Hathaway Inc.BRK.A63310715 – Insurance (Property & Casualty)

236,577.4

9%

EMC Insurance Group Inc.EMCI63310715 – Insurance (Property & Casualty)

326.3

9%

RLI Corp.RLI63310715 – Insurance (Property & Casualty)

1,439.1

9%

Hanover Insurance Group, Inc.,THG63310715 – Insurance (Property & Casualty)

1,781.6

9%

Unico American CorporationUNAM63310715 – Insurance (Property & Casualty)

66.6

9%

Montpelier Re Holdings Ltd.MRH63310715 – Insurance (Property & Casualty)

1,318.1

9%

Seabright Holdings IncSBX63310715 – Insurance (Property & Casualty)

249.0

9%

Alleghany CorporationY63310715 – Insurance (Property & Casualty)

5,950.7

8%

Hallmark Financial Services, IHALL63310715 – Insurance (Property & Casualty)

176.8

8%

White Mountains Insurance GrouWTM63310715 – Insurance (Property & Casualty)

3,509.0

8%

Investors Title CompanyITIC63610715 – Insurance (Property & Casualty)

139.1

8%

Marsh & McLennan Companies, InMMC64110712 – Insurance (Miscellaneous)

19,020.9

8%

FBL Financial GroupFFG63110709 – Insurance (Life)

869.4

8%

Erie Indemnity CompanyERIE63310715 – Insurance (Property & Casualty)

3,264.4

8%

Metlife IncMET63110709 – Insurance (Life)

39,615.8

8%

Aetna Inc.AET63240706 – Insurance (Accident & Health)

15,698.1

8%

WellPoint, Inc.WLP63240706 – Insurance (Accident & Health)

19,054.4

8%

Hilltop Holdings Inc.HTH63310715 – Insurance (Property & Casualty)

773.3

8%

Citizens, Inc.CIA63110709 – Insurance (Life)

485.8

7%

Donegal Group Inc.DGICA63310715 – Insurance (Property & Casualty)

370.9

7%

National Western Life InsurancNWLI63110709 – Insurance (Life)

596.1

7%

Navigators Group, Inc, TheNAVG63310715 – Insurance (Property & Casualty)

766.0

7%

Kemper CorpKMPR63310715 – Insurance (Property & Casualty)

1,842.8

7%

Allstate Corporation, TheALL63310715 – Insurance (Property & Casualty)

20,817.6

7%

Cna Financial CorpCNA63310715 – Insurance (Property & Casualty)

7,982.2

6%

Lincoln National CorporationLNC63110709 – Insurance (Life)

7,626.2

6%

Arch Capital Group Ltd.ACGL63310715 – Insurance (Property & Casualty)

6,084.7

6%

Platinum Underwriters HoldingsPTP63310715 – Insurance (Property & Casualty)

1,565.0

6%

Baldwin & Lyons, Inc.BWINB63310715 – Insurance (Property & Casualty)

339.5

5%

Selective Insurance GroupSIGI63310715 – Insurance (Property & Casualty)

1,086.8

5%

United Fire Group, Inc.UFCS63310715 – Insurance (Property & Casualty)

587.9

5%

Universal American CorporationUAM63240706 – Insurance (Accident & Health)

793.6

5%

Principal Financial Group IncPFG63210706 – Insurance (Accident & Health)

8,663.8

5%

American National Insurance CoANAT63310715 – Insurance (Property & Casualty)

2,055.2

4%

Kansas City Life Insurance CoKCLI63110709 – Insurance (Life)

416.9

4%

Cincinnati Financial CorporatiCINF63310715 – Insurance (Property & Casualty)

6,771.0

3%

Independence Holding CompanyIHC63110709 – Insurance (Life)

169.1

3%

State Auto FinancialSTFC63310715 – Insurance (Property & Casualty)

582.5

3%

Unum GroupUNM63110709 – Insurance (Life)

6,190.3

3%

Sun Life Financial Inc. (USA)SLF63110709 – Insurance (Life)

17,283.4

3%

Alterra Capital Holdings LtdALTE63310715 – Insurance (Property & Casualty)

2,861.2

3%

Assured Guaranty Ltd.AGO63510715 – Insurance (Property & Casualty)

2,911.2

3%

Fidelity National Financial InFNF63610715 – Insurance (Property & Casualty)

5,838.5

3%

Atlantic American CorporationAAME63110709 – Insurance (Life)

69.2

2%

Health Net, Inc.HNT63240706 – Insurance (Accident & Health)

2,140.7

2%

Hartford Financial Services GrHIG63310715 – Insurance (Property & Casualty)

10,641.6

2%

ING Groep N.V. (ADR)ING63110709 – Insurance (Life)

37,878.4

2%

Manulife Financial CorporationMFC63110709 – Insurance (Life)

26,357.8

2%

Genworth Financial  IncGNW63110709 – Insurance (Life)

4,500.3

2%

AEGON N.V. (ADR)AEG63110709 – Insurance (Life)

13,073.0

1%

Old Republic International CorORI63510715 – Insurance (Property & Casualty)

2,994.2

1%

OneBeacon Insurance Group, LtdOB63310715 – Insurance (Property & Casualty)

1,328.8

0%

Global Indemnity plcGBLI63310715 – Insurance (Property & Casualty)

555.8

-4%

CNO Financial Group IncCNO63110709 – Insurance (Life)

2,192.9

-5%

Crawford & CompanyCRD.B64110712 – Insurance (Miscellaneous)

326.7

-5%

Stewart Information Services CSTC63610715 – Insurance (Property & Casualty)

536.7

-9%

XL Group plcXL63310715 – Insurance (Property & Casualty)

8,182.5

-9%

Phoenix Companies, Inc., ThePNX63110709 – Insurance (Life)

155.4

-14%

First Acceptance CorporationFAC63310715 – Insurance (Property & Casualty)

51.2

-17%

Radian Group Inc.RDN63510715 – Insurance (Property & Casualty)

820.6

-23%

MBIA Inc.MBI63510715 – Insurance (Property & Casualty)

1,561.5

-24%

Kingsway Financial Services InKFS63310715 – Insurance (Property & Casualty)

53.4

-25%

MGIC Investment Corp.MTG63510715 – Insurance (Property & Casualty)

567.7

-28%

American International Group,AIG63310715 – Insurance (Property & Casualty)

51,803.5

-32%

eHealth, Inc.EHTH64110712 – Insurance (Miscellaneous)

501.2

Maiden Holdings, Ltd.MHLD63310715 – Insurance (Property & Casualty)

725.7

United Insurance Holdings CorpUIHC63310715 – Insurance (Property & Casualty)

92.7

Homeowners Choice, Inc.HCI63310715 – Insurance (Property & Casualty)

240.0

Verisk Analytics, Inc.VRSK64110712 – Insurance (Miscellaneous)

9,103.9

Primerica, Inc.PRI63110709 – Insurance (Life)

1,868.1

First American Financial CorpFAF63610715 – Insurance (Property & Casualty)

2,648.6

Imperial Holdings, Inc.IFT64110712 – Insurance (Miscellaneous)

86.3

Fortegra Financial CorpFRF64110712 – Insurance (Miscellaneous)

177.3

Now, it makes a lot of difference how dividends are set, and how buybacks are done.  Dividends should reflect a conservative estimate of how much free cash flow that a company is willing to part with.  Buybacks should only be done when it is at a discount to the intrinsic value of the firm.  If you have to distribute capital when the stock price is above fair market value, do a special dividend.

And when capital is dear, stop the buyback, maybe even reduce the dividend, or do a small secondary IPO.  When there are genuinely profitable opportunities to write business take them.

This is yet another reason why insurance stocks tend to trade near book — capital is so flexible that if capital can enter and exit easily, it should trade near book, because capital enters and exits at book, for the most part.

Ignore the extremes, but realize that companies that compound their fully converted book values can be excellent investments.

On Insurance Investing, Part 1

Wednesday, January 23rd, 2013

Shrinking the Share Count

This post was prompted by this post from Avondale Asset Management on how the share count from The Travelers has shrunk since 2005 (two years after their merger with The St. Paul, a company that I once worked for).  Only 57% of the shares remain.  Way to go.

Now, buying back stock is not a panacea.  It is only good when the shares are trading below or not much above fair market value.  What’s fair market value, you ask?  Well, that’s not an easy question to answer in most places, but in insurance, it means around 1.3x book value, adjusting for intangibles that have no economic significance.

Now if a company has some proprietary products, technologies or methods that give it a sustainable competitive advantage, that multiple can rise — AFLAC might be an example of that.  But sustainable competitive advantages in a mature and competitive industry like insurance are rare.  Above the 1.3x book value hurdle, it would be better to do special dividends.

Avondale was spot-on to feature The Travelers.  They are in the upper end of those that bought back shares 2005-2012.  Here’s my list:

CompanyTickerIndustry% of shares remaining since 2005
WellPoint, Inc.WLP0706 – Insurance (Accident & Health)

52%

Infinity Property and CasualtyIPCC0715 – Insurance (Property & Casualty)

56%

Travelers Companies, Inc., TheTRV0715 – Insurance (Property & Casualty)

57%

Aetna Inc.AET0706 – Insurance (Accident & Health)

58%

Employers Holdings, Inc.EIG0715 – Insurance (Property & Casualty)

59%

White Mountains Insurance GrouWTM0715 – Insurance (Property & Casualty)

60%

Torchmark CorporationTMK0709 – Insurance (Life)

61%

Assurant, Inc.AIZ0709 – Insurance (Life)

61%

Chubb Corporation, TheCB0715 – Insurance (Property & Casualty)

67%

Erie Indemnity CompanyERIE0715 – Insurance (Property & Casualty)

68%

RenaissanceRe Holdings Ltd.RNR0715 – Insurance (Property & Casualty)

69%

Endurance Specialty Holdings LENH0715 – Insurance (Property & Casualty)

69%

Loews CorporationL0715 – Insurance (Property & Casualty)

71%

Allied World Assurance Co HoldAWH0715 – Insurance (Property & Casualty)

71%

W.R. Berkley CorporationWRB0715 – Insurance (Property & Casualty)

72%

Health Net, Inc.HNT0706 – Insurance (Accident & Health)

72%

Platinum Underwriters HoldingsPTP0715 – Insurance (Property & Casualty)

72%

Allstate Corporation, TheALL0715 – Insurance (Property & Casualty)

73%

CIGNA CorporationCI0706 – Insurance (Accident & Health)

75%

UnitedHealth Group Inc.UNH0706 – Insurance (Accident & Health)

77%

Progressive Corporation, ThePGR0715 – Insurance (Property & Casualty)

78%

Montpelier Re Holdings Ltd.MRH0715 – Insurance (Property & Casualty)

78%

Verisk Analytics, Inc.VRSK0712 – Insurance (Miscellaneous)

78%

American Financial GroupAFG0715 – Insurance (Property & Casualty)

80%

StanCorp Financial Group, Inc.SFG0706 – Insurance (Accident & Health)

80%

Primerica, Inc.PRI0709 – Insurance (Life)

80%

Investors Title CompanyITIC0715 – Insurance (Property & Casualty)

81%

Hanover Insurance Group, Inc.,THG0715 – Insurance (Property & Casualty)

83%

Coventry Health Care, Inc.CVH0706 – Insurance (Accident & Health)

84%

RLI Corp.RLI0715 – Insurance (Property & Casualty)

84%

Kemper CorpKMPR0715 – Insurance (Property & Casualty)

84%

Axis Capital Holdings LimitedAXS0715 – Insurance (Property & Casualty)

85%

First Acceptance CorporationFAC0715 – Insurance (Property & Casualty)

86%

Everest Re Group LtdRE0715 – Insurance (Property & Casualty)

89%

Eastern Insurance Holdings IncEIHI0709 – Insurance (Life)

90%

Prudential Financial IncPRU0709 – Insurance (Life)

91%

Horace Mann Educators CorporatHMN0715 – Insurance (Property & Casualty)

92%

FBL Financial GroupFFG0709 – Insurance (Life)

92%

AFLAC IncorporatedAFL0706 – Insurance (Accident & Health)

93%

Cincinnati Financial CorporatiCINF0715 – Insurance (Property & Casualty)

93%

Kansas City Life Insurance CoKCLI0709 – Insurance (Life)

93%

Kingsway Financial Services InKFS0715 – Insurance (Property & Casualty)

93%

HCC Insurance Holdings, Inc.HCC0715 – Insurance (Property & Casualty)

94%

Unum GroupUNM0709 – Insurance (Life)

94%

EMC Insurance Group Inc.EMCI0715 – Insurance (Property & Casualty)

95%

eHealth, Inc.EHTH0712 – Insurance (Miscellaneous)

95%

OneBeacon Insurance Group, LtdOB0715 – Insurance (Property & Casualty)

95%

Aspen Insurance Holdings LimitAHL0715 – Insurance (Property & Casualty)

96%

Unico American CorporationUNAM0715 – Insurance (Property & Casualty)

97%

Markel CorporationMKL0715 – Insurance (Property & Casualty)

98%

Safety Insurance Group, Inc.SAFT0715 – Insurance (Property & Casualty)

98%

Humana Inc.HUM0706 – Insurance (Accident & Health)

99%

Atlantic American CorporationAAME0709 – Insurance (Life)

100%

State Auto FinancialSTFC0715 – Insurance (Property & Casualty)

100%

A.F.P Provida SA (ADR)PVD0718 – Investment Services

100%

American National Insurance CoANAT0715 – Insurance (Property & Casualty)

101%

Baldwin & Lyons, Inc.BWINB0715 – Insurance (Property & Casualty)

101%

Mercury General CorporationMCY0715 – Insurance (Property & Casualty)

101%

Marsh & McLennan Companies, InMMC0712 – Insurance (Miscellaneous)

101%

National Western Life InsurancNWLI0709 – Insurance (Life)

101%

Brown & Brown, Inc.BRO0712 – Insurance (Miscellaneous)

101%

Selective Insurance GroupSIGI0715 – Insurance (Property & Casualty)

101%

Sun Life Financial Inc. (USA)SLF0709 – Insurance (Life)

101%

Life Partners Holdings, Inc.LPHI0712 – Insurance (Miscellaneous)

101%

Aon PLCAON0712 – Insurance (Miscellaneous)

102%

ProAssurance CorporationPRA0715 – Insurance (Property & Casualty)

102%

Principal Financial Group IncPFG0706 – Insurance (Accident & Health)

102%

First American Financial CorpFAF0715 – Insurance (Property & Casualty)

102%

China Life Insurance Company LLFC0709 – Insurance (Life)

103%

Genworth Financial  IncGNW0709 – Insurance (Life)

103%

Navigators Group, Inc, TheNAVG0715 – Insurance (Property & Casualty)

104%

National Interstate CorporatioNATL0715 – Insurance (Property & Casualty)

104%

Amerisafe, Inc.AMSF0715 – Insurance (Property & Casualty)

104%

Cna Financial CorpCNA0715 – Insurance (Property & Casualty)

105%

Donegal Group Inc.DGICA0715 – Insurance (Property & Casualty)

106%

Stewart Information Services CSTC0715 – Insurance (Property & Casualty)

106%

Berkshire Hathaway Inc.BRK.A0715 – Insurance (Property & Casualty)

107%

Prudential Public Limited CompPUK0709 – Insurance (Life)

107%

Willis Group Holdings PLCWSH0712 – Insurance (Miscellaneous)

107%

Crawford & CompanyCRD.B0712 – Insurance (Miscellaneous)

111%

Old Republic International CorORI0715 – Insurance (Property & Casualty)

112%

Molina Healthcare, Inc.MOH0706 – Insurance (Accident & Health)

112%

United Fire Group, Inc.UFCS0715 – Insurance (Property & Casualty)

113%

Partnerre LtdPRE0715 – Insurance (Property & Casualty)

113%

Protective Life Corp.PL0709 – Insurance (Life)

114%

Manulife Financial CorporationMFC0709 – Insurance (Life)

114%

Independence Holding CompanyIHC0709 – Insurance (Life)

116%

ACE LimitedACE0715 – Insurance (Property & Casualty)

116%

Reinsurance Group of America IRGA0706 – Insurance (Accident & Health)

118%

Citizens, Inc.CIA0709 – Insurance (Life)

119%

Universal Insurance Holdings,UVE0715 – Insurance (Property & Casualty)

121%

Phoenix Companies, Inc., ThePNX0709 – Insurance (Life)

122%

AEGON N.V. (ADR)AEG0709 – Insurance (Life)

124%

Symetra Financial CorporationSYA0709 – Insurance (Life)

124%

Arch Capital Group Ltd.ACGL0715 – Insurance (Property & Casualty)

127%

Fidelity National Financial InFNF0715 – Insurance (Property & Casualty)

128%

Hilltop Holdings Inc.HTH0715 – Insurance (Property & Casualty)

130%

Arthur J. Gallagher & Co.AJG0712 – Insurance (Miscellaneous)

131%

ING Groep N.V. (ADR)ING0709 – Insurance (Life)

135%

Argo Group International HoldiAGII0715 – Insurance (Property & Casualty)

136%

Seabright Holdings IncSBX0715 – Insurance (Property & Casualty)

138%

Global Indemnity plcGBLI0715 – Insurance (Property & Casualty)

141%

Metlife IncMET0709 – Insurance (Life)

143%

MBIA Inc.MBI0715 – Insurance (Property & Casualty)

145%

Hartford Financial Services GrHIG0715 – Insurance (Property & Casualty)

146%

American Safety Insurance HoldASI0715 – Insurance (Property & Casualty)

150%

CNO Financial Group IncCNO0709 – Insurance (Life)

153%

Universal American CorporationUAM0706 – Insurance (Accident & Health)

153%

Radian Group Inc.RDN0715 – Insurance (Property & Casualty)

155%

American Equity Investment LifAEL0709 – Insurance (Life)

159%

Hallmark Financial Services, IHALL0715 – Insurance (Property & Casualty)

160%

Validus Holdings, Ltd.VR0709 – Insurance (Life)

160%

Lincoln National CorporationLNC0709 – Insurance (Life)

161%

Enstar Group Ltd.ESGR0715 – Insurance (Property & Casualty)

169%

Meadowbrook Insurance Group, IMIG0715 – Insurance (Property & Casualty)

172%

Greenlight Capital Re, Ltd.GLRE0715 – Insurance (Property & Casualty)

173%

Alleghany CorporationY0715 – Insurance (Property & Casualty)

191%

Tower Group IncTWGP0715 – Insurance (Property & Casualty)

196%

Alterra Capital Holdings LtdALTE0715 – Insurance (Property & Casualty)

197%

CNinsure Inc. (ADR)CISG0712 – Insurance (Miscellaneous)

208%

XL Group plcXL0715 – Insurance (Property & Casualty)

215%

MGIC Investment Corp.MTG0715 – Insurance (Property & Casualty)

220%

Amtrust Financial Services, InAFSI0715 – Insurance (Property & Casualty)

259%

Assured Guaranty Ltd.AGO0715 – Insurance (Property & Casualty)

262%

American International Group,AIG0715 – Insurance (Property & Casualty)

1265%

On the top side, and I did not see any of these, be aware of reverse splits, which can reduce the share count, are a sign of a badly run company, but do nothing for the economics of a firm, aside from keeping them listed on a major exchange.

On the bottom side, factor in large mergers paid for with shares.  Most large-scale mergers don’t work out well, so I don’t mind those companies being near the bottom of the list.

On a closing note, there is a weak positive correlation in most mature industries between stock price performance and relative decreases in share count, assets, and sales.  This sounds counter-intuitive, but good management teams know when to grow and when not to grow.  They don’t do acquisitions for scale.  They don’t grow sales if the sales growth won’t justify the cost of capital.  Building the assets of the company bigger does nothing for the bottom line; selective asset sales can free up cash for more productive uses.  Good management teams do not build empires — they add when it makes sense (grow), subtract when it makes sense (shrink), divide when it makes sense (spinoffs), and multiply when it makes sense (IPOs, JVs, new projects).

PS –  What does the WSJ have today?  An article on buybacks.  Enjoy.

2012 Financial Report of the US Government

Tuesday, January 22nd, 2013

I have written about this overlooked report for about ten years now.  I feel like a lonely warrior defending a tough location, with little assistance. If I could give a subtitle here, I would call it “Lies of the Past, Present, and Future.”  If I were more poetic, I would call it, “The end of a once Great Nation, Bedeviled with Corruption.”

This report is so despised by the US Government, that they always release it at a time where it will be buried by the news cycle.  This year is no different; they released it near the inauguration.  As an aside, I have talked with a representative from the group that puts this together, and they like me because I publicize it.  They called me to ask for advice on how they can make it better.

I may not be much, but I get 2-3 calls per year from government agencies asking for advice.  I block out at least an hour for them; it’s the least I can do for my country.  The last one from the GAO thanked me profusely.  They said they talked to many other people, but few that made the issues so clear.

Let me give you the first graph:

Excluding the times when new social entitlements were added, or added to the report, the unfunded liability of the US Government tended to increase at a rate of 9%, because less was being contributed to the social insurance programs than was necessary to keep up with the liability.  We have cheated these programs since the beginning, as a political ruse to gain favor for them, and giving a huuge subsidy to all who came before the baby boomers… now the price tag is coming due, and it ain’t pretty.

In the graph above, I attempt to explain two scams of the US government.  They stem from the same source — PPACA (Obamacare).  First, the true cost of PPACA was a lie.  Taxes were front-ended.  Benefits were back-ended.  The net benefit is gone now, and we face the black hole of insufficient taxes to meet benefits.  Second, Medicare was raided by reducing reimbursements, which C0ngress then undoes. There is no true savings, and there can’t be; government almost never produces anything as efficiently as the private sector.  It is normal for government to downplay the initial cost so that the program will be approved.  Once approved, cost overruns are the norm.

As such I expect the liability to grow until it is broken, or until it breaks us.  I am not trying to be a Scrooge, I am just trying to point at what may break the system, and produce a greater heartache.  A broken government is worse than one that does less, but survives.  One who is heartless continues to add liabilities to a system that can’t afford them, e.g., Bush 43 and Obama, rather than doing the tough work of scaling back entitlements so the past promises and the system survives.

In the above graph, what I call alternative Medicare Scenario, is the alternative scenario in the report which is the more likely scenario, which assumes that Congress does not enforce lowered medicare reimbursement that PPACA required (a dishonest aspect of the bill).  The portion called “Obamacare and Redefinitions” is my estimate of assumption changes that reflect an effort to make things cost less that will be undone as the true costs emerge.  No one is trying to be honest here — those writing the report, and the actuaries at the Social Security Administration are doing their best, but the politicians that passed PPACA twisted the math to make it look like a win for the American people, and bit-by-bit, it will be revealed to be a loss.

One more note: I have added into my estimates the “Infinite Horizon Increment,” which adds in the present value of the net value of entitlements beyond 75 years from now.

Here’s my second graph:

Here is where the past gets cheated: as I did this graph, I noted that GDP figures had been revised down from past estimates.  This makes recent growth look better than before, which people care about today, and past growth look worse, which few care about much.  (Note: the adjusted ratio takes out the wishful thinking of the Obama Administration.)

Regardless, watch the upward march of liabilities versus GDP… this is the march of rising promises that will eventually be broken.  Maybe we need a Constitutional Convention to sort this out, because the politicians just keep adding to the problems, and we keep re-electing them.  The US was originally based on a concept of limited government, with most domestic powers granted to the states.  That has been overturned, and over the last 100 years, big government as the protector of little people who cannot fend for themselves has been the policy.

Maybe I should go back to my saying, “Bubbles are predominantly phenomena of finance.  They continue to exist until the asset in question yields less than the liability that carries it.”  We await the moment where the majority of assets no longer trust the US Dollar, which would have been sooner than this, but most major nations have compromised their currencies to satisfy politically important exporters, in this “beggar thy neighbor” world, importing asset bubbles in their wake.

Unsustainable policies are the rule of the day.  I don’t what what will come of them, whether it will inflation or deflation, higher taxes or reduction in spending.  But a day is coming where we will be forced to choose, and under conditions less favorable than if the choices were made now.

Book Review: Benjamin Graham: The Memoirs of the Dean of Wall Street

Saturday, January 19th, 2013

I enjoyed this book, but it is not a book on investing.  Here is my rough breakdown of the book:

  • 40% Ben Graham’s childhood
  • 30% Early work experience up until the Great Depression
  • 10% His personal life with family and others.
  • 10% His late-Depression successes in investing up to 1940.
  • 10% His efforts as a playwright and as an amateur economist.

So, here’s my biggest gripe about the book: in many ways, Ben Graham’s biggest days as an investor — his greatest times of success in the 1940s & 1950s don’t get mentioned at all.  I learned more of what he was like in that era from reading Alice Schroeder’s The Snowball.

Should this surprise us?  No.  Ben Graham wanted to live the good life in modern terms.  From his time as a youth, he was hard-working, growing up amid poverty, and he never wanted to be poor as an adult.

He was a very bright guy on many topics.  He was not only studied in the humanities (which he loved more), he was exceptionally good at math.  The book does not describe him in these words, but he was the first hedge fund manager, and the first quantitative investor.

What made Graham a lot of money was realizing that convertible bonds and preferred stocks carried a valuable option that was often undervalued, and so he would buy the convertible security and short common against it.  Strategies like this, plus activist investing, where he uncovered information advantages on undervalued stocks allowed him to become wealthy.

And that was enough for him.  Unlike his more focused protege, Warren Buffett, once the game got too tough, and a pleasant retirement was attractive, he trotted into the sunset, with modest contact with his former friends in investing.

The book does not describe his time teaching at Columbia, nor any of the great investors that he influenced.  Ben Graham was interested in investing, but he was more interested in the humanities, and generally having a happy time.  Thus, if you read this book, realize that it is about a slice of the life of Ben Graham.  The first half of his life comes in great detail.  The last half of his life comes almost not at all.

But this is not an autobiography, it is a memoir.  As such, Graham tells us what he wants to tell us, and leaves the rest unsaid.  He tells us a little about his thoughts on marital infidelity, but does not tell us how his ending companion ended up being his deceased son’s wife.

All that said, we get what Graham wanted to reveal to us.  Janet Lowe’s book on his life is more comprehensive on his later days… even Alice Schroeder gives us more on his later life by accident of covering Buffett.

In summary: this isn’t primarily a book on investing.  It is a book on the thinking of one very bright man who invested and did well, and used the freedom that money brought for his own ends, both for good and for bad.

Quibbles

Already expressed.

Who would benefit from this book:  If you want to know the early life of Ben Graham, this is a great book.  Beyond that, you will be disappointed.  If you want to, you can buy it here: Benjamin Graham: The Memoirs of the Dean of Wall Street.

Full disclosure: I borrowed it from the local library.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

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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