Month: January 2013

The Product that Never saw the Light of Day

The Product that Never saw the Light of Day

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

Redacted Version of the January 2013 Version of the FOMC Statement

December 2012 January 2013 Comments
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 month No 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?

How to Become Super-Rich?

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.

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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

On Insurance Investing, Part 3

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:

company ticker img_desc

mktcap

prchg_52w
Radian Group Inc. RDN 0715 – Insurance (Property & Casualty) ?????????????? 882.0

155%

Homeowners Choice, Inc. HCI 0715 – Insurance (Property & Casualty) ?????????????? 241.1

146%

Stewart Information Services C STC 0715 – Insurance (Property & Casualty) ?????????????? 528.1

100%

Imperial Holdings, Inc. IFT 0712 – Insurance (Miscellaneous) ???????????????? 89.7

86%

Kingsway Financial Services In KFS 0715 – Insurance (Property & Casualty) ???????????????? 54.0

68%

Atlantic American Corporation AAME 0709 – Insurance (Life) ???????????????? 69.7

63%

eHealth, Inc. EHTH 0712 – Insurance (Miscellaneous) ?????????????? 506.9

59%

Investors Title Company ITIC 0715 – Insurance (Property & Casualty) ?????????????? 135.2

59%

First American Financial Corp FAF 0715 – Insurance (Property & Casualty) ?????????? 2,522.8

58%

Coventry Health Care, Inc. CVH 0706 – Insurance (Accident & Health) ?????????? 6,239.6

57%

Hilltop Holdings Inc. HTH 0715 – Insurance (Property & Casualty) ?????????????? 753.0

55%

CNO Financial Group Inc CNO 0709 – Insurance (Life) ?????????? 2,315.5

52%

Allstate Corporation, The ALL 0715 – Insurance (Property & Casualty) ???????? 21,154.9

51%

Symetra Financial Corporation SYA 0709 – Insurance (Life) ?????????? 1,629.6

50%

American International Group, AIG 0715 – Insurance (Property & Casualty) ???????? 54,180.4

46%

Sun Life Financial Inc. (USA) SLF 0709 – Insurance (Life) ???????? 17,505.2

46%

Platinum Underwriters Holdings PTP 0715 – Insurance (Property & Casualty) ?????????? 1,595.2

43%

Hartford Financial Services Gr HIG 0715 – Insurance (Property & Casualty) ???????? 10,829.2

41%

Lincoln National Corporation LNC 0709 – Insurance (Life) ?????????? 8,005.7

41%

Amtrust Financial Services, In AFSI 0715 – Insurance (Property & Casualty) ?????????? 2,232.4

40%

HCC Insurance Holdings, Inc. HCC 0715 – Insurance (Property & Casualty) ?????????? 3,989.2

39%

Fidelity National Financial In FNF 0715 – Insurance (Property & Casualty) ?????????? 5,669.5

38%

Horace Mann Educators Corporat HMN 0715 – Insurance (Property & Casualty) ?????????????? 847.4

38%

Montpelier Re Holdings Ltd. MRH 0715 – Insurance (Property & Casualty) ?????????? 1,341.4

37%

Seabright Holdings Inc SBX 0715 – Insurance (Property & Casualty) ?????????????? 249.3

37%

Verisk Analytics, Inc. VRSK 0712 – Insurance (Miscellaneous) ?????????? 9,172.3

37%

AEGON N.V. (ADR) AEG 0709 – Insurance (Life) ??? ?????13,026.1

36%

Fortegra Financial Corp FRF 0712 – Insurance (Miscellaneous) ?????????????? 179.3

35%

XL Group plc XL 0715 – Insurance (Property & Casualty) ?????????? 8,353.8

35%

Primerica, Inc. PRI 0709 – Insurance (Life) ?????????? 1,877.3

34%

Allied World Assurance Co Hold AWH 0715 – Insurance (Property & Casualty) ?????????? 2,946.7

34%

Travelers Companies, Inc., The TRV 0715 – Insurance (Property & Casualty) ???????? 29,569.3

33%

Everest Re Group Ltd RE 0715 – Insurance (Property & Casualty) ?????????? 5,944.0

33%

Prudential Public Limited Comp PUK 0709 – Insurance (Life) ???????? 38,254.3

33%

CIGNA Corporation CI 0706 – Insurance (Accident & Health) ???????? 16,718.9

33%

United Insurance Holdings Corp UIHC 0715 – Insurance (Property & Casualty) ???????????????? 91.9

32%

Partnerre Ltd PRE 0715 – Insurance (Property & Casualty) ?????????? 5,236.2

32%

Cincinnati Financial Corporati CINF 0715 – Insurance (Property & Casualty) ?????????? 6,959.7

29%

Protective Life Corp. PL 0709 – Insurance (Life) ?????????? 2,500.8

29%

Argo Group International Holdi AGII 0715 – Insurance (Property & Casualty) ?????????????? 926.7

29%

Hallmark Financial Services, I HALL 0715 – Insurance (Property & Casualty) ?????????????? 171.6

26%

Aspen Insurance Holdings Limit AHL 0715 – Insurance (Property & Casualty) ?????????? 2,380.3

26%

Alterra Capital Holdings Ltd ALTE 0715 – Insurance (Property & Casualty) ?????????? 2,911.1

25%

Torchmark Corporation TMK 0709 – Insurance (Life) ?????????? 5,314.2

24%

Alleghany Corporation Y 0715 – Insurance (Property & Casualty) ?????????? 6,048.5

24%

Eastern Insurance Holdings Inc EIHI 0709 – Insurance (Life) ?????????????? 135.2

24%

Berkshire Hathaway Inc. BRK.A 0715 – Insurance (Property & Casualty) ????? 242,512.2

23%

Manulife Financial Corporation MFC 0709 – Insurance (Life) ???????? 26,899.6

23%

Arch Capital Group Ltd. ACGL 0715 – Insurance (Property & Casualty) ?????????? 6,188.5

22%

Enstar Group Ltd. ESGR 0715 – Insurance (Property & Casualty) ?????????? 2,006.2

22%

Axis Capital Holdings Limited AXS 0715 – Insurance (Property & Casualty) ?????????? 4,664.5

22%

Genworth Financial? Inc GNW 0709 – Insurance (Life) ?????????? 4,647.8

21%

Aon PLC AON 0712 – Insurance (Miscellaneous) ???????? 18,361.6

21%

American Equity Investment Lif AEL 0709 – Insurance (Life) ?????????????? 862.9

20%

White Mountains Insurance Grou WTM 0715 – Insurance (Property & Casualty) ?????????? 3,585.0

20%

ACE Limited ACE 0715 – Insurance (Property & Casualty) ???????? 28,999.2

20%

Markel Corporation MKL 0715 – Insurance (Property & Casualty) ?????????? 4,581.2

19%

United Fire Group, Inc. UFCS 0715 – Insurance (Property & Casualty) ?????????????? 595.0

19%

Employers Holdings, Inc. EIG 0715 – Insurance (Property & Casualty) ?????????????? 658.7

18%

W.R. Berkley Corporation WRB 0715 – Insurance (Property & Casualty) ?????????? 5,643.1

18%

Amerisafe, Inc. AMSF 0715 – Insurance (Property & Casualty) ?????????????? 517.4

18%

National Interstate Corporatio NATL 0715 – Insurance (Property & Casualty) ???????? ??????592.7

18%

Old Republic International Cor ORI 0715 – Insurance (Property & Casualty) ?????????? 2,906.0

17%

Kansas City Life Insurance Co KCLI 0709 – Insurance (Life) ?????????????? 418.7

17%

Brown & Brown, Inc. BRO 0712 – Insurance (Miscellaneous) ?????????? 3,901.8

17%

Aetna Inc. AET 0706 – Insurance (Accident & Health) ???????? 16,644.7

17%

Crawford & Company CRD.B 0712 – Insurance (Miscellaneous) ?????????????? 305.5

16%

Universal Insurance Holdings, UVE 0715 – Insurance (Property & Casualty) ?????????????? 182.4

16%

Chubb Corporation, The CB 0715 – Insurance (Property & Casualty) ???????? 21,220.1

15%

National Western Life Insuranc NWLI 0709 – Insurance (Life) ?????????????? 593.0

15%

American Financial Group AFG 0715 – Insurance (Property & Casualty) ?????????? 3,862.0

15%

Loews Corporation L 0715 – Insurance (Property & Casualty) ???????? 17,109.9

15%

Endurance Specialty Holdings L ENH 0715 – Insurance (Property & Casualty) ?????????? 1,839.7

14%

China Life Insurance Company L LFC 0709 – Insurance (Life) ???????? 91,295.3

14%

State Auto Financial STFC 0715 – Insurance (Property & Casualty) ?????????????? 602.7

14%

Principal Financial Group Inc PFG 0706 – Insurance (Accident & Health) ?????????? 9,036.6

13%

EMC Insurance Group Inc. EMCI 0715 – Insurance (Property & Casualty) ?????????????? 324.6

13%

Maiden Holdings, Ltd. MHLD 0715 – Insurance (Property & Casualty) ?????????????? 758.2

13%

RenaissanceRe Holdings Ltd. RNR 0715 – Insurance (Property & Casualty) ?????????? 3,982.5

13%

Validus Holdings, Ltd. VR 0709 – Insurance (Life) ?????????? 3,340.1

12%

Selective Insurance Group SIGI 0715 – Insurance (Property & Casualty) ?????????? 1,106.6

12%

UnitedHealth Group Inc. UNH 0706 – Insurance (Accident & Health) ???????? 57,244.5

11%

Hanover Insurance Group, Inc., THG 0715 – Insurance (Property & Casualty) ?????????? 1,821.7

11%

Cna Financial Corp CNA 0715 – Insurance (Property & Casualty) ?????????? 8,351.3

11%

ProAssurance Corporation PRA 0715 – Insurance (Property & Casualty) ?????????? 2,752.6

11%

Assured Guaranty Ltd. AGO 0715 – Insurance (Property & Casualty) ?????????? 3,264.4

11%

Marsh & McLennan Companies, In MMC 0712 – Insurance (Miscellaneous) ???????? 19,053.5

10%

Safety Insurance Group, Inc. SAFT 0715 – Insurance (Property & Casualty) ?????????????? 728.8

10%

Unico American Corporation UNAM 0715 – Insurance (Property & Casualty) ???????????????? 68.2

10%

Progressive Corporation, The PGR 0715 – Insurance (Property & Casualty) ???????? 13,682.1

10%

Independence Holding Company IHC 0709 – Insurance (Life) ?????????????? 167.3

10%

AFLAC Incorporated AFL 0706 – Insurance (Accident & Health) ???????? 25,077.1

10%

Navigators Group, Inc, The NAVG 0715 – Insurance (Property & Casualty) ?????????????? 751.0

10%

Metlife Inc MET 0709 – Insurance (Life) ???????? 41,077.8

9%

Kemper Corp KMPR 0715 – Insurance (Property & Casualty) ?????????? 1,874.3

8%

ING Groep N.V. (ADR) ING 0709 – Insurance (Life) ???????? 37,707.5

7%

Arthur J. Gallagher & Co. AJG 0712 – Insurance (Miscellaneous) ?????????? 4,502.5

7%

American National Insurance Co ANAT 0715 – Insurance (Property & Casualty) ?????????? 2,070.2

7%

Prudential Financial Inc PRU 0709 – Insurance (Life) ???????? 27,417.8

6%

StanCorp Financial Group, Inc. SFG 0706 – Insurance (Accident & Health) ?????????? 1,776.7

4%

Global Indemnity plc GBLI 0715 – Insurance (Property & Casualty) ?????????????? 535.1

4%

WellPoint, Inc. WLP 0706 – Insurance (Accident & Health) ???????? 20,092.9

3%

FBL Financial Group FFG 0709 – Insurance (Life) ?????????????? 902.6

2%

Unum Group UNM 0709 – Insurance (Life) ?????????? 6,407.6

2%

Infinity Property and Casualty IPCC 0715 – Insurance (Property & Casualty) ?????????????? 684.9

2%

Baldwin & Lyons, Inc. BWINB 0715 – Insurance (Property & Casualty) ?????????????? 340.7

1%

Molina Healthcare, Inc. MOH 0706 – Insurance (Accident & Health) ?????????? 1,357.9

-2%

Reinsurance Group of America I RGA 0706 – Insurance (Accident & Health) ?????????? 4,098.1

-2%

Assurant, Inc. AIZ 0709 – Insurance (Life) ?????????? 3,039.7

-3%

RLI Corp. RLI 0715 – Insurance (Property & Casualty) ?????????? 1,439.5

-6%

Erie Indemnity Company ERIE 0715 – Insurance (Property & Casualty) ?????????? 3,283.2

-7%

Citizens, Inc. CIA 0709 – Insurance (Life) ?????????????? 459.8

-8%

American Safety Insurance Hold ASI 0715 – Insurance (Property & Casualty) ?????????????? 196.8

-8%

Tower Group Inc TWGP 0715 – Insurance (Property & Casualty) ?????????????? 740.9

-10%

Willis Group Holdings PLC WSH 0712 – Insurance (Miscellaneous) ?????????? 6,032.0

-10%

Mercury General Corporation MCY 0715 – Insurance (Property & Casualty) ?????????? 2,183.3

-11%

OneBeacon Insurance Group, Ltd OB 0715 – Insurance (Property & Casualty) ?????????? 1,308.7

-12%

Greenlight Capital Re, Ltd. GLRE 0715 – Insurance (Property & Casualty) ?????????????? 835.9

-12%

Donegal Group Inc. DGICA 0715 – Insurance (Property & Casualty) ?????????????? 371.4

-12%

Universal American Corporation UAM 0706 – Insurance (Accident & Health) ??? ???????????801.3

-13%

Humana Inc. HUM 0706 – Insurance (Accident & Health) ???????? 11,855.7

-14%

CNinsure Inc. (ADR) CISG 0712 – Insurance (Miscellaneous) ?????????????? 330.1

-17%

Health Net, Inc. HNT 0706 – Insurance (Accident & Health) ?????????? 2,204.9

-24%

MGIC Investment Corp. MTG 0715 – Insurance (Property & Casualty) ?????????????? 581.9

-26%

MBIA Inc. MBI 0715 – Insurance (Property & Casualty) ?????????? 1,631.2

-30%

Meadowbrook Insurance Group, I MIG 0715 – Insurance (Property & Casualty) ?????????????? 318.1

-36%

Phoenix Companies, Inc., The PNX 0709 – Insurance (Life) ?????????????? 156.1

-36%

Life Partners Holdings, Inc. LPHI 0712 – 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

Sorted Weekly Tweets

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

An Echo, but not Sound

Time for my penny stock scoreboard:

Ticker Date of Article Price @ Article Price @ 1/24/13 Decline Annualized Splits
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

On Insurance Investing, Part 2

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:

company ticker sic img_desc mktcap Growth of FCBV
Life Partners Holdings, Inc. LPHI 6411 0712 – Insurance (Miscellaneous)

50.7

76%

Universal Insurance Holdings, UVE 6331 0715 – Insurance (Property & Casualty)

185.2

75%

CNinsure Inc. (ADR) CISG 6411 0712 – Insurance (Miscellaneous)

337.6

56%

Amtrust Financial Services, In AFSI 6331 0715 – Insurance (Property & Casualty)

2,128.7

38%

Employers Holdings, Inc. EIG 6331 0715 – Insurance (Property & Casualty)

652.6

32%

Enstar Group Ltd. ESGR 6331 0715 – Insurance (Property & Casualty)

1,951.0

26%

Tower Group Inc TWGP 6331 0715 – Insurance (Property & Casualty)

734.8

25%

Amerisafe, Inc. AMSF 6331 0715 – Insurance (Property & Casualty)

508.5

23%

Humana Inc. HUM 6324 0706 – Insurance (Accident & Health)

11,297.2

21%

Allied World Assurance Co Hold AWH 6331 0715 – Insurance (Property & Casualty)

2,856.1

21%

Arthur J. Gallagher & Co. AJG 6411 0712 – Insurance (Miscellaneous)

4,441.2

20%

Willis Group Holdings PLC WSH 6411 0712 – Insurance (Miscellaneous)

6,009.5

20%

China Life Insurance Company L LFC 6311 0709 – Insurance (Life)

94,339.3

20%

ProAssurance Corporation PRA 6331 0715 – Insurance (Property & Casualty)

2,698.5

19%

RenaissanceRe Holdings Ltd. RNR 6331 0715 – Insurance (Property & Casualty)

3,949.8

18%

National Interstate Corporatio NATL 6331 0715 – Insurance (Property & Casualty)

576.7

18%

Argo Group International Holdi AGII 6331 0715 – Insurance (Property & Casualty)

910.3

17%

Brown & Brown, Inc. BRO 6411 0712 – Insurance (Miscellaneous)

3,851.4

17%

AFLAC Incorporated AFL 6321 0706 – Insurance (Accident & Health)

24,134.6

16%

Endurance Specialty Holdings L ENH 6331 0715 – Insurance (Property & Casualty)

1,796.8

16%

W.R. Berkley Corporation WRB 6331 0715 – Insurance (Property & Casualty)

5,455.7

15%

American Financial Group AFG 6331 0715 – Insurance (Property & Casualty)

3,772.7

15%

Horace Mann Educators Corporat HMN 6331 0715 – Insurance (Property & Casualty)

830.9

15%

Eastern Insurance Holdings Inc EIHI 6311 0709 – Insurance (Life)

135.5

15%

Validus Holdings, Ltd. VR 6331 0709 – Insurance (Life)

3,296.1

15%

CIGNA Corporation CI 6324 0706 – Insurance (Accident & Health)

16,104.2

14%

Reinsurance Group of America I RGA 6321 0706 – Insurance (Accident & Health)

4,143.2

14%

Safety Insurance Group, Inc. SAFT 6331 0715 – Insurance (Property & Casualty)

715.6

14%

Chubb Corporation, The CB 6331 0715 – Insurance (Property & Casualty)

20,701.5

13%

Loews Corporation L 6331 0715 – Insurance (Property & Casualty)

16,854.0

13%

ACE Limited ACE 6351 0715 – Insurance (Property & Casualty)

28,285.6

13%

HCC Insurance Holdings, Inc. HCC 6331 0715 – Insurance (Property & Casualty)

3,937.5

13%

Travelers Companies, Inc., The TRV 6331 0715 – Insurance (Property & Casualty)

29,108.4

13%

Coventry Health Care, Inc. CVH 6324 0706 – Insurance (Accident & Health)

6,080.9

12%

Markel Corporation MKL 6331 0715 – Insurance (Property & Casualty)

4,456.4

12%

Torchmark Corporation TMK 6311 0709 – Insurance (Life)

5,103.5

12%

UnitedHealth Group Inc. UNH 6324 0706 – Insurance (Accident & Health)

55,732.6

12%

Partnerre Ltd PRE 6331 0715 – Insurance (Property & Casualty)

5,116.2

12%

Meadowbrook Insurance Group, I MIG 6331 0715 – Insurance (Property & Casualty)

311.6

12%

StanCorp Financial Group, Inc. SFG 6321 0706 – Insurance (Accident & Health)

1,704.1

12%

Prudential Financial Inc PRU 6311 0709 – Insurance (Life)

26,777.4

12%

Infinity Property and Casualty IPCC 6331 0715 – Insurance (Property & Casualty)

688.6

12%

Assurant, Inc. AIZ 6311 0709 – Insurance (Life)

2,935.0

12%

Greenlight Capital Re, Ltd. GLRE 6331 0715 – Insurance (Property & Casualty)

837.4

12%

Progressive Corporation, The PGR 6331 0715 – Insurance (Property & Casualty)

13,738.8

11%

Protective Life Corp. PL 6311 0709 – Insurance (Life)

2,451.0

11%

Axis Capital Holdings Limited AXS 6331 0715 – Insurance (Property & Casualty)

4,508.1

11%

Molina Healthcare, Inc. MOH 6324 0706 – Insurance (Accident & Health)

1,300.1

11%

American Equity Investment Lif AEL 6311 0709 – Insurance (Life)

834.1

11%

Symetra Financial Corporation SYA 6311 0709 – Insurance (Life)

1,578.3

11%

Aon PLC AON 6411 0712 – Insurance (Miscellaneous)

18,199.1

10%

Mercury General Corporation MCY 6331 0715 – Insurance (Property & Casualty)

2,169.0

10%

Everest Re Group Ltd RE 6331 0715 – Insurance (Property & Casualty)

5,843.7

10%

American Safety Insurance Hold ASI 6331 0715 – Insurance (Property & Casualty)

197.1

10%

Prudential Public Limited Comp PUK 6311 0709 – Insurance (Life)

38,071.4

10%

Aspen Insurance Holdings Limit AHL 6331 0715 – Insurance (Property & Casualty)

2,324.9

10%

Berkshire Hathaway Inc. BRK.A 6331 0715 – Insurance (Property & Casualty)

236,577.4

9%

EMC Insurance Group Inc. EMCI 6331 0715 – Insurance (Property & Casualty)

326.3

9%

RLI Corp. RLI 6331 0715 – Insurance (Property & Casualty)

1,439.1

9%

Hanover Insurance Group, Inc., THG 6331 0715 – Insurance (Property & Casualty)

1,781.6

9%

Unico American Corporation UNAM 6331 0715 – Insurance (Property & Casualty)

66.6

9%

Montpelier Re Holdings Ltd. MRH 6331 0715 – Insurance (Property & Casualty)

1,318.1

9%

Seabright Holdings Inc SBX 6331 0715 – Insurance (Property & Casualty)

249.0

9%

Alleghany Corporation Y 6331 0715 – Insurance (Property & Casualty)

5,950.7

8%

Hallmark Financial Services, I HALL 6331 0715 – Insurance (Property & Casualty)

176.8

8%

White Mountains Insurance Grou WTM 6331 0715 – Insurance (Property & Casualty)

3,509.0

8%

Investors Title Company ITIC 6361 0715 – Insurance (Property & Casualty)

139.1

8%

Marsh & McLennan Companies, In MMC 6411 0712 – Insurance (Miscellaneous)

19,020.9

8%

FBL Financial Group FFG 6311 0709 – Insurance (Life)

869.4

8%

Erie Indemnity Company ERIE 6331 0715 – Insurance (Property & Casualty)

3,264.4

8%

Metlife Inc MET 6311 0709 – Insurance (Life)

39,615.8

8%

Aetna Inc. AET 6324 0706 – Insurance (Accident & Health)

15,698.1

8%

WellPoint, Inc. WLP 6324 0706 – Insurance (Accident & Health)

19,054.4

8%

Hilltop Holdings Inc. HTH 6331 0715 – Insurance (Property & Casualty)

773.3

8%

Citizens, Inc. CIA 6311 0709 – Insurance (Life)

485.8

7%

Donegal Group Inc. DGICA 6331 0715 – Insurance (Property & Casualty)

370.9

7%

National Western Life Insuranc NWLI 6311 0709 – Insurance (Life)

596.1

7%

Navigators Group, Inc, The NAVG 6331 0715 – Insurance (Property & Casualty)

766.0

7%

Kemper Corp KMPR 6331 0715 – Insurance (Property & Casualty)

1,842.8

7%

Allstate Corporation, The ALL 6331 0715 – Insurance (Property & Casualty)

20,817.6

7%

Cna Financial Corp CNA 6331 0715 – Insurance (Property & Casualty)

7,982.2

6%

Lincoln National Corporation LNC 6311 0709 – Insurance (Life)

7,626.2

6%

Arch Capital Group Ltd. ACGL 6331 0715 – Insurance (Property & Casualty)

6,084.7

6%

Platinum Underwriters Holdings PTP 6331 0715 – Insurance (Property & Casualty)

1,565.0

6%

Baldwin & Lyons, Inc. BWINB 6331 0715 – Insurance (Property & Casualty)

339.5

5%

Selective Insurance Group SIGI 6331 0715 – Insurance (Property & Casualty)

1,086.8

5%

United Fire Group, Inc. UFCS 6331 0715 – Insurance (Property & Casualty)

587.9

5%

Universal American Corporation UAM 6324 0706 – Insurance (Accident & Health)

793.6

5%

Principal Financial Group Inc PFG 6321 0706 – Insurance (Accident & Health)

8,663.8

5%

American National Insurance Co ANAT 6331 0715 – Insurance (Property & Casualty)

2,055.2

4%

Kansas City Life Insurance Co KCLI 6311 0709 – Insurance (Life)

416.9

4%

Cincinnati Financial Corporati CINF 6331 0715 – Insurance (Property & Casualty)

6,771.0

3%

Independence Holding Company IHC 6311 0709 – Insurance (Life)

169.1

3%

State Auto Financial STFC 6331 0715 – Insurance (Property & Casualty)

582.5

3%

Unum Group UNM 6311 0709 – Insurance (Life)

6,190.3

3%

Sun Life Financial Inc. (USA) SLF 6311 0709 – Insurance (Life)

17,283.4

3%

Alterra Capital Holdings Ltd ALTE 6331 0715 – Insurance (Property & Casualty)

2,861.2

3%

Assured Guaranty Ltd. AGO 6351 0715 – Insurance (Property & Casualty)

2,911.2

3%

Fidelity National Financial In FNF 6361 0715 – Insurance (Property & Casualty)

5,838.5

3%

Atlantic American Corporation AAME 6311 0709 – Insurance (Life)

69.2

2%

Health Net, Inc. HNT 6324 0706 – Insurance (Accident & Health)

2,140.7

2%

Hartford Financial Services Gr HIG 6331 0715 – Insurance (Property & Casualty)

10,641.6

2%

ING Groep N.V. (ADR) ING 6311 0709 – Insurance (Life)

37,878.4

2%

Manulife Financial Corporation MFC 6311 0709 – Insurance (Life)

26,357.8

2%

Genworth Financial? Inc GNW 6311 0709 – Insurance (Life)

4,500.3

2%

AEGON N.V. (ADR) AEG 6311 0709 – Insurance (Life)

13,073.0

1%

Old Republic International Cor ORI 6351 0715 – Insurance (Property & Casualty)

2,994.2

1%

OneBeacon Insurance Group, Ltd OB 6331 0715 – Insurance (Property & Casualty)

1,328.8

0%

Global Indemnity plc GBLI 6331 0715 – Insurance (Property & Casualty)

555.8

-4%

CNO Financial Group Inc CNO 6311 0709 – Insurance (Life)

2,192.9

-5%

Crawford & Company CRD.B 6411 0712 – Insurance (Miscellaneous)

326.7

-5%

Stewart Information Services C STC 6361 0715 – Insurance (Property & Casualty)

536.7

-9%

XL Group plc XL 6331 0715 – Insurance (Property & Casualty)

8,182.5

-9%

Phoenix Companies, Inc., The PNX 6311 0709 – Insurance (Life)

155.4

-14%

First Acceptance Corporation FAC 6331 0715 – Insurance (Property & Casualty)

51.2

-17%

Radian Group Inc. RDN 6351 0715 – Insurance (Property & Casualty)

820.6

-23%

MBIA Inc. MBI 6351 0715 – Insurance (Property & Casualty)

1,561.5

-24%

Kingsway Financial Services In KFS 6331 0715 – Insurance (Property & Casualty)

53.4

-25%

MGIC Investment Corp. MTG 6351 0715 – Insurance (Property & Casualty)

567.7

-28%

American International Group, AIG 6331 0715 – Insurance (Property & Casualty)

51,803.5

-32%

eHealth, Inc. EHTH 6411 0712 – Insurance (Miscellaneous)

501.2

Maiden Holdings, Ltd. MHLD 6331 0715 – Insurance (Property & Casualty)

725.7

United Insurance Holdings Corp UIHC 6331 0715 – Insurance (Property & Casualty)

92.7

Homeowners Choice, Inc. HCI 6331 0715 – Insurance (Property & Casualty)

240.0

Verisk Analytics, Inc. VRSK 6411 0712 – Insurance (Miscellaneous)

9,103.9

Primerica, Inc. PRI 6311 0709 – Insurance (Life)

1,868.1

First American Financial Corp FAF 6361 0715 – Insurance (Property & Casualty)

2,648.6

Imperial Holdings, Inc. IFT 6411 0712 – Insurance (Miscellaneous)

86.3

Fortegra Financial Corp FRF 6411 0712 – 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

On Insurance Investing, Part 1

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:

Company Ticker Industry % of shares remaining since 2005
WellPoint, Inc. WLP 0706 – Insurance (Accident & Health)

52%

Infinity Property and Casualty IPCC 0715 – Insurance (Property & Casualty)

56%

Travelers Companies, Inc., The TRV 0715 – Insurance (Property & Casualty)

57%

Aetna Inc. AET 0706 – Insurance (Accident & Health)

58%

Employers Holdings, Inc. EIG 0715 – Insurance (Property & Casualty)

59%

White Mountains Insurance Grou WTM 0715 – Insurance (Property & Casualty)

60%

Torchmark Corporation TMK 0709 – Insurance (Life)

61%

Assurant, Inc. AIZ 0709 – Insurance (Life)

61%

Chubb Corporation, The CB 0715 – Insurance (Property & Casualty)

67%

Erie Indemnity Company ERIE 0715 – Insurance (Property & Casualty)

68%

RenaissanceRe Holdings Ltd. RNR 0715 – Insurance (Property & Casualty)

69%

Endurance Specialty Holdings L ENH 0715 – Insurance (Property & Casualty)

69%

Loews Corporation L 0715 – Insurance (Property & Casualty)

71%

Allied World Assurance Co Hold AWH 0715 – Insurance (Property & Casualty)

71%

W.R. Berkley Corporation WRB 0715 – Insurance (Property & Casualty)

72%

Health Net, Inc. HNT 0706 – Insurance (Accident & Health)

72%

Platinum Underwriters Holdings PTP 0715 – Insurance (Property & Casualty)

72%

Allstate Corporation, The ALL 0715 – Insurance (Property & Casualty)

73%

CIGNA Corporation CI 0706 – Insurance (Accident & Health)

75%

UnitedHealth Group Inc. UNH 0706 – Insurance (Accident & Health)

77%

Progressive Corporation, The PGR 0715 – Insurance (Property & Casualty)

78%

Montpelier Re Holdings Ltd. MRH 0715 – Insurance (Property & Casualty)

78%

Verisk Analytics, Inc. VRSK 0712 – Insurance (Miscellaneous)

78%

American Financial Group AFG 0715 – Insurance (Property & Casualty)

80%

StanCorp Financial Group, Inc. SFG 0706 – Insurance (Accident & Health)

80%

Primerica, Inc. PRI 0709 – Insurance (Life)

80%

Investors Title Company ITIC 0715 – Insurance (Property & Casualty)

81%

Hanover Insurance Group, Inc., THG 0715 – Insurance (Property & Casualty)

83%

Coventry Health Care, Inc. CVH 0706 – Insurance (Accident & Health)

84%

RLI Corp. RLI 0715 – Insurance (Property & Casualty)

84%

Kemper Corp KMPR 0715 – Insurance (Property & Casualty)

84%

Axis Capital Holdings Limited AXS 0715 – Insurance (Property & Casualty)

85%

First Acceptance Corporation FAC 0715 – Insurance (Property & Casualty)

86%

Everest Re Group Ltd RE 0715 – Insurance (Property & Casualty)

89%

Eastern Insurance Holdings Inc EIHI 0709 – Insurance (Life)

90%

Prudential Financial Inc PRU 0709 – Insurance (Life)

91%

Horace Mann Educators Corporat HMN 0715 – Insurance (Property & Casualty)

92%

FBL Financial Group FFG 0709 – Insurance (Life)

92%

AFLAC Incorporated AFL 0706 – Insurance (Accident & Health)

93%

Cincinnati Financial Corporati CINF 0715 – Insurance (Property & Casualty)

93%

Kansas City Life Insurance Co KCLI 0709 – Insurance (Life)

93%

Kingsway Financial Services In KFS 0715 – Insurance (Property & Casualty)

93%

HCC Insurance Holdings, Inc. HCC 0715 – Insurance (Property & Casualty)

94%

Unum Group UNM 0709 – Insurance (Life)

94%

EMC Insurance Group Inc. EMCI 0715 – Insurance (Property & Casualty)

95%

eHealth, Inc. EHTH 0712 – Insurance (Miscellaneous)

95%

OneBeacon Insurance Group, Ltd OB 0715 – Insurance (Property & Casualty)

95%

Aspen Insurance Holdings Limit AHL 0715 – Insurance (Property & Casualty)

96%

Unico American Corporation UNAM 0715 – Insurance (Property & Casualty)

97%

Markel Corporation MKL 0715 – Insurance (Property & Casualty)

98%

Safety Insurance Group, Inc. SAFT 0715 – Insurance (Property & Casualty)

98%

Humana Inc. HUM 0706 – Insurance (Accident & Health)

99%

Atlantic American Corporation AAME 0709 – Insurance (Life)

100%

State Auto Financial STFC 0715 – Insurance (Property & Casualty)

100%

A.F.P Provida SA (ADR) PVD 0718 – Investment Services

100%

American National Insurance Co ANAT 0715 – Insurance (Property & Casualty)

101%

Baldwin & Lyons, Inc. BWINB 0715 – Insurance (Property & Casualty)

101%

Mercury General Corporation MCY 0715 – Insurance (Property & Casualty)

101%

Marsh & McLennan Companies, In MMC 0712 – Insurance (Miscellaneous)

101%

National Western Life Insuranc NWLI 0709 – Insurance (Life)

101%

Brown & Brown, Inc. BRO 0712 – Insurance (Miscellaneous)

101%

Selective Insurance Group SIGI 0715 – Insurance (Property & Casualty)

101%

Sun Life Financial Inc. (USA) SLF 0709 – Insurance (Life)

101%

Life Partners Holdings, Inc. LPHI 0712 – Insurance (Miscellaneous)

101%

Aon PLC AON 0712 – Insurance (Miscellaneous)

102%

ProAssurance Corporation PRA 0715 – Insurance (Property & Casualty)

102%

Principal Financial Group Inc PFG 0706 – Insurance (Accident & Health)

102%

First American Financial Corp FAF 0715 – Insurance (Property & Casualty)

102%

China Life Insurance Company L LFC 0709 – Insurance (Life)

103%

Genworth Financial? Inc GNW 0709 – Insurance (Life)

103%

Navigators Group, Inc, The NAVG 0715 – Insurance (Property & Casualty)

104%

National Interstate Corporatio NATL 0715 – Insurance (Property & Casualty)

104%

Amerisafe, Inc. AMSF 0715 – Insurance (Property & Casualty)

104%

Cna Financial Corp CNA 0715 – Insurance (Property & Casualty)

105%

Donegal Group Inc. DGICA 0715 – Insurance (Property & Casualty)

106%

Stewart Information Services C STC 0715 – Insurance (Property & Casualty)

106%

Berkshire Hathaway Inc. BRK.A 0715 – Insurance (Property & Casualty)

107%

Prudential Public Limited Comp PUK 0709 – Insurance (Life)

107%

Willis Group Holdings PLC WSH 0712 – Insurance (Miscellaneous)

107%

Crawford & Company CRD.B 0712 – Insurance (Miscellaneous)

111%

Old Republic International Cor ORI 0715 – Insurance (Property & Casualty)

112%

Molina Healthcare, Inc. MOH 0706 – Insurance (Accident & Health)

112%

United Fire Group, Inc. UFCS 0715 – Insurance (Property & Casualty)

113%

Partnerre Ltd PRE 0715 – Insurance (Property & Casualty)

113%

Protective Life Corp. PL 0709 – Insurance (Life)

114%

Manulife Financial Corporation MFC 0709 – Insurance (Life)

114%

Independence Holding Company IHC 0709 – Insurance (Life)

116%

ACE Limited ACE 0715 – Insurance (Property & Casualty)

116%

Reinsurance Group of America I RGA 0706 – Insurance (Accident & Health)

118%

Citizens, Inc. CIA 0709 – Insurance (Life)

119%

Universal Insurance Holdings, UVE 0715 – Insurance (Property & Casualty)

121%

Phoenix Companies, Inc., The PNX 0709 – Insurance (Life)

122%

AEGON N.V. (ADR) AEG 0709 – Insurance (Life)

124%

Symetra Financial Corporation SYA 0709 – Insurance (Life)

124%

Arch Capital Group Ltd. ACGL 0715 – Insurance (Property & Casualty)

127%

Fidelity National Financial In FNF 0715 – Insurance (Property & Casualty)

128%

Hilltop Holdings Inc. HTH 0715 – Insurance (Property & Casualty)

130%

Arthur J. Gallagher & Co. AJG 0712 – Insurance (Miscellaneous)

131%

ING Groep N.V. (ADR) ING 0709 – Insurance (Life)

135%

Argo Group International Holdi AGII 0715 – Insurance (Property & Casualty)

136%

Seabright Holdings Inc SBX 0715 – Insurance (Property & Casualty)

138%

Global Indemnity plc GBLI 0715 – Insurance (Property & Casualty)

141%

Metlife Inc MET 0709 – Insurance (Life)

143%

MBIA Inc. MBI 0715 – Insurance (Property & Casualty)

145%

Hartford Financial Services Gr HIG 0715 – Insurance (Property & Casualty)

146%

American Safety Insurance Hold ASI 0715 – Insurance (Property & Casualty)

150%

CNO Financial Group Inc CNO 0709 – Insurance (Life)

153%

Universal American Corporation UAM 0706 – Insurance (Accident & Health)

153%

Radian Group Inc. RDN 0715 – Insurance (Property & Casualty)

155%

American Equity Investment Lif AEL 0709 – Insurance (Life)

159%

Hallmark Financial Services, I HALL 0715 – Insurance (Property & Casualty)

160%

Validus Holdings, Ltd. VR 0709 – Insurance (Life)

160%

Lincoln National Corporation LNC 0709 – Insurance (Life)

161%

Enstar Group Ltd. ESGR 0715 – Insurance (Property & Casualty)

169%

Meadowbrook Insurance Group, I MIG 0715 – Insurance (Property & Casualty)

172%

Greenlight Capital Re, Ltd. GLRE 0715 – Insurance (Property & Casualty)

173%

Alleghany Corporation Y 0715 – Insurance (Property & Casualty)

191%

Tower Group Inc TWGP 0715 – Insurance (Property & Casualty)

196%

Alterra Capital Holdings Ltd ALTE 0715 – Insurance (Property & Casualty)

197%

CNinsure Inc. (ADR) CISG 0712 – Insurance (Miscellaneous)

208%

XL Group plc XL 0715 – Insurance (Property & Casualty)

215%

MGIC Investment Corp. MTG 0715 – Insurance (Property & Casualty)

220%

Amtrust Financial Services, In AFSI 0715 – Insurance (Property & Casualty)

259%

Assured Guaranty Ltd. AGO 0715 – Insurance (Property & Casualty)

262%

American International Group, AIG 0715 – 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

2012 Financial Report of the US Government

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

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

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.

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