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Archive for February 15th, 2013

Questions from Readers

Friday, February 15th, 2013

From a reader:

I have enjoyed reading your blog for the past few years. I started researching some insurance companies and went to some of your posts to help me get a better understanding of their financials. In one of your posts you talk about RGA trading below TBV and TBV ex AOCI. Why do you exclude AOCI from TBV?  Do insurance companies trade on ex AOCI multiples or regular BV and TBV multiples?

  • BV -> Book Value
  • TBV -> Tangible Book Value
  • RGA -> One great life reinsurer, Reinusurance Group of America.
  • AOCI -> Accumulated Other Comprehensive Income

We typically exclude AOCI from book value, because AOCI stems from one time events, or things that may revert.  That said, insurance stocks they tend to react to book value prior to any adjustments.  Maybe the answer is this: unless we think the AOCI should revert, the AOCI should be credited to the value of the firm, though ignored by its operating income.

In this low interest rate environment, many bonds trade above the prices at which they were purchased.  Unrealized Capital Gains are usually one of the biggest items in AOCI.  Sadly, only the asset values rise when rates fall, because liabilities aren’t publicly traded, and as such have no price to mark to market.  With life companies, because of the longer tail of obligations, and the capitalizing of deferred acquisition costs (DAC, which is a discounted measure) the unrealized capital gains are applied to reduce the DAC.  DAC, though intangible, is a hard intangible, because there are are cash flows behind it, and if those cash flows are insufficient to repay the DAC asset, the asset gets written down.

Most insurance analysts as a result exclude AOCI from book value for valuation purposes; they think it will disappear when rates rise.  Now that said, I have read research that indicates that insurance stocks track unadjusted book value more than BV less AOCI.  If true, I think that works better for short-tail insurers, because discounting of liabilities does not have so much impact.

I look at it all and kind of shrug.  After that, I do some digging to analyze whether some components of AOCI might be more permanent than otherwise considered.

Insurance stocks mostly trade in line with their book value.  I have been around long enough to see the average multiple move in the range of 0.5x to 2.0x.  Be aware of where we are in the range, and whether pricing power is rising of falling.

From another reader:

I stumbled upon your blog post regarding generating ideas. I too use google alerts to fill the inbox. Unfortunately, I have been unhappy with the results so far. I have attached my alerts (with some culling of personal ones), which can be generated from the bottom of the manage alerts page. 

 I was hoping that you would do likewise and send me your fruitful query strings. 

It would be greatly appreciated.

My Googlebots use the following phrases:


  • CEO resigned
  • CEO “Steps down”
  • CEO fired

Now, creating good Googlebots takes time and effort, trial and error.  I typically create them for a specific task, and when that task is complete, I retire them.  My biggest success with Googlebots occurred in 2005, when they detected the peak in the housing market.  I had about 10 Googlebots working to pick up market chatter.  In October 2005, they went through a dramatic change, where the chatter was confused, and the speed of the closing for housing sales dropped dramatically.  After that, the chatter was subdued.  I posted my result at RealMoney’s Columnist Conversation sometime in October, and told my boss that though credit conditions were still loose, the wind was now at our back on housing prices.  We were “too early” bears on housing, and I was the one skeptic in the shop on the timing of that.

That’s all for now.


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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