Search Results for “enh insurance”

On Insurance Investing, Part 6

Posted on 11 May 2013 by David Merkel

This piece is the sixth out of seven in a series that I have been writing at Aleph Blog.? Here are links to the first five pieces:

On Insurance Investing, Part 1 (reducing share count)
On Insurance Investing, Part 2 (growing fully convertible book value per share)
On Insurance Investing, Part 3 (price momentum and mean reversion)
On Insurance Investing, Part 4 (Management & reserving conservatism)
On Insurance Investing, Part 5 (Management quality & product quality)

Recently I decided to spend some time analyzing the insurance industry.? It?s a different place today than when I became a buy-side analyst ten years ago.? Why?

First, for practical purposes, all of the insurers of credit are gone.? Yes, we have Assured Guaranty, and MBIA is limping along. Old Republic still exists. Radian and MGIC exist in reduced states.? The rest have disappeared.? In one sense, this should not have been a surprise, because the mortgage and credit guaranty businesses never had a scientific model for reserving.? I?m not even sure it is possible to have that.

Second, the title insurers are diminished.? Some, like LandAmerica are gone. Fidelity National seems to be diversifying itself out of insurance, buying up a restaurant chain last year.

Third, health insurers face an uncertain future.? Obamacare may disappear, or Obamacare could slowly eliminate insurers.? It?s a mess.? Insurers debate to what degree they should compete in insurance exchanges.

But beyond all of that, valuations are fair-to-cheap across the insurance industry.? Part of that may stem from ETFs.? Insurers as a whole are smaller than the banks, but not as much smaller as they used to be.? Now, if you are a hedge fund, and you want to short banks, you probably have the best liquidity shorting a basket of financials, which shorts insurers as well.

That may be part of the issue.? There are other aspects, which I will try to address as I go through subindustries.

Offshore

By ?Offshore? I mean P&C reinsurers and secondarily insurers that do business significantly in the US, and who list primarily on US exchanges, but are not based in the US.? Most of them are located in Bermuda.

In 2011-2012, many of them were challenged by the high levels of catastrophes globally.? But the prices of the reinsurers did not fall because pricing power returned, and investors expect higher future earnings as a result.

Before I go on, I need to explain that what I will use to give a rough analysis of value is a Price-to-Book vs Return on Equity analysis [PB-ROE].? For more details, you can read my article here.? The short explanation is that companies in the insurance business (and other financials) are constrained by the amount of equity (net worth) that they have.? The ability to earn a return as a percentage of the equity [ROE] drives the market valuation as a fraction of the equity [P/B].

Here is a scatterplot for PB-ROE for the Offshore group:

Companies above the line may be overvalued, and companies below the line may be undervalued.? ROE is what is expected by analysts for the next fiscal year, not what has been obtained in the past.

The fit is fairly tight, and indicates mostly logical valuations for this group.? The companies that are possibly overvalued are: Arch Capital [ACGL] and Renaissance Re [RNR]. Possibly undervalued: Tower Group [TWGP] and Endurance Specialty [ENH].

Now, this simple model can fail if you have an intelligent management team that has a better model.? Arch Capital and Renaissance Re may be that.? But with an expected ROE of less than 20%, it is hard to justify their valuation, when the average stock in this group needs an expected 11% ROE to be valued at book.

Why such a high ROE to get book?? Earnings quality.? Reinsurers have noisy earnings due to catastrophes.? You don?t give high valuations to companies that run hot or cold.? But the trick here is to see who is accumulating book value the fastest ? they tend to be the stars over time.? Endurance and Arch have been good at that.

Life

The life insurance business would be simple, if it indeed were only life insurance.? Much of the industry is handed over to annuities, and all manner of asset gathering.? Even life insurance can be made more complex through variable and variable universal life, where assets are invested in stocks, and do not receive a rate from the company.

Part of the trouble is that variable products are not simple, but the insurers offer guarantees for a fee.? When I see those products, my reaction is usually, ?How do they hedge that?!?

Thus I am concerned for insurers that are ?equity-sensitive? as I reckon them.? Here is the PB-ROE scatterplot:

A tight fit.? The insurers that are seemingly undervalued are equity-sensitive ones: Phoenix Companies [PNX], Aegon [AEG], and ING [ING].? Those that are overvalued are Citizens [CIA], Eastern Insurance Holdings [EIHI], and Atlantic American [AAME].? For the undervalued companies, I am unlikely to buy because I am skeptical of the accounting.? I would look further down the list and consider buying some companies that are more reliable, like Assurant [AIZ], National Western [NWLI], and Fortegra Financial Corp [FRF].

One more note: to get book value in Life Insurance, you need a 9.8% ROE on average.? That?s high, but I expect that is so because investors are skeptical about the accounting.

Property & Casualty

This graph gives PB-ROE for the entire onshore P&C insurance industry:

It?s a good fit.? Again, the casualties of the last year weigh on the property-centric insurers, but for the most part, this is logical.

Potential underperformers include First Acceptance [FAC], Employers Holdings [EIG], and Erie Indemnity [ERIE].? Below the line: Hartford Financial Services [HIG], Hilltop Holdings [HTH] Hartford Financial [HIG], and United Insurance Holdings [USIH].

Again, these are only screening tools.? Before buying or selling, understanding management and reserving quality, and riskiness of the lines of business makes a considerable difference.? Erie Indemnity has an ?asset light? model where it manages insurers, but does not bear underwriting risk.? Hartford has a significant life insurance and annuity exposure.? Models are models, and we have to understand their limitations.

Health

With Obamacare, I don?t know which end is up.? It could end up being a giant sop to the health insurers, or it could destroy the health insurers in order to create a government single-payer model, rather than the optimal model for cost reduction, where first parties pay directly, or pay insurers.? You want reductions in medical costs, get the government out of healthcare, and that includes the corporate deduction for employee health insurance.

My rationale is this: it could mess up the private market enough that the solution reached for is a single payer solution. I?ve talked with a decent number of health actuaries on this. The ability to price risk is distinctly limited. Young people pay too much, older folks too little. That?s a formula for antiselection. I think Obamacare was badly designed. I will not achieve its ends, and when the expenses start coming in, they will be far higher than anticipated. That has been the experience of the government in health care in the US. Utilization is underestimated, the further removed people from feeling its costs.

There are many models for profitability here, which makes things complex, but here is the present PB-ROE graph:

It?s an okay fit, with the idea that the following companies might be undervalued: Wellpoint [WLP] and Humana [HUM].? And the following overvalued: ?Molina Healthcare [MOH].

I don?t regard myself as an expert on the health insurance sub-industry, so treat this with skepticism.? I include it for completeness, because I think the PB-ROE concept has value in insurance.? One more note, the PB-ROE model thinks of this as a safe investment subindustry, because to have a book value valuation, you have to have an ROE of 1.8%.

Financial Insurers

This group comprises the surviving mortgage, title and financial insurers, and two companies in the ghoulish business of buying life insurance policies from sick people.? Here?s the PB-ROE graph:

This graph is weird, because it slopes down, and does not have a good fit.? That?s because we?ve been through a rough period financially, and in many cases GAAP accounting does not do a good job with these companies that take a lot of credit risk.

We can still look for companies that have high price-to-book, and low ROEs ? note Life Partners [LPHI] and Radian [RDN] as possible sell candidates. We can also look for companies that have low price-to-book, and high ROEs ? note Assured Guaranty [AGO] and MBIA [MBI] as possible buy candidates.

This subsector is more difficult than most, because credit is not an underwritable risk.? It is feast and famine.? We are in a period of feast now, so in some ways what is bad is good.? The more risk, the more return.? But winter may come soon ? who knows what the Fed may do?? In general, I avoid this subsector for longs.

Insurance-Related Companies

This is a group that is a non-group.? It?comprises brokers and insurance service providers.? Here?s the PB-ROE graph:

It doesn?t look like much of a group.

As it is the potential outperformers include?Brown & Brown [BRO], and Aon [AON], two leading insurance brokers.? A potential underperformer Willis Group [WSH], another leading insurance broker.

Summary

Insurance is complex, and the accounting is doubly complex, which is a major reason why many stay away from it.? But insurers as a group have had reliable and outsized returns over the rememberable past, which should encourage us to do a little kicking of the tires when a decent amount of the industry trades below its net worth and is still earning money with little debt.

In my opinion, this is a recipe for earnings in the future, and why I own a lot of insurers for myself, and for clients.

In the final part of this series, I will go over some nuances of insurance accounting ? I leave it to the end because it is kind of dull, but can make a lot of difference, because some companies look cheap and aren?t really cheap.

Full disclosure: long AIZ, ENH, NWLI for clients and myself

On Insurance Investing, Part 3

Posted on 26 January 201329 January 2013 by David Merkel

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.

On Insurance Investing, Part 2

Posted on 24 January 2013 by David Merkel

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

Posted on 23 January 2013 by David Merkel

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.

Thinking about the Insurance Industry

Posted on 25 February 201225 February 2012 by David Merkel

Recently I decided to spend some time analyzing the insurance industry.? It?s a different place today than when I became a buy-side analyst nine years ago.? Why?

Second, the title insurers are diminished.? Some, like LandAmerica are gone. Fidelity National seems to be diversifying itself out of insurance, recently buying up a restaurant chain.

Third, health insurers face an uncertain future.? Obamacare may disappear, or Obamacare could slowly eliminate insurers.? It?s a mess.

But beyond all of that, valuations are depressed across the insurance industry.? Part of that may stem from ETFs.? Insurers as a whole are smaller than the banks, but not as much smaller as they used to be.? Now, if you are a hedge fund, and you want to short banks, you probably have the best liquidity shorting a basket of financials, which shorts insurers as well.

That may be part of the issue.? There are other aspects, which I will try to address as I go through subindustries.

Offshore

In 2011, many of them were challenged by the high levels of catastrophes globally.? But the prices of the reinsurers did not fall because pricing power returned, and investors expect higher future earnings as a result.

Here is a scatterplot for PB-ROE for the Offshore group:

Companies above the line may be overvalued, and companies below the line may be undervalued.? ROE is what is expected by analysts for the next fiscal year, not what has been obtained in the past.

The fit is fairly tight, and indicates mostly logical valuations for this group.? The companies that are possibly overvalued are: Arch Capital [ACGL] and Global Indemnity [GBLI]. Possibly undervalued: Everest Re [RE] and Endurance Specialty [ENH].

Now, this simple model can fail if you have an intelligent management team that has a better model.? Arch Capital may be that.? But with an expected ROE of less than 10%, it is hard to justify their valuation, when the average stock in this group needs an expected 13% ROE to be valued at book.

Life

Part of the trouble is that variable products are not simple, but the insurers offer guarantees for a fee.? When I see those products, my reaction is usually, ?How do they hedge that?!?

Thus I am concerned for insurers that are ?equity-sensitive? as I reckon them.? Here is the PB-ROE scatterplot:

A very tight fit.? The insurers that are undervalued are equity-sensitive ones: Phoenix Companies [PNX], American Equity Investment {AEL] , Lincoln National [LNC], and ING [ING].? Those that are overvalued are FBL Financial [FFG], and CNO Financial [CNO].? CNO has issues from long-term care, a coverage I dislike a great deal.? FBL is worth exploring.

One more note: to get book value in Life Insurance, you need an 11.7% ROE on average.? That?s high, but I expect that is so because investors are skeptical about the accounting.

Property & Casualty

This graph gives PB-ROE for the entire onshore P&C insurance industry:

It?s a good fit.? Again, the casualties of the last year weigh on the property-centric insurers, but for the most part, this is logical.

Potential underperformers include Hallmark Financial Services [HALL], Hilltop Holdings [HTH], Eastern Insurance Holdings [EIHI], Old Republic International [ORI], and Erie Indemnity [ERIE].? Below the line: Hartford Financial Services [HIG], Allstate [ALL], Tower Group [TWGP], and Horace Mann [HMN].

Because of the lower risk in P&C insurers, a firm only needs to earn an ROE of 6.6% to have a book value valuation.

Health

There are many models for profitability here, which makes things complex, but here is the present PB-ROE graph:

It?s a pretty good fit, with the idea that the following companies might be undervalued: Wellpoint [WLP] and CIGNA [CI].? And the following overvalued: ?Molina Healthcare [MOH] and Wellcare Health Plans [WCG].

Other Insurers and Insurance-Related Companies

This is a group that is a non-group.? It? comprises brokers, service providers, title and financial insurers.? Here?s the PB-ROE graph:

Pretty tight for a non-group.? Perhaps it is because it derives off of a much larger group, some of which has died off, leaving behind profitable entities.

As it is the potential outperformers include? Assured Guaranty [AGO], the largest remaining financial guaranty insurer, Fortegra Financial Corporation [FRF] a third party administrator of sorts, and what remains of the title insurance industry, Fidelity National [FNF], First American [FAF], and Stewart Title [STC].? That is one beaten-down group, and, one that would benefit a lot if housing bounced back.? There is a lot of potential earnings power there, and it trades for little above book value.

Potential underperformers include AJ Gallagher [AJG] and E-Health [EHTH].? I?ve dealt with AJ Gallagher professionally, and have respect for their management team, but maybe the valuation is stretched there.? E-Health is a health insurance broker, and over its existence hasn?t done anything deserving of a premium valuation.

And, for this non-group, it is riskless enough that you only need a 4% ROE to have a book value valuation.? This is one beaten-down sector of the market, and one that I do not own any of, but that I will eventually return to, because I have owned I in the past.? Should residential real estate finally normalize, many of these companies will fly.

I write this as one that was bearish on housing-related stocks since 2005.? There is potential here.

Summary

Insurance is complex, and the accounting is doubly complex, which is a major reason why many stay away from it.? But insurers as a group have had reliable and outsized returns over the rememberable past, which should encourage us to do a little kicking of the tires when so much of the industry trades below its net worth and is still earning money with little debt.

In my opinion, this is a recipe for earnings in the future, and why I own a lot of insurers for myself, and for clients.

Full disclosure: long ENH, but I may take other positions for clients in the next month

Flavors of Insurance, Part VIII (Financial)

Posted on 12 December 2010 by David Merkel

Financial guarantee insurers insure creditworthiness in a number of related, but different areas. They insure home mortgages for lenders who accept low down payments. They insure the debt of municipalities, who often find it cheaper to sell insured debt. In structured finance they guarantee the senior-most debt branches of residential mortgage [RMBS], commercial mortgage [CMBS], and asset-backed securities [ABS]. In the corporate credit arena, they guarantee the senior-most debt branches of collateralized debt obligations, and occasionally, single issuer project finance.

There are generally two types of companies in this sub-industry, with a slight overlap of business between them. One group guarantees low down payment mortgages for lenders. The other group engages in the rest of the businesses listed above. Financial guaranty and mortgage insurance are regulated separately from other types of property and casualty insurance. For the most part, companies that engage in these lines of business are specialists, though their continued high profitability is attracting new entrants.

Financial guaranty insurers have a primary function of credit enhancement for the corporate, municipal and consumer credit. In this function, securitization both competes with and facilitates their business. RMBS, CMBS and ABS can be structured as insured deals, or as deals where the senior bonds are protected by subordinated bonds sold to institutional investors at yields appropriate to compensate them for the risk. Even so, insured bonds trade with greater liquidity than uninsured bonds. The financial guaranty insurers are vital to the smooth functioning of structured finance.

The mortgage insurers have faced problems in the recent past. Loss experience on subprime borrowers has been disappointing. There have been bulk loan transactions that have also had poorer loss experience than ordinary transactions that flow one-by-one from lenders. Mortgage insurers are adjusting their pricing to reflect the differing loss costs.

In addition, lenders that originate low down payment mortgages often force the mortgage insurers to cede low-risk parts of the business to reinsurance captives controlled by the lenders. This is a continuing problem, with many of the mortgage insurers refusing to go along with the most uneconomic reinsurance deals.

There are yet other threats that mortgage insurers face. Fannie and Freddie could get their charters adjusted to allow them to accept uninsured mortgages with lower down payments. Large lenders could decide that they don’t need insurance for loans that they keep on balance sheet. Second mortgages compete with mortgage insurance. Inflated appraisals inflate the true amount at risk to the mortgage insurers. Finally, refinancing makes it difficult for the insurers to retain business on their books.

Aiding the mortgage insurers is the continued price appreciation of housing, which lowers the incidence and severity of claims. Homes are critical to most people who own them; it usually is the last thing that people will miss a payment on. Finally, there are significant barriers to entry for new competitors in the mortgage insurance business.

With the financial guaranty insurers, the issues are different. The amount of leverage is huge; the face amount of debt insured at a AAA financial guaranty insurer can be more than one hundred times greater than their surplus. Financial guaranty insurers underwrite to a zero loss tolerance. In other words, every transaction is expected to produce no losses; anything less than that would make the ratings agencies downgrade them severely.

Balance sheet complexity is large in terms of the many contingencies insured. Remember our phrase “too smart for your own good risk?” That may apply here. The rating agencies consistently affirm that these insurers are AAA, but we will argue that the rating agencies are co-dependent with them. The financial guaranty insurers indirectly generate a lot of revenue for the rating agencies. If an insurer begins to slip, initially it would pay the ratings agencies to delay the recognition of that, and work with them to lower leverage; the damage to the ratings agencies and financial guarantee insurers from a downgrade of a financial guarantee insurer to less than AAA would be huge. It would throw into question many of the fundamental underpinnings of the structured securities markets. It would also lead to turbulence in the AAA-only portion of the fixed income markets, which are quite large, but can’t deal with any degree of uncertainty.

Against this, the financial guarantee insurers have the following big advantage: they only guarantee the timely payment of principal and interest of obligations. If it is to their advantage to pay off the obligation immediately, they will do so. If it is to their advantage to string out the payments, they can do that as well. In a time of financial stress, the financial guaranty insurers can pay off claims slowly, and reduce the writing of new business, which would allow them to delever rapidly.

The twin engines of the rise of structured finance and low down payments on mortgages amid a rapidly growing housing market have fueled the performance of this sub-industry. The stocks in this industry have performed well. Valuations today are not outlandish, but they are kept low by the concerns that we have listed above.

In general, we believe that the future will be more risky for this sub-industry than the past. Both engines of growth will be slower in the future. In addition, the mortgage insurers have to contend with borrowers that are reliant on the low interest rates on ARMs in order to continue making payments on their homes. Consumer credit is overextended, and that will affect the loss experience on RMBS and ABS.

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Bringing it to the Present

I wish I had screamed louder.? Yes, I told the party line story back in 2004, but I tried to highlight the risks involved.

When I went to work for Hovde, I had a hierarchy of trust for reserving:

Life
Personal lines / Health
Commercial Lines
Reinsurance
Title
Financial

Financial insurers and mortgage insurers have proven less than sound.? They are just another example of what happens when leverage collapses.

As a bond manager, I never trusted the rating agencies on structured finance.? I wanted my AAA bonds to be AAA without support.

The financial insurers were too critical to the system.? We needed them to work.? That should have been the signal that something was wrong.? When something has to work, we are in big trouble, that is a sign that things are out of balance.

As it is now things are broken, and we are in an intermediate state where we are waiting for guarantors to be created.? The system needs third parties to take risks for pay.

Changes in My Insurance Longs

Posted on 3 July 20073 July 2007 by David Merkel

I have updated my insurance longs over at Stockpickr.com. (At present, I have no shorts, but if I did, I would not reveal them. Check my disclosure policy for details.) Here are the major changes:

I have sold Reinsurance Group of America, Allstate, Scottish Re (there was only a stub left), Endurance, Allied World, and Employers Holdings. I have bought Safety, Aspen, Argonaut, and PXRE. These changes have take place over the past few months. I have not mentioned them until now, because my employer was still building positions in the names; we are done now.
Why the changes? Here goes: with the exception of Scottish Re, I still like all of the companies and their management teams. By name:

Allied World and Endurance — nice runs. Not sure I want to hold them through storm season.
Aspen is a cheap substitute for AWH and ENH, maintaining some of my property exposure cheaper.
Argonaut and PXRE — merging. Argonaut got PXRE cheaply, and the deal makes good long term sense. Argonaut re-domiciles in Bermuda, and slow lowers its tax rate. It also further diversifies by writing property reinsurance, but not too much.
Allstate — I still own this in the broad market portfolio, but that has different objectives than the hedge fund that I work for. It has a longer time horizon. In the short run, Allstate will be pressured by increasing competition in the personal lines space. On the other hand, what a cheap valuation. I like it!
Scottish Re — can’t write new business. Very opaque earnings model. It is a pig in a poke, and I don’t think one can trust the book value.
Employers Holdings — I have to beg a mea culpa here, and say that my initial article on RealMoney was wrong. My goof? The prospectus was complex, badly worded, and I mis-estimated the true share count. After figuring out the true share count, I realized that the stock was fairly valued, not cheap. Apologies to all who went in with me on this; at least if I have to make an error, better to make it when no big losses are made.
Reinsurance Group of America — a real class act, but past my valuation parameters for now.
Safety Insurance — Very well run pure play personal lines insurer in Massachusetts, and cheap! Insulated from the general competition in personal lines in the USA.

Anyway, that’s what I am up to in insurance now, and how my portfolio differs from where I was in the first quarter.

Full disclosure: long AHL, AGII, ALL, PXT, and SAFT

Insurance Earnings So Far 1Q07 ? VIII

Posted on 7 May 20077 May 2007 by David Merkel

Before I start, some additional commentary on M&A items. It was interesting to see Liberty Mutual buy Ohio Casualty for several reasons:

At the premium that they paid, there were better things to buy. I don’t find a 6% return on capital to be that attractive, and I don’t see a lot of synergies.
It implies that there is not that much for sale among stock P&C companies.
Primary Casualty companies buying Bermuda reinsurers makes a lot of sense (like AGII/PXT). This isn’t as cogent.
It lowers my previously high opinion of Liberty Mutual.

On another note, I found the announcement from KMG America to be lightweight. After the stock fell so hard, I had a look at it, and concluded that the purchase GAAP accounting adjustments stripped profits out of the old stable blocks of business to hide losses in the LTC block. Now, that’s just a guess on my part. I could be dead wrong. That said, I would not be surprised to see that KBW finds only limited opportunities for capital enhancement.

On to earnings:

Life

KMG America missed, taking a number of charges, and hiring an investment banker. The stock went up. FBL Financial beat by a small amount.

Title

Investors Title beat earnings. In a very mixed quarter for title earnings, the smallest of the five did well.

Personal

Mercury General and Safety Insurance both beat earnings. Mercury expanded their writings and Safety contracted them slightly. Safety had the bigger beat, though.

Primary Casualty

NYMAGIC, Amerisafe, and Ameritrust all beat earnings, with growing revenues. Ameritrust Financial deserves special mention because it came public recently through unusual means; they listed the stock on NASDAQ, and allowed the private equity holders to go “free to trade.” I can think of another example of that, Quanta Holdings, but AFSI lookws more stable than Quanta.

Conglomerates

Berkshire Hathaway meets earnings, but what can I say? Earnings aren’t very relevant to the way the marginal investor views Berky. The insurance pricing cycle does mean something here, and Buffett was honest enough to inform investors that insurance earnings will likely not be as good next year.

The Bermudans

Max Capital Group beat earnings but on lower written premiums. It will be interesting to see how it fares tomorrow.

Full Disclosure: Long SAFT

Insurance Earnings So Far 1Q07 ? VII

Posted on 3 May 2007 by David Merkel

Things are slowing down, but not much.? Here’s my summary of Thursday’s earnings:

Financial

RAM Holdings beats handily, and Assured Guaranty beats.? I used to own RAM Holdings, but I kicked it out because of the negative macro view of the firm that I work for.? Absent the negative macro view, I would have loaded the boat in the twelves and hung on.? I like the management team and the strategy.

Life

Nationawide and Phoenix both beat.? Big beat for Phoenix, and the stock price was up 5%.? Both are heavily levered to equity prices, so the beat should not be so surprising.
Manulife met estimates and the price fell a little.? Manulife is a company where I don’t get the valuation; it seems too high.? As pointed out yesterday, American Equity missed and fell hard today.? UnumProvident rose as it demonstrated its turnaround through beating earnings on Wednesday after the close.

Brokers

Aon reports and beats on higher revenues.? It seems like the big brokers are beating, while the smaller brokers are missing.? They are different business models.

Primary Commercial

PMA Capital and Tower Group beat, while Specialty Underwriters Alliance missed.? Revenues grew at all of them, and generally continued a 1Q07 theme: so long as earnings are decent enough, the market prefers companies that are growing the top line.

Title

First American misses. They foresee a slowdown in their business and will be looking to reduce expenses.? A writedown here, a writedown there.? FAF is well-managed in my opinion, so if the stock falls tomorrow, it won’t stay there for long.

Personal Lines

Kingsway and Twenty First Century Holdings both miss.? Kingsway is has a high loss ratio from a troublesome acquisition, and the stock goes down 11%.? TCHC cuts earnings giuidance in half because of the onerous nature of Florida personal lines regulation.? The stock falls 45% in the aftermarket on Thursday.? My guess is it finishes up from there, but running a personal lines company with a large Florida exposure is risky; that should not be news to anyone.

The Bermudans

Odyssey Re beats, continuing the pattern of strong earnings on low cats.? They wrote less business, so perhaps gains tomorrow will be muted.? The earnings of Endurance Specialty were pretty good, but their conservatism in new writings was not appreciated by investors, and the stock was down more than 2%.

In summary: Great quarter for primary commercial and the Bermudans.? Good quarter for Life insurance and Financial insurance.? So-so quarter for brokers, personal lines and title.? Poor quarter for mortgage insurers.? Conservatism is not appreciated at present.? Absent catastrophes, I would be inclined to see these trends continue into the next quarter.

Full disclosure: long ENH (take heart, Ken LeStrange!)

Insurance Earnings So Far 1Q07 ? VI

Posted on 2 May 2007 by David Merkel

Looks like Seeking Alpha missed yesterday’s post.? Oh, well.? Onto the tidal wave of earnings:

Life

Assurant beat handily, on higher revenues.? Only the health division lagged. Prudential Insurance beat as well, with its international division leading the way.? UnumProvident beat, showing that its turnaround has legs.? American Equity missed stating that their interest spread margins had shrunk.? That’s a difficult condition to turn around in the short run, particularly given the long duration of the liabilities.? I would stay away.

Personal lines

Twenty-first Century, Erie Indemnity, Infinity Property Casualty, Horace Mann, and Cincinnati Financial all beat, while Kingsway and ALFA both miss.? Infinity reported before Wednesday’s open, and raised guidance; it was up 11% on the day.? Kingsway had to raise reserves, and ALFA had damage from tornadoes down South.

Primary Casualty

Procentury, FPIC, First Mercury, White Mountains, and EMC Insurance beat.? CRM Holdings met estimates.? OneBeacon missed estimates.? In general, it has been a great quarter for long tail insurance writers.? Investment income up, claims low, what more can you ask for?? Premium trends are mixed.? Only FPIC and EMC Insurance wrote less business.

The Bermudans

Both Endurance Specialty and Aspen Holdings beat, and both wrote less business than this time last year.? Endurance had significant claims from European windstorm Kyrill.? Ren Re beat earnings handily Tuesday evening, but the stock went nowhere on Wednesday, given the shrinkage of written premium.? The same may prove true of Endurance and Aspen.

We’re past the halfway point of the earnings season for insurance.? In general, Bermuda and primary casualty are strong.? Life and personal lines are pretty good.? Only mortgage is having any significant difficulties.

Full disclosure: long AIZ ENH