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On Insurance Investing, Part 7 [Final]

On Insurance Investing, Part 7 [Final]

I wrote this piece once, and lost it, 1000 words.? Going to try again.

1) The first thing to realize is that diversification across insurance subindustries usually does not work.

Do not mix:

  • Life & P&C
  • Financial & Anything
  • Health & Anything

Maybe you can mix P&C, Mortgage & Title, after all Old Republic survived.? The main point is this.? Insurance is not uniform.? Coverages are sold and underwritten differently.? Generally, higher valuations will be obtained on “pure play” companies? Diversification is swamped by management inability.? These are reasons for AIG and Allstate to spin off their life operations.

2) Middle-sized companies tend to do best from a valuation standpoint: the large have nowhere to grow, and the small are always questionable on their viability.? With a few exceptions, I like sticking with focused mid-cap companies with my insurance names.

3) Be aware of total subindustry capital relative to need.? After a big disaster, those that underwrote well will have capital to deploy into a stronger underwriting environment, where capital is scarce.? But don’t make too much of it because capital has become very fluid in insurance; the barriers to entry and exit are low.? Still, it is best to be an investor after a disaster, when everyone is running scared.? When total capital is high, and companies are fat, dumb, and happy, it is time to leave.

4) It’s good to look through the Statutory statements [regulatory statements filed with state insurance regulators] of their operating insurance subsidiaries to look for odd entries.? Occasionally, you will run into problems that do not have to be reported under GAAP accounting.? (Note: they should be reported under the spirit of GAAP, but not the letter of GAAP.? I have a saying, “It is okay to violate GAAP to be more honest, but not to be less honest.”)

Here’s an example: I ran across a life company that had to post an extra statutory reserve because they would lose money if interest rates rose.? That’s a significant admission, and the company was invested far more aggressively than almost all the other life companies we were tracking.? We shorted it, and got ripped as the credit markets surged 2003-2005.? We got out with a small gain when their earnings proved inadequate as interest rates rose, and credit losses rose.? But it took a long time.

At this point, I would be looking for special reserves established for secondary guarantees established for Term and Universal Life, and Variable Life & Annuity policies.? There is no specific requirement to hold those reserves on a GAAP basis, even though there may be general principles that would encourage additional reserves or disclosures.

5) There are ways of multiplying capital across subsidiaries — Subsidiary A reinsures liabilities of subsidiary B, while Subsidiary B reinsures liabilities of subsidiary A.? This is a way to create hidden leverage, so be aware of what is being done at the subsidiary level.? Doing these sorts of things is dumb, though legal.

Reviewing leverage is a good idea as well, where it is located, and what conditions it has.? The practice of insurance subsidiaries issuing surplus notes to parent companies has become all too common, which allows subsidiaries to write more business at the risk that when a subsidiary becomes impaired, the domiciliary state takes it over, and the parent company gets little to nothing.? (Payments on surplus notes can only be made with the approval of the insurance commissioner. In insolvency surplus notes typically receive nothing.)

The thing is, it is a lot harder to produce return on assets than return on equity. Though part 6 focused on ROE, in the short run, insurance companies can improve their ROE through substituting debt for equity.? The same applies to insurance companies that write GIC Medium Term Notes.? It’s just a cheap way of making a little extra income arbitraging your subsidiary’s high claims paying ability rating.? It fascinates me that regulators have allowed the insurance industry such latitude with deposit contracts that are called annuities, but have never once been annuitized.

Another hidden source of leverage are financial reinsurance agreements.? Down in the insurance subsidiaries, companies trade away a portion of future profits for surplus today.? These are usually bad deals to enter into, but because some insurance companies have a sales culture that requires continual growth, even if the sales that don’t justify the cost of capital required to back the policies.

6) Free cash flow is difficult to determine for financials, this applies to insurers as well.? Each regulator has rules on how much can be paid in dividends to their holding company.? Typically, subsidiaries can dividend away surplus so long as they are still strongly capitalized after the dividend.? (If it is large, they may have to petition their regulator for approval)? So if you want to approximate free cash flow for an insurer, try the following:? (Income or loss outside your insurance companies for the current period) + (Distributable Income from insurance companies for the current period).? The latter figure is statutory income +/- any decrease/(increase) in capital required to maintain the remaining business with adequate financial strength, calculated separately for each subsidiary.

7) Last note: on DAC/VOBA [deferred acquisition costs, value of business acquired; they? are similar, so I will just talk about DAC].? Once I had to convince a boss that though it is an intangible, like goodwill, it is not like goodwill in that it is more rigorously tested for recoverability.? If DAC gets written down (as opposed to amortized) that means that the future sum of profits on some of the insurance business is expected to be less than the acquisition costs deferred for the business.

Now, DAC can be done conservatively, by product and class year.? The more disaggregated it is, the more conservative, generally.? A few cells getting written down is no big thing.? But DAC can be as liberal as having one cell, which means if DAC is written down, the total value of future profits from existing business has been reduced — the company is worth a lot less.? The change in value is even more than the reduction in the DAC, because in the writedown process, the discount rate on the DAC went from a positive number to zero.? All other things equal, a DAC asset is worth more the higher its discount rate.

S0 pay attention: if DAC amortization is high relative to net income before tax, it means there isn’t that much margin for adverse deviation in the DAC.? Also, all other things equal, lower levels of DAC as a fraction of net worth are better.

Close with a story: before Mony Group was bought by AXA, it was doing DAC for the company as a whole.? A value investor, seeing the discount to book value, and sensing opportunity bought a lot of Mony.? Profitability was so bad, they had to write down DAC.? Book value declined & price to book value declined as well.? The value investor agitated for a sale, and AXA stepped in, buying it for moderate premium to where it was trading.? The group I was with went long for an arbitrage trade on a cash deal.

But the value investor thought the premium wasn’t high enough and agitated for more.? Because the takeout price was 70% of book, the idea seemed plausible.? But when you factored in the DAC earning 0% and a few other items, it looked generous enough to me.? So when the price got several percent above the deal terms we sold our stake and went short as much as we could find without having to pay much interest on the borrow.? Bit-by-bit the stock price moved down until a few days before the deal would close, when the price collapsed below the deal price, and we covered.? We even arbed a little more on the long side, but the trade was over.

And the point is this: it may look cheap, but test your assumptions on the values of assets and liabilities before committing a lot of capital to a any insurance stock.? GAAP, Tax and adjusted Statutory income validate book value, so a cheap stock with a low return on equity or assets is often not cheap.

On Insurance Investing, Part 6

On Insurance Investing, Part 6

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:

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:

Offshore

 

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:

Life

 

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:

Onshore

 

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:

Health

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:

Financial

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:

Insurance Related

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 5

On Insurance Investing, Part 5

The Squishy Stuff

I think I have just one more post left after this one, and this series ends.? This post deals with qualitative factors, which are harder to ascertain than the quantitative factors, and require more experience in order to learn.? But maybe I can aid my readers with a few pointers so they can learn faster.

Before we go, this series published at The Street.com University is an excellent start for any analyst, and includes many insurance examples.? But now for the rest.

Some products cannot be underwritten.? Anytime the insured knows more than the company, that is not a policy to write.? As an example, I toss out Long-term care policies, where the insurance industry has lost and lost again.? The insureds know their likely claims far better than the insurers do.? I feel the same about credit and mortgage insurance, where losses are so correlated that in a real crisis the insurance company fails, and those relying on the insurance fail as well.

I feel the same way about variable annuity living benefits at present — a rising market sets up the losses for when the market falls.

Avoid investing in companies where the law of large numbers does not apply.? This is true of all financial coverages.? If there is one big macro factor that drives your business it is not a safe place to be.

On Management

Management teams should be reliable.? They should always give complete and consistent answers to all questions, and demonstrate that they are managing the business, with underwriting being profitable.? They also should be willing to let results fall short of analysts’ estimates when it is true.

Though the short-term stock performance will be bad, the honesty will support the stock nearer to book value.? Investors appreciate honest companies, even when they do badly.

Finally if management has any sustainable competitive advantages (rare in insurance) they will use the advantages, and describe them in general terms so hat other insurers don’t reverse engineer them.

Be sure and read my series listed above.? It offers far more than what I have written here.

On Insurance Investing, Part 4

On Insurance Investing, Part 4

This will be a short but important part in this series on insurance investing.? It deals with the accounting, and applies to all areas of insurance.? Insurance accounting is complex. When an insurance policy is written, the insurer does not know the true cost of the liability that it has incurred; that will only be known over time.

Now the actuaries inside the firm most of the time have a better idea than outsiders as to where reserve should be set to pay future claims from existing business, but even they don’t know for sure.? Some lines of insurance do not have a strong method of calculating reserves.? This was/is true of most financial insurance, title insurance, etc., and as such, many such insurers got wiped out in the collapse of the housing bubble, because they did not realize that they were taking one big nondiversifiable risk.? The law of large numbers did not apply, because the results were highly correlated with housing prices, financial asset prices, etc.

Even with a long-tailed P&C insurance coverage, setting the reserves can be more of an art than science.? That is why I try to underwrite insurance management teams to understand whether they are conservative or not.? I would rather get a string of positive surprises than negative surprises, and you tend to one or the other.

There are a couple ways to analyze this:

1) This had more punch when interest rates were higher, because insurance managements were more tempted to compromise underwriting, because they had compelling investment opportunities, but asking the anti-question, “How are you planning on growing the top line next year?” is a good one.

An inexperienced or liberal management team will try to talk about business opportunities.? An experienced, or conservative management team will say, “We don’t target top line growth.? We aim for growth in fully converted book value per share.? We only grow the top line when the market favors that, and ability to write risks at favorable prices is easy.”

Conservative investors should be wary of any financial company that is growing aggressively; finance is a mature industry, and sustainable competitive advantages are few.

2) What is the company’s attitude on reserving?? How often do they report significant additional claims incurred from business written more than a year ago?? Good companies establish strong reserves on current year business, which depress current year profits, but gain reserve releases from prior year strongly set reserves.

So get out the 10K, and look for “Increase (decrease) in net losses and loss expenses incurred in respect of losses occurring in: prior years.”? That value should be consistently negative.? That is a sign that he management team does not care about maximizing current period profits but is conservative in its reserving practices.

One final note: point 2 does not work with life insurers.? They don’t have to give that disclosure.? My concern with life insurers is different at present because I don’t trust the reserving of secondary guarantees, which are promises made where the liability cannot easily be calculated, and where the regulators are behind the curve.

As such, I am leery of life insurers that write a lot of variable business, among other hard-to-value practices.? Simplicity of product design is a plus to investors.

In all things as investors, aim for a margin of safety.? That is the hallmark of value investing.

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.

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.

Eight Notes on Insurance, Economics, and Value Investing

Eight Notes on Insurance, Economics, and Value Investing

  1. Doug Kass over at RealMoney made the following comment: “The next shoe to drop will be the failure of a public homebuilder and a private mortgage insurer. The latter concerns me more than the former, as the markets are not aware of the economic implications of my view.”? An interesting comment to be sure.? Unlike other insurers that benefit from state guarantee funds, the mortgage insurers do not so benefit.? That said, in a concentrated sub-industry that has only seven players (MTG, RDN, PMI, TGIC, GNW, ORI, and AIG), one advantage that poses is that failure of one company will not lead to assessments on the rest of the companies, leading to cascading failures.? So who would be affected?? Fannie and Freddie would get a lot of credit risk back, as would any private lender that used the mortgage insurers to reduce risks.? Even some of the mortgage originators with captive mortgage reinsurers would take some degree of a hit (most of the top originators had these).
  2. Some younger friends of mine asked me for advice recently, and the question came up, “Should I invest in the market, or pay down debt?”? Now, we weren’t talking about credit card debt, which they paid off in full every month.? They did have a home equity loan at 8.5% fixed.? My view was this: with 10-year Treasuries yielding 4.4%, and marginal investment grade corporate bonds yielding 6.0% or so, a reasonable return expectation for the equity markets as a whole would be in the 8-9% region.? Add 2-3% to the BBB-bond yield, and that should be a reasonable guess, given that I think the market is somewhere between lightly undervalued and fairly valued.? My advice to them was to pay down the home equity loan, and once it was paid off, invest in an index fund, or a diversified mutual fund.? Until then, better to earn 8.5% with certainty, than 8-9% with uncertainty.
  3. As can be seen from my recent reshaping, yes, I do buy sectors of the market that look ugly.? Shoe retailers and mortgage REITs have not done well of late.? Am I predicting no recession by buying the retailers?? No; so long as the shoe retailers aren’t too trendy, demand for shoes is relatively stable, and these stocks are already discounting a recession.? I chose two that had virtually no debt, so I am on the safer side of the trade, maybe.
  4. Does buying a mortgage REIT mean that I am betting on further FOMC loosening?? No.? The mortgage REITs that I hold embed a pretty nasty set of assumptions for the riskiness of the safest parts of the mortgage bond markets.? While a FOMC loosening would probably help, I’m not counting on that.
  5. My value investing is different than most value investors, because I spend more time on industries, either buying quality companies in beaten-up sectors, or companies with pricing power, where that power is underdiscounted by the market.
  6. If we are trying to estimate the central tendency of inflation and eliminate volatility, it is better to use a trimmed mean, or median, rather than toss out volatile components like food and energy, particularly when those components have led inflation for the last 5-10 years.? The unadjusted CPI is a better predictor of the unadjusted CPI than is the core CPI.
  7. Personally, I think the next ten years will be kinder to “long only” equity managers than hedged managers.? There is only so much room for shorting, which is an artificial overlay on the system.? We aren’t at the limits of shorting yet, but we are getting closer to those limits.? It would not surprise me to see ten years from now to find that balanced fund managers beat hedge fund managers on average (after correcting for survivor bias, which is more severe with hedge funds).? It’s much easier and more effective to do risk management in a long only mode, and I believe that the virtues of long only management, and balanced funds, will become more apparent over the next ten years.
  8. I’m thinking of doing a personal finance post on what insurance to buy.? Is that something that readers would like to read about?

Saving, Investing, and Storage

Photo Credit: Jason Woodhead || Forget the United States Oil Fund — if you want to own oil, buy a tank and store the oil on your own property. 😉

This should be a short post. Buffett likes to own T-bills when he doesn’t have anything that he wants to buy. Why? He is storing value until the time comes when he can buy something that he thinks offers a superb return over the long haul.

And now for something that seems completely different: commodity investing, when it was introduced in the nineties, offered “yield” from rolling the futures contracts from month-to-month. That ended when the trade got too crowded, and the “yield” went negative. The ETFs that pursued these strategies were inventory financing charities in disguise. They still are, even though their strategies are more complex than they were.

Think for a moment. Why should you earn a yield-type return off of owning a commodity? Really, that should not exist unless there is a scarcity of speculators willing to let producers hedge their risk with them. There is a speculative return, positive or negative, from holding a commodity, but in the present environment, where there is no lack of people willing to hold commodities, there is no yield-like return, unless it is negative.

As a result, commodities should be viewed as storage, not an investment. Do you think in the long run that gold will be more valuable than it is today? It might be wise to store some away. That said, you have to be careful here. In inflation-adjusted terms, most commodities have gotten cheaper over time, with occasional violent rallies that convince people to speculate (all too late).

Storage is not investing. Storage tucks something away, and it will not change, even if its price changes because of changes in the economy.

Investing is far less certain — you can lend to or buy equity in a venture which could produce astounding returns, or you could lose it all, or something in-between. With investing, it is rare that you will end up with what you started with.

This is not to say that storage is a bad thing — we exchange our savings in bank balances to store value in a different form. A bank could go bust. If enough go bust at the same time, value could be lost if the government does not back up the FDIC. Holding T-bills preserves value to the degree that the government is willing to pay on its own debts in fiat currency, which is pretty likely.

Holding a commodity with a price you think will correlate strongly with the prices you will experience in retirement is not a bad idea. That said, it is storage. It will not grow your purchasing power the way that investment will.

As such, I encourage you to mostly invest, and store a little. Storage is more certain, but has no return. Investing has returns, both positive and negative, but generally over time provides more value than storage.

PS — owning a home, except in a crowded area that is growing, is not an investment but is storage. You should not expect capital gains in real terms from owning a house. That said, it will provide you with rent-free living for a long time once the mortgage is paid off. (Please ignore the property taxes, insurance and maintenance costs.)

Getting a Job in Insurance

Getting a Job in Insurance

Photo Credit: Boston Public Library

Well, I never thought I would get this question, but here it is:

Thank you for your dedication to your blog.

I was wondering if you have any skill development advice for recent graduates to gain a job in insurance – is technical or programming skills the most important or perhaps making business cases, or showing that you can make sound and reasonable conclusions?

Thank you for your time.

Kind regards,

There are many things to do in insurance.? Some are technical, like being an actuary, accountant, investment analyst/manager/trader, underwriter, lawyer or computer programmer.? Some take a great deal of interpersonal skills, like being an administrator, marketer or agent.? Then there are the drones in customer service and claims.? Ancillary jobs can include secretaries, janitors, human resources, and a variety of other helpers to the main positions.

Before I begin, I want to say a few things.? FIrst, if you work in insurance, be kind to the drones and helpers.? It is the right thing to do, but beyond that, they don’t have to go beyond their job description — they know their opportunities are limited — it is only a job.? Treat them with respect and kindness, and they will go above and beyond for you.? I learned this positively first-hand, and a few of them 20-30 years older explained it to me when I noticed they weren’t helping others who were full of themselves.

Second, the insurance industry does a lot to train drones, helpers, agents, marketers, underwriters, and younger people generally, if they are willing to work at it.? There are self-study courses and exams that vary based on what part of the industry you are in.? Take the courses and exams, and your value goes up — it is not obvious how that will work, but it often pays off.

Third, it is not a growing industry, but lots of Baby Boomers are retiring, and leave openings for others.? Also, drone and helper positions often don’t pay so well at the entry level, and turnover is somewhat high.? The same is true of agents — more on that later.

Fourth, watch “The Billion Dollar Bubble,” and episodes of Banacek if you want.? The actual practices of how they did things in the ’60s and ’70s don’t matter so much, but it gets the characterization of the various occupations in insurance right.

FIfth, insurance is a little like the “Six Blind Men and the Elephant.”? Actuaries, Accountants, Administrators, Marketers, Underwriters, and Investment Managers (and Lawyers and Programmers) each have a few bits of the puzzle — the challenge is to work together effectively.? It is easier said than done.? You can read my articles on my work life to get a good idea of how that was.? I’ve written over 30 articles on the topic.? Here are most of the links:

DId I leave out the one on insurance company lawyers?? Guess not.

Sixth, it is easier to teach those with technical skills how the business works than to teach drones and helpers technical skills.? It’s kind of like how you can’t easily teach math and science to humanities and social science majors, but you can do the reverse (with higher probability).? It is worth explaining the business to computer programmers.? It is worth explaining marketing and sales to actuaries.? Accountants get better when they understand what is going on behind the line items, and maybe a touch of what the actuaries are doing (and vice-versa).

Seventh, only a few of the areas are close to global — the administrators, the underwriters, the actuaries, and the marketers — and that’s where the fights can occur, or, the most profitable collaborations can occur.

Eighth, insurance companies vary in terms of how aggressive they are, and the dynamism of positions and ethical conundrums vary in direct proportion.

So, back to your question, and I will go by job category:

  1. Drones and helpers typically don’t need a college education, but if they show initiative, they can grow into a limited number of greater positions.
  2. Computer programmers probably need a college degree, but if you are clever, and work at another insurance job first, you might be able to wedge your way in.? While I was an actuary, I turned down a programming job, despite no formal training in programming.
  3. Lawyers go through the standard academic legal training, pass the bar exams, nothing that unusual about that, but finding one that truly understands insurance law well is tough.
  4. Accountants are similar.? Academic training, pass the accounting exams, work for a major accounting firm and become a CPA — but then you have to learn the idiosyncrasies of insurance accounting, which blends uncertainty and discounting with interest.? The actuaries take care of a lot of it, but capturing and categorizing the right data is a challenge.
  5. Actuaries have to be good with math to a high degree, a college degree is almost required, and have to understand in a broad way all of the other disciplines.? The credentialing is tough, and may take 5-10 years, with many exams, but you often get study time at work.
  6. Agents — can you sell?? Can you do a high quality sale that actually meets the needs of the client?? That may not require college, but it does require significant intelligence in understanding people, and understanding your product.? Many agents can fob some bad policies off on some simpletons, but it comes back to bite, because the business does not last, and the marketing department either revokes your commissions, or puts you on a trouble list.? “Market conduct” is a big thing in insuring individuals.? The agents that win are the ones that serve needs, are honest, and make many sales.? Many people are looking for someone they can trust with reasonable returns, rather than the highest possible return.? One more note: there are many exams and certifications available.
  7. Marketers — This is the province of agents that were mediocre, and wanted more reliable hours and income.? It’s like the old saw, “Those who cannot do, teach. Those who cannot teach, administrate.”? It is possible to get into the marketing area by starting at a low level helper, but it is difficult to manage agents if you don’t have their experience of rejection.? Again, there are certifications available, but nothing will train you like trying to sell insurance policies.
  8. Underwriters — as with most of these credentials, a college degree helps, but there is a path for those without such a degree if you start at a low level as a helper, show initiative, and learn, learn, learn. Underwriters make a greater difference in coverages that are less common.? Where the law of large numbers applies, underwriters recede.? The key to being an underwriter is developing specialized expertise that allows for better risk selection.? There are certifications and exams for this, pursue them particularly if you don’t have a college degree.? Pursue them anyway — as an actuary, I received some training in underwriting.? It is intensely interesting, especially if you have a mind for analyzing the why and how of insured events.
  9. Investment personnel — this is a separate issue and is covered in my articles in how one can get a job in finance.? That said, insurance can be an easier road into investing, if you get a helper position, and display competence.? (After all, how did I get here?)? You have to be ready to deal with fixed income, which? means your math skills have to be good.? As a bonus, you might have to deal with directly originated assets like mortgages, credit tenant leases, private placements, odd asset-backed securities, and more.? It is far more dynamic than most imagine, if you are working for an adventurous firm.? (I have only worked for adventurous firms, or at least adventurous divisions of firms.)? Getting the CFA credential is quite useful.
  10. Administrators — the best administrators have a bit of all the skills.? They have to if they are managing the company aright.? Most of them are marketers, and? a few are actuaries, accountants,or lawyers.? Marketing has an advantage, because it is the main constraint that insurance companies face.? It is a competitive market, and those who make good sales prosper.? VIrtually all administrators are college educated, and most have done additional credentialing.? Good administrators can do project, people and data management.? it is not easy, and personally, few of the administrators I have known were truly competent.? If you have the skills, who knows?? You could be a real success.

Please understand that I have my biases, and talk to others in the field before you pursue this in depth.? Informational interviewing is wise in any job search, and helps you understand what you are really getting into, including corporate culture, which can make or break your career.? Some people thrive in ugly environments, and some die.??Some people get bored to death in squeaky-clean environments, and some thrive.

So be wise, do your research, and if you think insurance would be an interesting career, pursue it assiduously.? Then, remember me when you are at the top, and you need my clever advice. 😉

 

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