Search Results for: nwli

Mad Bombers

Photo Credit: vaXzine || It’s da Bomb. man…

Some securities I own are illiquid. A few are very illiquid. When I wrote for theStreet.com, we had a warning that we posted for every security mentioned where the market cap was less than half a billion dollars, because what we wrote could budge the market, and sometimes it did. I remember when I wrote a post about personal lines P&C insurers, and I mentioned Safety Insurance [SAFT], which was definitely small, as one of the companies that I thought was worth owning, and we did own it at the firm that I worked for. The stock popped about 5% before settling down.

But frenzies to buy are usually tame compared with frenzies to sell. There is an urgency to preserving value that makes the seller particularly zealous in getting out rapidly.

In the last three weeks, I’ve experienced this twice with two securities that I own. In both cases I bought moreas the seller got aggressive. Let me show you what happened.

Image Credit: Aleph Blog

This is a graph of National Western Life Insurance over the last three weeks. It’s my largest holding in one of my strategies. On September 23rd, near the close, an aggressive seller, on no news, sold a large block of stock, driving down the price temporarily. I was one of those buying from him, but by no means the biggest buyer.

Image Credit: Aleph Blog

Then there is TCW Strategic Income Fund [TSI], which is the second-largest holding as bond funds go for my clients, behind PIMCO Enhanced Short Maturity Active ETF [MINT] which I use for liquidity. Yesterday, someone was aggressively selling until 2PM or so, and then they seemed to be done. They may have been selling for three days prior to that. In this case also, I was buying as they were selling, and in this case I caught the bottom tick. Again, there was no news, but when is there ever news for a bond fund?

My main point is this: be willing to be a buyer on days when there is no news, an it is not a sector effect, when a security that you know well is getting thrown out the window for no good reason. Occasionally mad bombers show up and they have to sell down to the last share. Having known some institutional traders, that last sale can be quite aggressive because they want to be DONE!

THere was a guy at theStreet.com, I think his name was Ken Wolff who often talked about “dumpers.” Stocks where a bad event happens, and everyone runs to sell, and there is a climax of volatility where the aggressive sellers have sold their last shares. You see the spike up in volume, and the spike down in the price. His idea was that it was simple to buy then, and close out the trade at the end of the day. On that front, I thought he was pretty clever.

Panic never leads to good results. Understand what you own very well, and be willing to buy when other market participants are irrational.

Full disclosure: long NWLI TSI MINT

See You in Court, Uncle Sam!

See You in Court, Uncle Sam!

Photo Credit: thecrazysquirrel
Photo Credit: thecrazysquirrel

Before I start tonight, I just wanted to mention that I was on South Korean radio a few days ago, on the main English-speaking station, talking about Helicopter Money. ?If you want listen to it or download it as a podcast, you can get it here. ?It’s a little less than 11 minutes long.

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The bravery of Steve Kandarian and the executives at MetLife is a testimony to something I have grown to believe. ?Frequently the government acts without a significant legal basis, and bullies companies into compliance. ?If a company is willing to spend the resources, often the government will lose, when the laws are unduly vague or even wrongheaded.

This was true also in a number of the allegations made by Eliot Spitzer. ?Lots of parties gave in because the press was negative, but those that fought him generally won. ?Another tough-minded man, Maurice Raymond “Hank” Greenberg pushed back and won. ?So did some?others that were unfairly charged.

MetLife won its case against the?Financial Stability Oversight Council [FSOC] in US District Court. ?The government will likely appeal the case, but though I have been a bit of a lone voice here, I continue to believe that MetLife will prevail. ?Here’s my quick summary as to why:

  • The FSOC’s case largely relies on the false idea that being big is enough to be a systemic risk.
  • Systemic risk is a mix of liquidity of liabilities, illiquidity of assets, credit risk, leverage, contagion, and lack of diversity of profit sources.
  • Liquidity of liabilities is the most important factor — in order to get a “run on the bank” there has to be a call on cash. ?Life insurers have long liability structures, and it is very difficult for there to be a run. ?People would have to forfeit a lot of value to run.
  • Contrast that with banks that use repo markets, and have short liability structures (w/deposit insurance, which is a help). ?Add in margining at the investment banks…
  • The only life insurers that suffered “runs” in the last 30 years wrote lots of short-term GICs. ?No one does that anymore.
  • Life insurers invest a lot of their money in relatively liquid corporates, and lesser amounts in illiquid mortgages. ?Banks are the reverse.
  • Leverage at life insurers is typically lower than that of banks.
  • Insurers make money off of non-financial factors like mortality & morbidity. ?Banks run a monoculture of purely financial risk. ?(Okay, increasingly many of them make money off of “free” checking, and then kill their sloppy depositors who overdraw their accounts… as I said to one of my kids, “Hey, your best friend “XXX bank” sent you a love note thanking you for the generous gift you gave them.”)
  • That makes contagion risk larger for banks than life insurers — banks often have more investments across the financial sector than insurers do.
  • Life insurers tend to be simpler institutions than banks. ?There is less too-clever-for-your-own-good risk.
  • State regulators are less co-opted than Federal regulators. ?They also employ actuaries to analyze actuaries. ?(At least the better and larger states do.)
  • Finally, life insurers do more strenuous tests of solvency and risk. ?They test solvency for decades, not years. ?They have actuaries who are bound by an ethics code — the quants at the banks have no such codes, and no responsibility to the regulators. ?The actuaries with regulatory responsibility serve two masters, and though I had my doubts when the appointed actuary statutes came into being, it has worked well. ?The problems of the early ’90s did not recur. ?The insurance industry generally eschewed non-senior RMBS, CMBS and ABS?in the mid-2000s, while the banks loved the yieldy illiquid beasties, and lost as a result.

Anyway, that’s my summary case. ?I haven’t always been a fan of the industry that I was raised in, but the life insurers learned from their past errors, and as a result, made it through the financial crisis very well, unlike the banks.

PS — there are some things I worry about at life insurers, like LTC and secondary guarantees, but I doubt the FSOC could figure out how big those are as an issue. ?A few companies are affected, and I’m not invested in them. ?Also, those risks aren’t systemic.

Full disclosure: long ENH NWLI BRK/B GTS RGA AIZ KCLI and MET

Thoughts on MetLife and AIG

Thoughts on MetLife and AIG

Photo Credit: ibusiness lines
Photo Credit: ibusiness lines

In some ways, this is a boring time in insurance investing. ?A lot of companies seem cheap on a book and/or earnings basis, but they have a lot of capital to deploy as a group, so there aren’t a lot of opportunities to underwrite or invest wisely, at least in the US.

Look for a moment at two victims of the?Financial Stability Oversight Council?[FSOC]… AIG and Metlife. ?I’ve argued before that the FSOC doesn’t know what it is doing with respect to insurers or asset managers. ?Financial crises come from short liabilities that can run financing illiquid assets. ?That’s not true with insurers or asset managers.

Nonetheless AIG has Carl Icahn breathing down its neck, and AIG doesn’t want to break up the company. ?They will spin off their mortgage insurer, United Guaranty. but they won’t get a lot of help from that — valuations of mortgage insurers are deservedly poor, and the mortgage insurer is small relative to AIG.

As I have also pointed out before AIG’s reserving was liberal, and recently AIG took a $3.6 billion charge to strengthen reserves. ?Thus I am not surprised at the rating actions of Moody’s, S&P, ?and AM Best. ?Add in the aggressive plans to use $25 billion to buy back stock and pay more dividends?over the next two years, and you could see the ratings sink further, and possibly, the stock also. ?The $25 billion requires earning considerably more than what was earned over the last four years, and more than is forecast by sell-side analysts, unless AIG can find ways to release capital and excess reserves (if any) trapped in their complex holding company structure.

AIG plans to do it through?(see pp 4-5):

  • Reducing expenses
  • Improving?the Commercial P&C accident year loss ratio by 6 points
  • Targeted divestitures (United Guaranty, and what else gets you to $6 billion?)
  • Reinsurance (mostly life)
  • Borrowing $3-5B (maybe more after the $3.6B writedown)
  • Selling off some hedge fund assets to reduce capital use. (smart, hedge funds earn less than advertised, and the capital charges are high.)

Okay, this could work, but when you are done, you will have reduced the earnings capacity of the remaining company. ?Reinsurance that provides additional surplus strips future earnings out the the company, and leaves the subsidiaries inflexible. ?Trust me, I’ve worked at too many companies that did it. ?It’s a lousy way to manage a life company.

Expense reduction can always be done, but business quality can suffer. ?Improving the Commercial lines loss ratio will mean writing less business in an already overcompetitive market — can’t see how that will help much.

I don’t think the numbers add up to $25 billion, particularly not in a competitive market like we have right now. ?This is part of what I meant when I said:

…it would pay Carl Icahn and all of the others who would be interested in breaking up AIG to hire some insurance expertise. ?Insurance is a set of complex businesses, and few understand most of them, much less all of them. ?It would be easy to naively overestimate the ability to improve profitability at AIG if you don?t know the business,? the accounting, and how free cash flow emerges, if it ever does.

They might also want to have a frank talk with Standard and Poors as to how they would structure a breakup if the operating subsidiaries were to maintain all of their current ratings. ?Icahn and his friends might be surprised at how little value could initially be released, if any.

Thus I don’t see a lot of value at AIG right now. ?I see better opportunities in MetLife.

MetLife is spinning off their domestic individual life lines, which is the core business. ?I would estimate that it is worth around 15% of the whole company. ?In the process, they will be spinning off most of their ugliest liabilities as far as life insurance goes — the various living benefits and secondary guarantees that are impossible to value in a scientific way.

The main company remaining will retain some of the most stable life liabilities, the P&C operation, and the Group Insurance, Corporate Benefit Funding, and the International operations.

I look at it this way: the company they are spinning off will retain the most capital intensive businesses, with the greatest degree of reserving uncertainty. ?The main company will be relatively clean, with free cash flow being a high percentage of earnings.

I will be interested in the main company post-spin. ?At some point, I will buy some MetLife so that I can own some of that company. ?The only tough question in my mind is what the spinoff company will trade at.? Most people don’t get insurance accounting, so they will look at the earnings and think it looks cheap, but a lot of capital and cash flow will be trapped in the insurance subsidiaries.

There is no stated date for the spinoff, but if the plan is to spin of the company, a registration statement might be filed with the SEC in six months, so, you have plenty of time to think about this.

Get MET, it pays.

One Final Note

I sometimes get asked what insurance companies I own shares in. ?Here’s the current list:

Long RGA, AIZ, NWLI (note: illiquid), ENH, BRK/B, GTS, and KCLI (note: very illiquid)

“Smart Beta” and Portfolio Rule Seven

“Smart Beta” and Portfolio Rule Seven

I’m not an advocate for smart beta. ?There are several reasons for that:

  • I don’t pay attention to beta in the stocks that I buy; it is not stable.
  • The ability to choose the right brand of enhanced indexing in the short-run is difficult to easily achieve.
  • I’m a value investor, a bottom-up stock picker that doesn’t care much about what the index does in the short-run. ?I aim for safety, and cheapness.

But today I read an interesting piece called?Slugging It Out in the Equity Arena. ?It talks about an issue I have been writing about for a long time — the difference between what a buy-and-hold investor receives and what the average investor receives. ?The average investor chases performance, and loses 2%+ per year in total returns as a result. ?As the market relative to the index is a zero-sum game, who wins then?

The authors argue smart beta wins. They say:

To us, the smart beta moniker refers to rules-based investment strategies that use non-price-related weighting methods to construct and maintain a portfolio of stocks.1?The research literature shows that smart beta strategies earn long-term returns around 2% higher than market capitalization-weighted indices. Moreover, smart beta strategies do not require any insight into the weighting mechanism. One can build a smart beta strategy with any stock ranking methodology that is not related to prices, from a strategy as na?ve and transaction-intensive as equal weighting to a more efficient approach such as weighting on the basis of fundamental economic scale. For example, a low volatility portfolio and its inverse, a high volatility portfolio, both outperform the market by roughly 2%?as long as they are systematically rebalanced.2??It is not the weighting method but the rebalancing operation that creates most of smart beta?s excess return. Acting in a countercyclical or contrarian fashion, smart beta strategies buy stocks that have fallen in price and sell stocks that have risen.

When I read that, I said to myself, “That is a more intense version of my portfolio rule seven:

Rebalance the portfolio whenever a stock gets more than 20% away from its target weight. Run a largely equal-weighted portfolio because it is genuinely difficult to tell what idea is the best. Keep about 30-40 names for diversification purposes.

I learned this rule from three good managers — one growth, one core, one value. ?They were all fairly rigorous in their quantitative analyses, but they all agreed, a 20% filter on target weight added ~2%/year to performance on average. ?But unlike the current “smart beta” discussion, I have been using this idea for the last 15-20 years.

The mostly equal-weighting also induces a smallcap and value tilt, which is an additional aid to performance. ?Since I concentrate by industry, the 30-40 stocks?requirement does not lead to over-diversification, as a great deal of my returns comes from choosing the right industries.

In one sense, portfolio rule seven is an acknowledgement of mental limitations, and is an exercise in humility. ?So things have been great? ?They will eventually not be so. ?As prices go up, so does fundamental risk. ?Take a little off the table. ?Raise a bit of cash.

Things have been bad? ?Look at the fundamentals. ?How badly have they deteriorated? This can take three paths:

a) Fundamentals?have deteriorated badly, or I made an initial error in judgment. ?I would not own it now, even at the current price there are much better stocks to be owned. ?Sell the position.

b) Fundamentals are the same, a little better, or haven’t deteriorated much. ?Rebalance to target weight.

c) Fundamentals are better and people are just running scared from a class of companies — not only rebalance, but make it a double-weight. ?I only do this in crises, for high-quality misunderstood companies like RGA and NWLI in the last financial crisis. ?Some of that is my insurance knowledge, but I have done it with companies in other industries.

For fundamental investors, who think like businessmen, there is value in resisting trends. ?Having an orderly way to do it is wise. ?Don’t slavishly follow me, but ask whether this fits your management style. ?This fits me, and my full set of rules. ?Modify it as you need, it is not as if there is one optimal answer.

I’ll close with an excerpt from the first article that I cited, which was its summary:

KEY POINTS
1.?????Smart beta strategies are countercyclical, periodically rebalancing out of winning stocks and into losers. They may underperform for extended periods but they ultimately tend to prevail.
2.?????Investors? procyclical behavior, selling recent losers and buying recent winners, pays for the estimated 2% per year in long-term value added by smart beta strategies.
3.?????Smart beta investing can be reasonably expected to have an edge as long as investors persist in following trends and chasing performance.

Are you willing to take the long-term view, meaning more than 3 years? ?These ideas will work. ?Focus on longer-term value, and do your analytical work. ?And if you outsource your investing, be willing to allocate more to stocks during bad times. ?To avoid really ugly scenarios, wait until the 200-day moving average has broken to the upside, of look at the 13Fs of value managers.

Do that and prosper. ?Resisting trends intelligently can make money.

Questions from Readers

Questions from Readers

Miscellaneous questions post — here goes:

Thank you very much for your blog! I am hooked since I found it and have been getting smarter by the day!

I like Safety Insurance Group, found it through your blog, noticed you were no longer long. They don’t do life insurance, just cars and houses – I know you say not to mix because they are sold and underwritten differently. They had a rough Q1 but a good 2013, seems like the winter Mass weather might have done it. They are over Book of 1 so there are other insurers that are cheaper, but they look like a good compliment to NWLI (also found through you and like very much) in the auto space, in a small (and thus dominate-able) market.?

Am I missing something about SAFT??

Many sincere thanks David!

I like the management team at Safety Insurance. ?When I met with them years ago, they impressed me as bright businessmen competing well in one of the most dysfunctional insurance markets in the US — Massachusetts. ?Most major insurers did not write auto and home insurance there as a result. ?But then the state of Massachusetts began to loosen up their tight regulations, and some of the bigger insurers that stayed away have entered — GEICO, MetLife, Liberty Mutual, etc.

When the market was more closed, SAFT had strategies that allowed them to profitably take market share Commerce Group [now Mapfre]. ?With more competition in Massachusetts, Safety’s earnings have suffered. ?I can’t get excited about a short tail P&C insurer trading above book at 13-14x forecast earnings.

Maybe people are buying it for the 4%+ dividend. ?I don’t use dividend yield as an investment criteria, for the most part. ?I would avoid Safety Insurance. ?It’s well-run, but the price of the stock is too high. ?If it drops below $35, it would be a compelling buy.

Hi David,

I was interested in your comment on Normalized Operating Accruals as an indicator of accounting quality.

Why is this?

I tend to view changes in accruals as an indication of the underlying strength of a business, but would appreciate your insight on this.

Thanks

The idea behind net?operating accruals is that accrual entries represent future cash flows, which are less certain than cash flows that have already happened. ?Companies that report high levels of accounts receivable, inventories, etc., as a fraction of assets or earnings, tend to offer negative earnings surprises, because many of those accruals will not convert to cash as expected.

Here is how I measure Net Operating Accruals:

(Total assets – Cash ?- (Total liabilities – Short-term debt – Preferred stock – Long-term debt))/Total assets (or earnings)

An apology here, because the term commonly used is “net operating accruals” and I messed up by calling it “normalized.”

Companies with conservative accounting (fewer accruals) tend to have stronger earnings than those that are more liberal in revenue recognition.

Dave, you and I are too old school. We need to move into this century. The way that most people seem to get into the investment industry has nothing to do with what you talk about. It is far easier to become a “financial advisor” that pushes annuities on the 60+ crowd. You don’t really have to learn anything about investing. All you need to know is about salesmanship. Offer a free lunch/dinner and reel them in!

I honestly think that more folks are going this route instead of the “hard way” you have outlined. . .

Maybe you can do a sarcastic post: “How to NOT be valuable, but make a lot of money in the Investment Business.”

Personally I find the annuity and non-traded REIT pushers very repulsive. At the same time, I know several of them that have done very well . . .

There are two factors at work here — yield and illiquidity. ?The need for yield is driven by monetary policy. ?Particularly with a?sizable?increase in retirees, many of whom can’t make enough “income” when interest rates are so low, they take undue risks to get “income,” not realizing the risks of capital loss that they are taking.

When I was an analyst/manager of Commercial Mortgage Backed Securities, there was a key fact one needed to understand: safe mortgages?do not depend on whether the businesses leasing the properties operate well or not. ?Safe mortgages have no operational risk, and thus avoid theaters, marinas, etc. ?Stick to the four food groups: Multifamily, Retail, Office, and Industrial.

There will be negative events with insecure investments offering a high yield. ?You may not get the return of your money, as you try to get a high return on your money.

Then there is the illiquidity — that is what allows the sponsors the ability to pay high commissions to those who sell the annuities and non-traded REITs. ?Because the investors can’t leave the game, the income stream of the sponsor is very certain. ?They take a portion of the anticipated income stream, and pay it in a lump sum to their agents as a commission. ?And that is why the agents are so highly motivated.

Eventually, the demand for yield will be disappointed. ?Uncertain yields will fail in a crisis, and reset much lower. ?Income that stems from dividends, preferred dividends, MLPs, junk bonds, structured notes, etc., is not secure in the short-to-intermediate run. ?It is far better to invest to grow value than to invest for income. ?They can pay you a yield, sure, but if the underlying value is not growing, you will eventually get capital losses, and after that, much less yield.

Look for safety in yield investments. ?If you are going to take risks in investing, take risk, but ignore the income component. ?Don’t stretch for yield.

Miscellaneous Notes

Miscellaneous Notes

When I was writing at RealMoney.com, I would often do little posts in the Columnists Conversation, and title them “Notes and Comments,” or something like that. ?I don’t normally do that here, but I would like to tie up some loose ends.

1) I received the following e-mail six weeks ago, and I feel it is worthy to be shared with readers:

Hi David,

I follow?the Aleph blog from time to time. I run value and special situations oriented hedge fund whose goal is to purchase businesses that sell for at least 50 cents on the dollar. It seems that we are like minded in investment terms. I have an extensive investment checklist which that I believe can add value to investors. It took me a few years and I derived it by reading stacks of annual reports from Buffett, Klarman, etc?

If it adds value to your readers, more than happy to share the 90+item investment checklist.

http://www.brarifunds.com/wp-content/uploads/BIF-Checklist.pdf

Regards,

Pope

Pope Brar, Managing Partner/Founder

Brar Investment Funds

I’ve read through the checklist and it is a good one. ?It has all of the elements of my processes (though I am not as rigorous) and much more. ?His checklist is worth a read. ?Have a look at it.

2) From last night’s post, a reader asked:

Lots of insurers here.? Given your expertise in that area, I’d be curious to know if you think this screen is turning up names that are on the riskier end of the spectrum.

I wrote a seven part series on this, and here are the summary ideas, and the links:

  1. Shrinking the share count
  2. Growing Fully Convertible Book Value per Share
  3. Price Momentum and Mean-Reversion
  4. On Conservative Management & Reserving
  5. Some Things Can’t Be Underwritten
  6. Analyzing Insurance Sub-Industries and the PB-ROE model
  7. Insurance Accounting and Miscellaneous Insurance Insights?

I’ve been decreasing my insurance shareholdings lately because:

  • Pricing is weak for most P&C coverages, and
  • I don’t trust the reserving for secondary guarantees in life and annuity policies.

Here’s the insurance companies from last might’s article in decreasing order of earnings yield:

Company Ticker Industry Country B/P E/P ROE
Imperial Holdings, Inc. IFT 0709 – Insurance (Life) United States ?1.38 ?37.03 ?26.83
Greenlight Capital Re, Ltd. GLRE 0715 – Insurance (P&C) Cayman Islands ?0.90 ?19.45 ?21.61
Assured Guaranty Ltd. AGO 0715 – Insurance (P&C) Bermuda ?1.18 ?18.59 ?15.75
American Equity Investment Lif AEL 0709 – Insurance (Life) United States ?0.86 ?16.77 ?19.50
Everest Re Group Ltd RE 0715 – Insurance (P&C) Bermuda ?0.88 ?15.35 ?17.44
Validus Holdings, Ltd. VR 0715 – Insurance (P&C) Bermuda ?1.00 ?13.30 ?13.30
Axis Capital Holdings Limited AXS 0715 – Insurance (P&C) Bermuda ?1.01 ?13.20 ?13.07
Endurance Specialty Holdings L ENH 0715 – Insurance (P&C) Bermuda ?1.31 ?12.55 ?9.58
CNO Financial Group Inc CNO 0709 – Insurance (Life) United States ?1.29 ?12.39 ?9.60
American International Group I AIG 0715 – Insurance (P&C) United States ?1.34 ?12.00 ?8.96
Montpelier Re Holdings Ltd. MRH 0715 – Insurance (P&C) Bermuda ?0.99 ?11.83 ?11.95
Allied World Assurance Co Hold AWH 0715 – Insurance (P&C) Switzerland ?1.00 ?11.73 ?11.73
XL Group plc XL 0715 – Insurance (P&C) Ireland ?1.12 ?11.72 ?10.46
Argo Group International Holdi AGII 0715 – Insurance (P&C) Bermuda ?1.27 ?11.55 ?9.09
Platinum Underwriters Holdings PTP 0715 – Insurance (P&C) Bermuda ?1.02 ?11.25 ?11.03
Allianz SE (ADR) AZSEY 0715 – Insurance (P&C) Germany ?0.92 ?11.08 ?12.04
ACE Limited ACE 0715 – Insurance (P&C) Switzerland ?0.84 ?10.92 ?13.00
ProAssurance Corporation PRA 0715 – Insurance (P&C) United States ?0.87 ?10.86 ?12.48
MBIA Inc. MBI 0715 – Insurance (P&C) United States ?1.45 ?10.86 ?7.49
National Western Life Insuranc NWLI 0709 – Insurance (Life) United States ?1.63 ?10.85 ?6.66
Partnerre Ltd PRE 0715 – Insurance (P&C) Bermuda ?1.23 ?10.75 ?8.74
Old Republic International Cor ORI 0715 – Insurance (P&C) United States ?0.88 ?10.53 ?11.97
Employers Holdings, Inc. EIG 0706 – Insurance (A&H) United States ?0.93 ?10.46 ?11.25
United Fire Group, Inc. UFCS 0715 – Insurance (P&C) United States ?1.05 ?10.30 ?9.81
Maiden Holdings, Ltd. MHLD 0715 – Insurance (P&C) Bermuda ?0.93 ?10.11 ?10.87
EMC Insurance Group Inc. EMCI 0715 – Insurance (P&C) United States ?1.02 ?9.88 ?9.69
Investors Title Company ITIC 0715 – Insurance (P&C) United States ?0.86 ?9.85 ?11.45
Protective Life Corp. PL 0709 – Insurance (Life) United States ?0.92 ?9.76 ?10.61
Lincoln National Corporation LNC 0709 – Insurance (Life) United States ?1.07 ?9.76 ?9.12
FBL Financial Group FFG 0709 – Insurance (Life) United States ?0.96 ?9.73 ?10.14
Assurant, Inc. AIZ 0709 – Insurance (Life) United States ?1.00 ?9.67 ?9.67
Kemper Corp KMPR 0715 – Insurance (P&C) United States ?0.95 ?9.64 ?10.15
Aspen Insurance Holdings Limit AHL 0715 – Insurance (P&C) Bermuda ?1.12 ?9.61 ?8.58
Horace Mann Educators Corporat HMN 0715 – Insurance (P&C) United States ?0.91 ?9.60 ?10.55
Unum Group UNM 0709 – Insurance (Life) United States ?0.98 ?9.55 ?9.74
WellPoint Inc WLP 0706 – Insurance (A&H) United States ?0.89 ?9.52 ?10.70
ING Groep NV (ADR) ING 0709 – Insurance (Life) Netherlands ?1.14 ?9.46 ?8.30
Axa SA (ADR) AXAHY 0709 – Insurance (Life) France ?1.19 ?9.46 ?7.95
Hanover Insurance Group, Inc., THG 0715 – Insurance (P&C) United States ?0.99 ?9.44 ?9.54
Baldwin & Lyons Inc BWINB 0715 – Insurance (P&C) United States ?0.98 ?9.42 ?9.61
American Financial Group Inc AFG 0715 – Insurance (P&C) United States ?0.87 ?9.15 ?10.52
Alleghany Corporation Y 0715 – Insurance (P&C) United States ?1.01 ?9.15 ?9.06
American National Insurance Co ANAT 0715 – Insurance (P&C) United States ?1.40 ?8.99 ?6.42
HCC Insurance Holdings, Inc. HCC 0715 – Insurance (P&C) United States ?0.82 ?8.92 ?10.88
Allstate Corporation, The ALL 0715 – Insurance (P&C) United States ?0.82 ?8.75 ?10.67
Symetra Financial Corporation SYA 0709 – Insurance (Life) United States ?1.23 ?8.64 ?7.02
Selective Insurance Group SIGI 0715 – Insurance (P&C) United States ?0.90 ?8.51 ?9.46
White Mountains Insurance Grou WTM 0715 – Insurance (P&C) Bermuda ?1.07 ?8.49 ?7.93
Fortegra Financial Corp FRF 0712 – Insurance (Misc) United States ?1.28 ?8.18 ?6.39
Cna Financial Corp CNA 0715 – Insurance (P&C) United States ?1.10 ?8.15 ?7.41
Stewart Information Services C STC 0715 – Insurance (P&C) United States ?0.83 ?7.96 ?9.59
Navigators Group, Inc, The NAVG 0715 – Insurance (P&C) United States ?1.09 ?7.68 ?7.05
Reinsurance Group of America I RGA 0706 – Insurance (A&H) United States ?1.08 ?7.49 ?6.94
Safety Insurance Group, Inc. SAFT 0715 – Insurance (P&C) United States ?0.84 ?7.39 ?8.80
State Auto Financial Corp STFC 0715 – Insurance (P&C) United States ?0.83 ?6.92 ?8.34
Genworth Financial Inc GNW 0709 – Insurance (Life) United States ?1.72 ?6.87 ?3.99
First American Financial Corp FAF 0715 – Insurance (P&C) United States ?0.87 ?6.75 ?7.76

Now, let me list for you the companies I would avoid on this list: IFT, GLRE, AGO, AEL, CNO, AIG, XL, MBI, LNC, FBL, AHL, ING, AXAHY, AFG, GNW. ?That does not mean that I endorse the others. ?In general, those that I say to avoid have poor underwriting skills or a bad business model.

3) Another letter from a reader, on a very different topic, the FOMC:

thanks again – I always look forward to this update.

My thoughts are, they are increasing their flexibility in one direction (towards??accommodation?).? While they did move the point about??after the purchase program ends? to a spot perhaps better suited to a discussion of that point, I also took it to mean that there may be less commitment to end QE.? (Although, so long as the deficit keeps declining, they really have no choice but to dial back purchases to keep the supply and the non-Fed demand in line.? This is the overlooked reason, I believe that long rates appear to be moving independently of Fed action.? Their demand is not the only variable).

?Final thought -?to what extent do you think that the Fed?s great misunderstanding is their inherent bias towards lowest rates possible under any economic conditions: i.e. for any given level of inflation, that Fed policy is best that reflects the lowest level of non-inflationary?interest rates [because this presumably encourages credit expansion and therefore economic growth]?

?To my way of thinking, the difficulty with this is that it assumes that credit always has to expand FASTER than the economy overall.? I don?t mean that credit expansion is not important, it is a big component of growth, just that credit can?t grow faster than income forever and at some point, we have to find a model that enables income to grow fast enough to increase living standards without overleverage.

?To me, this is the central policy challenge of the 21st century, because a) globally, credit has surged relative to national income and has reached a limit, b) populations are aging and must therefore favor lower levels of credit – and consumption – overall and c) the bills associated with 1 and 2 are now coming due.

?The Fed, however, seems stuck on the idea that their job should be to inflate rapid credit expansion regardless of the creditworthiness of the borrowers.? This strikes me as dumb, or perhaps more like wishful thinking that if credit expands, growth will drive incomes higher and somehow these will catch up (with some acceptable lag).

?Notice that no one at the Fed talks about things like the household savings rate any more?? I would be ok with QE if the Fed could explain that they were facilitating an orderly deleveraging: in which case Household Debt/Equity (which indicates potential for end-consumer final demand) would be a better metric than unemployment.

?As it is, I believe that what they are really targeting (large) bank balance sheets, and that QE is really a massive backdoor subsidy to money center banks to guarantee enough operating income to allow them to write off bad loans while increasing capital reserves to comply with Basel III.? (Full disclosure, I have a significant portion of my assets in a large US bank that was trading well?below the strike price of the warrants issued against its shares to Berkshire Hathaway at the time I purchased the shares, which bank shall remain nameless).

?Politically, I suppose, saying,??well, we need to ensure banks are profitable so as to ensure the solvency of the payments system? looks disturbingly like a bailout for the 1% and is out of touch with a more populist America.

?Anyway, sorry for the diatribe, but curious to get your thoughts.? I think I am less reflexively sceptical about the efficacy of the Fed?s policy (but I fully agree with your view that they are not supporting employment with it).

?Thanks again for all the work you do.

The central idea I would like to comment on is that incremental easing has had less and less effect on the economy, at least in the short-run. ?Aside from energy companies, willingness to invest in the business has been light, while willingness to buy back stock has been high. ?That doesn’t produce growth in the economy.

The Fed doesn’t realize that it can’t stimulate the economy at the zero bound. ?QE is ineffective, and may become fuel for high inflation if the banks start to lend aggressively. ?Inflation is not the goal, and I think many policymakers are confused — the goal is real growth.

We can protect the payments systems by protecting the regulated subsidiaries of banks, and letting the holding companies bear the losses, which is what we failed to do in 2008-2009.

All that said, we have a punk economy, but what will happen if we get a large increase in bank lending, leading to inflation. ?What will the Fed do then?

An Idea for When the Market is High

An Idea for When the Market is High

Last night I was at the Towson University?International Markets Summit. ?I’m grateful to the students for inviting me, as it is an honor. ?During the presentation, I mentioned the book “Accounting for Value” by Stephen Penman. ?I reviewed the book two years ago. ?A great book, and one that should lead readers to modify their views on value investing.

But one aspect of the book was easy to implement, he cited his paper that you can read here,?Returns to Buying Earnings and Book Value: Accounting for Growth and Risk. ?Buy the stocks that are the cheapest as measured by the highest quintiles of book value to price, and trailing twelve month earnings per share to price.

I ran this analysis for all US-traded stocks with over $100 million of market capitalization. ?Here are the results:

Company Ticker Industry Country B/P E/P
Petrobras Argentina SA ADR PZE 0606 – Oil & Gas – Integrated Argentina

1.26

7.95

Pampa Energia S.A. (ADR) PAM 1203 – Electric Utilities Argentina

0.83

11.41

OMV AG (ADR) OMVKY 0609 – Oil & Gas Operations Austria

1.13

11.33

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

1

13.3

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

0.88

15.35

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

0.93

10.11

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

0.99

11.83

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

1.01

13.2

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

1.02

11.25

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

1.07

8.49

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

1.12

9.61

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

1.18

18.59

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

1.23

10.75

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

1.27

11.55

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

1.31

12.55

Gerdau SA (ADR) GGB 0121 – Iron & Steel Brazil

1.32

6.84

Gafisa SA (ADR) GFA 0215 – Construction Services Brazil

2.04

15.52

Petroleo Brasileiro Petrobras PBR 0606 – Oil & Gas – Integrated Brazil

1.67

13.2

Telefonica Brasil SA (ADR) VIV 0915 – Communications Services Brazil

0.85

7.58

Companhia de Saneamento Basico SBS 1209 – Water Utilities Brazil

0.89

8.57

Endeavour Silver Corp EXK 0118 – Gold & Silver Canada

0.89

9.9

Teck Resources Ltd (USA) TCK 0124 – Metal Mining Canada

1.33

6.84

TransGlobe Energy Corporation TGA 0609 – Oil & Gas Operations Canada

0.85

10.03

Granite Real Estate Investment GRP.U 0933 – Real Estate Operations Canada

0.87

7.53

Brookfield Office Properties I BPO 0933 – Real Estate Operations Canada

1.08

10.08

Boardwalk REIT (USA) BOWFF 0933 – Real Estate Operations Canada

1.14

11.54

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

0.9

19.45

Sinopec Shanghai Petrochemical SHI 0103 – Chemical Manufacturing China

1.52

11

Yongye International, Inc YONG 0103 – Chemical Manufacturing China

1.65

43.36

China XD Plastics Co Ltd CXDC 0109 – Containters & Packaging China

1.13

22.71

Lihua International Inc LIWA 0127 – Misc. Fabricated Products China

2.31

41.21

Xinyuan Real Estate Co., Ltd. XIN 0215 – Construction Services China

5.22

42.83

China Automotive Systems, Inc. CAAS 0415 – Auto & Truck Parts China

0.99

11.04

China Petroleum & Chemical Cor SNP 0609 – Oil & Gas Operations China

0.87

10.11

Concord Medical Services Hldg CCM 0806 – Healthcare Facilities China

3.06

12.45

China Telecom Corporation Limi CHA 0915 – Communications Services China

1.17

7.03

Xueda Education Group (ADR) XUE 0969 – Schools China

0.84

6.63

Changyou.Com Ltd (ADR) CYOU 1018 – Computer Services China

1.23

20.92

Nam Tai Electronics, Inc. NTE 1024 – Electronic Instruments & Controls China

1.11

21.58

Jinpan International Limited JST 1024 – Electronic Instruments & Controls China

1.7

13.36

Semiconductor Manufacturing In SMI 1033 – Semiconductors China

0.96

8.06

China Eastern Airlines Corp. L CEA 1106 – Airline China

1.05

12.11

China Southern Airlines Co Ltd ZNH 1106 – Airline China

1.7

13.19

Guangshen Railway Co. Ltd (ADR GSH 1112 – Railroads China

1.34

6.64

Axa SA (ADR) AXAHY 0709 – Insurance (Life) France

1.19

9.46

Volkswagen AG (ADR) VLKAY 0412 – Auto & Truck Manufacturers Germany

0.94

9.73

Allianz SE (ADR) AZSEY 0715 – Insurance (Property & Casualty) Germany

0.92

11.08

E.ON SE (ADR) EONGY 1203 – Electric Utilities Germany

1.28

8.17

National Bank of Greece (ADR) NBG 0727 – Regional Banks Greece

2

131.03

Capital Product Partners L.P. CPLP 1118 – Water Transportation Greece

0.83

10.36

Safe Bulkers, Inc. SB 1118 – Water Transportation Greece

0.83

11.99

StealthGas Inc. GASS 1118 – Water Transportation Greece

1.32

9.08

Navios Maritime Holdings Inc. NM 1118 – Water Transportation Greece

1.32

13.4

Sun Hung Kai Properties Limite SUHJY 0215 – Construction Services Hong Kong

1.44

15.22

Hysan Development Company Limi HYSNY 0215 – Construction Services Hong Kong

1.66

20.18

Tai Cheung Holdings Ltd (ADR) TAICY 0215 – Construction Services Hong Kong

2.11

34.38

Le Gaga Holdings Ltd ADR GAGA 0509 – Crops Hong Kong

1.55

14.63

Bank of East Asia Ltd. (ADR), BKEAY 0727 – Regional Banks Hong Kong

0.85

8.78

Iao Kun Group Holding Co Ltd IKGH 0912 – Casinos & Gaming Hong Kong

1.36

12.89

Cheung Kong (Holdings) Limited CHEUY 0933 – Real Estate Operations Hong Kong

1.16

11.07

Seaspan Corporation SSW 1118 – Water Transportation Hong Kong

1.05

15.2

Magyar Telekom Tavkozlesi Nyrt MYTAY 0915 – Communications Services Hungary

1.34

6.66

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

1.12

11.72

Fly Leasing Ltd(ADR) FLY 0939 – Rental & Leasing Ireland

1.3

17.39

Ellomay Capital Ltd. ELLO 1033 – Semiconductors Israel

0.93

10.95

FUJIFILM Holdings Corp. (ADR) FUJIY 0112 – Fabricated Plastic & Rubber Japan

1.55

6.64

Kobe Steel, Ltd. (ADR) KBSTY 0121 – Iron & Steel Japan

1.47

14.7

Mitsui & Co Ltd (ADR) MITSY 0218 – Misc. Capital Goods Japan

1.33

13.26

Wacoal Holdings Corporation (A WACLY 0403 – Apparel/Accessories Japan

1.45

7.14

Toyota Motor Corp (ADR) TM 0412 – Auto & Truck Manufacturers Japan

0.82

10.5

Honda Motor Co Ltd (ADR) HMC 0412 – Auto & Truck Manufacturers Japan

0.92

7.61

Nissan Motor Co., Ltd. (ADR) NSANY 0412 – Auto & Truck Manufacturers Japan

1.11

10.04

Nomura Holdings, Inc. (ADR) NMR 0718 – Investment Services Japan

1.09

10.18

Mizuho Financial Group Inc. (A MFG 0727 – Regional Banks Japan

1.13

14.9

Sumitomo Mitsui Financial Grp, SMFG 0727 – Regional Banks Japan

1.28

16.67

Mitsubishi UFJ Financial Group MTU 0727 – Regional Banks Japan

1.53

13.67

Nippon Telegraph & Telephone C NTT 0915 – Communications Services Japan

1.39

8.93

ORIX Corporation (ADR) IX 0939 – Rental & Leasing Japan

0.98

7.59

Ternium S.A. (ADR) TX 0121 – Iron & Steel Luxembourg

0.89

7.61

ING Groep NV (ADR) ING 0709 – Insurance (Life) Netherlands

1.14

9.46

VimpelCom Ltd (ADR) VIP 0915 – Communications Services Netherlands

0.93

13.67

ASM International NV (ADR) ASMI 1033 – Semiconductors Netherlands

1.01

74.95

Petroleum Geo-Services ASA (AD PGSVY 0612 – Oil Well Services & Equipment Norway

0.81

9.85

Banco Latinoamericano Comerc E BLX 0727 – Regional Banks Panama

0.85

8.39

Compania de Minas Buenaventura BVN 0118 – Gold & Silver Peru

1.18

10.05

OFG Bancorp OFG 0727 – Regional Banks Puerto Rico

0.93

11.04

Popular Inc BPOP 0727 – Regional Banks Puerto Rico

1.52

19.77

Triple-S Management Corp. GTS 0806 – Healthcare Facilities Puerto Rico

1.79

12.52

LUKOIL (ADR) LUKOY 0606 – Oil & Gas – Integrated Russian Federation

1.91

19.08

China Yuchai International Lim CYD 0218 – Misc. Capital Goods Singapore

1.2

15.34

Net 1 UEPS Technologies Inc UEPS 0703 – Consumer Financial Services South Africa

0.91

6.79

POSCO (ADR) PKX 0121 – Iron & Steel South Korea

1.72

6.97

Shinhan Financial Group Co., L SHG 0727 – Regional Banks South Korea

1.24

8.42

Woori Finance Holdings Co., Lt WF 0727 – Regional Banks South Korea

1.91

9.86

SK Telecom Co., Ltd. (ADR) SKM 0915 – Communications Services South Korea

0.89

11.87

Repsol SA (ADR) REPYY 0606 – Oil & Gas – Integrated Spain

1.06

7.93

Transocean LTD RIG 0612 – Oil Well Services & Equipment Switzerland

1.14

9.54

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

0.84

10.92

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

1

11.73

United Microelectronics Corp ( UMC 1033 – Semiconductors Taiwan

1.3

8.02

Silicon Motion Technology Corp SIMO 1033 – Semiconductors Taiwan

1.96

19.74

BP plc (ADR) BP 0606 – Oil & Gas – Integrated United Kingdom

0.85

15.1

Noble Corporation PLC NE 0612 – Oil Well Services & Equipment United Kingdom

1.08

10.05

Subsea 7 SA (ADR) SUBCY 0612 – Oil Well Services & Equipment United Kingdom

1.09

7.02

ENSCO PLC ESV 0612 – Oil Well Services & Equipment United Kingdom

1.11

12.2

Rowan Companies PLC RDC 0612 – Oil Well Services & Equipment United Kingdom

1.3

6.71

HSBC Holdings plc (ADR) HSBC 0727 – Regional Banks United Kingdom

0.94

8.09

Vodafone Group Plc (ADR) VOD 0915 – Communications Services United Kingdom

1.47

31.68

J Sainsbury plc (ADR) JSAIY 0957 – Retail (Grocery) United Kingdom

0.96

10.57

Global Ship Lease, Inc. GSL 1118 – Water Transportation United Kingdom

2.11

16.62

Cliffs Natural Resources Inc CLF 0124 – Metal Mining United States

1.87

12.76

M.D.C. Holdings, Inc. MDC 0215 – Construction Services United States

0.91

23.28

M/I Homes Inc MHO 0215 – Construction Services United States

0.92

27.21

URS Corp URS 0215 – Construction Services United States

1.16

7.02

Mestek, Inc. MCCK 0218 – Misc. Capital Goods United States

0.98

11.53

General Motors Company GM 0412 – Auto & Truck Manufacturers United States

0.83

7.98

Rocky Brands Inc RCKY 0418 – Footwear United States

1.21

6.82

Johnson Outdoors Inc. JOUT 0430 – Recreational Products United States

0.87

7.83

LeapFrog Enterprises, Inc. LF 0430 – Recreational Products United States

0.89

17.58

Yasheng Group HERB 0509 – Crops United States

11.77

70.4

Seaboard Corporation SEB 0515 – Food Processing United States

0.82

6.77

John B. Sanfilippo & Son, Inc. JBSS 0515 – Food Processing United States

0.84

8.55

Omega Protein Corporation OME 0515 – Food Processing United States

1.01

12.24

Ennis, Inc. EBF 0518 – Office Supplies United States

0.92

8.43

ACCO Brands Corporation ACCO 0518 – Office Supplies United States

1.01

11.07

Universal Corp UVV 0524 – Tobacco United States

0.93

10.8

Hess Corp. HES 0609 – Oil & Gas Operations United States

0.86

12.86

Approach Resources Inc. AREX 0609 – Oil & Gas Operations United States

0.93

9.48

Equal Energy Ltd. (USA) EQU 0609 – Oil & Gas Operations United States

0.96

9.38

Sandridge Mississippian Trust SDT 0609 – Oil & Gas Operations United States

1.49

63.59

PHI Inc. PHII 0612 – Oil Well Services & Equipment United States

0.85

8.96

Medallion Financial Corp TAXI 0703 – Consumer Financial Services United States

0.94

9.13

CIT Group Inc. CIT 0703 – Consumer Financial Services United States

0.96

7.26

Goldman Sachs Group Inc GS 0703 – Consumer Financial Services United States

0.97

10.16

Ellington Financial LLC EFC 0703 – Consumer Financial Services United States

1.04

13.7

Walter Investment Management C WAC 0703 – Consumer Financial Services United States

1.11

23.94

Chimera Investment Corporation CIM 0703 – Consumer Financial Services United States

1.12

11.58

PHH Corporation PHH 0703 – Consumer Financial Services United States

1.19

9.68

EZCORP Inc EZPW 0703 – Consumer Financial Services United States

1.58

7.55

WellPoint Inc WLP 0706 – Insurance (Accident & Health) United States

0.89

9.52

Employers Holdings, Inc. EIG 0706 – Insurance (Accident & Health) United States

0.93

10.46

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

1.08

7.49

American Equity Investment Lif AEL 0709 – Insurance (Life) United States

0.86

16.77

Protective Life Corp. PL 0709 – Insurance (Life) United States

0.92

9.76

FBL Financial Group FFG 0709 – Insurance (Life) United States

0.96

9.73

Unum Group UNM 0709 – Insurance (Life) United States

0.98

9.55

Assurant, Inc. AIZ 0709 – Insurance (Life) United States

1

9.67

Lincoln National Corporation LNC 0709 – Insurance (Life) United States

1.07

9.76

Symetra Financial Corporation SYA 0709 – Insurance (Life) United States

1.23

8.64

CNO Financial Group Inc CNO 0709 – Insurance (Life) United States

1.29

12.39

Imperial Holdings, Inc. IFT 0709 – Insurance (Life) United States

1.38

37.03

National Western Life Insuranc NWLI 0709 – Insurance (Life) United States

1.63

10.85

Genworth Financial Inc GNW 0709 – Insurance (Life) United States

1.72

6.87

Fortegra Financial Corp FRF 0712 – Insurance (Miscellaneous) United States

1.28

8.18

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

0.82

8.75

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

0.82

8.92

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

0.83

6.92

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

0.83

7.96

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

0.84

7.39

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

0.86

9.85

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

0.87

6.75

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

0.87

9.15

ProAssurance Corporation PRA 0715 – Insurance (Property & Casualty) United States

0.87

10.86

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

0.88

10.53

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

0.9

8.51

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

0.91

9.6

Kemper Corp KMPR 0715 – Insurance (Property & Casualty) United States

0.95

9.64

Baldwin & Lyons Inc BWINB 0715 – Insurance (Property & Casualty) United States

0.98

9.42

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

0.99

9.44

Alleghany Corporation Y 0715 – Insurance (Property & Casualty) United States

1.01

9.15

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

1.02

9.88

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

1.05

10.3

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

1.09

7.68

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

1.1

8.15

American International Group I AIG 0715 – Insurance (Property & Casualty) United States

1.34

12

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

1.4

8.99

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

1.45

10.86

FBR & Co FBRC 0718 – Investment Services United States

1.03

29.21

KKR Financial Holdings LLC KFN 0718 – Investment Services United States

1.05

11.24

NASDAQ OMX Group, Inc. NDAQ 0718 – Investment Services United States

1.13

6.66

Piper Jaffray Companies PJC 0718 – Investment Services United States

1.17

7.42

Primus Guaranty, Ltd. PRSG 0718 – Investment Services United States

1.25

50.12

Arlington Asset Investment Cor AI 0718 – Investment Services United States

1.28

11.6

Oppenheimer Holdings Inc. (USA OPY 0718 – Investment Services United States

1.34

6.71

CIFC Corp CIFC 0718 – Investment Services United States

1.73

9.51

JPMorgan Chase & Co. JPM 0724 – Money Center Banks United States

0.98

7.39

First National Bank Alaska FBAK 0727 – Regional Banks United States

0.81

6.61

Old National Bancorp ONB 0727 – Regional Banks United States

0.81

7

Sandy Spring Bancorp Inc. SASR 0727 – Regional Banks United States

0.81

7.28

TowneBank TOWN 0727 – Regional Banks United States

0.81

7.52

Fidelity Southern Corporation LION 0727 – Regional Banks United States

0.81

10.35

Central Pacific Financial Corp CPF 0727 – Regional Banks United States

0.81

21.18

Cascade Bancorp CACB 0727 – Regional Banks United States

0.81

22.18

LCNB Corp. LCNB 0727 – Regional Banks United States

0.82

6.69

S & T Bancorp Inc STBA 0727 – Regional Banks United States

0.83

7.38

Great Southern Bancorp, Inc. GSBC 0727 – Regional Banks United States

0.83

8.55

ESB Financial Corporation ESBF 0727 – Regional Banks United States

0.84

6.88

WesBanco, Inc. WSBC 0727 – Regional Banks United States

0.84

7.15

Trustmark Corp TRMK 0727 – Regional Banks United States

0.84

7.28

KeyCorp KEY 0727 – Regional Banks United States

0.84

7.3

MidWestOne Financial Group, In MOFG 0727 – Regional Banks United States

0.84

8.77

Bar Harbor Bankshares BHB 0727 – Regional Banks United States

0.84

9.1

Seacoast Banking Corporation o SBCF 0727 – Regional Banks United States

0.84

21.31

First Bancorp Inc FNLC 0727 – Regional Banks United States

0.85

7.39

Mercantile Bank Corp. MBWM 0727 – Regional Banks United States

0.85

9.45

Heritage Financial Group Inc HBOS 0727 – Regional Banks United States

0.86

7.23

MainSource Financial Group Inc MSFG 0727 – Regional Banks United States

0.86

7.33

Norwood Financial Corporation NWFL 0727 – Regional Banks United States

0.86

7.9

Fulton Financial Corp FULT 0727 – Regional Banks United States

0.87

6.82

Pulaski Financial Corp PULB 0727 – Regional Banks United States

0.88

6.85

Washington Federal Inc. WAFD 0727 – Regional Banks United States

0.88

6.87

International Bancshares Corp IBOC 0727 – Regional Banks United States

0.89

7.93

Lakeland Bancorp, Inc. LBAI 0727 – Regional Banks United States

0.9

6.84

Northrim BanCorp, Inc. NRIM 0727 – Regional Banks United States

0.9

7.67

BCB Bancorp, Inc. BCBP 0727 – Regional Banks United States

0.9

7.91

ACNB Corporation ACNB 0727 – Regional Banks United States

0.9

8.14

Intermountain Community Bancor IMCB 0727 – Regional Banks United States

0.9

9.74

First Financial Corp THFF 0727 – Regional Banks United States

0.91

7.44

Farmers & Merchants Bancorp In FMAO 0727 – Regional Banks United States

0.91

7.8

Southeastern Bank Financial Co SBFC 0727 – Regional Banks United States

0.91

11.29

Isabella Bank Corp ISBA 0727 – Regional Banks United States

0.92

6.95

First Merchants Corporation FRME 0727 – Regional Banks United States

0.93

6.76

Wintrust Financial Corp WTFC 0727 – Regional Banks United States

0.93

7.12

First Citizens BancShares Inc. FCNCA 0727 – Regional Banks United States

0.94

7.57

Firstbank Corporation FBMI 0727 – Regional Banks United States

0.94

8.03

Century Bancorp, Inc. CNBKA 0727 – Regional Banks United States

0.95

10.72

Central Valley Community Banco CVCY 0727 – Regional Banks United States

0.96

6.62

PNC Financial Services Group I PNC 0727 – Regional Banks United States

0.96

8.94

American National BankShares I AMNB 0727 – Regional Banks United States

0.96

9.01

Capital One Financial Corp. COF 0727 – Regional Banks United States

0.97

9.95

Provident Financial Services, PFS 0727 – Regional Banks United States

0.99

6.92

NASB Financial, Inc. NASB 0727 – Regional Banks United States

0.99

11

Flagstar Bancorp Inc FBC 0727 – Regional Banks United States

1.01

21.87

First Defiance Financial FDEF 0727 – Regional Banks United States

1.02

8.35

MidSouth Bancorp, Inc. MSL 0727 – Regional Banks United States

1.03

6.96

C&F Financial Corp CFFI 0727 – Regional Banks United States

1.04

13.4

First Community Bancshares Inc FCBC 0727 – Regional Banks United States

1.05

7.25

Provident Financial Holdings, PROV 0727 – Regional Banks United States

1.05

8.78

Chemung Financial Corp. CHMG 0727 – Regional Banks United States

1.06

6.7

Territorial Bancorp Inc TBNK 0727 – Regional Banks United States

1.08

7.23

Berkshire Hills Bancorp, Inc. BHLB 0727 – Regional Banks United States

1.09

6.61

Regions Financial Corporation RF 0727 – Regional Banks United States

1.09

7.73

Old Second Bancorp Inc. OSBC 0727 – Regional Banks United States

1.1

113.32

Farmers Capital Bank Corp FFKT 0727 – Regional Banks United States

1.14

7.7

Premier Financial Bancorp, Inc PFBI 0727 – Regional Banks United States

1.18

10.46

FIRST FINANCIAL NORTHWEST, INC FFNW 0727 – Regional Banks United States

1.18

14.46

Intervest Bancshares Corp IBCA 0727 – Regional Banks United States

1.19

8.37

MBT Financial Corp. MBTF 0727 – Regional Banks United States

1.23

28.89

New Hampshire Thrift Bancshare NHTB 0727 – Regional Banks United States

1.26

7.66

MVB Financial Corp MVBF 0727 – Regional Banks United States

1.29

10.03

Citigroup Inc C 0727 – Regional Banks United States

1.3

8.73

Susquehanna Bancshares Inc SUSQ 0727 – Regional Banks United States

1.31

8.42

QCR Holdings, Inc. QCRH 0727 – Regional Banks United States

1.44

12.41

First Niagara Financial Group FNFG 0727 – Regional Banks United States

1.45

8.28

First Citizens Bancorporation, FCBN 0727 – Regional Banks United States

1.5

9.95

Farmers & Merchants Bank (Long FMBL 0909 – Business Services United States

0.98

8.05

Kelly Services, Inc. KELYA 0909 – Business Services United States

1.02

7.21

Lakes Entertainment, Inc. LACO 0912 – Casinos & Gaming United States

1.01

14.29

Black Box Corporation BBOX 0915 – Communications Services United States

1.38

7.36

Iridium Communications Inc. IRDM 0915 – Communications Services United States

1.72

10.16

Courier Corporation CRRC 0927 – Printing & Publishing United States

0.86

6.72

CSS Industries Inc CSS 0927 – Printing & Publishing United States

1.08

7.53

Blackstone Mortgage Trust Inc BXMT 0933 – Real Estate Operations United States

0.87

145.18

New York Mortgage Trust Inc NYMT 0933 – Real Estate Operations United States

0.88

14.44

PennyMac Mortgage Investment T PMT 0933 – Real Estate Operations United States

0.89

13.15

Starwood Property Trust, Inc. STWD 0933 – Real Estate Operations United States

0.94

7.84

Capstead Mortgage Corporation CMO 0933 – Real Estate Operations United States

0.99

7.31

Dynex Capital Inc DX 0933 – Real Estate Operations United States

1.02

12.82

Two Harbors Investment Corp TWO 0933 – Real Estate Operations United States

1.04

16.24

American Capital Agency Corp. AGNC 0933 – Real Estate Operations United States

1.05

14.81

Apollo Commercial Real Est. Fi ARI 0933 – Real Estate Operations United States

1.09

7.4

MFA Financial, Inc. MFA 0933 – Real Estate Operations United States

1.09

9.89

Anworth Mortgage Asset Corpora ANH 0933 – Real Estate Operations United States

1.1

9.07

Resource Capital Corp. RSO 0933 – Real Estate Operations United States

1.16

9.91

Rent-A-Center Inc RCII 0939 – Rental & Leasing United States

0.97

8.84

Willis Lease Finance Corporati WLFC 0939 – Rental & Leasing United States

1.31

9.51

Biglari Holdings Inc BH 0942 – Restaurants United States

0.83

23.81

Rick’s Cabaret Int’l, Inc RICK 0942 – Restaurants United States

0.92

8.66

PCM Inc PCMI 0948 – Retail (Catalog & Mail Order) United States

1.09

7.11

Trans World Entertainment Corp TWMC 0963 – Retail (Specialty Non-Apparel) United States

1.68

7.37

TravelCenters of America LLC TA 0963 – Retail (Specialty Non-Apparel) United States

1.76

7.55

Tech Data Corp TECD 0966 – Retail (Technology) United States

0.87

7.43

hhgregg, Inc. HGG 0966 – Retail (Technology) United States

1.32

6.67

Ingram Micro Inc. IM 1015 – Computer Peripherals United States

0.84

6.68

Key Tronic Corporation KTCC 1015 – Computer Peripherals United States

0.93

9.42

Xerox Corp XRX 1018 – Computer Services United States

0.89

8.31

VOXX International Corp VOXX 1024 – Electronic Instruments & Controls United States

1.57

10.96

OmniVision Technologies, Inc. OVTI 1033 – Semiconductors United States

0.91

8.46

Benchmark Electronics, Inc. BHE 1033 – Semiconductors United States

1

9

JetBlue Airways Corporation JBLU 1106 – Airline United States

0.85

6.84

Republic Airways Holdings Inc. RJET 1106 – Airline United States

1.42

12.1

SkyWest, Inc. SKYW 1106 – Airline United States

2.19

8.93

Atlas Air Worldwide Holdings, AAWW 1109 – Misc. Transportation United States

1.49

10.44

International Shipholding Corp ISH 1118 – Water Transportation United States

1.67

7.41

Gas Natural Inc EGAS 1206 – Natural Gas Utilities United States

0.89

6.75

What are my surprises here?

  • My but there are a lot of foreign companies in this list, far more as a percentage than the 3575 total companies I started with. ?It seems that foreign companies are cheap.
  • Now, that said, accounting standards are tighter in the US than elsewhere, and particularly, be careful on Chinese companies. ?Many of them are scams.
  • There are a lot of financial companies listed. ?I would note that earnings quality for financial companies is often poor, so don’t go “hog wild” buying financial companies.

All that said, this could be a good list for starting due diligence, and I will use at least some of this in my next selection of companies for my clients.

What’s that, you say? ?Do I and my clients own any of these firms? ?Yes we do. ?Of the 38 stocks in my portfolio, 11 of them pass this screen, and here is the summary:

Full Disclosure: Long?ENH, SNP, GTS, LUKOY, BP, ESV, RGA, AIZ, NWLI, IM, XRX

On National Western Life

On National Western Life

From respected reader:

Just did a quick calc based on NWLI earnings and thought I would pass onto you as I know you at least used to hold it as a double weight. ?Let me know if you think there are major holes in this theory:

From the Annual Report:

“The yield on debt security purchases to fund insurance operations rebounded somewhat to 3.53% in 2013 from 3.37% in 2012 but was still below the 4.18% yield attained in 2011.”

So, investment yields improved, but are still down. ?Their unrealized gains in securities dropped from $541 million to $146 because of this, so this part of the “hidden value” in the shares went down.

But if rates can get back up to that 4.18%, a quick calc says that would cause annual earnings on their $9 billion investment portfolio to increase $58 million. ?If 2/3’s of this is credited to annuity holders, it leaves $19.5 million before tax for shareholders. ?32% tax from 2013 gives after tax earnings increase of $13 million or $3.57 increase in earnings per share.

If we could get yields back up to 5.5% like they were a few years ago, using the same calc would give an increase in EPS of $9.38, or a 1/3 increase in earnings.

It is still a double-weight here. ?It is not as cheap as it once was, but it is still cheap. ?Financial stocks should always be valued on a combination of price-to-book and price-to-expected-earnings.

Why? ?Because accrual items in the accounting can either be aggressive, fair or conservative. ?If aggressive, earnings will be overstated, and book value understated. ?If conservative, earnings will be understated, and book value overstated. ?For the most part, the two measures balance the squishy accounting.

Now as for the disclosures in the NWLI 10K, we need to note that more than 2/3rds of the bonds that they hold are “held to maturity.” ?That’s unusual, as is their policy where they don’t buy high yield bonds. ?Held to maturity means the value of the bonds amortizes over time, but price moves don’t affect the accounting, unless default is likely. ?Thus if interest rates rise, book value will not be affected much, but earnings will rise on a GAAP basis.

NWLI has a conservative investing culture, and in the present aggressive environment that is a *good thing.* ?Adjusting for the held to maturity securities, the adjusted price-to-book is 55%, and my estimate of future earnings is one-ninth of the current price. ?It is rare to find stocks trading at a significant discount to book and a single-digit P/E.

Full disclosure: long NWLI

Sorted Weekly Tweets

Sorted Weekly Tweets

Companies & Industries

 

  • Twitter Sold Some Stock http://t.co/oIwxhl5BAh Valuing speculative companies is tough. Ask how much of sectoral profits they could grab $$ Nov 08, 2013
  • Then discount that at 20%/year, and decide whether you have enough margin for considerable error. I don’t think Twitter gets there. $$ Nov 08, 2013
  • Most US Blockbuster Stores to Close http://t.co/Q77XgZEYGI The internet changes everything; anything that can be bytes is blown to bits $$ Nov 07, 2013
  • Utilities in Pain Selling Renewable Assets at Record Rate http://t.co/0v5YgeAoVj Utilities don’t want 2 allocate capital to low returners $$ Nov 06, 2013
  • FHFA Takes Aim at ‘Forced’ Insurance http://t.co/FZslhVSyLp Won’t happen, b/c banks won’t lend if proprty is uninsured against casualties $$ Nov 05, 2013
  • Coconut Crisis Looms as Postwar Palm Trees Age http://t.co/C5Ub4BnEgu Coconut Trees have aged w/not enough replanting, cuts into yields $$ Nov 05, 2013
  • Makes me wonder whether the life companies didn’t also raise mortality charges in order to make up 4 compressed/negative interest margins $$ Nov 05, 2013
  • Universal Life Policies Hurt by Low-Rate Era http://t.co/qEcwGR3gTQ Guaranteed rates high relative to current interest rate environment $$ Nov 05, 2013
  • Western Digital Adds Helium to Enterprise Hard Drives http://t.co/tCj4H6ksC4 More storage, less power use,aids big data | FD: + $WDC $$ Nov 04, 2013
  • Here’s How Much Berkshire Hathaway Made On Financial Weapons Of Mass Destruction In Q3 http://t.co/F7actdnrmv Buffett wins | FD: + $BRK.B $$ Nov 04, 2013
  • The new American capitalism: Rise of the distorporation http://t.co/KKp7BK91xA Thinly capitalized corporations that distribute profits $$ Nov 03, 2013

 

Politics & Policy

 

  • Obamacare Website Frustrations Persist as Deadline Looms http://t.co/NA5zV7cze1 Harder to fix bad code than to rewrite the system $$ #loser Nov 08, 2013
  • Artificial Trans Fats in Food Deemed Unsafe by US FDA http://t.co/sXf5r5DjjO Y R we limiting freedom in something so basic as food? $$ Nov 08, 2013
  • Obama’s Catastrophic Victory http://t.co/Z9gryN2oA7 Wait till people with bronze policies have to pay their costs prior to the deductible $$ Nov 06, 2013
  • It would involved tort reform, & encouragement of charities to aid the sick, & would shrink Medicare & Medicaid, moving 2a free market $$ Nov 06, 2013
  • Real health reform would remove all government preferences, including the employer deduction, & move to a client pays directly model $$ Nov 06, 2013
  • Colorado Education-Tax Measure Fails http://t.co/GV5rpq9NSQ Interesting datapoint; even 4 local schools, difficult 2 raise income taxes $$ Nov 06, 2013
  • SEC Fines Greater Wenatchee Regional Events District4Misleading Investors http://t.co/oDHpxG5o6I Failed2disclose certain finl projections $$ Nov 06, 2013
  • CFPB Debt Collection Rules May Move in Unprecedented Direction http://t.co/G5LBwfc3em May even affect ability to collect on private debts $$ Nov 06, 2013
  • BlackRock, Fidelity Face Initial Risk Study by Regulators http://t.co/SwyaxP14HB That they would consider this proves they r clueless $$ Nov 06, 2013
  • Obama repeatedly promised people could keep their health insurance under Obamacare http://t.co/dS84R05kzH Law affected ability 2 do that $$ Nov 06, 2013
  • Jonathan Tepper on Obamacare http://t.co/L163WSrcaL A relatively neutral assessment of PPACA, which does not reduce oligopolies & costs $$ Nov 06, 2013
  • Wells Fargo Said to Face US Mortgage-Bond Probe http://t.co/nrbZQOiGHy FIRREA statute used. $BAC $CSGN $JPM $C $WFC all face these probes $$ Nov 06, 2013
  • A tax break for wealthy landowners under scrutiny, from @BBGVisualData http://t.co/lTxFAEPwwk Many parties allied to keep low value break $$ Nov 06, 2013
  • IRS Cracks Down on Breaks 4 Rich Americans http://t.co/dN6dtnTCQG Cracks down on conservation easements; graphic: http://t.co/8jKqjCi7na $$ Nov 06, 2013
  • McDonnell v. Royal Dutch Shell Plc 13-cv-07089 http://t.co/HMbTcvLdEV <– If anyone wants 2c the complaint on Dated Brent Crude Rigging $$ Nov 06, 2013
  • Congress May Push Milk Prices to $8 a Gallon http://t.co/kPPeJ42YlP The solution is 2 end milk price supports; have a free market in milk $$ Nov 05, 2013
  • Obamacare Expedited Bidding Limited Who Could Build Site http://t.co/EEa2UKZQ78 US Medicare&Medicaid Services preapproved 16, only 4 bids $$ Nov 04, 2013
  • Obama’s Broken Promise of Better Government Through Technology http://t.co/eaYVdiAYAj Technology is only as good as its implementation $$ Nov 04, 2013
  • A Stage-4 Gallblader Cancer Survivor Says: I Am One of ObamaCare’s Losers http://t.co/9nZLusmknt PPACA sob story #2 loses coverage & docs $$ Nov 04, 2013
  • Mr. Obama, I Am Unhappy That Obamacare Threatens To Kill Me. http://t.co/T3YnjqYzRJ PPACA sob story #1, loses his healthcare coverage $$ Nov 04, 2013

 

Market Impact

 

  • The Biggest Little Secret In Money Management http://t.co/zeIzMWJmIz Most new fancy strategies can mostly be replicated in simple ways $$ Nov 08, 2013
  • The Dividend Challenge http://t.co/icI80BpcoR E.g., In 1993-1994 dividend-oriented funds did horribly as rates soared. Divs aren’t magic $$ Nov 07, 2013
  • Of Debt, Growth, Interest Rates and History http://t.co/ZEG4za0XLg High debt & real interest rates tend to dampen economic growth $$ Nov 06, 2013
  • Many bonds only have a small number of holders, so it gets easier to guess who the big traders might b, thus affecting the market price $$ Nov 06, 2013
  • When bonds don?t trade http://t.co/71JD7XbJ9S Difficult to facilitate buyside trading w/each other; they want to keep their moves quiet $$ Nov 06, 2013
  • Gross Loses World?s Largest Mutual Fund Title to Vanguard http://t.co/HfpH7pURgE Wonder if Pimco is 2big 4 Gross’ quant strategies 2 work $$ Nov 05, 2013
  • Over the last 10 years investing in venture capital has not outperformed public equity (Pg 5) http://t.co/GnBTZPRhz0 Capital Index.pdf $$ Nov 04, 2013
  • Investors Return to IPOs in Force http://t.co/Hn9RFceouq Fresh Fruits r opposite of IPOs, good when plentiful, IPOs bad when plentiful $$ Nov 04, 2013
  • New Homes Get Built With Renters in Mind http://t.co/j4NYgVS54n If investors r truly long-term 4 running rentals, this could b stable $$ Nov 04, 2013
  • Reduce the noise levels in your investment process http://t.co/XUE0HYpWGt @ritholtz guides us in telling us what chatter 2 avoid hearing $$ Nov 03, 2013

 

Rest of the World

 

  • China?s Soviet-Style Suburbia Heralds Environmental Pain http://t.co/7Sk5too1g1 Central planning fails again $$ Nov 07, 2013
  • Kyoto Veterans Say Global Warming Goal Slipping Away http://t.co/DCqPxzIJcE No incentive to cut carbon emissions; eg, Germany’s coal use $$ Nov 04, 2013
  • Rankings That Rankle http://t.co/xB5bftp7yb Rather than reform further, China would rather shoot the messenger bearing bad tidings $$ Nov 04, 2013
  • Merkel Facing Power Dilemma as Coal Plants Open http://t.co/fMLyBrg7Zz Note that Germany does not care much about CO2 emissions $$ Nov 04, 2013

 

Central Banking

 

  • Greenspan?s Bequest to Yellen Is Board Harmony Shown in Records http://t.co/gIdq6MQjnX more interesting is Volcker offering 2resign in 86 $$ Nov 07, 2013
  • MSNMoney’s Jubak:Fed Has No Way Out of Its Mountain of Debt http://t.co/TVhTheDWSj No surprise. Central bank balance sheets rarely shrink $$ Nov 06, 2013
  • Kozicki Shows Central Bankers Only as Good as Forecasts http://t.co/GwhwxkRLYe Proves we shouldn’t rely on neoclassical economic models $$ Nov 06, 2013

 

Personal Finance

 

  • The red-blue divide in personal finance http://t.co/OgS2PL0jgh Shares my view on Dave Ramsey; useful 4 $$ management, avoid on investing Nov 06, 2013
  • Can I repo a car if I co-signed the auto loan? http://t.co/2xJp83ppnt Rather, lend them the $$ w/a formal loan document; NEVER co-sign!! Nov 05, 2013
  • Mom co-signed, now stuck with student loan payments http://t.co/uVenTWv2Oc Never co-sign, not for a child, parent, friend, anyone, ever $$ Nov 05, 2013
  • The 4% Safe Withdrawal Rule Declines to 3% http://t.co/pSvGBLgXhC My rule: Take 10Y Treasury yield, +1% if neutral, +2% if bullish $$ Nov 05, 2013
  • Banks offering mortgages with only 5% down payments http://t.co/w62w0qwnOX Financing long-term assets w/low equity helped create crisis $$ Nov 05, 2013

 

Other

 

  • Excel monkeys unite! For today, we are cancelling the circular reference! http://t.co/6D7H9NekSi On the challenging Modeloff competition $$ Nov 06, 2013
  • The siren call of Microsoft Excel http://t.co/g5isxFXJJS Excel has its uses, but not for security, audit & production. Use 2 prototype $$ Nov 06, 2013
  • Symbolic Family: De Blasio Success Shows Sea Change for Interracial Couples http://t.co/uzJWeUY0zq We’re one race: We’re human $$ Nov 06, 2013
  • More Commuters Self-Driven, Census Finds http://t.co/XRcRJ7fSo3 Surprising that no one has found an internet-based solution 4 carpooling $$ Nov 05, 2013
  • Game of thrones with world chess champion Viswanathan Anand http://t.co/HnEv9GbmRh Long piece on the reigning chess champ & new challenge $$ Nov 05, 2013
  • Anand On How Computers Have Changed Chess http://t.co/UPjZs61f70 Most openings have become transparent; only odd openings offer surprise $$ Nov 05, 2013
  • Simple Tech Fix Could Allow Millions to Hear – Bloomberg http://t.co/1HrLV8Vj2u Transmits sound directly to a listener?s hearing aid $$ Nov 05, 2013
  • Capt.James A. Kirk Takes Command of Navy Vessel http://t.co/DYj4Noyp8z His nickname is “T.” His vessel has advanced cloaking abilities $$ Nov 04, 2013

 

Wrong

 

  • Wrong Fed Study: Lengthen Low-Rate Guidance to Fix Unemployment Faster http://t.co/Sf3X2lsDOz No data on unemployment in liquidity trap $$ Nov 07, 2013
  • Wrong: Why ‘Rate Shock’ Is An Essential Part Of Health Reform http://t.co/jxxmJQcpTo People should not be forced 2buy more than they want $$ Nov 06, 2013
  • Wrong: Think inside the (right) box; 5 must-read business books http://t.co/VmxZHuFqsf I read “Big Data.” Good, not great. Rest look iffy $$ Nov 05, 2013
  • “Disagree. I read “Big Data.” Good, not great. Others look iffy, particularly ‘Antifragile.'” ? David_Merkel http://t.co/wcVPO5mmxK $$ Nov 05, 2013
  • Wrong: Economists overvalue stock markets http://t.co/vaWef32JS7 Stock prices provide valuable economic signals: http://t.co/XyaEJqXwGn $$ Nov 04, 2013
  • Wrong: Americans? Debt Hangover Seen Ending in Boost to Growth http://t.co/pJXgAYeEwt The consumer remains highly leveraged vs history $$ Nov 04, 2013
  • Wrong: If It Looks Like a Bank, Regulate It Like a Bank http://t.co/8BA1XlrLAJ Money market funds don’t look like banks; very safe assets $$ Nov 04, 2013
  • Wrong: Asymmetric Return With A Catalyst http://t.co/FTHYYP2Rwx Writer doesn’t get difficultly of getting free $$ from life insurers $HRG Nov 04, 2013
  • http://t.co/jH200iYZyT Comps of $MET & $PRU – horribly optimistic. $NWLI would be better. Another reason I don’t read seeking alpha $$ $HRG Nov 04, 2013

 

Comments, Replies & Retweets

 

  • RT @pdacosta: “Forward guidance is a stupid academic fantasy grabbed by those who wish to escape making real policy.” – @AdamPosen h/t @NHe? Nov 07, 2013
  • RT @pdacosta: A tragedy and a travesty: Unemployment in Spain http://t.co/u4UlylupKH Nov 06, 2013
  • http://t.co/fwt1rLXORs You could try applying the same to Title and Mortgage insurer kickbacks.” ? David_Merkel http://t.co/El8F8V0690 $$ Nov 05, 2013
  • @ritholtz First Bloomberg View Column: Welcome http://t.co/rqAqgL8slw Bloomberg picks up a great columnist grown from financial blogging $$ Nov 04, 2013
  • “Well done, Barry. Your writing skill has taken you above and beyond.” ? David_Merkel http://t.co/c42lp6sH6i @ritholtz new @bloomberg $$ Nov 04, 2013

 

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

 

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