I have a saying that when there is no news, the market reveals its true direction.  That applies to individual securities as well as the market as a whole.  Why?

Think of institutional traders, who drive much of the market.  They are so big that they have to spread out their orders over time, or they would move the market against their positions.  On days when there is no news, volume tends to be light, displaying the actions of the big traders.

Valero recently spun off CST Brands, which was their retailing arm, selling gasoline, and things you find at convenience stores.  Seems cheap to me.  Over the last few days it has been rising on no news.  To me that means some institutional investors are buying.

I’ve seen the same thing happen when a stock falls on no news.  That’s usually a bad sign if you are long, because it means someone is selling for a reason you are not aware of.  Now, if you have done your homework, and know more than the seller, a lower price is to you advantage if you want to buy more.  The trouble is, you don’t know how much the seller has to unload.  To use CST Brands as an example again, I received some shares as a result of holding Valero for clients (and me, I get what my clients get), but I estimated how much index related selling had to happen as a result.  I bought a full stake for my clients at the point where the total volume from the prior “when issued” trading, plus actual trading on the first day hit my estimates.  It was close to the low for the day, though someone more enterprising could have picked up shares cheaper during the “when issued” trading, if he was clever.

But sometimes when there is news, you need to try to gauge whether something is an over- or under-reaction.  My favorite example here is RGA, the prominent well-run life reinsurer.  Once every eight quarters or so, they report a lousy quarter.  Why?  Because of the law of small numbers.  The large claims inside a life reinsurer are few, but make a considerable difference to the earnings when a bunch of large policy deaths happen at the same time.  The general public does not get this, so when RGA has a bad quarter, it is usually a good time to be a buyer.

The same applies to P&C reinsurers during crises.  I added to my reinsurance holdings post-Sandy, because I knew that the reinsurers would take relatively few claims because they don’t cover flood for residential, though they might have commercial-related claims.  As it was, none of my insurance holdings had any significant claims from Sandy, and the portfolio did well.

Toss out another example, but Endurance Specialty is one of the leading underwriters of crop insurance.  Crop insurance was a horrible place to be last year, and that put pressure on ENH as a stock.  But that neglected all of the other lines of business of Endurance that were performing well, as well as the risk controls that Endurance placed on its crop insurance business.

Perhaps the broad message here is to know your stocks well, so well that you can gauge whether a  market reaction to news is overdone, underdone, or meh, normal.

Analyzing the reaction to news (or no news) bonds and other assets as well.  When I was an institutional bond manager, I would watch the results of trading on the slow days, because it would give a clue to what the “big guys” were doing.  Also, when an event that has been anticipated occurs, like a ratings downgrade on the bonds of a troubled company, the market reaction says a lot, because often there are many who were waiting to buy once the downgrade happened, so price rises a lot at the downgrade.  (Think of the USA downgrade by S&P.)  The reverse is true for downgrades that are more of a surprise.

In summary, all news is not equal.  The reactions to news, and the lack thereof, can tell us a lot about the intentions of large market actors.  Do your homework well, and prosper off of the knowledge that it gives you regarding reactions, over-reactions, and under-reactions.

Full disclosure: long VLO CST RGA ENH

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.

From a reader who I appreciate:

David, I am curious if you have thoughts about insurance companies (especially P&C) hedging political risk … the answer to this question obviously will carry over to healthcare quickly.

Recently, my state (Corrupticut) was hit by hurricane Sandy. Many municipalities (but not all) still had extensive flood control, hurricane gates, levies, etc from the 1970s — the last time we had really active hurricanes.

In an effort to bump up property tax revenue, several municipalities allowed developers to build McMansions right on top of, or in place of, sand dunes that had existed for centuries. The dunes blocked the view or some such nonsense. Quite predictably, these municipalities had much higher damage than those who maintained dunes and other protection.

Our idiot governor decided to keep his heel on the throats of insurance companies to make them pay — and the insurance companies called his bluff. “Fine Mr Malloy, we will stop selling home owners insurance in your state — good luck getting a mortgage without any insurance. Gee whiz, the lack of mortgages probably will devastate home prices. You should have thought of that before you chased us out.”

All up and down the coast line, insurance companies are telling state and local governments that sand dunes, levies and sea walls must be restored and maintained — or insurance will not cover anything.

States along the gulf of Mexico (ie hurricane Katrina et al) enacted laws prohibiting developers from taking down mangrove fields.

I heard rumors (not sure if they are true) that re-insurance companies have told underwriters that they will not accept pools that contain policies in states that allow destruction of natural flood barriers.

Perhaps most recently, New Jersey’s governor told his MTV “J Wow” constituents that they were going to restore sand dunes regardless of whether it looked good.

I seriously doubt that corrupt populist politicians (like the governor of my state) will stop promising to seize private property to buy votes … but it also seems they have pushed the P&C insurance industry too far. Hard to imagine that anyone will knowingly operate at a loss.

And Hugo Chavez not withstanding, most national governments won’t jeopardize their own regime to subsidize a practice that also threatens their regime.

The US government doesn’t have the trillions needed to allow FEMA to insure McMansions built where sand dunes once stood.

Whether the US ends up with “universal healthcare” or not — the federal government does not have the money to keep the current healthcare system growing 8-10% per year while the economy grows less than half as fast.

The end result is obvious — stupid government policies will fail long term. Maybe common sense will prevail again. Maybe the government will bankrupt itself and become irrelevant. Hard to guess which.

But in the short term — how can the insurance companies hedge political risk?

One of the reasons for high storm damages over the past ten years has been the pressure from developers to develop land that is beautiful, but subject to flooding risk  from storms.  In the present time, that has led insurers to raise prices on such developments, and/or refuse to insure, allowing state-sponsored captive insurers to absorb the risk on behalf of the taxpayers.

Insurers have gotten smarter, in my opinion, and most have learned to resist the actions of the states, sacrificing business volume for profitability.  They understand that there is a “Knot at the Bottom of the Rope,” below which you can’t go any lower.  So if a state is making certain classes of business unprofitable, stop underwriting those classes of business.

Contract law favors the insurers.  They can’t be compelled to take losses against their will, except by contract.

Eventually politicians have to face reality, lest they go the way of Argentina, or worse, Zimbabwe.  Insurers, though they may not be loved, reflect a fair estimation of risk.  Politicians in the short-run may try to bend the view of risk to voters, but if contract law is observed, no change will happen.

Look, we would all like Santa Claus behind us bailing out our every mistake and trouble, but in the real world, where resources are limited, claim payments flow according to contract.

Yes, the reinsurers push on the insurers, and that leads to reductions in coverage.  They have economic incentives as well, and they are all the more sharp, because they really get hit when things get bad.

Finally, you are correct that the US can’t maintain its current approach to healthcare.  If we were smart, we would eliminate the corporate tax deduction for healthcare, and return the system to the free market.  If you want health insurance, let it be done outside of the tax code.  That could help balance the budget.  As I listen to many screaming, I would add, “And let’s eliminate the interest deduction on mortgages, and the charitable donation deductions.”

We have to clean up the tax code such that most tax preferences disappear, so that the budget can balance.  Balanced budgets promote growth, because people do not fear higher future taxes.

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

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

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

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

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

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

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

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

Offshore

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

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

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

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

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

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

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

Why such a high ROE to get book?  Earnings quality.  Reinsurers have noisy earnings due to catastrophes.  You don’t give high valuations to companies that run hot or cold.  But the trick here is to see who is accumulating book value the fastest – they tend to be the stars over time.  Endurance and Arch have been good at that.

Life

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

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

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

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

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

Property & Casualty

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

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

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

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

Health

With Obamacare, I don’t know which end is up.  It could end up being a giant sop to the health insurers, or it could destroy the health insurers in order to create a government single-payer model, rather than the optimal model for cost reduction, where first parties pay directly, or pay insurers.  You want reductions in medical costs, get the government out of healthcare, and that includes the corporate deduction for employee health insurance.

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

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

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

I don’t regard myself as an expert on the health insurance sub-industry, so treat this with skepticism.  I include it for completeness, because I think the PB-ROE concept has value in insurance.  One more note, the PB-ROE model thinks of this as a safe investment subindustry, because to have a book value valuation, you have to have an ROE of 1.8%.

Financial Insurers

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

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

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

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

Insurance-Related Companies

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

It doesn’t look like much of a group.

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

Summary

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

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

In the final part of this series, I will go over some nuances of insurance accounting – I leave it to the end because it is kind of dull, but can make a lot of difference, because some companies look cheap and aren’t really cheap.

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

I’m going to comment on three articles written before Buffett’s party.  I am not picking on these because they are dumb.  I am picking on them because they are brighter than most, but still don’t get Buffett.

Copying Warren Buffett harder for investors today

No individual investor can copy Buffett in full, unless he buys BRK, which isn’t the worst idea around.  These two articles explain why almost no one can copy Warren:

• How Warren Buffett is Different from Most Investors, Part 1
• How Warren Buffett is Different from Most Investors, Part 2

In general, it is far better to follow the principles that Buffett has espoused — value investing, than to try to mimic Buffett himself.  Buffett is so big that he can’t look at the little opportunities that you and I can look at.  So take advantage of your small size, and buy some of the illiquid companies that Buffett can’t touch, because they don’t move the needle.

That said, if I were in the shoes of Todd Combs or Ted Weschler, I would create a “small cap bucket” for odd names that you know are cheap, but you only want to get at your level.  You don’t want to waste a lot of time on this, but you do want to take advantage of your insights, at least to the level that DFA does.

Buffett’s Bear: 5 Questions Doug Kass Should Ask

I think Doug Kass will have better questions than these, but they are simple enough that I can answer them in my imitation of Buffett’s voice:

1) Why the lackluster returns?

Charlie & I have often said our stock was overvalued.  We recently initiated a buyback, because we no longer thought so.  Since then, performance has been adequate.

But we don’t manage for market returns.  We manage the company to compound the net worth.  We can’t control the capitalization that outside investor might assign the company, so we focus on what we can control.

2) Why shouldn’t Berkshire break-up?

There are real financing advantages to being part of Berkshire Hathaway.  We have chosen firms that will do well in good times and bad and have conservatively financed them.  Further, one of our advantages is that those who sell companies to us know that the culture of the company will be preserved.  That gives us an advantage in acquiring firms that most of private equity does not have.  It makes us eclectic, but it is a good eclectic.

3) Is the stock market overvalued?

We don’t pay much attention to that, but we won’t overpay for investments, and we are not finding much attractive at present.  We just try to grow the net worth of our company.

4) Is Geico moving fast enough?

GEICO has done exceptionally well over the years, underwrites very well, and is one of the lowest cost operators  in personal insurance.  Speed is not what we are concerned with; we are more concerned about the quality of what we do rather than taking chances, as we believe some of the industry is regarding close monitoring of policyholder behavior.  If it truly works, our managers at GEICO will adopt it.

5) Is Berkshire’s business model preventing success?

I empower my managers to make all manner of decisions to enhance the value of the company.  This is not a weakness; they help me make money in good times and in bad times.  The stock market has had a hard run of late; please revisit what we do after the next correction in the market.

(I hope Doug Kass has better questions than these…)

Berkshire Annual Meeting: 5 Questions for Warren Buffett

1) Come on, Warren, isn’t it Ajit?

This isn’t obvious.  We have many excellent managers.  Ajit’s underwriting skills are considerable, as well as his general management skills.  He would do well to succeed me, but there may be others who are better.

2) About that Heinz deal…?

Heinz was an excellent deal for us, and we would do more of them.  We have an excellent partner managing the investment, and if it does well, we have a disproportionate amount of the upside in the deal.  If it does middlingly, we do well also.

3) How does the economy look to Berkshire?

Really, we don’t care much about the economy in the short-run.  We are building a business to exist over the long-term.  We are bulls on America; no one has ever won in the long haul being bearish on America.

4) About those new stakes in Goldman Sachs and General Electric?

We have expressed our desires to be long-term holders of Goldman Sachs.  As for General Electric, we admire the company.  Who doesn’t?  That said, we will manage our stakes relative to our long-term expectations of their value.

5) Is your Twitter account due diligence?

We only buy companies where there is no competition, and where we think there is value and sustainable competitive advantage.  We created a Twitter account for me so that we could communicate with those who follow our company.

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I’m sure Buffett would sound better.  That said, even though it is the Wall Street Journal’s reporters, there are better questions to ask.  Hopefully Doug Kass will ask some of them.  That said, Berkshire Hathaway is well thought out.  I think a question that would surprise Buffett would be unlikely.  And if it did surprise Buffett, Charlie would give an adequate terse answer.

I have noted recently a number of advertisements offering risk-free investing.  When I dig into them, they are selling life insurance and annuities.  They claim high rates of return with virtually no risk.  Here are the problems:

• Life insurers have come off of 3+ decades of falling interest rates, portfolio yields are high relative to what you can get in the market today.  Some insurers may show above average rates, but if enough take advantage of them, the rates will fall to market levels.
• Commissions to agents are relatively high, which has two effects: 1) less investment performance goes to the insured, and more to the agent, and 2) High surrender charges.  If you ever need your money in full, you will never get it back from an insurance contract.
• People have forgotten the 1970s, with rising interest rates, where many insurers were near bankruptcy, and on a market value basis, many were technically bankrupt.
• Life insurers that have written a lot of variable business or a lot of indexed business have taken on a lot of hidden equity risk.  Imagine a Great Depression scenario, where equities fall 90% over 3 years, and it takes 20 years more for values to recover.  Guess what?  Virtually all of the life insurance industry dies, whereas most survived the Great Depression.
• From Mutual Insurers, life insurance dividends are not guaranteed.  In a real crisis, dividend scales could drop to zero.  The insurance you thought was free regains a price.
• Equity indexed products rarely return well.  When I analyzed them back in the early 2000s, T-bill yields were the result of my models.  Today, T-bill yields are so low that the returns must be better.  That said, you will have to accept low returns versus a long surrender charge.

Insurance is meant for protection, not savings.  It is also meant for scamming the tax man, especially with respect to estate taxes.

Just be wary here, I’m not naming names, because many of these parties are litigious, another sign of weakness.  But there is no “one size fits all” method for Wealth Management.  One of my clients recently complimented me because I don’t try to get all of the assets of a client.  Indeed, I want my clients to feel that they have chosen me for their purposes.  I do not want them to allocate more to me than they are comfortable allocating.

So, be aware of the limitations inherent in life insurance products.  And when you hear that something is virtually risk-free, take a step back and hold onto your wallet.  Nothing is risk-free.  Even with the guaranty funds backing the insurers, the full value of large policies is not guaranteed, much like large depositors in the banks.

The regulation of the solvency of life insurers has been better than that of banks for the last 30 years, but it hasn’t been perfect.  I was on the takeover team that tried to have AIG to take over the Equitable.  AXA overbid, and bought a bad situation just as it was about to turn.

As for AIG, some of those promoting insurance products say that AIG’s life insurance subsidiaries did not need a bailout in the crisis.  That was false, because of the securities lending agreements, and a few other things.  Most of the domestic life companies of AIG received bailout money.

The good record of life insurance lack of default over the last 30 years is the result of three things:

• Falling interest rates
• Better solvency regulation than banks
• AIG’s life insurance subsidiaries were bailed out.

Be diversified, and don’t use just one set of entities to fund your retirement.  Using only insurers runs a lot of regulatory and taxation risk.  A future government may find clever ways to undo the clever tax avoidance that has been achieved there so far.  Spread your regulatory risk.  If you are wealthy enough, spread out your country risk, but be wary as you do so.  Who will support the rule of law better than the US?  Where will governments not tap assets under custody in a crisis?  Remember Cyprus.  It will not be the last place where assets are expropriated for the good of locals, even if locals got hurt as well.

Two of my 35 stocks have short interest ratios over 10 days.  [Short interest ratio = amount of shares shorted / average daily volume]

I look at this statistic, and force myself to re-examine companies where the ratio is over 10.  Maybe there is something that I don’t know.

The two stocks in question are Stancorp Financial and National Western Life Insurance.  The short cases for both are based on a naive view of how insurance companies work.

Stancorp is a disability insurer.  Disability insurers often do badly in a recession because disability claims increase — people who are unemployed claim they are disabled.

There are two models for disability insurance: 1) Underwrite carefully, and pay all legitimate claims. 2) Accept all business, but when claims come in litigate with vigor.

Stancorp follows the first model.  I would never own an insurer that followed the second model, it is dishonest, and it is bad business.

Because Stancorp does its risk management up front, it does not get the same degree of unemployment masquerading as disability claims.  But the shorts don’t get this.  Thus the short interest ratio near 20.

Doesn’t bother me.  This is a undervalued company with a quality management team.  Low debt.  Sustainable competitive advantages in its niches.  One nice thing about being a knowledgeable insurance investor is that you can get a firm grip on the nature of the management teams, and invest in the good ones when they are out of favor.

With National Western, the short interest ratio is near 11.  Admittedly, it is an unusual company.  No analysts. Large controlling shareholder.  Hasn’t lost money in over 10 years.  Trades at less than 40% of adjusted book value.  Sells insurance policies to foreigners who want flight capital.

With interest rates falling, some shorts think some insurers will have difficulty meeting policy interest guarantees.  From my view, that is not the case with National Western, they have a large amount of long bonds to protect the guarantees.

Thus I say to the shorts: short all you want.  You will be buyers at higher levels.

Full disclosure: long NWLI and SFG for my clients and me

Note: this was published at RealMoney on 7/1/2004.  This was part three of a  four part series. Part One is lost but was given the lousy title: Managing Liability Affects Stocks, Pt. 1.  If you have a copy, send it to me.

Fortunately, these were the best three of the four articles.

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Investing Strategies

Different investor groups in the market have different patterns of funding and disbursement.

Understand those patterns to read market action more clearly and see what trends might emerge.

Recently, the firm I work for held a large amount of the common stock of Phoenix (PNX:NYSE). As the stock rallied, I kept moving out my sell target, because the technicals on the stock were so compelling. There were no analysts saying buy, there were a few saying sell and the short interest was high. The company was doing all the right things and the stock had great price momentum, but the valuation was just too high. I wanted to sell, but I couldn’t figure out when.

Finally, on Feb. 21, the stock price began to rally on no news. Going to the message boards, I discovered that there was a momentum investor with a radio show who was making one of his occasional television appearances, and was touting Phoenix. I went to our trader and said that we had our chance. There was a group of valuation-insensitive buyers buying the stock with abandon. I said, “Ride the ask [offer stock at the asking price], and if you get any thick bids near the ask, hit them.” (Read: If there are aggressive large bidders, sell to them at their level.) We sold our position in two weeks, without disturbing the market; we were able to get an average price of about $14.25. (Our trader is top-notch.) Today the price of Phoenix is about 15% lower. The momentum investors choked on the stock that we (and others) fed them.

Why did this work for us? We understood two aspects of how Phoenix traded very well: the fundamentals and technicals. The fundamentals taught us what fair value should be, but the technicals taught us how investors would react to movements in the stock price.

Every investor has a mode of funding and a mode of disbursement. The funding and disbursement modes affect how long and under what conditions an investor wants to, or is able to, hold his position. Some examples will illustrate general principles of these modes. I will describe the ways that various classes of investors fund their investments, how their investments are held, how they are liquidated and how all of this affects what kinds of investments they can use from both an asset class and liquidity standpoint. I also will attempt to explain how the behavior of some classes of investors can become temporarily self-reinforcing, leading to booms and busts.  Finally, I will try to give some practical advice along the way as to how you can benefit from the behaviors of different classes of investors.

1. Banks and Other Depositary Institutions

Banks make promises to depositors. Some of these promises are absolute; some are contingent on external events. Bank regulations exist to make the keeping of the promises more certain (or, in modern times, keep the guarantee funds solvent). Banks have to keep adequate capital on hand to provide a margin of safety against insolvency. The amount of capital varies on the immediacy with which deposits may be withdrawn, the degree of equity/credit risk of the assets and how well the asset cash flows are matched to the liability cash flows.

Liquid assets must be set aside to meet the amount of funds that may be withdrawn immediately with little or no penalty. The more that is set aside, the lower the risk and the lower the profit. If the assets are materially longer or contain more equity risk than a money-market-like investment, there may be a loss when the assets are liquidated to pay off depositors. In general, the cash flows of assets must be matched to the liabilities that fund them, at least in aggregate.

This biases banks to hold primarily short- to intermediate-term, high-quality fixed-income assets: bonds, loans, mortgages and mortgage-backed securities. These are generally safe investments, but banks are fairly leveraged institutions. If the market moves against their investments and their capital cushion gets eroded to the point where their ability to operate becomes questionable to regulators (or customers), the banks might be forced to sell investments into a falling market in order to preserve solvency.

The first motive of a financial institution is to survive; the second is to profit. When the first motive is threatened, even if there is a good possibility that the institution will survive and make more money if it retains the assets that now are perceived as risky, in general, the risky assets will get sold to assure survival at the cost of current profitability.

To return to a concept I discussed in the first column I wrote for RealMoney, Valuing Financial Slack in the Steel Sector, banks with a high degree of leverage relative to the overall riskiness of their assets and liabilities possess little in the way of financial slack. Volatility in the markets that cuts against their position harms such companies. They end up becoming forced sellers and buyers.

Banks with financial slack can enjoy volatility. When the markets are dislocated, they can make room on their balance sheets to wave in securities that are distressed and temporarily trading below intrinsic value. During times of volatility, the strong benefit at the expense of the weak, whereas weak firms outperform during periods of stability. As an example, after the real estate crisis in 1989-1992, the banks that did the best over the whole cycle were those that did not become overleveraged, did not over-lend to marginal credits and had diversified operations. During the crisis, they had the flexibility to lend in situations of their choosing at favorable yields.

2. Insurance Companies

Insurance companies are like banks but generally have longer funding bases and typically run at a higher ratio of surplus to assets. Insurance companies typically have more ways to lose money than banks, and potential cash flow mismatches in the longer liability structure require more capital to fund potential losses. In principle, the higher surplus levels and the longer liabilities should allow for investment in longer-duration assets like equities, but the regulations make that difficult. Surplus is limited; what gets used for equities can’t be used for underwriting.

As a counterexample, consider what happened to the European insurance industry in 2002. European insurers are allowed to invest much more in equities than their U.S. counterparts can. (Berkshire Hathaway (BRK.A:NYSE) is an interesting exception here.) As the bull market of the 1990s came to an end, European insurers found themselves flush with surplus from years of excellent stock-market returns, and adequate, if declining, underwriting performance. The fat years had led to sloppiness in underwriting from 1997 to 2001.

During the bull market, many of the European insurers let their bets ride and did not significantly rebalance away from equities. Running asset policies that were, in hindsight, very aggressive, they came into a period from 2000 to 2002 that would qualify as the perfect storm: large underwriting losses, losses in the equity and corporate bond markets and rating agencies on the warpath, downgrading newly weak companies at a time when higher ratings would have helped cash flow. In mid-2002, their regulators delivered the coup de grace, ordering the European insurers to sell their now-depressed stocks and bonds into a falling market. Sell they did, buying safer bonds with the proceeds. Their forced selling put in the bottom of the stock and corporate bond markets in September and October of 2002. Investors with sufficient financial slack, like Warren Buffett, were able to wave in assets at bargain prices.

This principle may be articulated more broadly as, “The tightest constraint dominates investment policy.” As an example, an insurer that already was at a full allocation on junk bonds could not take advantage of the depressed levels in the junk bond markets; such investors were biting their nails, wondering if they would make it through alive. Another example occurred in 1994, when the most volatile residential mortgage bonds were blowing up. Insurance companies that had a full allocation to that class could not buy more when prices were at their most attractive. Companies and investors that rarely bought the “toxic waste” of the residential mortgage bond market began scooping up bonds at discounts unimaginable previously. A number of flexible investors, including St. Paul (now St. Paul Travelers) and Marty Whitman both ventured outside their ordinary investment habitats to benefit from the crisis.

3. Defined Benefit Pension Plan

Defined benefit plans need cash to fund payments to beneficiaries. The amount and timing of the benefit payments vary with plan demographics (sex, age and income), physical roughness of the industry and the specific plan provisions (e.g., late retirement, early retirement, etc.). Inflows to DB plans depend on funding levels and the financial health of the company sponsoring the plan. For an individual DB plan, the cash inflow and outflow characteristics will help determine the plan’s asset allocation, together with the risk tolerance of the plan sponsor.  The more risk-averse a plan is, the less capable it is of funding inflows, and the older the plan’s participant population, the larger the proportion of assets that will go into bonds and other safer investments.

For all DB plans in aggregate, though, the cash flow and demographic characteristics mirror those of the Old Economy. DB plans were created back in the days when the relationships between employer and employed were more fixed than they are now. In the current era of more short-lived employment relationships and with the average age of participants in DB plans rising, these plans face several challenges:

1. Net cash outflows are getting closer.
2. There are fewer cash inflows.
3. Plans are being terminated (or converted to cash balance plans) due to cost, economic weakness and inflexibility.

DB plans are major holders of equity and debt in the U.S., but they are not as great a force as they once were.  Defined contribution plans (i.e. 401(k)s, 403(b)s, etc.) are bigger now. The relative decline and aging of DB plans has had, and will continue to have, two effects in the market. First, because of aging, there will be a greater relative demand for bonds. Second, DB plans have always had a long investment time horizon. That is shrinking now. DB plans tend to resist trends in the market; they tend to rebalance to a fixed asset allocation, which leads them to buy low and sell high. DB plans were the ones selling equities in March 2000 and buying in October 2002; their rebalancing strategies insured that. As DB plans become a smaller fraction of the investor base, markets will become more volatile due to the reduction in long-horizon capital in the market.

4. Endowments

Endowments plan to survive forever. Forever is a tough mandate.

Inflows to endowments are uncertain, and outflows are fairly constant. They have spending formulas, the most common of which has the charity spending a constant percentage each year, usually 4% to 6% of the endowment. (In the old days, say 10 years ago, most formulas allowed charities to spend income, which was defined as dividends plus net capital gains.) Within these constraints, endowments behave like defined benefit plans.

5. Mutual Funds

Mutual funds do not face any fixed funding or disbursement. Their flows come from retail money chasing past performance. Managers that do well face the blessing of attracting more funds, which they hope will not dilute their returns. Managers that do poorly have funds withdrawn from them, forcing them to liquidate investments that they otherwise think are promising. If a manager is a big enough investor in a given company’s stock (think of Janus’ concentrated portfolios), this can have the effect of worsening performance as liquidation goes on, or boosting the already good performance of managers that are receiving cash inflows to a concentrated fund.

These tendencies become more pronounced the better or worse that performance gets. When performance is near the median level, say, within the second and third quartiles, performance-driven fund flows are small. For many mutual fund managers, this gives them the incentive to never drift too far away from the benchmark, whether that is an equity index or an average portfolio of peers. There is safety in the pack, even if there might be more grass to eat further from the herd. It is rare for a mutual fund manager to be fired for being mediocre.

6. Index Funds

What is true of regular mutual funds is also true of index funds, but the difference between the two helps illuminate a basic idea on demographics. Aside from taking market share away from active managers, when do index funds receive and disburse funds? The answer lies mainly in the demographics of investors.

When investors are younger, they invest surplus cash. When they are older, particularly after retirement, they liquidate investments to generate cash. Given the demographics in the U.S., the excess return for merely belonging to the S&P 500 has been roughly 4% per year over the past 15 years; index funds have received disproportionate large inflows relative to the market as a whole. Aside from that, in aggregate, active equity managers benchmark to something that approximates the S&P 500. Belonging to the S&P 500 ensures a continuing flow of capital.

Or does it? What will happen near 2020, when aggregate investment behavior changes from saving to liquidation?  Belonging to major indices may not have the same cachet as investors liquidate their holdings to fund present needs. What was 4% positive in the 1990s could become 4% negative in the 2020s, absent a continuing move toward passive investing.

I don’t have a firm answer here, but I do have suspicions. I would be cautious of too much index exposure 15 years from now, to the extent it can be avoided. (And of course, this will be anticipated several years before the flows turn negative.)

7. Unleveraged Private Investors

Sometimes private investors feel disadvantaged vs. larger institutional players, but there are advantages that unleveraged private investors have that institutional players often don’t: the abilities to invest for the long term, concentrate and do nothing.

Institutional investors are subject to the tyranny of constant measurement because they manage money for others. As I have noted before, measurement affects how a manager invests, particularly when it might affect the amount of assets under management, or the receipt of incentive fees. This encourages managers to be both short-term in their orientation and more like an index. It also encourages hyperactivity; clients often expect a manager to make changes to the portfolio even when doing nothing could be the most prudent policy.

Unleveraged private investors can make aggressive investment decisions. They can concentrate their portfolios or consider more esoteric areas of the market. They also can back away from the market if they feel that opportunities are absent. Finally, they can buy and hold, which is not always an option for institutions. They can’t always ride out long but temporary dips in the price of an asset.

That an unleveraged private investor can do these things doesn’t mean he should. Using these advantages presumes a level of expertise in the market well in excess of the average investor. Most investors are average and should index. Those with skill should use it to their maximum advantage, realizing that they are taking their own financial life in their hands; the risks to such an approach are significant, but the same is true of the rewards.

Unleveraged private investors have needs for cash. Some will need it for college, retirement, a second home, etc.  The sooner that an investor will need to liquidate a significant portion of his portfolio, the more conservative the portfolio must be to achieve those spending goals. Looking at private investors in aggregate, this would mean that as the baby boomers approach and enter retirement, there might be a tendency for the overall willingness to take risk in the markets to decline. Also, once the baby boomers are in retirement, assets will have to be liquidated to support them, which will be a drag on the markets at that time.

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In the second part of this column, I will describe how the funding and disbursement modes of three more key groups of investors affect the market, and how balance sheet players and total return players further mix up the market forces. I’ll also use the Long Term Capital Management crisis to illustrate how illiquidity can shape and shake the market.

There’s kind of a rule of thumb in Asset-Liability management, that you match liquidity over the next 12 months, and match interest rate sensitivity overall.  I would do more than that, creating my own randomized interest rate models, as well as a new way of creating structured randomness in simulation models.  For a brief period of time, I had one of the best multivariate randomness programs out there, eliminating the problem of correlations in higher dimensions common with Hammersly points.  (My work was not theoretical, but intuitive… once I saw how the randomness was created, I figured out how to de-correlate the higher dimensions (since it was based on prime numbers, create more number than you need, and use a higher prime number to select observations.)

Anyway, when I brought my full-interest rate curve scenarios to the investment department in 1994, they said to me, “These are the first realistic interest rate scenarios we have ever seen.  Did you constrain them?”  I told them “No, just weak mean reversion.  Noise dominates in the short run, mean reversion dominates in the long run.”

As a result, for the lines of business over which I had oversight, we measured our interest rate mismatch in terms of days, weeks, and months, but never years.  Please ignore this incident where things drifted, but worked out exceptionally well (really, that should be a part of this series).  We published a document to show everyone how well we managed interest rate risk in Provident Mutual’s pension division.  We used scenarios far beyond what was required to show how well we did our work.  The regulators never complained.

At that point in time, the ability to integrate residential mortgage-backed securities into cash flow analyses was rudimentary at best.  But I found ways to make it work, most of the time.  That said, I remember joking with the MBS manager in late 1993, and saying there was a new term for a well-protected PAC bond.  He asked, “What is it?”  I replied, “Cash.”  He sarcastically said, “Oh, you are so funny.”   That said, I pointed out to the investment department that some of their bonds that they thought would last another four years would disappear in 2-3 months.

Then there was the floating rate guaranteed investment contract project that I eventually killed because it was impossible.  You can’t argue with expectations that are unrealistic.  Even better, I beat the Goldman Sachs representative.

In running the GIC desk at Provident Mutual, I had to review a lot of strategies because making money on short-term bonds/loans was difficult, and difficult the degree that I doubted as to whether we were in a good business.  On the bright side, I protected the firm until the day that we  could not write any more  GICs, because our credit quality was too low.  That was the fault of the less entrepreneurial part of the company, so I couldn’t so much about it, except close my operations down.  I asked the senior management team to provide a guarantee to my GICs, but they refused.

As such, I shut the line of business down.  With clients that were unreasonable over credit quality, and management unwilling to extend credit protection to GICs, the battle over GICs was ended, and I sent the line into runoff.

Five years later, as we were now part of the same firm I stood at the estate of John Dwight, with a young woman that I had sold the last GIC of Provident Mutual to, I said, “The end of the GIC business of Provident Mutual.”  We talked, she smiled, but it was part of the end of an era, because GICs were a minority of the assets in Stable Value funds.

If nothing else, this helps to highlight the impermanence of all that is done in financial firms.  I know this in my own life, but I am sure that it is true for most people in finance.

When I worked for Pacific Standard, which had the dubious distinction of being the largest life insurance insolvency of the 1980s, I had few investment-related tasks.  Investments were handled by the overly aggressive parent company Southmark, which gave little attention to risk.

But I knew things weren’t going well, and so I interviewed widely, finally landing two job offers with Midland National and AIG.   I chose the spot with AIG, because they led me to believe I would work on the international side.  When I arrived, lo, I had a job on the domestic side.  As far as the job went, had I known I would be placed on the domestic side, I would have rather gone to Midland National.  They thought I had real leadership potential — whether true or not, that’s what I was told, and I would not have minded living in South Dakota, or nearby.  As it was, there were many good things that happen to me as a result of living in-between Wilmington, Delaware, and Philadelphia, living on the PA side of the line for reasons of adoption and homeschooling.

When I got to AIG, there was one main thing that involved my risk management skills.  AIG parent wanted growth in GAAP earnings.  They wanted to see a 15% ROE, which few in the life industry were attaining.  In order to do that, they entered into reinsurance treaties (before I arrived).  These would lever up the balance sheets of the subsidiary companies, without incurring debt.  Most of them passed risk to the reinsurers, one did not.

So, when I was called into an examination by the Delaware State Insurance Department auditor over the one treaty that did not pass risk, he said to me, “You know this treaty does not pass risk.”  I replied, “Under ordinary circumstances, I would agree, but the reinsurer has taken a significant loss from this treaty.”  He said, “What do you mean?”  I replied that when Congress passed the DAC tax, the reinsurer suffered the loss — they paid up front, and we pay over time, with zero interest.

He looked at me and said that reinsurance treaties did not exist to cover tax policy, and that the treaty was a sham.  I just shrugged.  I was not the creator of the treaty, and would not have done it if I had been at AIG two years earlier.

But the there were the two larger treaties that passed risk with a vengeance to a large reinsurer [LR] who is no longer a reinsurer (if anyone wrote treaties like these, he might not be a reinsurer anymore either).  In one sense, the treaties were structured like the trading requirements in CDOs.  If you must trade:

• Get more income
• Don’t give up rating
• Don’t extend maturity
• And a few more smaller things.

I was not there when the treaties were created.  Had I been there, I would have paid a lot more attention to them, and instructed the investment department to set up segregated portfolios, which was not done.  As it was, bonds that underlay the treaty were casually sold as if free to do so.

Now I arrive on the scene.  After reading the treaties, and looking at the data, I conclude that the treaties have been abused on our side.  I suggested to LR that I go through the history, and reallocate bonds that would have fulfilled the treaties strictures, an re-work the accounting so that the terms of the treaty would be fulfilled.  Initially LR agreed to this.

The treaty passed all investment risk to the reinsurer, so defaults would hit them.  What was worse, the liabilities underlying the treaty were structured settlements.  (Structured settlements result from a court case where someone is injured.  The defendant offers to buy from a reputable life insurer an annuity that will make the requisite payments.  Low bid wins, and if the plaintiff is badly injured, the cost goes down for payments that terminate at death.  That’s where most of the bad estimates com in.)  In those days, structured settlements were a “winner’s curse.”  If you won, it was because you mis-bid.  AIG Domestic Life Companies regularly overbid for their business (as did most of the industry).  LR did not do enough due diligence to see the underwriting errors.

I did a mortality study to estimate how badly we needed to increase reserves, and lo, it was more than $100 million, all of which would flow to LR.  LR decided to sue.  After I had gone on to Provident Mutual, AIG settled with LR.  Our missteps with the assets made the case tough, and the reinsurance treaty was rescinded.  That should have been enough to jolt AIG’s earnings for a quarter, but it did not.  Funny that, and it always left me a little suspicious of AIG.  (And LR.)

Before I left AIG, I had clipped the wings of the underwriters of the structured settlements so that they could not write on cases for the most severely disabled.  I also shut down a tiny line of variable annuities that was losing money left and right to an outsourcer who had a sweet contract from a prior management team, but upon leaving AIG I did not feel that great, because I had not built anything — most of my time had been spent trying to limit losses from prior bad underwriting and planning.  It wasn’t fun, and I loved my next company more because I got to build.

PS – a prior note on AIG.