1) I like PartnerRe — they invest in their people; they limit their risks; they keep their balance sheet strong.? So it was with pleasure when I saw they had bought back the majority of some of their their junior debt at 50+ cents on the dollar.? Good move.
2) The short-term performance model for financial stocks recommends insurance brokers and reinsurers here. No surprise, because both of them face little risk on the asset side of the balance sheet.? For insurance brokers, short?term performance favors BRO, AOC, and EHTH.? For reinsurers, short-term performance favors VR, RNR, GLRE, and AWH.? Personally, I would consider BRO and AWH. Very soundly run firms.
3) There are troubles with life insurers as noted in this WSJ piece.? Personal notes: I applied to be chief investment officer of Shenandoah Life in 2003.? They told me they needed to get more out of their asset portfolio.? I gave them some free consulting — I told them that their portfolio was fine, but that they had too many lines of business, and their expenses were too high.
Penn Treaty (spit, spit) — I know some of the management there; they were dealt a bad hand.? I fault the state insurance department of Pennsylvania for not taking them over four years ago, and allowing a reserve credit for a reinsurance treaty that did not pass risk.
As for Conseco and Genworth, it is just another demonstration of how long term care insurance is not an underwritable liability.? There is too much freedom for policyholders to influence benefits paid.
Then there are the equity-sensitive insurers, like Hartford, Lincoln National, and Phoenix.? They will have a very high beta versus the market, because they are on the cusp.? Sad place to be.
4)? Why are we trying to reassure China regarding their purchases of US Government debt?? As a government, they made efforts to push their exports on the US, and had to take back US debt, because it seemed to be the best store of value, or at least, the most liquid.? Personally, I do not see any reason to kowtow.? They are not our problem; we are their problem.? Let China figure out that they have been playing ina rigged casino.? They still don’t have many places to park spare funds.
5) I have a little more sympathy for Ben Bernanke after he appeared on 60 Minutes.? That doesn’t mean that I think he is right, but to see an honest man trapped in a situation where his gifted intellect is stunted because he has bought into a flawed paradigm is painful.? Worse is that he will drag us along with him.? That said, I find it laughable that the recession will end in 2009.? That’s just political talk to make us comfortable.
6) When the dollar and gold move together, it is a sign that the rest of the world is in worse shape than the US.? Frightening, huh?
7) As I have commented long before this, state and municipal pensions are in deep trouble, or worse the states and municipalities are in trouble.? It may add up to a lot of funds.? Also, they may have made a number of bad investments.
There were many years where some of the states rested on their laurels and did not put a cent into the pension coffers.? The surging market took care of their funding, wrong as that was to assume.? Now they are paying the price for their political indolence.
8 ) The flub.? Whoops, the FHLB. What, they invested in dodgy mortgage securities?? They are supposed to support the mortgage markets regardless.? Big surprise that they get whacked in this environment.
9) I am no big fan of fair value, but I detest those that want to modify FAS 157. The problems are due to bad investment decisions, not bad accounting rules.? Even with held-to-maturity accounting, there is loss recognition.? Investors are not dumb.? To the extent that losses are not recognized in the accounting, suspicion grows.
Accounting does not affect cash flows, and as such does not affect the valuation of firms.? Most major accounting studies reflect this truth.
10) Can you pass the CEO test?? Personally, I found this article to be edifying.? It describes what an effective/good CEO is.
Full Disclosure: Long PRE HIG
Great recap! This is a nice run-down, and I definitely agree with you on a lot of these points. On China, however, I really feel that we do need to insure them that our Treasuries are still worth their while. Having that invested cash in our economy is important down the road.
Good point on Bernanke. Indeed, that interview on 60 minutes, and the fact that he was so willing to give one in this market, did create a bit more sympathy. More than anything else though, it made me re-think the way the Fed functions. No doubt that the reassurance about the recession ending is a bunch of “happy talk” to try and spur investment.
Also, I wouldn’t say that having the USD and Gold trading together is a case of a deteriorating global economy… though it certainly seems that way. Do you think that this pairing will decouple any time soon?
Amen to your points, David, especially the one about Ben Bernanke. He is a man who genuinely believes he has the power to “fix” the problem when in fact all he can do is alter the shape and timing of the deleveraging. A good man who has a flawed sense of his abilities can cause more trouble than an evil one.
I think one of his big problems is that he thinks like an academic and his unexamined assumption is that since “we” are all in this together, all of the players will act for the greater good and not use the crisis as an opportunity for profit–case in point, AIG. If he does not understand that the traders (CDS writers) at AIG were essentially given a free pass to continue their lousy trades for the intentional or unintentional benefit of their counterparties by the government’s effective guarantee of AIG’s operations, it is because he would be astonished that anyone would have the chutzpah to continue the same actions that got them into trouble after they had been discovered. But since there was no punishment for bad trades (and in fact, since many of the participants at AIG lost a pretty penny on the fall of the stock price)the clear message was that now was the time to get paid while they still could. Perfectly understandable from a streetwise perspective, but it would not fit in well with academic economic theory and would therefore be discarded (see Kuhn).
In this matter he is a bit like the captain of a ship who expects the crew to keep bailing after a leak has sprung. He doesn’t realize he’s not in charge of the USS Enterprise but rather at the helm of the Queen Anne’s Revenge.
RE: FASB 157
If this proves one thing, it is that Congress has no place in accounting. The idea Congress-critters are pushing — that changing the price at which a distressed asset is carried on a balance sheet somehow makes it less distressed — is offensive. If they think that investors and analysts won’t make adjustments for this, they are dumber than they look and sound.
Accounting transparency is important for investors. Any loss of transparency translates into larger discounts investors must use to value financial assets.
As you mentioned, changing the carrying value of assets won’t affect cash flows. I wonder if the decreased transparency will ultimately mean that investors place a larger emphasis on DCF valuations than on relative value analysis (as they won’t be able to trust those industry ratios as much with the free-for-all accounting Congress is inviting).
David,
Would you please consider posting a general article on what happens when an insurance co. goes into receivership?
I just found out my dad has an annuity with Shenandoah. I know you won’t be able to give specific advice (and I’m not asking); I’d just like to try to understand the issues.
Thanks,
Rich
David — As one who saw, early on, the problems coming from FAS 157, I am sorry to learn that you “detest” me. 🙂
My interpretation of recent policy discussions is that your concerns have been addressed. It is possible to provide plenty of information in footnotes without the hit to regulatory capital.
If we want to see a strong economy, and I know that you do, there is some level of lending consistent with that objective. The mis-timed implementation of FAS 157 has had a pro-cyclical effect, reducing lending at WARP speed. Qualified borrowers should be able to get commercial loans, home loans, auto loans, and student loans. We are killing ourselves with these accounting rules.
I do not mind if investors look at the reports from banks and decide that there are risks. That is their right. Instead, we have forced many institutions to place unrealistic, pseudo-market values on performing assets.
I would be more convinced by your opinions if you specifically engaged the writings from Tom Brown and crew, Bill Isaac, Bob McTeer, Brian Wesbury, and others who have shown very concrete examples of where mark-to-market is misleading.
Just a thought — and I certainly do not “detest” you if you disagree!
Jeff
Jeff, I have promised Jack Ciesielski that I would write one more post on the issue, and send it to the FASB as well.
I welcome you sending me what you think the best links are on the anti-SFAS 157 side of the argument. I think I have answered most of them in the past — I typically don’t link to those I disagree with, but I will this time.
And, I regard you as a friendly acquaintance on this and other matters. I don’t like most of the arguments on the anti-MTM side, but most of those expressing such opinions are honorable people that I have some respect for.
So, let’s have at it. Hey, even one of the principals of my firm vehemently disagrees with me on this… this is an interesting controversy.