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:
- Shrinking the share count
- Growing Fully Convertible Book Value per Share
- Price Momentum and Mean-Reversion
- On Conservative Management & Reserving
- Some Things Can’t Be Underwritten
- Analyzing Insurance Sub-Industries and the PB-ROE model
- 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?
