Value Investing – Page 66

Ten Comments on the Current Market Melange

Posted on 17 March 2009 by David Merkel

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

On The Ron Smith Show Today

Posted on 12 March 200912 March 2009 by David Merkel

The invite came late today, but in the 4PM (Eastern) hour, I will be on The Ron Smith Show.? For those in the Baltimore area, that’s 1090 on the AM dial.? For those over the internet, go here, and click the “Listen Live” button.

What will we be talking about?? Alan Greenspan’s editorial that I replied to here, and which FT Alphaville picked up on twice.? (Incidentally, here is where my “Blame Game? (one, two) series is located.

Also, we will be discussing the WSJ article, Obama, Geithner Get Low Grades From Economists.? Now economists have enough egg on their faces from the current crisis, so maybe their ability to judge should be weighed in the balance as well.? I’m not crazy about the actions of the Fed or the Treasury during either the Bush, Jr. or Obama Administrations.? As with my Blame Game series — there is more than enough blame to go around.? The real question is whether policymakers aren’t digging us into a deeper eventual hole, which I think they are.

And then we’ll talk about whatever else the callers want to talk about.? It’s fun and fast — the hour just blows by.? More to come later — I have pieces on AIG, Berky, and a few other things in the hopper.

Oh, one more thing, from jck at Alea: U.S. Household Net Worth: Down $11.5 Trillion in 2008. I definitely questioned the growth in national net worth when I was writing for RealMoney.? My main argument was that incurring debt to buy the assets was artificially inflating their vale, and when debt levels normalized, net worth would drop as well.

Time Horizon Compression

Posted on 10 March 2009 by David Merkel

Before I start for the evening, I would like to point to another Stable Value is in trouble piece from a reputable source.? I never knew that AIG was 10% of the wrapper business.? Well, as I often say, “Seemingly free money brings out the worst in people.”

This piece will have echoes from my recent piece The Bane of Broken Balance Sheets, where I tried to point out why many assets are trading below equilibrium levels, but also why it is rational for them to be so valued, because of the lack of long-term financing capacity.? This piece will talk about shrinking time horizons, or equivalently, a rise in discount rates for distant and risky cash flows.

During recessions, people become more short term in their thinking.? It is even worse in depression conditions, as we are in now.? Average people become concerned for their jobs, and begin saving as a pad against the future.? Spending is not so free.? Things that are broken can be fixed or done without.? We can live with a dent here or a scratch there. Coffee?? I can make that myself.? Homemade bread tastes a lot better.

Given the implicit downward pressure on wages, people begin producing more at home, and more in informal areas of society, where the ability of the taxman to reach in is reduced or non-existent.? Now when average people are so concerned about their current expenses, do you think they are in a mood to take investment risks?? Not at all.? Money is needed with near certainty.? Even tax-advantaged vehicles like 401(k)s and IRAs are targets for raiding.? The concept of retirement becomes quaint, fueled by the large birth cohort attempting to do it, versus the smaller prior birth cohorts that society could easily handle.

Sorry, but someone has to do the work, and to have too many aiming to retire in a nation that does not save is not possible.? So there are many with inadequate savings that are pulling back, and realizing that they will have to work until they die, or are incapacited.? Social Security won’t swing it, and in another 10-15 years, benefits will begin to be reduced in real terms, because the economy will not be able to bear it.

Now, someone might (tactlessly) say, “Okay, so poor working schmoes will have to work until they die.? Big deal for the capital markets, because they are marginal players there.”? For one with more delicate sensibilities, I would point them to the subprime mortgage market in 2006, of which I wrote a timely piece.? Who cared about subprime?? It was less than 1% of the mortgage market.? Well, true, but it would have an impact on housing prices as resets happened, and would be the straw that broke the camel’s back, leading to a self-reinforcing decline in housing prices.? The poor working schmoes are the first to get hurt when the cycle turns, but they certainly aren’t the last to be hurt.

Corporations shepherd their liquidity as well in such a crisis, and think less of long term projects with less certain rewards, but instead look at things that can affect the bottom line now.? Cutting projects, workers, etc., will aid the bottom line.? Small acquisitions of technologies and marketing channels that can be grown organically may work.? Dividends and buybacks may not work.? Cash might have to be conserved.

Private equity faces a situation where debts need to be serviced, but business is slow, and contributions from limited partners are not forthcoming.? Even the private equity players become more short-term in their orientation.

Equity managers hold onto more cash.? Prime brokers extend less leverage.? Banks become more particular with underwriting standards.? In everything there is more of a desire to preserve the present than to build the future.

This is what we get for years of mindless monetary policy where everyone trusted in the “Greenspan Put.”? After years where liquidity would be thrown at every small problem, now we are in a situation where there is little liquidity to throw at big problems.? We overleveraged the system — of course there is no liquidity until the system is delevered.? Liquidity only exists when leverage is stable or being built up.? When leverage declines, there is no liquidity.

In such a situation as this, we should expect compression of P/E, P/B, and other ratios.? We should expect high yields on corporate and high-yield bonds.? Are stocks cheap?? Yes, but they will probably get cheaper, because we don’t have a lot of liquidity to bid for them.

This cycle will turn when the cash flow yield of assets reaches levels people can make money on in the worst environments; where equity funds new projects with no debt, and the profit is obvious.? We’re not there yet by any means.? Perhaps 20% or so lower, we will find a bottom.

Give Buffett Credit

Posted on 28 February 20091 March 2009 by David Merkel

The chatty, folksy annual report of Berkshire Hathaway is out.? I have occasionally been a critic of Buffett, but this year, I see little to criticize.? In a bad year, he told it straight.? He lost more book value in 2008 than any other year in percentage and dollar terms.? Worse yet, the market capitalization fell much more.

But guess what?? Berky is the biggest financial company in the US, bar none, by a wide margin.? Financials have done horribly, Berky less so.? Comparing the book value performance of Berky versus the market value of the S&P 500, this was one of Berky’s best years.

Looking at his divisions, insurance, utilities, and other businesses did well, and his investing did horribly, like most of the rest of us.? Sure, his timing was bad with some of his preferred stock purchases, and his willingness to write index put options.? But if those that Berky invested in survive the crisis, Buffett will come back smiling broadly.

Here’s another pillar of strength.? A lot of capital has been destroyed in the insurance industry in the capital markets, reducing surplus.? Those that have surplus will benefit.? Who is the most ready to write more business?? Berky.? After that, maybe PartnerRe.? Insurance should do well for Berky in the intermediate term.

Though I don’t own it, I find Berky to be intriguing.? Who knows, I might finally join the Buffett cult and buy some under $75,000.

PS — Give Buffett credit?? I would argue that Berky is cheap relative to other insurance credits.? Complexity creates the discount, but the firm is well-managed.

Full disclosure: long PRE

Fifteen Notes on Our Troubled Global Economy

Posted on 20 February 2009 by David Merkel

1) It’s nice to see someone else recommend my proposal for partially solving housing woes.? Immigration made America great.? Kudos to my Great-great-grandparents.

2) Is there Any Such Thing as Systemic Risk? Surely you jest.? Systemic risk exists apart from klutzy governmental intervention, as noted in my article, Book Reviews: Manias, Panics, and Crashes, and Devil Take the Hindmost.

3) The Economist has another good post on the effect of past buybacks affecting companies today.? As for me, I criticized dividends in the past:

		David Merkel
		Buybacks Depend on the Management Team
		1/5/2006 12:11 PM EST

I neither like nor dislike buybacks, special dividends, and other bits of financial engineering that extract limited value at a cost of increasing leverage. In one sense, these measures are a type of LBO-lite at best, merely covering the tracks of the dilution from options issuance mainly, or preparing to send the company to bankruptcy at worst.

A lot depends on what spot in an industry’s pricing cycle a given company is. It’s fine to increase leverage when the bad part of the cycle has played out and pricing power is finally returning. Unfortunately, unless they are careful, companies tend to have more excess cash toward the end of the good part of the cycle, at which point increasing leverage is ill-advised, but often happens because of pressure from activist investors and sell-side analysts.

My first article on RealMoney dealt with the concept of financial slack, and why it is particularly valuable for cyclical companies not to take on as much leverage as possible. One of the dirty secrets of investing is that highly-levered companies typically do not do well in the long run; they sometimes do exceptionally well in the short run, though, so if it is your cup of tea to speculate on highly-levered companies, just remember, don’t overstay your welcome at the party.

One final note: If a management team is talented, they should retain a “war chest” for the opportunities presented by volatility. Lightly-levered companies benefit from volatility, because they can buy distressed assets on the cheap. Highly-levered companies need volatility to stay low, because adverse conditions could lead to insolvency.

Leverage policy is just another tool in the bag of corporate management; it is neither good nor bad, but in the wrong hands, it can be poisonous to the health of a company. For most investors, sticking with strong balance sheets pays off in the longer-term.

Position: None

4) Financial accounting rules can work one of two ways: best estimate (fair value), or book value with adjustments for impairment.? Either system can work but they have to be applied fairly, estimating the value/amount of future cash flows.? Management discretion should play a small role.

5) Regarding Barry’s post on Bank Nationalization: I don’t like the term “nationalization.”? It’s too broad, as others have pointed out.? I am in favor of triage, which is what insurance departments (and banking regulators are supposed to) do every year.? Separate the living from the wounded from the dead.

The dead are seized and sold off, with the guaranty fund taking a hit, as well as any investors in the operating company getting wiped out.? The wounded file plans for recovery, and the domiciliary states monitor them.? The living buy up the pieces of the dead that are attractive, and kick money into the guaranty fund.? No money from the public is used.

We have made so many errors in our “nationalization” (bailout) that it isn’t funny.? We give money to them, rather than taking them through insolvency.? Worse, we give money to the holding companies, which does nothing for the solvency of operating banks.? We don’t require plans for recovery to be filed.? Further, we let non-experts interfere in the process (the politicians).? Better that the regulators get fired for not having done their jobs, and a new set put in by the politicians, than that the politicians add to the confusion through their pushing of unrelated goals like increasing lending, and management compensation.

The concept of the “stress test” is crucial here.? It could be set really low (almost all banks pass) or really high (almost all banks fail — akin to forcible nationalization).? Clearly, something in-between is warranted, but the rumors are that the test will be set low, ensuring that few banks get reconciled, and the crisis continues for a while more.

I’m in favor of the bank regulators doing their jobs, and the FDIC guiding the rationalization of bad banks, with an RTC 2 to aid them.? Beyond that, there isn’t that much to do, and there shouldn’t be that much money thrown at the situation.? We have wasted enough money already with too little in results.

One final comment — for years, many claimed that the banks were better regulated than the insurers.? Who will claim that now?

6) Equity Private rides again at Finem Respice (“look to the end”).? A good first post on how this all will not end well.

7) Whatever one thinks about mortgage cramdowns (I can see both sides), they will have a negative effect on bank solvency, and the solvency of those who hold non-Fannie and Freddie mortgage backed-securities.

8 ) What has happened to Saab is what should happen to insolvent automakers here in the US.? The companies will survive in a smaller form, with the old owners wiped out, and new owners recapitalizing them.

9)? Will the new housing plan work?? I’m not sure, but I would imagine that it would cost a great deal to support a large asset class above its theoretical equilibrium value.? There are also the issues of favoritism, and rewarding those less prudent.? We will see whether it doesn’t work (like Bush’s proposals), or works too well (my, but we burned through that money fast).? (Other thoughts: Mean Street, Barry, simple explanation from the NYT.)? As it is, many people will not be eligible for the help.

10) How do you eat an elephant?? One bite at a time. How well did Japan do in working through its leverage problem in the 90s and 2000s?? Reasonably well, though it took a while.? Deleveraging takes time when many balance sheets are constrained, and asset values are falling back to psuedo-equilibrium levels.? One person’s liability is another person’s asset; when a large fraction of parties are significantly levered, the reconciliation of bad debts can cascade, like a child playing with dominoes.

So, Japan took its time with a messy process rather than have a “big bang,” with less certain results in their eyes.? In America, we want to get this over with quickly, but not do a “big bang” either.? That’s where a lot of the cost comes in, because in order to reconcile private debts rapidly, the government must subsidize the process.? All that said, in the end we will have a lot of debt issued by the US Government, just in time to deal with the pensions/entitlement crisis from a position of weakness. And, that’s where Japan is today, facing a shrinking population with a lot of government debt, and rising demands for entitlement spending.? Japan may be a laboratory for the US, Canada, and Europe as we look at the same problems 5-20 years out.

11) If you want to search for prices and other data on bonds, look here.

12) Marc Faber makes many of the point that I have made about the crisis in this editorial.

13) Swiss bankruptcy?? I would never have thought of that possibility, but considering that it is a smaller country with a relatively large banking system, and those banks have made a decent amount of loans to weaker creditors in Eastern Europe.? Add Switzerland to the list with Austria on Eastern European lending troubles.

14) What is Buffett thinking in his recent sale of stocks?? Some criticize him for being inconsistent with his philosophy of long holding periods, but Buffett is a very rational guy.? He is getting some good opportunities in this market, and is selling opportunities that seem less good to him.? Could he be wrong?? Yes, but over the year, he has been pretty good at estimating the relative values of assets.? He’s made his share of mistakes recently, but 95% of investors have been in that same boat.? At least he has the insurance franchise to carry things along, and given the reduction in surplus across the industry from the fall in equitiues and other risky assets, pricing power should begin improving soon.? Berky is interesting here.

15) Mirroring the bubble, Anglo-Irish Bank rode the global liquidity wave up, then down.? Ireland was the hot place in the EU, and now the bigger boom, fueled by easy credit, has given way to a bigger bust.

The Ecology of Investment Strategies

Posted on 19 February 2009 by David Merkel

Any investment strategy can be overused.? Part of the job of a portfolio manager is to ask the question “To what degree am I in or out of the consensus? Where am I in the cycle for my strategy?”

Few managers are conscious of the water that they swim in.? They assume their strategies provide consistent advantage, when in truth the advantage is periodic, even if it works better than average over the long haul.? The truth is that every strategy has limits, and when too many parties apply a strategy, the excess returns disappear, or even go negative.

All investors have to sit down and ask the question, “What aspects of the market will I try to take advantage of?” with the corresponding question, “What will I ignore?”? Adding to that, “How much of the market can I invest in, given my advantage?” (What is the carrying capacity of my strategy?)

Most value managers don’t care for momentum.?? Most growth managers don’t care much about valuations.? Some things will be ignored.

It is tough to be a institutional asset manager.? The competition is fierce.? What’s worse, you and all of your competition comprise 80% or so of the market.

Further, you know what side your bread is buttered on.? If you have average, or at least not fourth quartile performance, the assets will stick with you, and your firm will make money off them.? The economics of the business are simple.? For the most part, risk-taking is not rewarded, and risk-reduction has some stickiness.

Adding to the problem are the investment manager consultants.? Because most of them are a net loss, they gravitate to what is unchangable.? Modern Portfolio Theory, though wrong, is a respected basis from which academics and some others make investment decisions.? Using Sharpe ratios, and other objective bits of investment nonsense, they winnow the field of investment managers.

The thing is, for those managers that submit to this mularkey, it enforces mediocrity at best.? For those that don’t accept it, not much money flows to them, whether the manager is good or bad.? They don’t fit the model that doesn’t represent reality.

Never underestimate the power of a simple model to overwhelm the minds of simple-minded people.? Most consultants, and most academics, would rather have a wrong model that allows them make money, or publish, than get things right.? Truth is, the right answer is hard to get to, and doesn’t fold into simple mathematics easily.

Technical analysis is akin to voodoo in the minds of most professional investors.? Mention it prominently, and you are kicked out of the game.? There are close substitutes though: for growth investing there is price momentum, and for value investing there are behavioral finance anomalies.

In closing, these two articles that ask why mutual funds don’t adopt technical trading methods illustrate the problems with large scale investing.? Smaller investors can take advantage of market anomalies that bigger firms pass up.? Imagine for a moment that Fidelity, Vanguard, and Capital Group decided to apply the full range of identified anomalies across the entirety of their portfolios, and trade them as aggressively as smaller players might.? The prospective excess profits from the anomalies would disappear rapidly, and might go negative as enough money chased them.? Most players would eventually abandon applying the strategies because they stopped working.? Too much money chasing them.

The lesson for most of us smaller players is to be aware of how much money is using strategies like ours, and adapt when the space where we thought we had a durable competitive advantage has become crowded.? That’s not easy, but then, regular outperformance is tough to do, and tougher, the more money one manages.

Ask the Opposite Question

Posted on 11 February 2009 by David Merkel

I once wrote a five-part (labor of love) series for RealMoney called, If You Get to Speak to Management.”? It is offered freely here.? Tonight, I want to offer a simpler bit of advice: “Ask the opposite question that you would want to ask.”

Management teams and investors relations folks are generally pleasers.? They bias what they say toward what? people want to hear.

Are you concerned about them contimuing the buyback?? Then ask them about retaining capital for capital flexibility.? Are you worried about their balance sheet?? Then ask them about how they will grow the dividend and buyback.

In an environment like this, where capital is scarce, it could be productive to ask how management teams are managing M&A and buyback when valuations are so cheap.? “Why aren’t you buying out your cheap competitors?? Why aren’t you buying your own stock?”

I had a boss 1998-2001 who was a pro at this.? He would ask “dumb” questions on conference calls, and I would start to correct him, and he would make a “slash the throat” gesture.? I would shut up, and invariably, the Wall Streeter would tell a variety of lies that we would listen to, and once the call was done, disregard them.

It was an excellent tool for validating who thought we were patsies, which we were not.? Sticks in the mud, well, maybe, but we did well for our clients.

As for now, I still think the tool is useful.? Ask the opposite question to management teams and see how they fare.

Financial Versus Actuarial Models of Risk

Posted on 10 February 200910 February 2009 by David Merkel

There are two basic investment risk models, one based on projected cash flows over a long period of time, discounted at a variety of future interest rate scenarios, and one based on short term correlations of expected market values.? I call the first model the actuarial model, and the second the financial model (pejoratively, the Wall Street model).

Under ordinary conditions, the financial model looks better.? It asks, “Can we make money in the short run versus our capital costs?” The? actuarial model asks, “Can we assure that we will be solvent under a wide number of economic scenarios over the long run, some of which might be quite severe?”

During boom conditions, the financial model wins, while those following an actuarial model are branded fuddy-duddies.? During bust conditions, those following an actuarial model survive, while many following the financial model don’t.

There were many on Wall Street that claimed to be following a WOW “Worst Of the Worst” model.? I remember interviewing the chief risk officer of one of those firms in 2005 — Bear Stearns.? Talked a really good game.? To be fair, so did the risk manager of Goldman Sachs that year.? I assume most of the risk managers of Wall Street had their WOW models — after the crisis with LTCM, they had to look at the correlations on risk assets going to one in a crisis.

My guess is the WOW models were largely ignored, and the more common VAR models followed.? Perhaps Goldman And Morgan Stanley gave more weight to the worst outcomes, but hindsight is 20/20.? They might have survived in spite of themselves.

My point: you’ve got to survive in order to win.? Models that emphasize current profits at the expense of survivability get whacked during large busts.? Even if they survive, the hole that they must crawl out of is deep.

The economy is highly variable, and the financial economy as a derivative of it is even more so.? Companies that think long-term with respect to risk management tend to survive crises; they have limited their risks, and left returns on the table during the boom times.

Survival is a major part of the game.? Look at previously successful financial companies.? It doesn’t matter how well you did in the past if you are down 90, 95, 99% over the last two years.

As such, for those that invest in financial companies, evaluate their survivability.? How likely is it that they will get hit badly?? Are they overleveraged?? Do they need additional financing?

Actuarial models focus on the long run, and analyze survivability.? Why aren’t they used more frequently?? The actuarial models indicate a greater need for capital than VAR models.? More capital left in reserve means a lower return on equity, and a lower stock price in the short run.

High quality management teams for financials place more value on their long-run (actuarial) risk models.? They want to make money over the long term, if they can.? Those that focus on VAR will do better in the short run, until the next big bear market hits.? For value investors, stick with the quality players relying on long-term risk models.? Momentum players are free to play with the VAR users, but keep your stop orders ready.

A Different Look at Industry Momentum — II

Posted on 28 January 200928 January 2009 by David Merkel

There have been a lot of posts on the power of the momentum anomaly lately.? To mention two, there was my post, A Different Look at Industry Momentum, and a post by Mebane Faber at his excellent blog World Beta, Quantitative Strategies for Achieving Alpha.? I know there have been more recently, but somehow I did not bookmark them.

Tonight’s note considers whether the strength of the momentum effect might not be waning.? Consider this:

This graph shows the excess returns of my industry momentum model over the past twelve years.? Momentum has worked over that time period, but deceasingly so, with a few wipeouts along the way.? Many will remember the worst of them in August 2007, when quantitative investing was decidedly crowded.

Remember, I view investment strategies using an ecological framework.? There are many strategies that work on average, but often many of them are overpursued, and the excess returns have been competed away.? Or, a strategy has been forgotten, relatively speaking, and now it might have some punch.

I am guessing that momentum as a factor is overplayed at present, and it might be wise to leave it to the side until the next wipeout.? If that were to apply in the present market, it would mean the failure of the more stable parts of the market to retain value: consumer staples, utilities, health care, other cash flow spinning industries.

There are two ways that could happen: 1) a resurgence of the cyclicals, and 2) market collapse, where investors give up on all stocks, even stable ones.? I’m not going to bet on either of those, but either is possible in this environment.? If demand begins to rise in the world due to falling commodity prices, #1 is possible, and #2 would come from a continuing collapse in consumer demand.

Food for thought in this ugly environment. Invest carefully, the need for a margin of safety is more critical than ever.

A Day in the Life of John Davidson, Part II

Posted on 24 January 200924 January 2009 by David Merkel

John looked at the deep brown wood.? When he first came to the boardroom ten years ago he was impressed at its seeming splendor, and thrilled to be a new CEO of Wonderful Life.? Today, the thrill was gone and the wood just seemed dark.

?Hiya, Johnny! Howya doin???

With a jolt, John Davidson turned to face Brent Fowler, CEO of Whata Life.? He answered, ?Just fine, Brent, and you??

?Oh, Johnny.? There are always opportunities to be pursued in our business, and we are doing well in exploiting all of them.?

?Indeed, sir.? Congratulations on another good year.?? John choked up a bit as he said this, because he did not get how Whata Life could be so profitable and grow so fast at the same time.

?Thaaank you , Johnny.? If you are in the right place at the right time, the profits just flow, and that is where we aim to be!?

John didn?t have much to say to that, so he bid Brent adieu for the moment, and bumped into Henry Goldsmith, who was the head of Mega?s Bermuda P&C reinsurance company.? He had always found Henry to be a straight shooter, so he smiled as he asked, ?Hi Henry, how goes it on the rock??

Henry smiled and said, ?Not so bad.? No major disasters, so we make a lot.? We just have to leave some of it to the side for future disasters.? And you??

?Could be better, Henry.? The credit crunch is eating at our assets, and growth has been marginal, despite our best efforts.?

?How much money have you lost??

?We?re making money, Henry, but less than last year.? We can?t dividend as much back to Mega.?

Henry?s eyes widened, and he said, ?Oooh.?? My sympathies.? Look, it?s a tough environment; every life company is having a rough time of it.? Just look at AFLAC.? If they can?t make it, no one can.?

?Very true.? Thanks, Henry.?

?Don?t mention it, John.? Hey remember, if things go bad, I?m here for you.?

?Thanks again, Henry.?? John knew that Henry kept his word, so he considered it an offer to help him in his next job search.? Good guy, bad day.? At that moment the head of domestic P&C, Marc Blitztein, walked into the room.? ?Hey, John, old man, how?re you doing??

Marc was the youngest of the subsidiary managers, but he had turned around the flagging domestic P&C division by focusing on new quantitative underwriting tools before most of the smaller competition caught on.

?Good to see you, Marc. How?s business??

?Could be better.? Competition is rough, but we keep finding new ways for people to know us.?

?Indeed you do.? That Zebra mascot of yours is ubiquitous.?

?Ziggy?? What a concept!? It?s amazing what one good idea will do.?? John wished that he had Ziggy.? Maybe that Zebra could sell life policies as well.? Alas, he had no fancy logos or cartoon pitchmen.

John said, ?Well, more power to you.? Worried about this meeting??

?A little.? We aren?t growing the way we used to; we?re only around 10% growth, and loss costs are catching up with us, somewhat.? How about you??

John shook his head.? ?I don?t know.? Things weren?t great prior to the credit crunch, but given the effect on asset values, we are pinched here.? We won?t be able to dividend as much next year.?

Marc looked at him sympathetically, and said, ?I?ve heard what that can mean.? My heart goes with you.?

?Thanks,? said John, distracted as his cell phone bleeped.? It was his wife.

?Hi honey, you won?t believe what John, Jr., did today??

?Uh, dear?? Can I call you back this evening?? The big meeting is about to happen.?

?I?m sorry, dear.? Call me back.? I?m praying for you.? Love you.?

?I love you too dear.? Bye.?

As he turned his cell phone off, he saw that the CEO of Mega Insurance, Brad Baldwin, had entered the room, together with Stan Bullard, scion of the family that owned Mega.? Behind them was the CFO, the corporate actuary, and a person he had never seen before.? John wondered what might be going on, and thought that this would be one bad day.