Search Results for “nwli” – Page 2

On High Short Interest Ratios

Posted on 23 April 201323 April 2013 by David Merkel

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

At the Towson University Investment Group?s International Market Summit, Part 4

Posted on 20 April 2013 by David Merkel

1??????? Any specific stock, bond, industry, country, or asset picks that you feel strongly about?

I like:

The P&C insurance & reinsurance industries — they are very good at compounding earnings, especially the ones that are good underwriters, conservatively reserved, and shareholder focused over the long haul.
Selected energy and information technology stocks, so long as the valuations are inexpensive.
RGA, National Western Life, Stancorp Financial, AFLAC, and Industrias Bachoco SA
Emerging market bonds — their policies are mainly more orthodox than the developed world, for now.

2??????? What strategies do you use to determine if a company is worth a deeper look into, in the first five minutes?

There is this article: GE Does Not Bring Good Things For Your Life. If you have a Bloomberg Terminal, that is a useful article.

But even if not, the five-minute drill is easy:

Look at price to expected earnings. ?Look at past earnings.
Look at indebtedness and goodwill. ?Ask: is this a stable industry? ?Does the goodwill represent anything valuable, some barrier against competition?
Compare cash flow from operations versus earnings. ?An excess is usually better.
Look at price-to-book for financials and price-to-sales for utilities and industrials — lower is better.
Ask yourself if this is an industry with increasing, stable, or decreasing pricing power.
Look at whether the share count is rising or falling. ?Falling is better.
Does it pay a dividend? ?Yes is better.

Beyond this, for corporate bonds, I have a similar arrangement. ?And I call that the one-minute drill, because in institutional fixed income, you have to be fast when the market is hot.

3??????? What have been valuable resources that you would recommend to up-and-coming investors?

Look through the book reviews that I have written — there are almost 200 of them. ?I have read a lot of books by eminent value investors, bond investors, growth investors, alternative asset managers — you name it, I have read a lot of investment books.

But let’s add in another question:

4??????? What advice would you give to a student who wants to start investing but has not prior knowledge?

My friend Niall O’Malley gave a good answer to this when he said create two lists of stocks — one that you think will do well, and one that you think will do badly. ?Then track them, and learn from the companies that violate your expectations.

My answer would be more plebian — paper trade. ?I did that in my early 20s, long before I had money to invest. ?I came close to winning the Value Line contest in the mid-80s.

But the biggest thing is making a commitment to improve your investment knowledge. ?When I was 26, I said that I would spend one hour per day, except Sundays, to improve my investment knowledge. ?I went all over the map. ?I read practical stuff. ?I read academic stuff. ?I read stuff on stocks. ?I read stuff on bonds. ?I read stuff on industries, sectors, companies, etc. ?I read stuff on management, operations, financial management. ?I read, read, and read.

Investing requires continual self-education. ?Read and learn and profit.

Final episode tomorrow.

Full disclosure: Long RGA, NWLI, SFG, AFL, IBA

Sorted Weekly Tweets

Posted on 15 April 2013 by David Merkel

Market Dynamics

The Scary Risks of Safety Bubble Up http://t.co/Tv3tG8TwSH Never forget that dividend stocks r stocks & that assets r risky if overpriced $$ Apr 11, 2013
Cheap Mortgages Are Hiding the Truth About Home Prices http://t.co/bQoXGHWVwO If Mtge rates r artificially low then housing prices r high $$ Apr 11, 2013
Suckers! Tech Execs Selling Stock as Nasdaq Hits High http://t.co/6lPnjk7sxu Fed is the tide; who will b found swimming naked when it ebbs $$ Apr 11, 2013
Banking Business: Complexity Cubed http://t.co/N1itJvjmbx If you want to simplify corporate structure, start simplifying the tax code $$ Apr 11, 2013
The 14% Rate of Corporate Profits Will Eventually Revert 2 Mean, Spoiling the Party http://t.co/6TZXKn29uX Don’t use P/E 2 measure cheap $$ Apr 10, 2013
Most big companies, unless they r simple start to underperform at mkt cap > $100B. Managing the complexity is virtually impossible. $$ Apr 10, 2013
How The Equity Q Ratio Anticipates Stock Market Crashes http://t.co/2LiEi9zFzR & The Q Ratio and Market Valuation http://t.co/9tM6srmneq $$ Apr 10, 2013
Check Here to Tip Taxi Drivers or Save for 401(k) http://t.co/cNg8wSSDmh Stupid efforts at manipulating behavior eventually fail $$ #quitit Apr 10, 2013
Questions to Ask Your Adviser About Fees http://t.co/78kLdmlTGN Main things what do you pay & find out who else is paying him Apr 09, 2013

Europe

Merkel?s No-Nuke Stumble May Erode Re-Election Support http://t.co/B8c0441GDR An unforced error; far better 2 invest in Nuke plant safety $$ Apr 11, 2013
Swedish Banks Make Money Ditching Cash as Krona Goes Virtual http://t.co/pcWOQztjwL It is a mistake to make $$ disappear. Ask Cyprus why $$ Apr 11, 2013
Economic Crisis Hits the Netherlands http://t.co/63VuWJta03 Imagine a nation where 120% LTV loans & trading homes every 3 yrs is common $$ Apr 10, 2013
ECB Survey Challenges Image of Poor Southern Europe http://t.co/ITmwyBr5ng I suspect this study is wrong or measuring the wrong thing $$ Apr 10, 2013
Why Thatcher Wouldn?t Succeed in Our ?Lean In? Culture http://t.co/CKpMa4GYov U have to + in the concept of killing sacred cows w/courage $$ Apr 10, 2013
Portugal austerity plan frays http://t.co/ukBVsCYNeE Top court struck down wage cuts and lower pensions for state workers; what now, Troika? Apr 09, 2013
Soros: Europe faces ‘slow death’ Japan is trying to escape http://t.co/SEtqiNEBBU Seems 2 argue for massive QE, but no sign that QE works Apr 08, 2013
Why Rescue Fragile Banks? Outsource Them Instead http://t.co/ixYB95jHug Exile TBTF banks to the E-Zone; let them pay 4 the bailouts Apr 08, 2013
Europe Builds Own Chapter 11 http://t.co/kHrgFmMHc2 Moves closer to the US, but still is not as flexible in rehabilitating corporations Apr 07, 2013

Credit Markets

Foreclosures Jump in New York as US Sees Decline: Mortgages http://t.co/oaz5prhQVA Judicial f/c states catch up w/the rest of the US $$ Apr 11, 2013
Pimco’s Gross Turns Positive on 10-Year Treasurys http://t.co/8uBxkzWxgK Guessing what central banks will want 2 buy, mug’s game Apr 10, 2013
Bank Investors Press Breakups to Add Value, Burnell Says http://t.co/DQefb93MB5 Biggest banks r worth more broken up; can’t manage well $$ Apr 10, 2013
Banks rethink the branch, but will it work? http://t.co/JwDHF22Re4 This article is just another way 2say there r2 many banks & branches $$ Apr 10, 2013
The leverage story banks want to hide http://t.co/yebYHRCxn5 To avoid bank insolvency focus on liquidity of assets/liabs in stressed times Apr 09, 2013
Contagion Starts Small http://t.co/0PeQhSd6Qb Small->large requires domino debt failures, needing liquidity for illiquid, or safety mismatch Apr 09, 2013
Time bomb to the next crash is ticking as debt sales surge http://t.co/zn41h2eJ8E Investors requiring safety mismatch buying unsafe debt Apr 09, 2013
Where Bank Regulators Go to Get Rich http://t.co/hGnGn3hpwt An astounding array of former regulators aiding “end arounds” on regulation Apr 08, 2013

Rest of the World

Ghost of Suharto Seen in Boomtowns Leading Indonesia Growth http://t.co/nYsu2yuN5L Indonesia often booms near end of global econ cycle $$ Apr 11, 2013
Low bond yields luring global central banks into equities: survey http://t.co/HoeVX2qHbY This is so unorthodox & cronyist it beggars belief Apr 09, 2013
Why Capitalism Won?t Change North Korea?s Regime http://t.co/dSxzrFaCgz Current leaders will lose out if people learn how badly they live $$ Apr 10, 2013
Clashes Highlight Egyptian Divide http://t.co/oaMtZkIbjC Hippocratic Oath applies to diplomacy w/”regime change:” “First do no harm!” Apr 08, 2013
Is the Global Economy Slowly Falling Apart? http://t.co/zMQx2ih1vE Good list of some of the major problems; overstated title/weak conclusion Apr 08, 2013

China

A Day in the Life of a Beijing ‘Black Guard’ http://t.co/P8ElsIJPMM Secretive groups stop Chinese citizens complaining about local govts $$ Apr 11, 2013
China Exports Miss Forecasts as ?Absurd? Data Probed http://t.co/Ycch2uQu04 Will b interesting 2c how people revise views on Chinese data $$ Apr 10, 2013
In China, off-balance-sheet lending risks lurk in the shadows http://t.co/Vg4tBss9gV Tough Q: how do the shadow banks & municipalities fund? Apr 09, 2013
New Bird Flu Seen Having Some Markers of Airborne Killer http://t.co/8QrkkXKaY5 No sign of mammal-to-mammal transmission, would not worry Apr 07, 2013
China Says It Can Manage H7N9 Virus as Infections Rise http://t.co/mfgn75pOIY No human-to-human transmission yet, SARS-like most likely Apr 08, 2013

Japan

Japanese Rush to Sell Gold as Price in Yen Jumps http://t.co/Hd8ZIANSrE Selling valuable Gold assumes that current devaluation fails $$ #FTL Apr 10, 2013
Japan PM Abe aide: BOJ has further easing options http://t.co/JB7Ea2qC0d Dangerous loonies in Japan lead world devaluation $$ #currencywars Apr 10, 2013
The Japanese Abenomics Experiment: A Fukushima Kind of Result! http://t.co/c5hj2l8tPL Waiting for the BANG moment when rates rise, can’t pay Apr 09, 2013
Japan: http://t.co/koNpj8ZmO0 & http://t.co/bQfnsDTUM3 & http://t.co/eAsUZqUkcX Starting twist, 99 yen = $$ & Current acct surplus Apr 08, 2013

US Politics & Policy

Options Few as US Leaders Told Saturday Mail Can?t End http://t.co/317ANktRxp Raise all postage prices, & double 4 junk mail $$ Apr 11, 2013
Boomers Push Doctor-Assisted Dying in End-of-Life Revolt http://t.co/kTfahFMOwh It’s almost like the Boomers want to corrupt everything $$ Apr 11, 2013
Medical School at $278,000 Means Even Bernanke Son Has Debt http://t.co/VrYkFx2Lcr Bad idea 2 invest where rules can b changed against u $$ Apr 11, 2013
Obama seeks to reduce US subsidy of crop insurance http://t.co/LfxfYeC63n It is time 2 end ALL Ag subsidies; just goes 2 Big Agriculture $$ Apr 10, 2013
FOMC Minutes Show Several Members Saw QE Over by Year-End http://t.co/xkcGOm2ly1 Don’t think so, but if true, lighten up on risk assets $$ Apr 10, 2013
Andy Kessler: The Pension Rate-of-Return Fantasy http://t.co/MzvTrYHBFh Excellent piece: bad pension assumptions; will lead2 benefit cuts $$ Apr 10, 2013
Interview with Harvard Economist Carmen Reinhart on Financial Repression http://t.co/XkB8Mf5R1Z Sane words amid macroeconomic snake oil $$ Apr 10, 2013
USDA asks White House to approve sugar-for-ethanol program http://t.co/g2Ldt5ge3s Utter corruption, $$ in the pockets of the US Sugar lobby Apr 09, 2013
A Primer for Understanding Obama’s Budget http://t.co/O9DgmLFQQD This is y Federal Debt always goes up by more than the planned deficit Apr 09, 2013
Evangelicals Push Immigration Path http://t.co/KCaNhFnhGd Governments limit immigration 4 selfish reasons; migrants come b/c desperation Apr 09, 2013
U.S. Plans New Laser Weapon for Persian Gulf http://t.co/ZdzZZTwSs4 Don’t get too excited; it only works at short range #studyphysics Apr 09, 2013
O?Malley Wins on Guns, Taxes Seen as 2016 Resume-Packing http://t.co/74fFr0oKkf Raided liability funds 2 finance current spending #phony Apr 09, 2013
How Obamacare Will Distort the Health-Care Market http://t.co/o0yHYcgESu This was easy2c in advance; ability to adjust premiums very limited Apr 08, 2013
Rhode Island’s Scary State Treasurer http://t.co/ib56cMDhWI Raimondo fires back after Forbes contributor attacks her http://t.co/qHeAUIw7P7 Apr 08, 2013
Workers Stuck in Disability Stunt Economic Recovery http://t.co/G0gqpP8pLM Many of these people should be called unemployed, not disabled Apr 08, 2013
Chicago Mayor’s Pension Conundrum http://t.co/iE5grwyd14 Tip of the iceberg; this is going on in different ways in all US states Apr 08, 2013

Wrong

Wrong: This Underused Metric Points To Big-Name Bargains http://t.co/MpAgxDmzsN 4 of 8 “bargains” r insurers; no way 2calc free cash flow $$ Apr 10, 2013
Wrong: Kill the 30-Yr Mortgage http://t.co/XKm9fRJXaR You don’t finance long-term assets like homes w/short-term debt. Badly thought-out $$ Apr 10, 2013
A better long-term solution to make the residential RE mkts more stable would be to ban mortgage insurance & second lien mortgages (HEL) $$ Apr 10, 2013
Wrong: Stalking the Silent Financial Killer in Our Midst http://t.co/HVOm4GCjHM Please kill this while little: LTC not underwritable $$ Apr 10, 2013

Other

Mmm, the Flavors of Fermentation http://t.co/i7sNTIixK4 Interesting article that points out the many ways we use fermentation 4 flavoring $$ Apr 11, 2013
Gates Helps Australia?s Richest Man in Bid to End Slavery http://t.co/UMUOLJ8nvT Noble goal 2 free those who r essentially kidnapped $$ Apr 11, 2013
How Thatcher Saved Britain http://t.co/Re3BWfPvPx She did not give in 2 the Unions, nor Argentina, nor USSR, nor the media; she stood alone Apr 10, 2013
Wood: the fuel of the future http://t.co/QZC54Ud6gy Having lived in a town where wood was the most common winter heat source, air was dirty Apr 09, 2013
Tour Data Suggest Tiger Woods Owes His Comeback to One Basic Skill?Sinking Putts http://t.co/WSOTrhn0iU Drive 4 show; Putt 4 dough. Apr 09, 2013
Label Decoder | Protein Additives http://t.co/HAx2Ta4UEu I think we are creating more health problems by eating processed foods Apr 09, 2013
10 Insanely Overpaid Nonprofit Execs http://t.co/gH0Fa7EszO Caught btw managing a large enterprise & charitable mission; fight each other Apr 08, 2013
The Golf Shot Heard Round the Academic World http://t.co/EeFl5NFoMz Multiculturalism that cannot tolerate the ideas of conservatives Apr 07, 2013

Insurance

As an aside, SCOR’s balance sheet is more levered than it seems. Reminds me a little of Scottish Re (spit, spit) RGA’s looks solid FD:+ $RGA Apr 11, 2013
RGA, Scor in final race for Generali US unit-sources http://t.co/MUbVuvMpZv SCOR aggressive, will likely overpay | FD: + $RGA $$ Apr 11, 2013
Ace?s Greenberg Says Takeover Spree Beats Share Buybacks http://t.co/lwYLCLUg45 Seems like Evan is trying 2 create a mini- $AIG $$ $ACE Apr 11, 2013
Record levels for global reinsurer capital http://t.co/y70eA0H6Xz Listen 2 1Q conf calls, listen 4 pricing, divs, buybacks. EZ $$ been made Apr 10, 2013
Metlife on Offensive Against Systemic Tag http://t.co/NgBhd6I1p7 Life Ins cos shouldn’t b SIFIs unless they have short-dated funding $$ $MET Apr 10, 2013
Insurers see promise in pay-for-performance health plans http://t.co/Hrpy0KEk4M Skeptical: does not remove incentives 4 overuse by doctors Apr 09, 2013

Banks

Banks Are Not as Bad as You Think: Pettis http://t.co/rPWAZy1GbD Afraid I have to disagree, bad banks set back growth in 1870s & 1930s $$ Apr 11, 2013
Crapo Says He Opposes Setting Capital Standards With Legislation http://t.co/SshephsE7y Far better2focus on liquidity analyses under stress Apr 09, 2013

Technology

Regulators Feeling ‘Social’ Pressure http://t.co/sylIMHMQ65 In Age of Twitter, Old Rules That Don’t Address New Media Pose Challenges $$ Apr 11, 2013
Drug Conjugates: ‘Guided Missiles’ to Treat Cancer http://t.co/eA3EatBo7M Drug conjugates attack tumor cells, rather than just any cells $$ Apr 10, 2013
The Future Of Mobile [SLIDE DECK] http://t.co/iLu3Cr3uQ7 Long, but data-packed & a breezy read. cc @hblodget thanks, I learned some stuff Apr 09, 2013
Sponsors Now Pay for Online Articles, Not Just Ads http://t.co/wDOd0t57nd I get ~10/week of these at my blog. Have never taken any of them. Apr 09, 2013
We Just Took A Big Step Toward Having Super High-Definition Desktop Displays http://t.co/VL5LYGWACt So fine u won’t notice the pixels Apr 09, 2013
This Simple App Could Put E-Books On Millions Of Phones In The Third World http://t.co/wOFojOf6N2 Software & Cheap phones promote literacy Apr 09, 2013
Hypothermia Cure: Cooling Infants to Battle Brain Damage http://t.co/EG0o8qRu1H Interesting & Odd technology may benefit 0.1%+ of births Apr 09, 2013

US Economy

Murdoch-Diller Showdown Threatens to Make Fox Cable-Only http://t.co/pcIriVUDYw Endgame for the separation of content & transmission $$ Apr 11, 2013
North Dakota Undergoes Refining Renaissance http://t.co/UTFF2277sz U know things r hot when a new crude refinery is built from scratch $$ Apr 11, 2013
You Got In; Now, Please Come http://t.co/GWCQyqnIGV Speaks 2 the overcapacity problem in colleges; high fixed costs r driving pleading $$ Apr 10, 2013
?Everyone believes that, given where we are with interest rates, the only eventual direction is up” I c this said daily maybe more $$ Apr 10, 2013
US Transports Economic Pulse : Trucks — Boats – Planes – Trains http://t.co/0kriEgfKnt Two up, two down — all in all, we muddle along Apr 09, 2013
I am become Ron Johnson, Destroyer of Worlds http://t.co/YUxa84LUKT @reformedbroker sets up future biz school case study. I + my $0.02 $JCP Apr 09, 2013

Replies, Comments & Retweets

Commented on StockTwits: Not really. At present I own the following for clients & me: $NWLI $RGA $AIZ $SFG $AFL &… http://t.co/q0v0UYfVRp Apr 11, 2013
Ouch RT @ReformedBroker: Gundlach: Forget Fed Minutes, QE is not stopping anytime soon, talk is just talk. Yellen’s down to do this til 2025 Apr 11, 2013
RT @ReformedBroker: “Japan is important to watch, it’s a pace car for stock market peaks, weird policy responses and currency debasement … Apr 11, 2013
I think so too $$ RT @ReformedBroker: Gundlach: “Emerging market corporate debt is THE best area of investment grade fixed income right now” Apr 11, 2013
@fundmyfund If “Everyone Ought to be Rich” then who will deliver the pizzas? 😉 Apr 11, 2013
@LaurenLaCapra Another idea: http://t.co/Gw1UKjS66Q DB available 4 pay: http://t.co/L2kLOZUlr0 League Tables cost $6 http://t.co/EG0FGgb6pu Apr 11, 2013
@LaurenLaCapra Thy this http://t.co/L9ZkQztxzD and if that’s not enough try this Google query: http://t.co/mO3CEmQwiM Take care Apr 11, 2013
‘@PensionDialog 2003 vs now, interest rates were higher & valuations 4 risk assets lower. Pension returns will b lower over next 10 years $$ Apr 10, 2013
@ritwik_priya Saw that, though housing values have fallen across much of Europe, particularly where mortgage debt is high Apr 10, 2013
@PensionDialog That’s backward looking, while interest rates are forward looking. In 2003, 10Y Tsy yields were more than 2% higher than now Apr 10, 2013
‘@EMostaque To some degree, others will let funding levels stay low (& hope), some will pay more $$ , some will cut benefits where possible Apr 10, 2013
@IraApfel Sadly, proposal will reduce assets in MMFs, which r usually more stable than banks in a crisis. Better: http://t.co/nC8D4TetbQ $$ Apr 10, 2013
Yes RT @asymptotix: So, if anyone must leave, it should be Germany (and Finland), not Italy, Greece, Ireland, Portugal or Spain.. Apr 09, 2013
@jarrodwilcox A free trade zone in Europe is a good thing & might prevent war; a common currency, the way it is going could start one Apr 09, 2013
@jarrodwilcox But I think WW 3 is a boogeyman. Sandwiched between Russia/USSR & the US, that big of a war wouldn’t be likely 2 happen. Apr 09, 2013
Probably the latest peak blossom since I’ve been here RT @EddyElfenbein: Cherry blossoms in DC http://t.co/IG9XiDIYrc Apr 09, 2013
RT @jarrodwilcox: @AlephBlog Euro looks like a disaster until you remember WWII. Political will to overcome divisions may still be will … Apr 09, 2013
Those are succinct insights in why the Euro would fail. There were other saying similar things at the time… http://t.co/7B0cpWcIhO Apr 09, 2013
RT @AndreCimini: @AlephBlog Yes, absolutely. Here’s a couple of very interesting articles on Canada: 1) http://t.co/HEXt7c8HKH 2) htt … Apr 09, 2013
@AndreCimini Cam Hui is a good guy; I usually agree w/him. Second article makes some very good points; I learned from it, tho I knew some Apr 09, 2013
@AndreCimini It was an interesting article. Interesting to contrast US/States v Canada/Provinces. Provinces do more; linked tighter2Canada Apr 09, 2013
RT @AndreCimini: @AlephBlog Here’s why CDN gov’t debt deceiving; add in provincial debt and total debt is around 86% of GDP. http://t.c … Apr 09, 2013
@AndreCimini Thanks, I had forgotten that. Apr 09, 2013
1 straw blowing in the wind, some go other ways RT @ReformedBroker: Forward Earnings Estimates Set a New Record High http://t.co/4OxyGoYQcX Apr 08, 2013
@groditi Also factor in the drag from pension liabilities, reductions from spending rules from lower interest rates; I think it washes Apr 08, 2013

FWIW

My week on twitter: 34 retweets received, 2 new listings, 61 new followers, 34 mentions. Via: http://t.co/cPSEMLXpb8 Apr 11, 2013

Neglected Stocks Are Typically in Strong Hands

Posted on 13 March 2013 by David Merkel

Neglected stocks — I measure it by the ratio of market cap to average dollar volume.? 15% of my portfolio is allocated to such stocks, but I would be happy for it to be 50%, if not more. Many of my companies have a single large holder or group — Industrias Bachoco, National Western Life Insurance Company, CVR Energy, and?Berkshire Hathaway.? These companies have few analysts; there is no way for a brokerage to make money off of them.

Yes, there is a control discount for such companies, because they can’t be taken over, except by the dominant owner.? But if they are well-run, they can be great places to invest.? The dominant investor has his interests aligned with yours over the long haul.? This means that in good and bad times, a large amount of the stock is locked up, and is not available to be bought or sold.? Strong hands hold the stock, which is typically a good place to be.

I like holding cheap, illiquid companies, where there is no hint of financial stress, and they are earning decent money.? I don’t care if they are in dull industries.? If they are compounding their earnings at a decent clip, the stock will eventually catch up.

The point is to own good businesses at good prices.? That’s what I aim to do.

Full disclosure: long BRK/B, CVI, IBA & NWLI

Two Insurance Questions

Posted on 27 February 201327 February 2013 by David Merkel

First question:

Good afternoon.? I’m an avid reader of your blog and want to thank you for the work that you’ve done. I’m reading through the 10-Ks of insurers to try and educate myself and wanted to see if you can provide some advice.? I’m trying to find a guide/book that can help me understand the mechanics of the loss reserve developments show as an adjustment to each “vintage” year.? For example, I’m trying to understand if these are rolling reserves or if they are standalone on an annual basis.? I’m also trying to understand how changes in reserves flow through the income statement.? If you have a book that you can point me to, I’d really appreciate it.? Thanks for your help and have a nice weekend.

First, to any casualty actuaries reading me, if I get this wrong please correct me.? I am a life actuary by training, though I’ve tried to learn your discipline in broad from outside.

There are two main exhibits for P&C reserving in 10Ks — there are the loss triangles that go by accident year (i.e. the year in which the claim is incurred, rather than paid).? But the triangles show what has been paid, and how the incurred estimate changes over time.? With this, you can see how estimates of losses have proven liberal or conservative over time.

The second main exhibit breaks down reserve setting? for the current year.? It breaks into two main parts:

What reserves have you set for the business written in the current year?
How have you changed your estimate of losses incurred for prior years?

My article last night dealt with the latter of those questions.? What this implies is that good companies are very conservative in setting reserves for the current year, and lets the excess of those reserves release over time.? This may not juice stock performance in the short run, but in the long-run, it will lead to good results, because there will be few negative surprises from reserving.

Here’s the second question:

I?ve been intrigued by the recent reader questions, specifically the last couple questions on insurance stocks (RGA, AIZ and others). It sparked a mini research project this weekend for me and I read through a bunch of your old posts, along with some of the company reports and conference call transcripts. I don?t have in depth knowledge of the insurance industry?. I like the business model and understand the basic business, but am not yet well versed with reading and deciphering balance sheet items and insurance industry specific metrics-although I?m getting there

My question is very general in nature. As a value investor, each month I go through 6 or 7 different screens (basic value metrics like P/E, P/B, P/FCF, etc?). I know you?ve said that insurance stocks tend to follow their book value over time, but can trade in ranges from 0.5 to 2.0 times book? and I?ve read through your thoughts on adjusting book value for intangible items and AOCI. But my question is basically: ?Why is the market pricing so many insurance stocks so far below book value?? I know that the near term outlook for interest rates is that they?ll stay low, and I know the near term outlook for the industry isn?t great, but it seems like the market is pricing these stocks for poor results for years.

I know you can?t answer this question specifically, but I just wanted to hear your expertise on why you think these stocks are so far below their book value. I subscribe to Value Line and was reading the latest section on Life Insurers (section 8 from last month)? Value Line covers 10 or 12 of these stocks- RGA, LNC, MET, AFL, PRU, AIZ among others? and all of them seem to be priced at very low prices to earnings and/or book value. In the stock you like, National Western Life Insurance (NWLI), as I?m sure you know-it?s priced at .44 x book, and 6x forward earnings. Almost all of the stocks I looked at in Value line are single digit current P/E ratios as well.

The other thing I?ve noticed as I looked at the 10 year financial histories of these stocks is this: most of them are successfully growing their businesses (premium income seems to be steadily rising each year with most of them), and most of them are growing their book values. Some had the bad year in 2008, but many of them seem to be growing their book values at 10-15% per year consistently for the past decade.

So you have stocks that are selling at very low P/E ratios, very low P/B ratios (and low relative to their own historical valuations in both those categories), AND they are growing their book values (most of them at least).

I guess I?m just looking for some help as to what I could be missing? What does the market see that warrants these valuations?

Insurance is a mature industry.? It’s not a sexy industry.? Further, the accounting in insurance is complex, and few outside the industry understand it.? I have a huge book explaining the nuances of GAAP accounting for life insurers… it is complex.

Now there are some reserving issues with life insurers.? With secondary guarantees, there is little way to tell that reserving is adequate with Variable Products, or Universal Life with no lapse guarantees.

As such, I avoid the companies that are heavy with these products.? Part of the discount there is the distrust of the accounting, but the taint spreads to the industry as a whole,? and as such, the whole life insurance industry trades at a discount.? Some more so, some less.

That said, well-run insurance companies pay great dividends and compound book value at high rates.? Aside from NWLI, I don’t own any pure play life insurers,? Yes, I own SFG, but it is mostly a disability insurer.? AIZ offers funeral insurance, but it is #1 there, with weak competition.? I own RGA. a life reinsurer, but the issues are very different.

There are concerns in life insurance about crediting rate guarantees that can’t be met.? I don’t own any companies with that problem; that is a real problem.

I’m happy to own the insurers without accounting problems, which have low P/B & P/E ratios.? In the long run, their ability to compound returns will benefit any portfolio — it is only a question as to when serious and large investors realize this.? I am willing to wait for this.

Full disclosure: long NWLI SFG AIZ RGA AFL

Reply to a Reader

Posted on 13 February 2013 by David Merkel

From a Reader:

I really enjoy your blog. ?I have two questions for you. ?First, given your experience, how do you factor the price an asset into your risk assessment of an asset and the sizing of that position in a portfolio? ?I have recently re-read Howard Marks book The Most Important Thing Illuminated. ?It is probably the investment book I have re-read more times than any other except The Intelligent Investor. ?His approach to risk is the best I have read. ?Early in my investment career, I lost most of my money buying what appeared to be cheap stocks that were overlevered. ?So now I make sure the company is not a disintegrating entity (like the directory companies) and have reasonable amount of debt. ?I have used the benchmarks in How to Make Money with Junk Bonds by Levine. ?It one of the best books I have read about junk bonds with narratives like Graham’s old Security Analysis. ?As a result I have tried to size my positions based relative undervaluedness. ?I have played around with Kelly Formula to estimate relative size of positions but in the end have used a more qualitative approach. ?Currently, I have large positions (which will become smaller over time) in some radio and TV firms. I was looking at insurance and some financials as the next area to re-balance and you had mentioned AIZ in your blog and it looks good based upon by insurance valuation metric of (growth in BB & dividends/price-to-book ratio) – yielding almost 20%. ?The only other insurers even close is Fairfax Financial and EGI (a small Canadian auto insurer). ?You had mentioned and I agree with insurance you need to get to know the management. Do you the management of AIZ? ?There governance and incentives appear to be set up correctly. ?Given your insurance background, what is your take on some the life insurers such as Lincoln National (trading at a discount to book) and some of the other hybrids (like HIG and AIG)?

?The other question has to do with faith. ?How do you see your faith playing a role in your investments, vocation and family and the balance thereof? ?I too am an Evangelical Christian and find it challenging with a job (I am a partner in a business valuation firm), family (2 great kids and a beautiful wife) and a passion for investment analysis. ?

?You may want to check out The Corner of Berkshire and Fairfax if you have not already. ?If so inclined you may also want to go to Toronto in May for the Fairfax annual meeting, it the best gathering of value investors I have found by far.

I don’t do much with position sizing.? Every asset has the same target weight in my portfolio, aside from double-weights, for stocks of which I have certainty. I only have two double-weights: Reinsurance Group of America, and National Western Life Insurance.

Until I find that my trading is hindered by size of the float, I will try to maintain relatively equal allocations.

Assurant is a very well run firm, and the negatives around reducing premiums on force-placed homeowners insurance are overdone.? If it sells off significantly, it will become another of my double-weights.

Regarding your early problems with value investing, you have to remember that the core of value investing is not cheapness, it is margin of safety.? We make money by not losing it, and having positive surprises on our neglected companies.

As for HIG & AIG, I don’t find them attractive because they have had cultures of under-reserving.? Even with all they have gone through, I am reluctant to buy them amid cheapness and low operating ROEs.

Life insurers like LNC, which have written a lot of variable products business, are unattractive because the accounting does not reflect the real economics, and the guarantees they have written are under-reserved.

As for how my faith (in Christ) influences my investing, there is the usual — I don’t invest in any businesses that I could not ethically run as a sole owner.? Thus I avoid healthcare, entertainment, legal loansharking, and any company that is widely known to cheat people.

As for my time management, it has always been family first, work second, Church third, and other things behind that.? There is no other good way.

Beyond that, my blog is replete with analyses that tell people to avoid scams, and embrace opportunities when they are available.? Avoid complexity and invest in vanilla investments.? You will do best that way.

Full disclosure: long RGA NWLI AIZ

On Insurance Investing, Part 3

Posted on 26 January 201329 January 2013 by David Merkel

Subtitle: The Value of Momentum and Mean-Reversion

In the extreme short-run, mean-reversion dominates.? Over a year, momentum dominates.? Over a four year period mean-reversion returns.

The same applies to insurance stocks.? This is perhaps more true of insurance stocks, because the accounting is so opaque.? When accounting is opaque, it takes a longer period of time for market prices to catch up with the underlying reality.

I do not trust momentum naively.? I compare it to fundamentals and ask if it has more room to run or fall.? Remember, insurance is a mature industry… there are few sustainable competitive advantages here.? Near turning points, valuations are stretched or in the dumps.

That said, here is my table of momentum for the insurance industry:

company	ticker	img_desc	mktcap	prchg_52w
Radian Group Inc.	RDN	0715 – Insurance (Property & Casualty)	?????????????? 882.0	155%
Homeowners Choice, Inc.	HCI	0715 – Insurance (Property & Casualty)	?????????????? 241.1	146%
Stewart Information Services C	STC	0715 – Insurance (Property & Casualty)	?????????????? 528.1	100%
Imperial Holdings, Inc.	IFT	0712 – Insurance (Miscellaneous)	???????????????? 89.7	86%
Kingsway Financial Services In	KFS	0715 – Insurance (Property & Casualty)	???????????????? 54.0	68%
Atlantic American Corporation	AAME	0709 – Insurance (Life)	???????????????? 69.7	63%
eHealth, Inc.	EHTH	0712 – Insurance (Miscellaneous)	?????????????? 506.9	59%
Investors Title Company	ITIC	0715 – Insurance (Property & Casualty)	?????????????? 135.2	59%
First American Financial Corp	FAF	0715 – Insurance (Property & Casualty)	?????????? 2,522.8	58%
Coventry Health Care, Inc.	CVH	0706 – Insurance (Accident & Health)	?????????? 6,239.6	57%
Hilltop Holdings Inc.	HTH	0715 – Insurance (Property & Casualty)	?????????????? 753.0	55%
CNO Financial Group Inc	CNO	0709 – Insurance (Life)	?????????? 2,315.5	52%
Allstate Corporation, The	ALL	0715 – Insurance (Property & Casualty)	???????? 21,154.9	51%
Symetra Financial Corporation	SYA	0709 – Insurance (Life)	?????????? 1,629.6	50%
American International Group,	AIG	0715 – Insurance (Property & Casualty)	???????? 54,180.4	46%
Sun Life Financial Inc. (USA)	SLF	0709 – Insurance (Life)	???????? 17,505.2	46%
Platinum Underwriters Holdings	PTP	0715 – Insurance (Property & Casualty)	?????????? 1,595.2	43%
Hartford Financial Services Gr	HIG	0715 – Insurance (Property & Casualty)	???????? 10,829.2	41%
Lincoln National Corporation	LNC	0709 – Insurance (Life)	?????????? 8,005.7	41%
Amtrust Financial Services, In	AFSI	0715 – Insurance (Property & Casualty)	?????????? 2,232.4	40%
HCC Insurance Holdings, Inc.	HCC	0715 – Insurance (Property & Casualty)	?????????? 3,989.2	39%
Fidelity National Financial In	FNF	0715 – Insurance (Property & Casualty)	?????????? 5,669.5	38%
Horace Mann Educators Corporat	HMN	0715 – Insurance (Property & Casualty)	?????????????? 847.4	38%
Montpelier Re Holdings Ltd.	MRH	0715 – Insurance (Property & Casualty)	?????????? 1,341.4	37%
Seabright Holdings Inc	SBX	0715 – Insurance (Property & Casualty)	?????????????? 249.3	37%
Verisk Analytics, Inc.	VRSK	0712 – Insurance (Miscellaneous)	?????????? 9,172.3	37%
AEGON N.V. (ADR)	AEG	0709 – Insurance (Life)	??? ?????13,026.1	36%
Fortegra Financial Corp	FRF	0712 – Insurance (Miscellaneous)	?????????????? 179.3	35%
XL Group plc	XL	0715 – Insurance (Property & Casualty)	?????????? 8,353.8	35%
Primerica, Inc.	PRI	0709 – Insurance (Life)	?????????? 1,877.3	34%
Allied World Assurance Co Hold	AWH	0715 – Insurance (Property & Casualty)	?????????? 2,946.7	34%
Travelers Companies, Inc., The	TRV	0715 – Insurance (Property & Casualty)	???????? 29,569.3	33%
Everest Re Group Ltd	RE	0715 – Insurance (Property & Casualty)	?????????? 5,944.0	33%
Prudential Public Limited Comp	PUK	0709 – Insurance (Life)	???????? 38,254.3	33%
CIGNA Corporation	CI	0706 – Insurance (Accident & Health)	???????? 16,718.9	33%
United Insurance Holdings Corp	UIHC	0715 – Insurance (Property & Casualty)	???????????????? 91.9	32%
Partnerre Ltd	PRE	0715 – Insurance (Property & Casualty)	?????????? 5,236.2	32%
Cincinnati Financial Corporati	CINF	0715 – Insurance (Property & Casualty)	?????????? 6,959.7	29%
Protective Life Corp.	PL	0709 – Insurance (Life)	?????????? 2,500.8	29%
Argo Group International Holdi	AGII	0715 – Insurance (Property & Casualty)	?????????????? 926.7	29%
Hallmark Financial Services, I	HALL	0715 – Insurance (Property & Casualty)	?????????????? 171.6	26%
Aspen Insurance Holdings Limit	AHL	0715 – Insurance (Property & Casualty)	?????????? 2,380.3	26%
Alterra Capital Holdings Ltd	ALTE	0715 – Insurance (Property & Casualty)	?????????? 2,911.1	25%
Torchmark Corporation	TMK	0709 – Insurance (Life)	?????????? 5,314.2	24%
Alleghany Corporation	Y	0715 – Insurance (Property & Casualty)	?????????? 6,048.5	24%
Eastern Insurance Holdings Inc	EIHI	0709 – Insurance (Life)	?????????????? 135.2	24%
Berkshire Hathaway Inc.	BRK.A	0715 – Insurance (Property & Casualty)	????? 242,512.2	23%
Manulife Financial Corporation	MFC	0709 – Insurance (Life)	???????? 26,899.6	23%
Arch Capital Group Ltd.	ACGL	0715 – Insurance (Property & Casualty)	?????????? 6,188.5	22%
Enstar Group Ltd.	ESGR	0715 – Insurance (Property & Casualty)	?????????? 2,006.2	22%
Axis Capital Holdings Limited	AXS	0715 – Insurance (Property & Casualty)	?????????? 4,664.5	22%
Genworth Financial? Inc	GNW	0709 – Insurance (Life)	?????????? 4,647.8	21%
Aon PLC	AON	0712 – Insurance (Miscellaneous)	???????? 18,361.6	21%
American Equity Investment Lif	AEL	0709 – Insurance (Life)	?????????????? 862.9	20%
White Mountains Insurance Grou	WTM	0715 – Insurance (Property & Casualty)	?????????? 3,585.0	20%
ACE Limited	ACE	0715 – Insurance (Property & Casualty)	???????? 28,999.2	20%
Markel Corporation	MKL	0715 – Insurance (Property & Casualty)	?????????? 4,581.2	19%
United Fire Group, Inc.	UFCS	0715 – Insurance (Property & Casualty)	?????????????? 595.0	19%
Employers Holdings, Inc.	EIG	0715 – Insurance (Property & Casualty)	?????????????? 658.7	18%
W.R. Berkley Corporation	WRB	0715 – Insurance (Property & Casualty)	?????????? 5,643.1	18%
Amerisafe, Inc.	AMSF	0715 – Insurance (Property & Casualty)	?????????????? 517.4	18%
National Interstate Corporatio	NATL	0715 – Insurance (Property & Casualty)	???????? ??????592.7	18%
Old Republic International Cor	ORI	0715 – Insurance (Property & Casualty)	?????????? 2,906.0	17%
Kansas City Life Insurance Co	KCLI	0709 – Insurance (Life)	?????????????? 418.7	17%
Brown & Brown, Inc.	BRO	0712 – Insurance (Miscellaneous)	?????????? 3,901.8	17%
Aetna Inc.	AET	0706 – Insurance (Accident & Health)	???????? 16,644.7	17%
Crawford & Company	CRD.B	0712 – Insurance (Miscellaneous)	?????????????? 305.5	16%
Universal Insurance Holdings,	UVE	0715 – Insurance (Property & Casualty)	?????????????? 182.4	16%
Chubb Corporation, The	CB	0715 – Insurance (Property & Casualty)	???????? 21,220.1	15%
National Western Life Insuranc	NWLI	0709 – Insurance (Life)	?????????????? 593.0	15%
American Financial Group	AFG	0715 – Insurance (Property & Casualty)	?????????? 3,862.0	15%
Loews Corporation	L	0715 – Insurance (Property & Casualty)	???????? 17,109.9	15%
Endurance Specialty Holdings L	ENH	0715 – Insurance (Property & Casualty)	?????????? 1,839.7	14%
China Life Insurance Company L	LFC	0709 – Insurance (Life)	???????? 91,295.3	14%
State Auto Financial	STFC	0715 – Insurance (Property & Casualty)	?????????????? 602.7	14%
Principal Financial Group Inc	PFG	0706 – Insurance (Accident & Health)	?????????? 9,036.6	13%
EMC Insurance Group Inc.	EMCI	0715 – Insurance (Property & Casualty)	?????????????? 324.6	13%
Maiden Holdings, Ltd.	MHLD	0715 – Insurance (Property & Casualty)	?????????????? 758.2	13%
RenaissanceRe Holdings Ltd.	RNR	0715 – Insurance (Property & Casualty)	?????????? 3,982.5	13%
Validus Holdings, Ltd.	VR	0709 – Insurance (Life)	?????????? 3,340.1	12%
Selective Insurance Group	SIGI	0715 – Insurance (Property & Casualty)	?????????? 1,106.6	12%
UnitedHealth Group Inc.	UNH	0706 – Insurance (Accident & Health)	???????? 57,244.5	11%
Hanover Insurance Group, Inc.,	THG	0715 – Insurance (Property & Casualty)	?????????? 1,821.7	11%
Cna Financial Corp	CNA	0715 – Insurance (Property & Casualty)	?????????? 8,351.3	11%
ProAssurance Corporation	PRA	0715 – Insurance (Property & Casualty)	?????????? 2,752.6	11%
Assured Guaranty Ltd.	AGO	0715 – Insurance (Property & Casualty)	?????????? 3,264.4	11%
Marsh & McLennan Companies, In	MMC	0712 – Insurance (Miscellaneous)	???????? 19,053.5	10%
Safety Insurance Group, Inc.	SAFT	0715 – Insurance (Property & Casualty)	?????????????? 728.8	10%
Unico American Corporation	UNAM	0715 – Insurance (Property & Casualty)	???????????????? 68.2	10%
Progressive Corporation, The	PGR	0715 – Insurance (Property & Casualty)	???????? 13,682.1	10%
Independence Holding Company	IHC	0709 – Insurance (Life)	?????????????? 167.3	10%
AFLAC Incorporated	AFL	0706 – Insurance (Accident & Health)	???????? 25,077.1	10%
Navigators Group, Inc, The	NAVG	0715 – Insurance (Property & Casualty)	?????????????? 751.0	10%
Metlife Inc	MET	0709 – Insurance (Life)	???????? 41,077.8	9%
Kemper Corp	KMPR	0715 – Insurance (Property & Casualty)	?????????? 1,874.3	8%
ING Groep N.V. (ADR)	ING	0709 – Insurance (Life)	???????? 37,707.5	7%
Arthur J. Gallagher & Co.	AJG	0712 – Insurance (Miscellaneous)	?????????? 4,502.5	7%
American National Insurance Co	ANAT	0715 – Insurance (Property & Casualty)	?????????? 2,070.2	7%
Prudential Financial Inc	PRU	0709 – Insurance (Life)	???????? 27,417.8	6%
StanCorp Financial Group, Inc.	SFG	0706 – Insurance (Accident & Health)	?????????? 1,776.7	4%
Global Indemnity plc	GBLI	0715 – Insurance (Property & Casualty)	?????????????? 535.1	4%
WellPoint, Inc.	WLP	0706 – Insurance (Accident & Health)	???????? 20,092.9	3%
FBL Financial Group	FFG	0709 – Insurance (Life)	?????????????? 902.6	2%
Unum Group	UNM	0709 – Insurance (Life)	?????????? 6,407.6	2%
Infinity Property and Casualty	IPCC	0715 – Insurance (Property & Casualty)	?????????????? 684.9	2%
Baldwin & Lyons, Inc.	BWINB	0715 – Insurance (Property & Casualty)	?????????????? 340.7	1%
Molina Healthcare, Inc.	MOH	0706 – Insurance (Accident & Health)	?????????? 1,357.9	-2%
Reinsurance Group of America I	RGA	0706 – Insurance (Accident & Health)	?????????? 4,098.1	-2%
Assurant, Inc.	AIZ	0709 – Insurance (Life)	?????????? 3,039.7	-3%
RLI Corp.	RLI	0715 – Insurance (Property & Casualty)	?????????? 1,439.5	-6%
Erie Indemnity Company	ERIE	0715 – Insurance (Property & Casualty)	?????????? 3,283.2	-7%
Citizens, Inc.	CIA	0709 – Insurance (Life)	?????????????? 459.8	-8%
American Safety Insurance Hold	ASI	0715 – Insurance (Property & Casualty)	?????????????? 196.8	-8%
Tower Group Inc	TWGP	0715 – Insurance (Property & Casualty)	?????????????? 740.9	-10%
Willis Group Holdings PLC	WSH	0712 – Insurance (Miscellaneous)	?????????? 6,032.0	-10%
Mercury General Corporation	MCY	0715 – Insurance (Property & Casualty)	?????????? 2,183.3	-11%
OneBeacon Insurance Group, Ltd	OB	0715 – Insurance (Property & Casualty)	?????????? 1,308.7	-12%
Greenlight Capital Re, Ltd.	GLRE	0715 – Insurance (Property & Casualty)	?????????????? 835.9	-12%
Donegal Group Inc.	DGICA	0715 – Insurance (Property & Casualty)	?????????????? 371.4	-12%
Universal American Corporation	UAM	0706 – Insurance (Accident & Health)	??? ???????????801.3	-13%
Humana Inc.	HUM	0706 – Insurance (Accident & Health)	???????? 11,855.7	-14%
CNinsure Inc. (ADR)	CISG	0712 – Insurance (Miscellaneous)	?????????????? 330.1	-17%
Health Net, Inc.	HNT	0706 – Insurance (Accident & Health)	?????????? 2,204.9	-24%
MGIC Investment Corp.	MTG	0715 – Insurance (Property & Casualty)	?????????????? 581.9	-26%
MBIA Inc.	MBI	0715 – Insurance (Property & Casualty)	?????????? 1,631.2	-30%
Meadowbrook Insurance Group, I	MIG	0715 – Insurance (Property & Casualty)	?????????????? 318.1	-36%
Phoenix Companies, Inc., The	PNX	0709 – Insurance (Life)	?????????????? 156.1	-36%
Life Partners Holdings, Inc.	LPHI	0712 – Insurance (Miscellaneous)	???????????????? 50.3	-40%

I note that the basement contains a lot of funky companies with issues.? The penthouse contains a lot of credit-sensitive companies that have rallied off of the strong equity market, and moderately strong housing market.

I do not have much trust in the momentum now, because many are trusting in the rosy scenario where losses have been normalized.? I do not think that is the case, and think that there will be additional losses from credit risk coming soon.

On Insurance Investing, Part 2

Posted on 24 January 2013 by David Merkel

If you grow book value, particularly if your liabilities are short, you will grow market value.? Many reinsurance and insurance companies aim at growing fully convertible book value per share.

Fully convertible book value per share assumes that you invest your dividends in the common stock (without taxation), and thus compound your gains through reinvestment, taking account of dilution.? Hmmm… when will someone dream up the idea of structuring an insurance company as an MLP or a REIT?? I don’t think it is likely, but maybe someone could dream it up.

It also implies that all possible dilution is factored in from convertible preferred stock or convertible bonds.? Now insurance companies tend to trade near book value over the long run, so companies that can grow their book value rapidly and pay dividends can be interesting investments.? Particularly where the liabilities of the company are short — property reinsurance or personal lines insurance, growth in book value plus dividends tends to be a reliable indicator of value creation.

If liabilities are longer, it gets more questionable, because under-reserving becomes more likely — it is very hard to be certain of the reserving of long-dated or volatile coverages.

Anyway, here is a list of insurance companies, and how they have accumulated book value plus dividends over the past seven years.? Note that this is a mathematical calculation off a limited database, and that splits and M&A can throw this calculation off.? With that caveat, here is the list:

company	ticker	sic	img_desc	mktcap	Growth of FCBV
Life Partners Holdings, Inc.	LPHI	6411	0712 – Insurance (Miscellaneous)	50.7	76%
Universal Insurance Holdings,	UVE	6331	0715 – Insurance (Property & Casualty)	185.2	75%
CNinsure Inc. (ADR)	CISG	6411	0712 – Insurance (Miscellaneous)	337.6	56%
Amtrust Financial Services, In	AFSI	6331	0715 – Insurance (Property & Casualty)	2,128.7	38%
Employers Holdings, Inc.	EIG	6331	0715 – Insurance (Property & Casualty)	652.6	32%
Enstar Group Ltd.	ESGR	6331	0715 – Insurance (Property & Casualty)	1,951.0	26%
Tower Group Inc	TWGP	6331	0715 – Insurance (Property & Casualty)	734.8	25%
Amerisafe, Inc.	AMSF	6331	0715 – Insurance (Property & Casualty)	508.5	23%
Humana Inc.	HUM	6324	0706 – Insurance (Accident & Health)	11,297.2	21%
Allied World Assurance Co Hold	AWH	6331	0715 – Insurance (Property & Casualty)	2,856.1	21%
Arthur J. Gallagher & Co.	AJG	6411	0712 – Insurance (Miscellaneous)	4,441.2	20%
Willis Group Holdings PLC	WSH	6411	0712 – Insurance (Miscellaneous)	6,009.5	20%
China Life Insurance Company L	LFC	6311	0709 – Insurance (Life)	94,339.3	20%
ProAssurance Corporation	PRA	6331	0715 – Insurance (Property & Casualty)	2,698.5	19%
RenaissanceRe Holdings Ltd.	RNR	6331	0715 – Insurance (Property & Casualty)	3,949.8	18%
National Interstate Corporatio	NATL	6331	0715 – Insurance (Property & Casualty)	576.7	18%
Argo Group International Holdi	AGII	6331	0715 – Insurance (Property & Casualty)	910.3	17%
Brown & Brown, Inc.	BRO	6411	0712 – Insurance (Miscellaneous)	3,851.4	17%
AFLAC Incorporated	AFL	6321	0706 – Insurance (Accident & Health)	24,134.6	16%
Endurance Specialty Holdings L	ENH	6331	0715 – Insurance (Property & Casualty)	1,796.8	16%
W.R. Berkley Corporation	WRB	6331	0715 – Insurance (Property & Casualty)	5,455.7	15%
American Financial Group	AFG	6331	0715 – Insurance (Property & Casualty)	3,772.7	15%
Horace Mann Educators Corporat	HMN	6331	0715 – Insurance (Property & Casualty)	830.9	15%
Eastern Insurance Holdings Inc	EIHI	6311	0709 – Insurance (Life)	135.5	15%
Validus Holdings, Ltd.	VR	6331	0709 – Insurance (Life)	3,296.1	15%
CIGNA Corporation	CI	6324	0706 – Insurance (Accident & Health)	16,104.2	14%
Reinsurance Group of America I	RGA	6321	0706 – Insurance (Accident & Health)	4,143.2	14%
Safety Insurance Group, Inc.	SAFT	6331	0715 – Insurance (Property & Casualty)	715.6	14%
Chubb Corporation, The	CB	6331	0715 – Insurance (Property & Casualty)	20,701.5	13%
Loews Corporation	L	6331	0715 – Insurance (Property & Casualty)	16,854.0	13%
ACE Limited	ACE	6351	0715 – Insurance (Property & Casualty)	28,285.6	13%
HCC Insurance Holdings, Inc.	HCC	6331	0715 – Insurance (Property & Casualty)	3,937.5	13%
Travelers Companies, Inc., The	TRV	6331	0715 – Insurance (Property & Casualty)	29,108.4	13%
Coventry Health Care, Inc.	CVH	6324	0706 – Insurance (Accident & Health)	6,080.9	12%
Markel Corporation	MKL	6331	0715 – Insurance (Property & Casualty)	4,456.4	12%
Torchmark Corporation	TMK	6311	0709 – Insurance (Life)	5,103.5	12%
UnitedHealth Group Inc.	UNH	6324	0706 – Insurance (Accident & Health)	55,732.6	12%
Partnerre Ltd	PRE	6331	0715 – Insurance (Property & Casualty)	5,116.2	12%
Meadowbrook Insurance Group, I	MIG	6331	0715 – Insurance (Property & Casualty)	311.6	12%
StanCorp Financial Group, Inc.	SFG	6321	0706 – Insurance (Accident & Health)	1,704.1	12%
Prudential Financial Inc	PRU	6311	0709 – Insurance (Life)	26,777.4	12%
Infinity Property and Casualty	IPCC	6331	0715 – Insurance (Property & Casualty)	688.6	12%
Assurant, Inc.	AIZ	6311	0709 – Insurance (Life)	2,935.0	12%
Greenlight Capital Re, Ltd.	GLRE	6331	0715 – Insurance (Property & Casualty)	837.4	12%
Progressive Corporation, The	PGR	6331	0715 – Insurance (Property & Casualty)	13,738.8	11%
Protective Life Corp.	PL	6311	0709 – Insurance (Life)	2,451.0	11%
Axis Capital Holdings Limited	AXS	6331	0715 – Insurance (Property & Casualty)	4,508.1	11%
Molina Healthcare, Inc.	MOH	6324	0706 – Insurance (Accident & Health)	1,300.1	11%
American Equity Investment Lif	AEL	6311	0709 – Insurance (Life)	834.1	11%
Symetra Financial Corporation	SYA	6311	0709 – Insurance (Life)	1,578.3	11%
Aon PLC	AON	6411	0712 – Insurance (Miscellaneous)	18,199.1	10%
Mercury General Corporation	MCY	6331	0715 – Insurance (Property & Casualty)	2,169.0	10%
Everest Re Group Ltd	RE	6331	0715 – Insurance (Property & Casualty)	5,843.7	10%
American Safety Insurance Hold	ASI	6331	0715 – Insurance (Property & Casualty)	197.1	10%
Prudential Public Limited Comp	PUK	6311	0709 – Insurance (Life)	38,071.4	10%
Aspen Insurance Holdings Limit	AHL	6331	0715 – Insurance (Property & Casualty)	2,324.9	10%
Berkshire Hathaway Inc.	BRK.A	6331	0715 – Insurance (Property & Casualty)	236,577.4	9%
EMC Insurance Group Inc.	EMCI	6331	0715 – Insurance (Property & Casualty)	326.3	9%
RLI Corp.	RLI	6331	0715 – Insurance (Property & Casualty)	1,439.1	9%
Hanover Insurance Group, Inc.,	THG	6331	0715 – Insurance (Property & Casualty)	1,781.6	9%
Unico American Corporation	UNAM	6331	0715 – Insurance (Property & Casualty)	66.6	9%
Montpelier Re Holdings Ltd.	MRH	6331	0715 – Insurance (Property & Casualty)	1,318.1	9%
Seabright Holdings Inc	SBX	6331	0715 – Insurance (Property & Casualty)	249.0	9%
Alleghany Corporation	Y	6331	0715 – Insurance (Property & Casualty)	5,950.7	8%
Hallmark Financial Services, I	HALL	6331	0715 – Insurance (Property & Casualty)	176.8	8%
White Mountains Insurance Grou	WTM	6331	0715 – Insurance (Property & Casualty)	3,509.0	8%
Investors Title Company	ITIC	6361	0715 – Insurance (Property & Casualty)	139.1	8%
Marsh & McLennan Companies, In	MMC	6411	0712 – Insurance (Miscellaneous)	19,020.9	8%
FBL Financial Group	FFG	6311	0709 – Insurance (Life)	869.4	8%
Erie Indemnity Company	ERIE	6331	0715 – Insurance (Property & Casualty)	3,264.4	8%
Metlife Inc	MET	6311	0709 – Insurance (Life)	39,615.8	8%
Aetna Inc.	AET	6324	0706 – Insurance (Accident & Health)	15,698.1	8%
WellPoint, Inc.	WLP	6324	0706 – Insurance (Accident & Health)	19,054.4	8%
Hilltop Holdings Inc.	HTH	6331	0715 – Insurance (Property & Casualty)	773.3	8%
Citizens, Inc.	CIA	6311	0709 – Insurance (Life)	485.8	7%
Donegal Group Inc.	DGICA	6331	0715 – Insurance (Property & Casualty)	370.9	7%
National Western Life Insuranc	NWLI	6311	0709 – Insurance (Life)	596.1	7%
Navigators Group, Inc, The	NAVG	6331	0715 – Insurance (Property & Casualty)	766.0	7%
Kemper Corp	KMPR	6331	0715 – Insurance (Property & Casualty)	1,842.8	7%
Allstate Corporation, The	ALL	6331	0715 – Insurance (Property & Casualty)	20,817.6	7%
Cna Financial Corp	CNA	6331	0715 – Insurance (Property & Casualty)	7,982.2	6%
Lincoln National Corporation	LNC	6311	0709 – Insurance (Life)	7,626.2	6%
Arch Capital Group Ltd.	ACGL	6331	0715 – Insurance (Property & Casualty)	6,084.7	6%
Platinum Underwriters Holdings	PTP	6331	0715 – Insurance (Property & Casualty)	1,565.0	6%
Baldwin & Lyons, Inc.	BWINB	6331	0715 – Insurance (Property & Casualty)	339.5	5%
Selective Insurance Group	SIGI	6331	0715 – Insurance (Property & Casualty)	1,086.8	5%
United Fire Group, Inc.	UFCS	6331	0715 – Insurance (Property & Casualty)	587.9	5%
Universal American Corporation	UAM	6324	0706 – Insurance (Accident & Health)	793.6	5%
Principal Financial Group Inc	PFG	6321	0706 – Insurance (Accident & Health)	8,663.8	5%
American National Insurance Co	ANAT	6331	0715 – Insurance (Property & Casualty)	2,055.2	4%
Kansas City Life Insurance Co	KCLI	6311	0709 – Insurance (Life)	416.9	4%
Cincinnati Financial Corporati	CINF	6331	0715 – Insurance (Property & Casualty)	6,771.0	3%
Independence Holding Company	IHC	6311	0709 – Insurance (Life)	169.1	3%
State Auto Financial	STFC	6331	0715 – Insurance (Property & Casualty)	582.5	3%
Unum Group	UNM	6311	0709 – Insurance (Life)	6,190.3	3%
Sun Life Financial Inc. (USA)	SLF	6311	0709 – Insurance (Life)	17,283.4	3%
Alterra Capital Holdings Ltd	ALTE	6331	0715 – Insurance (Property & Casualty)	2,861.2	3%
Assured Guaranty Ltd.	AGO	6351	0715 – Insurance (Property & Casualty)	2,911.2	3%
Fidelity National Financial In	FNF	6361	0715 – Insurance (Property & Casualty)	5,838.5	3%
Atlantic American Corporation	AAME	6311	0709 – Insurance (Life)	69.2	2%
Health Net, Inc.	HNT	6324	0706 – Insurance (Accident & Health)	2,140.7	2%
Hartford Financial Services Gr	HIG	6331	0715 – Insurance (Property & Casualty)	10,641.6	2%
ING Groep N.V. (ADR)	ING	6311	0709 – Insurance (Life)	37,878.4	2%
Manulife Financial Corporation	MFC	6311	0709 – Insurance (Life)	26,357.8	2%
Genworth Financial? Inc	GNW	6311	0709 – Insurance (Life)	4,500.3	2%
AEGON N.V. (ADR)	AEG	6311	0709 – Insurance (Life)	13,073.0	1%
Old Republic International Cor	ORI	6351	0715 – Insurance (Property & Casualty)	2,994.2	1%
OneBeacon Insurance Group, Ltd	OB	6331	0715 – Insurance (Property & Casualty)	1,328.8	0%
Global Indemnity plc	GBLI	6331	0715 – Insurance (Property & Casualty)	555.8	-4%
CNO Financial Group Inc	CNO	6311	0709 – Insurance (Life)	2,192.9	-5%
Crawford & Company	CRD.B	6411	0712 – Insurance (Miscellaneous)	326.7	-5%
Stewart Information Services C	STC	6361	0715 – Insurance (Property & Casualty)	536.7	-9%
XL Group plc	XL	6331	0715 – Insurance (Property & Casualty)	8,182.5	-9%
Phoenix Companies, Inc., The	PNX	6311	0709 – Insurance (Life)	155.4	-14%
First Acceptance Corporation	FAC	6331	0715 – Insurance (Property & Casualty)	51.2	-17%
Radian Group Inc.	RDN	6351	0715 – Insurance (Property & Casualty)	820.6	-23%
MBIA Inc.	MBI	6351	0715 – Insurance (Property & Casualty)	1,561.5	-24%
Kingsway Financial Services In	KFS	6331	0715 – Insurance (Property & Casualty)	53.4	-25%
MGIC Investment Corp.	MTG	6351	0715 – Insurance (Property & Casualty)	567.7	-28%
American International Group,	AIG	6331	0715 – Insurance (Property & Casualty)	51,803.5	-32%
eHealth, Inc.	EHTH	6411	0712 – Insurance (Miscellaneous)	501.2
Maiden Holdings, Ltd.	MHLD	6331	0715 – Insurance (Property & Casualty)	725.7
United Insurance Holdings Corp	UIHC	6331	0715 – Insurance (Property & Casualty)	92.7
Homeowners Choice, Inc.	HCI	6331	0715 – Insurance (Property & Casualty)	240.0
Verisk Analytics, Inc.	VRSK	6411	0712 – Insurance (Miscellaneous)	9,103.9
Primerica, Inc.	PRI	6311	0709 – Insurance (Life)	1,868.1
First American Financial Corp	FAF	6361	0715 – Insurance (Property & Casualty)	2,648.6
Imperial Holdings, Inc.	IFT	6411	0712 – Insurance (Miscellaneous)	86.3
Fortegra Financial Corp	FRF	6411	0712 – Insurance (Miscellaneous)	177.3

Now, it makes a lot of difference how dividends are set, and how buybacks are done.? Dividends should reflect a conservative estimate of how much free cash flow that a company is willing to part with.? Buybacks should only be done when it is at a discount to the intrinsic value of the firm.? If you have to distribute capital when the stock price is above fair market value, do a special dividend.

And when capital is dear, stop the buyback, maybe even reduce the dividend, or do a small secondary IPO.? When there are genuinely profitable opportunities to write business take them.

This is yet another reason why insurance stocks tend to trade near book — capital is so flexible that if capital can enter and exit easily, it should trade near book, because capital enters and exits at book, for the most part.

Ignore the extremes, but realize that companies that compound their fully converted book values can be excellent investments.

On Insurance Investing, Part 1

Posted on 23 January 2013 by David Merkel

Shrinking the Share Count

This post was prompted by this post from Avondale Asset Management on how the share count from The Travelers has shrunk since 2005 (two years after their merger with The St. Paul, a company that I once worked for).? Only 57% of the shares remain.? Way to go.

Now, buying back stock is not a panacea.? It is only good when the shares are trading below or not much above fair market value.? What’s fair market value, you ask?? Well, that’s not an easy question to answer in most places, but in insurance, it means around 1.3x book value, adjusting for intangibles that have no economic significance.

Now if a company has some proprietary products, technologies or methods that give it a sustainable competitive advantage, that multiple can rise — AFLAC might be an example of that.? But sustainable competitive advantages in a mature and competitive industry like insurance are rare.? Above the 1.3x book value hurdle, it would be better to do special dividends.

Avondale was spot-on to feature The Travelers.? They are in the upper end of those that bought back shares 2005-2012.? Here’s my list:

Company	Ticker	Industry	% of shares remaining since 2005
WellPoint, Inc.	WLP	0706 – Insurance (Accident & Health)	52%
Infinity Property and Casualty	IPCC	0715 – Insurance (Property & Casualty)	56%
Travelers Companies, Inc., The	TRV	0715 – Insurance (Property & Casualty)	57%
Aetna Inc.	AET	0706 – Insurance (Accident & Health)	58%
Employers Holdings, Inc.	EIG	0715 – Insurance (Property & Casualty)	59%
White Mountains Insurance Grou	WTM	0715 – Insurance (Property & Casualty)	60%
Torchmark Corporation	TMK	0709 – Insurance (Life)	61%
Assurant, Inc.	AIZ	0709 – Insurance (Life)	61%
Chubb Corporation, The	CB	0715 – Insurance (Property & Casualty)	67%
Erie Indemnity Company	ERIE	0715 – Insurance (Property & Casualty)	68%
RenaissanceRe Holdings Ltd.	RNR	0715 – Insurance (Property & Casualty)	69%
Endurance Specialty Holdings L	ENH	0715 – Insurance (Property & Casualty)	69%
Loews Corporation	L	0715 – Insurance (Property & Casualty)	71%
Allied World Assurance Co Hold	AWH	0715 – Insurance (Property & Casualty)	71%
W.R. Berkley Corporation	WRB	0715 – Insurance (Property & Casualty)	72%
Health Net, Inc.	HNT	0706 – Insurance (Accident & Health)	72%
Platinum Underwriters Holdings	PTP	0715 – Insurance (Property & Casualty)	72%
Allstate Corporation, The	ALL	0715 – Insurance (Property & Casualty)	73%
CIGNA Corporation	CI	0706 – Insurance (Accident & Health)	75%
UnitedHealth Group Inc.	UNH	0706 – Insurance (Accident & Health)	77%
Progressive Corporation, The	PGR	0715 – Insurance (Property & Casualty)	78%
Montpelier Re Holdings Ltd.	MRH	0715 – Insurance (Property & Casualty)	78%
Verisk Analytics, Inc.	VRSK	0712 – Insurance (Miscellaneous)	78%
American Financial Group	AFG	0715 – Insurance (Property & Casualty)	80%
StanCorp Financial Group, Inc.	SFG	0706 – Insurance (Accident & Health)	80%
Primerica, Inc.	PRI	0709 – Insurance (Life)	80%
Investors Title Company	ITIC	0715 – Insurance (Property & Casualty)	81%
Hanover Insurance Group, Inc.,	THG	0715 – Insurance (Property & Casualty)	83%
Coventry Health Care, Inc.	CVH	0706 – Insurance (Accident & Health)	84%
RLI Corp.	RLI	0715 – Insurance (Property & Casualty)	84%
Kemper Corp	KMPR	0715 – Insurance (Property & Casualty)	84%
Axis Capital Holdings Limited	AXS	0715 – Insurance (Property & Casualty)	85%
First Acceptance Corporation	FAC	0715 – Insurance (Property & Casualty)	86%
Everest Re Group Ltd	RE	0715 – Insurance (Property & Casualty)	89%
Eastern Insurance Holdings Inc	EIHI	0709 – Insurance (Life)	90%
Prudential Financial Inc	PRU	0709 – Insurance (Life)	91%
Horace Mann Educators Corporat	HMN	0715 – Insurance (Property & Casualty)	92%
FBL Financial Group	FFG	0709 – Insurance (Life)	92%
AFLAC Incorporated	AFL	0706 – Insurance (Accident & Health)	93%
Cincinnati Financial Corporati	CINF	0715 – Insurance (Property & Casualty)	93%
Kansas City Life Insurance Co	KCLI	0709 – Insurance (Life)	93%
Kingsway Financial Services In	KFS	0715 – Insurance (Property & Casualty)	93%
HCC Insurance Holdings, Inc.	HCC	0715 – Insurance (Property & Casualty)	94%
Unum Group	UNM	0709 – Insurance (Life)	94%
EMC Insurance Group Inc.	EMCI	0715 – Insurance (Property & Casualty)	95%
eHealth, Inc.	EHTH	0712 – Insurance (Miscellaneous)	95%
OneBeacon Insurance Group, Ltd	OB	0715 – Insurance (Property & Casualty)	95%
Aspen Insurance Holdings Limit	AHL	0715 – Insurance (Property & Casualty)	96%
Unico American Corporation	UNAM	0715 – Insurance (Property & Casualty)	97%
Markel Corporation	MKL	0715 – Insurance (Property & Casualty)	98%
Safety Insurance Group, Inc.	SAFT	0715 – Insurance (Property & Casualty)	98%
Humana Inc.	HUM	0706 – Insurance (Accident & Health)	99%
Atlantic American Corporation	AAME	0709 – Insurance (Life)	100%
State Auto Financial	STFC	0715 – Insurance (Property & Casualty)	100%
A.F.P Provida SA (ADR)	PVD	0718 – Investment Services	100%
American National Insurance Co	ANAT	0715 – Insurance (Property & Casualty)	101%
Baldwin & Lyons, Inc.	BWINB	0715 – Insurance (Property & Casualty)	101%
Mercury General Corporation	MCY	0715 – Insurance (Property & Casualty)	101%
Marsh & McLennan Companies, In	MMC	0712 – Insurance (Miscellaneous)	101%
National Western Life Insuranc	NWLI	0709 – Insurance (Life)	101%
Brown & Brown, Inc.	BRO	0712 – Insurance (Miscellaneous)	101%
Selective Insurance Group	SIGI	0715 – Insurance (Property & Casualty)	101%
Sun Life Financial Inc. (USA)	SLF	0709 – Insurance (Life)	101%
Life Partners Holdings, Inc.	LPHI	0712 – Insurance (Miscellaneous)	101%
Aon PLC	AON	0712 – Insurance (Miscellaneous)	102%
ProAssurance Corporation	PRA	0715 – Insurance (Property & Casualty)	102%
Principal Financial Group Inc	PFG	0706 – Insurance (Accident & Health)	102%
First American Financial Corp	FAF	0715 – Insurance (Property & Casualty)	102%
China Life Insurance Company L	LFC	0709 – Insurance (Life)	103%
Genworth Financial? Inc	GNW	0709 – Insurance (Life)	103%
Navigators Group, Inc, The	NAVG	0715 – Insurance (Property & Casualty)	104%
National Interstate Corporatio	NATL	0715 – Insurance (Property & Casualty)	104%
Amerisafe, Inc.	AMSF	0715 – Insurance (Property & Casualty)	104%
Cna Financial Corp	CNA	0715 – Insurance (Property & Casualty)	105%
Donegal Group Inc.	DGICA	0715 – Insurance (Property & Casualty)	106%
Stewart Information Services C	STC	0715 – Insurance (Property & Casualty)	106%
Berkshire Hathaway Inc.	BRK.A	0715 – Insurance (Property & Casualty)	107%
Prudential Public Limited Comp	PUK	0709 – Insurance (Life)	107%
Willis Group Holdings PLC	WSH	0712 – Insurance (Miscellaneous)	107%
Crawford & Company	CRD.B	0712 – Insurance (Miscellaneous)	111%
Old Republic International Cor	ORI	0715 – Insurance (Property & Casualty)	112%
Molina Healthcare, Inc.	MOH	0706 – Insurance (Accident & Health)	112%
United Fire Group, Inc.	UFCS	0715 – Insurance (Property & Casualty)	113%
Partnerre Ltd	PRE	0715 – Insurance (Property & Casualty)	113%
Protective Life Corp.	PL	0709 – Insurance (Life)	114%
Manulife Financial Corporation	MFC	0709 – Insurance (Life)	114%
Independence Holding Company	IHC	0709 – Insurance (Life)	116%
ACE Limited	ACE	0715 – Insurance (Property & Casualty)	116%
Reinsurance Group of America I	RGA	0706 – Insurance (Accident & Health)	118%
Citizens, Inc.	CIA	0709 – Insurance (Life)	119%
Universal Insurance Holdings,	UVE	0715 – Insurance (Property & Casualty)	121%
Phoenix Companies, Inc., The	PNX	0709 – Insurance (Life)	122%
AEGON N.V. (ADR)	AEG	0709 – Insurance (Life)	124%
Symetra Financial Corporation	SYA	0709 – Insurance (Life)	124%
Arch Capital Group Ltd.	ACGL	0715 – Insurance (Property & Casualty)	127%
Fidelity National Financial In	FNF	0715 – Insurance (Property & Casualty)	128%
Hilltop Holdings Inc.	HTH	0715 – Insurance (Property & Casualty)	130%
Arthur J. Gallagher & Co.	AJG	0712 – Insurance (Miscellaneous)	131%
ING Groep N.V. (ADR)	ING	0709 – Insurance (Life)	135%
Argo Group International Holdi	AGII	0715 – Insurance (Property & Casualty)	136%
Seabright Holdings Inc	SBX	0715 – Insurance (Property & Casualty)	138%
Global Indemnity plc	GBLI	0715 – Insurance (Property & Casualty)	141%
Metlife Inc	MET	0709 – Insurance (Life)	143%
MBIA Inc.	MBI	0715 – Insurance (Property & Casualty)	145%
Hartford Financial Services Gr	HIG	0715 – Insurance (Property & Casualty)	146%
American Safety Insurance Hold	ASI	0715 – Insurance (Property & Casualty)	150%
CNO Financial Group Inc	CNO	0709 – Insurance (Life)	153%
Universal American Corporation	UAM	0706 – Insurance (Accident & Health)	153%
Radian Group Inc.	RDN	0715 – Insurance (Property & Casualty)	155%
American Equity Investment Lif	AEL	0709 – Insurance (Life)	159%
Hallmark Financial Services, I	HALL	0715 – Insurance (Property & Casualty)	160%
Validus Holdings, Ltd.	VR	0709 – Insurance (Life)	160%
Lincoln National Corporation	LNC	0709 – Insurance (Life)	161%
Enstar Group Ltd.	ESGR	0715 – Insurance (Property & Casualty)	169%
Meadowbrook Insurance Group, I	MIG	0715 – Insurance (Property & Casualty)	172%
Greenlight Capital Re, Ltd.	GLRE	0715 – Insurance (Property & Casualty)	173%
Alleghany Corporation	Y	0715 – Insurance (Property & Casualty)	191%
Tower Group Inc	TWGP	0715 – Insurance (Property & Casualty)	196%
Alterra Capital Holdings Ltd	ALTE	0715 – Insurance (Property & Casualty)	197%
CNinsure Inc. (ADR)	CISG	0712 – Insurance (Miscellaneous)	208%
XL Group plc	XL	0715 – Insurance (Property & Casualty)	215%
MGIC Investment Corp.	MTG	0715 – Insurance (Property & Casualty)	220%
Amtrust Financial Services, In	AFSI	0715 – Insurance (Property & Casualty)	259%
Assured Guaranty Ltd.	AGO	0715 – Insurance (Property & Casualty)	262%
American International Group,	AIG	0715 – Insurance (Property & Casualty)	1265%

On the top side, and I did not see any of these, be aware of reverse splits, which can reduce the share count, are a sign of a badly run company, but do nothing for the economics of a firm, aside from keeping them listed on a major exchange.

On the bottom side, factor in large mergers paid for with shares.? Most large-scale mergers don’t work out well, so I don’t mind those companies being near the bottom of the list.

On a closing note, there is a weak positive correlation in most mature industries between stock price performance and relative decreases in share count, assets, and sales.? This sounds counter-intuitive, but good management teams know when to grow and when not to grow.? They don’t do acquisitions for scale.? They don’t grow sales if the sales growth won’t justify the cost of capital.? Building the assets of the company bigger does nothing for the bottom line; selective asset sales can free up cash for more productive uses.? Good management teams do not build empires — they add when it makes sense (grow), subtract when it makes sense (shrink), divide when it makes sense (spinoffs), and multiply when it makes sense (IPOs, JVs, new projects).

PS –? What does the WSJ have today?? An article on buybacks.? Enjoy.

Evaluating Regulated Financials

Posted on 29 December 2012 by David Merkel

Dear readers, I repost here an edited version of what I shared with a Linked-in group:

=–=-==-=-=–=-=-==-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-==-=-=-=-=-=-

I took Benefit-Cost Analysis from Dr. Hanke of Johns Hopkins in 1980, and so I never gained the benefit of his current proprietary tweaks to the Discounted Cash Flows model for stock valuation.? That said, application of DCF to any regulated financial company is difficult, because not all of the capital is free to be deployed into investment in new business, stock buybacks, or dividends.

The level of required capital at a regulated financial varies with the risks of the blocks of business (liabilities) that it underwrites, the assets they buy with the proceeds from the liabilities, and the cash flow, currency and other mismatches between the assets and the liabilities.

The marginal amount of capital for new business and investments may be significantly different than what is required for old business.? So here is my question to the group, especially the students, to think about: how would you apply your DCF model to a situation like this?

Notes, Mostly on Financials

Three final notes: 1) If you want to experiment with this, here are five very different insurers that are my current favorites: RGA (life reinsurance), ENH (P&C insurance & reinsurance), AIZ (Life, P&C, Warranties, Pensions & Individual Health), SFG (disability), & NWLI (Life insurance and annuities sold to foreigners for flight capital).? Try applying the model to one, and see what you get.

2) Most real risk in large financials does not come from inadequacy of capital, but from borrowing short and investing/lending long.? The key measure is whether an institution has enough high-quality short-term assets to meet a run on the institution, where those that supply funds to the institution demand them back at the same time.

With life insurance companies, failures occasionally happen from a run on the company (General American and ARM financial in 1999), but more often, because regulators think the capital base has shrunk too much because of bad credit risks, and take the company into conservation. (Pacific Standard, Confederation, Kentucky Central, near-miss w/The Equitable, etc.)

With P&C insurers and reinsurers, failure happens because bad underwriting leads to a shrinkage of capital, and the regulators take them into conservation. (Think of Reliance and Saul Steinberg, though a lot of reinsurers were de facto bankrupt in the mid-1980s, but the regulators didn’t catch them.)

With small banks and thrifts, it?s credit problems versus capital.? Liquidity does not usually play a role because of deposit guarantees.

With large banks, it is illiquid and longer assets versus short financing.? In the recent crisis, much of that came from financing mortgage inventories in the repurchase market, where financing had to be renewed daily, and margin requirements in derivative financing that had to be adjusted daily.? In the latter case, a credit downgrade would trigger a need for more capital to be put up as margin, just at the time when liquidity was scarce.? In the former case, deteriorating prices for the assets financed in the repurchase market led to an increase in the capital haircut, requiring more liquidity out of the borrowers at the time they could least afford it. (AIG, Wachovia, Countrywide, etc.)

Finally, remember that the financial markets are talkative.? No one wants to hold unsecured credit from a bank they think will go broke, so if there is a reasonable doubt on failure, liquidity dries up because other banks stop dealing with you (Bear Stearns, Lehman Brothers, Merrill Lynch, etc.)

As an example in my own life, back when I managed and traded corporate bonds back in 2002, when the market was feeling a lot of stress, I joked with my broker, ?Hey, is XYZ Corp trading flat yet??? (With most corporate bonds, when you settle a trade, the pro-rata portion of the next interest payment is added to the price.? A bond like XYZ Corp, when its solvency is doubtful, the dealers start settling bond trades assuming it will not make another payment.)? He told me that it was not trading flat.? The high yield manager, Ed, sitting next to me, after the call ended said, ?Just a matter of time.?

Half an hour later, my broker that talked with before called me back, and in an edgy voice said ?XYZ Corp is now trading flat!? and quickly ended the call.? Ed looked at me and said, ?Dave, don?t do that again.?

Liquidity is plenteous when you don?t need it, and scarce when really needed.? Remember that when investing in financials.

3) The Baltimore CFA Society gives significant discounts for students that want to attend our meetings.? $10 gets you a $30 meal and an interesting speaker or two, so consider yourselves invited.? Next meeting on January 11^th is one of our bigger ones.? You even get to meet the aforementioned ?Ed.?

Full disclosure: long RGA, AIZ, NWLI, ENH, SFG