Wintaai Holdings Ltd (not listed)

[MrB]

Wintaai Holdings Ltd is the holding company for what will eventually become a collection of insurance and operating companies, but to date it holds one substantial asset, Stonetrust Commercial Insurance Co. Some of the related ground has already been covered in Investmd's thread Chou Dhandho StoneTrust which includes the recent (overly glowing) Forbes article. 

We're invested in Wintaai, so I'm going to steer clear of the valuation discussion for now and prefer to have Francis and Mike speak for themselves in the attached letter to shareholders. 

Probably safe to say you can tag at least another 15% onto the BVPS for Q1 2021. 

 

Wintaai and Stonetrust Annual Letters (2020).pdf

[Cigarbutt]

Than you for this info MrB.

Apologies: negative outlook for Wintaai Holdings.

In the US for the last 5 years, WC insurance has been an unusually bright spot in commercial lines. What's in store and what does it mean for Stonetrust?

1-In the last 5 years, Stonetrust has consistently underperformed on the underwriting side when comparing to related peers in the WC space.

From AM Best and post above (2015-19), industry vs Stonetrust:

2015             95.8    109.6

2016             95.6    100.4

2017             92.5     99.6

2018             87.0     96.3

2019             88.3     89.6

avg 2015-9   91.8     99.1

2020           85-86    86.4

2-From available disclosure, it's not possible to assess the reserving profile of Stonetrust over time and it's possible (though unlikely) that higher combined ratios in 2015 to 2019 were related to more conservative reserves than average (accident year combined ratios closer to reality than peers) and 2020 may be the beginning of the realization of this aspect. However, it is estimated that net premiums written for WC declined by about 8% in 2020 (with rates not really moving) and, for Stonestrust, NPW declined by only 2.3% (retention stayed the same). Even if this may partly reflect that Stonetrust has been geographically expanding, more likely it means that Stonetrust may not be ideally  positioned counter-cyclically for reserving. AM Best suggests that the WC industry has become significantly under-reserved. This is hard to confirm prospectively but AM Best has been pretty good overall with these reserve issues in the past even if exact timing is difficult to map. For example, their asbestos reserving deficit work has proven to be quite solid, over time. Just using basic historical assumptions, it's reasonable to suggest that the high amount of reserve releases of the last 2,3 or even 4 years (for the industry as a whole) will become a correspondingly large deficiency movement in the future. Stonetrust has written business lately with an above 100% accident year combined ratio (2019's CR was subject to a non-recurrent gain on the underwriting expense side). Reversing the positive reserve development pattern at this point while growing faster than peers is a recipe for further underwriting (calendar year) losses.

3-From the investment point of view, i suggest the hypothesis that results may be relatively positive in some periods but (IMHO) it's likely that net relative results will be inferior over the long term. A differentiated investment strategy is not well looked upon by regulators when results are poor.

4-A key concern is the message that WC (and Stonetrust) should do well with the market hardening. Since the WC seems to have a life of its own , it's unlikely to follow trends seen in other commercial lines.

A positive aspect is the excess capital but what happens to this excess capital and the returns obtained may disappoint.

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Additional comments about 2020 and the WC's insurance market and what it may mean going forward (for Stonetrust). In 2020, results turned out much better than expected with the direct and indirect Covid-19's impact. WC claims were less frequent (and especially less costly) than most predicted and most of the costs came from lost wages secondary to temporary quarantine measures. Results varied to some degree across states for a variety of reasons including general policy and specific coverage rules but positive trends were noted across geographies. An aspect which occurred which is amazingly unprecedented is that claims came down (during the downturn) both absolutely and relatively. In a typical downturn, claim frequency tends to go down absolutely but not relatively (this is an interesting phenomenon but likely not interesting enough to discuss here). This wasn't the case in 2020 and people are puzzled. Puzzled in the same way when trying to explain the conundrum now where employers are looking for workers and there is a significant pool of potentially available workers and, still, employers have difficulty finding candidates...This is likely closely tied to the centralized mandate (which has gone up one notch in 2020) which implies to centrally and simultaneously provide both work and help to the masses. This is bound to fire back if the idea is to encourage productivity in this mature (aging) economy/population and is likely to be a negative for WC insurance long term (payrolls) but transfers backed by the printing press will help WC combined ratios for a while still.

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Stonetrust reports lower average medical claims per case and this may suggest (?) that this is related to better 'management' but, just eye-balling, it appears that the difference may be simply related to the states where they do (and don't do) business.

Of course, everything above could be wrong. This should be an interesting re-assessment in 5 to 10 years.

 

[MrB]

No need to apologise CB. I much rather listen to different view. 

[MrB]

Discussion on Stonetrust

Edited June 1, 2021 by MrB

[MrB]

2021 Q1 results are out. Healthy increase in BV and AM Best A rating in sight. 

Wintaai Financial Highlight (Mar 2021).pdf