The Stench of Sleaze is Wafting from Fremont

[Guest HarryLong]

Readers of  my articles  know that  I am  not a  fan of  Fremont CEO Dick Dunning. To review, I have  found his  behavior to  be the  worst example  of CEO conduct that  I have  ever encountered.

 

As I have recounted on BuildFremont.com,  BuildFremont.com/Blog (still cached on Google), and SeekingAlpha.com the most egregious examples were:

 

I. Refusing to recognize my nomination to Fremont's Board. For instance, in its 2008 proxy statement, Fremont stated the wrong deadline for the nomination of directors. The deadline in the proxy, disturbingly, contradicted the date stated in its Articles of Incorporation. While I am sure the company did not do this on purpose, the company did refuse to recognize my nomination, even though it was made before the deadline listed in the company's own proxy statement.

 

II. Having me travel across the country to meet him and his executives and not bringing people to the meeting that he committed to bring (Skip Massucci and Kent Shantz). The next day, Dick Dunning refused to rectify his mistake. He insisted on a conference call with the absent executives, rather than the face-to-face meeting he had agreed to before I flew up to Michigan (why did I fly from Florida to Michigan for a conference call?).

 

More recently, something almost unimaginable has occurred. Earlier this week, a bill was winding its way through a Michigan State Senate committee which could block the takeover of small Michigan insurers. However, there is more to the story.

 

The Detroit News article "Bill seen as roadblock to takeover of Fremont insurer" (http://www.detnews.com/article/20100414/BIZ/4140427/1361/Bill-seen-as-roadblock-to-takeover-of-Fremont-insurer#ixzz0lHqENFxX), details how Jeff Cobb, chief of staff to Sen. Gerald Van Woerkom, R-Muskegon, who sponsored the bill, has made it very clear the bill is is aimed at protecting some specific companies.

 

To quote the article, "Cobb said the bill is narrowly tailored to block the takeover of Fremont and would affect only a couple other companies in the state."

 

This is the biggest smoking gun I have ever read. You have the Chief of Staff to a State Senator who is basically admitting, according to the Detroit News, that he has sponsored legislation that would block the takeover of a specific public company.

 

According to the article, “The legislation would require approval of two-thirds of outstanding shares of a company to elect director candidates who are not backed by a majority of that company's board of directors.”

 

Did executives, employees, or board members of Fremont have any hand in introducing this legislation, suggesting it, or asking it to be written? Have any executives, employees, board members, or contractors of the company been lobbying for this bill? If they have not, they should put out a press release saying that they do not support the state legislature meddling in free enterprise, shareholder rights, and shareholder democracy.

 

According to Fremont's latest proxy statement, Donald VanSingel, Chairman of the Board, “served 20 years as a Representative in the Michigan House of Representatives, and was a lobbyist from 1993 until his retirement in 2007 with Government Consultant Services in Lansing, Michigan; Mr. VanSingel has experience in government relations, legislative matters and as a director of a public company.” If Donald VanSingel does not support such shameless legislation, I hope he comes out with a public statement condemning it. Clearly, with his years of experience as a State Representative and lobbyist, he could quash this bill.

 

There is a larger issue at work. What rights do common people, who are the vast majority of shareholders, have to put checks on company management in this country? Are wealthy CEOs, in a larger sense, so powerful as to enlist the help of legislatures in protecting their jobs? (I would never imply that Fremont or Dick Dunning is doing this, I am simply posing a larger question about public policy). Shouldn't shareholders have the right to elect directors, who are entrusted to oversee management, by simple majorities?

 

Shareholder democracy works. Efforts to undermine shareholder democracy not only hurt shareholders, but also workers. When companies are mismanaged, if shareholders cannot oust management, workers bear the brunt of it as they are laid off, or have their health benefits and pensions cut. If companies are managed well, management has nothing to fear from shareholders. In any case, shareholders, who have their money at stake, should decide who runs a company--not legislators who as we have seen too often in this country, are often beholden to lobbyists.

 

Has the opposite approach worked in Michigan? Currently, Michigan has the highest unemployment rate in the country. Mismanagement destroyed GM. Who bore the cost of that? GM workers.

 

There is a word for what Sen. Gerald Van Woerkom is doing. It's called cronyism. Don't let a politician fool you when he discusses protecting local companies or local employees. Politicians really care about protecting rich, well-connected CEOs. There is one person who Sardar Biglari has said he wants to replace if he is successful in taking over Fremont. Guess who it is. CEO Dick Dunning.

 

I say, good riddance.

 

 

 

Disclosure: Long FMMH

 

[Guest HarryLong]

It looks like I was too optimistic.

 

If this next article is correct, these people are truly despicable.

 

http://insurancenewsnet.com/article.aspx?id=180579&type=newswires

[Parsad]

I absolutely agree Harry!  That is one of the most disgusting things I've ever seen both from a political and corporate standpoint.  Absolutely abhorent! 

 

I think the federal government should actually step in here and prevent this legislation from being enacted.  I can understand a corporate CEO doing this to remain entrenched, but I cannot believe a legislator would bow to a single corporation's desire to remain entrenched.  God awful!  Cheers!

[Guest HarryLong]

http://seekingalpha.com/instablog/365592-harry-long/63805-fmmh-it-gets-worse?source=new_post_submission

http://insurancenewsnet.com/article.aspx?id=180579&type=newswires

 

(FMMH) It Gets Worse

 

Apparently, my last article on Fremont was too charitable. According to InsuranceNewsNet.com (insurancenewsnet.com/article.aspx?id=180...), "State Sen. Gerald Van Woerkom, R-Muskegon, drafted the bill at the request of Fremont executives, Chief of Staff Jeff Cobb said. The company is based in Van Woerkom's district. The legislation may apply to other insurance companies, he said, but the idea is solely to protect Fremont from a potential hostile takeover."

 

The article then goes on to quote Jeff Cobb directly, " 'We want it to address only Fremont if we can,' Cobb said. "

 

And later, " 'Our plan would be to have it in place by the next shareholders' meeting," Cobb said.' "

 

If this article is correct, it points to three things:

 

I. The bill was drafted by State Sen. Van Woerkom at the request of Fremont executives.

II. Jeff Cobb, Sen. Van Woerkom's Chief of Staff has admitted it.

 

III. The legislation is designed to address only one company.

 

If that is true, it is the most despicable scandal I have heard of in recent memory and both Senator Woerkom and CEO Richard Dunning should resign from their respective positions. This whole situation is truly outrageous.

 

 

 

 

 

Disclosure: Long FMMH

[Parsad]

That's why I was disgusted!  I've seen labor unions and other organizations get legislators to draft bills to maintain jobs in a state, but never to prevent the removal of a specific executive.  Cheers!

[Packer16]

Given the behavior of management, how are you confident that there is value here?  Since management has a large amount of discretion in reporting, how do you know they may not be using aggressive assumptions in their estimates?  If management has this kind of attitude, how do they treat their customers and employees?  Its one thing in a consumer business (like a restaurant) where you can see the issues and the corrective actions in work but in a "trust" business like insurance the issues in my opinion are much harder to see as an outsider.  Is there some data I am missing to feel more comfortable that if anyone takes over this business there will not be alot of cockroaches hanging around?

 

Packer

[nodnub]

Packer, you raise a valid concern. 

[bargainman]

Given that the government is *supposed* to be structured with checks and balances.. I wonder if Sardar, should he be motivated enough, would have recourse either through the executive or judicial branches of government?  Presumably someone can veto the bill, and presumably once the bill passes it can be upheld or overturned in court?  Anyone know enough about the law to comment?

[valuecfa]

The article then goes on to quote Jeff Cobb directly, " 'We want it to address only Fremont if we can,' Cobb said. "

 

And later, " 'Our plan would be to have it in place by the next shareholders' meeting," Cobb said.' "

 

Wow. Incredible. Were i a shareholder i would be making a few phone calls and writing a few letters. It's incredible that the Fremont execs are seeking legislation brought to block this specific deal. It it even more incredible that the senators are supportive, and openly a party to this behavior. This special interest behavior just makes me cringe.

[omagh]

If I were a senator, I would be thanking Fremont for the cheque for my re-election campaign.

 

-O

Wow. Incredible. Were i a shareholder i would be making a few phone calls and writing a few letters. It's incredible that the Fremont execs are seeking legislation brought to block this specific deal. It it even more incredible that the senators are supportive, and openly a party to this behavior. This special interest behavior just makes me cringe.

[Crip1]

Am I wrong in thinking that perhaps more effort expended by Mr. Dunning on performing his job then the effort in saving his job would be more beneficial to the shareholders, AND to Mr. Dunning?

 

Also, am I wrong in thinking that this is a tell-tale sign of "Peter Principle" on behalf of Mr. Dunning?

 

Granted, I am on the outside and do not know much of the inner workings, but from what I have read...

 

-Crip

[Guest HarryLong]

Am I wrong in thinking that perhaps more effort expended by Mr. Dunning on performing his job then the effort in saving his job would be more beneficial to the shareholders, AND to Mr. Dunning?

 

Also, am I wrong in thinking that this is a tell-tale sign of "Peter Principle" on behalf of Mr. Dunning?

 

Granted, I am on the outside and do not know much of the inner workings, but from what I have read...

 

-Crip

 

If you go to BuildFremont.com/blog (still cached in google), you will see some fascinating dialogue with Fremont executives. Of course, if you're not into insurance, it is a very good substitute for counting sheep. Without putting too fine a point on it, my personal opinion is that shareholders would be served best if Dick sought his personal calling elsewhere.

[bookie71]

Is this bill legal under the "commerce" section of the U.S. Constitution? 

[JAllen]

Can I ask what makes Fremont worth spending so much time on?

 

Harry, why do you continue to devote time to it?  Why is it worth it to fly across country to meet those guys for you?

 

Thanks.

 

BTW,  I'm going to buy some just to help vote that A-hole out when it comes to that!

[Guest HarryLong]

Can I ask what makes Fremont worth spending so much time on?

 

Harry, why do you continue to devote time on it?  Why is it worth it to fly across country to meet those guys for you?

 

Thanks.

 

BTW,  I'm going to buy some just to help vote that A-hole out when it comes to that!

 

I guess I can only answer your question with more questions.

 

Do you know of any P&C insurer at less than $100 million in market cap with:

 

Over-reserving?

 

A good combined ratio?

 

Zero debt on the liabilities side of its balance sheet?

 

Selling at a discount to tangible book?

 

A double-A rated fixed income portfolio?

 

Remember, Buffett had a real problem in the early days getting his guys to underwrite at a profit. Just go back and read his annual reports. If you do know of any public insurers with the above attributes, or any private ones with the above attributes at less than $100 million in tangible equity, give me a call.

[Myth465]

Why less than $100 million. I would guess Fremont is a good company with bad Management.  Chanticleer Holdings has done a great job of picking cheap insurers. Even with that said there are alot of cheap insurers out there. HALL was a great buy 3 weeks ago before it ran up 30%.

[Guest HarryLong]

Why less than $100 million. I would guess Fremont is a good company with bad Management.  Chanticleer Holdings has done a great job of picking cheap insurers. Even with that said there are alot of cheap insurers out there. HALL was a great buy 3 weeks ago before it ran up 30%.

 

Myth, have you read Hall's financial statements?

 

I think there is a weird tendency to reply to things I never said. There are a lot of cheap insurers. There are very few quality, cheap, small insurers.

 

Again, if you can name some specific ones which pass the criterion I listed, have at it.

[Myth465]

Sorry about that. Let me rephrase what I wrote. They have debt and are too big based on your metrics.

 

What I was wondering is why you have the criteria you have. I think there are plenty of good cheap insurers available. Maybe not with the exact same metrics that you have laid out, but plenty of cheap ones none the less.

 

I think the question is a fair question. Given the fact that there are other cheap insurers which should be money good. Why fool with these idiots who have Legislators willing to change state law for them. The reason why I listed HALL is because it was trading at 70% of book (there is some goodwilll though), has very good underwriting, has a value investor at the helm, has cash / a very conservative portfolio, low debt, and went up 35% over the last 4 weeks.

 

I guess the question I am really asking is is this worth the opportunity costs. It seems like BH needs to get 5 of his friends to buy 10% to vote out the bums. Even then he would need another 16% of the remaining shareholders to vote in favor of his nominee should this law pass. It also seems like this law may also hamper planned out of state growth.  

 

---

 

Sleaze usually runs deep. I doubt its sitting in only in the Corporate office. The positive numbers though would be hard to fake.

[nodnub]

Am I wrong in thinking that perhaps more effort expended by Mr. Dunning on performing his job then the effort in saving his job would be more beneficial to the shareholders, AND to Mr. Dunning?

Also, am I wrong in thinking that this is a tell-tale sign of "Peter Principle" on behalf of Mr. Dunning?

Granted, I am on the outside and do not know much of the inner workings, but from what I have read...

-Crip

 

If you go to BuildFremont.com/blog (still cached in google), you will see some fascinating dialogue with Fremont executives. Of course, if you're not into insurance, it is a very good substitute for counting sheep. Without putting too fine a point on it, my personal opinion is that shareholders would be served best if Dick sought his personal calling elsewhere.

 

Harry, I have read the google cached version of your blog. From this perspective of your conversations and meetings with Fremont - I wouldn't trust these guys to run a hot dog stand on a street corner.  If they can't rationally discuss their own business without emotional breakdowns, yikes!!

 

May I ask why you have removed the buildfremont.com website?  Did you believe it was inflaming them rather than helping them see the errors they were making?

 

[Ballinvarosig Investors]

You guys are completely overstating the importance of Dick Dunning to Fremont. You're also probably being overly negative on the man himself, especially considering the performance of Fremont, which has been very good under his reign. Also, I'm surprised why anyone can't see why Biglari wants Fremont so badly. It's solid operationally, priced at a discount to intrinsic value, has excellent growth prospects and has pristine float that is just asking to be deployed better. If Biglari does get it, the thing could be a compounding machine that could even rival Geico (assuming it doesn't get run into the ground at least once). Even if present management remains; I don't see any reason why it can't perform like it already has in the last five years. The fact that present management have navigated the current financial crisis excellently, I can't see any reason why they don't continue to perform in the years ahead.

 

For me at least, Fremont is a Ben Graham net-net, that has a high likelihood of Phil Fisher growth.

[Guest HarryLong]

Sorry about that. Let me rephrase what I wrote. They have debt and are too big based on your metrics.

 

What I was wondering is why you have the criteria you have. I think there are plenty of good cheap insurers available. Maybe not with the exact same metrics that you have laid out, but plenty of cheap ones none the less.

 

I think the question is a fair question. Given the fact that there are other cheap insurers which should be money good. Why fool with these idiots who have Legislators willing to change state law for them. The reason why I listed HALL is because it was trading at 70% of book (there is some goodwilll though), has very good underwriting, has a value investor at the helm, has cash / a very conservative portfolio, low debt, and went up 35% over the last 4 weeks.

 

I guess the question I am really asking is is this worth the opportunity costs. It seems like BH needs to get 5 of his friends to buy 10% to vote out the bums. Even then he would need another 16% of the remaining shareholders to vote in favor of his nominee should this law pass. It also seems like this law may also hamper planned out of state growth.  

 

---

 

Sleaze usually runs deep. I doubt its sitting in only in the Corporate office. The positive numbers though would be hard to fake.

 

OK, let's break down your point into more sizeable pieces. I want to be clear that I am discussing insurers in general, rather than specific cases. But first, what do we mean by "money good" or book value? I would submit that at an insurance company, book value is a function of estimates about future liabilities, due to IBNR, or "Incurred But Not Reported" losses.

 

The asset side, unless you're in subprime, illiquid, mortgages, is pretty hard to fake. So, what is a reserving table? It gives you a table, to simplify, of how actual payouts compared to initial estimates of liability. Therefore, if the reserving table is consistently inaccurate, and Assets - Liabilities = Shareholders Equity (book value), that means that you probably (very probably) do not have an accurate number for Liabilities in that equation. If you do not have an accurate number for L in the equation A - L = S.E. , then you have no idea what book value is, and the price / book ratio is totally useless to use.

 

So no, I don't agree that an insurer is cheap, just because it has a low P / B, it may actually be extremely expensive. Second, if you agree with my argument above, it is quite clear that there are very few cheap insurers around, and it is quite clear that when you actually find a cheap one, it's worth spending time on.

 

Third, we need to differentiate between short tail and longer tail insurance. As you know long tail insurance is notoriously difficult to estimate reserves for. Short tail insurance is much easier.

 

Unless you have outright fraud, it's pretty difficult to fake number is plain vanilla homeowners and auto insurance, etc. Worker's comp is just the opposite.

 

The vast majority of Fremont's business is plain vanilla. I have never, ever suggested Fremont's numbers are not real. From where I stand, the accounting is quite good. How would you fake a highly rated fixed income portfolio? How would you fake reserving in what is primarily short tail business? The smart money is staked on the notion that the numbers are very real.

[Guest HarryLong]

You guys are completely overstating the importance of Dick Dunning to Fremont. You're also probably being overly negative on the man himself, especially considering the performance of Fremont, which has been very good under his reign. Also, I'm surprised why anyone can't see why Biglari wants Fremont so badly. It's solid operationally, priced at a discount to intrinsic value, has excellent growth prospects and has pristine float that is just asking to be deployed better. If Biglari does get it, the thing could be a compounding machine that could even rival Geico (assuming it doesn't get run into the ground at least once). Even if present management remains; I don't see any reason why it can't perform like it already has in the last five years. The fact that present management have navigated the current financial crisis excellently, I can't see any reason why they don't continue to perform in the years ahead.

 

For me at least, Fremont is a Ben Graham net-net, that has a high likelihood of Phil Fisher growth.

 

Well, I think you answer your own critique. Without Dunning, you can deploy float, perhaps have more rational conversations about strategic direction, premium growth, agents, pricing, writing business over the internet, etc., have a CEO who doesn't try to use a state legislature to block shareholder rights, etc

 

It sounds like, despite the facts I've laid out on my blog/website, you really like Dick. If he does end up getting fired, feel free to give him a job at an insurance company you back, or better yet, make him an amazing offer right now so he voluntarily leaves Fremont! :) lol.

 

If you love Dick's management, offer him a raise, and let the free market do its job. It sounds like both of us would be happier if he was running your insurer! Lmao.

 

[beerbaron]

The asset side, unless you're in subprime, illiquid, mortgages, is pretty hard to fake. So, what is a reserving table? It gives you a table, to simplify, of how actual payouts compared to initial estimates of liability. Therefore, if the reserving table is consistently inaccurate, and Assets - Liabilities = Shareholders Equity (book value), that means that you probably (very probably) do not have an accurate number for Liabilities in that equation. If you do not have an accurate number for L in the equation A - L = S.E. , then you have no idea what book value is, and the price / book ratio is totally useless to use.

 

HarryLong, I think the bonds on the asset side are marked to market. I remember reading in a document that insurer's not for Sales bonds are amortized, ex: if a a bond is bough at 112 and expires in one year, it will lose value at about 1% per month. It's not subject as wide swings like equity but since bonds are a large part of an insurer's portfolio it can actually have a nice effect.

 

Your totally right about reserves, and if an insurer understates it's reserves he can disclose more profit/equity on it's balance sheet and then he can write more policies as a result. It's a very tricky business.

 

BeerBaron

[Myth465]

Book value for me would be assets minus liabilities, I would also remove goodwill to make it tangible. Money good meant ideas like HALL, ideas which are very likely to trade up over the next few years or so. Fairfax or Berkshire at 70% book would be money good in my opinion. At some point I would expect them to trade up to book value even though it may never reach intrinsic value.

 

The goal for me is to buy a quality insurer with decent to great underwriting (100% combined ratio or less with  conservative reserving) and boring (not loosing money) or great investing at or below book value. I would even pay a slight premium for really outstanding companies.

 

I have a better idea of what you are looking for now, and can understand the focus on short tail insurers. I hold LRE which has alot of the characteristics that you are looking for, for alot of the same reasons.

 

Wilber Ross, Buffett, and Prem Watsa all seem to believe that quality ensures are cheap. We have had several posts here discussing many Bermuda, Canadian, and US Based insurers. Many can be bought for below Book Value. A crappy insurer isnt worth much, but you can buy quality for cheap was my argument without the activist activity required. Personally I dont know of any which meet your criteria but, Chanticleer Advisors seems to play in the same space regarding insurers.

 

I agree and have agreed that the positive numbers would be tough to fake. The heart of my question is is it worth the time given the entrenched Management? The guy probably isnt important to Fremont, but he isnt leaving without a fight, and as it is right now he is standing between shareholders and future reforms and probably between share holders and a higher stock price.

 

I can understand Sardar he has the cash and may have the contacts / muscle to influence change. I don't. Im not questioning the merits of the investment. I was more interested in hearing what makes this battle one worth fighting for someone like yourself (I am assuming you lack the capital to take over Fremont and now that I think about it this could be a very bad assumption).

[Guest HarryLong]

Book value for me would be assets minus liabilities, I would also remove goodwill to make it tangible. Money good meant ideas like HALL, ideas which are very likely to trade up over the next few years or so. Fairfax or Berkshire at 70% book would be money good in my opinion. At some point I would expect them to trade up to book value even though it may never reach intrinsic value.

 

The goal for me is to buy a quality insurer with decent to great underwriting (100% combined ratio or less with  conservative reserving) and boring (not loosing money) or great investing at or below book value. I would even pay a slight premium for really outstanding companies.

 

I have a better idea of what you are looking for now, and can understand the focus on short tail insurers. I hold LRE which has alot of the characteristics that you are looking for, for alot of the same reasons.

 

Wilber Ross, Buffett, and Prem Watsa all seem to believe that quality ensures are cheap. We have had several posts here discussing many Bermuda, Canadian, and US Based insurers. Many can be bought for below Book Value. A crappy insurer isnt worth much, but you can buy quality for cheap was my argument without the activist activity required. Personally I dont know of any which meet your criteria but, Chanticleer Advisors seems to play in the same space regarding insurers.

 

I agree and have agreed that the positive numbers would be tough to fake. The heart of my question is is it worth the time given the entrenched Management? The guy probably isnt important to Fremont, but he isnt leaving without a fight, and as it is right now he is standing between shareholders and future reforms and probably between share holders and a higher stock price.

 

I can understand Sardar he has the cash and may have the contacts / muscle to influence change. I don't. Im not questioning the merits of the investment. I was more interested in hearing what makes this battle one worth fighting for someone like yourself (I am assuming you lack the capital to take over Fremont and now that I think about it this could be a very bad assumption).

 

My main point is that book value cannot be determined just by taking Assets - Liabilities.  You need to focus on the accuracy of the estimates of liabilities.

 

As for time, if you win, it's worth it, if you don't, it's not :)