Best Insurance investment right now? MFC, RE, CNA or RNR

[Guest HarryLong]

I don't know if my latest comment posted. I was saying that Stubble has clearly done his research, knows what he's talking about, and I respect him. He clearly knows insurance.

 

Nope.  I'm lazy too.  

 

I flip through annual reports in a half-assed way, and try to get some notion of the big picture.  The half-assed approach for an insurance company is to take a quick look at the last five years of net written premiums to get some idea of their top-line growth, the CRs for the last five years, investment portfolio composition, the famous loss triangles, BV per share and debt level.  This is a 5-10 minute read of the P&L and balance sheet, plus 5 more minutes to look in the notes to find the triangles.  For most companies, I toss them on either the garbage pile or the "too hard pile" after a cursory, half-assed review.  I make a great many errors of omission by taking this approach, but it only costs me about 15-30 minutes.

 

My rough memory of CNA was that they have mediocre returns on their investment portfolio, they have chronic adverse development, they have a capital structure that is heavily dependent on funds from L, and at the time they traded at P/BV of about 0.70.  Frankly, given their long track record of mediocre results, that P/BV seemed roughly right.

 

I might also be making a mistake with Lancashire, by tossing it on the too hard pile simply because they do not have a lengthy loss triangle.  But even after 30-45 minutes, I could not get comfortable with it.

 

No damned way am I going to read the quarterly reports or a bunch of annual reports for those two.  I'm just too lazy.

 

SJ

 

 

 

I am in accord with your conclusion. CNA does not seem cheap to me at all, given the factors which you correctly cited.

[Packer16]

As for AWH, the 9-yr average combined ratio through 2009 was 89.5% with only one year 2005 above 100%.  This alone did not peak my interest but this plus the large reserves redundancies which for 2005 which was estimated to be 40% as of 2009 and the fact that it is selling for 70% of book value.  The last quarter combined ratio was not that good but if they are over reserving by 40% then it may not be as bad is it appears.  In addition, I expect a re-insurer to have lumpy returns on a quarterly basis.

 

 

Packer

[Guest HarryLong]

As for AWH, the 9-yr average combined ratio through 2009 was 89.5% with only one year 2005 above 100%.  This alone did not peak my interest but this plus the large reserves redundancies which for 2005 which was estimated to be 40% as of 2009 and the fact that it is selling for 70% of book value.  The last quarter combined ratio was not that good but if they are over reserving by 40% then it may not be as bad is it appears.  In addition, I expect a re-insurer to have lumpy returns on a quarterly basis.

 

 

Packer

 

I've been wrong before, but I would be careful, given those results, combined with pricing trends. The last 5 years have been times of plenty. Let's see how they do in lean times.

[Uccmal]

Harry, You side stepped that one nicely.

 

My assessment of the P&C industry.  Right today, it is a dangerous area to invest.  Within the next couple of years there is going to be a lot of damage to a lot of P&C companies.  Only those with real strong capital positions are going to be able to write business at new higher rates.  I presently hold FFH which I am reasonably confident will be one of the thrivers.  In the past I have held MRH, KFS, BRK, and MKL.  The reserves most companies are reporting are stretching the limits of capital adequacy.  Thanks for the kind offer to visit your 'room' but as many here have said right now these can be easily written off as being in the too hard pile.

 

 

[Guest HarryLong]

Harry, You side stepped that one nicely.

 

My assessment of the P&C industry.  Right today, it is a dangerous area to invest.  Within the next couple of years there is going to be a lot of damage to a lot of P&C companies.  Only those with real strong capital positions are going to be able to write business at new higher rates.  I presently hold FFH which I am reasonably confident will be one of the thrivers.  In the past I have held MRH, KFS, BRK, and MKL.  The reserves most companies are reporting are stretching the limits of capital adequacy.  Thanks for the kind offer to visit your 'room' but as many here have said right now these can be easily written off as being in the too hard pile.

 

 

 

No sidestep, you are welcome to call me at any time. I admire your record, and I welcome your critique if you call.

[turar]

onyx1, Rabbitisrich, TariqAli, thanks for all the suggestions!

[bargainman]

It's really hilarious if it wasn't so sad.

 

Most of you idolize Buffett, who "started with the A's", but when I suggest you do the same, scoff. Total hypocrites.

 

Well Buffett says a lot of things.  One of them was also that if he has to go to the Nth line in a spreadsheet to make his investing decision he isn't interested.  That would seem to suggest that he also believes in the law of diminishing returns no?

[Rabbitisrich]

Regarding CNA, if you like the company at the current price you are surely betting on Motamed, rather than the Loews. Reserve developments have been positive the last couple of years and they pulled capacity back in the '07-'10 pricing environment. But I would feel more comfortable with the company if their assets more closely resembled Chubb's. In 2008, they liquidated much of their treasuries in favor of a large increase in their corporate portfolio. Time will tell if they were truly opportunistic or simply chasing yield; either way, given the evidence of major discretion on the investing side and the absence of a great record on the insurance side, it's probably a good idea to demand a big turnaround discount in addition to the normal soft market, hurricane season insurance discount.

[Rabbitisrich]

onyx1, Rabbitisrich, TariqAli, thanks for all the suggestions!

 

No problem, I'm near sighted with slight astigmatism and dry eyes, so computer reading isn't normally a wonderful experience. An attachment for your monitor to reduce the glare and the blue light might help a lot, and you might find that wearing light sunglasses helps as well!

[bargainman]

On a side note, how are you guys reading the reports? I find reading anything longer than a couple of pages off the computer screen hard on eyes and concentration (especially with the rest of the Internet a click away). I tried printing and reading, but seems like a huge waste of paper. I tried requesting companies to send me printed materials, but it's even a worse waste. I tried using Sony Reader e-book device, but the formatting is horrible in any readable font size, especially financial tables. Just curious.

 

Just discovered this site:

http://lab.arc90.com/experiments/readability/

 

Looks pretty interesting to help reading.. not sure how well it'd work for 10Qs etc though..

[ExpectedValue]

On a side note, how are you guys reading the reports? I find reading anything longer than a couple of pages off the computer screen hard on eyes and concentration (especially with the rest of the Internet a click away). I tried printing and reading, but seems like a huge waste of paper. I tried requesting companies to send me printed materials, but it's even a worse waste. I tried using Sony Reader e-book device, but the formatting is horrible in any readable font size, especially financial tables. Just curious.

 

Just discovered this site:

http://lab.arc90.com/experiments/readability/

 

Looks pretty interesting to help reading.. not sure how well it'd work for 10Qs etc though..

 

I use Readability and it is great for reading long newspaper articles or documents.

Not so great at reading 10Ks, it will almost assuredly mangle any tables in the document.

[Myth465]

Regarding CNA, if you like the company at the current price you are surely betting on Motamed, rather than the Loews. Reserve developments have been positive the last couple of years and they pulled capacity back in the '07-'10 pricing environment. But I would feel more comfortable with the company if their assets more closely resembled Chubb's. In 2008, they liquidated much of their treasuries in favor of a large increase in their corporate portfolio. Time will tell if they were truly opportunistic or simply chasing yield; either way, given the evidence of major discretion on the investing side and the absence of a great record on the insurance side, it's probably a good idea to demand a big turnaround discount in addition to the normal soft market, hurricane season insurance discount.

 

Very good points, and I will likely leave my exposure to CNA within Loews. Motamed seems to want to build a smaller Chubb, and appears to want more of a vanilla investment portfolio. I think they are working on the underwriting, but have the same fears as you. The large portfolio basically controls book value, and will likely cause a severe drop in BV should the bond market correct. They have worked to better position the assets, but still have huge exposure to a fairly volatile market. The Tisches are also worried a bit about inflation given the low rates, huge portfolio of bonds, and long tail nature of the insurance they write.

[Investmentacct]

This is a bit off-topic ,as we all know what WEB has said overtime, but I liked the folksy humor and wisdom when he said this :

 

"Some men read Playboy.  I read financial reports."

 

http://www.cnbc.com/id/22026138/Warren_Buffett_Going_Global_Becky_s_Video_Diary

[twacowfca]

 

There is nothing wrong with ‘skimming’ a universe to ascertain its present state, but an investor cannot substitute it for ‘research’.  Jumping straight to metrics, then basing decisions on nothing but metrics, simply proves that the investor knows the methodology - but is clueless as to application.

 

Books & reading teach methodology; experience, an open mind, & open discussion teach application – provided the investor has the common sense/investment maturity to recognize it. The discussion is greatly facilitated when referenced to published facts (10Q’s, AR’s, etc).

 

Most folks are quite willing to share insights, related experience, technical expertise, etc – but don’t expect them to do the work for you. It is one thing to suggest an approach, methodology, etc - but if you’re looking for an adviser you’re in the wrong place.  

 

Examples:  The real value of NPV is realizing that the precise number is un-important, the true lesson is the timing & magnitude of the cash-flows; but to truly realize that, you have to thrash it out. Similarly - the actual P/E paid is un-important;  the real variables are the growth rate & the length of your expected holding period.

 

SD    

 

 

 

Your last paragraph is insightful.  Thank you for sharing your wisdom.

[twacowfca]

As a gesture of good faith, I will move beyond the petty general resistance to thorough research and roll up my sleeves.

 

AWH: "The combined ratio was 99.5% in the first quarter of 2010 compared to 75.0% in the first quarter of 2009."

 

I've found other companies with fantastic underwriting results that are also cheap. Why would I touch AWH, given the choice to pick something of higher quality? If you start digging, you'll have the same choice.

 

 

AWH is in a lumpy business that cannot be intelligently evaluated without reference to their long term record, sector and competition.  Good and bad quarters should be related to long term results.

[Guest HarryLong]

As a gesture of good faith, I will move beyond the petty general resistance to thorough research and roll up my sleeves.

 

AWH: "The combined ratio was 99.5% in the first quarter of 2010 compared to 75.0% in the first quarter of 2009."

 

I've found other companies with fantastic underwriting results that are also cheap. Why would I touch AWH, given the choice to pick something of higher quality? If you start digging, you'll have the same choice.

 

 

AWH is in a lumpy business that cannot be intelligently evaluated without reference to their long term record, sector and competition.  Good and bad quarters should be related to long term results.

 

It's not bad, but one can do better.

[Guest HarryLong]

If I had to rank the companies.....

 

A League of Their Own with excellent historical combined ratio performance and reserving....

 

I.    SUR    (Latest Quarter Combined Ratio is 82.8)

II.    NATL    (Latest Quarter Combined Ratio is 86.5)

III.  PGR    (Latest Quarter Combined Ratio is 90.9)

IV.  RLI      (Latest Quarter Combined Ratio is 89)

 

 

-----------------------------------------

Could potentially be improving over their historical performance [but maybe not, so I would keep monitoring them],

which is more volatile than that for the stocks above.

V. AFSI                                            (Latest Quarter Combined Ratio is 80.3)

VI. AFG (owns over 50% of NATL)      (Latest Quarter Combined Ratio is 87)

 

-----------------------------------------

 

Merry Christmas, I did your reading for you :)

 

 

[Myth465]

It seems like any company which writes insurance related to natural disasters or catastrophes will naturally be excluded from your consideration. Your list includes 2 auto insurers and from what I see 2 specialty type insurers.

 

The other insurers listed by others in the thread were hit with Chilean claims from Property Insurance in Q1 and may be hit with Horizon / Hurricane related claims for Q2, Q3, and Q4. Many predict an extremely active hurricane season with plumes of oil floating in the gulf. They would naturally be excluded because these large cats would push ratios above 100% from time to time. FFH would also be excluded even though many made a gigantic amount of money owning them over the last few years. TWA alluded to this when he discussed lumpy returns.

 

Thanks for the list, I was more interested in the angle than the names. Now I have a better understanding of your rationale. I guess everyone has to pick their poison.

 

[Guest HarryLong]

It seems like any company which writes insurance related to natural disasters or catastrophes will naturally be excluded from your consideration. Your list includes 2 auto insurers and from what I see 2 specialty type insurers.

 

The other insurers listed were hit with Chilean claims from Property Insurance in Q1 and may be hit with Horizon / Hurricane related claims for Q2, Q3, and Q4. Many predict an extremely active hurricane season with plumes of oil floating in the gulf. They would naturally be excluded because these large cats would push ratios above 100% from time to time. FFH would also be excluded even though many made a gigantic amount of money owning them over the last few years.

 

 

 

Check out the historical combined ratios and reserving. You will be impressed. Here's the article I just wrote:

 

http://seekingalpha.com/instablog/365592-harry-long/75936-the-best-insurers-in-america

[Packer16]

I think we were answering two different questions.  From your list, you appear to developing a list of high quality insurers.  My focus was on what combination of both valuation and quality provides the best risk adjusted returns.  CNA Surety appears to satisfy both criteria (as it had a 17% increase in book value (past 5 yrs) but also is only selling for 70% of book - yielding a 24% return on market price).  At the other end of the spectrum is Progressive with a 7% book value growth (past 5 yrs) and 2.0x times book multiple - yielding a 4.5% return on market price.  The interesting thing about Progressive is they had a great combined ratio over the past 5 years (avg 90.7%) so their investing (or maybe something else I am missing) must have been really bad to only have a 7% increase in book value per year. 

 

Packer

[Guest HarryLong]

I think we were answering two different questions.  From your list, you appear to developing a list of high quality insurers.  My focus was on what combination of both valuation and quality provides the best risk adjusted returns.  CNA Surety appears to satisfy both criteria (as it had a 17% increase in book value (past 5 yrs) but also is only selling for 70% of book - yielding a 24% return on market price).  At the other end of the spectrum is Progressive with a 7% book value growth (past 5 yrs) and 2.0x times book multiple - yielding a 4.5% return on market price.  The interesting thing about Progressive is they had a great combined ratio over the past 5 years (avg 90.7%) so their investing (or maybe something else I am missing) must have been really bad to only have a 7% increase in book value per year. 

 

Packer

 

Yes Packer, you are missing something. PGR did a special dividend which returned capital to shareholders. They were able to do so, and run a higher premium to surplus ratio than the industry in general, since their underwriting is so consistent.

[Guest HarryLong]

I think we were answering two different questions.  From your list, you appear to developing a list of high quality insurers.  My focus was on what combination of both valuation and quality provides the best risk adjusted returns.  CNA Surety appears to satisfy both criteria (as it had a 17% increase in book value (past 5 yrs) but also is only selling for 70% of book - yielding a 24% return on market price).  At the other end of the spectrum is Progressive with a 7% book value growth (past 5 yrs) and 2.0x times book multiple - yielding a 4.5% return on market price.  The interesting thing about Progressive is they had a great combined ratio over the past 5 years (avg 90.7%) so their investing (or maybe something else I am missing) must have been really bad to only have a 7% increase in book value per year. 

 

Packer

 

Given that SUR is both undervalued and high quality, why would anyone feel the urge to sacrifice quality for price, when alternatives exist that do not require any quality/price trade off whatsoever?

[Packer16]

When you add the dividend back for progressive you get a 12% increase in book value which makes more sense.  Thanks for the CNA Surety find, I will look into surety insurance in more detail. 

 

Given your affinity for small caps, you may want to look at some small media firms which have low EBITDA and FCF ratios with some aspect of recurring revenue including radio firms (SALM and SGA), cable (LNET and SURW) and Entertainment/Gaming (MGAM, TRK). 

 

Packer

[prevalou]

SUR:

-with more than 60% ownership by CNA, it is a bet on CNA management anyway. The CEO has only stock options.

-prices ara quite rational for everybody in this industry now (2009 shareholders letter) but for how long ? Has SUR a competitive advantage ?  For an insurer, rationality seems to be a great quality, but if everybody is rational, you can buy a basket of companies in the industry...

[Guest HarryLong]

SUR:

-with more than 60% ownership by CNA, it is a bet on CNA management anyway. The CEO has only stock options.

-prices ara quite rational for everybody in this industry now (2009 shareholders letter) but for how long ? Has SUR a competitive advantage ?  For an insurer, rationality seems to be a great quality, but if everybody is rational, you can buy a basket of companies in the industry...

 

I can only answer your question about competitive advantage with a question. How many other insurers have a lower historical combined with proportional over-reserving?

 

Also, how many insurers have such a dramatic increase in book value while writing at an EXTREMELY low premium to surplus ratio. It stands to reason that SUR is extremely conservatively managed.