Insurance: What Are People Thinking?

[Viking]

I recently posted my thoughts on FFH Q3 results. Lots of things going on with insurers. I thought I would ask what board members were thinking right now.

 

1.) Does anyone like insurers at current price levels?

2.) If yes, is it a sector play? Re-insurers? Others?

3.) Or are there companies out there that people feel are dirt cheap?

 

At current price levels, I like the re-insurer space and PRE (there are a bunch of cheap ones).

And I also like WRB (as I have previously posted).

My challenge with FFH is underwriting results will likely continue to be poor and I cannot estimate investment gains over the next 12 months (and I have been conditioned that positive moves in financial markets will not be reflected in the stock price in a timely way so I will likely have time to buy later should investments do well). So I will take a pass at current valuation.

[Guest Bronco]

Viking... I think people like insurance because they trade for less than book.

 

Of course, book value will go down when interest rates rise.  Of course, that may never happen because the u.s. Government has rolled out a plan to buy every bond issued on the face of the planet.

 

The discounts may be justified due to the reasoning I mentioned and the current soft market.  However, I believe the discounts are well overdone.  Two I own, ahl and cna (indirect ownership through loews) are out of hand cheap.

 

Others have more time and knowledge on reserving practices and reserve releases...I would also get their insight.

 

I continue to think brk is an amazing company.  I don't own any because the risk / reward isn't there for me, but brk and apple are by far two of the best run companies on the planet.  100 billion in cash between those two.  So I think the lazy investor, like me, could own those two but retruns may be more average due to the current pricing of the stocks.

 

I continue to think there will be more merger activity In this space, unless all insurance companies re-locate to michigan and hire greedy CEOs.

[Partner24]

I can't value all insurers, but some of them are quite cheap. That being said, while it trade at historical low valuations (price/book), some overstate their book because a lot suspect that their reserves are actually too low (some troubles ahead).

 

 

[StubbleJumper]

I own a small slice of ELF.  These guys know how to run an insurance business, and it's trading well below book.  The life side is a little ugly, auto is a little ugly, but I figure that I'll be happy with it's performance over the next 5 years.

[Myth465]

It seems like a no brainer to buy a pool of capital under book. But are the reserves correct. One could purchase AHL for 80% of book value. I think past reserves are fine for most insurers in P&C, but also see very little underwriting profit, and investments for most of these guys present a liability in my opinion. Its such a wild card.

 

My major issue is why buy now. When we get a hard market, all of these companies will get crushed. You can stand on the sidelines and pick the winner. If we get a huge cat, or a huge investment fallout BV will decline and so will stock prices. Why not wait until then.

 

The way to play seems to be to buy the decent smaller ones under book and wait for a buyout.

[twacowfca]

We're 130% long the better property insurers and reinsurers.  Why?  The same reason Willie Sutton said he robbed banks: " cause that's where the money is!"

[Guest Bronco]

Twa, can u tell me what ur handle means?  Just curious.

 

I'm simply a bronco fan.

 

Any names u care to share?  (rhyming comes from me reading dr Seuss to my daughter while I text, my apologies)

[Viking]

Myth, I would argue that a compelling reason to buy now is because they are cheap.

1.) earnings are depressed. Underwriting profits are shrinking and bond yields are very low.

2.) they are out of favour and many well run companies are trading right around book value.

The key point here, though, is the well run insurers are still VERY profitable (meaning you get paid to wait via dividends and growth in BV).

 

When the hard market comes, earnings will improve and they will be back in favour.

 

I have been very fortunate over the past few years of being able to time the market. I am in the process of trying to unlearn that (somewhat). When I find great opportunities (likely with a three to five year holding period) I am starting to establish a position (not too aggressive). Should a sell off happen then I will buy more.

 

The risk I am finding in trying to get too cute with timing is great ideas can move up faster than you can pull the trigger and once you miss the initial move it is hard to get in (too tempting to wait for it to fall back) and as it keeps moving up you miss the initial 20% to 30% move.

 

PRE is a great example (for me). I bought it in the spring and then sold it going into hurricane season (this was supposed to be a bad one) thinking I could buy it cheaper. And then got busy with life. Their business chugged along and the hurricane season was a non event. Stock was trading at $72; now it is trading at $82 and it is STILL dirt cheap. My learning is I got too cute (it is easy to identify the risks but not so easy to identify the positive catalysts). And, yes, I have reestablished a position.

[twacowfca]

Twa, can u tell me what ur handle means?  Just curious.

 

I'm simply a bronco fan.

 

Any names u care to share?  (rhyming comes from me reading dr Seuss to my daughter while I text, my apologies)

Frankly speaking, :)  It's an acronym for three things, tough to crack, but not memorable.  

 

In order: LRE, MUV2:GR, MRH.  Also, sometimes in and out of BRK and FFH.  Now, mostly out because the tide now seems to be favoring the first three more than the last two.

 

Boring!  Why no more?  

 

I do not like green eggs and ham!  I do not like them.  Sam I am!  -- Dr. T.S.G.  :)

[twacowfca]

Myth, I would argue that a compelling reason to buy now is because they are cheap.

1.) earnings are depressed. Underwriting profits are shrinking and bond yields are very low.

2.) they are out of favour and many well run companies are trading right around book value.

The key point here, though, is the well run insurers are still VERY profitable (meaning you get paid to wait via dividends and growth in BV).

 

When the hard market comes, earnings will improve and they will be back in favour.

 

I have been very fortunate over the past few years of being able to time the market. I am in the process of trying to unlearn that (somewhat). When I find great opportunities (likely with a three to five year holding period) I am starting to establish a position (not too aggressive). Should a sell off happen then I will buy more.

 

The risk I am finding in trying to get too cute with timing is great ideas can move up faster than you can pull the trigger and once you miss the initial move it is hard to get in (too tempting to wait for it to fall back) and as it keeps moving up you miss the initial 20% to 30% move.

 

PRE is a great example (for me). I bought it in the spring and then sold it going into hurricane season (this was supposed to be a bad one) thinking I could buy it cheaper. And then got busy with life. Their business chugged along and the hurricane season was a non event. Stock was trading at $72; now it is trading at $82 and it is STILL dirt cheap. My learning is I got too cute (it is easy to identify the risks but not so easy to identify the positive catalysts). And, yes, I have reestablished a position.

 

Very well said, Viking.  :)

[Uccmal]

Indeed Viking,  I have at least two holdings in my portfolio that have done nothing for a year or more and suddenly went up and there is no way I could have predicted it ahead of time.  SSW and CFP-T (this one from lumber futures).  The same thing will likely happen with FFH, WRB and their ilk the moment the smell of a hard market is about.

 

In general, right now,

- we know from WRB and FFH that many insurers may be under reserving.

- we know they are making nothing from bonds

- some have probably done okay on the equity side this fall but that could be fleeting.

- I am unsure about the inflationary effects on the claims side but it probably would only take minor inflation to tip alot of the P&C insurers over the edge since there is no coverage from interest yields.

[Myth465]

I have been very fortunate over the past few years of being able to time the market. I am in the process of trying to unlearn that (somewhat).

 

This is a nice problem to have. Perhaps we can switch lol I want this problem, and can trade you.

 

The risk I am finding in trying to get too cute with timing is great ideas can move up faster than you can pull the trigger and once you miss the initial move it is hard to get in (too tempting to wait for it to fall back) and as it keeps moving up you miss the initial 20% to 30% move.

 

The same seems to happen to me. Especially in this environment. Everything is running right now.

 

I own LRE, some CNA via L, and options on AHL which are up about 15%. I had SUR and a few others on a watch list and everything is being bought out.

 

I plan to hold L, LRE, and a token FFH position. AHL is a trade which appears to be working out. My issue is I dont want to have 50% of my capital in cheap insurers which would be quite easy right now. I want to hold the names I am comfortable with and trade the others.

 

FFH was my first big win. Between FFH and ORH, I really learned alot and made some decent cash. With that said its hard to buy a significant slug of it for me right now. They wont trade too far above BV unless underwriting is improved. I am pretty confident they are over reserving and will make money on the investment side but only time will tell.

[tnp20]

I have some AHLp. Preference share of AHL....currently paying 5%....~$3 premium for the convert feature from current price.

 

- So you get 5% whilst you wait

- Get to be higher on the capital structure

- Potentially free one long leg of an arbitrage against market/another similar but weaker insurer/AHL common as an opportunistic trade.

 

 

[Guest Bronco]

Man,myth,legend...

 

I was looking at CNA on Friday.  I think they have $12B in book value but yet trade less than $8B.  This is really steep.  If you take out the unrealized gains/losses in both directions, the operations are doing well. 

 

On an earnings basis, they may do $1B per year, for 3 years.  An 8x multiple may be ok, reasonable.

 

But after those 3 years, they will have a book value of $15B. 

 

Sticking with Loews, for sure.  I still believe DO is a good business.  People forget they have no basis in this company, meaning they generated $5B of FMV out of nothing.  They accomplished this nice economic feat by building the business and selling 1/2 of the business later at their cost.  Playing with the house's money.

 

The pipeline is as toll booth as driving up my beloved NJ turnpike.  The term boardwalk makes me even happier...apparently they named the business after the HBO speacial.  Will Jimmy whack Nuk?

 

Soon we (me and you Myth, and a couple other smart shareholders) will be sitting on $5B in cash at the corporate level. 

 

Life is good.  We have that dog business in Highmount, but apparently we can sell that for what we bought it.  If they did, add another $2B in cash at the corporate level.

 

I have always believed that these guys aren't as good as Buffett, but they aren't bad either.  They manage their mom's money.  And the FMV of the stock is cheaper than BRK when you compare the assets you are getting. 

 

Still haven't looked at Lancashire yet...some day.

 

Still playing around with Apple, Google, Deckers, Cypress and BH.  Looking for pullbacks on all but Deckers, which I own a small stake and am trading around.

 

 

[Viking]

Here is a nice summary from WSJ: "Low Interest Rates Hurt Insurers' Bottom Line"

 

online.wsj.com/article/SB10001424052748704405704575596932278239578.html

 

With 10 year US Treasuries yielding 2.5% and 10 year corporates yielding 3.5% book values at insurance companies are high; the offset is operating income has been shrinking. When interest rates turn the opposite will happen with BV getting pressured (at first) but over time operating income will improve.

 

It will be interesting to see what happens the next couple of years in this space. We have had two very slow years on the cat side of things so companies have been able to rebuild their balance sheets (and BV is high). Should we get above normal catastrophes (on a full year basis) things will really get interesting (only a matter of time).

[Guest Bronco]

It is nice that the US government is forcing a risk trade.  I've seen this movie.

 

Maybe AIG preferreds will pay a nice rate.

 

Do you like insurance companies will shift to preferreds, corporates, munis and stocks to the greatest extent possible (allowable)? 

 

The article nicely points out that reinvestment into government bonds will produce low interest rate returns.  So when rates rise, bond prices go down but the reinvestment opportunities will be better.  Kinda econ 101.

 

But worth keeping in mind.  Who knows when rates will rise though?  Will the government even allow for that?  How bad would the US market be if the government had to borrow at much higher terms?  US 100 year bonds anyone?

[ubuy2wron]

I own a small slice of ELF.  These guys know how to run an insurance business, and it's trading well below book.  The life side is a little ugly, auto is a little ugly, but I figure that I'll be happy with it's performance over the next 5 years.

  Stubble I own a more than small slice of ELF I have also recently purchased a piece of EVT which is about 50% invested in ELF and is a way to buy ELF at a discount. I have done a ton of DD on this name and it is my largest holding currently by a pretty significant margin. Book is approx 750 per share currently their P&C business is growing because their markets have hardened and their life business is doing just fine thankyou. A small foot note which I uncovered is that their P&C sub was founded by Canadas first Prime Minister Sir John A MacDonald. I suspect that the 20% of Empire Life their gem of a life insurer which they do not own may be available at an attractive price. It just might make sense for the Jackmans who have been involved in histories longest creeping takeover to speed up the process a little.

[StubbleJumper]

I own a small slice of ELF.  These guys know how to run an insurance business, and it's trading well below book.  The life side is a little ugly, auto is a little ugly, but I figure that I'll be happy with it's performance over the next 5 years.

 Stubble I own a more than small slice of ELF I have also recently purchased a piece of EVT which is about 50% invested in ELF and is a way to buy ELF at a discount. I have done a ton of DD on this name and it is my largest holding currently by a pretty significant margin. Book is approx 750 per share currently their P&C business is growing because their markets have hardened and their life business is doing just fine thankyou. A small foot note which I uncovered is that their P&C sub was founded by Canadas first Prime Minister Sir John A MacDonald. I suspect that the 20% of Empire Life their gem of a life insurer which they do not own may be available at an attractive price. It just might make sense for the Jackmans who have been involved in histories longest creeping takeover to speed up the process a little.

 

 

Agreed on all counts.  The Q3 results were solid.  It is unbelievable that this thing can be bought for ~$400 these days, which is a shade over half their book....and I don't see a lot of crud on their balance sheet that would justify asset write-downs.  I suspect that ELF will always trade at a discount, but half of book strikes me as an invitation to buy a good business at a great price.

 

The Jackmans must be sitting back and contemplating the possibility of buying the rest of ELF and taking it private.  Just go out and borrow a little bit of money, buy back the shares at 75% of book (which would be a good premium to current market!), and then pay out a large dividend a year or two later which could be used to re-pay the loan.  It would seem to be as easy as taking candy from babies?

 

SJ

 

 

BTW, in my case a "small slice" is about a 5% position.

[Myth465]

 

The Jackmans must be sitting back and contemplating the possibility of buying the rest of ELF and taking it private.  Just go out and borrow a little bit of money, buy back the shares at 75% of book (which would be a good premium to current market!), and then pay out a large dividend a year or two later which could be used to re-pay the loan.  It would seem to be as easy as taking candy from babies?

 

SJ

 

 

BTW, in my case a "small slice" is about a 5% position.

 

Elf seems like a steal but what is Management doing to close the gap on the valuation and why the cross ownerships. I hate when things are more complicated then required. Have they eluded to increased buybacks or a take over or something?

[ubuy2wron]

 

The Jackmans must be sitting back and contemplating the possibility of buying the rest of ELF and taking it private.  Just go out and borrow a little bit of money, buy back the shares at 75% of book (which would be a good premium to current market!), and then pay out a large dividend a year or two later which could be used to re-pay the loan.  It would seem to be as easy as taking candy from babies?

 

SJ

 

 

BTW, in my case a "small slice" is about a 5% position.

 

Elf seems like a steal but what is Management doing to close the gap on the valuation and why the cross ownerships. I hate when things are more complicated then required. Have they eluded to increased buybacks or a take over or something?

[ubuy2wron]

 

The Jackmans must be sitting back and contemplating the possibility of buying the rest of ELF and taking it private.  Just go out and borrow a little bit of money, buy back the shares at 75% of book (which would be a good premium to current market!), and then pay out a large dividend a year or two later which could be used to re-pay the loan.  It would seem to be as easy as taking candy from babies?

 

SJ

 

 

BTW, in my case a "small slice" is about a 5% position.

 

Elf seems like a steal but what is Management doing to close the gap on the valuation and why the cross ownerships. I hate when things are more complicated then required. Have they eluded to increased buybacks or a take over or something?

 

Sorry about the last post fat fingers. There is no need for any financing take out EVT and UNC the two trusts and use the ample liquidity there to take out the balance of ELF then when you do not have to share with any public shareholders buy the remaining Empire life from Dutch insurer desparate to sell assets IMO. Next step would be to sell insurance co's to somebody like Fairfax at some premium to BV. I can not believe that these insurance co's would not have ample bidders at prices more than BV. The cross holdings go way back and there is a reason mostly I suspect because of a desire to not pay tax. I would suggest you take a look at the older filings for Dominion and Anglo Investments which shows how the creeping takeover was started in the great depression and has resulted in some pretty amazing compund growth. One of the results of this digging is that the number of shares outstanding in EVT is actually materialy less than shown on financial statements. I think the worse case outcome is more of the same which results in a mid teen return over the next decade if the sun rises and sets pretty much like it has in the past. It may interest some the Frances Chou has been buying this name.

[Myth465]

Thanks for the tip, I remember prior posts about it but at 50% of book one has to take a deeper look.  Do you think the closed end funds are the best way to play it?

[treasurehunt]

Irwin Michael's notes on ELF from 2002 to 2010 are available here: http://www.valueinvestigator.com/en/valuevault/elf.php

 

Looks like ABC Funds sold out of ELF in March of this year. Irwin says "Although we believe that the worst is behind the Company, we were disappointed to see deterioration in the underwriting results at the Dominion of Canada General Insurance Company.". But it seems the main reason for the sale was something else: "In today’s market, we are looking for greater liquidity, something E-L Financial lacks.  Because we are seeing more attractively valued opportunities with greater liquidity elsewhere, we divested our position.".

[ubuy2wron]

Irwin Michael's notes on ELF from 2002 to 2010 are available here: http://www.valueinvestigator.com/en/valuevault/elf.php

 

Looks like ABC Funds sold out of ELF in March of this year. Irwin says "Although we believe that the worst is behind the Company, we were disappointed to see deterioration in the underwriting results at the Dominion of Canada General Insurance Company.". But it seems the main reason for the sale was something else: "In today’s market, we are looking for greater liquidity, something E-L Financial lacks.  Because we are seeing more attractively valued opportunities with greater liquidity elsewhere, we divested our position.".

I believe that EVT was the buyer of ABC's position. You have to imagine this like a tontine so if you are older than Hal Jackman u may not want to buy it.