7 Thoughts On Insurance Companies

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7 Thoughts On Insurance Companies
<a href="https://pixabay.com/users/stevepb/">stevepb</a> / Pixabay

by David Markel, CFA of Aleph Blog.

From reader after last night’s post.

I hope you are well. I think your blog is fantastic, thanks so much for sharing the time and wisdom for so little :)

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I was wondering whether you could elaborate a bit more on the bad business models existent in the insurance field. If there would be a simple rule of thumb or similar it would be useful, but I’m guessing it has to be something (difficult  to analyze) like chasing growth when premiums are insufficient, hiding leverage through subsidiaries, etc.

This was your comment:

Now, let me list for you the insurance companies I would avoid on this list: Imperial Holdings, Inc. (NYSE:IFT), Greenlight Capital Re, Ltd. (NASDAQ:GLRE), Assured Guaranty Ltd. (NYSE:AGO), American Equity Investment Life Holding (NYSE:AEL), CNO Financial Group Inc (NYSE:CNO), American International Group Inc (NYSE:AIG), XL Group plc (NYSE:XL), MBIA Inc. (NYSE:MBI), Lincoln National Corporation (NYSE:LNC), FBL Financial Group (NYSE:FFG), Aspen Insurance Holdings Limited (NYSE:AHL), ING Groep NV (ADR) (NYSE:ING), Axa SA (ADR) (OTCMKTS:AXAHY), American Financial Group Inc (NYSE:AFG), Genworth Financial Inc (NYSE:GNW).  That does not mean that I endorse the others.  In general, those that I say to avoid have poor underwriting skills or a bad business model.

(AIG is the biggest position in my portfolio.)

And secondly, I was wondering whether the fact that some are based in Bermuda gives them (or the LT investor) a competitive advantage when it comes to compounding (t)BV over time, because they are paying a lower tax-rate, aren’t they?

[normally, investors have to suffer a double whammy for taxes: the insurance companies they invest in are taxed when they have profits –the US has one of the highest tax rates internationally–; and then they are taxed when realizing the capital gains / receiving dividends. Which led me to think that if one would be investing in Bermuda-based cos. through a ROTH IRA account, he would be avoiding both fronts, right?

Thanks so much for your time David.

I know it was a long email, and I apologize for that, couldn’t make it shorter…

Okay, let me take it piece-by-piece.  I have biases, which I think are well-informed, but they are biases, ways of foreshortening the deluge of data, so that I can avoid making big errors.

1) I don’t believe that financial and mortgage insurers have an actuarially valid business model, and the last crisis proved me right.  Thus I am not interested in Assured Guaranty Ltd. (NYSE:AGO) and MBIA Inc. (NYSE:MBI).

2) I don’t believe that long-term care is insurable, and so I am not interested in CNO Financial Group Inc (NYSE:CNO) and Genworth Financial Inc (NYSE:GNW).

3) With American International Group Inc (NYSE:AIG), I don’t think that all of the reserve strengthenings are done for them.  They have always been aggressive in reserving.  I am not sure that has changed.

4) I think the business that Imperial Holdings, Inc. (NYSE:IFT) is in is unethical, and difficult if legal.

5) I think the takeover of Aspen Insurance Holdings Limited (NYSE:AHL) will fail, and the stock price will fall.

6) I think that many common life insurance reserving practices are liberal, and so I don’t like American Equity Investment Life Holding (NYSE:AEL), Lincoln National Corporation (NYSE:LNC), FBL Financial Group (NYSE:FFG), ING Groep NV (ADR) (NYSE:ING), and Axa SA (ADR) (OTCMKTS:AXAHY).

7) With XL Group plc (NYSE:XL), Greenlight Capital Re, Ltd. (NASDAQ:GLRE) and American Financial Group Inc (NYSE:AFG), I don’t respect the management.  Maybe with a few more years, that might change.

This explains my views on these insurance companies.  Other questions, let me know.

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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