7 Thoughts On Insurance Companies

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 :)

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.