A Very Good Checklist; Which Re-insurers To Avoid


When I was writing at RealMoney.com, I would often do little posts in the Columnists Conversation, and title them “Notes and Comments,” or something like that.  I don’t normally do that here, but I would like to tie up some loose ends.

1) I received the following e-mail six weeks ago, and I feel it is worthy to be shared with readers:

Hi David,

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I follow the Aleph blog from time to time. I run value and special situations oriented hedge fund whose goal is to purchase businesses that sell for at least 50 cents on the dollar. It seems that we are like minded in investment terms. I have an extensive investment checklist which that I believe can add value to investors. It took me a few years and I derived it by reading stacks of annual reports from Buffett, Klarman, etc…

If it adds value to your readers, more than happy to share the 90+item investment checklist.




Pope Brar, Managing Partner/Founder

Brar Investment Funds

I’ve read through the checklist and it is a good one.  It has all of the elements of my processes (though I am not as rigorous) and much more.  His checklist is worth a read.  Have a look at it.

2) From last night’s post, a reader asked:

Lots of insurers here.  Given your expertise in that area, I’d be curious to know if you think this screen is turning up names that are on the riskier end of the spectrum.

I wrote a seven part series on this, and here are the summary ideas, and the links:

  1. Shrinking the share count
  2. Growing Fully Convertible Book Value per Share
  3. Price Momentum and Mean-Reversion
  4. On Conservative Management & Reserving
  5. Some Things Can’t Be Underwritten
  6. Analyzing Insurance Sub-Industries and the PB-ROE model
  7. Insurance Accounting and Miscellaneous Insurance Insights 

I’ve been decreasing my insurance shareholdings lately because:

  • Pricing is weak for most P&C coverages, and
  • I don’t trust the reserving for secondary guarantees in life and annuity policies.

Here’s the insurance companies from last might’s article in decreasing order of earnings yield:

Company Ticker Industry Country B/P E/P ROE
Imperial Holdings, Inc. IFT 0709 – Insurance (Life) United States  1.38  37.03  26.83
Greenlight Capital Re, Ltd. GLRE 0715 – Insurance (P&C) Cayman Islands  0.90  19.45  21.61
Assured Guaranty Ltd. AGO 0715 – Insurance (P&C) Bermuda  1.18  18.59  15.75
American Equity Investment Lif AEL 0709 – Insurance (Life) United States  0.86  16.77  19.50
Everest Re Group Ltd RE 0715 – Insurance (P&C) Bermuda  0.88  15.35  17.44
Validus Holdings, Ltd. VR 0715 – Insurance (P&C) Bermuda  1.00  13.30  13.30
Axis Capital Holdings Limited AXS 0715 – Insurance (P&C) Bermuda  1.01  13.20  13.07
Endurance Specialty Holdings L ENH 0715 – Insurance (P&C) Bermuda  1.31  12.55  9.58
CNO Financial Group Inc CNO 0709 – Insurance (Life) United States  1.29  12.39  9.60
American International Group I AIG 0715 – Insurance (P&C) United States  1.34  12.00  8.96
Montpelier Re Holdings Ltd. MRH 0715 – Insurance (P&C) Bermuda  0.99  11.83  11.95
Allied World Assurance Co Hold AWH 0715 – Insurance (P&C) Switzerland  1.00  11.73  11.73
XL Group plc XL 0715 – Insurance (P&C) Ireland  1.12  11.72  10.46
Argo Group International Holdi AGII 0715 – Insurance (P&C) Bermuda  1.27  11.55  9.09
Platinum Underwriters Holdings PTP 0715 – Insurance (P&C) Bermuda  1.02  11.25  11.03
Allianz SE (ADR) AZSEY 0715 – Insurance (P&C) Germany  0.92  11.08  12.04
ACE Limited ACE 0715 – Insurance (P&C) Switzerland  0.84  10.92  13.00
ProAssurance Corporation PRA 0715 – Insurance (P&C) United States  0.87  10.86  12.48
MBIA Inc. MBI 0715 – Insurance (P&C) United States  1.45  10.86  7.49
National Western Life Insuranc NWLI 0709 – Insurance (Life) United States  1.63  10.85  6.66
Partnerre Ltd PRE 0715 – Insurance (P&C) Bermuda  1.23  10.75  8.74
Old Republic International Cor ORI 0715 – Insurance (P&C) United States  0.88  10.53  11.97
Employers Holdings, Inc. EIG 0706 – Insurance (A&H) United States  0.93  10.46  11.25
United Fire Group, Inc. UFCS 0715 – Insurance (P&C) United States  1.05  10.30  9.81
Maiden Holdings, Ltd. MHLD 0715 – Insurance (P&C) Bermuda  0.93  10.11  10.87
EMC Insurance Group Inc. EMCI 0715 – Insurance (P&C) United States  1.02  9.88  9.69
Investors Title Company ITIC 0715 – Insurance (P&C) United States  0.86  9.85  11.45
Protective Life Corp. PL 0709 – Insurance (Life) United States  0.92  9.76  10.61
Lincoln National Corporation LNC 0709 – Insurance (Life) United States  1.07  9.76  9.12
FBL Financial Group FFG 0709 – Insurance (Life) United States  0.96  9.73  10.14
Assurant, Inc. AIZ 0709 – Insurance (Life) United States  1.00  9.67  9.67
Kemper Corp KMPR 0715 – Insurance (P&C) United States  0.95  9.64  10.15
Aspen Insurance Holdings Limit AHL 0715 – Insurance (P&C) Bermuda  1.12  9.61  8.58
Horace Mann Educators Corporat HMN 0715 – Insurance (P&C) United States  0.91  9.60  10.55
Unum Group UNM 0709 – Insurance (Life) United States  0.98  9.55  9.74
WellPoint Inc WLP 0706 – Insurance (A&H) United States  0.89  9.52  10.70
ING Groep NV (ADR) ING 0709 – Insurance (Life) Netherlands  1.14  9.46  8.30
Axa SA (ADR) AXAHY 0709 – Insurance (Life) France  1.19  9.46  7.95
Hanover Insurance Group, Inc., THG 0715 – Insurance (P&C) United States  0.99  9.44  9.54
Baldwin & Lyons Inc BWINB 0715 – Insurance (P&C) United States  0.98  9.42  9.61
American Financial Group Inc AFG 0715 – Insurance (P&C) United States  0.87  9.15  10.52
Alleghany Corporation Y 0715 – Insurance (P&C) United States  1.01  9.15  9.06
American National Insurance Co ANAT 0715 – Insurance (P&C) United States  1.40  8.99  6.42
HCC Insurance Holdings, Inc. HCC 0715 – Insurance (P&C) United States  0.82  8.92  10.88
Allstate Corporation, The ALL 0715 – Insurance (P&C) United States  0.82  8.75  10.67
Symetra Financial Corporation SYA 0709 – Insurance (Life) United States  1.23  8.64  7.02
Selective Insurance Group SIGI 0715 – Insurance (P&C) United States  0.90  8.51  9.46
White Mountains Insurance Grou WTM 0715 – Insurance (P&C) Bermuda  1.07  8.49  7.93
Fortegra Financial Corp FRF 0712 – Insurance (Misc) United States  1.28  8.18  6.39
Cna Financial Corp CNA 0715 – Insurance (P&C) United States  1.10  8.15  7.41
Stewart Information Services C STC 0715 – Insurance (P&C) United States  0.83  7.96  9.59
Navigators Group, Inc, The NAVG 0715 – Insurance (P&C) United States  1.09  7.68  7.05
Reinsurance Group of America I RGA 0706 – Insurance (A&H) United States  1.08  7.49  6.94
Safety Insurance Group, Inc. SAFT 0715 – Insurance (P&C) United States  0.84  7.39  8.80
State Auto Financial Corp STFC 0715 – Insurance (P&C) United States  0.83  6.92  8.34
Genworth Financial Inc GNW 0709 – Insurance (Life) United States  1.72  6.87  3.99
First American Financial Corp FAF 0715 – Insurance (P&C) United States  0.87  6.75  7.76

Now, let me list for you the companies I would avoid on this list: IFT, GLRE, AGO, AEL, CNO, AIG, XL, MBI, LNC, FBL, AHL, ING, AXAHY, AFG, 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.

3) Another letter from a reader, on a very different topic, the FOMC:

thanks again – I always look forward to this update.

My thoughts are, they are increasing their flexibility in one direction (towards “accommodation”).  While they did move the point about “after the purchase program ends” to a spot perhaps better suited to a discussion of that point, I also took it to mean that there may be less commitment to end QE.  (Although, so long as the deficit keeps declining, they really have no choice but to dial back purchases to keep the supply and the non-Fed demand in line.  This is the overlooked reason, I believe that long rates appear to be moving independently of Fed action.  Their demand is not the only variable).

 Final thought – to what extent do you think that the Fed’s great misunderstanding is their inherent bias towards lowest rates possible under any economic conditions: i.e. for any given level of inflation, that Fed policy is best that reflects the lowest level of non-inflationary interest rates [because this presumably encourages credit expansion and therefore economic growth]?

 To my way of thinking, the difficulty with this is that it assumes that credit always has to expand FASTER than the economy overall.  I don’t mean that credit expansion is not important, it is a big component of growth, just that credit can’t grow faster than income forever and at some point, we have to find a model that enables income to grow fast enough to increase living standards without overleverage.

 To me, this is the central policy challenge of the 21st century, because a) globally, credit has surged relative to national income and has reached a limit, b) populations are aging and must therefore favor lower levels of credit – and consumption – overall and c) the bills associated with 1 and 2 are now coming due.

 The Fed, however, seems stuck on the idea that their job should be to inflate rapid credit expansion regardless of the creditworthiness of the borrowers.  This strikes me as dumb, or perhaps more like wishful thinking that if credit expands, growth will drive incomes higher and somehow these will catch up (with some acceptable lag).

 Notice that no one at the Fed talks about things like the household savings rate any more?  I would be ok with QE if the Fed could explain that they were facilitating an orderly deleveraging: in which case Household Debt/Equity (which indicates potential for end-consumer final demand) would be a better metric than unemployment.

 As it is, I believe that what they are really targeting (large) bank balance sheets, and that QE is really a massive backdoor subsidy to money center banks to guarantee enough operating income to allow them to write off bad loans while increasing capital reserves to comply with Basel III.  (Full disclosure, I have a significant portion of my assets in a large US bank that was trading well below the strike price of the warrants issued against its shares to Berkshire Hathaway at the time I purchased the shares, which bank shall remain nameless).

 Politically, I suppose, saying, “well, we need to ensure banks are profitable so as to ensure the solvency of the payments system” looks disturbingly like a bailout for the 1% and is out of touch with a more populist America.

 Anyway, sorry for the diatribe, but curious to get your thoughts.  I think I am less reflexively sceptical about the efficacy of the Fed’s policy (but I fully agree with your view that they are not supporting employment with it).

 Thanks again for all the work you do.

The central idea I would like to comment on is that incremental easing has had less and less effect on the economy, at least in the short-run.  Aside from energy companies, willingness to invest in the business has been light, while willingness to buy back stock has been high.  That doesn’t produce growth in the economy.

The Fed doesn’t realize that it can’t stimulate the economy at the zero bound.  QE is ineffective, and may become fuel for high inflation if the banks start to lend aggressively. Inflation is not the goal, and I think many policymakers are confused — the goal is real growth.

We can protect the payments systems by protecting the regulated subsidiaries of banks, and letting the holding companies bear the losses, which is what we failed to do in 2008-2009.

All that said, we have a punk economy, but what will happen if we get a large increase in bank lending, leading to inflation.  What will the Fed do then?

By David Merkel, CFA of alephblog

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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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