Thursday, November 29, 2007

Enstar Group’s inflated premium - ESGR

Enstar Group (ESGR) was created in 2001 and is in the business of acquiring and managing insurance and reinsurance companies in run-off. This has been very profitable for Enstar as Enstar has been successful in re-negotiating insurance claims at a point below their reserve level. This has increased Enstar’s book value or net worth at a decent clip.

Since 2001 Enstar has grown its book value per share/ net asset value (generally the best way of valuing an insurance company) from around $17 per share in 2001 to $34 as of September 2007.

Sometimes even good businesses get too expensive and Enstar is too expensive. Its shares trade for $114 which is over 3.3x its book value. Interestingly its price to book value has expanded from 0.9 in 2000 to 3.3 today. During this time its book value has doubled.

Whilst famous investors like Warren Buffett made their fortunes investing in insurance holding companies , no-one has ever made their fortune buying insurance companies for over 3x book (more likely smart investors would only be interested in paying around book value or modest premium to book value depending on the quality of the business).

In fact Enstar trades at a significant premium to all of its peers. Even if you take the view, well Enstar is a far superior company, you could respond by saying the same was said about AIG back in 2000 before reality set in and the rule of numbers took their toll.

By my calculation it will take Enstar over 8 years of consistently growing its net book value (currently $416 billion) at 15% (its historical average) to reach its current market valuation of over $1.3 billion and this means also making consistently profitable acquisitions. That’s a high threshold for any company to meet without a hiccup. Its also a long time to wait for the price you pay to match the underlying net asset value of the insurance business.

Furthermore Enstar has only been tested over a 6 year time frame, that’s not very long. Other insurance companies with excellent track records and stronger paper trails over 20 years such as Markel Corp trade for a more modest price to book ratio of 1.8.

It could be argued Enstar is more of a private equity vehicle than an insurer and part of the premium on Enstar’s stock is no doubt attached to Christopher Flowers involvement.

Flowers is a billionaire and has proven himself as a successful investor. I’m not disputing that fact. I am simply making a point that when you risk your capital you expect to be compensated for that risk and at its current price , even with the potential for private equity deals, Enstar is priced for perfection!

In conclusion, if investing is like playing cards you bet heavily when you have a strong hand not when you have a weak or ordinary hand. Buying Enstar at the current price is the same as betting heavily when you have a weak hand. The probability or odds of being very successful are low and odds of a poor outcome are high.

Disclosure: No position in Enstar ESGR, shares held in Markel MKL

Tuesday, November 27, 2007

Really strange insured risks

Specialty insurers will insure all kinds of risks even exploding baseballs and underwater hotels. Here is a link to the article, please refer to page 23

Monday, November 26, 2007

Top fastest growing US insurers

Top fastest growing US insurers - growth book value from Dec 1997 - Dec 2006
(not including reinvested dividends)
min $1 bil mkt cap

31-Dec-06 B/V, 31-Dec-97 B/V,Book value growth, Div yield, Current Price/Book

PHLY Philadelphia Consol 16.48 3.03 444% 1.60% 1.93
HCC HCC Insurance 18.28 5.1 258% 1.60% 1.44
MKL Markel 230.48 65.18 254% nil 1.83
WTM White Mountains 413.19 117.53 252% 1.60% 1.17
AIG AIG 39.09 12.2 220% 1.60% 1.30
RE Everest Re 78.58 25.89 204% 2.00% 1.09
STFC State Auto Financial 20.35 7.11 186% 2.10% 1.31
MLAN Midland Co. 29.9 10.55 183% 0.60% 1.93 (subject to takeover)
BRK-A Berkshire Hathaway 70274 25487 176% nil% 1.73
BER W R Berkley 17.3 6.33 173% 0.70% 1.51
RLI RLI 31.17 12.35 152% 1.60% 1.67
CGI Commerce Group 22.53 9.01 150% 3.40% 1.62
all numbers taken from msn money / investing stocks analysis charts

Just a few comments on the above

1. I haven't included reinvested dividends. I have shown current dividend yields.
2. book value doesn't consider real growth in intrinsic value & earnings power
for example Berkshire Hathaway's non-insurance earnings have grown at a much faster rate than book value over the last 10 years
3. Some of the companies above like W R Berkley and AIG have substantial real estate shown at cost on the balance sheet which will not show in book value
4.Fairfax Financial results whose results have been disappointing for the last 5 years and so I have not included , nevertheless has a stellar 20 year record of 20% + compounded book value growth along with Markel Corp & Berkshire Hathaway.

Sunday, November 25, 2007

Prem Watsa on the credit crunch. Its just beginning...

According to an article in the Globe and Mail, published November 23 2007, Prem Watsa famed investor and CEO of Canadian insurer Fairfax Financial Holdings (FFH) says losses from the credit cruch are only just beginning and it will take a long time for the US economy and housing sector to recover from a spate of poor lending decisions by mortgage brokers.

Here is the link


Prem Watsa has strategically prepared Fairfax Financial's investment portfolio by concentrating his fixed income portfolio almost exclusively in government bonds "for the first time ever" according to Prem and and using credit default swaps to bet on a widening of credit spreads in a growing aversion to risk of corporate defaults. According to the International Herald Tribune , the Markit CDX North American index of credit-default swaps on over 100 investment grade companies tripled since February, to 90 basis points from 33.

Since the end of September the index has doubled. Many of the companies Fairfax Financial holds in its CDS book are mortgage or banking stocks such as Countrywide Financial, Freddie Mac, Radian have seen their spreads more than double since September 30. As a result Fairfax Financial's investment portfolio of CDSs would now be valued between 1 to $1.5 billion up from around $500 million at the end of September 2007.

Nick Nejad has a great write up on the changes in the value of Fairfax Financial's CDS's at

No doubt as corporate debt spreads widen (and corporate bonds become cheaper) more opportunities will present themselves to insurance companies and other investors over the next few years. However, with the housing recession intensifying in the US, the potential for corporate failure amongst weaker public companies in the mortgage and banking industry is high.

Sources: International Herald Tribune, The Globe (,, Fairfax Financial annual/quarterly reports
Disclosure: I own shares in FFH

Hank Greenberg - A return to AIG?

On the 2nd November 2007, Hank Greenberg, former AIG CEO & insurance industry icon, filed a 13D with American International Group (AIG) indicating that he and other interested parties are considering strategic alternatives for AIG. Here is an extract from the 13D lodged...

"....The Reporting Persons believe that there are opportunities to significantly improve the Issuer's performance and strategic direction, as well as the value of their investment. In this connection, the Reporting Persons anticipate holding discussions with stockholders and third parties that may address a number of issues, including without limitation, their respective views on the Issuer's business and prospects, the suggested disposition of certain of its operations, investment opportunities and concerns over the direction and management of the Issuer generally, and other opportunities to improve or realize on the value of their investment in the Issuer.... "

Clearly Hank Greenberg believes AIG shares are undervalued and the company is performing below expectations. Hank controls through CV Starr & other companies over 12% of AIG and has the ability to exert considerable pressure on management, particularly if he can win the support of other shareholders.

AIG shareholders have experienced disappointing returns over the last 5 years and and may still hold a certain fondness for the tough talking Hank Greenberg who as CEO of AIG achieved 20% plus shareholder returns before his controversial exit in 2005.

AIG's financial results have been recently plagued by subprime writedowns and a softer insurance pricing business environment, AIG shares have suffered and are now trading at the cheapest levels in over 10 years trading on a PE multiple of 9 & a Price to Book ratio of 1.3. Typically AIG shares have traded above a price to book ratio of 2.

So is Hank making a play for AIG? Does he want the CEO job back or is it simply a case a revenge against a Board who turned their back on their CEO in the face of the New York A-G Spitzer's allegations against Hank Greenberg.

With a large part of his wealth invested in AIG shares Hank Greenberg obviously wants to improve the returns from his shares. Hank has recently accused the AIG board of being a bunch of lawyers and also that AIG lacked real leadership. Hank Greenberg has publicly said he does not want to return as CEO but there is no doubt with this recent 13D filing that he wants to to exert some control on the key leadership & board positions in AIG.

Personally as an AIG stakeholder, I would like to see Hank Greenberg return to AIG, whether you like or loathe Hank there is no doubt he knows AIG better than any other person and is more qualified than anyone to run AIG , even if he acts in simply a advisor role. Of course court proceedings are possibly pending & the outcome is unclear this may impact on his ability to work as director.

I will make further posts on this blog as the issue develops.

On a final note I do recommend Ron Shelp's book "Fallen Giant; The Amazing Story of Hank Greenberg and the History of AIG" for a great and well balanced account on Hank Greenberg and the extraordinary success he achieved with AIG. As David Schiff put it in a WSJ article (march 05) Hank Greenberg has "been the most important figure in the insurance business over the past 40 years."

Sources: Forbes,SEC database,Wall Street Journal
Disclosure: I own AIG shares


Welcome to my first blog.

My goal is to post at least once a week and I hope I can entertain you as well as provide you with a few alternative investment ideas and views.

This blog is about the global insurance industry which I find totally fascinating and enjoyable. With by far the largest share of the insurance industry, North America will hold much of my focus . However, I will also be exploring the fast growing insurance business in the Far East in particular China and India as well as other parts of the world.

Many investors find the insurance business dull and boring and would much rather read about fast growing semiconductor stocks or the latest high-flying IT company. If you are one of these people you're in the wrong place!

Nevertheless when it comes to investment returns the insurance business can be very sexy (consider this, only two value investors , Warren E Buffett & Shelby Cullom Davis, have made the US Fortune 500 list through investing & they achieved this mostly through insurance company investments)

Of course the same discipline of investing should apply when investing in insurance businesses just like any other form of stock investing.

As well as posting blogs , I will be providing my favourite links and highlighting other worthwhile publications. Also please give me your feedback, I don't mind if its positive or negative , I'd love to hear from you.

So grab a coffee , sit back & relax and enjoy ....