This report includes an excellent review of the insurance market in Brazil which is growing rapidly.
W R Berkley (BER) has in recent years established a business subsidiary in Brazil.
http://72.14.253.104/search?q=cache:ajXvswj4FGoJ:www.benfieldgroup.com/NR/rdonlyres/A9317CDE-963C-4B96-8960-6D5F5DC6C175/0/LAMarketReview2007.pdf+insurance+latin+america&hl=en&ct=clnk&cd=9&gl=au
Sunday, February 10, 2008
Wednesday, February 6, 2008
Warren Buffett - P&C industry profits will continue decline over next few years
In a recent business wire presentation from Canada, Warren Buffett said he expected 4points of worsening in combined ratios in 2008 vs 2007. Buffett said insurers will face combined headwinds from lower insurance pricing and increasing inflation, raising the amount of loss exposures for property and casualty insurers. Buffett expects several years of lower profitability and worsening combined ratios.
Here is a link to the presentation which includes a great Q & A with Warren Buffett on a great variety of topics...
http://phx.corporate-ir.net/phoenix.zhtml?c=127541&p=irol-eventDetails&EventId=1758500&WebCastId=726710&StreamId=1054665
Here is a link to the presentation which includes a great Q & A with Warren Buffett on a great variety of topics...
http://phx.corporate-ir.net/phoenix.zhtml?c=127541&p=irol-eventDetails&EventId=1758500&WebCastId=726710&StreamId=1054665
Tuesday, February 5, 2008
HCC Insurance (HCC) looks like reasonable value
Many insurance stocks have been sold off recently by investors due to fears over the credit crunch and expectations that softer insurance market pricing will further reduce insurers’ profitability.
One insurer which I think represents good value, despite these headwinds, is HCC Insurance. HCC insurance (HCC) is AA rated by S&P and began operations in 1974. It has offices in the US, Europe and the UK.
HCC Insurance is truly a specialty insurer with an excellent franchise . They don’t write general liability or workers compensation insurance. They write numerous products including directors and officers liability, aircraft insurance, marine insurance and life,accident and health products. Many of the insurance products fall outside the standard market so are subject to less price competition. HCC estimate that over 60% of their products fall outside the standard insurance cycle.
Historically, due to its specialty focus and underwriting discipline, HCC has maintained a combined ratio well below the industry average and their loss reserving has been overly conservative with loss redundancies consistently reported with one or two exceptional years. Since 1981, HCC has only made an underwriting loss on only two occasions in 2001 (combined ratio was 101.8%) which included $22 million in losses from the World Trade Centre attacks and 1999(combined ratio was 104.1%).
One way HCC maintains above average profitability is by keeping a solid grip on their underwriting. HCC will buy the Managing General Agents or MGAs that they use. This way they have more control over terms and the pricing of policies.
Around 12 months ago HCC was mired in controversy over the manipulation of options grants which cost the job of former CEO Stephen Way. The ultimate cost of these grants was minimal. A recent legal case resulting from this options was settled for $3 million , which was fairly immaterial. The loss of Stephen Way was far more damaging as he spearheaded HCC since founding the company in 1974 and has been instrumental in HCC’s success. Nevertheless, many of the key operating officers who have been part of HCC’s growth over many years including Frank Bramanti ,current CEO, and John Molbeck, current Chief Operating Officer, remain with HCC. Further, HCC has an experienced management team in each of its operating subsidiaries. Their de-centralised management structure is a key strength for HCC.
HCC under current management has been hitting on all cylinders over 2007. Net earnings are up 13% to $295 mil for the nine months ended 30 September 2007 from $261 million in nine months ended 30 September 2006. The GAAP combined ratio for 2007 and 2006 has been an excellent 83%. On a trailing twelve month basis their earnings are around $370 million.
Frank Bramanti has maintained disciplined & patient approach on the issue of making acquisitions , insisting they will wait for the right opportunities to come up as the insurance cycle continues to soften, and they will not over-pay. In the meantime, HCC continue to pay down their debt and build their cash reserves. Recently they acquired Mulitnational Underwriters (MNU) further adding to their health insurance arm and which will add $40 million in premiums to their business. They aso recently rceived approval for a new Lloyds syndicate platform to help expand their global insurance products.
HCC has a very conservative balance sheet, their fixed income investment portfolio had an average AAA rating. They have debt to capital of just 11.6%. Their fixed income investments are managed by New England Asset Management , a subsidiary of Berkshire Hathaway. They have just $20 million, less than 1% of shareholder equity, in subprime and Alt A bonds which are rated AAA and have not been subject to downgrade. They own no CDOs or CLOs.
HCC valuation looks reasonable and in my view is now being priced both for a recession and a soft insurance market (not to say the share price can’t go lower …all the better!). HCC Insurance has a market cap of around $3.1 billion or $27 per share, around 1.28x my estimate of closing book value of $21 for 2007. This is the one of the lowest price to book value ratios that HCC has traded at in the last decade. Its earnings for this year will be around $3.30 per share ,so the PE ratio is a modest 8x and pays a 1.6% dividend. A lot of downside risks have been priced into this company. Despite options related sales by two directors, insiders have been buying shares over the last 6 months. Of note, John Molbeck ,COO, bought $418K in stock on open market in August at around $27-$28 per share and during January Edward Ellis, Chief Financial Officer, exercised over $1 million in options at $18 per share and has not sold any shares after that exercise.
Finally,HCC Insurance could also become an acquisition target for a large insurance company such as AIG or foreign insurer such as Allianz, given the unique franchise HCC holds in the specialty insurance market. I would expect HCC would command a price to book value of 2x book or $42 per share if sold on a private market basis.
Disclosure: I own shares in HCC Insurance(HCC)
Disclaimer: The opinions expressed by the author’s own views and are not intended as investment advice and should not be relied upon as investment advice.
One insurer which I think represents good value, despite these headwinds, is HCC Insurance. HCC insurance (HCC) is AA rated by S&P and began operations in 1974. It has offices in the US, Europe and the UK.
HCC Insurance is truly a specialty insurer with an excellent franchise . They don’t write general liability or workers compensation insurance. They write numerous products including directors and officers liability, aircraft insurance, marine insurance and life,accident and health products. Many of the insurance products fall outside the standard market so are subject to less price competition. HCC estimate that over 60% of their products fall outside the standard insurance cycle.
Historically, due to its specialty focus and underwriting discipline, HCC has maintained a combined ratio well below the industry average and their loss reserving has been overly conservative with loss redundancies consistently reported with one or two exceptional years. Since 1981, HCC has only made an underwriting loss on only two occasions in 2001 (combined ratio was 101.8%) which included $22 million in losses from the World Trade Centre attacks and 1999(combined ratio was 104.1%).
One way HCC maintains above average profitability is by keeping a solid grip on their underwriting. HCC will buy the Managing General Agents or MGAs that they use. This way they have more control over terms and the pricing of policies.
Around 12 months ago HCC was mired in controversy over the manipulation of options grants which cost the job of former CEO Stephen Way. The ultimate cost of these grants was minimal. A recent legal case resulting from this options was settled for $3 million , which was fairly immaterial. The loss of Stephen Way was far more damaging as he spearheaded HCC since founding the company in 1974 and has been instrumental in HCC’s success. Nevertheless, many of the key operating officers who have been part of HCC’s growth over many years including Frank Bramanti ,current CEO, and John Molbeck, current Chief Operating Officer, remain with HCC. Further, HCC has an experienced management team in each of its operating subsidiaries. Their de-centralised management structure is a key strength for HCC.
HCC under current management has been hitting on all cylinders over 2007. Net earnings are up 13% to $295 mil for the nine months ended 30 September 2007 from $261 million in nine months ended 30 September 2006. The GAAP combined ratio for 2007 and 2006 has been an excellent 83%. On a trailing twelve month basis their earnings are around $370 million.
Frank Bramanti has maintained disciplined & patient approach on the issue of making acquisitions , insisting they will wait for the right opportunities to come up as the insurance cycle continues to soften, and they will not over-pay. In the meantime, HCC continue to pay down their debt and build their cash reserves. Recently they acquired Mulitnational Underwriters (MNU) further adding to their health insurance arm and which will add $40 million in premiums to their business. They aso recently rceived approval for a new Lloyds syndicate platform to help expand their global insurance products.
HCC has a very conservative balance sheet, their fixed income investment portfolio had an average AAA rating. They have debt to capital of just 11.6%. Their fixed income investments are managed by New England Asset Management , a subsidiary of Berkshire Hathaway. They have just $20 million, less than 1% of shareholder equity, in subprime and Alt A bonds which are rated AAA and have not been subject to downgrade. They own no CDOs or CLOs.
HCC valuation looks reasonable and in my view is now being priced both for a recession and a soft insurance market (not to say the share price can’t go lower …all the better!). HCC Insurance has a market cap of around $3.1 billion or $27 per share, around 1.28x my estimate of closing book value of $21 for 2007. This is the one of the lowest price to book value ratios that HCC has traded at in the last decade. Its earnings for this year will be around $3.30 per share ,so the PE ratio is a modest 8x and pays a 1.6% dividend. A lot of downside risks have been priced into this company. Despite options related sales by two directors, insiders have been buying shares over the last 6 months. Of note, John Molbeck ,COO, bought $418K in stock on open market in August at around $27-$28 per share and during January Edward Ellis, Chief Financial Officer, exercised over $1 million in options at $18 per share and has not sold any shares after that exercise.
Finally,HCC Insurance could also become an acquisition target for a large insurance company such as AIG or foreign insurer such as Allianz, given the unique franchise HCC holds in the specialty insurance market. I would expect HCC would command a price to book value of 2x book or $42 per share if sold on a private market basis.
Disclosure: I own shares in HCC Insurance(HCC)
Disclaimer: The opinions expressed by the author’s own views and are not intended as investment advice and should not be relied upon as investment advice.
Monday, February 4, 2008
Insider buying exceeds insider selling in January
from Bloomberg "Total purchases were 1.44 times more than sales, the first time in 13 years that insiders became net buyers, the data show. The S&P 500, the benchmark for American equities, hasn't fallen in the 12 months after insiders bought more than they sold, according to Washington Service data that go back 20 years."
here's the link
http://www.bloomberg.com/apps/news?pid=20601213&sid=aj7iYiQKz5UU&refer=home
here's the link
http://www.bloomberg.com/apps/news?pid=20601213&sid=aj7iYiQKz5UU&refer=home
Saturday, February 2, 2008
A bond insurer bailout is likely to put policyholders interests ahead of shareholders
During Markel Corporation’s recent conference call, Tom Gayner , Chief Investment Officer, explained why Markel had sold off their positions in the mono-line insurer/financial guarantors, Ambac and MBIA.
“In the financial guarantee companies (our portfolio position) is zero. There is too broad a case of dispersions and risk and reward and things that can happen that are way beyond just what you can analyze with numbers. I mean there's political issues involved that are well beyond our circle of competence. That is a battle we're going to sidestep.”(Tom Gayner 4Q 2008 Markel Corporation conference call)
Gayner’s comment on the “political issues” would likely refer to Insurance regulators interest in protecting muni-bond policyholders and ensuring the smooth running of the capital markets for municipal bonds. These political considerations are likely to come before the interests of financial guarantor shareholders.
The man charged with saving the day is Eric Dinallo, NY Insurance Commissioner. Dinallo has already moved to raise insurance capacity in the municipal bond market by inviting Berkshire Hathaway to insure municipal bonds for New York.
Dinallo has also discussed capital raising initiatives with major banks. According to a FT article Jan 28 2008, Dinallo convened with the major banks and told them that $15 billion would be needed to fix the bond insurers and protect their ratings. Various measures discussed included extending credit lines and capital raising initiatives to strengthen their balance sheets.
Dinallo’s current focus is on organizing a bailout of Ambac. As well as capital raising initiatives, a reinsurance plan has also been discussed, according to a recent Bloomberg report. Under this arrangement banks and brokerages, would offer to reinsure losses Ambac suffers on bonds and securities over an agreed upon limit in return for a fee. Any such reinsurance arrangement would involve a number of considerations such as ensuring financial institutions are not reinsuring their own exposures, calculating what the reinsurance loss provisions will be for each bank or brokerage and deteriming how much Ambac will have to pay for any reinsurance.
Bill Ackman, ardent critic of MBIA and Ambac , who is shorting the stock of both companies, believes regulators must act now if they want to protect policy holders. Ackman explained why he is still short MBIA and Ambac in a recent WSJ article
"The reason why we're still short the holding companies of MBIA and Ambac is because we believe the regulators and the banks are working to help policyholders, and not holding-company shareholders," (“Bond Insurer foe soldiers on” Feb 2 2008)
Ackman also mentions in this WSJ article that Banks, who have billions in off-balance sheet investments in CDOs and subprime mortgage securities that are insured by Ambac and MBIA, would see an arbitrage opportunity in helping the ailing bond insurers keep their triple A ratings. According to some estimates up to $70 billion of subprime investments would be written down by investment banks and others if the bond insurers failed. Paying the $15 billion price tag as suggested by Dinallo would be a small price to pay to protect the value of these securities.
Ackman is supportive of a plan to protect muni-bond holders but says” if the bailout is a mechanism for banks to continue to hide losses off balance sheet, then we think it's very bad for the capital markets." (“Bond Insurer foe soldiers on” Feb 2 2008)
What form the eventual bailout of Ambac or potential capital infusions for MBIA will take remains an open question , however this is a precarious time for financial guarantor shareholders. Political considerations such as protecting policy holders as well as ensuring the solvency of insurers are likely to dominate the thinking of Insurance regulators who are intent on stabilising the municipal bond markets.
Disclosure: I own shares in Markel Corp(MKL) and Berkshire Hathaway (BRKB) but no other positions in any securities discussed.
“In the financial guarantee companies (our portfolio position) is zero. There is too broad a case of dispersions and risk and reward and things that can happen that are way beyond just what you can analyze with numbers. I mean there's political issues involved that are well beyond our circle of competence. That is a battle we're going to sidestep.”(Tom Gayner 4Q 2008 Markel Corporation conference call)
Gayner’s comment on the “political issues” would likely refer to Insurance regulators interest in protecting muni-bond policyholders and ensuring the smooth running of the capital markets for municipal bonds. These political considerations are likely to come before the interests of financial guarantor shareholders.
The man charged with saving the day is Eric Dinallo, NY Insurance Commissioner. Dinallo has already moved to raise insurance capacity in the municipal bond market by inviting Berkshire Hathaway to insure municipal bonds for New York.
Dinallo has also discussed capital raising initiatives with major banks. According to a FT article Jan 28 2008, Dinallo convened with the major banks and told them that $15 billion would be needed to fix the bond insurers and protect their ratings. Various measures discussed included extending credit lines and capital raising initiatives to strengthen their balance sheets.
Dinallo’s current focus is on organizing a bailout of Ambac. As well as capital raising initiatives, a reinsurance plan has also been discussed, according to a recent Bloomberg report. Under this arrangement banks and brokerages, would offer to reinsure losses Ambac suffers on bonds and securities over an agreed upon limit in return for a fee. Any such reinsurance arrangement would involve a number of considerations such as ensuring financial institutions are not reinsuring their own exposures, calculating what the reinsurance loss provisions will be for each bank or brokerage and deteriming how much Ambac will have to pay for any reinsurance.
Bill Ackman, ardent critic of MBIA and Ambac , who is shorting the stock of both companies, believes regulators must act now if they want to protect policy holders. Ackman explained why he is still short MBIA and Ambac in a recent WSJ article
"The reason why we're still short the holding companies of MBIA and Ambac is because we believe the regulators and the banks are working to help policyholders, and not holding-company shareholders," (“Bond Insurer foe soldiers on” Feb 2 2008)
Ackman also mentions in this WSJ article that Banks, who have billions in off-balance sheet investments in CDOs and subprime mortgage securities that are insured by Ambac and MBIA, would see an arbitrage opportunity in helping the ailing bond insurers keep their triple A ratings. According to some estimates up to $70 billion of subprime investments would be written down by investment banks and others if the bond insurers failed. Paying the $15 billion price tag as suggested by Dinallo would be a small price to pay to protect the value of these securities.
Ackman is supportive of a plan to protect muni-bond holders but says” if the bailout is a mechanism for banks to continue to hide losses off balance sheet, then we think it's very bad for the capital markets." (“Bond Insurer foe soldiers on” Feb 2 2008)
What form the eventual bailout of Ambac or potential capital infusions for MBIA will take remains an open question , however this is a precarious time for financial guarantor shareholders. Political considerations such as protecting policy holders as well as ensuring the solvency of insurers are likely to dominate the thinking of Insurance regulators who are intent on stabilising the municipal bond markets.
Disclosure: I own shares in Markel Corp(MKL) and Berkshire Hathaway (BRKB) but no other positions in any securities discussed.
Friday, February 1, 2008
Fairholme Fund shareholder letter 2007
Bruce Berkowitz and the team at Fairholme Funds have a great track record and have achieved a 17% plus annual compounded return since starting out in 1999. Their shareholder letters are always insightful.
Insurance holding company Berkshire Hathaway (BRKA/B) remains their top position with around 20% of their portfolio. They continued to add to this position during the period ending November 30 2007. Their rationale on why the credit crunch will benefit Berkshire ...
"With a war chest of roughly $40 billion of cash and $100 billion of other liquid investments, Berkshire is a logical senior lender or last-resort acquirer for the financially wounded."(Fairholme annual report 2007)
They also added to their investment in Sears Holdings (SHLD) . Commenting on public and media criticism of Sear's Chairman, Eddie Lampert ....
"Many despair that Sears seems unable to regain past retail glory, despite a conservative balance sheet and many valuable assets. In searching for instant gratification, most are missing key points. As with Warren Buffett in the late 1990s, many believe Eddie Lampert’s investment skills have faded — but it is just as unlikely that this leopard has lost his spots." (Fairholme annual report 2007)
Finally, the Fairholme management have always kept a 20% plus cash balance , they discuss the philosophy and benefits of doing this...
"The unexpected happens more frequently and with more severity than most expect.Accordingly, cash remains a sizeable chunk of the portfolio. As demonstrated this year, cash helped the Fund to weather portfolio headwinds and allowed the Fund to buy without the need to sell already inexpensive securities on the cheap. Shareholders should not fear a temporary decline in the Fund’s NAV, as lower prices for sound investments usually indicate better bargains and higher future returns — particularly with cash hoarded for such chances." (Fairholme annual report 2007)
Here is the link to the Fairholme shareholder letter and annual report. Enjoy...
http://www.fairholmefunds.com/
Disclosure: I own shares in the Fairholme Fund (FAIRX)
Insurance holding company Berkshire Hathaway (BRKA/B) remains their top position with around 20% of their portfolio. They continued to add to this position during the period ending November 30 2007. Their rationale on why the credit crunch will benefit Berkshire ...
"With a war chest of roughly $40 billion of cash and $100 billion of other liquid investments, Berkshire is a logical senior lender or last-resort acquirer for the financially wounded."(Fairholme annual report 2007)
They also added to their investment in Sears Holdings (SHLD) . Commenting on public and media criticism of Sear's Chairman, Eddie Lampert ....
"Many despair that Sears seems unable to regain past retail glory, despite a conservative balance sheet and many valuable assets. In searching for instant gratification, most are missing key points. As with Warren Buffett in the late 1990s, many believe Eddie Lampert’s investment skills have faded — but it is just as unlikely that this leopard has lost his spots." (Fairholme annual report 2007)
Finally, the Fairholme management have always kept a 20% plus cash balance , they discuss the philosophy and benefits of doing this...
"The unexpected happens more frequently and with more severity than most expect.Accordingly, cash remains a sizeable chunk of the portfolio. As demonstrated this year, cash helped the Fund to weather portfolio headwinds and allowed the Fund to buy without the need to sell already inexpensive securities on the cheap. Shareholders should not fear a temporary decline in the Fund’s NAV, as lower prices for sound investments usually indicate better bargains and higher future returns — particularly with cash hoarded for such chances." (Fairholme annual report 2007)
Here is the link to the Fairholme shareholder letter and annual report. Enjoy...
http://www.fairholmefunds.com/
Disclosure: I own shares in the Fairholme Fund (FAIRX)
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