Aspen Insurance Holdings: Discounted And Shareholder Friendly [View article]
I've been lucky enough to sit next to a few reinsurance brokers (Willis Re, AON) on flights. Insight from them is that it is EXTREMELY competitive. There is a lot of capital chasing risk these days. The low yield environment is driving mispricing across all asset classes, and the risk business is no different. What is hiding it right now is a benign risk environment.
A lot of the gains in the stocks themselves is due to one-off event, like price to book closing the gap from 70% across the industry to now 95-100%, some even higher than 100%. Even if that is just a reversion to the mean, it is a one-off event. Price to book is not (or should not) go over 110%, at least historically. So much of those gains aren't going to be repeated, and that leaves you with a business growing premium at around 6% and earning 1.5% on their bond portfolio in reserves. That's not a lot of compensation for the catastrophe risk many of these companies take. Cats don't happen every quarter, so earnings are lumpy for ones with heavy reinsurance focus. Don't mistake the closure of the price to book value gap as a repeatable part of their business model.
One last note: share buybacks have fueled some of that P/B gap closure, and buybacks aren't accretive anymore once P/B is at 100%. They make a ton of sense when P/B is 60-70% because it's like getting an instant 30% return on capital. they make almost no sense at 100%.
Aspen Insurance Holdings: Discounted And Shareholder Friendly [View article]
<I>if the future tends to be as redundantly reserved as the past, then there will be reserve releases which will make tangible book increase.</I>
That's a nice way to look at it from a conservative standpoint, but one could just as easily say they left money on the table by not writing to their full capacity. If there is a mega-cat, they'll look like geniuses but in a benign risk environment they are putting a drag on profitability.
Great article. AHL is one of my favorite companies!
Michael- good question. The tricky part is making sure the low price to book isn't just the market punishing a poor performer. I do cash out when my covered calls get hit - which has been happening lately. Then it brings up the next question you'll probably ask - how do you know when to get back in? - and I do that by writing out of the money naked puts. That ensures that if I buy again, it is after some degree of a sell-off, and if the price doesn't go down, then it generates current income in the meantime.
Thinking about it more philosophically, selling puts is like earning an insurance-type of premium, on a reinsurer (who insures the risks of another insurer) - so in terms of calculus it is like a 3rd or 4th derivative depending on how you count it (since a put option itself is a derivative, on an equity which already has a degree of optionality embedded in it).
great question. PRE is a European reinsurer that I will include in the larger update next weekend. They haven't announced earnings yet. I agree with you that there is too much cash chasing yield, and is finding its way into this sector.
I sell puts to acquire shares, and then sell calls to get rid of the shares, and the runup in the sector is so big that no puts have exercised in a while, and exercised covered calls will take me out of ALL my equity positions by June, barring a major (>10%) sector decline. Thus I am not in the mood to buy. But it has been hard to know where to put cash to work - nothing is cheap lately.
90-95% book value is the highest since the 2008 collapse. 120% is a valuation that larger primary insurers like BRK and CB trade at, and is a little high for reinsurers. (There are a few that do trade that high, including RNR and ACGL). A theory that we have developed on these discussion boards is that reinsurers should trade cheaper than primary insurers because they carry the tail risk for the industry.
Blending Alpha And Beta: Building A 'Mini-Endowment' [View article]
This is a great approach, and I like your focus on low expense ETF's. I do wonder if you are making things a little more complicated than they need to be by adding small allocations of 2 or 3% to a few things - they become unable to impact overall returns meaningfully at small allocations like that. If truly important, could they be made larger, and if not important, could they be eliminated?
3 Gold Stocks With Recent Intensive Insider Buying [View article]
the drop in 49 North stock has been stunning. I am not long currently, but have owned some in the past. The are selling very far below liquidation value I believe. I saw they are issuing debentures. Glad they are not issuing common stock at these low levels. I am thinking hard about buying some - and yet it keeps going down.
Reinsurance Update: Looking Ahead To Q1 2013 Results [View article]
Thanks for the in-depth industry update. Obviously I am an amateur in this space and very glad to have your insight. This industry fascinates me, just the way they are able to price risk and spread the risk around, which is ultimately good for capitalism. From an investment standpoint, I like the non-correlation to other asset classes.
Reinsurance Update: Looking Ahead To Q1 2013 Results [View article]
thanks for the additional long ideas. I omitted mention of why certain companies were excluded: ACGL because it trades too high over book (same for RNR), GLRE because it is run a little more like a hedge fund (lots of equity exposure) and is small with little disclosure, and MHLD because it is so small.
I like your ideas about reinsurers should trade lower P/B than primary insurers - makes sense because it is the reinsurers backing up the primaries against tail risk.
Another interesting idea that you made me think of is the Winner's Curse - because the pricing of underwriting is a bidding process, the one who bids lowest by definition gets the lowest return on capital. I'll have to figure out how to write an article about that sometime.
Reinsurance Update: Looking Ahead To Q1 2013 Results [View article]
What kinds of alternative sources are you talking about? Cat bonds are one example that started getting hot pre-2008, with money coming in from hedge funds and the like. The market, as judged by stock prices, doesn't seem overly concerned about this. These stocks have gone vertical for several months now - most are even up today as the rest of the market suffers a 1+% loss.
Bruce- Revenue growth is a smokescreen - AMZN has been losing money for several quarters, and even in good quarters has razor thin margins. I am not sure what the value of growing revenue is if they are losing money. Reminds me of the old joke about "losing money, but making it up on volume"
I enjoyed the article and the conversational style. I totally agree with the sentiment about Amazon. Hard to believe how a company can still maintain a 1999-era valuation, but AMZN does it somehow.
while I agree with your premise and I am short AMZN, just because Garmin's sales were temporarily higher due to promotion does not necessarily mean that Kindle unit sales dropped. It could have been steady, and simply was exceeded temporarily by a promotion. I don't think you can extrapolate total revenue of AMZN from a loss leader-type promotion campaign. But I like the rest of your line of reasoning. AMZN has terrible margins and somehow gets heavily rewarded by the markets.
Using Free Cash Flow To Compare Company Valuations [View article]
yes, good comments. The repurchase price did indeed get reset to 1.2. Also that is good to point out the equity holdings don't factor into BRK's free cash flow- although one could make a counterargument that those companies' FCF is not available to Berkshire so rightfully isn't included in BRK's FCF. It just might help understand the ratios a little better when comparing to different kinds of companies, and why BRK's P/FCF looks a little higher in these comparisons.
Aspen Insurance Holdings: Discounted And Shareholder Friendly [View article]
A lot of the gains in the stocks themselves is due to one-off event, like price to book closing the gap from 70% across the industry to now 95-100%, some even higher than 100%. Even if that is just a reversion to the mean, it is a one-off event. Price to book is not (or should not) go over 110%, at least historically. So much of those gains aren't going to be repeated, and that leaves you with a business growing premium at around 6% and earning 1.5% on their bond portfolio in reserves. That's not a lot of compensation for the catastrophe risk many of these companies take. Cats don't happen every quarter, so earnings are lumpy for ones with heavy reinsurance focus. Don't mistake the closure of the price to book value gap as a repeatable part of their business model.
One last note: share buybacks have fueled some of that P/B gap closure, and buybacks aren't accretive anymore once P/B is at 100%. They make a ton of sense when P/B is 60-70% because it's like getting an instant 30% return on capital. they make almost no sense at 100%.
Aspen Insurance Holdings: Discounted And Shareholder Friendly [View article]
That's a nice way to look at it from a conservative standpoint, but one could just as easily say they left money on the table by not writing to their full capacity. If there is a mega-cat, they'll look like geniuses but in a benign risk environment they are putting a drag on profitability.
Great article. AHL is one of my favorite companies!
Reinsurance Update: Interim 2013 Q1 Earnings Comparisons [View article]
good question. The tricky part is making sure the low price to book isn't just the market punishing a poor performer. I do cash out when my covered calls get hit - which has been happening lately. Then it brings up the next question you'll probably ask - how do you know when to get back in? - and I do that by writing out of the money naked puts. That ensures that if I buy again, it is after some degree of a sell-off, and if the price doesn't go down, then it generates current income in the meantime.
Thinking about it more philosophically, selling puts is like earning an insurance-type of premium, on a reinsurer (who insures the risks of another insurer) - so in terms of calculus it is like a 3rd or 4th derivative depending on how you count it (since a put option itself is a derivative, on an equity which already has a degree of optionality embedded in it).
Reinsurance Update: Interim 2013 Q1 Earnings Comparisons [View article]
I sell puts to acquire shares, and then sell calls to get rid of the shares, and the runup in the sector is so big that no puts have exercised in a while, and exercised covered calls will take me out of ALL my equity positions by June, barring a major (>10%) sector decline. Thus I am not in the mood to buy. But it has been hard to know where to put cash to work - nothing is cheap lately.
Property Casualty Insurance And Reinsurance: What You Need To Know [View article]
Reinsurance Update: Interim 2013 Q1 Earnings Comparisons [View article]
Blending Alpha And Beta: Building A 'Mini-Endowment' [View article]
3 Gold Stocks With Recent Intensive Insider Buying [View article]
Reinsurance Update: Looking Ahead To Q1 2013 Results [View article]
Reinsurance Update: Looking Ahead To Q1 2013 Results [View article]
I like your ideas about reinsurers should trade lower P/B than primary insurers - makes sense because it is the reinsurers backing up the primaries against tail risk.
Another interesting idea that you made me think of is the Winner's Curse - because the pricing of underwriting is a bidding process, the one who bids lowest by definition gets the lowest return on capital. I'll have to figure out how to write an article about that sometime.
Reinsurance Update: Looking Ahead To Q1 2013 Results [View article]
Amazon's Growth Is Slowing [View article]
Amazon's Growth Is Slowing [View article]
Just How Slow Are Kindle Sales? [View article]
Using Free Cash Flow To Compare Company Valuations [View article]