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Brian Abbott

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  • Wide-Moat Put Writing: An Income Investing Alternative [View article]
    For what it's worth, the idea of owning a long call, and a covered short put, and a short equity position, sounds like the equivalent of a collar trade in reverse, where the short put sale pays for all or part of the long call. Interesting,

    I have never heard of doing that for a short stock position but it makes total sense. Long collars are used all the time.
    Dec 30, 2012. 04:20 PM | Likes Like |Link to Comment
  • Evaluating Regulated Financials [View article]
    David, I enjoyed your post. I just wrote an article about applying Free Cash Flow analysis to reinsurers, including endurance (ENH):

    I think I tangentially made the same point that you did, when I write about reinsurers having great FCF in periods without catastrophe losses. Interestingly enough, in at least the most recent quarter (an admittedly small time frame), ENH actually had the worst P/FCF of the reinsurers I analyzed, and Axis Capital (AXS) looked the best. I would appreciate your thoughts on that.
    Dec 30, 2012. 02:16 PM | Likes Like |Link to Comment
  • This Benjamin Graham Rule Encourages More Disciplined Investing [View article]
    Great article! Summarizes something I have felt throughout the 20 years I've been investing, but never have seen articulated so well.
    Dec 30, 2012. 11:43 AM | 2 Likes Like |Link to Comment
  • A Homemade 130/30 Investment Strategy: A Longer-Term Perspective [View article]
    Great article, Daniel. I have a pending article that will show TLT has a -0.78 correlation to SPY, although I drew a different conclusion: that with such anti-correlation, TLT would merely serve to offset (dampen) the movement of SPY, which seems would be the opposite of leverage. There is also the problem that if interest rates rose, it could cause TLT and SPY to both lose, meaning that anti-correlation could fail at exactly the time of market turmoil due to emerging inflation.

    I think of 130/30 as a way of capturing mean reversion, by shorting overpriced and overextended stocks, and also shorting the ones with higher betas in order to capture some additional leverage through beta. This probably isn't the right way to implement it, I am sure!
    Dec 30, 2012. 11:40 AM | Likes Like |Link to Comment
  • Assurant: Insurer With Huge Share Buybacks And Cheap Valuation [View article]
    With a P/FCF of 4, and a P/B of 0.52, I wholeheartedly concur that this company is a cash cow selling at a nice discount, and any buybacks are highly accretive to book value. It's been on my shopping list for 3-4 years and I never pulled the trigger - thanks for focusing on it. Nice article!
    Dec 30, 2012. 11:25 AM | Likes Like |Link to Comment
  • Comparing Berkshire Hathaway To Other Reinsurance Companies [View article]
    But you can't pay book value for it. $BRK.B is currently 1.17 of book value and they have a repurchase authorization for approx 1.20. You also can't buy GEICO individually. You have to also buy a railroad, a pipeline, a private jet leasing company, and many many other businesses with it.
    Dec 29, 2012. 01:50 PM | Likes Like |Link to Comment
  • Reinsurance Companies As Free Cash Flow Cash Cows [View article]
    most ratios compare share price to the selected metric, in this case FCF. For the example of AXS, it means that at least for the most recent quarter, that for every $4 invested in equity, they produced $1 in FCF.

    Also, ss the comment below points out and as I mentioned in the article, one quarter is a short time frame so looking at trailing twelve months or year to date, or longer, may be better, but those FCF numbers are not generally available and would have to be manually derived.
    Dec 28, 2012. 12:11 PM | Likes Like |Link to Comment
  • Reinsurance Companies As Free Cash Flow Cash Cows [View article]
    Yes, I agree about the need to look longer term. It's not just a comparison of a company's own long term combined ratios, but also to its competitors - and that's a lot of data to maintain. The earnings press releases don't always break CR into segments (are you comparing just reinsurance CR, or overall with primary insurance lines, and Lloyd's syndicates?), and sometimes requires digging into 10Q footnotes, plus you can also have later reserve releases or charges, so even the stated numbers can change from the initial report, especially for companies with more long-tail underwriting.

    Realistically, one can also look at book value growth over time, because without underwriting profits and investment profits, you don't grow book value, and poor underwriting leads to loss of book value through catastrophe payouts (complicated by dividend payouts which do subtract from book value).

    I disagree about many companies going out of business. There haven't been any high-profile bankruptcies in the past 10 years that I am aware of. What I have noticed happens is that a company with worse results tends to trade at a big discount to book, then gets acquired, and the certain lines of business then go into run-off while the better lines are retained.

    thanks for reading and commenting!
    Dec 28, 2012. 12:05 PM | Likes Like |Link to Comment
  • Investing In Reinsurance Stocks: Part 2 [View article]
    @CarLoad- usually I will sell LEAP calls (in other industries) but reinsurance usually doesn't have longer than 6-7 months. With LEAPs I will usually go one or two strike prices higher for better potential capital gains, when the numbers make sense. Thanks for the comments!
    Dec 24, 2012. 12:39 PM | Likes Like |Link to Comment
  • Writing Uncovered Put Options On Reinsurance Stocks [View article]
    yes, you can plan on more articles in 2013, definitely. Thanks for the kind words. Obviously the put-writing strategy is more broad than just the reinsurance sector, so I hope the friends find it useful - exactly what I was aiming for. Thanks again!
    Dec 21, 2012. 03:25 PM | Likes Like |Link to Comment
  • An Introduction To Investing In Reinsurance Companies [View article]
    At current prices, MKL is still 5% over book and ALTE is still 5% below book. 10% is a wide arb spread, which does imply market perceives risk it won't go through. A paired trade on long ALTE, short MKL seems like a reasonable arbitrage trade. Or even just long ALTE seems like a good move. The company is in play and if one company wanted to acquire it, even if company refuses, their board will be under pressure to get a deal done or else risk the stock price giving back the 25% gain they got yesterday. There have been a few bidding wars in the past few years - you mentioned TRH, and another ironically was ALTE itself which is the product of Max Capital (MXGL) acquisition, but hard to imagine that happening during the holiday quiet period.

    I don't have any interest in holding the merged company. I don't invest in primary insurance companies because of lower margins. The other risk with these acquisitions is the underwriters - that's the real intellectual capital in the reinsurers, and I don't trust the acquiring companies to not meddle with that. Most mergers include headcount reductions as one of the "synergies" to justify doing the deal.

    Not sure what to make of it, but today half of the companies I hold gave up almost all of the gains the sector got yesterday on this merger news. That could be due to new Sandy loss estimates, plus JPMorgan issued a few downgrades, or it could be realization that more acquisitions aren't in the making.
    Dec 20, 2012. 08:44 PM | Likes Like |Link to Comment
  • An Introduction To Investing In Reinsurance Companies [View article]
    How timely - After writing my first reply, the next day I notice that one of the stocks I listed with widest discount to book value, Alterra (ALTE), is getting a buyout offer from Markel: at a 34 percent premium to the stock price which is about 10% over book value. (A few months ago Flagstone was bought by Validus, and Flagstone formerly had the widest discoount to book) Hmmm.... I am sensing a pattern here!
    Dec 19, 2012. 09:08 AM | 1 Like Like |Link to Comment
  • An Introduction To Investing In Reinsurance Companies [View article]
    You make a great point about the permanent impairment of price to book value for most of these companies (ie, consistently selling below book, including acquisitions). TRH was a special case because they had problems back with AIG's near-collapse, but even the 15% discount to book at acquisition was a large increase from where they had traded before. But the finance theory for permanent prices below book value might say that the market is rendering a verdict that these companies destroy capital, through bad underwriting, bad investing, or expensive management, or that book value itself may be improperly valued. If all of these theories are wrong, then the best approach for these companies is to buy back their shares below book value, which in fact most of these companies are doing.

    I don't have an informed opinion on Alleghany. Many of the ones I listed as reinsurers are not quite pure plays, as they have diversified into also writing primary lines of specialty insurance, including Lloyd's syndicates. So Alleghany would probably fit it alongside them. Thanks for commenting!
    Dec 18, 2012. 03:12 PM | 1 Like Like |Link to Comment
  • An Introduction To Investing In Reinsurance Companies [View article]
    thanks for commenting, and the additional insight! Those are some great points - especially buybacks. Buying back at below book value seems like should be accretive to earnings..

    I think RNR has been close to a short, trading at 117% of book value. GLRE used to be similarly priced but it has come down. It makes sense to hedge by shorting an overpriced one that pays little dividend. It would ease the pain of the occasional catastrophe. That premium over book value is a continuous headwind against their return on equity, and it is hard to have consistently superior underwriting skill to overcome that hurdle.
    Dec 18, 2012. 09:12 AM | Likes Like |Link to Comment
  • An Introduction To Investing In Reinsurance Companies [View article]
    General Re has had its share of problems for Berkshire. Their underwriting wasn't going so well in the late 90's. One interesting difference with Berkshire compared to the pure-play reinsurers is that BRK invests the float into private and public equity., while the pure plays have retreated back into bond portfolios with 5-10% or less equity exposure. (I am sure BRK invests in bonds too but that never makes the news headlines). GLRE is another name that goes heavily into equities, and is run by hedge fund manager David Einhorn. When famous investors like Buffett and Einhorn want to own reinsurance companies, I take notice.

    The random nature of catastrophe losses (and better yet, occasional lack of losses) makes this asset class fairly non-correlated to the rest of the equity sector. Whenever I test correlation coefficients, reinsurers are consistently 30-50% vs SP500, which is pretty low (about the same magnitude as gold mining equities). And the volatility exacts a risk premium, which is one theory of why these trade below book value in most cases. Maybe that would make another article to contribute....
    Dec 17, 2012. 09:03 PM | 1 Like Like |Link to Comment