Life Insurers Trading Mainly On Volatility [View article]
Richard,
Just checking the correlation of share prices to SPY, PRU has an awesome 95%, HIG and MET mid to high 80's. So they are simply moving consistent with SPY. SPY and VIX are very self-consistent, for 2011, higher VIX = lower SPY, R2 0.87...Of course, all of these stocks have lagged the index.
Anyway, given the serious efforts to hedge the market sensitivity, I question the degree of correlation.
The life insurers have been disclosing their European peripheral exposures, they strike me as manageable. In addition to credit risk, interest rate risk, and equity market risk, they are also exposed to forex risk due to operations in Asia, primarily Japan and Korea.
Regulators concern themselves with RBC (risk based capital), and the companies generally regard some portion of their capital that is not required to maintain RBC at acceptable levels as being available to deploy on behalf of shareholders, pay dividends, do buybacks. HIG thinks they have $500 million excess, MET and PRU are in the multiple billions.
I don't think they're exposed to being wiped out, the worst case scenario would involve hurried capital raises, dilutive to existing shareholders.
The companies don't provide counterparty information on their hedges, although they will assert that they are diversified in that regard. Supposedly the counterparties, if they have too much risk, would lay that off on yet another party.
With these companies trading very much in line with SPY/VIX, and all the hedging going on, it seems like Mr. Market just doesn't believe in the efficacy of hedging. Doing a word search in the 10-K for "derivative" or "hedge" will get over 100 instances.
But with interest rate, equity market and forex risks hedged, in an ideal world the life insurers are dealing with mortality and longevity risk, and facilitating investments for their policyholders by hedging out the market extremes which the policyholder couldn't handle on his own.
Life Insurers Trading Mainly On Volatility [View article]
jack,
Many are forgetting what the normal range of VIX is. The median going back to 1990 is 19. I can remember back before the crisis when VIX seemed to be stuck in a range from 12 to 18.
I guess my strategy is to wait for things to calm down.
Life Insurers Trading Mainly On Volatility [View article]
UndiversifyBC,
The point on yield is good, there has been quite a bit of concern voiced about low interest rates. MET for one has hedged against low interest rates, starting in 2004, and they can absorb a protracted period of low interest rates.
But like any insurance company, to the extent their products are backed by fixed income securities, it is best practice to match the maturity of liabilities and the assets that support them, something the better run companies have been very careful about. So the thing to do going forward is to revise products/pricing to reflect the interest rates available on newly invested money.
I fail to see any necessary causal relationship between VIX and share prices for Life insurers. I have been looking to P/B or P/E to drive performance. It's too bad but an inverse relationship to VIX seems to have more desriptive power as far as the results for 2011 than more relevant considerations.
That leaves the Market risk of fluctuations in equity investments for variable annuities. I recently located the following, which describes the resources MET applies to hedging these exposures:
The point is, these companies trade as if they have no hedges in place, and they are fully exposed to the volatiltiy of the index. While HIG was not hedged for its tail risk going into the financial crisis, the company now has adequate resources devoted to the hedging activity, and can cope with S&P 500 at 700 if that were to happen.
Bank Of America: Piercing Its 'Opaque' Balance Sheet - Part II [View article]
wwwkkk3,
The reason to include the representations and warranties was to confine the risks assumed by the insurance company to what they agreed to accept. They did not intend to or agree to accept risk of malfeasance by the banks involved, such as egregious disregard of their own published underwriting standards.
It was not possible for the insurance company to go in and individually re-underwrite the mortgages prior to accepting the risk. So representations and warranties do the underwriting.
Bank Of America: Piercing Its 'Opaque' Balance Sheet - Part II [View article]
wwwkk3,
Yes. Materially and Adversely is not causation. If a mortgage that breaches representations or warranties is included in the MBS collateral, it increases the risk assumed by the insurance company, beyond what the company agreed to accept, and the company's interests are materially and adversely affected, even though no loss has occurred, or if a loss did occur, the breach was not the proximate cause of the loss.
Cisco: A Look At Product Groups And Growth Potential [View article]
CC,
Thanks for your comment. I bought this shortly after you did your article on it, then I was a little concerned after you bailed but I held through, looks like it's going to be OK now.
I think you're correct that this isn't going to make a rapid recovery, I probably should have qualified my target by saying within two years.
But I figure between the leverage and the premium from selling calls you don't really need a quick move to earn a very respectable rate of return.
Options Strategy: Diagonal Call Spread On J&J [View article]
holornnine,
The options pricing formula considers dividends - the JNJ Jan 2012 50.0 calls would cost $1.09 more if there were no dividend, according to an online options calculator. There is also an effect on the call sold.
When considering the use of options compared to owning the shares, the dividend is a consideration. The strategy as written up does have an income from the call sold, amounting to 18.6% annualized in the static case.
Actually this LEAPS as a substitute for share ownership is easier to do on stable, dividend paying stocks because the time cost is less.
EU leaders, specifically Germany, drop demands for private sector holders of sovereign debt to bear part of the cost of any bailouts. There is a belief that Germany's call for such over a year ago, ignited this latest round of the crisis. To review: No losses for any bondholders ever. Maybe that's what has lit a fire under risk markets this morning. [View news story]
Sounds like the definition of triple A to me: "No losses for any bondholders ever."
Hartford Financial: TARP Warrants Offer Advantages [View article]
One other thought, HIG has approval from its regulator for the various companies to lend money back and forth, and the loans will be admitted assets for the company making them.
I think this is intended to let them move cash around as needed to support capital needs and as such I think it makes the chances of a repeat of the scary stuff in 2008-2009 unlikely. That and they are now properly hedged against tail risk, which they weren't prior to the GFC.
Is Xerox Worth Buying? Or Is It A Buyer? [View article]
Zerox has a lot of cash flow, a primary reason to own the company. The ACS deal was done at a fair price, and ACS prior to acquizition also demonstrated strong cash flow. CSC has strong cash flow.
It really gets to be a question of how XRX deploys the cash flow. Their presentations all talk about buybacks, and with the price where it is they can very reliably incrase shareholder value by that means.
HPQ was severely critisized for buying Anonymy, that was the straw that broke the camel's back and got Leo out of there. So now everyone else is buying cloud. If XRX can't develop it they will have to buy it, I hope they don't overpay.
I'm still holding XRX, based on value and cash flow.
Hartford Financial: TARP Warrants Offer Advantages [View article]
bbarberayr,
I was a little puzzled at the market reaction today, added a small amount to my position, bought some warrants.
I expect to go over the presentation sometime within the next few days, so other than looking at core earings of 3.45 mid guidance and computing a forward P/E of 5 at today's price of 17.19, I don't have anything new.
HIG says they are hedging in a manner designed to protect statutory surplus, particularly in the Life insurance. I looked at some of the statutory reports and it seems to me they have been gaining in terms of surplus, pretty definite progress. So for the life insurance I expect to work with that.
I haven't seen whether Hartford is going to be using the new accounting standards for DAC, which both MET and PRU have discussed. My belief is that any earnings reported with the new accounting will be more conservative in that fewer expenses will be deferred and treated as assets. So that is something I need to look at.
The P&C operation is healthy and the cycle seems to be turning.
Another thing is that MET and PRU have both presented their outlook, I thought it was favorable, but they too are trading at discounts to book or forward earnings. So the whole industry is on sale. Probably it's risk aversion, they all have variable annuity exposures, and trade with a relatively high beta.
At this point I continue to hold outsize positions in the Life insurers, because I'm long term optimistic on the S&P 500, and the life companies should outperform the index, based on the idea that it's low and will eventually make it up above 1.400.
Meanwhile they all have cash to deploy and if share prices stay in the shitter they can create value by doing buybacks for less than book value.
Life Insurers Trading Mainly On Volatility [View article]
Just checking the correlation of share prices to SPY, PRU has an awesome 95%, HIG and MET mid to high 80's. So they are simply moving consistent with SPY. SPY and VIX are very self-consistent, for 2011, higher VIX = lower SPY, R2 0.87...Of course, all of these stocks have lagged the index.
Anyway, given the serious efforts to hedge the market sensitivity, I question the degree of correlation.
The life insurers have been disclosing their European peripheral exposures, they strike me as manageable. In addition to credit risk, interest rate risk, and equity market risk, they are also exposed to forex risk due to operations in Asia, primarily Japan and Korea.
Regulators concern themselves with RBC (risk based capital), and the companies generally regard some portion of their capital that is not required to maintain RBC at acceptable levels as being available to deploy on behalf of shareholders, pay dividends, do buybacks. HIG thinks they have $500 million excess, MET and PRU are in the multiple billions.
I don't think they're exposed to being wiped out, the worst case scenario would involve hurried capital raises, dilutive to existing shareholders.
The companies don't provide counterparty information on their hedges, although they will assert that they are diversified in that regard. Supposedly the counterparties, if they have too much risk, would lay that off on yet another party.
With these companies trading very much in line with SPY/VIX, and all the hedging going on, it seems like Mr. Market just doesn't believe in the efficacy of hedging. Doing a word search in the 10-K for "derivative" or "hedge" will get over 100 instances.
But with interest rate, equity market and forex risks hedged, in an ideal world the life insurers are dealing with mortality and longevity risk, and facilitating investments for their policyholders by hedging out the market extremes which the policyholder couldn't handle on his own.
Life Insurers Trading Mainly On Volatility [View article]
Many are forgetting what the normal range of VIX is. The median going back to 1990 is 19. I can remember back before the crisis when VIX seemed to be stuck in a range from 12 to 18.
I guess my strategy is to wait for things to calm down.
Life Insurers Trading Mainly On Volatility [View article]
The point on yield is good, there has been quite a bit of concern voiced about low interest rates. MET for one has hedged against low interest rates, starting in 2004, and they can absorb a protracted period of low interest rates.
But like any insurance company, to the extent their products are backed by fixed income securities, it is best practice to match the maturity of liabilities and the assets that support them, something the better run companies have been very careful about. So the thing to do going forward is to revise products/pricing to reflect the interest rates available on newly invested money.
I fail to see any necessary causal relationship between VIX and share prices for Life insurers. I have been looking to P/B or P/E to drive performance. It's too bad but an inverse relationship to VIX seems to have more desriptive power as far as the results for 2011 than more relevant considerations.
That leaves the Market risk of fluctuations in equity investments for variable annuities. I recently located the following, which describes the resources MET applies to hedging these exposures:
http://bit.ly/v0Yu1h
The point is, these companies trade as if they have no hedges in place, and they are fully exposed to the volatiltiy of the index. While HIG was not hedged for its tail risk going into the financial crisis, the company now has adequate resources devoted to the hedging activity, and can cope with S&P 500 at 700 if that were to happen.
Bank Of America: Piercing Its 'Opaque' Balance Sheet - Part II [View article]
Bank Of America: Piercing Its 'Opaque' Balance Sheet - Part II [View article]
The reason to include the representations and warranties was to confine the risks assumed by the insurance company to what they agreed to accept. They did not intend to or agree to accept risk of malfeasance by the banks involved, such as egregious disregard of their own published underwriting standards.
It was not possible for the insurance company to go in and individually re-underwrite the mortgages prior to accepting the risk. So representations and warranties do the underwriting.
Bank Of America: Piercing Its 'Opaque' Balance Sheet - Part II [View article]
Yes. Materially and Adversely is not causation. If a mortgage that breaches representations or warranties is included in the MBS collateral, it increases the risk assumed by the insurance company, beyond what the company agreed to accept, and the company's interests are materially and adversely affected, even though no loss has occurred, or if a loss did occur, the breach was not the proximate cause of the loss.
Cisco: A Look At Product Groups And Growth Potential [View article]
Thanks for your comment. I bought this shortly after you did your article on it, then I was a little concerned after you bailed but I held through, looks like it's going to be OK now.
I think you're correct that this isn't going to make a rapid recovery, I probably should have qualified my target by saying within two years.
But I figure between the leverage and the premium from selling calls you don't really need a quick move to earn a very respectable rate of return.
Vishay: Pullback Creates Buying Opportunity [View article]
P/B .83, TTM P/E 4.24, P/S .50.
Bear in mind management has a credit line to buy shares if appropriate, at these prices they could reduce share count substantially.
Options Strategy: Diagonal Call Spread On J&J [View article]
The options pricing formula considers dividends - the JNJ Jan 2012 50.0 calls would cost $1.09 more if there were no dividend, according to an online options calculator. There is also an effect on the call sold.
When considering the use of options compared to owning the shares, the dividend is a consideration. The strategy as written up does have an income from the call sold, amounting to 18.6% annualized in the static case.
Actually this LEAPS as a substitute for share ownership is easier to do on stable, dividend paying stocks because the time cost is less.
EU leaders, specifically Germany, drop demands for private sector holders of sovereign debt to bear part of the cost of any bailouts. There is a belief that Germany's call for such over a year ago, ignited this latest round of the crisis. To review: No losses for any bondholders ever. Maybe that's what has lit a fire under risk markets this morning. [View news story]
Radian: Why I'm Selling [View article]
The bonds expiring in 2013 are trading to yield 44.595%.
Radian: Why I'm Selling [View article]
RDN is moving around pretty rapidly right now, if you can figure what direction it goes next you could make some money.
Hartford Financial: TARP Warrants Offer Advantages [View article]
I think this is intended to let them move cash around as needed to support capital needs and as such I think it makes the chances of a repeat of the scary stuff in 2008-2009 unlikely. That and they are now properly hedged against tail risk, which they weren't prior to the GFC.
Is Xerox Worth Buying? Or Is It A Buyer? [View article]
It really gets to be a question of how XRX deploys the cash flow. Their presentations all talk about buybacks, and with the price where it is they can very reliably incrase shareholder value by that means.
HPQ was severely critisized for buying Anonymy, that was the straw that broke the camel's back and got Leo out of there. So now everyone else is buying cloud. If XRX can't develop it they will have to buy it, I hope they don't overpay.
I'm still holding XRX, based on value and cash flow.
Hartford Financial: TARP Warrants Offer Advantages [View article]
I was a little puzzled at the market reaction today, added a small amount to my position, bought some warrants.
I expect to go over the presentation sometime within the next few days, so other than looking at core earings of 3.45 mid guidance and computing a forward P/E of 5 at today's price of 17.19, I don't have anything new.
HIG says they are hedging in a manner designed to protect statutory surplus, particularly in the Life insurance. I looked at some of the statutory reports and it seems to me they have been gaining in terms of surplus, pretty definite progress. So for the life insurance I expect to work with that.
I haven't seen whether Hartford is going to be using the new accounting standards for DAC, which both MET and PRU have discussed. My belief is that any earnings reported with the new accounting will be more conservative in that fewer expenses will be deferred and treated as assets. So that is something I need to look at.
The P&C operation is healthy and the cycle seems to be turning.
Another thing is that MET and PRU have both presented their outlook, I thought it was favorable, but they too are trading at discounts to book or forward earnings. So the whole industry is on sale. Probably it's risk aversion, they all have variable annuity exposures, and trade with a relatively high beta.
At this point I continue to hold outsize positions in the Life insurers, because I'm long term optimistic on the S&P 500, and the life companies should outperform the index, based on the idea that it's low and will eventually make it up above 1.400.
Meanwhile they all have cash to deploy and if share prices stay in the shitter they can create value by doing buybacks for less than book value.