Intangible Valuation's Comments RSS Syndication from SeekingAlpha.com http://seekingalpha.com/user/1669031/comments http://seekingalpha.com/article/1499162/comments?source=feed#comment-19930972 19930972
Also, the debt numbers above don't jive with the financial statements (they have debt of $8.19 million as of Feb 28, 2013) -- by about $3 million. Given the size of the business, that is material.

Also, I wouldn't personally subtract the cash in the valuation because $2 million of the cash is in the form of a customer deposit and is therefore working capital and not "free" to be subtracted from the market price to get the ex-cash price or w.e. ]]> Thu, 13 Jun 2013 10:31:30 -0400
Also, the debt numbers above don't jive with the financial statements (they have debt of $8.19 million as of Feb 28, 2013) -- by about $3 million. Given the size of the business, that is material.

Also, I wouldn't personally subtract the cash in the valuation because $2 million of the cash is in the form of a customer deposit and is therefore working capital and not "free" to be subtracted from the market price to get the ex-cash price or w.e. ]]> http://seekingalpha.com/article/1491662/comments?source=feed#comment-19898462 19898462
I hear ya, I hear ya. I'll do a follow up to this as their portfolio develops and we will see, over time, what the truth is. ]]> Wed, 12 Jun 2013 14:52:09 -0400
I hear ya, I hear ya. I'll do a follow up to this as their portfolio develops and we will see, over time, what the truth is. ]]> http://seekingalpha.com/article/1491662/comments?source=feed#comment-19898302 19898302
Out of conservatism but also I believe there are different types of life insurance and I am not sure how realizable of an asset it is. What are your thoughts on the matter?

And thanks for the comment on NJ banks, I'll make a more appropriate comparison next time.

Yea, I think all your worries are justified and vetting management is pretty tough to do. I choose Parke (and skipped over similarly priced banks) because I thought Parke's NPL were disproportionately effected by individual assets and if some of the large problem loans are resolved, it could mean significant improvements in the portfolio. It is true that these are historical mistakes, and should be judged critically as such.

As to your last question Greg, I would agree -- although, I would also say that a diligent analyst might be able to get some insight into the properties which are nonperforming and such insights could be valuable. I'll be writing about more banks in coming weeks but feel free to send me some you'd like covered seeing as I am relatively new to the community and regional banking sector.]]> Wed, 12 Jun 2013 14:48:33 -0400
Out of conservatism but also I believe there are different types of life insurance and I am not sure how realizable of an asset it is. What are your thoughts on the matter?

And thanks for the comment on NJ banks, I'll make a more appropriate comparison next time.

Yea, I think all your worries are justified and vetting management is pretty tough to do. I choose Parke (and skipped over similarly priced banks) because I thought Parke's NPL were disproportionately effected by individual assets and if some of the large problem loans are resolved, it could mean significant improvements in the portfolio. It is true that these are historical mistakes, and should be judged critically as such.

As to your last question Greg, I would agree -- although, I would also say that a diligent analyst might be able to get some insight into the properties which are nonperforming and such insights could be valuable. I'll be writing about more banks in coming weeks but feel free to send me some you'd like covered seeing as I am relatively new to the community and regional banking sector.]]> http://seekingalpha.com/article/1491662/comments?source=feed#comment-19897082 19897082 Wed, 12 Jun 2013 14:33:12 -0400 http://seekingalpha.com/article/1491662/comments?source=feed#comment-19895782 19895782
I agree about regional and smaller banks -- I'll be on the look out for more.]]> Wed, 12 Jun 2013 14:05:16 -0400
I agree about regional and smaller banks -- I'll be on the look out for more.]]> http://seekingalpha.com/article/1491662/comments?source=feed#comment-19852422 19852422 Tue, 11 Jun 2013 14:12:52 -0400 http://seekingalpha.com/article/1473431/comments?source=feed#comment-19796852 19796852 Mon, 10 Jun 2013 11:16:49 -0400 http://seekingalpha.com/article/1482351/comments?source=feed#comment-19750312 19750312 Sat, 08 Jun 2013 14:29:41 -0400 http://seekingalpha.com/article/1473431/comments?source=feed#comment-19737302 19737302 Fri, 07 Jun 2013 21:54:24 -0400 http://seekingalpha.com/article/1473431/comments?source=feed#comment-19734982 19734982 http://seekingalpha.co...]]> Fri, 07 Jun 2013 19:52:57 -0400 http://seekingalpha.co...]]> http://seekingalpha.com/article/1473431/comments?source=feed#comment-19734952 19734952 Fri, 07 Jun 2013 19:50:56 -0400 http://seekingalpha.com/article/1473431/comments?source=feed#comment-19730882 19730882 Fri, 07 Jun 2013 17:18:29 -0400 http://seekingalpha.com/article/1473431/comments?source=feed#comment-19730812 19730812 Fri, 07 Jun 2013 17:16:25 -0400 http://seekingalpha.com/article/1482351/comments?source=feed#comment-19719182 19719182
1. http://bit.ly/ZyiN66

I doubt there will be reform but hopefully we have more public prisons moving forward.]]> Fri, 07 Jun 2013 12:30:30 -0400
1. http://bit.ly/ZyiN66

I doubt there will be reform but hopefully we have more public prisons moving forward.]]> http://seekingalpha.com/article/1476091/comments?source=feed#comment-19648791 19648791 Wed, 05 Jun 2013 16:01:11 -0400 http://seekingalpha.com/article/1476091/comments?source=feed#comment-19648691 19648691
The payments will likely result in a small gain or loss but the gain or loss will be determined by the *current* and depreciated carrying values of the assets as carried on the balance sheet. Since the assets are not carried at fair value, but historical amortized cost, who knows whether the $100 payments (probably $65 million after tax...) will result in a GAAP net income extraordinary gain.

The reversal of the deferred tax asset ought to result in a large gain, but deferred tax assets are sort of magical beasts anyways since they depend on future earnings (for the asset to be justifiable) and, even then, they are just *place holders for taxes already paid.* Deferred tax assets exist because tax accounting != GAAP accounting. Hope that helps. ]]> Wed, 05 Jun 2013 15:59:46 -0400
The payments will likely result in a small gain or loss but the gain or loss will be determined by the *current* and depreciated carrying values of the assets as carried on the balance sheet. Since the assets are not carried at fair value, but historical amortized cost, who knows whether the $100 payments (probably $65 million after tax...) will result in a GAAP net income extraordinary gain.

The reversal of the deferred tax asset ought to result in a large gain, but deferred tax assets are sort of magical beasts anyways since they depend on future earnings (for the asset to be justifiable) and, even then, they are just *place holders for taxes already paid.* Deferred tax assets exist because tax accounting != GAAP accounting. Hope that helps. ]]> http://seekingalpha.com/article/1482351/comments?source=feed#comment-19636521 19636521 Wed, 05 Jun 2013 11:23:36 -0400 http://seekingalpha.com/article/1476091/comments?source=feed#comment-19613381 19613381
Also, with the debt pay down, ALSK will be much closer to an interest coverage ratio of 2 -- which is acceptable for a public utility.

I think the first two reasons you stated do have an effect a great number of people, but, obviously, a decline in a share price is good if there is value there. Also, Alaska is pretty shielded from the macro fall out of an international crisis so I am unsure that the geopolitical situation has baring here. Good comments though.]]> Tue, 04 Jun 2013 18:03:03 -0400
Also, with the debt pay down, ALSK will be much closer to an interest coverage ratio of 2 -- which is acceptable for a public utility.

I think the first two reasons you stated do have an effect a great number of people, but, obviously, a decline in a share price is good if there is value there. Also, Alaska is pretty shielded from the macro fall out of an international crisis so I am unsure that the geopolitical situation has baring here. Good comments though.]]> http://seekingalpha.com/article/1465081/comments?source=feed#comment-19575851 19575851 Mon, 03 Jun 2013 20:23:21 -0400 http://seekingalpha.com/article/1473431/comments?source=feed#comment-19573961 19573961 AWH)* or Lancashire (LCSHF.PK)**. So, the discount to book is like an extra buffer while we patiently let earnings and growth in tangible book increased the value of the shares. Also, given PRE's exposure to property catastrophe reinsurance, which is short-tail, we can have rapid strength in the shares should the the near term provide few catastrophes. After all, PartnerRe, for 7 years, brought in over $1 billion in cash from operations each year.

PRE is a strong financial company selling at a PE of less than 10 -- the discount to book is icing on the cake. You should check out my article** on Lancashire because the company is selling at a premium to book (because of management, historical earnings, underwriting performance, and capital management) and it is still a good buy I think. The discounts to tangible book are protection and buffering. They provide safety and the possibility of added capital gains. Earnings are more likely to drive the share price than tangible book is -- and the best example of that is Lancashire.

*http://seekingalpha.co...
**http://seekingalpha.co...]]> Mon, 03 Jun 2013 18:56:09 -0400 AWH)* or Lancashire (LCSHF.PK)**. So, the discount to book is like an extra buffer while we patiently let earnings and growth in tangible book increased the value of the shares. Also, given PRE's exposure to property catastrophe reinsurance, which is short-tail, we can have rapid strength in the shares should the the near term provide few catastrophes. After all, PartnerRe, for 7 years, brought in over $1 billion in cash from operations each year.

PRE is a strong financial company selling at a PE of less than 10 -- the discount to book is icing on the cake. You should check out my article** on Lancashire because the company is selling at a premium to book (because of management, historical earnings, underwriting performance, and capital management) and it is still a good buy I think. The discounts to tangible book are protection and buffering. They provide safety and the possibility of added capital gains. Earnings are more likely to drive the share price than tangible book is -- and the best example of that is Lancashire.

*http://seekingalpha.co...
**http://seekingalpha.co...]]> http://seekingalpha.com/article/1473431/comments?source=feed#comment-19572531 19572531
If I recall correctly, management has done about 11% on average since inception. Management, however, targets ROEs in the "mid-to-low teens," I believe.]]> Mon, 03 Jun 2013 17:53:31 -0400
If I recall correctly, management has done about 11% on average since inception. Management, however, targets ROEs in the "mid-to-low teens," I believe.]]> http://seekingalpha.com/article/1473431/comments?source=feed#comment-19569031 19569031
I didn't mean to submit that last comment, and seeking alpha doesn't allow us to edit comments because, I think, they like the historical record or whatever. In any case, the other comment is fine insofar as you are talking about a business without preferreds. Technically, you needs to subtract the preferred shares at liquidation preference. I don't think PartnerRe will redeem the preferreds soon but the preferreds still represent a chunk of capital within the business. In any case, once you take into account the preferreds the diluted book value of $102 and the tangible diluted book of $92 make sense. If you ignore the liquidation preferrence (which I did above... corrections will be coming to the article), you won't be able to reconcile the press release to the balance sheet and shares outstanding. So the reason the press release is so low is due to the preferreds and not a "redilution" or something. So, your comment helped me notice my error at about the same time as Greg Porter pointed it out. Thanks for that. ]]> Mon, 03 Jun 2013 16:26:33 -0400
I didn't mean to submit that last comment, and seeking alpha doesn't allow us to edit comments because, I think, they like the historical record or whatever. In any case, the other comment is fine insofar as you are talking about a business without preferreds. Technically, you needs to subtract the preferred shares at liquidation preference. I don't think PartnerRe will redeem the preferreds soon but the preferreds still represent a chunk of capital within the business. In any case, once you take into account the preferreds the diluted book value of $102 and the tangible diluted book of $92 make sense. If you ignore the liquidation preferrence (which I did above... corrections will be coming to the article), you won't be able to reconcile the press release to the balance sheet and shares outstanding. So the reason the press release is so low is due to the preferreds and not a "redilution" or something. So, your comment helped me notice my error at about the same time as Greg Porter pointed it out. Thanks for that. ]]> http://seekingalpha.com/article/1473431/comments?source=feed#comment-19568491 19568491 http://bit.ly/10UefVl ) with $325 million being callable after June 2016 and $250 million being callable after March 2018.

In any case, thank you for the correction. I think if we take the preferreds into account, the corporation is at a premium to tangible book by $300 to $400 million. But, assuming time value of money discounting, we get back below book by a smidge. And, of course, if PartnerRe is overreserved, we are again below book.

There is also the case where PartnerRe doesn't redeem the preferreds which would allow the capital required to pay down the preferreds to be used in the business to the benefit of the common stock holders. After all, the cost of capital on the preferreds is pretty small and completely manageable. ]]> Mon, 03 Jun 2013 16:13:01 -0400 http://bit.ly/10UefVl ) with $325 million being callable after June 2016 and $250 million being callable after March 2018.

In any case, thank you for the correction. I think if we take the preferreds into account, the corporation is at a premium to tangible book by $300 to $400 million. But, assuming time value of money discounting, we get back below book by a smidge. And, of course, if PartnerRe is overreserved, we are again below book.

There is also the case where PartnerRe doesn't redeem the preferreds which would allow the capital required to pay down the preferreds to be used in the business to the benefit of the common stock holders. After all, the cost of capital on the preferreds is pretty small and completely manageable. ]]> http://seekingalpha.com/article/1473431/comments?source=feed#comment-19565551 19565551
I take the most recent balance sheet (see here: http://1.usa.gov/ZoIXrY) and I grab stockholders equity (less non-controlling interest) which is about $6,910 million and subtract the following items:

Deferred acquisition costs - $646
Goodwill - $456
Intangible assets - $207
Net tax assets - $11

The first three should always be subtracted, the last one requires some judgment but I like to subtract it to be conservative.

Doing that math, I get $5,590 million (I rounded to $5.6 billion in the article above).

Then, if you are able to find it, you'd want to subtract managements best estimate of the time value of money discount on reserves which is UNREPORTED under GAAP. Also, to be fair, this isn't reported by many reinsurers so its difficult to find and estimate. In PartnerRe's case, it is $452 million -- which you'd add to the $5,590 to get $6,042.

Then, I would look at how the insurer has typically reserved itself. If it has overreserved itself adequately for many years, I think it is safe to estimate that tangible book is future reduced due to conservatism and that it might be worth more as future claims are paid out.

This last bit is highly subjective and I suggest using very very conservative numbers but it is almost by necessity going to be arbitrary since the future hasn't happened yet.

So that is my approach -- and, to reiterate, after the basic adjustments to tangible book, the adjustments begin to take on a more subjective character and therefore one always needs to error on the side of caution. Hope that helps.]]> Mon, 03 Jun 2013 15:20:10 -0400
I take the most recent balance sheet (see here: http://1.usa.gov/ZoIXrY) and I grab stockholders equity (less non-controlling interest) which is about $6,910 million and subtract the following items:

Deferred acquisition costs - $646
Goodwill - $456
Intangible assets - $207
Net tax assets - $11

The first three should always be subtracted, the last one requires some judgment but I like to subtract it to be conservative.

Doing that math, I get $5,590 million (I rounded to $5.6 billion in the article above).

Then, if you are able to find it, you'd want to subtract managements best estimate of the time value of money discount on reserves which is UNREPORTED under GAAP. Also, to be fair, this isn't reported by many reinsurers so its difficult to find and estimate. In PartnerRe's case, it is $452 million -- which you'd add to the $5,590 to get $6,042.

Then, I would look at how the insurer has typically reserved itself. If it has overreserved itself adequately for many years, I think it is safe to estimate that tangible book is future reduced due to conservatism and that it might be worth more as future claims are paid out.

This last bit is highly subjective and I suggest using very very conservative numbers but it is almost by necessity going to be arbitrary since the future hasn't happened yet.

So that is my approach -- and, to reiterate, after the basic adjustments to tangible book, the adjustments begin to take on a more subjective character and therefore one always needs to error on the side of caution. Hope that helps.]]> http://seekingalpha.com/article/1473431/comments?source=feed#comment-19565011 19565011
If you mean empirically, then they have lately traded sub book value since the panic of 08. But that isn't "typical" or "atypical" or anything. That is just the short term record of human transactions -- the transactions themselves don't necessarily have to do with the fundamentals of the business. Check out the historical record for the price-to-tangible-book ratio here: http://bit.ly/13AK1IT

Now, according to SFAS 5, reinsurance companies can't carry reserves for future catastrophe losses (because they haven't happened yet and accounting must be historical). So I suppose an argument could be made that reinsurers should sell at a slight discount to their value as justified by book or earnings. But how should one adjust for a 1 in 250 year catastrophe loss? There is not an obvious answer. If a 1 in 250 year loss could be 15% of shareholders equity, ought we to discount the book value by 15%? Or by 15% divided by 250 years -- i.e., 0.06%? SFAS 5 determined that under GAAP, accountants couldn't record reserves for future events which may or may not happen. If they happen, tangible book may seem retrospectively overstated while those claims are paid out. If a catastrophe doesn't happen, tangible book simply increases by the amount of the premium less the expense ratio.

Anyways, it is very true that reinsurers have sold below book recently (i.e., for the last 4 to 5 years) but that isn't justified by the fundamentals, I don't think. Nor is a 4 to 5 year period indicative of the normal course of business.

In my opinion, if a reinsurer has assets which are *most likely* worth $6 billion, and it is selling at $5 billion, that discount is neither typical or rational -- it is probably temporary and irrational.

That said, the market can be irrational for long period of time...as Keynes remarked: "Markets can remain irrational a lot longer than you and I can remain solvent." Anyways, good question.]]> Mon, 03 Jun 2013 15:06:58 -0400
If you mean empirically, then they have lately traded sub book value since the panic of 08. But that isn't "typical" or "atypical" or anything. That is just the short term record of human transactions -- the transactions themselves don't necessarily have to do with the fundamentals of the business. Check out the historical record for the price-to-tangible-book ratio here: http://bit.ly/13AK1IT

Now, according to SFAS 5, reinsurance companies can't carry reserves for future catastrophe losses (because they haven't happened yet and accounting must be historical). So I suppose an argument could be made that reinsurers should sell at a slight discount to their value as justified by book or earnings. But how should one adjust for a 1 in 250 year catastrophe loss? There is not an obvious answer. If a 1 in 250 year loss could be 15% of shareholders equity, ought we to discount the book value by 15%? Or by 15% divided by 250 years -- i.e., 0.06%? SFAS 5 determined that under GAAP, accountants couldn't record reserves for future events which may or may not happen. If they happen, tangible book may seem retrospectively overstated while those claims are paid out. If a catastrophe doesn't happen, tangible book simply increases by the amount of the premium less the expense ratio.

Anyways, it is very true that reinsurers have sold below book recently (i.e., for the last 4 to 5 years) but that isn't justified by the fundamentals, I don't think. Nor is a 4 to 5 year period indicative of the normal course of business.

In my opinion, if a reinsurer has assets which are *most likely* worth $6 billion, and it is selling at $5 billion, that discount is neither typical or rational -- it is probably temporary and irrational.

That said, the market can be irrational for long period of time...as Keynes remarked: "Markets can remain irrational a lot longer than you and I can remain solvent." Anyways, good question.]]> http://seekingalpha.com/article/1476091/comments?source=feed#comment-19555071 19555071 Mon, 03 Jun 2013 11:23:52 -0400 http://seekingalpha.com/article/1470391/comments?source=feed#comment-19421431 19421431 Thu, 30 May 2013 11:34:17 -0400 http://seekingalpha.com/article/1454101/comments?source=feed#comment-19212291 19212291
Hence why I stress "long-term" because no one ever knows what events might come along in the short term -- but I trust the CEO and its differentiated culture, much of which I believe is demonstrated in the giving back of capital which can't be put to good use.

Also the long-term PE of 7.6, at today's prices, helps with the argument. For instance, Hiscox, another London traded Bermudian insurer and reinsurer trades at a premium and PE of 15 or 16. In my opinion Hiscox, despite its long history (since 1946 or 1901 depending on how much you want to give the founder credit for), doesn't seem to deserve the premium to Lancashire. Of course, Lancashire is still young so that counts against it a bit in the insurance business, but its management team has been around a long time (CEO Richard Brindle has at least 24 years of underwriting experience).

I understand the question, but I sort of think the company would right size itself should pricing become so weak has to dramatically reduce premiums. And, if they turn out to be right, we, as shareholders, would thank them for their foresight -- since losses due to inadequate pricing would shrink capital available in specific markets allowing Lancashire to advance back into them under better pricing conditions. But yes, they might carry staff into poor pricing conditions provided they believed them temporary.]]> Fri, 24 May 2013 12:39:52 -0400
Hence why I stress "long-term" because no one ever knows what events might come along in the short term -- but I trust the CEO and its differentiated culture, much of which I believe is demonstrated in the giving back of capital which can't be put to good use.

Also the long-term PE of 7.6, at today's prices, helps with the argument. For instance, Hiscox, another London traded Bermudian insurer and reinsurer trades at a premium and PE of 15 or 16. In my opinion Hiscox, despite its long history (since 1946 or 1901 depending on how much you want to give the founder credit for), doesn't seem to deserve the premium to Lancashire. Of course, Lancashire is still young so that counts against it a bit in the insurance business, but its management team has been around a long time (CEO Richard Brindle has at least 24 years of underwriting experience).

I understand the question, but I sort of think the company would right size itself should pricing become so weak has to dramatically reduce premiums. And, if they turn out to be right, we, as shareholders, would thank them for their foresight -- since losses due to inadequate pricing would shrink capital available in specific markets allowing Lancashire to advance back into them under better pricing conditions. But yes, they might carry staff into poor pricing conditions provided they believed them temporary.]]> http://seekingalpha.com/article/1409071/comments?source=feed#comment-18624151 18624151 RE)**. As you might guess, it is mostly due to regulation and taxation. Here is what I wrote then:

"Why does Bermuda host so many insurance companies? How is it the second-largest reinsurance market, second only to New York? First, the country doesn't levy a corporate income tax on insurers, so that is quite a perk. Another reason is the regulatory environment which:

"…fosters innovation and creativity by responding to the emerging needs of the insurance and reinsurance markets…from the development of mechanisms such as captives in the 1960's, through the formation of excess liability carriers ACE and XL and the development of finite risk reinsurer Centre Solution in the 1980's, and though the formation of property catastrophe companies Mid-Ocean Re, PartnerRe, Endurance Re and many other over the last two decades, Bermuda has been and continues to be, a centre for innovation in the insurance market." [1]

Also, there is a tax incentive for American insurers to purchase reinsurance from a foreign firm, e.g., firms from Bermuda. This tax incentive, which takes the form of allowing premiums paid to foreign insurers as tax deductions, would be eliminated in the most recent White House budget***. This elimination will make having Bermudian reinsurance less advantageous if you are an American insurer seeking reinsurance. Losing this advantage would make the Bermudian insurers less attractive."

I hope that answers your question. We could always go deeper and talk about specific laws (for instance, I think Bermuda recently promised in a law not to tax insurers until at least 2035 or thereabouts). But that is the gist. Thanks for reading.

** On Everest RE: http://bit.ly/13k2POt
***http://bit.ly/174koVK]]> Thu, 09 May 2013 10:54:26 -0400 RE)**. As you might guess, it is mostly due to regulation and taxation. Here is what I wrote then:

"Why does Bermuda host so many insurance companies? How is it the second-largest reinsurance market, second only to New York? First, the country doesn't levy a corporate income tax on insurers, so that is quite a perk. Another reason is the regulatory environment which:

"…fosters innovation and creativity by responding to the emerging needs of the insurance and reinsurance markets…from the development of mechanisms such as captives in the 1960's, through the formation of excess liability carriers ACE and XL and the development of finite risk reinsurer Centre Solution in the 1980's, and though the formation of property catastrophe companies Mid-Ocean Re, PartnerRe, Endurance Re and many other over the last two decades, Bermuda has been and continues to be, a centre for innovation in the insurance market." [1]

Also, there is a tax incentive for American insurers to purchase reinsurance from a foreign firm, e.g., firms from Bermuda. This tax incentive, which takes the form of allowing premiums paid to foreign insurers as tax deductions, would be eliminated in the most recent White House budget***. This elimination will make having Bermudian reinsurance less advantageous if you are an American insurer seeking reinsurance. Losing this advantage would make the Bermudian insurers less attractive."

I hope that answers your question. We could always go deeper and talk about specific laws (for instance, I think Bermuda recently promised in a law not to tax insurers until at least 2035 or thereabouts). But that is the gist. Thanks for reading.

** On Everest RE: http://bit.ly/13k2POt
***http://bit.ly/174koVK]]> http://seekingalpha.com/article/1409071/comments?source=feed#comment-18606431 18606431
I have some thoughts on the question: "how much redundancy of reserves is too much?" The question is interesting because those reserves are really just a book keeping entry on the balance sheet. The actual reserves themselves are in the form of bonds. So that capital, which is part of the reserve redundancy, is earning a yield on its bonds *rather* than the average ROE. To make a long story short, I think we could, in theory, quantify the "loss from too much redundancy" by multiplying the redundancy figure by the spread between the avg. ROE and the current yield on the investment portfolio. In more natural interest rate environments, I bet this spread would be much smaller than it is today. I suppose the moral is, perhaps, that now is the time to play it close to the chest as an insurer (i.e., not over-reserve) so that capital which would be allocated to low yielding bonds could instead be (1) allocated to the capital to expand the business and earn the avg. ROE or it could be (2) allocated to share buy backs or dividends. And with many of our reinsurers below book, buy backs are effectively a capital deployment at a yield of the avg. ROE + the discount from a accurately calculated book.]]> Wed, 08 May 2013 21:44:05 -0400
I have some thoughts on the question: "how much redundancy of reserves is too much?" The question is interesting because those reserves are really just a book keeping entry on the balance sheet. The actual reserves themselves are in the form of bonds. So that capital, which is part of the reserve redundancy, is earning a yield on its bonds *rather* than the average ROE. To make a long story short, I think we could, in theory, quantify the "loss from too much redundancy" by multiplying the redundancy figure by the spread between the avg. ROE and the current yield on the investment portfolio. In more natural interest rate environments, I bet this spread would be much smaller than it is today. I suppose the moral is, perhaps, that now is the time to play it close to the chest as an insurer (i.e., not over-reserve) so that capital which would be allocated to low yielding bonds could instead be (1) allocated to the capital to expand the business and earn the avg. ROE or it could be (2) allocated to share buy backs or dividends. And with many of our reinsurers below book, buy backs are effectively a capital deployment at a yield of the avg. ROE + the discount from a accurately calculated book.]]>