Packer16

Why get involved with this mess when there are plenty of other opportunities without this uncontrollable risk. I would be more inclined if the US gov't was acting more logical but with the know nothing crew blaming everyone else we have running things, I would stay miles away. Did you know the commission looking into the spill has no petroleum or geologists on it but has a few radical environmentalists on its. What kind of result do you think you are going to get out of these guys? And the President believes the experts without questioning and using common sense he apparently does not have. Also that the 6 month offshore ban was not the idea of a group of scientists but inserted after they signed off on other recommendations. These guys will manipulate the data to there ends, make dumb conclusions and make BP pay for the result. What do you think the $20 billion shake down fund was for - I would not be surprised of this money is used for other purposes such as TARP has been used. Call me skeptical but this crew is a disaster waiting to happen. Packer

Has anyone looked at any land companies? JOE which has been hit by the spill panic @ $4,000/acre looks cheap based upon the 130 miles of oceanfront property they own. Morningstar's back of the envelope valuation is about 2x the current price and there is a fair amount of shorting in the stock. I was also looking at Griffen Nursery which has an FFO of about $10 m (capped at 8%) yield a value of $125 million. They state they have 4,000 total acres (1,000 of the total available for residential housing). For an average price of $300,000 (in Hartford, CT area) and a land value of about 20% home price and 4 lots per acre results in a high-end price for the land of $240 million. The total market cap of the firm is about $135 million. Packer

He may have been the first to legislate but given the evidence I have seen so far - increasing rates for health insurance (more than in previous years), out-of-network doctors increasing quickly and no solution to the community rating issue (firms above 50 folks are on their own) - I think the outcome in the end is far from assured. Rather than take small step to get people comfortable with making their own economic choices (like HSAs) the gov't controlled approach is going to lead to the gov't rationing of care, a compromise that may work in Europe and Canada but will have resistance in the US. In the US you need to let the folks make the decisions (even though they may result in the same answer), if you do not you will get the backlash that is now occurring and will grow with each issue that is dealt with in this way. Folks in the US do not like autocrats no matter how correct they may be. Packer

I think there is a practical issue here to. How would you mark to market an illiquid loan/derviative to a business that does have publicly traded securities? Which is probably most loans. You take your best guess and knowing accountants they will want to be as conservative as possible. Does this help you determine the quality of the loan? or the banks underwriting standards from the outside? Probably not. This may help internal management of loans and for that purpose it probably has a wide uncertainty bounds but will it help the outside investor? Probably not as promotional managers will try to inflate/game the numbers. My bottom line question is will this addition data in the hands of an outside investor help him/her develop a better valuation? I am skeptical. Packer

I think raising the gov't raising the price of oil would be a disaster. To be effective it would cost trillions of dollars we don't have and to what end? Incentives exist to develop new cheaper alternative energy sources already (the inventor would be a very wealthy man). Technology development does not work by throwing money at it. If there was a technology and all we had to do was to engineer a way to use it, thee adding more money to that technology development would be the best way to develop it rather than a subsidy. Although subsidies are well intentioned, I think they create terrible side effects and if extensively used (as in Spain) can lead to insolvency. You also have to think of alternative uses for those dollars. Although energy independence and clean energy are good goals, toady they are expensive and uncertain in terms of payback on each $ invested. I would much rather either 1) spend it on other more cost effective ways to increase living standards (remove agricultural subsidies with a 1-time payment to farmers, providing wells to developing countries along with malaria nets and inexpensive drugs to give these countries a hand up) or 2) allow folks just to keep the $ to be spent to spend as they wish. These big comprehensive programs lead to corruption and mis-allocation of resources which in many cases overwhelm the intended benefits. You are seeing this in "health-care" reform where the solution to a real need is being corrupted by the implementation of the plan and the plan was clearly oversold. One area not touched by the health-care plan is community rating. If a firm is under 50 folks they can get community rate but above 50 they are not. This leads to huge increase in costs once your firm goes above 50 folks. Clearly the comprehensive plan provided little benefit for these firms - their premiums will go up. Clearly these guys don't understand the health care market and expect gov't fiat to carry the day. I am sure this is just the tip of the iceberg in regards to how reform has made the system worse by cost shifting and the shifters taking SOTT (as Whitman states). Packer

I agree about alternative energy research. However, I hope this will not turn into subsidizing uneconomic sources like wind and solar are today as this will only add to our debt problems like it has done in Spain. As I think about his statement about China being the potential leader in alternative technology, I really question the premise. They may come up with a better widget but how unique is the technology that others may not be able to easily modify and make it their own. Given the nature of the market, I think this is a more likely outcome than royalties going to China for some unique technology. I think China will peter out like Japan in consumer electronics - catching up quickly and possibly having a market but not a profitable one. Packer

In the current downturn I think it depended on your exposure to financials and commodities and the amount of levering you feel comfortable with from both options and in your firms balance sheet. These 2 sectors had the biggest fall and recovery. Monish had a large commodity exposure and some financials. I had similar performance: 2007 - +55.6%, 2008 - -49.2%, 2009 - +108.5%, 2010 (YTD) - +16.6%. As a result, I am trying to learn from those who have done better in downturns. (Note: I had mostly different firms on the recovery than in the decline.) Packer

I think the reason CNA is cheap is it is post-arbitrage situation as described by Whitman in the Aggressive Conservative Investor. Whitman observed many of the situations in the 1970s. As to the munis, I think CNS will be fine unless they are forced to sell these bonds to pay claims and I am would think that they have other fully priced bonds they could sell. I also think on an after-tax basis, I think munis are probably still the best bond investment out there. As to RLI and NATL, they both are selling at or above book value and thus may not be as misspriced as CNA. That at least explains my lack of interest at these price levels. If they were trading at 70% of book my interest would be greater. Packer

Unfortunately I think this will lead to the resource curse as the easiest way to get ahead in Afghanistan will be to control the resource (most likely by force) versus having to develop other ways of growing the economy. Packer

I think if you look at Acmat (the only other surety firm out there) you will see the loss numbers are consistent with CNA. The expense ratio is higher due to a small insured base. Packer

One small comp you can look at is ACMAT (although they also have a construction component). In good times, it appears as if the loss ratios are in the high teens to twenties and when a bad patch is hit the loss ratios increase to to the high twenties to the low 50s) for both firms. A majority of premiums are from insuring construction and other large projects. It appears that the last bead patch was during the last recession 2001 to 2005. So going forward some positives is large amount of infrastructure projects planned with the stimulus and all. Both firms loss ratios have held up through 2009. One risk I am having a hard time gauging is the take-down risk. I have had 3 takedowns in the past 6 months which have lowered my investment upside considerably. Given CNA owns 70%, does anyone have a feeling for the probability of a take-down for less than book and can CNA force this? Also the next largest shareholder is DFA (an efficient markets fund - which doesn't give me a good feeling about the defense if a take-down is initiated by CNA). Packer

Will the payout for the option only occur if the event comes to pass? You state a $300k below market value. How is that determined? Does it include a lack of liquidity discount? What is your opinion on the value of the underlying asset (i.e. is it undervalued, overvalued or fairly valued)? My initial take is to run a sensitivity analysis with varying probabilities of the event occurring, time frames and lack of marketability discounts (if applicable). You have identified 2 payout scenarios are there any other likely scenarios? If you are trying to allocate a total purchase price for what purpose is this? If it is for your own investment you may want to use a scenario analysis (described above) if for financial reporting or tax you may want to use an option model (BS or Binomial if value of the option is significantly dependent on factors other than the underlying asset price) as the reviewers of the analysis will be comfortable using this method. The best approach is dependent upon the specific facts of the case. Packer

When you add the dividend back for progressive you get a 12% increase in book value which makes more sense. Thanks for the CNA Surety find, I will look into surety insurance in more detail. Given your affinity for small caps, you may want to look at some small media firms which have low EBITDA and FCF ratios with some aspect of recurring revenue including radio firms (SALM and SGA), cable (LNET and SURW) and Entertainment/Gaming (MGAM, TRK). Packer

I think we were answering two different questions. From your list, you appear to developing a list of high quality insurers. My focus was on what combination of both valuation and quality provides the best risk adjusted returns. CNA Surety appears to satisfy both criteria (as it had a 17% increase in book value (past 5 yrs) but also is only selling for 70% of book - yielding a 24% return on market price). At the other end of the spectrum is Progressive with a 7% book value growth (past 5 yrs) and 2.0x times book multiple - yielding a 4.5% return on market price. The interesting thing about Progressive is they had a great combined ratio over the past 5 years (avg 90.7%) so their investing (or maybe something else I am missing) must have been really bad to only have a 7% increase in book value per year. Packer

A portion of standard of living that has not been mentioned which is very important is choice (i.e. having a wide range of options). Once most folks have enough resources to feed cloth and shelter themselves, the range of choices become increasingly more important than increasing wealth. This is where I think we are much better than 20 - 30 years ago. I also think the amount and quantity of leisure time has increased tremendously - just think of the increase per capital revenues for entertainment type companies. If we were really in such bad shape or even the same how could we spend so much more and spend so much more time in leisure activities? I think another thing that is missed is that the qualitative aspect of quality of life (freedom and choices) can be as or more important the quantitative aspect (increased wages). Packer

I think the intangibles you quote as being negative are not negatives versus the past. The good ole days were not as good as folks remember. Terrorism replaced the Soviet Threat (with probably a lower cost - even with Iraq and Afgahnistan), the food developed is cheaper (we spend less on food so we can spend more on other items) and you have the option if you want to be non-GM food if you want to (at Whole Foods), the lower quality of K-12 education has more to do with the union issue (no mechanism to weed out underperforming teachers) which is being worked on but we do have the best community college and post-secondary system which is available if folks chose to become educated, the lower quality of discourse is only lower if you look at specific outlets but if you can sythesize many sources (including this site), I think the discourse is more diverse and enlightening. In this context, I feel more I have a better life today then I had 10 -20 years ago. What does everyone think? Is life in general better or worse than 10 -20 years ago? We have more choices so those who want to can utilize these choices. Packer

As for AWH, the 9-yr average combined ratio through 2009 was 89.5% with only one year 2005 above 100%. This alone did not peak my interest but this plus the large reserves redundancies which for 2005 which was estimated to be 40% as of 2009 and the fact that it is selling for 70% of book value. The last quarter combined ratio was not that good but if they are over reserving by 40% then it may not be as bad is it appears. In addition, I expect a re-insurer to have lumpy returns on a quarterly basis. Packer

Harry, As to the 25% expense ratio for HCC look at pg 16 of the 2009 10-K. You can also look at Value Line for a longer term history. For the comparison to industry if you look at Value Line composite data less the autos insurers (who are selling to individuals) you can see the advantage HCC has (see pages 589 to 610 of current Value Line). Packer

I agree. These are probably the best value investing books I have read this year. The nice thing I like about the little book is it actually gives you examples of how value investors overcome these behavioral biases. Packer

You may be right but I think the appropriate approach is to ask tough questions about the thesis and see what the response is rather than assume the guy has done no research. We need to focus on specifics not generalities as the assumption is most of us has some experience in what we are talking about and have spent the time/effort to be here posting. If we haven't done the research it will show in the response. I think the board provides a forum to kill an idea as Berkowitz puts it with other similar minded investors. In addition, it provides other alternatives to examine in more detail. Packer

What makes you think others have not done their research? If you want to challenge their assumptions or premises do so with specifics about the stocks that they say may be good investments not generalities (as Ballinvarosig has done with MFC) as generalities add no value to what this community is about. If they do not explain thier rationale enough ask them why as opposed to assuming they have not done their research. Sorry for being so blunt but I want to this to be as educational as possible to all. As to Fremont, it appears that they have done a good job growing book value (16% per year over the past 4 years) and the have good redundancies over the past 8 years but the price at the current time (close to book) appears higher than other insurers who have similar BV growth and redundancy characteristics. What are your thought on Fremont versus some of the other insurers mentioned like RNR, AWH, HCC, LRE LN, AHL and MRH? Packer

How do you determine the CEO's net worth? I can find his salary from the proxy statement. As to the filter list, the key filter is the highest BV growth and market return on book value (so the comparison is based upon market value of equity versus book value of equity). The top firms on this list include - HCC, RNR, AWH, AHL, FFH, LRE LN and MRH. AWH, AHL and MRH sell for a significant discount to book so their required growth to get the same return is correspondingly less. FFH was included even though it has deficiencies because of its investment expertise and returns. Packer

Alternative energy is the long-term answer but the only way it becomes viable (today) is with much higher energy prices which I think will destroy the world economy. Paying subsidies for alternative energy in my book is pouring money down a pit, however, the money to advance technology until it becomes viable is good investment. I know this spill is a tragedy but what is the true probability of an event like this happening again if more redundancy is put on the rigs. I hope this doesn't become like Three Mile Island where offshore drilling is banned as it will hurt many. Packer

I may have left out the upfront filter I have applied to all these insurers, namely, CR<100 over the cycle (in most cases by large amounts), growing book value by greater than 15%/yr over the past 5 years, historical reserves redundancies over the past 10 years (assures historical underwriting is rationale), a 10-year track record, investments in reasonably conservative investments and a good amount of insider holdings. Given these parameters what else can an outsider look at? Packer

Has anyone looked at TOPS. They lease their ships for a shorter period of time and have a cheaper valuation. I was not able to find who there customers were however. Any additional info would be appreciated. TIA. Packer