samwise

I would do the same if I had confidence that their earnings would keep growing, which means 1. Capturing more market share. 2. No or low mean reversion in combined ratios. Do you have confidence in their growth? Their lead is supposedly in loss ratios, not structural costs like GEICO. Isn't that just a matter of building better models for underwriting. Why won't others catchup? (Their is a 8 year old VIC writeup, I think).

Thanks Spek.

Why EV/sales as a metric? Do you expect earnings/sales to falls? It’s not expensive on P/E (like most financials. )

Has anyone looked at PGR Progressive? They seem to have been gaining market share last few years using new data to offer lower prices while keeping a CR around 90. Morningstar thinks they mean revert to 95/96 CR, and competitors can catch up. It gets mentioned as doing better than GEICO, in the BRK, section. Yes it’s expensive at 3x book, but not if you think there is still growth ahead and it has a decent moat. I am also impressed that they report monthly. Must have really good systems internally.

Yes not 70% are shedding, but a few, or one is enough to restart the fire. Can they keep it up for 3 years? Maybe it’s possible. We can all have our opinions on this. There isn’t really any evidence unless you want to count how many people can stick to a healthy diet.

I haven't been able to envisage the end state here. So imagine you are super-successful like Oz, NZ, Singapore and your cases go to zero. The rest of the world (ROW) screws up and muddles its way to group immunity, perhaps at horrific cost. So ROW have 70-80% people with immunity, and the virus is still circulating. Now you have three ways out. 1. Vaccine is developed and you get immunity without the horrific costs. 2. The virus is totally eradicated. 3. You live in your bubble, separate from the rest of the world until either 1 or 2 happen. This doesn't seem like a viable option if its a long time. So whats the end state these guys are thinking of or hoping for?

Yes, there’s forces pulling and pushing here. As seen on this board and in the news. Pull: we humans won’t accept overloaded ICUs. And a 4-5% death rate. Push: But equally unlikely we will accept our livelihoods gone for over a year. Let’s see how it plays out. As an investor I have counted on the second “push” to construct a downside fundamental risk scenario as I buy stocks over the last month. Of course, this doesn’t restrict the market from doing anything in the interim, or I could simply be wrong.

We are already seeing people tired of the restrictions. I think human society will accept a reduced human life expectancy. If life expectancies fall by 5-10 years (worst case, probably much less than that in reality), that only takes us back to 1950s, a period of good economic growth. And humans have lived with diseases which had no cure for hundreds of years. Society will accept that too. The plagues we hear about in history had horrible death rates. Diseases with lower death rates were just a part of normal life. If this happens within a year (or a cure or vaccine is found), then the stock market is realistically priced right now. Edit: Near term, we still want to ensure everyone who needs it gets ICU treatment though. So probably have a year of some restrictions ahead of us. But i’m thinking of this becoming a part of seasonal diseases. Part of the worst case scenario with no cure and no vaccine and no lasting immunity.

A new Cold War against China?

The great depression lead to communists and fascists and dictators taking over a large part of the world. But yeah, it built character ??? I do think you're right in a lot of regards. I was specifically thinking about America but I agree the net might be negative across the world. There could have been a fair amount of luck involved that we didn't end up that way. There was a recent study linking Spanish Flu deaths with voting for Hitler in Germany. Strong correlation which the researchers couldn't explain using alternative factors the researchers looked at. I wouldn't have expected it, but it sort of backs Liberty's point.

Stock ideas? Car dealerships and second hand car retail? AN, KMX, CAMB, VTU?

Sweden hasn’t got much of an economic advantage by staying open, nominally. Time will tell if they have gained time and get through this recession faster. Their estimate for GDP are -7% and -10% in the scenarios they published. So keeping your shop open doesn’t help if almost nobody comes. They expect a bounce next year. https://www.riksbank.se/en-gb/press-and-published/notices-and-press-releases/press-releases/2020/monetary-policy-april-2020--the-riksbank-is-supporting-an-economy--in-crisis/ Edit: compare to Denmark modelling three scenarios where the GDP is down 3 to 10%. http://www.nationalbanken.dk/en/publications/Documents/2020/04/ANALYSIS_No%204_Danish%20and%20international%20economy%20hit%20by%20pandemic.pdf

This is NY's strategy. Cuomo was mentioning aiming for R_t in [0.8,1.2]. One hand on the valve of social contact, and eyes on the 3 dials of new cases, hospitalizations, and something else I forgot (ICU?). It'll be interesting to see how finely that valve can be turned. Agree with clutch that the end-state here is similar deaths (area under curve), unless a cure or vaccine is found soon as Dalal hopes. Sweden seems to be managing about ok, with daily cases between 500-750 per day since march end. Although it looks like the peak is rising above 750 now. Thats the risk with trying to control R_t around 1. A bit above 1 and cases will compound again. edit: Sweden data https://www.worldometers.info/coronavirus/country/sweden/ daily new cases chart

thanks for bringing up the idea. The risks below are just from a quick read. Please correct me if I am wrong here. The major risk, as you said, is regulation. And the new president of Mexico may not be friendly in the setting of next 5 year plan and rates. It can be taken back or transferred, and in the best case will end in 28 years. The other risk is that this is a concession, so not sure you should think of it as a compounder. Are you sure the stock should be more valuable after 10 years? Possibly air travel will grow (after COVID), but the remaining cashflows will be only 18 years. Seemingly sure-shot contracts can end painfully as Neustar found out. https://www.reuters.com/article/us-usa-neustar-fcc/neustar-faces-loss-of-contract-after-fcc-staff-recommendation-idUSKBN0M02E220150304

I think at this point, the Swedes have done OK in my opinion. As long as their health care system isn’t crashing in Stockholm, where the population density is highest, their approach isn’t really a failure. They try to get herd immunity at an acceptable cost (in terms of lives). So far, by their own judgement, that is still the case and who are we to judge otherwise? Also, besides that , Sweden isn’t really normal either, they just have a soft shutdown instead off hard one. not too different from what we have in some states in the US. https://www.thelocal.se/20200424/interview-isabella-lovin-coronavirus-the-biggest-myth-about-sweden-is-that-life-is-going-on-as-normal Their government cannot legally do a lockdown it seems. So they have guidance only. And despite shops being open, it seems activity is down. GDP is definitely taking a hit as the bodies pile up in the corner. If anyone has an idea of their GDP hit versus Denmark, please do share. I suspect (speculate) that not having a lockdown doesn't help too much with GDP. However it means that the government will not offer subsidies and support, and if people don't show up to shop, a small business still has to make payroll and rent. In neighboring Denmark , the government will pay 75% of your payroll. I'm really interested in the economic impacts from Swedens approach.

The companies you mention are in an area i understand well. Will take a look and maybe start or participate in a separate thread? For the employers' liability side, the potential cost is still unknown and, using an insurance-like frame of mind, this is very difficult to price at this point. Jurisdictions (see example below) are now publishing (evolving) guidelines and law firms (smelling opportunities) publish their own versions on how to deal with this. If interested, listed below is a reference coming from Corvel (a company i know very well) that offers a webcast next week. https://www.cdc.gov/coronavirus/2019-ncov/community/guidance-business-response.html https://www.corvel.com/covid-19 CB, we can continue here. The Coronavirus thread is hard to navigate through the parochial US issues. California has this, which is BBSI’s big market. https://www.fresnobee.com/news/coronavirus/article242213436.html Oklahoma https://oklahoman.com/article/5660908/injured-workers-test-how-workers-comp-handles-covid-19 https://www.wcb.mb.ca/how-the-wcb-is-responding-to-covid-19 https://www.businessinsurance.com/article/20190801/NEWS08/912329903/Infectious-disease-risks-stump-employers# Seems people with occupational exposure are covered, basically healthcare workers. All others may be covered, but it isn’t clear.

Spekulatius, how do you compare these with FRA.DE (Frankfurt Airport). Lower country and regulatory risk in Germany I would think.

The current credit market rate is pretty bad for companies that are shut and not paying their rents. These companies, like CCL are raising money at very high rates. CCL paid about 11.5% as an investment grade company. 9.5% isn't too bad in this environment, although they had to give part of the upside to secure this rate. https://www.barrons.com/articles/carnival-pays-steep-rates-for-nearly-6-billion-in-new-debt-51585834262

So many questions (and unknowables) and so little time! It looks like health insurers will face much higher costs from COVID-19 but other costs may go down. Anyways, they can always catch up with premium increases after. Hospitals and providers will take a huge hit from less elective procedures which are higher margin items. More people are likely to forgo care but that also may result in unexpected net results at the population level. Costs will somehow (with various deductibles and co-pays along the way) be transmitted from the employer to the individual with presently devised bailouts (of the Medicaid type, and depending on the state), recently adopted (and to be defined) legal provisions and likely other public bailouts to come. Workplace safety claims is an issue that needs to be resolved. The CV has exposed some strengths of the system but also the deep deficiencies. What's happening tells a lot more about the host than about the disease. It's hard to see an outcome that doesn't involve more public oversight and possibly outright nationalization (whether one likes it or not). So what about investments? In the long term, this simply means that all health-related stocks' returns will gravitate to utility-like regulated returns. Players that clearly don't bring value to the system are likely to suffer (there are many of those now). There will be opportunities for under-the-radar small private entities (that may be allowed to grow before private equity shows up) that may be able to bridge gaps during the changing roles and balance between the private market and central public entities. If you're looking for some kind of scorecard of CV vs systemic response, see: https://www.cfr.org/backgrounder/comparing-six-health-care-systems-pandemic This discussion could end up with specific names if there is sufficient interest. Thanks CB. Investments I was looking at were NSP and BBSI. low PE, high ROE, decent growth prospects, but short term hit from COVID, hopefully not fatal to these companies. These companies basically handle HR, payroll, and benefits for small employers. Part of the profit is insurance. Both seem to offer workers comp themselves , and NSP seems to have some profit/loss impacts from health insurance. There is a cost from the shutdown's reduced employment, usual for these companies in any economic slowdown, but also a possible loss from the insurance side. Thats what made me wonder about the cost of treatment, who covers it etc. The US is pretty litigious, and the healthcare costs were already a high percentage of GDP. Not sure what impacts the current costs will have on health insurance providers, and ultimately on the costs of renewing/getting insurance. Good point that all other health costs may go down, so the net effect could be small or even positive. Also not sure how liable employers are if employees get infected at work. Like those meat plants that have shut. Can the employers be sued for not providing enough safety at work? Since the infection will probably form a cluster, frequency of claims can be high. A few deaths, and the exposure can be every large.

Question about US healthcare, from an investment perspective. Being outside the US I don’t understand US healthcare, but could impact companies and consumers. So I thought I’d ask on this thread, which has a lot US posters. Who pays for treatment of COVID? Is it the health insurance? What about those who are now unemployed? Is this a big hit for insurers or employers who self insure. If employers stay open, are they open to workplace safety claims? Are the sick supposed to pay for treatment themselves, and if so do we expect much more indebted consumers coming out of this? I read and article saying testing is now free, but treatment would be 70k out of pocket even for those insured. This would make most people prefer to rough it out in those majority of cases when the symptoms are mild. Not sure of the accuracy of that. TIA for any answer.

Yeah, models aren't perfect, but I don't really see an alternative. Is there one? An alternative is feedback from experience. If we find there is a lot of capacity, then we can open up a bit. If they start trending towards overload, reduce social contacts a bit. The risk is the feedback takes a couple of weeks to show in the data, so probably still a good idea to keep refining the models and have some foresight. Another risk is if the population can be controlled with that granularity. One path through the epidemic is to keep hospitals just below full capacity. Assuming the only concern we have is higher death rate with healthcare overload.

It’s not the same as debt. You can stop paying preferred dividends (usually along with stopping common stock dividends) and the pref holder cannot take you to bankruptcy court. Isn’t that the best way to boost liquidity now?

Thanks for the interesting links Liberty. He now believes that true infections are way higher and true mortality way lower than he thought a month ago. He is suggesting that an anti-body test in NYC is now needed to know the true infections rate. If we truly find large numbers were infected, way above the false positive rate, that would be good news for health and wealth. Not sure what he saw to change his mind. But assuming the death rate is much lower, what would change? Not sure it would change anything about the correct policy response. No government will want their ICUs overloaded. So they will reduce contacts every time ICUs seem to be getting full, and ease up when ICUs are way below capacity. The virus reacts fast. So they will get constant feedback in 10-14 days. What it would change is reduced ultimate deaths and the less time before we get to normal. Less time means companies and consumers will burn through less cash, or take on less debt. These are good for equity investors.

I don't want to come across as cynical or anything (and I'm definitely not making any immoral suggestions), but if you look at the profile of that 1% I'm not so sure that would be bad for the economy as a whole at all. Agreed. As an investor I don’t think much productive capacity is lost from the economy. But a lot of time is lost till then. If we simply had zero earnings for two years, followed by a return to normal, most investments would be bargains now. But as an investor, I don’t know who owns the assets by the time we are through this. Not many businesses can survive for long at close to zero revenue, but with fixed costs like rent and interest. So the equity can be wiped, loaded with debt or diluted.

Thanks for the news from Poland. Makes sense to me. The one and only lever we humans have currently is to control R0. At normal behaviour R0=2-3 and the cases in ICUs compound. Then to regain some control you lock people in and drop R0 much below 1 to reduce cases in ICUs. Then at a low case load you allow some economic functions, just enough to keep caseload constant. The first article below seems to indicate this is Sweden’s choice. They have reduced riders on transit by 60%, and a constant caseload entering ICUs. Interesting that their politicians can’t actually do much, it’s the health agency’s choice. The reopening in British Columbia seems to have a similar model. See article 2 below. Specifically the lines showing different growth rates in cases. It’s like steering a car. You find cases rising, then you clamp down hard until it drops. Then you open up a bit and test, trace isolate; allow some activity but not others (which is a political problem of equity). And so on with constant feedback. It’s just how everyone drives the car, or the fed watches the data. Rolling lockdowns as Kashkari said. Btw we can’t judge Sweden’s response purely by number of deaths, as article 3 below does. They have consciously chosen a position on the death-vs-economy trade off where there will be more deaths. They are arguing that this path is economically sustainable. So you also need to judge how much better the economy is. I haven’t found out yet how much better an economy they have bought themselves in the trade off. They also claim their path is more sustainable. We will see. I do agree that this is a marathon, not a sprint. How does it all end? Best case: vaccine in a year, or a cure in a few months. Base case: constant caseload, rolling lockdowns, 1% of the world population dies (80M) or whatever the true death rate is. Bad for the economy also. Worst case: virus mutates and we have several cycles like 1918. Article 1: https://www.vox.com/2020/4/9/21213472/coronavirus-sweden-herd-immunity-cases-death Article 2: see the chart et the end. Basically they are with different R0. https://bc.ctvnews.ca/b-c-health-officials-say-some-covid-19-restrictions-could-be-lifted-in-mid-may-1.4901026 Article 3: https://www.project-syndicate.org/commentary/swedish-coronavirus-no-lockdown-model-proves-lethal-by-hans-bergstrom-2020-04 Edit: I guess the next decision, if you accept the above, becomes exactly how do you get the right level of R0, to maintain caseload in ICUs and maximize the economy. Which places should shutdown : hairdressers, nail parlours or bars? Who should sacrifice for society and how do you compensate them? Or you let everyone make their own risk assessment. Do you compensate for operational leverage for e.g. in restaurants, or do you let those businesses go bankrupt. It’s hard to run a whole economy by diktat, as the communists discovered. So do you make a market in risk: everyone pays every time they go out somewhere (thus increasing R0), and use the funds to recruit more contact tracers. Who collects the money and how? Can you increase decrease R0 by increasing decreasing the fees. But this is a regressive tax for the poor. Well, unless we get a cure/vaccine pretty soon, we’ll be solving these problems.