Best Insurance investment right now? MFC, RE, CNA or RNR

[Guest HarryLong]

I'm not sure why you wouldn't give it a huge weight. In 1999 (the earliest year on the table), the reserve, as it was re-estimated 10 years later, turned out to be too conservative to the tune of 20.8%.

 

 

Well if I knew SUR was underreserved by 21% hell yes I'd give it a huge weight!!  :o  But unfortunately, that development cannot be projected upon today's reserves (any more than one can project the required addition to 2002 reserves of 14.7% so far).  If historical reserve performance is what you are after then the best to way get it is a year-by-year % calculation of development from the prior year.  The cumulative nature of the calander year triangle makes this very straightforward and all prior years get incorporated as you move forward in time.

 

I've been vindicated on SUR in my assertion that they were drastically over-reserved. Look at the latest reserve release. It is truly a wonder to behold.

 

I was right  ...

 

 

I did a rain dance yesterday, and today it rained.  Does that prove my ability to cause rain?    This quarter’s reserve release doesn’t advance your stated method of predicting reserve releases either.  Back up for a second.  The reasoning for the assertion of ‘drastically over-reserving’ was that at one moment in 1999 reserves were set,  and because 10 years later they turned out to be conservative to the tune of 21%, you assert that SUR systematically maintains reserves above actuarial estimates and is worth more than reported book value.   To base an investment decision today primarily on the quality of a single reserve judgment that prior management made 10 years ago is full of potential for nasty surprises.  This method isn’t predictive, and I hope no one here follows the advice of those who espouse it.  

 

 

 

 

Some great investors have made a lot of money from the notion that past management behavior and policies are somewhat predictive of future management behavior and policies, especially at financial companies. If you don't care to study the past, I can't force you to, but this notion you have that it is irrelevant is utterly fallacious.

 

Your "reasoning" is truly hilarious. A reserve release of over $70 million when the company's tangible equity is around $900 million clearly means nothing to you  ;D

 

If you didn't by SUR when I recommended it, I feel sorry for you, but there is no need to be bitter and to continue to engage in confirmation bias. On this thread, it is truly amazing to see confirmation bias rear its ugly head again and again. No matter how much data continually disproves your points, you insist on clinging to them, so clearly, this is an emotional issue for you--not an analytical one--and you lash out when challenged with evidence which contradicts your previously held beliefs.

 

Your competitors will quickly exploit your tendency towards confirmation bias, so I hope you try to correct it as soon as possible. Never underestimate the competition. We're not as dumb as you think. I always respect my competitors enough to be able to quickly change my mind should developing (and historical data I might not have been aware of) prove them right.

[Guest HarryLong]

I'm not sure why you wouldn't give it a huge weight. In 1999 (the earliest year on the table), the reserve, as it was re-estimated 10 years later, turned out to be too conservative to the tune of 20.8%.

 

 

Well if I knew SUR was underreserved by 21% hell yes I'd give it a huge weight!!  :o  But unfortunately, that development cannot be projected upon today's reserves (any more than one can project the required addition to 2002 reserves of 14.7% so far).  If historical reserve performance is what you are after then the best to way get it is a year-by-year % calculation of development from the prior year.  The cumulative nature of the calander year triangle makes this very straightforward and all prior years get incorporated as you move forward in time.

 

I've been vindicated on SUR in my assertion that they were drastically over-reserved. Look at the latest reserve release. It is truly a wonder to behold.

 

I was right  ...

 

 

I did a rain dance yesterday, and today it rained.  Does that prove my ability to cause rain?    This quarter’s reserve release doesn’t advance your stated method of predicting reserve releases either.  Back up for a second.  The reasoning for the assertion of ‘drastically over-reserving’ was that at one moment in 1999 reserves were set,  and because 10 years later they turned out to be conservative to the tune of 21%, you assert that SUR systematically maintains reserves above actuarial estimates and is worth more than reported book value.   To base an investment decision today primarily on the quality of a single reserve judgment that prior management made 10 years ago is full of potential for nasty surprises.  This method isn’t predictive, and I hope no one here follows the advice of those who espouse it. 

 

 

 

Onyx1, you are a truly interesting fellow. It is rather fascinating to observe your mind in action. In your mind, it appears that you are confusing irrelevant variables (dancing) with variables which go into reserve estimates (management policies and behaviors).

 

At any insurance company, make no mistake, there are very clear policies for the creation of reserves. They are perhaps some of the most well thought out, scrutinized, and systematically analyzed policies at any well run insurer. This notion you have that those policies are not directly correlated to results, and that therefore, great results are not predictive of great policies, is utterly bewildering.

 

Excellent process leads to excellent results. Consistently excellent results which continue (and even improve!) is evidence of excellent process. Your notion that at an insurance company, which is all about statistical analysis as its core competency, that somehow results and process are wholly unrelated, going so far as to compare predictions based thereon as akin to a "rain dance," is utterly fatuous.

 

To answer your ridiculous question, if you've consistently over-reserved for years, does it prove your ability to over-reserve and the likelihood of you doing so in the future--yes it does.

 

Even your choice of focus smacks of confirmation bias. It wasn't just a reserve release for the quarter--the company did a reserve release for the quarter and for the year. Moreover, if you follow the whole thread, you will see that the reason why reserve judgements made many years ago have greater weight in determining the quality of reserving than reserve judgements made recently, is that there have been more years for actual loss development to be compared against the reserves in the initial year (lawsuits take years to settle, for instance). You even go so far as to misquote me and misrepresent my views, saying that I believe SUR "maintains reserves above actuarial estimates". Not true at all. I am saying that their estimates lead to over-reserving. Remember, that is actually what good accounting and financial control should do! Remember, the prime principle of accounting is that when something could be interpreted in two ways, that it must always be interpreted in the way which leads to lower earnings. Therefore, by definition, since reserving is about interpretation, any insurance company actually practicing that principle successfully, such as SUR, should be over-reserving! You've got to go back to the basics, Onyx!

 

I wish you well, and like my interactions with Stove and T-bone, I see that no amount of evidence will sway you, but in good faith I have tried to help you become a better insurance analyst (a subject which I know a tiny bit about).

 

So far, SUR and FMMH, two insurers which I have repeatedly recommended, have received buyout offers, but what do I know? I've just spent the better part of my adult life analyzing insurers and spending time with insurance executives, learning about their thought process. You could benefit from my knowledge, but because it embarrasses you to be wrong, you would rather bury your head in the sand like an ostrich rather than study the data. But ostriches never avoid risk--they just get sand in their eyes  ;D

 

Experience keeps a dear school, but fools will learn in no other

--Franklin, Benjamin

 

Never give advice...

A wise man won't need it

A fool won't heed it.

 

--Unknown

 

[Guest HarryLong]

Onyx, I suppose my fault lies in not being on your elevated plane of enlightenment in which management results have no reflection on management methods or competence.

 

If you have discovered a new way of evaluating companies and their management teams which does not involve studying the results produced by management, please educate us all as to the gestation of this innovative new business theory.  ;D

 

And second, once you have explicated this new theory, please inform us of your new method of analyzing insurance reserving practices which does not involve the historical analysis of the results of past reserving.  ;D

 

 

[leftcoast]

As a friend of mine said,

 

"Incompetence never recognizes competence--it mistakes competence for arrogance. But competence always recognizes incompetence."

 

That sounds to me like something arrogance would say. So perhaps that makes me incompetent.  ;)

[Rabbitisrich]

If CNA is going to offer a higher bid it will probably have to come before the SUR results come out in May.

 

Perhaps 1.3X ending 2010 BV is a reasonable expectation. Or maybe CNA expected an easy buyout at the $22 bid, and isn't particularly eager to purchase except at a steep discount.

 

It's worth holding SUR at the current price, in any case.

[Guest HarryLong]

RLI has continued to do well. I am profoundly amazed that it garners so little recognition among insurance investors. It is fantastically well run.

[Rabbitisrich]

It's not just RLI. Insurance is the Rodney Dangerfield of businesses and the market is pricing companies like HCC at 1.1X book.

 

I've been loading up in anticipation of a fairly low risk 8%-12% over many years.

[Guest HarryLong]

Japan has been an interesting case study. I think people handicap results irrationally when they are essentially short gamma, or cat risk, and then compare the combined ratio to a specialty insurer and think they are comparing like to like. A specialty in insurer will always be less correlated, if at all, to the cat cycle.

 

I still like RLI.

[Guest HarryLong]

Of course, even more rationally, we should ask ourselves if we want to play in the competitive/commodity insurer sandbox, or instead want an oligopoly position in a 'picks and shovels' play, and in that vein, I would again point to Ebix, which knocked it out of the park again.

[doc75]

Of course, even more rationally, we should ask ourselves if we want to play in the competitive/commodity insurer sandbox, or instead want an oligopoly position in a 'picks and shovels' play, and in that vein, I would again point to Ebix, which knocked it out of the park again.

 

Harry: 

 

Thanks for your initial pointer to EBIX.  It's done very nicely since then.  Are you at all surprised by the continued short interest and wild price gyrations?  Or general lack of institutional following?  Seems to me like management just keeps on lining up the ducks nicely.

 

John

[Guest HarryLong]

Of course, even more rationally, we should ask ourselves if we want to play in the competitive/commodity insurer sandbox, or instead want an oligopoly position in a 'picks and shovels' play, and in that vein, I would again point to Ebix, which knocked it out of the park again.

 

Harry: 

 

Thanks for your initial pointer to EBIX.  It's done very nicely since then.  Are you at all surprised by the continued short interest and wild price gyrations?  Or general lack of institutional following?   Seems to me like management just keeps on lining up the ducks nicely.

 

John

 

I'm just a simple man from Texas. Nothing surprises me much anymore. I think we forget in this business that at a very basic level we are looking for things which will go from the bottom left to the upper right of our screens.

[Liberty]

EBIX seems pretty interesting, Harry. I'll put some time aside to read all their annual reports and conf. call transcrips...

[Myth465]

Congrats

 

CNA goes down.

 

http://www.businesswire.com/news/home/20110421005471/en/CNA-CNA-Surety-Sign-Definitive-Agreement-CNA

[Guest Bronco]

I'm assuming the board thinks this is a nice acquisition for CNA (even though they owned a big chunk in advance).

 

I've been buying a little CNA (not SUR) b/c of the $42 billion in investments, $1B in what I will hope are normalized earnings, $2-$2.5B in investment income, and an $8B market cap.

 

Wish WEB was managing the float of this company.

[Myth465]

Ya I believe Harry was right. CNA Surety was a license to print money. CNA could pay up now or pay up later or leave it sticking out there. I am sure the synergies and public listing savings make it a bit less expensive.

 

CNA has an amazing piece of float. Imagine if rates were at 6%, or CNA had FFH's bond team. If only the Tisches either scaled up their investment prowess or let Buffett / Prem manage the float for a fee.

[Guest Bronco]

Yeah - that investment portfolio is huge for a $8 billion company.  But we know the stock is cheap b/c of past mismanagement and only a minority stake is available to the public.

 

Myth, I get the feeling if you ran that float that CNA would be bigger than BRK and TRV combined!

 

Surely, book value will take a hit (and maybe a big one) as rates rise.  No secret.  But we may get nice pickups in future investment income. 

 

Time will tell but I don't think anyone would call this an expensive stock.

 

BTW - DO came out with earnings - $1 quarterly dividend I believe.

[Myth465]

Lol I am not sure I would do much better than the Tisches. They like me appeared to have no risk control and got caught reaching for yield. Now they are a bit more conservative, but I dont know if thats the answer either.

 

Prem and Buffett are geniuses because they get the yield without much risk. Buffett put a huge pile to work at 10% and Prem's team has probably the best bond returns I have seen. CNA should be buying BWP debt inmo. Its a nice way to get 6% + or so, but they probably dont want to mix subs. I think CNA will get a bit of media due to lack of involvement in Japan, but what I have learned is buyers want to see insurers who can underwrite. CNA was living off the FFH model. Lose money on insurance and make money on float. Thats great for Loews, but will get you below BV on the share price.

 

DO did quite well. I think with the gulf reopen things can only get better. I have DO leaps and am hoping for a double if it hits $100 after all the rigs go back to work. The real question is what the hell is Loews going to do with all that cash. I hope they dont buy wet gas, or oil. I think they need to diversify or they will just become an Oil and Gas conglomerate with a bit of insurance. I would like to see something that is fairly stable, and something that consumes capital. Maybe a utility. I dont really like Loews having too much excess cash, the Tisches arent WEB.

[Guest Bronco]

I'm with you 100%.  I have been writing to investor relations asking them to use the cash - worst case on equities if entire companies don't look attractive.  Of course, we have run 20% - 40% in the market since I wrote these emails.

 

Lorillard, excluding the legal risk, was an awesome cash cow.  Wish they had something similar in Loews to balance oil and insurance.  Unfortunately, the comments about looking at wet gas and oil were made by Tisch last quarter.  Seems like a very competitive space.

 

I still hold a bunch of Loews but not nerely as much as last year.  Will buy more at $40 and trade around that position.  I still see very limited downside at a $16B market cap ($40 stock price), $4b in cash, and CNA, BWP, and DO.  Highmount could still be sold for $2B is my guess.

 

BRK I like at $80.  Trading around Apple as well. 

 

I find myself investing in companies with lots of cash.  Doubt that will change.

[Myth465]

I am hoping they have something planned. They just missed the biggest stock sale in the past decade and spent zero cash. Oil and gas prices were also around $40 and $4 and they spent zero cash. Hell DO was cut in half, CNA chopped down, though BWP held up decently.

 

What are they waiting for? Now things are rich.

[Guest HarryLong]

Here are the numbers for ACGL. 110 combined for the quarter. It's inane to choose a company such as ACGL when one can buy something like RLI with a combined ratio in the low 80's.

 

http://finance.yahoo.com/news/Arch-Capital-Group-Ltd-bw-2705772838.html?x=0&.v=1

[Liberty]

Here are the numbers for ACGL. 110 combined for the quarter. It's inane to choose a company such as ACGL when one can buy something like RLI with a combined ratio in the low 80's.

 

http://finance.yahoo.com/news/Arch-Capital-Group-Ltd-bw-2705772838.html?x=0&.v=1

 

Harry, what do you think of AWH? I'm a fan of RLI, but AWH seems pretty solid too, and sells below book, unlike RLI, and the combined ratios have been in the low to mid 80s recently.

 

I made a thread about it here but so far it's only crickets and tumbleweeds...

 

http://cornerofberkshireandfairfax.ca/forum/index.php?topic=4287.0

[beerbaron]

Liberty wouldn't you be scared to put money in a insurer with 4 years of public history? Insurers is about faith as much as numbers.

 

What's their moat? How did they achieve a very loss ratio? Is it because of a focus on long term risk that has no happened yet or because of superior underwriting?

 

On the plus side the premiums did not go up while the profits stayed flat, which seems to indicate that they have not been writing new premiums to cover for the past loses.

 

BeerBaron

 

 

[Liberty]

Liberty wouldn't you be scared to put money in a insurer with 4 years of public history? Insurers is about faith as much as numbers.

 

What's their moat? How did they achieve a very loss ratio? Is it because of a focus on long term risk that has no happened yet or because of superior underwriting?

 

On the plus side the premiums did not go up while the profits stayed flat, which seems to indicate that they have not been writing new premiums to cover for the past loses.

 

BeerBaron

 

 

 

That's indeed my main concern, that they haven't been around that long. From what I can tell, they have experienced people in management and they've had backing from savvy players (Chubb, Goldman Sachs) since their creation in 2002, but it's hard to know if that means much...

 

But at a P/E under 5 and book around 0.8, there seems to be a decent margin of safety there...

 

I dunno, that's why I asked the board, to get more opinions. I'm personally undecided. I'd probably invest if they had a longer history and if management held more shares..

[Guest HarryLong]

Here are the numbers for ACGL. 110 combined for the quarter. It's inane to choose a company such as ACGL when one can buy something like RLI with a combined ratio in the low 80's.

 

http://finance.yahoo.com/news/Arch-Capital-Group-Ltd-bw-2705772838.html?x=0&.v=1

 

Harry, what do you think of AWH? I'm a fan of RLI, but AWH seems pretty solid too, and sells below book, unlike RLI, and the combined ratios have been in the low to mid 80s recently.

 

I made a thread about it here but so far it's only crickets and tumbleweeds...

 

http://cornerofberkshireandfairfax.ca/forum/index.php?topic=4287.0

 

You're shrewd to have found it, and I have been studying it. No one should slap down your idea. It will be interesting to see if they can stay below 90 in the coming quarters. If they don't end the year below 90, they are out of the running for me, but if they do, I will have to consider a position...

[Ballinvarosig Investors]

I suggested ProAssurance Corporation in the RLI thread a few months back, it's making all-time highs and has had another excellent year delivering a 68% combined ratio and a 13% ROE.