Hope your weekend has been relaxing. Here are a few of my notes from the previous week.
Any opportunity in reinsurance stocks?
The WSJ carried a story about how reinsurers’ profits have been hit by two things:
- Losses from catastrophes($135 billion, this includes regular insurance companies) in 2017.
- Rising competition from other parties willing to assume catastrophic risk.
What is reinsurance?
Reinsurance insures the insurers. They are not consumer-facing companies.
For example: Blue Cross is a consumer-facing health insurance company. Say they have a risk pool(policies) of $10 million dollars. They might pay for the first $2 million dollars of claims out of their own pocket and lay the other $8 million of claims off to a reinsurance company.
In order to do this, they pay said reinsurance company a premium. How much will depend on the amount of risk they are keeping and the amount they are passing off to the reinsurance company.
I found 18 publicly traded reinsurance stocks. Tickers in bold.
- ACGL | Arch Capital Group
- Y | Alleghany Corp
- AHL | Aspen Insurance Holdings
- AXS | Axis Captial Holdings
- ESGR | Enstar Group Limited
- RE | Everest Re Group, Ltd.
- RGA | Reinsurance Group of America, Inc.
- RNR | Renaissance Re Holdings Ltd.
- VR | Validus Holdings, Ltd.
- WTM | White Mountains Insurance Group, Ltd.
- AGII | Argo Group International Holdings, Ltd.
- GLRE | Greenlight Reinsurance, Ltd.-This is hedge fund manager David Einhorn’s company.
- MHLD | Maiden Holdings, Ltd.
- TPRE | Third Point Reinsurance, Ltd.
- BCRH | Blue Capital Reinsurance Holdings, Ltd.
- OXBR | Oxbridge Re Holdings Limited
- TIL | Till Capital Ltd.
- WMIH | WMIH Corp.
Loss of pricing power
Value chains track the flow of money through an industry. If you have a choice in whom you pay, you usually pay less.
From the article:
The main reason for reinsurers’ loss of pricing power is growing competition, which has come in part from insurance-linked securities such as catastrophe bonds.
In other words, there are more parties willing to take on that risk; thus the loss of pricing power for reinsurers.
As the article notes, the structure of these securities is called catastrophe bonds or cat bonds for short. Let’s look at how they are structured.
Artemis explains this well:
The typical catastrophe bond structure sees a special purpose vehicle or insurer (SPV or SPI) enter into a reinsurance agreement with a sponsor (or counterparty), receiving premiums from the sponsor in exchange for providing the coverage via the issued securities.
The SPV issues the securities to investors and receives principal amounts in return. The principal is then deposited into a collateral account, where they are typically invested in highly rated money market funds.
The investors coupon, or interest payments, are made up of interest the SPV makes from the collateral and the premiums the sponsor pays.
If a qualifying event occurs which meets the trigger conditions to activate a payout, the SPV will liquidate collateral required to make the payment and reimburse the counterparty according to the terms of the catastrophe bond transaction. If no trigger event occurs then the collateral is liquidated at the end of the cat bond term and investors are repaid.
Here is a diagram to help you visualize the flow of money from one party to another.
Walmart sinks 10% after disappointing earnings
Walmart Inc(WMT), which had improved its e-commerce operations over the past year in its fierce battle with Amazon.com Inc., stumbled in the fourth quarter after misjudging its online inventory for the holiday season, sending its stock tumbling and slicing more than $31 billion from its market capitalization reports the WSJ.
- Online growth slowed to 23% in the quarter. A drop from 50% growth the previous three quarters.
- Comparable sales rose 2.6% from a year earlier.
- Lower prices resulted in lower profit margins.
- More sales are shifting to the web. Online sales are generally less profitable than store sales. Why? When a shopper buys something in the store, they pick, pack, and take the item home. They are “the delivery”.
Today, customers expect free shipping. That cost money to send, pack and deliver the final good.
(Source:AlixPartners, H/T: CNBC)
Since bottoming out in late 2015, the stock has almost doubled. They pay a modest dividend of 2.23%.
At these levels, I don’t believe the risk-reward favors new long positions.
A company is in trouble when the CEO is disconnected from reality
Mr. Immelt and his top deputies projected an optimism about GE’s business and its future that didn’t always match the reality of its operations or its markets, according to more than a dozen current and former executives, investors and people close to the company per the WSJ. Full Article(paywall)
From the article:
This culture of confidence trickled down the ranks and even affected how those gunning to succeed Mr. Immelt ran their business units, some of these people said, with consequences that included unreachable financial targets, mistimed bets on markets and sometimes poor decisions on how to deploy cash.
According to some executives:
Mr. Immelt didn’t like hearing bad news, said several executives who worked with him, and didn’t like delivering bad news, either. He wanted people to make their sales and financial targets and thought he could make the numbers, too, they said.
When the employees know their boss doesn’t like hearing bad news, it affects the way they run their department.
My thought bubble
It is difficult to compare a stock’s performance between two managers over different time periods; there are many factors that affect a stock’s price besides a manager’s ability. Jack Welch is remembered as a legend. Jeff Immelt will not be as lucky.
Was Jack Welch a better manager? Probably, but he also presided during the two-decade boom known as the 80’s and 90’s when everything went up.
Note: The stock peaked and was already falling when Jeff Immelt took the helm.
All that said…
When is the best time to buy a stock? When the news flow is bad or when it becomes obvious a company will turnaround? Just saying….
Currently have 4 open positions: The % is the gain or loss from where we entered the position.
- Gilead Sciences(GILD) | +14.31%
- Gold(GLD) | +6.80%
- Twitter(TWTR) | +54.37%
- Bed Bath & Beyond(BBBY) | -1.34%
Closed Trades: Positions we have exited with a profit or loss.
- W W Grainger(GWW) | +65.05%
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What else is happening?
Household income vs the stock market.
(Source: Atlas by Quartz)
Sam Adams has been eclipsed.
Where the US ranks on household debt.
World stock markets in 1899 vs 2017. Notice a difference…
This made me laugh.
That’s all for today. Best wishes for a productive week,