Monthly Archive for March, 2011

A Barrel For A Safe: Banking in the Old Days

Posted on March 30, 2011, 7:54 am. Closed

Stories like this are one of the reasons I love reading history. I found the excerpt below in volume 46 of The Banker’s Magazine and Statistical Register for the period of July 1891 to June 1892:

The following banking incident is extracted from the Sandusky (O.) Journal. It was related by Mr. Hackerdorn, attorney for the N. Y., Lake Erie & W. Railroad. In former days gold was in demand, and it was a hard matter to have script redeemed in this coin, for, if the banks went to dealing in script, it meant their ruin, and it was a hard matter to find a bank willing to redeem the paper, if it could be avoided in any possible manner. In fact, when there was any script offered for redemption, the banks never could be found. It appears that an express company had $10,000 worth of script in its possession, which it wanted redeemed. The company’s officials learned that there was a bank at Jonesville, Ind., and immediately dispatched a messenger for that place on horseback, to secure gold for paper. The messenger drove around through the country for several days, searching for the town of Jonesville. No one appeared to know where it was, neither had any one ever heard of the Jonesville Bank. Finally the messenger came up to a man whom he met along the road, and made further inquiry as to the town of Jonesville and the Jonesville bank. The man told him that that place was Jonesville, and that the bank was at the corner, pointing out a dingy looking little blacksmith shop at the intersection of two country roadways. The messenger approached the shop with a look of astonishment, and on entering inquired of the smithy: “Is this the Jonesville Bank?” “Yes, sir,” was the reply; “got some of that ‘ere script, I suppose.” “Yes; can you redeem it?” “How much is it?” “$10,000.” “Yes, I guess I can; I’ve got the money in the safe.” “Well, where’s the safe?” “Over there in the corner,” said the blacksmith banker, and he at once proceeded to dump out a barrel of potatoes. In the bottom of the barrel was $30,000 in gold, and he redeemed the $10,000 worth of script.

Hard-Hit Insurers: SeaBright (SBX) Rode Through Storm, Can Flagstone (FSR) Do the Same?

Posted on March 23, 2011, 11:02 am. Closed

Back in August when shares of SeaBright Holdings tanked due to the need for reserve strengthening, I reflected that shareholders were most likely overreacting and that the company was likely a bargain at $7 per share. Well, since then shares have climbed back up to $10 per share. That’s an annualized return of 64%. It also turned out that other intelligent investors saw the same opportunity—the very capable investors at Alleghany (Y) added to the shares of SBX they had purchased in the first quarter of 2010.

Another company that is currently being hit hard is Flagstone Reinsurance (FSR). The company has published several press releases that have contributed to a very large sell-off in the stock:

  • February 28, 2011. $60-$80 million in loss events due to flooding and storms in Australia. Plus, there was the 6.3 magnitude earthquake in Christchurch, New Zealand, for which the company has not yet provided loss estimates.
  • March 15, 2011. The company reports preliminary loss estimates related to the New Zealand earthquake to be between $60-$90 million.
  • March 21, 2011. FSR reports that Moody’s has placed the ratings of the company under review.

So prior to the Japan earthquake, FSR was set for losses of $120-$170 million. Now, the market appears to be worried whether Flagstone will need to strengthen reserves after the Japan earthquake. In FSR’s 10-k, the company said it does “a significant amount of catastrophe business in Japan.”

I have no idea whether FSR is a good reinsurer or not. They’ve only been public for four years. Management of any insurance company can set reserves to really anything they want, whether its prudent or not, so when investing in the insurance arena, you have assure yourself that management is trustworthy and as conservative about underwriting and reserving as they claim to be.

But with FSR trading at half its book value, it seems that the market is overreacting (once again). Even if it turns out FSR management was not so good, the stock price will likely rebound after all this bad news fades away and the company starts to book new business at more favorable rates.

CEO’s Letter to MBIA Shareholders

Posted on March 21, 2011, 7:34 pm. Closed

MBIA recently posted online the CEO’s letter to shareholders. MBIA’s current problem stems from the overhang of legal problems stemming from the company’s transformation in 2009, which essentially split the company into a good part and a bad part. This occurred near the height of the financial meltdown and needless to say, all the big banks did not like this and I’m sure most of them felt MBIA was insolvent at the time and the transformation was just an attempt on the company’s part to avoid paying claims. I believe this is the primary reason why the big banks banded together to sue MBIA to reverse the transformation.

However, now its two years later and MBIA is still around and still making payments to claimsholders. In fact, in the last quarter of 2010, over one third of the original bank plaintiffs have withdrawn their claims against MBIA. It’s my belief that these banks know they do not have a good case because their argument that MBIA is insolvent is now moot.

Right now, MBIA stock is trading back at where it was prior to the flurry of announcements that banks like JPMorgan had withdrawn their claims. I believe its just a matter of time before this issue is finally resolved in MBIA’s favor. After this, MBIA the ratings agencies will likely upgrade MBIA and MBIA will be able to start insuring muni bonds again. This won’t happen this year, but most likely next year.

MBIA is also still progressing with its fraud lawsuits against the financial institutions. There will be a trial in the Bank of America/Countrywide case late this year, followed by a trial in the Ally Bank case in 2012. I believe the defendants in both these cases will settle a day or two before trial, if not on the footsteps of the courthouse on the day of. The underwriting standards of these financial institutions were just egregious. And if the banks did not lie to MBIA and other bond insurers, then they were totally negligent. I do not see how a jury could favor the side of the banks. I do not know why these financial institutions would want to air even more of their dirty laundry.

Some have likened value investing to time arbitrage—from the point after you purchase an undervalued security up to the point where it reaches intrinsic value, time elapses. Patient, confident investors with long time horizons are able to take advantage of this time arbitrage. This is one of the main reasons why value investors outperform the indexes. Companies like MBIA or AGO I think are perfect examples of time arbitrage—I am confident its only a matter of time before both companies recover, and when they do, shareholders will have earned outsized returns.

Investment Opportunities Resulting From the Japan Quake

Posted on March 13, 2011, 10:21 pm. 1 Comment

Bloomberg has a fairly good list of Japanese stocks affected by Friday’s earthquake. Of course, the obvious choices have been bid up: builders, construction-machinery makers and other construction-related companies.

I would rather take a look at the companies whose stock prices have taken a beating, but whose intrinsic value has suffered only a slight, temporary setback. This could be a company like Canon, Inc., the world’s largest camera-maker. Or perhaps the gap between price and intrinsic value has widened by a large margin for local power companies or railways, thus making for an extremely safe and lucrative investment.

The P&C and reinsurance companies are other areas of investment opportunity. With several large natural disasters in the past 6 months, rates could be firming up, which will mean greater premiums. Also, the international insurance brokers have already seen a good uptick in their share prices.

There could also be U.S. companies that will benefit from Japan’s rebuilding efforts. Try thinking “outside the box”.