Friday, October 24, 2008

Alpha Bank & Trust - Another Bank Failure

The Alpha Bank & Trust, of Alpharetta, GA was closed by the FDIC today. The deposits were assumed by Stearns Bank, of St. Cloud, Minnesota.

Press Release

Final Stats

Assets in nonaccrual status - 15.39%
Noncurrent loans to loans - 18.36%
Noncurrent assets plus other real estate owned to assets - 19.78%
Construction and land development loans - 61.02%
Core (Retail) deposits - 77.40%

Equity capital to assets - 5.20%
Core capital (leverage) ratio - 5.27%
Tier 1 risk-based capital ratio - 5.67%
Total risk-based capital ratio - 6.96%

(All data as of 6/30/08)

What Credit Crisis?

A new working paper from the Federal Reserve of Minneapolis says that four myths have been created during the financial crisis and perpetuated by the media and others.

"Here we examine four claims about the way the …financial crisis is affecting the economy as a whole and argue that all four claims are myths. Conventional analyses of the …financial crisis focus on interest rate spreads. We argue that such analyses may lead to mistaken inferences about the real costs of borrowing and argue that, during …financial crises, variations in the levels of nominal interest rates might lead to better inferences about variations in the real costs of borrowing."

The four myths:

1)Bank lending to nonfinancial corporations and individuals has declined sharply.

2)Interbank lending is essentially nonexistent.

3)Commercial paper issuance by nonfinancial corporations has declined sharply, and rates have risen to unprecedented levels.

4)Banks play a large role in channeling funds from savers to borrowers.

The authors present an impressive number of charts and statistics to support the conclusion. I would love to go through these one by one, but unfortunately the market seems to be crashing again. Here is the conclusion from the three authors:

"Our analysis has raised questions about the claims made for the mechanism whereby the financial crisis is affecting the overall economy. We emphasize that we do not dispute that the United States is undergoing a …financial crisis and that the United States economy may be in a recession or may experience one in the near future. Our analysis is based on publicly available data. Policymakers have access to other sources of data as well. Policymakers could well believe that bold action is necessary based on data that are different from that considered here. If so, responsible policymaking requires that they share both the data and the analysis that underlies the need for bold policy with the public."

Tuesday, October 14, 2008

Investing Carnival # 17

Welcome to the October 14, 2008 edition of the Investing Carnival supported by the members of The Dividend and Value Investing Network - The Div-Net. This is the seventeenth edition of the Carnival.

Stock Analysis

D4L presents Stock Analysis: United Technologies Corp (UTX) A Buy At This Price posted at Dividends4Life.

The DIV-Net presents Chevron Corporation (CVX) Dividend Stock Analysis posted at Dividend Growth Investor.

Bill presents Lowes is Too Low posted at Learn The Stock Market And How to Trade.

The Rest

Paul Goodwin presents Back to the Basics … Again posted at The Iconoclast Investor.

Super Saver presents Municipal Bonds Funds Yielding Over 4% posted at My Wealth Builder.


KCLau presents How Fundsupermart will Revolutionize the Unit Trust Industry in Malaysia posted at KCLau's Money Tips.

FIRE Finance presents Tax FREE Money Market Mutual Funds posted at FIRE Finance.

The Financial Blogger presents Behind The Financial Crisis: Credit Default Swaps posted at The Financial Blogger.

MBB presents The Top 5 Online Savings Banks posted at Money Blue Book Finance Blog.

Tushar Mathur presents Looking For A College Fund Bailout posted at Everything Finance.

Qovax presents Valuing a Business - Seth Klarman’s 3 Methods posted at Value Investing and Entrepreneurship by Qovax, a Software Startup.

Sandy Naidu presents Warren Buffet?s Advice posted at Future Nest Egg.

praveen presents Taking out the DOG... posted at My Simple Trading System.

Ryan Suenaga presents It’s Okay to be Afraid, but it’s Important to be Brave posted at Uncommon Cents.

Lazy Man presents Jim Cramer: Sell Your Stocks posted at Lazy Man and Money.

Alexander presents It’s Time to Give Your Financial Planner a Call posted at Wealth Junkies.

Silicon Valley Blogger presents A Profitable Stock Sale: Sold The Bank Shares in my 401k Account posted at The Digerati Life.

Dorian Wales presents The Credit Crisis Presents a Rare Opportunity for Learning and Experience posted at The Personal Financier.

sherin presents How do you prepare for losing your job posted at Investment Internals.

Mr. ToughMoneyLove presents Investors Have Capitulated – Now What? posted at Tough Money Love: Hard Truth about Money and Personal Finance.

Kevin presents Why Jim Cramer Thinks You Shouldn?t Be in Stocks posted at No Debt Plan.

White Mountains Insurance (WTM) Analyst Day – Q and A - Part Two

WTM Analyst Day – Q & A – June 17, 2008

This is part two of a rough transcription of the Question and Answer period from the White Mountains Analyst day held on June 17, 2008.

Here are the other posts I have written on the meeting:

WTM - Introductory Comments

WTM - The Reserve Issue

WTM - Review of One Beacon

WTM - Review of White Mountains Re

WTM - Review of Esurance

WTM - Investment Portfolio

WTM - Berkshire Transaction

WTM - Q and A - Part I

Has compensation been tied to long-term results?

LT comp has always been tied to results – using a formula to calculate. Short term can be a lot of discretion by CEO of units on short-term comp.

Since this happened on underwriting from six years ago – can more be tied to long term?

We have both ST and LT comp – whether the claims were there 6 year sago is irrelevant in deciding on comp – three years of adverse reserve development in a row - we are having a debate now in the company – a lot of these people were not here six years ago but they were here last year.

WTM Solutions – run off business – getting more activity?

Waxes and wanes with cycle as competitors get more stressed - yes, seeing more activity – pace is picking up – not enough pain felt just yet.

Person who used to run this retired last year but good team. They study 30 deals they get one. Neil Wasserman is in charge – part of team – confident in him. The expense base is $3 million a year so one deal basically pays for WTM Solutions.

Municipal Bond underwriting?

Looked at a lot of things – it is a good market – used to be in FSA – sold it in 2000 – kept some that was sold back last year. A good business – BRK is there – nothing yet that will benefit. Looked with partners starting 9 or 10 months ago.

We have done modeling on losses on sub prime guarantees done by insurers and come up with losses much higher – made a decision not to invest in existing insurer. Our hurdle is very high – high capital.

Globalization of Insurance business?

Look at it all the time – insurance is very local – would not go into Israel or Russia unless had someone who knew it well. Do not have the pretense that we can go into others markets and do better than them.

NOLS- Esurance - $300 million – is it currently being used?

Esurance is generating NOL’s - Gary sees a path to GAAP profitability reasonably soon so will soon use them pretty quickly. The AnswerFinancial NOL’s - we valued them knowing that we wouldn’t be used quickly - discounted them significantly – we hoping to do better than our own plans – we did not overpay.

BRK transaction?

Waiting for private letter ruling from IRS on taxability – have had conversations with them already.

Esurance conversion ratio of 8% - is that constant?

In 2000, conversion rate was 2% - up 1% compared to last year – improving the process – improving web site – always trying to improve. Not sure about competitors – believe that GEICO id higher – brand is important – so is pricing – on the phone conversion rate is 15%. AF conversion rate is 30% because they offer other carriers.

Are you OK with pricing vs. comp?

Not as competitive as a year ago – we took price increase in 18 states about up 9% because severity was going up – can see how comp they are by stet – CA very competitive – just raised rates in Florida so probably not that competitive there anymore. GEICO probably the most competitive on prices.

Symetra valuation last year was to be IPO’s at 1.4 times book. Is that current?

Can’t directly comment – that’s what it was last year and we were comfortable with it.

Are you shifting assets away from Energy in investing portfolio?

Have shifted from winners to laggards but overall weighting the same.

Monday, October 13, 2008

The Bad News On White Mountains Insurance Is Out

White Mountains Insurance has fallen precipitously the last month with the rest of the insurance group, and all of us knew something was coming either in regard to the mortgage backed securities portfolio, or the Level III asset portfolio which consists mostly of long/short investment partnerships, according to management. The company issued a press release this morning with the details:

"In light of recent developments in financial markets, White Mountains Insurance Group, Ltd. (the "Company") announced today that it expects its adjusted book value per share at September 30, 2008 to be between $400 and $420, a reduction from $444 at June 30, 2008. These results have not been reviewed by the Company's independent auditors and are subject to change."

The stock is now up $43 to $338 so it sells at 80% of book value.

"The reduction is due mainly to a 5% drop in the value of invested assets during the quarter. The total return on fixed maturity investments, including mortgage-backed and asset-backed securities, was -2% to -3% for the quarter, compared to a return of -0.5% for the Lehman Aggregate Index. The total return on equity securities was between -13% and -15%, compared to -8.4% for the S&P 500."

Not bad, many did much worse.

"Our underwriting results for the quarter were impacted by after tax catastrophe losses of roughly $100 million. For the quarter, our segment GAAP combined ratios are estimated to be as follows: OneBeacon, about 100%; White Mountains Re, about 120%; and Esurance, about 102%. Mark-to-market losses on the White Mountains Life Re portfolio were about $15 million."

OK, the insurance business sucks as well, but we all knew that too.

"Finally, we expect to receive final approval from the IRS on the Berkshire exchange by the end of October and to close that transaction soon thereafter."

The company stands behind its word, and will pay Berkshire $485 a share. No private equity cop out here.

As previously disclosed, White Mountains does not invest in any collateralized loan obligations or collateralized debt obligations. The Company's high quality, short duration fixed maturity portfolio remains defensively positioned and had minimal exposure to the adverse credit events during the third quarter. As of June 30, 2008, the Company had $2.6 billion in mortgage-backed securities, which represented 57% of the Company's shareholders' equity. $1.5 billion of the Company's mortgage-backed securities owned at June 30, 2008 carry the full faith and credit guaranty of the U.S. government. As of September 30, 2008, the total mortgage-backed security portfolio was approximately $2.6 billion. Management remains comfortable with the credit outlook of this short duration, high quality portfolio."

Disclosure - I am long WTM.

White Mountains Insurance (WTM) Analyst Day – Q and A

WTM Analyst Day – Q & A – June 18, 2008

This is a rough transcription of the Question and Answer period from the White Mountains Insurance Analyst day held on June 17, 2008.

My other posts on the meeting:

WTM - Introductory Comments

WTM - The Reserve Issue

WTM - Review of One Beacon

WTM - Review of White Mountains Re

WTM - Review of Esurance

WTM - Investment Portfolio

WTM - Berkshire Transaction

Advantages of having Answer Financial and Esurance together?

We get a lot of traffic to Esurance – 3.5 million quotes this year – people coming to the site - our conversion rate for online buyers is around 8% - the rest are going somewhere else - we are paying anywhere from $250-300 to get a policy – I am trying to monetize that traffic. We also get traffic from states where we don’t do business – only in 28 states – 30 by the end of the year right now we sell that traffic but would be better to keep it in house and give it to AF and use it build their volume.

Write most of our business online Seventy percent of our customers go through process without talking to anyone – 30% get someone on line at call center - people who buy online – their loss ratios are 15 points below people who buy on phone – the rest are better handled by AF. We also want AF to sell more of our business – right now only 10% and want to move it to 20%.

Have gas prices impacted miles driven which impacts claim frequency?

Frequency is really coming down – year over year through 1Q 08 - down 4% - thought it would be flat and in May it was down 8%. I think people are driving fewer miles and hopefully slower – flip side is that cars are smaller which may lead to higher severity of claims. Claim inflation may also be an issue going forward.

Monetizing Assets?

At this price we are a buyer of our stock – whether we can monetize any of our assets we look at this all the time. We talk to people who are interested. In current market odds are we are a better seller than buyer.

Who initiated BRK transaction?

When I (Barrette) got back a year ago the company had been working extensively on the deal…started somewhere in conversation between Jack and Warren – not sure who started it but it clearly got going – almost reached a deal a year ago but it didn’t – then I understood his parameters better - basically he needed to sell at market – did not want a below market price – when price hot my price and I knew he was a seller at that price that’s when the deal got done.

Is there a material change clause in BRK deal?

No clause…only if IRS doesn’t approve.

What could drive the $21 million reversal in Q2?

A GAAP market to market of our liabilities – when markets a very volatile and you have low interest rates in Japan we assume that they will maintain that for next 8 ½ years – what needs to reverse that it higher rates in Japan or lower volatility.

How much of WTM Re America (Folks) book is ceded?

WTM Re America is ceding 75% of property business and 50% of casualty business down to Bermuda – would increase them somewhat maybe to 80% each. That’s of the WTM Re America (Folks) book.

More color on limited partnerships that dominate Level 3 assets?

Three quarters are long short equity partnerships – in terms of transparency we get monthly reporting from them – audited annually – get a portfolio list – in touch with the managers – strategies do not have a lot of leverage. Can get losses from pilot error but won’t get compound damage from leverage – mostly Value managers - $2 billion from Prospector – reason why most are Level 3 is lag time on reporting.

$140 million reserve – what has company learned institutionally?

Now WTM will have a Chief Actuary – some form of dotted line reporting to corporate people – so the CFO of units don’t feel that CEO of unit can dictate to them. We will due diligence more regularly and more reserve meetings.

Friday, October 10, 2008

White Mountains Insurance (WTM) Analyst Day - Berkshire Transaction

White Mountains Insurance (WTM) held its annual analyst meeting on June 17, and I finally got around to listening to the webcast. The URL is here if you want to listen yourself.

I have written six other posts on the meeting. They are:

WTM - Introductory Comments

WTM - The Reserve Issue

WTM - Review of One Beacon

WTM - Review of White Mountains Re

WTM - Review of Esurance

WTM - Investment Portfolio

Berkshire Transaction

WTM discussed the Berkshire transaction in a little more detail. In March 2008, WTM announced an agreement with Berkshire Hathaway to buy back 1,724,200 of WTM shares that they held. WTM would pay $751 million and transfer two insurance entities that are in run off. The two subsidiaries are Commercial Casualty Insurance Company and International American Group. The shares held by Berkshire Hathaway represent 16.3% of the company. The aggregate exchange value is $836 million, or $485 per share.

Management said “As our founding father Jack Byrne says, you shoot ducks not when the gun is loaded but when the ducks are flying….we had a lot of activity last year but the ducks weren’t flying. But when we got to this year, and we got some additional capital…and there was a duck that was quacking, and that duck was our own stock.”

“We had the opportunity to create this exchange with BRK, which valued WTM at $485 per share or 1.1 times book.”

“Ben Graham would say when you look at a company and if you can get that company in at a 20% discount to its intrinsic business value, that’s an attractive time to do something there is no company we know better than our own so being able to do a transaction where we value WTM at $485 and then had 2 run off businesses valued at 1.5 times book, we value that as a very attractive proposition.”

Management went out of its way to assure investors that the company would have the capacity to make acquisitions if needed despite the outflow of cash to buy its shares from Berkshire. Debt to total tangible capital would be 22% and total debt would be $1.3 billion on a pro forma basis.

WTM said that the deal had been under discussion for quite some time and that the two companies almost reached agreement a year ago. The sale is expected to close in the third quarter.

My Comments:

With WTM closing at $310 on 10/09/2008, this deal looks like a steal for Berkshire, although I haven't seen a press release announcing the close of the deal. Does WTM want to use its precious capital in this manner during this crisis?

Thursday, October 9, 2008

Another Unthinkable Event

Is the unthinkable going to happen? What do I mean? How about the government closing the stock exchange to try to induce calm in the market. I am not talking about a circuit breaking close for a half an hour. I am referring to a multi day or week long halt. It's not as farfetched as it sounds, Roosevelt closed the banks in 1933.

Here are some major historical closing for the NYSE:

July 31 - Nov. 27, 1914 - Outbreak of World War I.

March 6 - 14, 1933 - Banking holiday.

September 11-14, 2001 - Terrorist Attacks.

I'm not saying that closing the exchange will work, as it may have the opposite effect, and many of these stocks trade off the exchange or overseas.

The full list of closings.

This Is Insane

Wesco Financial (WSC) is down $58 or 17%. This is the insurance company run by Charlie Munger, who sits next to Warren Buffett at every annual meeting of Berkshire. Does the market really feel that Wesco is going to take a loss because it owns CDO's or some other toxic paper?

Is Oil Demand Falling Off A Cliff?

Is demand for oil falling off a cliff with the stock market?

The Department of Energy reports that the U.S. Petroleum Products Product Supplied was only 18.66 million barrels per day for the four weeks ending October 3.

This is the lowest level since June 1999.