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(P&I) Insurance Canada

November 3, 2013

Drama. Insurance companies are in the business of buying our risk in life, disability and illness insurance, investment and investment income risk such as in segregated funds and annuities, and property & casualty risk. One side of the ledger – liability – is actuarially calculated and manifestly calculable, but the other side – returns on assets and premium – is vague and not reliable and a substantial risk to the insurance companies themselves.

Liabilities & Assets

Liabilities & Assets

For example, Fairfax Financial has seldom lost money in any year but the company lost $406 million and $32 per share in 2001; $450 million and $28 per share in 2005, and has posted a loss of $563 million or $30 per share for the first nine months of this year.

Moreover, that’s a big drop from earnings per share of $80 in 2008 despite steadily increasing assets from $28 billion in 2008 to the current $38 billion. The company attributes its losses to a failure of its hedging programme in equities against a market decline (it hasn’t declined yet) and losses on its bond portfolio because interest rates have unexpectedly increased. Right.

But there are other problems, and they are not peculiar to Fairfax but affect the whole industry.

It's A Different Kind Of Problem

Investing Is A Different Kind Of Problem

For example, the industry buys our risk at great expense to itself but its returns on risk are meagre; underwriting profits tend to be thin and selling expenses are high and then, there is always the residual liability for unexpected insurance losses such as the serial catastrophic disasters of 2011 (USA Today, January 4, 2012, 2011 was costliest year in world disasters) and Hurricane Sandy in 2012; or simply losses on bad investments (Reuters, November 2, 2013, Fairfax struggles to raise funds for BlackBerry bid: sources or The Wall Street Journal, September 16, 2008, U.S. to Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash as Credit Dries Up) because the industry tends to gamble on its investments and investment strategies in the hope of obtaining excess returns in the market despite its excellent use of experience and technology on the liabilities side of the balance sheet.

As a result (please see Exhibit 1 below), the return on assets is less than 1% and only a tenth of the return on assets in really risky businesses such as “Big Oil” (please see our recent Post) which knows how to manage on both sides of the balance sheet.

And the dividend cheque was $5 billion which is the same payout rate of 50% on earnings as “Big Oil” but only 1/10th of the amount on similar assets of about $1.7 trillion that are at risk for similar causes.

Exhibit 1: Insurance Canada – Fundamentals

Insurance Canada - Fundamentals

Insurance Canada – Fundamentals

(Please Click on the Chart to make it larger if required.)

The (B)(N) Solution

The (B)(N) Solution
Assets/Liabilities

As always, to offset the risk and depending on our budget and needs for additional investments, we will buy and hold any company that is trading at or above the price of risk, and no other and for no other reason. Anything else is just a gamble.

Moreover, rather than bet on just one company in the insurance business, we consider them all and have obtained a +60% return on capital and a +2.9% dividend yield on our portfolio investment this year, despite a market return of +7% and an industry average return of +30%. Please see Exhibit 2 and 3 below.

Exhibit 2: (B)(N) Insurance Canada – Prices & Portfolio – November 2013

Insurance Canada - Prices & Portfolio - November 2013

Insurance Canada – Prices & Portfolio – November 2013

(Please Click on the Chart to make it larger if required.)

Exhibit 3: (B)(N) Insurance Canada – Portfolio & Cash Flow Summary – November 2013

Insurance Canada - Portfolio & Cash Flow Summary - November 2013

Insurance Canada – Portfolio & Cash Flow Summary – November 2013

(Please Click on the Chart to make it larger and again if required.)

For more information and references, please see our recent Post, The RiskWerk Company Glossary.

And for more on what risk averse investing has done for us this year, please see our recent Posts on The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class actionLa Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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