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Voya Financial, Inc. Message Board

dumbandreallyslow 18 posts  |  Last Activity: Dec 4, 2015 9:42 PM Member since: Jun 29, 2013
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  • dumbandreallyslow dumbandreallyslow Dec 4, 2015 9:42 PM Flag

    I am actually wearing pants.

    I learned about fractional reserve banking the other day! Did you read the Mises article? Good article. I see your point, and it's a good one. But the risk for banks is a run, correct? Such risk for banks is compounded since they typically borrow short and lend long, making them susceptible to short-term credit crunches and inverted yield curves. What would be the catalyst for a run on all the banks? I would presume some banks have a higher risk of something like that happening because of excessive leverage on the balance sheet or a high level of non-performing loans.

    Similarly, I think some insurers are more at risk to cat events than others. That's all. And their stock may or may not be correctly pricing in that cat risk relative to their exposure. In this case, the insolvency risk is not being appropriately priced into the stock. Having said that, it's dumb to short the stock. But I think put options offer a good asymmetric payout and would liken this bet to buying CDS on subprime mortgages. Your downside is limited to the premium you pay, and the payout is enormous, because the risk is not being appropriately priced into the underlying stock. It may never happen, but you'll only lose your premium.

  • dumbandreallyslow dumbandreallyslow Dec 4, 2015 9:20 PM Flag

    Wait, I can short Liberty Mutual? What's the ticker?

  • Thinking about going long, but is this math correct? UVE said 31% of its Florida business is in Miami-Dade, Broward and Palm Counties.

    UVE has 545,301 policies in FL insuring $126bn. 31% of this means UVE is insuring $40bn in the Miami-Dade, Broward and Palm County areas. UVE is reinsured up to $2.1bn above the first $35mm. Their equity is about $250mm.

    A 100 PML hurricane in these counties, causing $125 billion to $250 billion in insured losses wipes out UVE? Anything above $2.5bn in losses for Universal (out of a total $40bn of insured value in the Miami-Dade, Broward and Palm County areas) would make them go under, right? Unlikely to happen but isn't this a small margin for error? wwwDOTcnbcDOTcom/2015/04/14/100-year-hurricane-could-cause-more-than-250b-losses-in-floridaDOThtml

  • Reply to

    Reinsurance program

    by big_brown_irid_bear Dec 4, 2015 6:36 AM
    dumbandreallyslow dumbandreallyslow Dec 4, 2015 11:37 AM Flag

    Finally, a solid rebuttal. This is all new to me, so thanks for clarifying their reinsurance program. You clearly understand the industry very well. Quick question, where are you getting the $500mm number from? That's an assumption?

    Can you help me interpret this datapoint (below) from the Catastrophe Stress Test Analysis from the FLOIR website? It says that there are 531,619 policies in force as of June 30, 2015. And UVE through its UPCIC subsidiary is insuring up to $121.6 billion in potential gross losses? Am I reading that right? Thanks again for your expertise. I guess if the government says they're okay, then they're okay!

    Universal Property & Casualty Insurance Company FL 531,619 121,555,915,324


  • Reply to

    Moved UVE Shares to Cash

    by frd626 Dec 3, 2015 10:09 PM
    dumbandreallyslow dumbandreallyslow Dec 3, 2015 10:22 PM Flag

    Does that make it harder for others to short? B/c brokers can't lend your shares out? No idea how that works.

  • dumbandreallyslow dumbandreallyslow Dec 2, 2015 1:07 AM Flag

    There's no borrow available on the stock, so can't short it, my friend.

  • dumbandreallyslow dumbandreallyslow Dec 1, 2015 5:30 PM Flag

    If you look at the report from Milliman titled "A Report on the Economic Impact of a 1-in-100 Year Hurricane on the State of Florida", you'll see that significant losses for insurers are suffered when only small geographic areas are hit by a hurricane. In other words, you don't need to have 100% of homes to be destroyed. The key variables are frequency and severity.

    For example, if you lived in a neighborhood and you had the biggest house worth $10 million insured up to $5 million, and the other 10 houses were $1 million insured up to $500K - imagine the following: only your house got destroyed, which means the insurer is on the hook for $5 million. If your house was safe and all other 10 houses in the neighborhood were destroyed, the insurer would still be on the hook for the same $5 million even though 10 houses were destroyed.

  • dumbandreallyslow dumbandreallyslow Dec 1, 2015 5:22 PM Flag

    You are correct that probabilities are independent in coin flips. But actuarial probabilities are based on actual past outcomes. Reinsurers, whether they're reinsuring auto risk or hurricane cat risk base their models on fixed, historical data.

  • dumbandreallyslow dumbandreallyslow Dec 1, 2015 5:20 PM Flag

    So you do agree that weather outcomes have a major impact on the future of UVE?

  • dumbandreallyslow dumbandreallyslow Dec 1, 2015 5:19 PM Flag

    Not short. No need for insults. The second part is the current p/b valuation. So what's your fair valuation?

  • Reply to

    UVE has excellent financial metrics

    by bursche49 Dec 1, 2015 5:03 PM
    dumbandreallyslow dumbandreallyslow Dec 1, 2015 5:11 PM Flag

    I think when looking at financial metrics of an insurance carrier, you have to keep in mind why its accounting is different from any other industry. It's the only business model where the cost of goods sold (COGS) are unknown. COGS for insurance carriers is estimated, you see. So what you're seeing is not really actual profits but estimated profits. The more mature the book of business is, the closer you are getting to actual profits on the premiums written. I think Buffett said it best when he wrote:

    *It takes a long time to learn the true profitability of any given year. First, many claims are received after
    the end of the year, and we must estimate how many of these there will be and what they will cost. (In
    insurance jargon, these claims are termed IBNR – incurred but not reported.) Second, claims often take
    years, or even decades, to settle, which means there can be many surprises along the way.
    For these reasons, the results in this column simply represent our best estimate at the end of 2004 as to how
    we have done in prior years. Profit margins for the years through 1999 are probably close to correct
    because these years are “mature,” in the sense that they have few claims still outstanding. The more recent
    the year, the more guesswork is involved. In particular, the results shown for 2003 and 2004 are apt to
    change significantly.

  • dumbandreallyslow dumbandreallyslow Dec 1, 2015 5:07 PM Flag

    Why are you getting emotional? This doesn't help anybody, if we're all trying to learn and not just gamble. Maybe I am on the wrong message board.

  • dumbandreallyslow dumbandreallyslow Dec 1, 2015 5:03 PM Flag

    So what's your fair value for the company, Mr. Guppy?

  • dumbandreallyslow dumbandreallyslow Dec 1, 2015 4:14 PM Flag

    Thanks. Are there any flaws with my analysis? It's back of the envelope. To me, this is no different than riding the housing market on the way up pre-2007 and trying to get out before 2008. But this is even trickier because mother nature doesn't give leading indicators such as increasing delinquencies or declining home prices.

  • dumbandreallyslow dumbandreallyslow Dec 1, 2015 4:12 PM Flag

    Can you dispute any of the points I made? Without laughing or insulting anyone...

  • dumbandreallyslow dumbandreallyslow Dec 1, 2015 4:10 PM Flag

    Not short. Just an insurance guy, seen this story many times.

  • Assume 50% chance of a major Florida storm in the next 10 years. Weather forecasters and hurricane experts expect a major storm to hit sooner, rather than later with every major storm having previously occurred in Florida every 2.3 years. It's been 10 years since a major Florida storm. See the recent article called, "Why Hurricanes Bypassed Florida for 10 Years". If a major storm hits, UVE is likely to go to $0 or a price/book multiple close to 0.0x (see below for further details).

    Now assume there's a 50% chance that UVE continues to grow and deserves the same multiple as Progressive, which is also trading at 2.41x price/book or price per share divided by book value per share. P/B is the multiple that insurers trade on. Assume that there's a 50% chance of this happening.

    So fair value should be (50% * 0.0x) + (50% * 2.41x) = 1.21x. This means the fair share price for UVE is 51% lower than current share price levels or 1.21x * book value per share of $8.36 = $10.11.

    But this is an option on weather outcomes in Florida, not a stock based on long-term fundamentals. So people shouldn't trade this as an investment but an option, which means the actual fair price should probably be much lower, to account for the binary nature of the potential outcomes. At expiry (or when a major storm happens), the stock goes close to $0.

    Such a storm is likely to cause UVE's risk-based capital level to blow through the Regulatory Action Level for the state of Florida's department of insurance department, meaning UVE would be taken over by the state regulators and rehabilitated or put into liquidation, essentially meaning shareholders get wiped out. FIGA or the Florida Insurance Guaranty Association has a list of such carriers - the last major Florida storms in 2004-2006 wiped out at least 7 insurance carriers: Vesta Fire Insurance, Shelby Insurance, Florida Preferred, Atlantic Preferred, Eagle Insurance, Southern Family Insurance, Commercial Casualty Insurance.

  • So UVE a tiny regional insurer is trading higher than Progressive? UVE has no competitive advantage, no lower-cost structure vs competitors and is tiny compared to Progressive and UVE trading at a HIGHER multiple than PGR? How does this make sense? The only way UVE grew was through lower premiums. This is the exact strategy that Tower Group used in the Northeast where major insurers had pulled out prior to the 2011 storms. Tower Group had rapid growth and TWGP was a Wall Street darling, but when the storms hit the Northeast, TWGP lost 90% of its value and got bought out at around $2/share when it was trading near $20 9 months earlier. TWGP was growing fast b/c it was charging lower premiums to customers - premiums BELOW the average expected loss per policyholder. It took more than 3 decades for Progressive to get where it is today. What's so special about UVE to have achieved this growth except charging premiums that are too low? How is this different from TWGP?

    With the risk of a SINGLE Florida storm likely to cause UVE to trigger a Regulatory Action Level Event, the stock should be trading like an option. A Regulatory Action Level Event means the equity of the company has gotten too low to support policyholder,s and state regulators are mandated to take action, with the worst case being conservatorship which is the equivalent of a bankruptcy for non-insurers. Shareholders get wiped out. Thus UVE should be trading like an option. If you think the chance of a Florida storm in the next 10 years is 50% and the chance to keep growing like Progressive is also 50%, then 50% * 0.0x + 50% * 2.41x = 1.2x. The stock should be trading at 1.2x even with these optimistic assumptions. This is 51% below current levels, with the notion the stock is more an OPTION on weather outcomes in Florida rather than a stock valued on sustainable fundamentals.

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