Boring Portfolio Report
Wednesday, July 30, 1997
by Dale Wettlaufer (TMF
Ralegh)
ALEXANDRIA, VA, (July 30, 1997) -- Hi, Dale Wettlaufer sitting in for Greg Markus, who's down in Maui or one of the glorious islands of our 50th state. To recap what happened in the Boring Port tonight, I quote Jeff Fischer, TMF Jeff: "Every stock up!"
Greg is now beating the Nasdaq and is within shouting distance of the S&P 500's return for 1997. Nice job, Greg! What more can you say about great companies like Borders, Oxford Health, Oracle, Cisco, and, uh, Carlisle Companies. Just to let you know, I still hold it, as does the "Mom Folio," and it's still a company that I feel very comfortable about. While Carlisle has exceeded expectations for the nearly one year that we've held it, that's not kicking off some pre-set sell signal that I have. I'd rather let the capital grow tax deferred than take a short-term gain right now. I know of few companies offering such a high quality management team, a very likely scenario for growing earnings per share 15% per year over the next five years, and which have very little dynamic risk. A company that can acquire others at private market multiples, which retain the talented management teams, which can generate good amounts of free cash flow, and which are then valued in the public markets for about twice the price at which they were acquired equals a nice little cash machine.
OK, I couldn't resist the temptation to talk about Carlisle (next time you're in a golf cart, check to see who makes the tires). Though my time is running extremely short tonight, I did want to discuss some ideas that have popped up in the radar. These are some fairly boring reinsurance companies in Bermuda, namely PARTNERRE (NYSE: PRE), LASALLE RE (NYSE: LSH), MID OCEAN LTD. (NYSE: MOC), and RENAISSANCERE HOLDINGS LTD. (NYSE: RNR). What we're talking about is companies that write insurance for other insurance underwriters. For instance, if Allstate wants to insure itself against potential catastrophe losses on the homeowners insurance it writes on Florida residences, it goes to one of these companies and takes out a reinsurance policy. If a hurriance rolls through Florida and causes damage above "X" amount of dollars, that's where the reinsurance company starts to pick up the losses. In this way, the insurance companies limit their losses. The smart insurance companies, such as BERKSHIRE HATHWAY (NYSE: BRK.A and BRK.B) -- which the "Mom Folio" and I do own -- look for opportunities to write reinsurance where the rates are most favorable to the underwriter, where other companies don't have the financial muscle to write insurance, and where the reinsurer thinks that the disaster it's insuring against has a low possibility of causing as much damage as the customer fears.
Such was the case in 1994, when a good amount of these companies started setting up shop in the tax haven of Bermuda. Remember 1994? That was the worst year in the bond market since the Depression and it was also the year of the Northridge earthquake, the second-largest catastrophe loss on record (at $12.5 billion). The crash in the bond market hurt the ability of marginal players to write insurance and reinsurance at cheap rates (bouyant capital markets usually spell decreased premiums -- not good for insurers). Seeing an opportunity to get into the market at a low point, investment banks got together investment pools to start these companies -- it's been an excellent run since that point.
At price-to-book multiples of 1.5, price-to-earnings multiples in the single digits, fatty dividend yields of 2.5% to 5% and above, investors are pricing these companies like the music is going to stop. That may or may not be the case, and that's something that I'm learning next in my investigation. Having started learning about the way insurance companies work in the last year, I'm not totally equipped to analyze the nuances of the extremely high profitabilty ratios of these companies. However, at PartnerRe, which is one subject of my research (along with Renaissane Re), the company's combined ratio last year was about 25%. That's in an industry where the average company runs a combined ratio -- underwriting expenses plus underwriting losses -- of about 98-100%+. The lower the number, the better.
So, these companies are quite cheap and somewhat Boring. There's more to learn, and I would recommend a trip by the Insurance Companies folder, where there are some very friendly and experienced Fools that love to talk about this sort of thing. Can I make money, and beat the equity averages, where the market thinks growth has topped out? I believe I can. The people who track these companies full time think PartnerRe can grow EPS at 13% per year over the next five years. At a current multiple to earnings of 8.8 times, I see some value there. I'd like to see some more interesting investments in the company's portfolio, though. Ah, well, maybe we can send some Foolishness their way.
Sorry I can't be a little more comprehensive with this light overview, but I've already run past my time. Enjoy, if you do some research on the Bermuda reinsurance industry. And if you do, I'll see you in the insurance companies folder.
Cheers,
Dale
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Stock Change Bid ATLS + 7/16 25.31 BGP + 3/16 25.63 CSL + 31/82 42.13 CSCO + 5/16 79.50 GNT +1 1/16 47.25 ORCL + 3/4 55.25 OXHP +1 5/8 84.63 PMSI + 1/16 11.56 TDW +1 5/16 50.81
Day Month Year History
BORING +1.21% 11.07% 24.19% 42.91%
S&P: +1.06% 7.59% 28.56% 53.19%
NASDAQ: +1.00% 10.12% 23.01% 52.56%
Rec'd # Security In At Now Change
2/28/96 400 Borders Gr 11.26 25.63 127.65%
5/24/96 100 Oxford Hea 48.02 84.63 76.21%
8/13/96 200 Carlisle C 26.32 42.13 60.03%
2/2/96 200 Green Tree 30.39 47.25 55.49%
6/26/96 100 Cisco Syst 53.90 79.50 47.50%
3/8/96 400 Prime Medi 10.07 11.56 14.84%
11/21/96 100 Oracle Cor 48.65 55.25 13.57%
3/5/97 150 Atlas Air 23.06 25.31 9.78%
12/23/96 100 Tidewater 46.52 50.81 9.22%
Rec'd # Security In At Value Change
2/28/96 400 Borders Gr 4502.49 10250.00 $5747.51
5/24/96 100 Oxford Hea 4802.49 8462.50 $3660.01
2/2/96 200 Green Tree 6077.49 9450.00 $3372.51
8/13/96 200 Carlisle C 5264.99 8425.60 $3160.61
6/26/96 100 Cisco Syst 5389.99 7950.00 $2560.01
11/21/96 100 Oracle Cor 4864.99 5525.00 $660.01
3/8/96 400 Prime Medi 4027.49 4625.00 $597.51
12/23/96 100 Tidewater 4652.49 5081.25 $428.76
3/5/97 150 Atlas Air 3458.74 3796.88 $338.14
CASH $7890.00
TOTAL $71456.23
