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Recent developments for bond insurors MBI and ABK have me reviewing my thesis on these picks, to decide whether to take my losses or to hang in and await additional information. Over the past week, their triple A ratings have been affirmed by S&P with a negative outlook, and by Moody's with a stable outlook for ABK and negative for MBI. Now Fitch has put MBI on credit watch negative, with the requirement that they produce an addional 1 billion of capital, above and beyond what Warburg Pincus will be providing. Fitch has yet to speak on ABK.
ABK seems to be standing up to the latest rounds of stress test analysis better than MBI. My position for ABK is still showing a small profit. On MBI, I sold out at 35 and went back in at 31, on the grounds that a savvy 3rd party became involved at that price: also, Marty Whitman, a guru I follow, remarked favorably on the Warburg Pincus deal that the dilution was OK, it removed his biggest risk which was massive dilution. So MBI got down as low as 18.84 yesterday, and now stands a little over 21,based on Fitch's rating action and a clarifying (re)disclosure of the size of their CDO portfolio. The previous disclosures had a certain degree of opacity, not something to be all that happy about.
My original thesis on these two was that losses from sub-prime would be manageable within the context of the existing capital base: that they would not need raise capital at the expense of excessive dilution in order to retain their triple A ratings. I felt MBI was a much safer investment than ABK, more conservative. ABK I went in on the assumption they would probably need to add some capital but it was already priced into the shares, with ample room for profit.
ABK so far did a reinsurance deal with AGO that seems to have been motivated by the need to retain its ratings. When Fitch reports their findings, then I should have more clarity. If Fitch does not require immediate additional capital, or if the amount is small, ABK should have very substantial upside potential. Strangely, S&Ps projected stress losses were much smaller for ABK compared to MBI, although the two are more or less the same size. Perhaps ABK is doing a better underwriting job. I bought into ABK at more or less where management made big buys, and I regard ABK as an excellent if somewhat specualtive investment. If the number 2 player becomes number 1, good results will follow, particularly if the former number 1 is seriously weakened.
For MBI my thesis is broken. The company has yet to respond to Fitch's announced credit watch negative. They were scheduled to hold a conference to discuss their capital situation on 12/14. That was cancelled because the rating agencies had not reported as of that date. Presumably it will be rescheduled and management will discuss their options - reinsurance, mix of business, reduced new business, borrowing, or equity. Also, the Warburg Pincus deal includes a shareholder rights offering, terms unknown. The terms could have a significant effect on dilution. My normal strategy is to exit when my thesis is broken, but in this case the stock is still well under adjusted book value per share, even treating hypothetical max stress losses as real and raising 2 billion equity capital at today's price.
What I have learned from this is respect for the power of dilution: it is very bad if a company is forced to raise equity capital under adverse market conditions. That was the risk I underestimated here, the risk of actual bankruptcy is nominal, the risk of massive dilution is not. The need to retain the triple A rating gives this issue a lot of power.
What I have relearned is that in crisis investing you need to wait patiently - I almost always start buying while the stock is still going down.
This is probably my last entry for the contest. Thanks to everyone who graded or commented on my posts. I enjoyed reading dishwasher, Doc A, eileenteska, Russ, kbarton, Viking Warrior etc...it is impressive also how many constestants beat the S&P or other indexes with a variety of strategies...
Merry Christmas,
Tom
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Comments (5)
Tom,
Live & Learn.
We LEARN by DOING.
I thinj of the costs of my Mistakes & Erros
as Investmwnts. It's like paying Tuition or DUES.
If you don't learn you haven't got your Money;s
worth.
Besides, SLO money is FUNNY - you ought
to be Laughing about the whole experience.
Be CHEERful - It's Christmas!
Have a Merry Christmas & a Happy, Healthy and
( hopefully more ) Prosperous New Year.
Morgen is auch ein Tag - Sunrise is a new day.
Don L. Ferk
( thanks for the tip of the hat to my right-brain alter ego, too )_
Posted by don ferk | December 21, 2007 4:06 PM
Tom, you are a numbers guy and this certainly comes through your posts. Duffbeer is not as numerical as most of you. I do al ot of hard knocks research to help in the decision process A few questions I ask myself before I buy anything investment---- would i buy this stock with real $$$ ? would I buy this with my $$$$ ? and last would I advise young
DuffBeer to buy it with his $$$$ ? All the formal analysis,number-trends-charts - beta you name it says buy then toss in that last question along with a few of as VW says Mr. Markets twists and you can lose. We all have gained by using play $$$$.
Tom thanks for your posts and setting those #### straight.
Now DuffBeer must go and count just how beers are left.
I have to get my Bomar Brain out !!!!!
Merry Christmas to you and your Family,
Cheers DuffBeer
Posted by duffbeer | December 21, 2007 10:52 PM
Tom, Which companies are on your radar as turn around candidates for 2008-2009. I have my eyes fixed on BSX (Bob Olstein in Smart Money Magazine), YRCW (John Neff at 2007 Barron's round table), MER(New CEO), RDN (Marty Whitman of 3rd ave interview in Forbes) and USG,BLDR,BLG in the building products sector with.
Posted by gullapalli | December 23, 2007 7:15 AM
Tommy Laddy,
Warren Buffet's Berkshire just Bought ING for a SONG. Warren knows Insurance like nobody's BizzyNess. He's going to rain Money down on ING and get into Muni-Bond Insurance Biz. ABK & MBI have alrady BUSTED Themselves. Warren's gonna Mop 'em up with a Spoon.
Wanna 'nuther go at Insurance - go 1st Kah-Lass - Berkshire Hathaway.
Not SO?
Don Lee Ferk
( aka VikingWarrior )
SLO-Port : RuthLesIntent
Posted by don ferk | December 28, 2007 1:09 PM
Reply to Don, Duff, Krishna, and Don(2)
First I appreciate your condolences as none of us likes to lose money or admit mistakes, certainly doing both together at one time is just a cramp. I would be less sad and somber if I didn't own MBI in my personal portfolio. I could lighten up anyway. The SLO after all is play money and next time around we get a refill back to 1 million.
Krishna, I think you are right to suggest I look at other possibilities in the beaten down or distressed area. Having lost some money there is no need to insist on getting it back by waiting for MBI to recover. If my remaining value in the position can be put to better uses, with the prospect of a quicker recovery, I need to consider that as one possible resolution to my concerns.
Playing it from where it lies, MBI has an adjusted book value/share of 52.92 if I assume S&P's stress scenario losses were actual and allowing for dilution from the Warburg Pincus deal. Its credit rating is 3 Triple A's with one threatened one notch downgrade to AA- from Fitch. There are no liquidity issues and the passage of time improves MBI's capital position, assuming they don't write a lot of new business. With the stock in the 19 area, I can afford to wait.
Don (comment 2) you mention Warren Buffett. He is starting a bond insurer, licensed in NY so far with an initial capital of 105 million. He also bought NRG, a reinsurance company which has been in runoff since 1993, from ING. Presumably it has regulatory approvals in various jurisdictions that will make it easier for him to do reinsurance on ....whatever he thinks will make money for Berkshire Hathaway.
I am puzzled at the market reaction because Buffett's involvement in bond insurance seems to me to be a plus. As one commentator put it, it's good for a battered sector when the smart money wades in. Buffett is beyond smart money: he is prudent money, sagacious money; indeed, wise money. I dare not say, omniscient money, omniscience is an attribute of the deity. One of the big questions about the bond insurers has been the viability of their business model. If Buffett does it, it's viable. If it's done by an outfit with financial credibility, there is plenty of demand for it.
Buffet knows insurance, bought GEICO when it was bankrupt, made money on that, wrote catastrophe reinsurance after Katrina, made money on that, so on and so forth. He could, before lunch on any day, buy MBI and/or ABK and make money on that. He would be lauded for his usual good judgment, paying well less than book value, savoring the huge cash flows, etc. It really is the type of situation he understands - frankly, I am amazed that he has missed it. Perhaps age is finally catching up to him. I have been wondering if I should send him an email and bring this oversight to his attention. I am not quite sure whether to address him as Warren, War, Warry, War'ny, or Mr. Buffett. My wife suggests Mr. Buffett. Maybe Dear Sir or Hola Warren...
Don, I know you would like William Ackman. He has been on MBI's case for years, a beef that started long ago, a veritable war of the titans, battle to the death, surely a Viking Warrior would fit right in. He said they were busted long before you did, and he says it louder and more publicly and people listen to him and keep selling the stock. . He is going to give all the money he made shorting it to charity, big of him. That's all personalities, I am a facts and figures type, hanging my hat on the book value and cash flow from business already on the books.
I have been through this kind of stuff before, I was holding Allstate when Katrina hit and then they announced they didn't have reinsurance. Then their CEO sold his stock the day it hit. I lived through it and actually made some money. Allstate had a bad case of asbestosis when I bought it, I made some money. The same with CB, the same with HIG. Typically with these insurance cases the what ifs get to be too much, there is never an end in sight, and then it's over and there is money to be made.
In any event, I am not going to atone for my errors by compounding them and selling this thing at the absolute bottom.
Tom
Posted by Thomas Armistead | December 28, 2007 4:46 PM