See Reinsurance Group of America (RGA) Forensic Analysis Retail Forensic Analysis Retail 2009-04-09 07:23:58 429.36 Kb and Reinsurance Group of America (RGA) Forensic Analysis Professional Forensic Analysis Professional 2009-04-09 07:25:35 714.65 Kb.

Professional subscribers should pay particular detail to the argument made behind the bearish perspective on this one. It's a doozy!

Comments are encouraged and welcome, of course, but if you wish to discuss subscriber only material openly I urge you to do so in the private forums:

  1. Retail Subscriber Private Forum
  2. Professional Subscriber Private Forum
  3. Institutional Subscriber Private Forum
Published in BoomBustBlog
Tuesday, 07 April 2009 01:00

Another one of those "I told you so's!"

One would think that I would get more respect out of the institutional circles...

From Bloomberg :

April 7 (Bloomberg) -- MBIA Inc. was sued by Third Avenue Management LLC, the New York company founded by mutual fund manager Martin Whitman, over claims the insurer’s split of its bond-insurance businesses hurts debt holders. See Is MBIA About to Pull the Wool Over the Market's Eyes?. As a matter of fact, if you read "Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton" you shouldn't be touching this company with a teflon tipped ten foot pole. But then again, who listens to me???....

Three mutual funds managed by Third Avenue bought notes issued by MBIA Insurance Corp. in February 2008 based on assurances that the company was recapitalizing following losses in its structured finance insurance business, according to a statement distributed yesterday by PR Newswire. You really should have known better. You can't say I didn't warn you. See After Reading the Prospectus and Reviewing Potential Losses, Would You Buy These Notes?, MBIA goes back to the well again. Who will be silly enough to invest in these securities, though... and A few more thoughts on MBIA, S&P and what AAA really means.

MBIA, the largest bond insurer by outstanding guarantees, said in February it was transferring $5 billion in cash and its public finance business to another entity that has no obligation to the notes, Third Avenue said in its statement. The lawsuit, filed in Delaware state court, alleges the transfers were illegal and unfair and seeks to unwind them, according to the statement.

“MBIA sold us these surplus notes, and then to our surprise and distress, stripped away the principal assets as well as the only going concern operations within MBIA Insurance Corporation,” Whitman, chairman of the Third Avenue funds, said in the statement. “That’s wrong, and a big disappointment to us, especially after we went to bat for them with our pocketbooks and more.” Again, I say, read my blog. See An analysis of mononline bifurcation vs. Buffet reinsurance.

Debt Guarantees

MBIA, based in Armonk, New York, said in February that it will split its municipal bond insurance business from the mortgage-related debt guarantees that led to the loss of its top credit ratings.

The company transferred guarantees on about $537 billion of municipal bonds to MBIA Insurance Corp. of Illinois, which it plans to rename National Public Finance Guarantee Corp.

The new unit will be separate from an existing one that guarantees complex mortgage-linked securities and other debt, which plunged in value during the U.S. housing and credit crises, prompting a 92 percent drop in the company’s shares since October 2007 and the ouster of its chief executive a year ago.

MBIA’s actions were legal and the Third Avenue’s lawsuit is without merit, MBIA Chief Executive Jay Brown said yesterday in an e-mailed statement.

“We appreciate Third Avenue’s past support of MBIA and regret that they felt” the lawsuit was necessary,” Brown said. “Our transformation should not have been a surprise, however, as I have been clear to all stakeholders since I returned a year ago that our corporate objective was to separate our structured and municipal businesses.” He's got a point here. Let me translate: I threw the sucker punch, and these sucker's are catching a 'tude 'cause I played them for suckers! I'm glad nobody paid attention to that blogger guy back in '07 with that scary Halloween story!

The filing of the lawsuit couldn’t be independently confirmed through court records. Brian Maddox, a spokesman for New York-based Third Avenue, didn’t return a voice-mail message left after hours.

1. MBIA in the news recently... I am not going to say I told you so.
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
...ent to attract greater interest, according to investors familiar with the deal on Friday. The issue of so-called surplus notes by MBIA Insurance Corp. is part of an effort by the bond insurer to buoy ...
Saturday, 12 January 2008

...o;), a wholly-owned subsidiary of MBIA Inc. (the “Company”), issued $1.0 billion principal amount of Surplus Notes due January 15, 2033 (the “Notes”) with an initial interest r...
Thursday, 17 January 2008

3. Is MBIA About to Pull the Wool Over the Market's Eyes?
(Reggie Middleton's Boom Bust Blog/MyBlog)
... The doubt about MBIA's solvency hurts stakeholders by reducing the value of MBIA's common shares, debt, and surplus notes, and severely diminishing the market value of credit enhancement provided...
Sunday, 22 February 2009

4. Fitch finally found my blog and cut Ambac's rating, So what's next...
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
...s know you weren't a AAA risk. Let's stop the shenanigans, please... MBIA's surplus notes plunged as low as 70 cents on the dollar yesterday, indicating a yiel...
Saturday, 19 January 2008

...e it. Let's see who'll be silly enough to actually buy these! I browsed through the prospectus of the last surplus notes offering and found that anyone who actually read the prospectus would hav...
Thursday, 07 February 2008

6. A few more thoughts on MBIA, S&P and what AAA really means
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
Observation: MBIA is forced to borrow at deep junk rates (14%) in a 7% environment (surplus notes have a slight premium). These notes then go on to trade at an immediate discount, yielding 20%.
Tuesday, 26 February 2008

7. An analysis of mononline bifurcation vs. Buffet reinsurance
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
The following is an interesting commentary forwarded by one of the boombustblog readers. I am enthused at the level of knowldege and common sense prevalent in this community. It really mak
Thursday, 28 February 2008

(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
The following is the MBIA "LETTER TO OWNERS DATED MARCH 3, 2008" excerpt and my comments. My next post will be my comments on out ongoing monoline research, and in particular Assured Guarant
Thursday, 06 March 2008

9. This company needs to be put out of its misery
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
I haven't written much about MBIA lately, primarily because I had closed my bearish position on them at about $9 per share. This was originally initiated in the $60's last year, and really intensifi
Monday, 12 May 2008

10. More on MBIA Surplus Notes
(Forum/Insurers and Insurance)
I was just reminded that surplus notes, in addition to their preferential treatment as quasi-equity, share the equity like attribute of being 2nd tier to superior claims - such as that brought down fr
Sunday, 13 January 2008

11. Re:More on MBIA Surplus Notes
(Forum/Insurers and Insurance)
...dings Plc, Europe?s biggest bank by market value, set up a collateralized debt obligation to repackage so-called surplus notes sold by insurance companies to bolster capital, according to Standard &am...
Friday, 18 January 2008

Published in BoomBustBlog
Wednesday, 04 March 2009 23:00

Consumer Retail Actionable Intelligence Note

This one is interesting. I will probably follow up with a professional/institutional only report soon.

March Actionable Intelligence Note - Consumer Retail Sector PD March Actionable Intelligence Note - Consumer Retail Sector PD 2009-03-05 01:43:42 163.35 Kb

Published in BoomBustBlog

I have just closed out my positions on PFG (roughly $20 down to about $6.80) and HIG (about $30 down to about $4.50). I have better things to do with the money (see my recently released research) and they are both trading in the mid single digits. As a result, I am releasing the most recent research reports to free registered users so you guys can see what you have missed out on (you still have to register and choose a free subscription).pfghigchart.gif

I'll be releasing 2009-to-date performance figures for my prop account as well as the blog research soon.

The article ("Going Short", March 01, 2009) had two (admittedely minor, but I'll correct them anyway) errors in that it stated that I tripled my money since the blog inception. I tripled my money for the one year period ending 2008. Absolute raw returns since blog inception till today (about a year and a half) is currently 670% for my prop account (the reporter had no way of knowing this, but I thought I would mention it anyway). It also stated that I had wild swings between profits and losses. I am assuming the reporter misread the graph. I had one aggregate down month for the existence of the entire account. The graph that he was probably referring to was a monthly return graph, not a cumulative return graph. See below:

Click to enlarge to print quality


Below are the raw, absolute returns for my proprietary account. These
returns are calculated by calculating the difference between my
starting point and ending point, and is the number that I use for
comparison (since it is the number that shows how much money I actually

Reggie's gross avg. return S&P return
For all 2007 (6 months)
42.93% -8.23%
For Q1 2008 50.03% 0.68%
For Q2 2008 53.46% -8.66%
For Q3 2008 32.40% -8.30%
For all 2008 196.11% -8.69%
Since inception (to 1/9/09)
481.04% -35.72%
2008 absolute return 335.42%
to S&P 500

My risk adjusted returns actually show I took significanly less risk per unit of return than just about everyone that publishes results on the web! Just had to set the record straight! I really did enjoy the article though. I thought it was well done (corrections excluded) and a good read. Here are the free reports:

document 10/25/08 Insurance Industry Update - Professional w/inventory addendum 2008-11-22 06:27:52 7.50 Mb

pdf Hartford Insurance Group Forensic Analysis - Pro 2008-11-22 06:30:43 619.29 Kb

pdf Hartford Insurance Group spreads and counterparty/debt holders - pro 2008-11-22 06:31:47 149.00 Kb

pdf Principal Financial Group Actionable Intelligence Note - Pro version 2009-02-23 09:13:39 252.74 Kb

And now, a word from our sponsor...

I have been planning to raise the prices of the subscription by (last)
Monday, but it came to my attention that some may be struggling with
access to the lower tier as it is, particularly considering the economy
and employment environement. I vowed I would attempt to keep access as
open as possible, but I also have bills to pay (a whole lot of bills).
So, I will postpone the price increase for oen week (till at least next
Monday) to give all non-paying members a chance to jump on board.On
that note,
Ms. Jennifer Keeley hinted that I share her email with the blog:





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Dear Reggie,

I have been reading your blog for over a year now, but
only yesterday did I decide to become a subscriber. I'm just an avergae individual investor
trying to navigate the bear market from my home computer, but I was able to pay
for my subscription within 3 hours of the market open with some XXXX [the most recent banking actionable intelligence report] puts (now
up 25% and counting.) So, a hearty thank you for all your hard work and feel
free to use me as an example for anyone on the fence re: subscribing.

Jennifer Keeley

Thank you, Jennifer, for the willingness to share your esperience. Has anyone else had the good fortune to quickly recoup their subscription fees from the research herein? If so, please share in the comments section below. BTW, I told you that last banking one would be hot.

Published in BoomBustBlog

I would like to make it clear that MBIA and the other
monolines have assisted the investment, commercial and mortgage banking
industry in the significant inflating of the perception of capital available.
If (or more aptly, when) this charade comes to an end (apparently
imminently) the banking system will recieve another, quite significant
shock to the system. One of several very interesting emails that I
received over the weekend.


I am e-mailing about MBIA's recent restructuring announcement, which
involves the transfer of $5B out of MBIA Insurance Corporation to one
of its subsidiaries, MBIA Illinois (to be renamed). $2.9B of the $5B
was paid for MBIA Illinois to reinsure 100% of MBIA Insurance
Corporation's public finance exposures. The remaining $2.1B was
transferred via a return of capital to MBIA Inc., MBIA Insurance
Corporation's parent. Concurrent with the transfer, MBIA Insurance
Corporation's ownership interest in MBIA Illinois has been confiscated
and transferred to another MBIA subsidiary. On the surface, this
wreaks of blatant theft and fraud.

Published in BoomBustBlog

I have released the latest insurance sector forensic analysis and valuation report. Keep in mind that as the financial sector gets hit hard in the equity and fixed income markets, these companies will report worse and worse investment portfolio results. Hedging at the institutional portfolio level is very difficult and expensive considering the amount of money in question and the significantly reduced amount of liquidity in both the exchange traded options market (due to market makers pulling back from historically excessive volatility) and the OTC options and swap market (see Counterparty risk analyses - counter-party failure will open up another Pandora's box). This company has a very high relative share price, a high comparative book valuation, and a considerably valid argument for valuation compression. A fairly good investment proposition, all in all.

pdf Forensic Report Retail 2009-02-23 14:11:08 418.58 Kb

pdf Forensic Report Pro 2009-02-23 14:09:16 418.58 Kb

Published in BoomBustBlog

I have just released an actionable Intelligence Note for the insurance industry. This specialty line insurer may prove to be very profitable. I will issue a full report within 7 to 10 trading days. In the meantime, I thought I will bring forth a little teaser.

See pdf Insurer Sector Actionable Intelligence Note 2009-02-13 16:25:30 322.08 Kb

Published in BoomBustBlog

Now, like HIG, PFG has hit its valuation range thus I am releasing the research to the public. I am shocked the mainstream media hasn't decided to run a feature story on me. I know I may be a bit brash, but in looking at the performance of the current pop pundits in comparison to my consistent results... Anyway, here is the PFG note (although I have made them free, registration is still required):Principal Financial Group Actionable Intelligence Note Principal Financial Group Actionable Intelligence Note 2008-12-12 06:01:55 162.29 Kb andPrincipal Financial Group Actionable Intelligence Note - Pro version Principal Financial Group Actionable Intelligence Note - Pro version 2009-01-15 11:18:50 252.74 Kb . If traded properly, this piece of research would have paid for a couple of years subscription on its own. BoomBustBloggers had TWO MONTHS notice regarding this companies obvious miss this quarter. The mere fact that it had "lower than expected" earnings vindicates an institutional subscription to the blog in and of itself. PFG did exactly as us BoomBustBloggers expected, so who expected differently? Speaking of which, institutional subscribers should be significantly boosting their returns through my significantly under-priced research. It will not stay this way for long, so I would like those who are in institutions and professional money managers to contribute a little more to the community. A polite request on my part.

An important note to all subscribers and potential subscribers

Insurance News and Analysis from across the Web

Reggie Middleton on Insurers and Insurance

Insurers get TARP

Insurers fixed income losses may exceed subprime

Life Insurers: terrible bond investors (no kidding!)

After $2.6 billion loss, Swiss Re gets a Buffet investment

ECB Financial Stability Review, June 2008

Insurance Linked Securities - Investing, Managing, and Trading

Cliff Risk and the Credit Crisis

I am working on a potentially very profitable thesis in this space. It is risky, but if it pans out as the other insurers did (MBIA - Ambac - Assured Guaranty - Hartford Insurance Group Forensic Analysis - Pro - Principal Financial Group - and the latest UK insurer The UK Insurer Forensic Analysis and Fundamental Valuation Sample Trade Addendum who should be breaking by the next quarterly reporting period (these links are to Pro reports, Retail subscribers may have to search the links manually) it will prove to be highly profitable. I don't see any reason why it shouldn't. I will be releasing preliminary reports on it next week and expect it to push my competition smashing performance numbers significantly higher.. It would be appreciated if the ticker/name weren't mentioned in the public forums until further notice do to its thinly traded status. You can see more of my opinion in the "Insurers and Insurance" section of

Despite all of this time and ample evidence, mainstream media and pundits still don't get the risks of the insurance industry and insurers such as PFG. Here is an excerpt from my first PFG actionable intelligence note:

AIG has been caught with their hand in the cookie jar, so to speak, writing naked CDS under the guise of synthetic securities. Basically, they were gambling. In this economic climate, the writers of CDS are most likely to take a loss, particularly those who wrote the swaps on anything related to a financial company or financial asset as an underlying. Those who bought the CDS have often recorded a paper gain, but counterparty risk is an issue as well. Realizing (after growing up in NY) that there is seldom only one cockroach, I had my team search for other insurance companies that basically gambled with their balance sheet under the guise of issuing insurance. The Principal Financial Group is who we found. Below, please find a summary analysis of what we've discovered.

· As a result of huge investment losses on its investment assets Principal Financials' equity has been eroded significantly. The company's tangible equity has plunged 34% to $4.3 bn in 3Q2008 from $6.5 bn in 3Q2007. Resultantly Principal's adjusted book value per share is at $16.3 per share implying adjusted P/B multiple of 1.14x.

· The company is highly leveraged with adjusted leverage of 33.4x as of September 2008. Despite deleveraging the company's leverage has increased as decrease in equity has been much sharper than decrease in assets.

· Principal's investment losses have ballooned significantly over the last few quarters particularly in 3Q2008. In 3Q2008 the company recorded net realized capital loss of $156 mn compared to $85 mn and $59 mn in 3Q2008 and 2Q2007, resepctively.

· Net unrealized losses on AFS securities (cumulative after tax charge to equity) increased to $2.0 bn in 3Q2008 from $1.0 bn in 2Q2008.

· Besides problems in investment portfolio (discussed in detail below), the company's operating metrics are also witnessing a softening trend. Principal's operating revenues declined 6.4% in 3Q2008 over 3Q2007 while its operating earnings declined 21% y-o-y in 3Q2008.

There are a plethora of additional issues that I have brought up in the two afore-linked reports that can't be seen with an electron microscope in the sell side analyst reports. I wonder why my subscriber roll is not larger than it is...

It is reasonable to assume that considering PFG's miserable quarterly results, they are at risk of a flight of capital - basically a run on the quasi-banks, as assets flee to a perceivably more stable environment. If so, this will weaken the insurer even more.

Highlights from the Principal Financial Group Inc. Q4 2008 Earnings Call

"Moving to Principal Global Investors, assets under management are down 19.6% from a year ago, again reflecting market conditions. For the year, net cash flows were positive, reflecting our depth and breadth of management capabilities.

PGI did experience negative non-affiliated flows of $3.6 billion in the fourth quarter, which is not indicative of our outlook going forward. The biggest contributor was a single real estate advisory mandate of $2.7 billion, which produced revenues of only $200,000 in 2008." See my "run on the bank" comment above.


As mentioned before, market volatility is causing retirement plan and institutional investors to delay making changes. They are apprehensive about investing into a falling market or being temporarily out of the market while executing a transition. As an example, we had commits in September and October from three sovereign institutions in Asia totaling $1.5 billion in global equities.

These were expected to fund by year end but they did not. Looking forward we currently expect two of these to fund, at least partially in the first quarter, and because PGI's relative investment performance remains strong, particularly for the three and five year periods, our level of final stage prospects remains high. Why is that? The markets, particularly the real estate, finance, investment and insurance sectors will get rougher this year, not better. if they were scared away last year, they will be totally frightened and frigid this year!


Of the 19% decline in asset under management from a year ago, 17% was attributable to foreign currency changes and 5% due to market declines, which were partially offset by a 3% increase from positive net cash flows. This raises a red flag. The broad currency moves of 2008 were very easy to see coming. It really calls into question the competency of the money manager if they were somehow caught by surprise by this. See the macro trade addendum of Banco Bilbao Vizcaya Argentaria SA (BBVA) Addendum - Pro Banco Bilbao Vizcaya Argentaria SA (BBVA) Addendum - Pro 2009-01-28 17:48:27 569.55 Kb or the same addendum of the UK insurer on how to hedge/speculate on such. If my retail individual investor subscribers can manage it, I don't see why a highly paid full time professional staff cannot achieve it. Maybe they should be subscribing to BoomBustBlog!


Let me add a couple of additional thoughts on health. We believe we are on track with the first phase of our turn around for the division stabilizing earnings.

The second phase is stabilizing then growing membership. We continue working on a number of fronts with a particular focus on more Principal specific network contracts in key metropolitan areas and on improving terms in existing network contracts.

These will help us gain greater control of claims cost, which in turn will enable us to price more competitively. We’re optimistic we will see progress in this area in 2009, but would remind investors that membership growth is a multiyear process as we are following a very disciplined approach. I would expect some margin compression here if this administration makes good on its healthcare promises of lowering costs across the board.


I don't know if they are simply trying to parse operating segments, but there is an apparent contradiction here. In one section they say:

In part, this reflects operations that are less equity sensitive and the U.S. asset accumulation and global asset management segments. Of the 19% decline in asset under management from a year ago, 17% was attributable to foreign currency changes and 5% due to market declines, which were partially offset by a 3% increase from positive net cash flows.

But in the next section they say:

Terry Lillis

Thanks Larry. As indicated this morning, I’ll spend a few minutes providing financial detail for the company on each of our operating segments. I’ll also cover our investment portfolio. Let me start with total company results.

At $0.69 in fourth quarter 2008, operating earnings per share was down $0.18 from a year ago. As always, there are a number of items impacting comparability between periods. But the variance primarily reflects the impact of equity markets on assets under management, and in term B revenues and earnings.

I'd believe Terry Illis if I had to put my money on it.

Between the full service accumulation and mutual funds businesses alone the decline in equity markets reduced earnings per share by $0.16. Earnings were also dampened by several items, including the impact on net investment income of holding more liquid investments, severance cost due to our expense initiatives, weakening of Latin American currencies against the U.S. dollar, lower prepayment fee income, and higher amortization of deferred acquisition costs, which I’ll discuss in m ore detail shortly. I had anticipated much of this and expessed some of my concerns in the reports above.

Negative investment performance due to equity market performance declines erased nearly $38 billion in 2008, with more than $18 billion of the decrease in the fourth quarter between full service accumulation and principal funds. These are some big numbers, and again as anticipated in my reports, they are taking large slices out of tangible equity. Solvency is now a significant issue due to leverage and downward volatility!

At $103 million, segment operating earnings for fourth quarter 2008 were down $47 million from a year ago due to significant equity market declines. Full service accumulation earnings were $54 million dollars for fourth quarter 2008 compared to $82 million in fourth quarter 2007, reflecting a 22% decline in daily average account values. Again, the risk of capital flight.

Principal funds earnings were $2 million for fourth quarter 2008 compared to $11 million for fourth quarter 2007, reflecting a 29% decline in average account values. For these two businesses, fee revenues dropped in line with the decline in account values, but the primary variable expense offset during the quarter was investment management fees. Which were obviously not deserved considering the abysmal performance. Your clients would have fared much better simply buying a subscription to the blog and preserving capital. It is the underserved compensation via management fee for the right to lose 22% of your money that will cause the more astute investors to flee from your asset management program. If you enforce lock ups or gates of any kind through your insurance products, the outward pressure will simply grow. After a while, people simply won't take the abuse anymore. Listen to how the statement reads, "Principal funds earnings were $2 million for fourth quarter 2008 compared to $11 million for fourth quarter 2007, reflecting a 29% decline in average account values. For these two businesses, fee revenues dropped in line with the decline in account values, but the primary variable expense offset during the quarter was investment management fees." We lost 22% of your money, but luckily we charged you for the favor in order to offset our losses!

Individual annuity earnings were also down, with a $100,000 loss in the fourth quarter 2008 compared to earnings of $15.1 million for the prior year quarter. Twenty percent earnings growth from the fixed annuity business was offset by the impact of unfavorable equity markets on the variable annuity business, which included a true up for deferred acquisition costs and an increase in the guaranteed minimum death benefit reserves.

These items reduced fourth quarter 2008 earnings by about $12 million and $4 million after tax, respectively. Before moving on, a couple comments on amortization of full service accumulation deferred acquisition costs or DAC, which at $9 million for fourth quarter 2008, was down from $32 million in the year ago quarter. We saw this coming as well. HIG has/will share similar problems.

Moving to international asset management and accumulation, fourth quarter earnings of $18 million compared to $25 million a year ago. The decline was primarily due to weakening of Latin American currencies relative to the U.S. dollar, which reduced fourth quarter 2008 earnings by nearly $7 million after tax, when compared to the same period in 2007. Both periods benefited by about $4 million after tax from higher yields on invested assets in Chile, due to unusually high inflation. Here's a freebie for the folk at PFG Asset Management - Close out those Chilean fixed income positions now or face me talking sh1t to you this time next quarter!. Don't say I didn't tell you so.

A couple of other comments, first on Principal International’s net cash flow: excluding about $1.2 billion of outflows during the year from corporate money market funds in India, net cash flows would be up modestly from 2007.

The global liquidity crisis has made the money market funds unprofitable and we reduced our exposure pending improvement in market conditions. Excluding India, net cash flows were 9% of beginning of year assets, with another outstanding year in Brazil, which generated net cash flows of $1.4 billion. Whaaattt!? You state this rather nonchalantly. I wish I could just brush off a $1.2 billion outflow, or is it if you say it calm and cool enough nobody will notice?

Let me now comment briefly on net realized capital losses. In fourth quarter 2008, we recognized capital losses of $189 million, bringing full year capital losses to $505 million – $297 million of the losses for the year are credit-related, including $110 million between Lehman Brothers and Washington Mutual. There is going to be a lot more where they came from. Be prepared. If you subscribed to the blog, you would have been net positive, not net negative here. I warned months in advance on both of those companies:Lehman on 2.21.08 Is Lehman really a lemming in disguise? and WaMu on 9/8/07 Yeah, Countrywide is pretty bad, but it ain’t the only one at the subprime party… Comparing Countrywide to its peers.

Although higher than normal during this period of financial crisis, adherence to our internal credit exposure guidelines and the resulting diversification has helped limit our losses. I’d also point out approximately $110 million of the net realized losses in 2008 were on securities that were marked-to-market through the income statement, but we believe should recover when more normal investment conditions return. You know, that's exactly what the management of (click each link for my reports on these other insurers) MBIA, Ambac, and Assured Guaranty said as well. We ARE returning to more normal investment conditions, which is why you are taking losses. You invested during one of the biggest bubbles in our history while levered up. That bubble popped and we are now returning to normal. Are you telling your investors that you are going to wait until the next bubble to inflate the prices of your investments and boost your income statement and balance sheet? Let's look at the chart of the aforementioned insurers as they wait for more "abnormal" market conditions to undo their investment and underwriting errors...


In effect, these losses for accounting purposes will not necessarily equate to a true loss of capital over the long-term. We recognize there is concern with gross unrealized losses, which increased $3.8 billion from September 30. Let me offer a few thoughts. Yep, heard that one before too. From the monolines as well. It ain't gonna happen like that fella. Not only are you starting to sound like them, but your chart is starting to resemble their's as well...


First, as Larry mentioned, given the longer term nature of our liabilities and our disciplined asset liability management, we have the ability and intent to hold assets until maturity. Similar to last quarter, widening credit spreads, driven more by forced selling into a thinly traded bond market than credit fundamentals, was the primary driver behind the increasing gross unrealized losses.

We continue to believe the fundamentals of our fixed maturity portfolio remain sound. Rightttt! Like those fixed income investments in WaMu and Lehman Brothers? Let me guess, you probably have some regional banks (see the Doo Doo 32, Doo-Doo Bank 32 drill down: Part 2 - Popular, Doo-Doo Bank 32 drill down: Part 3 - SunTrust Bank, and The Anatomy of a Sick Bank!), a little JP Morgan (Re: JP Morgan, when I say insolvent, I really mean insolvent, Is JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase? Doubtful!), maybe a little foreign banking exposure (Banco Bilbao Vizcaya Argentaria SA (BBVA) Addendum - Pro Banco Bilbao Vizcaya Argentaria SA (BBVA) Addendum - Pro 2009-01-28 17:48:27 569.55 Kb) and some Wells Fargo as well ( Wells Fargo Forensic Analysis, About this Bank Plan - It Won't Save the Truly Insolvent Banks!). It is counterparties such as PFG that powerd my high triple digit results from last year. Guaging the way management is talking, it appears as if they are willing to donate to the Reggie Middleton cause again this year as well. Our assets continue to contractually perform and we expect them to mature at par. As an estimate of the significant illiquidity premium being reflected in the cash market prices, if you use the more actively traded credit default swap market as observable data, the increase in gross unrealized losses on our corporate bond portfolio would have been approximately $3.4 billion lower in the fourth quarter. I know you have CMBS. I am bearish on the CRE market for two years now, and have been right on the money thus far (Macerich Forensic Valuation - Professional Macerich Forensic Valuation - Professional 2008-11-28 14:47:43 344.92 Kb and GGP and the type of investigative analysis you will not get from your brokerage house). If you have any RMBS exposure (I'm sure you do, either directly or through your financial holdings) it doesn't look favorable either (see About this Bank Plan - It Won't Save the Truly Insolvent Banks).

There is much more, but I'm tired and wish to go to bed. I still didn't recall anyone (whether management or analyst) commenting on the writing of the naked CDS. I think this is a big deal. You're gambling with insured's monies. Oh well, at least BoomBustBog subscribers see the light. Good night!

Published in BoomBustBlog

Investing to grow and protect your assets is going to prove to be very, very difficult this year. It is important that those who take this endeavor seriously buckle down and get to work. Any and all who subscribe to this blog should have easily made a strong return on thier initial investment, whether a bank that pays $100k for thier prop desk or a retail investor that pays $550. I am congealing my strategy for the balance of the year in the financial space, then will probably release further throught in the financial arena. It really doesn't look very pretty at all.

Hartford Financial Plans To Cut Dividend 84%, Swings To 4Q Loss

Hartford Financial Services Group Inc. (HIG) said Thursday it intends to cut its quarterly dividend by 84% to 5 cents as it swung to a fourth-quarter loss on investment losses.

Shares fell 13% to $13.14 in after-hours trading as the results fell far short of Wall Street's expectations. [Wall Street expectations are a joke, and anyone who seriously quotes or follows these so-called "expectations" are the ones to be laughed at. HIG told the analysts what numbers to expect and were in full control of where the so-called "independent", and so-called "Smart Money" was to expect guidance to end up. Despite this conscious and deliberate manipulation (I'm sorry, I mean guidance), HIG still couldn't hit the target that it helped hang! That goes to show you how out of control management is! Let's reiterate this so it is driven home properly. Wall Street's so-called "expectations" are actively guided and manipulated by the subject company, itself yet despite this manipulation (there I go again, I meant "guidance") the company still can't hit its numbers. BoomBustBlog expectations were significantly more down beat, and blog subscribers, HIG employees and shareholders who frequented this blog had a four month lead time to prepare for this as well as the opportunity to catch the first big downfall in the share price: HIG Actionable Item HIG Actionable Item 2008-11-22 06:32:24 189.75 Kb, Hartford Insurance Group Forensic Analysis - Pro Hartford Insurance Group Forensic Analysis - Pro 2008-11-22 06:30:43 619.29 Kb, Hartford Insurance Actionable Opinion Note Hartford Insurance Actionable Opinion Note 2008-11-22 06:30:14 538.89 Kb, Hartford Insurance Group spreads and counterparty/debt holders - pro Hartford Insurance Group spreads and counterparty/debt holders - pro 2008-11-22 06:31:47 149.00 Kb, and HIG Actionable Intelligence Update 8-12-08 HIG Actionable Intelligence Update 8-12-08 2008-12-08 08:54:33 49.96 Kb . For those who have not subscribed (shame on you), there is a sneak peak here, "Insurance sector Actionable Intelligence Note, made public ". Be sure to look at the other suspect companies in this sector in the subscription content area. They are several who are speculating in naked CDS writing with insureds' monies. They might has well have headed down to the slot machines in Vegas, with a bunch of policyholders in tow. This practice shouldn't even be allowed by the state insurance departments. Mr. Dinallo, do you hear me?]

"This was clearly the most challenging year in our company's nearly 200-year history," said Chief Executive Ramani Ayer.

He said the company plans to make capital preservation and risk mitigation priorities this year by de-risking [read as swallowing actual losses by turning them from unrealized losses to realized losses, hedging in this environment will cos just about as much as swallowing the loss. Who is going to take the other side of a hedge the size required by HIG's portfolio?] the variable annuity product portfolio and cutting the dividend, which is expected to save about $350 million a year.

At the end of 2008, Hartford's life-insurance unit had a preliminary risk- based capital ratio of 385% and the property-and-casualty units were capitalized at levels consistent with AA ratings, the company said. [Only fools, and the friends of fools still rely on those alphabet soup ratings to determine risk. Are there friends of fools in the insurance industry? See " A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton "]

As usual, you can click on any graph to enlarge it.

And then...

Hartford, along with other insurance companies, has faced continuing concerns about how its risk-adjusted capital cushion is holding up amid a falling equity market. Last month, it was granted a thrift charter, which would make it eligible for federal funds under the Troubled Asset Relief Program. [Ok, everyone else is jumping on the TARP bandwagon, why not? I hear Larry Flint from Hustler and the Girls Gone Wild Video crew are applying for a charter to get thier piece of the TARP as well (Seriously, I sh1t you not! Lookee here: Girls Gone Wild and Hustler request bailout funds! The Porn industry and booty seekers across the world get hit hard by the recession just like everybody else). I heard 50 cent applied too, but mucked up his application with a corny rhyme! Hey, where's the Smart Ass Blogger edition of the TARP? I want my piece of the American Pie too! From what I understand, ad rates are low and the revenue is not what it used to be.]

The insurance and financial-services company reported a net loss of $806 million, or $2.71 a share, compared with year-earlier net income of $595 million, or $1.88 a share.

The latest results included a $597 million write-down of goodwill in the corporate and annuity segments. [Hey subscribers who have read my reports, there's a surprise!]

Hartford had a core loss, which excludes net realized capital gains and losses, of 72 cents a share compared with core earnings of $2.66 a year earlier. [Hey, here's another surprise! The downloadable reports were uncannily prescient, weren't they. Once again, Kudos and Big Ups go out to my Research Staff!] Analysts estimated per-share core earnings of $1.30, according to a poll by Thomson Reuters. [You're joking, Right???? I think I should be followed by Thomspon Reuters. I know I will really throw off their mean estimates, every time!]

The net realized capital loss was $610 million, more than double the net realized capital loss a year earlier.

Assets under management fell 19% to $346.9 billion.

Profit fell 8% in the property-and-casualty segment on a decline in investment performance. Total written premiums for the property-and-casualty insurance business totaled $2.5 billion, down 2%, while the combined ratio, the percentage of each dollar the company collects in premiums against what it pays out on losses and expenses, excluding catastrophes, slid to 78% from 88.4%.

In October, Hartford closed on a $2.5 billion investment by German insurer Allianz SE (AZ), which gives Allianz a 23.7% stake in Hartford.

Looking ahead, Hartford expects 2009 core earnings of $5.80 to $6.20 a share. Analysts are looking for $6.08 a share. [Oh, Okay! Yep, we'll be sure to hang out hats on those estimates, predictions and prognostications, I mean like, for sure man!]

Hartford's stock price has fallen 84% since April but has more than tripled since its all-time low of $4.16 on Nov. 21.

-By Kathy Shwiff, Dow Jones Newswires; 201-938-5975; This email address is being protected from spambots. You need JavaScript enabled to view it.

Published in BoomBustBlog

This article ran in Barron's over weekend. It is interesting given my opinion of the subject matter. See "Anyone who subscribes to my blog should have earned their initial investment back several times over" then move on to Barrons:

The Hartford: Hedged Against Disaster

Hartford Financial is on firmer footing than investors might think, making the insurer's stock look like an ultracheap bet on recovery in the bond market. A chance to double your money in the next few years.

WANT TO MAKE A LEVERED BET on a recovery in the bond market? For those willing to take some risk, there are few better bets than buying the stock of Hartford Financial Services Group...


Even with all of this, the Hartford, as the company is known, seems to be a compelling buy. That is our conclusion after closely inspecting information released by company executives at the December Investor Day. (Hartford Financial officials were unavailable for comment last week because of a quiet period before this Thursday's scheduled profit report.) Among other things, the insurer's executives talked of a springback potential in book value once bond prices recover from current panic levels.

The Hartford's bond holdings are largely of high quality, with a negligible default risk. As for impairment risk, company officials have put that at less than 15% of its $11.6 billion unrealized loss portfolio, even under severe economic conditions. And if it were necessary to take charges on these securities, they would be incurred over several years.

A return to more normal conditions in the bond market won't boost Hartford's net worth back to year-end 2007's $61.20 a share. The company has had to take too many earnings write-downs in the past three quarters, including $3.5 billion in after-tax asset-impairment charges and a charge of nearly $1 billion resulting from a shortfall in the expected results of its variable-annuity business, owing to stock-market declines. Offsetting these negatives somewhat was a largely undilutive $2.5 billion infusion of new capital into Hartford by Allianz (ALV.Germany) in October. In return, the German insurer got debt and preferred shares.

Yet a return in book value to $50 a share in the next year or two is possible, particularly if Washington's push to boost the capital coursing through U.S. financial markets and bolster asset prices finally bears fruit. Likewise, earnings should stabilize after a horrid third-quarter loss of $2.6 billion, largely the result of bond- and stock-market losses hitting life-insurance results and Hurricane Ike hurting property-and-casualty earnings.

MORGAN STANLEY ANALYST NIGEL DAILY foresees Hartford Financial generating operating earnings of $5.40 a share in 2009 and $5.95 in 2010. His estimates are below the consensus forecasts, which contain a lot of stale assumptions. Nonetheless, Daily indicated in a recent report, the stock looks dirt cheap, and he later raised his one-year price target to 25. Based on his 2009 estimate, Hartford trades at a price-to-earnings ratio of just under 2.5 times. And the stock fetches less than half our conservative year-end book-value estimate of $30 a share.

The Morgan Stanley analyst further asserts that, when the equity and credit markets improve, Hartford's P/E multiple could jump. Historically, the Connecticut-based insurer has traded at an average of 10 times earnings and 1.4 times book value. If it gained back most of that valuation, shares could be changing hands in the 40s. In fact, that price could be attained in a year, assuming that the company incurs no more major earnings charges. A return of book value to 50 in the next year or two could send the shares even higher. One shouldn't forget that the Hartford traded at nearly 100 just 13 months ago.


Adding to the perceived weakness has been the company's rigor in taking permanent securities charge-offs, after subjecting its unrealized-loss portfolio to tough tests. Unlike unrealized losses, these hit not only GAAP book values, but also reported earnings.

For its structured securitizations, like those backed by commercial mortgages and other asset-backed securities, the company first makes draconian assumptions about the economy's future, against which it tests its portfolio's viability. Among them: a 10% jobless rate, a 30% drop in commercial real-estate values, a 40% drop in home prices and other economic misery.

As far as straight corporate and real- estate debt goes, the company permanently impairs any security that shows scant prospect of recovering over the next two years. This latter standard is more onerous than those followed by most of the Hartford's competitors, but it is being scrapped for fourth-quarter 2008 results


The Hartford led off an industry counterattack at its Dec. 5 Investor Day. No, the company maintained, it has no major capital issues that would stop it from honoring all claims or lead to a credit downgrade of its life-insurance operation. Its property-and-casualty unit had $1.1 billion in excess capital that could be infused into the life company. And the parent company has $2.4 billion in unused credit and contingent-capital facilities that could be downstreamed.

Perhaps most reassuring, executives said they had enjoyed better-than-projected performance on their hedges, thus reducing the impact of tumbling stock prices. Short of a slide in the Standard & Poor's 500 below 700 -- it is now around 800 -- no capital infusions would be necessary.

Certainly, the Hartford's shares aren't riskless. The insurer's normalized earnings power of around $10 a share will remain tantalizingly beyond reach for at least several years without a startling rally in both the U.S. stock and bond markets. But the battered shares could double or even triple in the interim.

Conclusion: Stock Broker and Newspaper financial advice can be hazardous to your networth! See Blog vs. Broker, whom do you trust! - a comparison of the blog's research model and the most prominent Wall Street bank's buy and sell recommendations over a comparable period - Goldman Sachs, Citibank, JP Morgan, and Morgan Stanley.

Published in BoomBustBlog