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Everest Re: Low Risk, High Reward

August 23, 2011 | About:
John Emerson

John Emerson


About the author:

John Emerson
I have been of student of value investing since the mid 1990s. I have continued to read and study value theory on an ongoing basis. My investment philosophy most closely resembles Walter Schloss although I employ considerably less diversification. I also pattern my style after Buffett's early investment career when he was able to purchase shares of tiny companies.

Rating: 4.1/5 (15 votes)


Mcwillia - 3 years ago
Everest is good, but Aflac has a far better combined ratio and has had it every year for over a decade, no exceptions. It also has a bond portfolio with durations well matched to liabilities, in the needed currency, namely yen. Its investment portfolio is only 30% in financials, contrary to popular myth, and it has nearly 30% of its massive portfolio in Japan Government Bonds, handy for a company whose liabilities are primarily in yen. Aflac has gotten a bad rap recently for its european bonds, but who has seen an insurer be more public and proactive in de-risking its portfolio than Aflac? Also, it is interesting that the entire portfolio is bonds. No real estate, no equities, no strange investments. Few insurers can say as much.

For those who think inflation is a risk, maybe for Everest, but not Aflac. Aflac bears little inflation risk on the underwriting side as it pays fixed sum benefits. Inflation risk is thus shifted to the policy holders. And U.S. investors can look forward to currency gains as the yen value increases relative to dollars (biggest net debtor nation will out-inflate the biggest net-saver country over time). There is also little of what Warren Buffett calls 'social inflation' of premiums, as the Japanese are famously averse to insurance fraud, jury trials and litigation.

Plus, Aflac operates in a country where cartel style insurance pricing virtually guarantees them fat profits. The annual collapse of the Japanese government makes it clear that the price regime is not likely to change any time soon. In fact, Aflac was given a total monopoly on so-called 'third sector' cancer insurance for nearly a decade when starting out. Nice. Also, their cushy relations with the regulators, in a country where the revolving door is very much still alive, is further assurance that the status quo will not shift against them anytime soon.

Aflac has better sales channels than its competitors, too. This is not true of Everest. Aflac has the exclusive right to sell cancer insurance through the Japan Post Office. So what? Well, that organization is something like the sixth largest financial concern in the world. Its a very big deal, and Aflac has it. Others don't.

They are the low cost provider, since they are not part of a Keiretsu where insurers must 'invest' float in the stock or debt of sluggish group members. They are also best in breed in a country famous for price-insensitive hyper brand-conscious consumers...an enviable position. Aflac's competitors in Japan are mainly under-capitalized zombies without the power to increase insurance supply. Yasuda may be the exception, but it is indeed 'the exception'.

Lastly, many may wonder what happens if Japan's government suffers more financial embarrassment. It will be forced to scale back its national health coverage, which will push people into the hands of insurers like...wait for it...Aflac.

Taking a step back, think about it. They provide supplementary heath and cancer coverage to the healthiest people on Earth. Nice gig. They insure the most honest and non-litigious. Good customers. They are the best capitalized firm and have the best brand.

Obviously, I'm long AFL.
John Emerson
John Emerson - 3 years ago

Thanks for the comment,

I am not very well versed in AFL, although I agree they have much better operating earnings and a moat which is supported by advertizing (like Geico and Progressive). What they did not have before was a margin of safety in form an extremely low price to tangible book (that has been remedied significantly) and it appears their missteps on the investment side has hurt them in the last ten years. They have not been nearly as successful as CB or RE in building shareholder equity over a ten year period. If you have read my past articles you are probably aware that I like to focus on low price to tangible book and companies which have been successful in increasing tangible equity per share for investors over a ten year period.

However I agree that the company merits a good look now with the huge drop, its change in investment approach, and its superior operating business. I hope you do well in the company I agree it appears cheap, sort of like an American Express after the salad oil scandal ie the drop in reputation does not match the drop in future earnings.

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