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Jacob Wolinsky
Jacob Wolinsky
Articles  | Author's Website |

Ira Sohn Conference: Steve Eisman Likes Property and Casualty Stocks

May 25, 2011 | About:
Steve Eisman is the Senior Portfolio Manager of the FrontPoint Financial Services Fund, which began operations in March 2004. The fund invests exclusively in the financial services sector. The fund has produced top-quartile returns since inception based on a combination of macro and micro economic analysis, which for example, allowed the Fund to predict the meltdown in mortgage-backed securities and the impact on the entire banking sector far earlier than most. From 1991-2000 Eisman was a Finanical Services equity analyst for Oppenheimer & Company during which time he was ranked as an “All-Star Analyst” by both Institutional Investor and the Wall Street Journal for many years. Before leading FrontPoint, Eisman was the senior Financial Services Analyst for a large hedge fund. Eisman graduated from the University of Pennsylvania (Magna Cum Laude) and Harvard Law School (Cum Laude). Eisman became famous overnight, after he was profiled in Michael Lewis’s best seller, "The Big Short."

From his talk:

U.S. financials have been the worst performing sector this year.

The banks set the tone for the entire group. Capital is at historic highs, loan to deposit ratio, which is one of the most important metrics and is strong.

Why the underperformance?

Regulatory uncertainty

Basel III

Volcker rule

Extra rules for "too big to fail" banks

Mortgage litigation problems

It is hard to value a bank on current earnings or on normalized earnings since what is normalized 2007-2010?! So analysts decided normalized earnings by looking at 2012, assuming credit costs will normalize, the Fed will raise rates, and there will be loan growth.

Credit quality is better, and the Fed has not raised rates. Net interest margins are under tremendous pressure.

Loan growth has been elusive. Investors have been hoping for revenue growth, and they are getting frustrated with the lack of growth.

The property, casualty sector looks attractive.

Property and casualty is very cyclical. It is like an ocean liner: If pricing goes up it goes up, and if it goes down, pricing goes down for years. Turns are usually very slow and trends continue for a while.

The industry now is overcapitalized. The perspective of risk also changes.

P&C barely suffered from the crisis. The entire sector has been de-rated. The pricing is beginning to harden and will extend to other parts of the sector.

New Zealand, Australia, Japan and domestic tornadoes have created $85 billion in losses. The industry uses risk models to compute capital losses. The new model is now RMS 11, and is being used by the insurers and rating agencies.

Going into this year, pricing was going to be down 5-10% like last year. However, now it will be up 5%. The increasing is slow and the ship is starting to slowly turn around.

If there is another massive event, the turn will be quick or nothing will happen and it will move slowly.

There are three ways to play the sector

Insurance Brokers. This is no risk, and the ones with the most international exposure will do the best. My favorite are Marsh (NYSE:MMC), Aon (NYSE:AON), and Willis (WSH).

Reinsurance companies are much more risky but offer more rewards.

Banks have been issuing huge amounts of stocks, while P&C sector has been buying back shares. However, on a P/TB P&C stocks are a lot cheaper than banks.

Reinsurers trade at 10% discount and banks at a 30% premium to tangible book value.

Disclosure: None


About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website

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