Wednesday, July 23, 2008

Whoa – here come the Japanese

Tokio Marine is a shockingly overcapitalised Japanese insurer. It consists of a vast excess of Japanese bonds and equities writing a fair bit of profitable Japanese business and some not so profitable business whenever it leaves Japan. (In that light it is oh-so-typical Japanese.)

It is buying Philidelphia Consolidated Holdings for an absurd price.

Philly is one of the best run companies I have ever seen. It has family ownership and control – with an old guy with too many heirs. It is a better risk selector than any in the business – and (despite a little bit of legerdemain with reinsurance) has generally written extraordinarily profitably. [For those with a memory – the legerdemain had to do with their Katrina losses. Herb Greenberg wrote about it…]

I have at various times been short the stock (and consistently lost money). This was not a management short – just a valuation story. Philly wrote at a combined ratio of 80 or so - in other words unsustainably well. And despite that it traded at one of the highest multiples in the industry. If they even reverted slightly towards normal the stock probably would have halved.

I am (thankfully) not short it now (plenty of other fish-to-fry). But you got to admire the family getting out now and finding a buyer.

Insurance rates are falling continuously – and so it is almost inevitable that they will not continue to underwrite at such super-profitable ratios. The right valation is probably $20 a share - not the $61 being paid...

The exit also solves the inheritance problem for the many heirs.


First lesson: Valuation shorts are pretty difficult. Look for structural shorts instead.

Second lesson: The Japanese are willing to pay big prices for non-problematic businesses and reasonable prices for problematic ones. We should not be surprised at the big Japanese banks injecting capital into the highly problematic Barclays.

There will eventually be a Japanese exit for many American financials. Maybe the Japs will be tempted by the weak USD.


I have never noticed these Japanese financials being particularly well managed – but they are wealthy – and in the acquisition battle wealth beats smarts – at least for the next couple of years.

I would be far more excited if a Japanese insurer were to buy back 400 billion yen of one of its own shares… but hope doesn’t help you pick stocks.

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