THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I always tried to turn every disaster into an opportunity."---John D. Rockefeller
"When written in Chinese, the word "crisis" is composed of two characters--one representing danger and the other representing opportunity"--John F. Kennedy (accurate quote/questionable translation)
"What goes around, comes all the way back around."--Justin Timberlake
In the wake of 9/11, the world's insurance market was frozen. Between assessing the actual loss, the implications of terrorism on an unprecedented and massive scale and unwinding issues of re-insurance (insurance companies buy, sell and pool risk between themselves continuously), very little insurance was available. As they have done since the founding of Lloyd's of London in a coffee house in 1688, enterprising British risk assessors (known as underwriters), now housed mostly in Bermuda, launched several new insurance companies. The "Class of 2001" has been very successful and now represents over 20% of the Bermuda insurance market which in turn represents 30-40% of special risk/property/casualty insurance worldwide.
Insurance companies live and die on their ratings, issued by rating bureaus such as AM Best. An insurance broker simply won't do business with a poorly rated insurer. The keys to a good rating are: 1)plenty of equity capital raised through the issuance of common or preferred stock (this is the pot of money that is at "risk" if the underwriters bet wrong on the next big disaster); and 2) good underwriting practices (a track record of betting on disasters that DON'T happen).
In early January, I loaded up on the preferred shares of Aspen Insurance Holdings (AHLpA) and Axis Capital Holdings (AXSpA), two member of the Class of 2001, each for under $25 per share (Remember, unless there are a few years before the shares can be "called" or redeemed by the issuer, you should only buy preferred shares at or below the standard $25 redemption price). Each pays me 7.5% in dividends and each dividend qualifies for 15% tax treatment (which to me has a tax equivalent return of over 9%). Both are rated "A" by AM Best, and both have appreciated in share value.
Flash forward to last Sunday. While perusing recent preferred share offerings on Quantumonline.com , I spied a new issue by MontpelierReinsurance Holdings, another alum of the Class of 2001. My due diligence uncovered that unlike many other insurers, Montpelier had incurred significant exposure to the tsunami, a fact which was giving AMBest some pause. In response, Montpelier raised more equity capital this month through the issuance of preferred stock denominated MRHpA. By Monday I had missed the best pickin's but still bought at just below $26 providing me a "qualified" dividend of over 8.5%. I paid over the $25 redemption price because the shares cannot be redeemed until 2016. Later in the week, AM Best reacted favorably to the issuance and upped its view of Montpelier from "stable" to "positive". I bought more on this news. Montpelier pays a higher dividend than Aspen or Axis because it is rated "A-" and therefore represents more risk. (NB: Reward is proportionate to risk--or at least it should be in a free and open market). I will likely add to this position over time.
In other news, "goldbugs" (devotees of that precious metal) were dismayed earlier in the week on the news that market maven George Soros sold 99% of his holdings in the exchange traded fund ("etf") known as GLD. GLD is the vehicle I use to buy and sell gold. Gold in general fell on this news but found support and rose on news that private Chinese investors purchased 93 tons of gold bars in Q1 2011as a hedge against inflation. This is a stunning number--almost as much as the treasury of Mexico bought a few weeks ago. Between purchases of bars (and other forms of bullion) and purchases for jewelry, the Chinese now rival Indians as the largest purchasers of gold. The stability that gold showed this week and the unsettling nature of Greek debt (and its implications for the whole of the Eurozone) caused me to re-enter the gold market.
I remain bullish on fuel---particularly oil and coal. This week the International Energy Agency issued a plea to oil producing countries to increase production to meet anticipated world wide demand. This is good news for producers--particularly US domestic producers of oil who even got an encouraging word from the President. China, the world's largest consumer of coal, is facing massive power shortages this summer caused by the squeeze of rising coal prices and the refusal of the Chinese government to allow electric companies in China to raise prices. The result is less power generation and resultant brown and black outs. With nuclear power in disfavor, the demand for coal will skyrocket over the next few years. As discussed before, this is not an easy "play" for me because none of the major players carries a decent dividend. I bought more Norfolk Southern Rail (NSC) and may repurchase some Peabody Coal (BTU) from which I was forced to exit under the 8% rule when commodities tanked last week.
So, in closing, it remains a fact that opportunities do arise from disasters and crises. It is simply the nature of things. You can do little if anything to prevent them. In the future, don't shy from them---prosper from them. Others will---they always have..
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