How I Pick Stocks Jeff Thompson, Property Casualty Insurance Analyst Presentation to the UCONN Schoo - PowerPoint PPT Presentation


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How I Pick Stocks Jeff Thompson, Property Casualty Insurance Analyst Presentation to the UCONN Schoo


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Title: How I Pick Stocks Jeff Thompson, Property Casualty Insurance Analyst Presentation to the UCONN Schoo

How I Pick StocksJeff Thompson, Property
Casualty Insurance AnalystPresentation to the
UCONN School of Business
Introduction/ Biography
  • Jeff Thompson is a Vice President of equity
    research at KBW, Inc. focusing on the property
    casualty insurance sector. Jeff has 14 years
    experience following the property casualty
    industry, beginning as a corporate finance
    specialist in 1990.
  • He has received three Wall Street All-star
    analyst rankings, placing in the top-five
    nationally for stock picking in both 1999 1997
    and once for earnings estimate accuracy in 1995.
  • He has been interviewed on CNBC, Bloomberg
    television, Bloomberg radio, FCR Morning Report,
    and quoted in numerous newspaper and industry
    journals. KBW has ranked 2 in Institutional
    Investor for property casualty research in the
    last two years.
  • Prior to KBW, Jeff worked as an equity analyst at
    Conning Company, Advest and Northington
  • He holds a bachelor degree with honors from
    Amherst College, where he concentrated his
    studies in Mathematics and English.

What is KBW?
  • Keefe, Bruyette Woods (KBW) is the largest
    full-service investment bank that specializes
    exclusively in the financial services sector.
  • Founded in 1962 and 100 employee owned, our firm
    is recognized as a leading authority for
    financial services companies. KBW's focus
    includes banking companies, insurance companies,
    broker/dealers, mortgage banks, asset management
    companies and specialty finance firms. Our firm
    has established industry-leading positions in the
    areas of research, corporate finance, mergers and
    acquisitions and sales and trading for financial
    services companies.
  • KBW was directly involved in the 9/11 tragedy and
    lost 67 employees in Tower II of the World Trade
    Center. The firm has since rebuilt.

How Does KBW Make Money?
  • Equity research
  • Corporate Finance
  • Trading
  • Fixed Income

Why the P-C Insurance sector is overlooked
  • Mature, slow growth
  • Volatile earnings history/ Cats
  • Cyclical
  • Difficult accounting
  • Heavily regulated
  • Small percentage of the SP
  • Asbestos, Tobacco, Torts
  • Insurance is boring

Quick Overview of Industry
  • As of 2001, the industry reported
  • - Premiums of 324 billion
  • - Assets of 973 billion
  • - Reserves of 385 billion
  • Surplus of 294 billion
  • Types of insurance organizations stock, mutual,
    stock reciprocal, and brokers
  • By line of business as a total of premium
  • - Personal Lines 54,
  • - Commercial Lines 40,
  • - Reinsurance 6.

Quick Terminology for P-C
  • Net written premium
  • Loss ratio
  • Expense ratio
  • Combined ratio
  • Investment Income
  • Reserves

A Universe of P- C Stocks
Source KBW estimates
My Principles of Investing
  • An investor should be able to answer two
    fundamental questions
  • What will the world look like in 6-months?
  • How do I position myself to make money?
  • Answering these questions forces the investor to
    form an opinion from both a top-down and bottom
    up analysis, a combination that leads to a sound,
    powerful prediction of stock performance.

2004 Outlook for Property Casualty Insurance(or
what the world will look like in 6 months)
  • Peak Pricing Achieved (Cyclical)
  • Peak ROEs Ahead
  • Valuations May Come Under Pressure
  • Top line Expansion to Slow Focus on Book Value
  • Favor Bermuda, Personal Lines, and Specialty
    Lines Companies
  • MA to Start Weak but Gain Steam
  • Reserves (Balance Sheets) Still at Risk

Peak Pricing Underwriting Cash Flow Indicates
Weakening Rates but Strengthening Profits
Property Casualty Industry Historical Cash Flow
and Premium Growth
Source A.M. Best KBW Estimates
Peak Pricing, Drivers of Competition
  • Pressure on Pricing
  • Combined Ratios have been Stronger
  • Cash flow has improved
  • Aggressive New Capital
  • Improving Investment Returns?
  • But Some Offsets Remain
  • Reserve Issues Remain (Asbestos)
  • Loss Trends Favorable
  • Interest Rates Still at Historically Low Levels

Book Value Growth Entering Peak Profitability
NWP Growth versus Return on Surplus
Source A.M. Best
Valuations Multiples Under Pressure
  • Multiples may be under pressure

Source FactSet
Source FactSet
Source FactSet
Valuations Multiples Under Pressure
  • Book Value Matters

Five-Year Book Value CAGR vs. Stock Performance
Source KBW Research
Impact of Rising Interest Rates
  • Investment income may turn more positive

Property Casualty Industry Net Investment Income
Source A.M. Best and KBW Research
Impact of Rising Interest Rates
  • But stock performance may suffer

Source FactSet
Personal Lines
  • Competition may increase and rate increases may
  • But loss trends may stay favorable
  • Low frequency supported by growth of insured auto
    vs. growth of insured drivers.

NWP Growth and Combined Ratios of Personal Lines
Source KBW estimates
  • Bermuda in a secular growth mode
  • Despite better 2004 terms, 2003s underwriting
    results will be tough to beat
  • Capital markets activity to remain high
  • MA may pick up by late 2004

NWP Growth and Combined Ratios of
Source KBW estimates
Commercial Lines
  • Pricing competition returns, particularly for
    property lines commodity business.
  • Profitability rises as higher rates are earned

NWP Growth and Combined Ratios of Commercial
Lines Insurers
Source KBW estimates
Insurance Brokerage
  • Slowing organic growth
  • Acquisition activity continues
  • Profit margins at peak levels
  • Prefer brokers with non-cycle dependent long term
    growth prospects

Insurance Brokers Revenue Growth and Operating
Source KBW estimates
Insurance Brokerage
Number of Insurance Brokerage Acquisitions 1997 -
Source SNL Financial
Capital Markets
  • Almost 12 billion was raised in 2003
  • More is needed to cover industry shortfalls
    estimated by A.M. Best to be impaired by over
    240 billion.
  • Includes debt and trust preferred securities

Source KBW Research
Capital Markets
  • Continued IPO activity but more secondary
  • Dividend increases, some buybacks
  • MA in second half
  • Organic growth still acceptable
  • Weak currency
  • Slowing growth
  • More anxious sellers
  • Targets MRH, MXRE, NYM, PNG, PRE, SAFC
  • Buyers ACE, BER, SPC, XL

MA Activity by Total Deal Value
Source KBW Research
Reserve Risk
  • 97-01 accident years still at risk for adverse
  • Asbestos may get worse before it improves

Industry Loss Ratio and Paid-to-Incurred
Source A.M. Best
What Stocks Do We Recommend(or how to position
yourself to make Money)
  • Two stocks with a good investment rationale
    Philadelphia Consolidated (PHLY) and Allstate
  • ALL upside in stock driven by improving
    profitability, increased emphasis on top-line
    growth initiatives, low relative valuation.
  • PHLY upside driven by strong organic growth and
    profitability, by mixed marketing strategy and
    product innovation.

Forward Projections Modeling
Allstate (Continued)
Summary Page for Allstate
Earnings Model for Philadelphia Consolidated
KBW Focus List Price Targets 12/31/03
Upside to Target Price
Source KBW estimates
Job Interviews What Employers Like to See
  • Demonstrated interest in area of job application
    internships, courses, etc.
  • Success in life good grades, test scores, good
    summer jobs, (non-athletic achievements).
  • Strong work ethic.
  • Broad intellect.
  • Good sense of reality.

Questions to include in an Interview
  • Make sure you have questions!
  • What kind of employee typically outperforms at
    your firm? What are their characteristics?
  • What are your first year expectations? What
    happens if expectations are exceeded?
  • What is the opportunity for advancement? Where
    can I expect to be in 2 years? 5 years?
  • These questions drive a view of eagerness and
    motivation, people who are not viewed as eager
    and motivated are often overlooked.