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To: Freedom Fighter who wrote (1680)7/15/1999 9:33:00 PM
From: Shane M
   of 4656
 
Wayne,

I think I looked into Mercury General about 6 months ago. I really liked their numbers and growth rate. (I think they are auto only?) If I remember correctly, however, they had large California exposure - and in the insurance biz California is known for being unpredictable in their regulations. The risk was kindof high in that regard. I asked our regional controller about them and he recommended I stay away from insurance in California because of the unpredictable regulatory environment.

The number one company on our radar right now is probably Progressive. Certainly not a value stock, but they're shaking things up. Of course State Farm is still viewed as probably the best run operation out there, but Progressive is definitely getting full attention from all players.

When evaluating Allstate, keep in mind that I primarily see the battle lines in terms of a direct and captive agency force. (I see the Independent agency channel under the Allstate brand name, but there are other Independent Agency companies within Allstate - Deerbrook is the primary name). Allstate is branching out increasingly into other distribution channels. We recently purchased CNA's personal lines which more than double our Independent agent capacity. We've also regularly been acquiring Life Insurance companies. I fully expect us to announce a direct channel product in the near future - hopefully before the end of the year.

So I'm seeing the battle from where things are the toughest right now. Industrywide, the Captive agency channel is shrinking and as usual the existing players are fighting harder for a shrinking piece of that pie. But the parts of the war that I'm seeing are not all that's out there. There are troops waiting in the wings, and Allstate definitely has the resources to put major capital behind any new foray. If we can deal with Channel conflict effectively, and if we don't stifle an internal direct channel company, I think we can do very well.

Here's another idea. Banks want to get into insurance? Well they need underwriting and claims service, right? Well, Allstate is recognized for having solid claims service, and the underwriting systems are in place. So why don't we farm out our strength in claims and underwriting and let banks be the front lines for this potential new growth market. I haven't head many people talk about this, but as top line growth becomes increasingly difficult, I think you'll see more people higher up in the company begin to think out of the box.

Another area I'd look for investment opportunity in insurance is to find the "insurance marketplace" on the internet. There's really not alot out there that's very good (with the exception of life ins. products which are rated on simple criterion), but as it becomes feasible to automate the purchase of P&C insurance on the internet (meaning I don't have to fill out 20 minutes of online forms) I expect value added marketplaces to emerge which aggregate offerings of multiple insurers. (Analagous to what we see with mutual fund marketplaces through Charles Schwab). I'd love for me to be able to enter my name, identification #, cars, and deductible/limits. and have the system automatically go out and get my MVR, do all the approproiate checks required by different insurance companies, and have it come back to me with quotes from 10 different insurers. Right now it's easier for most consumers to call several insurers to get quotes, but the time is coming when it'll be just as easy/easier for an aggregator to do the legwork.

Just my opinions on the industry.

Shane

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To: Shane M who wrote (1681)7/15/1999 11:25:00 PM
From: James Clarke
   of 4656
 
If you are looking at Buffett-like insurance companies, take a good look at Horace Mann (HMN). The business looks right and the price looks right. A beautiful little niche business making a consistent 17% ROE on a combined ratio in the low 90s.

JJC

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To: James Clarke who wrote (1682)7/15/1999 11:49:00 PM
From: Shane M
   of 4656
 
Jim,

Thanks for the mention of HMN (Horace Mann). Haven't heard of them, but numbers do look good. I'll look into further.

BTW: They announced after the market today that they're having a worse than expected quarter. Might provide a significant dip for buyers..
quicken.excite.com

You mentioned HCR (Manor Care) a few days ago as an alternative to HMA. Are you confident the restructuring they're undertaking will return them to 1997 and prior performance levels?

Shane

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To: Shane M who wrote (1683)7/16/1999 12:22:00 AM
From: James Clarke
   of 4656
 
I don't know Manor Care - I was only proposing it as a potential idea that some other smart value investors I know are thinking about.

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To: Shane M who wrote (1681)7/16/1999 10:22:00 PM
From: Freedom Fighter
   of 4656
 
Shane,

Thanks for that very helpful overview of the industry.

I bought into MCY when it was selling at a discount to the prevailing industry PE ratios and at an absolute price that I was very comfortable with.

Mercury has been able to consistently produce an underwriting profit on its insurance while generating above average ROE. It has also grown premiums at a rate that is faster than average. Those are the main things I look for. Based on the comparisons I have done with other companies, I think it should sell at a premium to most auto insurers.

The California environment does appear to be hyper-competitive right now, so premium growth and earnings are depressed. However, the research I did I was quite comforting. MCY standard line auto insurance is favorably priced versus virtually everyone. They are also expanding their operations into Florida and a few other states and appear to be getting promising results. So I am hoping that despite the competition at present, they will do very well longer term.

Their size also makes them an interesting possibility as a takeover candidate for someone who wants a presence in California.

I think the investment is going to require some patience on my part but I also think it will be rewarding.

Thanks for the help,

Wayne


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To: James Clarke who wrote (1682)7/16/1999 10:28:00 PM
From: Freedom Fighter
   of 4656
 
James,

I just discovered Horace Mann a few weeks ago. It immediately went on my "Watch" list. I'm not familiar enough with it to make any comments because I haven't even read the annual report. The surface numbers are impressive though and I agree that it's worth looking at.

Did you buy RAL?

Wayne

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To: Freedom Fighter who wrote (1686)7/16/1999 11:27:00 PM
From: James Clarke
   of 4656
 
Horace Mann I just started looking at before I posted last night, so I am actually delighted about the 8% drop today on an earnings preannouncement. But the preannouncement was signficant enough that it makes me wonder whether something is wrong with the franchise. If the franchise is still solid, the stock is a buy. It will take some work to answer that all-important question.

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To: Michael Burry who wrote (1666)7/17/1999 12:06:00 AM
From: jhg_in_kc
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the deal with health care is that it is too important to be in the hands of any person who does it for profit. the ancient chinese system is best. each person pays a doctor every day until he or she becomes sick. then you stop paying until the doctor makes you well. this is a form of health insurance which eliminates predatory behavior.
i hope this cools your blood a bit. <g>

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To: James Clarke who wrote (1687)7/17/1999 12:09:00 AM
From: jhg_in_kc
   of 4656
 
fyi, rmbs up 20% in 2 days. on sept.5, its license to print money commences. this is no dunkin donuts. cheers.
jhg

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To: jhg_in_kc who wrote (1688)7/17/1999 12:32:00 AM
From: Michael Burry
   of 4656
 
Off topic

...each person pays a doctor every day until he or she becomes sick. then you stop paying until the doctor makes you well...

Isn't that what has gotten Social Security and Medicare into so much trouble? The unequal distribution of ages in the population make it unworkable.

Mike

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