Legendary investor Marty Whitman’s purchases of bond and mortgage insurers Radian (RDN, Financial), Ambac (ABK, Financial) and MBIA (MBI, Financial) have been very controversial, and widely discussed. Watching an investment plunging 95% and continuing to buy more, what kind of conviction does that need?
Will these investment work out? We are still waiting to see. But the investing in Ambac is working out. With this article we will to review his moves in these bond insurers.
Marty Whitman started to buy these bon insurers in 2007, by Oct. 31, he owns about 10 million shares of Radian (RDN) at about $30 a share, MBIA at about $60 a share, and 2 million shares of Ambac at $20 a share. He wrote in the shareholder for the quarter ended Oct. 31, 2007:
“For example, MBIA Common has been selling at about a 57% discount from Adjusted Book Value, and Radian Common has been selling around a 77% discount from a book value written down to reflect $400 million of calendar third quarter 2007 unrealized losses based on mark to market accounting. Both MBIA and Radian appear to be very well financed.”
Apparently to him, financial guaranty insurance qualifies as a good business:
“Historically, financial guaranty insurance has been a highly profitable business for the monoline insurers, even though the insureds received a very attractive deal by being able to obtain AAA ratings at low cost. Insurance company profitability is measured by a combination of underwriting profits and net investment income. Underwriting profit is measured by the “combined ratio”, i.e., the ratio of the sum of losses and expenses to net premium income and net premiums written. Net investment income, usually all interest income, tends to be larger as long as loss liabilities are “long tail”, i.e., the losses do not have to be paid out until long after the insurance premiums have been collected and then invested in bonds. Typically, MBIA’s insurance subsidiaries have enjoyed a combined ratio each year under 40%. Net investment income for the MBIA insurance subsidiaries has grown over the years to almost $600,000,000 per annum. The prospects appear quite good to Fund management that, once past the current housing difficulties, MBIA will return to its historic patterns of very attractive combined ratios and relatively steady growth in net investment income.”
By Jan. 31, 2008, the prices of all three stocks have lost more than 60%. Marty Whitman added significantly to his positions and he wrote:
“On February 11th, TAVF acquired from MBIA, 10,610,425 shares of MBIA Common at $12.15 per share. This brought the Fund’s holding to 23,148,845 shares of MBIA Common, or about 10% of the issue outstanding. Previously, Third Avenue also had acquired $197,000,000 of 14% Surplus Notes issued by an MBIA insurance subsidiary. Since December 2007, MBIA has raised about $2.6 billion of new capital, of which TAVF has supplied almost $326,000,000.”
“MBIA is now strongly capitalized. It ought to qualify easily for an AAA rating with a $17 billion claims paying ability. If so qualified, MBIA would be in a position to underwrite a large amount of profitable new business. However, there seem to be three impediments tangential to capitalization that might prevent MBIA from receiving a credit rating of AAA-Stable.”
“Obviously, I feel good about TAVF’s investment in MBIA. The Fund ought to do well under almost any scenario. By any objective standard, the MBIA investments are attractive ones with the insurance subsidiaries deserving of an AAA-Stable rating. Yet, there exists a sense of discomfort due to the dangers of Rating Agency subjective considerations and capricious regulators.”
By April 30, 2008, these three stocks lost another 60% in prices, and Marty Whitman doubled his position in MBIA, added significantly to Ambac, and kept Radian almost unchanged. He wrote in this quarter’s letter:
“Net-net, the bear raids seem beneficial for the Fund. The raids are beneficial if all they do is depress the prices of common stocks by propagandizing faulty analysis, e.g., Ambac and MBIA. TAVF can acquire securities at true bargain prices. However, insofar as bear raiders can actually reduce corporate values, e.g., Bear Stearns, where important customers and creditor constituencies were convinced that Bear Stearns was not credit-worthy, bear raiders can be a real problem. Since TAVF is not going to become a bear raider, Fund management’s job is to avoid those situations where bear raiders actually harm companies; and to acquire common stocks of well-capitalized companies where all the bear raiders succeed in doing is to depress common stock prices without diminishing the underlying values of the businesses which are the targets of the bear raiders.”
“Bear raids will continue unabated unless those people leading shortselling forays can be shown some downside, whether economic, legal or both. For example, there appears to be a four-pronged approach toward trying to destabilize MBIA as a going concern. First, there are efforts to strip the holding company of assets so that the holding company might become insolvent. Second, there is pressure brought on the ratings agencies to remove the AAA ratings from MBIA’s insurance subsidiaries. Third, there are pleas to regulators suggesting that they restrict the insurance subsidiaries’ ability to write policies. Finally, and as part of the other three, the bear raiders are trying to discourage clients from doing business with MBIA. None of these actions seem to have any merit at all. But from the bear raiders point of view, why not press these approaches? After all, there is no downside.”
In the quarter ended July 31, 2008, Marty Whitman tripled again his position in Ambac as its prices lost another 60%. He did not add significantly to the other two positions. He wrote:
“Both Ambac and MBIA are distressed securities because there clearly seems to have been a permanent impairment of their businesses as monoline insurers providing AAA wraps to municipalities and financial structured instruments. Both Ambac and MBIA have lost their AAA credit ratings. Yet, in effective run-off, it seems likely that the companies will generate large amounts of cash and large amounts of favorable tax attributes, even assuming a reasonable worst case basis where claims prove to be two or three times larger than what the companies are presently reserving for. One of the most favorable characteristics of insurance companies (such as Ambac and MBIA) is the relative ease of exit from present activities, combined with the ability to employ resources elsewhere. Both Ambac and MBIA have claimed that they intend to reenter the monoline insurance businesses as AAA providers of wraps for municipal bond issuers. Whether such businesses can be rebuilt remains an open question.”
“In a most meaningful way, Ambac and MBIA remind me a lot of one of Third Avenue’s most successful investments – Mission Insurance Group. Mission’s name has now been changed to Covanta Holding Corporation, which was acquired out of Chapter 11 in 2004. Insurance is a minor Covanta activity. Its main area of operations is the creation of energy from waste. Since March 2004, Covanta’s stock price has risen over 540%, 24% of which has been over the past 12 months. The prices for the acquisitions of Ambac Common and MBIA Common during the quarter were less than 30% of Fund management’s estimate of reasonable worst case NAVs, assuming they remain going concerns.”
Marty Whitman has lowered his cost to Ambac to about $5.5 a share, MBIA to $23 a share, and Radian group to $28 a share. These stocks are more than tripled from their July bottoms. Marty Whitman had made money on Ambac, and still waiting for MBIA and Radian to recover.
Will these investment proved to be successful? With his cost, Ambac may pay him off nicely, the positions in MBIA and Radian have higher cost, and it will take longer to recover.
What can GuruFocus users do with these investments? Do we have the same conviction? Or these investments are just “too hard”?
Bill Ackman, another key player of bond insurers, in the opposite direction, has been short on these stocks. He still holds short positions in MBIA on June 30. He seems to be right so far. Will both of them be right? One in short term and the other in long term?
This is what Marty Whitman wrote about Bill Ackman:
“Ackman recently laid out his views in two publications, “How to Save the Bond Insurers”, dated November 28, 2007, and “Bond Insurers Transparency: Open Source Research”, dated January 30, 2008. He also published “Is MBIA Triple A?”, in 2002.”
“While he is an articulate advocate, Ackman’s arguments are off base.”
“William Ackman appears to be disingenuous when he writes and talks about saving MBIA’s policyholders. Why does he care about policyholders? Ackman’s objective is to drive down the market price of MBIA securities.”
Also check out:
Will these investment work out? We are still waiting to see. But the investing in Ambac is working out. With this article we will to review his moves in these bond insurers.
Marty Whitman started to buy these bon insurers in 2007, by Oct. 31, he owns about 10 million shares of Radian (RDN) at about $30 a share, MBIA at about $60 a share, and 2 million shares of Ambac at $20 a share. He wrote in the shareholder for the quarter ended Oct. 31, 2007:
“For example, MBIA Common has been selling at about a 57% discount from Adjusted Book Value, and Radian Common has been selling around a 77% discount from a book value written down to reflect $400 million of calendar third quarter 2007 unrealized losses based on mark to market accounting. Both MBIA and Radian appear to be very well financed.”
Apparently to him, financial guaranty insurance qualifies as a good business:
“Historically, financial guaranty insurance has been a highly profitable business for the monoline insurers, even though the insureds received a very attractive deal by being able to obtain AAA ratings at low cost. Insurance company profitability is measured by a combination of underwriting profits and net investment income. Underwriting profit is measured by the “combined ratio”, i.e., the ratio of the sum of losses and expenses to net premium income and net premiums written. Net investment income, usually all interest income, tends to be larger as long as loss liabilities are “long tail”, i.e., the losses do not have to be paid out until long after the insurance premiums have been collected and then invested in bonds. Typically, MBIA’s insurance subsidiaries have enjoyed a combined ratio each year under 40%. Net investment income for the MBIA insurance subsidiaries has grown over the years to almost $600,000,000 per annum. The prospects appear quite good to Fund management that, once past the current housing difficulties, MBIA will return to its historic patterns of very attractive combined ratios and relatively steady growth in net investment income.”
By Jan. 31, 2008, the prices of all three stocks have lost more than 60%. Marty Whitman added significantly to his positions and he wrote:
“On February 11th, TAVF acquired from MBIA, 10,610,425 shares of MBIA Common at $12.15 per share. This brought the Fund’s holding to 23,148,845 shares of MBIA Common, or about 10% of the issue outstanding. Previously, Third Avenue also had acquired $197,000,000 of 14% Surplus Notes issued by an MBIA insurance subsidiary. Since December 2007, MBIA has raised about $2.6 billion of new capital, of which TAVF has supplied almost $326,000,000.”
“MBIA is now strongly capitalized. It ought to qualify easily for an AAA rating with a $17 billion claims paying ability. If so qualified, MBIA would be in a position to underwrite a large amount of profitable new business. However, there seem to be three impediments tangential to capitalization that might prevent MBIA from receiving a credit rating of AAA-Stable.”
“Obviously, I feel good about TAVF’s investment in MBIA. The Fund ought to do well under almost any scenario. By any objective standard, the MBIA investments are attractive ones with the insurance subsidiaries deserving of an AAA-Stable rating. Yet, there exists a sense of discomfort due to the dangers of Rating Agency subjective considerations and capricious regulators.”
By April 30, 2008, these three stocks lost another 60% in prices, and Marty Whitman doubled his position in MBIA, added significantly to Ambac, and kept Radian almost unchanged. He wrote in this quarter’s letter:
“Net-net, the bear raids seem beneficial for the Fund. The raids are beneficial if all they do is depress the prices of common stocks by propagandizing faulty analysis, e.g., Ambac and MBIA. TAVF can acquire securities at true bargain prices. However, insofar as bear raiders can actually reduce corporate values, e.g., Bear Stearns, where important customers and creditor constituencies were convinced that Bear Stearns was not credit-worthy, bear raiders can be a real problem. Since TAVF is not going to become a bear raider, Fund management’s job is to avoid those situations where bear raiders actually harm companies; and to acquire common stocks of well-capitalized companies where all the bear raiders succeed in doing is to depress common stock prices without diminishing the underlying values of the businesses which are the targets of the bear raiders.”
“Bear raids will continue unabated unless those people leading shortselling forays can be shown some downside, whether economic, legal or both. For example, there appears to be a four-pronged approach toward trying to destabilize MBIA as a going concern. First, there are efforts to strip the holding company of assets so that the holding company might become insolvent. Second, there is pressure brought on the ratings agencies to remove the AAA ratings from MBIA’s insurance subsidiaries. Third, there are pleas to regulators suggesting that they restrict the insurance subsidiaries’ ability to write policies. Finally, and as part of the other three, the bear raiders are trying to discourage clients from doing business with MBIA. None of these actions seem to have any merit at all. But from the bear raiders point of view, why not press these approaches? After all, there is no downside.”
In the quarter ended July 31, 2008, Marty Whitman tripled again his position in Ambac as its prices lost another 60%. He did not add significantly to the other two positions. He wrote:
“Both Ambac and MBIA are distressed securities because there clearly seems to have been a permanent impairment of their businesses as monoline insurers providing AAA wraps to municipalities and financial structured instruments. Both Ambac and MBIA have lost their AAA credit ratings. Yet, in effective run-off, it seems likely that the companies will generate large amounts of cash and large amounts of favorable tax attributes, even assuming a reasonable worst case basis where claims prove to be two or three times larger than what the companies are presently reserving for. One of the most favorable characteristics of insurance companies (such as Ambac and MBIA) is the relative ease of exit from present activities, combined with the ability to employ resources elsewhere. Both Ambac and MBIA have claimed that they intend to reenter the monoline insurance businesses as AAA providers of wraps for municipal bond issuers. Whether such businesses can be rebuilt remains an open question.”
“In a most meaningful way, Ambac and MBIA remind me a lot of one of Third Avenue’s most successful investments – Mission Insurance Group. Mission’s name has now been changed to Covanta Holding Corporation, which was acquired out of Chapter 11 in 2004. Insurance is a minor Covanta activity. Its main area of operations is the creation of energy from waste. Since March 2004, Covanta’s stock price has risen over 540%, 24% of which has been over the past 12 months. The prices for the acquisitions of Ambac Common and MBIA Common during the quarter were less than 30% of Fund management’s estimate of reasonable worst case NAVs, assuming they remain going concerns.”
Marty Whitman has lowered his cost to Ambac to about $5.5 a share, MBIA to $23 a share, and Radian group to $28 a share. These stocks are more than tripled from their July bottoms. Marty Whitman had made money on Ambac, and still waiting for MBIA and Radian to recover.
Will these investment proved to be successful? With his cost, Ambac may pay him off nicely, the positions in MBIA and Radian have higher cost, and it will take longer to recover.
What can GuruFocus users do with these investments? Do we have the same conviction? Or these investments are just “too hard”?
Bill Ackman, another key player of bond insurers, in the opposite direction, has been short on these stocks. He still holds short positions in MBIA on June 30. He seems to be right so far. Will both of them be right? One in short term and the other in long term?
This is what Marty Whitman wrote about Bill Ackman:
“Ackman recently laid out his views in two publications, “How to Save the Bond Insurers”, dated November 28, 2007, and “Bond Insurers Transparency: Open Source Research”, dated January 30, 2008. He also published “Is MBIA Triple A?”, in 2002.”
“While he is an articulate advocate, Ackman’s arguments are off base.”
“William Ackman appears to be disingenuous when he writes and talks about saving MBIA’s policyholders. Why does he care about policyholders? Ackman’s objective is to drive down the market price of MBIA securities.”
Also check out:
