Wednesday, April 22, 2015

European Reliance vs. Genesee Valley Gas

The Greek crisis seems like a never ending drama. My stake in Greece is my European Reliance (EUPIC) position. So I am watching the drama unfold with keen interest. First a little background. Greece faced a major financial crisis in 2011. but gradually came out of the crisis by 2014. Even though its GDP by had shrunken by 40% and unemployment was at 25%, the government deficit was almost nil. Then in the 2014 election campaign the leftest party Syriza ran on a platform of rolling back 5 years of austerity. And they won in early 2015.

Initially after the election, Greece was given temporary support while the new government comes up with a new plan to reform its economy. This hasn't happened so far. So, it looks like Greece will not get further outside help to service its debts, let alone get new loans. But regardless of whether it stays in the Eurozone or not, foreign companies will need to be paid in Euros or dollars or some respected currency. Greece can leave the Eurozone and print Drachmas in the way Zimbabwe printed their currency with reckless abandon. But it won't do any good in paying for imported goods and services. Right now Greece has a deficit about 10% of GDP. Greece cannot have a trade deficit if it cannot borrow money. So, Greece will to go through a lot of internal struggles if it thumbs its nose at the rest of the Eurozone and defaults on its debt.

ATH:EUPIC Genesee Valley
Gas (1953)
Price € 1.26 $ 5.00
Market Cap € 34.65 M $ 0.118 M
P/E TTM 2.8 x 1.9 x
Div yield 0.0 % 0.0 %
P/BV 0.49 0.40
ROE17.8 % 21.1 %
Against this backdrop, EUPIC has been hugely profitable. It has earned € 0.37, € 0.35, and € 0.33 in 2014, 2013, and 2012 respectively. This means the company earns a high-teens return on equity. And the company has ample equity for its business. Its assets are € 330M, its equity is € 70M and its premium revenue is € 166M. So the company is not overextending itself by writing excessive policies.

I believe the company has done well in part because of Greece's bad economic situation. In a society where the government is on the brink of insolvency, people can hardly rely on government social assistance. Therefore, I believe people who have the means would rely on the private sector to provide what used to be from the government; such as insurance for health and pensions. And in the event of a Greek government default or a Grexit, people will rely even more on the private sector.

As I try my best to evaluate EUPIC objectively, I try to imagine what a young Warren Buffett would do if he saw a similar company. That's one main reason why I've been posting so much about his partnership days. And it just so happens that Buffett did see a somewhat similar situation in his early twenties, when he was playing around with a small capital base. He recounts in 2005:
You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map - way off the map. You may find local companies that have nothing wrong with them at all......

Other examples: Genesee Valley Gas, public utility trading at a P/E of 2, GEICO, Union Street Railway of New Bedford selling at $30 when $100/share is sitting in cash, high yield position in 2002. No one will tell you about these ideas, you have to find them.

So, then I got very interested in Genesee Valley Gas and found it in the Moody's Public Utility Manual. I found that in one year, 1953, the company earned $2.61. Genesee is a tiny cap company even by 1950s standards and so it is very illiquid. In fact I don't know where it was traded let alone the price. But Buffett did say that it was trading at $5. He did not say which year. But using his $5 price in 1953 then the stock was trading at a P/E of 2. However, Buffett failed to mentioned that 1953 was the only year it made that much. In other years earnings was was lower. See chart below. But still it was a very cheap stock.

Genesee Valley Gas is a small-time utility serving Western New York. It only served 28,000 people. During the depression it went into backruptcy protection and was reorganized. I suppose the legacy of that still affected the company almost 20 years later.

Now compare that with EUPIC today. EUPIC is just as solid and it has much more consistent earnings. The PE range is about the same. And both companies sell for considerably less than book. The big drag on EUPIC is of course the Greek macro situation. But as mentioned above I don't believe it will be a total castrophy if Greece defaults or even if it leaves the Eurozone. In either or both cases this company will continue to operate because Greece will no doubt continue to function. If I am right maybe some successful money manager will one day recount how back in the day, when Europe and Greece were in crisis, we could find bargains galore so long as we turned over enough rocks.

I think a young Warren Buffett would approve of EUPIC.


  1. How much percentage wise do you put into EUPIC? I am long EUPIC (~1.5%).
    I also like their assets. Judging from the ratings breakdown they don't own a meaningfull portion of greek sovereign debt. If Greece exits the euro their A-rated Eurobonds will hold more a less their value in euro but their liabilities will shrink.
    Additionally their money management business with growing AUM is worth something. My fear is that there is not much competition at the moment and thus they are earning abnormal returns. E.g. it is nearly impossible to earn decent money with car insurance in Germany, but EUPIC is earning quite a lot in Greece. Furthermore due to regulatory issue it is not possible to pay out 100% of profits as they have to strengthen reserves first. The life insurance liability is a little bit difficult to evaluate. Generally I don't like this long-term liabilities.

  2. hi Martin,

    I have a 3% position in EUPIC.
    I conservatively estimate their Greek bond holdings at 5% of assets. Their life insurance isn't that big a part of their business. Either is their asset management I believe.
    But thanks for the info on car insurance. Can you elaborate why it is so hard to make money in car insurance in Europe?

    Did you read just yesterday they said they are hiring 150 more sales agents? I think they are doing something better than their competitors though I don't know what.

  3. Hey boveinbear,

    thanks for your blog. Kansas City Life is interesting, but i prefer National Wester Life (even more conservative, better earning sources and a high profitable international business).

    If you re interested in German Insurance Companies Wüstenrot & Württemberg and Rheinland Holding. They are under book and single digit P/E. But of course, they have not the high Return on Equity as European Reliance. (I will buy a few shares in that , too, very interesting story).

    Thanks Ulrich