Update on My Insurance Holdings

Kansas City Life Insurance (OTC:KCLI) is a smallcap life and health insurance company with a long and stable history. In the company's Q1 earnings report their investments were down $38 M due to the market downturn. Consequently the company equity dropped $3 per share but book value is still $81 per share.

	KCLI	EUPIC
Price	$29.4	€ 3.69
Marketcap M	$282.24	€ 101.47 ($ 114.97)
ROE %	2.6	11.8
PE	14.11	6.55
PTBV	0.36	0.78
Div Yield %	3.67	6.5

KCLI makes 30% of its revenue from investments, therefore investment income is critical to be profitable. But in this low interest environment the company must sacrifice safety to get decent yield. The company has more than half of its assets in corporate bonds. Virtually all of its bonds are investment grade, but there is still a lot at the bottom tier of investment grade. When the downturn happened, there was a big fear that we would see a wave of corporate downgrades and defaults. Fortunately, the Fed pulled out the bazooka and said it was willing to buy up corporate debt to shore up the market.

In the report, the company still has $779 M of equity, even after factoring in Q1 losses. That may seem like plenty but the company's capital and surplus (equity) for statutory regulation purposes is only $260 M at 2019 year end. This $260 M amount is used by regulators determine if the company is solvent and can do more business. So a deep downturn in the bond market can be very scary for the company. But they dodged a bullet, maybe, as the bond market has been quite bullish recently.

KCLI is a really conservative old insurance company. The Bixby family has run it for four generations! Philip Bixby CEO has run the company for the last two decades. Because the company is so stable, past data can be very useful to understand the company and its management intentions.

In the last 15 years, their overall book value has gone from $692 M to $779 M. Over the same period, their shares outstanding have gone from 11.9 M to 9.6 M, as they have consistently tried to buy their shares back, mostly in the $40-$50 range. So the net result is that their book value per share has gone from $51 to $81 in 15 years. That's a paltry 3.13% return.

Along with equity growth, shareholders also get a steady dividend. Sadly, since the current CEO has taken over the company twenty years ago, they have never increased the dividend, although one year, they did distribute a special dividend of $2 per share.

The stock is right now at $29.40 after the recent market drop, but at this level it still hasn't recovered like the favoured US large caps. If the company could return to around $36, that is a 3% dividend. Add the dividend to the 3.13% equity growth and overall, shareholders can expect around a 6.13% return.

This isn't a great return, but I just live with KCLI as a steady source of income. If I have spare cash, I can put it to work at KCLI. Or if I want to get adventurous, I could borrow money to buy KCLI. With interest rates so low, I can pocket the spread between the dividend and the interest cost.

My second insurance holding is European Reliance (ATH:EUPIC). This company is similar to KCLI. It does life, health and auto insurance for the Greek market. EUPIC had a great 2019, the company earned € 17.5 M, and € 22.4 M pre-tax. Of the pre-tax profit, € 7.3 M was from underwriting, and all other was € 15.1 M. As expected however, Q1 2020 was bad news. The company's book value dropped by € 13 M. Again, it was better than I feared, because I saw that they have downside exposure to € 30 M of Greek mutual funds. The ratios in the table are as of Q1 2020, so they still aren't bad. If that is the worst of it, EUPIC is a good company selling for really cheap. And it is very generous with the dividends. I added to my position during this downturn.

That's the second update of my holdings. Next post I will update my cigarette stocks.

People, Let's get a Grip!

Happy Sunday everyone. I just had to get that out of the way!

The hysteria around where I am, is almost laughable. People are hoarding toilet paper like it will give them immunity to Coronavirus! So, get a grip!

So, I am thinking that if people hoard toilet paper as a gut reaction to a virus, then certainly everyday retail investors are capable of selling way beyond what the current situation calls for.

Unfortunately for me, I own a lot of lower-tier stocks, stocks that are in emerging markets and the cheaper stocks in developed markets. So my stocks have actually dropped farther than the market as a whole.

Below are four of my holdings. Notice that they all yield dividends way above average. All four of these companies have improved earnings. All four of these companies have increasing earnings. Tachibana Electech (8159:TSE) is in fact is a netnet. This means that it is worth more dead than alive! While I do realize that the coronavirus crisis will materially impact Tachibana Electech — the company issued a profit warning for the current quarter — nothing that happens this year should take 35% off the valuation!

	Lewis	Tachibana	Riken	EUPIC
Price	R 23.81	¥ 1248.00	¥ 1770.00	€ 3.38
Shares (M)	80.3	26	23.6	27.5
Earnings TTM	398.1	4422	3857	10.9
Marketcap (M)	R 1911.94 ($ 117.30)	¥ 32448.00 ($ 306.11)	¥ 41772.00 ($ 394.08)	€ 92.95 ($ 103.17)
ROE	8.3	6.3	8.3	8.3
PE	4.8	7.3	10.8	8.5
PTBV	0.43	0.46	0.96	0.79
Div Yield	10.46	3.85	2.2	3.85
Price / NCAV	-	0.73	1.36	-

I am posting this table to share and also to remind myself that we shouldn't pay attention to the markets because the fundamentals reflect the value of shares, not the market whims.

While we always suspect the market is due to get a shock that will cause a drop, where the shock comes from is near impossible to guess with any certainty. I never thought that when the 10 year run ends, the shock would come not from geopolitical or world economic events, but from a germ!

In 2009 when the world was suffering a financial meltdown, I read up on the great depression, and tried to draw parallels. I found there weren't that many similarities.

	Fatalities	% of World
1918 Flu	50 M	3
1958 Asian Flu	2 M	0.06
1962 Hong Kong Flu	50 M	0.03
2020 Coronavirus	10,000 so far	0.0001

Now in 2020, the world seemingly is going through a cataclysmic pandemic, I think it pays to read up on similar pandemics of recent history. The table here shows the most deadly flu outbreaks during the last 150 years when we've had sophisticated financial markets. In that time, I can safely say that these worldwide health crises have not had a negative impact on world economic growth. World War I and the 1918-1919 influenza pandemic did not prevent the roaring twenties. The two pandemics in the 50's and 60's did not affect Warren Buffett's generation in the least bit.

Sure, the world economic output could be reduced significantly because of the Coronavirus, but probably only for two quarters. China, the vanguard in this crises, is already starting to stabilize its new infection rates. I wouldn't be surprised if things go back to 3-6 months there. And my feeling is the lessons learned when this crises is over will spur new economic activity in the health care and infrastructure sector to prepare for the next one. Also, lost production can be recovered when the world consumer market returns back to normal.

But many in the world will not try to rationalize the situation and instead make a sport of hoarding toilet paper and other necessities. It is in our human nature to do something active when danger is lurking and is out of our control. And really there is no harm in doing so. However, the same mentality cannot apply to retail investing, because the market will be rational in the end.

Today, the S&P 500 is down 25% from the peak because of a germ. I think this is definitely the time to be contrarian like Baron Rothschild, who famously said: "Buy when there's blood in the streets, even if the blood is your own.".

Portfolio Update

This blog is so devoid of recent entries that I felt compelled recently to post something, anything. Fortunately I have a lot of odds and ends I can update on my portfolio and the market in general.

After riding high under Trump for a year, I am convinced the US market cannot go any higher. The Shiller PE ratio is at a mind boggling 32.3! That is higher than anytime before the great depression and is only surpassed by the dot-com bubble in 2000. On the other hand, I have holdings that are still reasonably valued overseas and even some in the US. Plus I hate paying capital gains taxes. So, instead of selling a lot I settled on hedging the US market. After all, this is a perfect time to short the US market if I am convinced it cannot go any higher.

I hedged the US market by shorting the S&P500 mini futures. Each of these futures is a contract to buy or sell a contract that will pay out $50 times the S&P 500 index on the delivery date. So suppose on the contract expiry the S&P500 is 2700. Then the contract would conceptually pay out $135,000. In reality the contract settles financially everyday, so the original purchase amount and the settlement payout do not happen but instead the delta in the value of the contract is debited or credited at the close of each trading day. So far I am turning a profit shorting the mini futures. However, I really prefer that were not the case, as each gain means an overall downward bias in my portfolio. But it only confirms my belief that the market cannot go any higher.

 A Prussian general once said that "No battle plan survives first contact with the enemy". I feel that way looking back at my first merger arbitrage situation , between Anthem and Cigna. As it turned out, all the forecasts about its chances of success were too optimistic. The merger fell apart after various state governments voiced objections and sued to block it. Despite this, I fell into the golden period for managed care organizations and both companies rose handsomely. I have since sold my Cigna shares. So the moral of this story is that with careful thought and due diligence, even if I am wrong in my predictions, I can still come out ahead. The S&P 500 hedge is another play from this same playbook.

In addition to the hedge I have also reduced my exposure to US companies whenever he opportunity arose. This was the case with IEHC and Senvest.

While the S&P 500 and my US holdings have done wonderfully since Trump's presidency. My international holdings are a mixed bag There have been laggards such as Lewis Group of South Africa. And there are some wonderful stocks, such as Installux, European Reliance, Tachibana Eletech and Riken Keiki. I have listed the basic metrics of some of my international holdings below.

	Tachibana	Riken	EUPIC	Installux	Lewis	CMH
Price	¥ 2028.00	¥ 2504.00	€ 3.47	€ 415.00	R 31.20	R 27.50
Marketcap ($Mil)	¥ 51105.60 ($ 461.66)	¥ 58092.80 ($ 524.78)	€ 95.43 ($ 110.79)	€ 125.83 ($ 146.09)	R 2602.08 ($ 190)	R 2057.00 ($ 150.2 )
ROE %	6.4	11.2	13.8	9.7	4.8	35.6
PE	13.1	14.1	6	14.5	9.9	8.3
PTBV	0.84	1.67	0.94	1.39	0.49	2.97
Div Yield %	1.97	1.2	3.46	1.93	6.41	5.85

Note that all these companies, with the exception of CMH of South Africa, all have very little debt. The companies whose stock appreciated significantly did so with a combination of increased profits and multiple expansion. I am still waiting for that to happen in my South African stocks. I have not wavered in my belief that the long term future of world economy is in the emerging markets. But in the meantime while I wait, they are yielding 6%.

2015 Year End Results

By March every year all companies with fiscal year end on Dec 31 should have announced their annual results. Six of my holdings are summarized below. Overall all results are reasonable and make all six stocks overvalued. But I don't know why the market trades these stocks so cheap. I am not one to think too much of catalysts so I have no clue when will it end.

	EUPIC	PFHO	SEC	KCLI	Soundwill	KARE
Price (April 1)	€ 1.49	10.15	CAD$ 125.70	9.20	HK$ 9.20	€ 240.00
Marketcap M	€ 40.98 ($ 46.71)	8.12	CAD$ 354.47 ($ 270.59)	384	HK$ 2616.20 ($ 337.57)	€ 662.40 ($755.14)
PE	3.66	4.84	loss	13.15	loss	12.40
ROE	0.14	0.33	-	0.04	-	0.15
PTBV	0.51	1.58	0.53	0.58	0.16	1.89
Div Yield %	0.00	12.32 (one time)	0.00	2.70	2.17	3.54
Vol (basis)	0.51	6.89	1.06	5.52	2.41	4.13

The table summarizes the key metrics. I mostly focus on PE and PTBV. And for each company, one or the other shows the company is cheap. The last row gives the average daily volume divided by the total shares. The fraction is showed in basis points units. So PFHO daily volume, which is 6.89 basis points, is actually 0.0689% of total volume. I have found most companies with healthy volumes should trade at about 20 to 30 basis points (0.2% to 0.3%). The table shows that all the six companies trade at extremely low volumes. None are at 20 or 30 basis points. This may explain why the stocks trade so cheap, they have extremely small interest.

European Reliance Insurance (ATH:EUPIC) continued its growth streak by increasing pre-tax profits by 6.6%. Even better is equity growth at 13.3%. The stock is still super cheap. I presume the reason is the ongoing crisis situation in Greece. Warren Buffett used to say he could find stocks that trade at 2 or 3 or 4 times earnings. They exist now and you just have to look. Well, I found one here trading at less than 4x earnings! On top of that it is trading at half of book. Now if only the market can cooperate.

Pacific Health Care Organization (PFHO) had a rough third and fourth quarter. The stock went from the high twenties to as low as $6.50 after announcing that they will lose their biggest customer Amtrust in Q4. But after their official annual report, the stock managed to recover to $10.15. Q4 results show that subtracting Amtrust's waning revenues in the quarter, the company still did $1.2M in business. So at that conservative trend, the company can do $4.8M for 2016. At their current profit margin of 20%, that is still more than $1 a share. The company said in the report that they employed 36 people in mid-March. That is still more employees than they've ever had except for their record year in 2014. And the company is continuing its IT expansion. I am cautiously bullish on PFHO.

Senvest Capital (SEC:TSX) reported FY15 EPS CAD$(35.39), which is pretty much expected. However, the book value per share increased because of a 19% rise in the Canadian dollar relative to the USD throughout the year. That would give per share book value of CAD$271 at year end. And also with estimated hedge fund losses from the company's 13F and its website, we can expect expect book value after Q1 to be about $237. Today it trades at $127. So the stock trades at 53% of book. That is too low even by Senvest standards. And one big reason for the huge discount is the market's view that the company charges excessive fees. This year has been kind of flat, and so there is little if any incentive bonus. The salary drawn should be all the employee expense on the books which is $12.5M. Other operating expenses, which may include costs for expanding their New York office is $16.8M. I am not thrilled about the expense. But for a company that manages about $1.4B in net money for common shareholders, minority interests and hedge fund holders. One can argue the cost is reasonable.

Kansas City Life Insurance (KCLI) reported for the first time after delisting from NASDAQ. The company revealed it bought back 1.1M shares for an average price of $51.13. The shares included normal buybacks and the odd-lot tender offer of 906,500 shares at $52.50. There are now 9.6M outstanding shares. The company earned $29.2M for the year, which is flat compared to the previous two years. However comprehensive income was $(9.0)M due to unrealized losses in fair value of securities. The comprehensive loss along with the 1.1M reduction in shares, minus the dividend, meant that the book value per share was flat from 2014 to 2015 at $68.55. I anticipate that unrealized gains will be much higher in 2016 because interest rates will be lower than expectations at late 2015. Lower interest rates mean a higher valuation on the company's stock portfolio, with the drawback that the company may receive less revenue as people avoid the company's products due to their low yield.

Soundwill Holdings (HK:878) is a real estate company that renovates and develops buildings as well as lease properties, primarily in Hong Kong. It is dirt cheap on a price to book basis. But last year it turned a small loss mainly due to fair value adjustments on its investment properties and almost no property sales.

Soundwill owns some of the best retail properties in Hong Kong. But rents were ridiculously high. I heard some of their properties were the highest retail properties in the world! But now that less tourists are coming from China, rent prices have fallen. Along with rents the fair value of Soundwill's properties have also fallen.

In 2014, the company sold HK$2.5B worth of properties for a $1B gross profit. But last year they had virtually none. But that could be a simply a quirk of timing. The following table shows the company's yearly property sales as well as the total money held as deposit on properties under development. The sales seem to oscillate every two years, with a high amount on year followed by a low. But the amount under deposit on the low years does seem to foreshadow good sales the following year. So, I expect 2016 to have significant property sales as in 2014.

	2015	2014	2013	2012	2011	2010
Property Sales (HK$ M)	10.40	2466.00	199.00	1310.60	483.20	591.20
Deposits	735.00	421.00	1277.00	482.00	529.00	422.00

Karelia Tobacco (ATH:KARE) reported year end earnings of € 19.35 versus € 22.44 a year earlier. Revenues were up 15% and gross margins, net of excise taxes, were up to 14% from 12.7% a year ago. The difference in the bottom line is from a previously mentioned € (14M) adverse tariff decision. The appeal is ongoing which, if successful, would return € 14M to income.

Hong Kong and Greek Portfolio Update

I haven't posted the results from my holdings for a while. And there has been a slew of them. Almost all of them have not disappointed. But their stock performance has been disappointing. I guess that is the hard reality of investing in out of favour markets.

The Greek crisis that has resurfaced this year has stained my nerves. But my two Greek holdings have held up very well. European Reliance (EUPIC) reported H1 revenues up 7% yoy. Such revenue numbers are very encouraging considering how the Greeks are strapped for cash. On the other hand, I am not surprised that a consumer insurer does well in Greece because it fills a void left by the very cash strapped government. The H1 earnings are down slightly from $0.15 to $0.125. The difference was mainly due to higher operating expenses, in part because the company hired more staff. The company currently trades at 1.9x book and 4.2x TTM earnings. This company is one of the cheapest stocks I own. And I am very pleased that the company recently has begun to publish all their investor information in English.

Karelia Tobacco (KARE), also based in Greece, also did very well in H1. This one is less surprising considering that the company gets most of its revenue from exports. In addition, smoking is a mostly recession-proof industry. The company report H1 revenue up 15% yoy. Net revenue (without excise tax) was up an incredible 28%. Earnings went up only 3% mostly because of an adverse court decision regarding duties. The company said that they will appeal the decision even though they have already expensed the loss. Without this decision the H1 profit would have been around $12 per share instead of the $8.52.

In following Greek news through the crisis I also learned that Greece is a society with an all powerful elite. The Karelia family sure counts as part of that group and that is wonderful. They will defend their business interest from all the nonsense happening in the country. So that if the country somehow implodes, the company will find a way to do fine and protect its wealth, and by extension my shares also.

The Hong Kong stockmarket is down in sympathy with the turmoil in China's markets. I feel Hong Kong has some of the most undervalued stocks anywhere today. My two Hong Kong stocks are currently trading at very depressed values. Soundwill Holdings (HK:878), which owns some of the best retail properties in Hong Kong, reported H1 earnings that were similar to last year. Considering the China turmoil I am very happy it wasn't worse. Soundwill typically depends on the mainland China shoppers to to buy the luxury products and dine sumptuously at their prime rental locations. So, there will be downward pressure on rents now that the Chinese government has clamped down on illicit income and China's economy is slowing down. Anecdotal evidence says that some rents in prime locations are down 10-15%. That said Soundwill's rental income has actually increased yoy, albeit slightly. So, I don't see why the stock is trading at a ridiculous HK$9.50 today! Below I show how much the balance sheet is worth per share. Compare that with Hk$9.50 per share!

Soundwill		HK $ per share
Assets	Property under development	12.00
	Other current Assets	3.39
	Investment property	56.00
	Other non-current assets	1.00
Liabilities	All Debt	8.08
	Other liabilities	4.88
	Equity to shareholders	58.34
	Minority Interest	1.09
6 Month EPS		1.02

Someone who is still turned off by the stock can point to the overpriced real estate market. An overpriced real estate market means Soundwill's assets are overstated. Still the margin of safety is so big I believe Soundwill is a steal. And the company is regularly turning over its real estate. In the H1 report, the company said it will convert HK$0.75 per share of this investment properties into cash through a sale that is expected to close in the latter part of 2015.

My other Hong Kong stock is New Century Group (HK:234). The company is profitable and also has a tremendous balance sheet. It trades at 14.1 ¢! Below shows the balance sheet and note that the vast majority of the debt is an interest free loan from the majority owners.

New Century Group		HK ¢ per share
Assets	Equity investment	6.6
	Other current Assets	1.3
	Investment properties	10.9
	Other non-current assets	1.5
	Cash	8.9
Liabilities	All Debt	2.7
	Other liabilities	1.1
	Equity to shareholders	25.5

The company announced recently that it will acquire a cruise liner in addition to the two it already owns for about HK$170 M. That is approximately 1/3 of the company's available cash. But the purchased cruise liner has generated charter income of about HK$20 M in each of the last two years. So that is a greater than 10% return on investment if it continues. I think it is a very reasonable way for the company to deploy its cash.

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
ROE	17.8 %	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.

Earnings on tap: McRea Industries, Senvest, EUPIC, CMH, Putprop

McRae Industries (MCRAA) recently reported H1 2015 results. Revenue in H1 was $57.31 M versus $58.26 M the previous year. And the gross margin was 28.1% versus 30.9% the previous year. This resulted in a H1 income drop of $3.80 M versus $4.55 M the previous year. Despite the slight disappointment, management tone was upbeat. They attributed the lower margin to two main factors. The first is higher costs associated with hiring and training new personnel, which is encouraging because it says they are expanding capacity. The second is due to higher import costs, which is worrying. One would expect that with the dollar getting stronger and stronger that import costs would decrease. On the other hand if most of their imports is from China then that would not apply as the Yuan is actually appreciating versus the dollar. The company did express optimism that demand remain strong in all product segments, so this year results should be on par with last year's record results.

Senvest just reported 2014 results which was as expected given the company posts the results of its funds monthly. Shareholder's equity at year end stands at CDN$738 M or CDN$264 per share. The company currently trades at 64 % of year-end book value. However, it should be even lower considering that after Q1 2015, the Senvest main funds Senvest Partners is up 7% and the Senvest Israel Partners is probably up around the same. The stock today probably trades at less than 60% of book!

Senvest	year end 2014	year end 2013	year end 2012	year end 2011
Common equity (CDN$ M)	738	565	331	263
yoy equity gain	31%	71%	26%
Employee compensation (M)	32	43	12.5
Compensation as a percentage of equity	4.3%	7.6%	3.8%

Senvest is a steal in my opinion. But, there is a lively debate in stock forums and the blogosphere whether the stock is indeed undervalued. The debate centers on whether the management deserves the compensation for the alpha, or lack of, that they generate for their portfolios. The above table shows the employee compensation (management fees) for the last 3 years and their percentages of equity. The fees are from the consolidated balance sheets which is shared by not just the common shareholders but also the outside owners of the Senvest funds and the minority interests. I estimate that the outside owners pay about 1/3 to 1/4 the management fees. And the minority interest is another 10%. So overall, the common shareholders directly pay around 60% of the total employee compensation. So, with this in mind, the fees are around 2.5% in a bad year, when incentive bonuses do not kick in, and it is around 5% in a good year, when incentive bonuses kick in. I think that is reasonable. Back in the day, when I was still buying mutual funds in Canada, the mutual fund management expense ratios could run as high as 2.5%!

I'll be watching the employee expense numbers closely in the coming quarters as the company also said it is expanding its work force in New York.

European Reliance of Greece (EUPIC:ATH) reported earnings of € 0.37 in 2014 versus € 0.35 a year ago. Equity grew to € 70M from € 58M a year ago. This means that the company is now selling for 1/2 book! No doubt the underpricing is due to the ongoing Greek debt crisis. I definitely need to think of the company's contingencies in the event of a Greek exit from the Eurozone, because if I can access the downside I can have a better gauge of whether this company should really be priced at 1/2 book.

Next up are my two South African holdings. CMH, an auto retailer, pre-announced that 2014 headline earnings would be between R2.04 and R1.88 versus R1.58 a year ago. Actual EPS would be between R1.73 and $1.57 versus R1.57 a year ago. Beyond that the company didn't give any more details. So it appears that the company has some one-time charges in the last year, which lowered earnings in a otherwise excellent year. Today the company trades at 9x earnings.

My other South Africa holding Putprop reported sales in line with last year. But a flurry of news made me just too scared and I sold. I think real estate companies are not for my style of investing and it'll be a while before I'll buy another. In the last six months Putprop reported its primary customer was in arrears with rent. It also announced it was doing a rights offer at R6.30 when the stock was trading at R7.00. However, when the rights offering time came, the stock was trading at R6.20! And several board members were replaced at around the same time. All these borderline red flags and the stock's poor performance made me give up on Putprop.

2014 Good Year for Insurance

My insurance holdings are all doing well in 2014. I am not a swing-for-the-fences type of guy. I'd much prefer staid consistent returns. And insurance companies give me that — for now. Insurance companies are strictly regulated in the US. An insurance company requires a license from state regulators in whatever state it wants to operate. The regulators set guidelines for drawing up the liabilities, i.e., the reserves. This is especially true for life insurance companies. People's life expectancies are very well understood, and when a company combines thousands of policies together, the result is a very predictable income and payment stream. Life insurance is also a commodity because there is little room for innovation. For these reasons, life insurance companies are in a competitive low-margin business. On the other hand, many trade considerably below book. Kansas City Life (KCLI) is a case in point. The company's 3 month and 9 month earnings so far this year are in line with last year. But this is just a 4% return on equity! This is a paltry return for a company with no top line growth.

I also own AIG. AIG specializes in both life and property and casualty (P&C). The company's third quarter results was pretty much inline with a year ago period. AIG is now in its first quarter without Benmosche as CEO since 2009, when he steered the company out of the financial disaster. AIG's return on equity is better than KCLI but its relative market to book value is about the same, as shown below. But AIG is a more dynamic company and has much greater potential to improve results despite its larger size.

For comparison purposes, I have also included in the table two life insurance companies that I do not own. Independence Holdings (IHC) sells life and health insurance, and National Western Life (NWLI) sells life insurance along with a lot of annuities. The final insurer in the table is European Reliance (EUPIC). This company sells life, health and car insurance, among other services. It looks better than the others by all metrics. The downside to the company is that it is in Greece. But I bet few would know that after four years of negative GDP, the country is poised to be positive again in the coming quarter. And in my opinion, the dirt cheap stock price gives me ample margin of safety against the company's risks; I EUPIC is a much better stock to own than KCLI. And therefore, I plan to close my KCLI position and use the proceeds to add to my EUPIC position.

	KCLI	AIG	IHC	NWLI	ATH:EUPIC
Price	$ 50.000	$ 54.000	$ 14.220	$ 271.970	€ 1.440
Market Cap	548.40 M	75.60 M	249.96 M	988.88 M	€ 39.60 M ($ 49 M USD)
P/E TTM	19.5 x	8.5 x	10.9 x	9.4 x	3.9 x
Div yield	2.2 %	0.9 %	2.5 %	0.1 %	0 %
P/BV	0.72	0.70	0.85	0.64	0.60
ROE	3.7 %	8.2 %	7.8 %	6.9 %	15.5 %
ROA	0.62 %	1.68 %	1.95 %	0.94 %	3.25 %

ITIC also reported earnings. The company earned $7.0M for the first 9 months versus $13.0M last year. This dramatic drop was not because of a drop in revenue, which was only slightly down, but due to positive effects of claim provisions last year. ITIC sells title insurance; however, I don't really think of it as an insurance company like the other five mentioned in the earlier table. Title insurance claims are a tiny fraction of the premium — less than 10% — and they don't take long to occur. If a claim is made on a policy it usually happens within a few years after purchase. Also, part of the cost of the title insurance policy is the title search that the insurer must perform. So, ITIC can be considered a service company as much as an insurance company.

And my fifth and final insurance company, Wellpoint, reported Q3 revenues up 4% and income up 3%. And most importantly, year end EPS guidance is now around $8.88, up from $8.81. The stock has gone up almost 40% year-to-date. Even the midterm elections last week couldn't drag it down. The Republicans now control both houses of Congress and now can ram through legislation to repeal Obamacare. Their rhetoric says they will too. Of course if they do president Obama will veto it and the Republics do not have the votes to override the veto.

Still, I was pleasantly surprised at the lack of reaction from the market. But I am really not at all concerned by the election results. Obamacare is most widely know for the individual mandate, which is mostly provided by the public exchanges. But the public exchanges only provide 750k customers out of 37M. Wellpoint is doing well now mainly because of better management and the benefits from medical insurance expansion through many aspects of Obamacare. If the Republicans do succeed somehow in changing healthcare, it will only be to tweak this system of private insurance with subsidies for the poor. But the spirit of Obamacare is here to stay. So Wellpoint will benefit no matter which party runs the government after Obama leaves in 2017.

Why I Bought European Reliance

ATH:EUPIC
Price	€ 1.390
Market Cap	€ 38.22 M ($ 52 M USD)
P/E TTM	3.9 x
Div yield	0 %
P/BV	0.63
ROE	16.3 %

My next stop in my virtual world travels takes me to Greece. My macro impression is that Greece is on the road to recovery. I primarily invest in small and micro caps now, and I saw some interesting ideas for Greek small caps here and here. I applied my screener to stocks in Greece and found a few but one really stuck out: European Reliance General Insurance SA (ATH:EUPIC).

EUPIC offers insurance and pensions and mutual funds to individuals in Greece. The company insurance offerings include life, health, fire and car. Its underwriting operations are outstanding. And it trades significantly less than book. I am sure the main reason it trades so low is because it is in Greece. The world knows that Greece had a very difficult 2011 and 2012. In fact, the country has been in recession for 5 years, and it is far from over. The country still has 25% unemployment. But from what I gather, the country has turned the corner and is on the way to recovery. One can see this from how the bond markets are pricing Greek 10 year government bonds. See chart below from the WSJ.

I invested in EUPIC partly because the company had a stellar earnings record through the last four years. The company did suffer losses in its investment portfolio in 2011, but the company's outstanding underwriting results made up for it. Prior to four years ago, the company's underwriting was decent but not as good as it is now. The company also took a € 15M writedown in its equity in 2008, when the financial crisis hit. Before that the company was trading above book and it hasn't traded close to book since then. See the following table. All numbers except dividends are in millions.

	Income	Equity	Investment income	Dividend/shr	Shares
Q1 2014		60.4	0.9		27.5
2013	9.5	57.5	0.8	0.000	27.5
2012	9.0	50.0	0.9	0.100	27.5
2011	2.7	39.5	(7.0)	0.050	27.5
2010	1.3	37.9	1.5	0.040	27.5
2009	3.1	37.7	3.4	0.040	27.5
2008	(0.0)	30.2	4.2	0.040	27.5
2007	2.5	44.5	1.6	0.073	19.2
2006	3.2	25.5	1.9	0.000	19.2
2005	1.8	20.0	0.8	0.000	19.4
2004	1.7	21.6	0.5	0.000	18.3

The company's balance sheet is like most life insurance companies. The company has investment assets, mostly bonds and some equities. The company's liabilities are just the company's underwriting obligations. The company states that 75% of the company's bonds are in the US and "core European countries". I take this to mean countries like UK, France, Germany, Netherlands and not Greece.

EUPIC was established in 1977. The current CEO has been CEO or Chairman since its founding. Some of its founders are still directors. This shows a commitment and stability in the organization. I have found company statements going back to 2001, beyond that I have nothing. In 2007, the Greek bank Piraeus bought a 30% stake in the company. In exchange the bank gave the company the fire insurance business from its mortgage sales.

My impression (or hope) is that the company's insurance profile after the Piraeus investment has made the company much more profitable. But the financial crisis followed by the Greek bond crisis has overshadowed the company's solid underwriting performance. So when the sentiment turns and drives equities upwards, this company should once again trade for book.

The company's auditor is PKF Euroauditing SA going back to 2001. I have never heard of the auditor but their website seems to indicate it is a stable and big European company.

The one thing that worries me about the company me is that it has inexplicably chosen not to pay a dividend for the 2013 fiscal year. I cannot really think of a good reason for this.

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Note**: investing in Greek microcaps is a risky business. I have tediously gathered the data in this article from filings written in Greek. But I am sure I have made mistakes. If you are considering investing in this please read the disclaimer on the right.