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Update UVXY (tIRA)

Time was running out.

music selection:  “Airplanes, Part II” — B.o.B

A deadline was approaching.  Interactive Brokers is no longer going to allow partnerships in tax advantaged accounts as of the 30th meaning I had to exit my UVXY put trade there early.  I still have 10 strikes in my taxable account that I’m going to hold a little longer.

On 1NOV2017, I purchased 28 contracts of UVXY190118P00010000 for 5.60 a share.  It is somewhat disappointing but I was only able to get 5.65 a share for the same contract today.  The trade was in force for 28 days and yields 11.64% annualized.

Since I am unable to roll the position forward into more UVXY puts, I have chosen to buy insurance companies with the proceeds.  I’ve written before about insurance being arguably the best business in America.  When a company is underwriting profitability and investing its float, they essentially are investing on margin with a negative interest rate.  Even when investing very conservatively, the companies can compound wealth at an enormous rate for decades.

First up is Arch Capital (ACGL).  This is a property and casualty insurer with a 10 year average combined ratio of 91.  A combined ratio under 100 denotes profitable underwriting.  Their ten year growth in book value per share comes to 527% which gives a glimpse into the kind of wealth compounding I expect in the future from them.  Shares are trading for approximately 1.54 times net book value.  This is a good price for a company with strong growth in book value per share.

My other insurance buy today is HCI Group (HCI).  I’m excited about the enormously strong 10 year average underwriting performance here with a combined ratio of 75.  That is outstanding.  The company grows book value per share even faster than ACGL with a 10 year return of 839%.  Despite being a much stronger performer than Arch Capital, HCI trades for a small premium at 1.61 times net book value.  HCI also yields 4.63% through its quarterly distribution.  Importantly, HCI is a small insurer that should be an attractive buy out target by larger firms looking to add market share that comes with strong underwriting discipline.  This one could yield a quick homerun.

In other news, I want to point readers towards a resource produced by Joshua at Finance Footing.  If you are interested in the Oil and Gas sector (which is HOT right now), he details 51 O&G ETF and ETNs at http://financefooting.com/crude-oil-etfs-etns/  He includes a link to a free resource that analyses the performance of these 51 tickers and finds they are not all created equal.  Some are total dogs while others are rockstar performers.  This resource could give you and edge if you are looking for exposure to Oil and Gas.

Devour your prey raptors!

{ 2 comments… add one }
  • Steve November 29, 2017, 8:41 pm

    Any insight into the hurricane related losses for HCI? It looks like they’re on track to lose a lot of money this year, but it’s hard to find much coverage on this other than some raw data.

    I own a few small cap stocks and one of my greatest frustrations is the inability to find much news about these companies. Sometimes I’ll see the stock move 5% or more in a day and then find out in a couple of days why. HCI falls into this category and so I’m wondering how you chose this one.

    • The Lizard King November 29, 2017, 9:11 pm

      Loss years are normal for P&C insurance companies. They are not a negative signal but rather a positive one. The carnage shakes weak competitors out of the market and leads to better underwriting performance in the future. HCI’s ten year average combined ratio is just super. That and their long history of growing book value per share faster than the broad market were used to make my determination. A short term loss is just a buying opportunity for a company of this quality. The small cap nature adds an element of risk but it also adds an element of potential outsized returns. A company this size can easily double or triple its revenue over a short period of time. That is impossible for an insurer like AIG. They also make attractive take over targets which may be even more true if the price dips into an attractive range.

      In the end, “you pays your money, you takes your chances”. And I like my chances with insurers that have strong underwriting discipline.

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