Sunday, October 30, 2005
Eyes peeled for syndicate forecasts
SVB, the Lloyd's insurer and third largest portfolio constituent is expected to announce third quarter syndicate forecasts soon, perhaps as soon as tomorrow.
I've long maintained that SVB's share price is wildly dislocated from its value. I believe the market assumes the 2004 reserving decision, taken to address the previous management's expensive foray into US liability insurance, did not accurately forecast future payments and that further reserving against shareholders funds will be required in the future. From the information we have, I reckon this unlikely. First, SVB have had numerous opportunities to revise the decision made over a year ago and has not considered it necessary. Second, when new management is installed at a plc they frequently take the opportunity to 'kitchen-sink'. This is the process whereby as much as possible is blamed on previous management by writing down the value of investments or acquisitions. The result is a sharp, temporary decline in earnings. The company share price suffers as the extent of prior difficulties are laid bare to the market and confidence in the company evaporates and is replaced by the fear that a similar loss could occur again in the future. To cover themselves against this, new management often 'kitchen-sink' the figures, increasing loss estimates to the maximum margin of error and safety - reducing the likelihood of any further embarassment. The kitchen sink often carries a silver-lining - that any excessive caution displayed in the write-down will later become apparent resulting in a second adjustment to the balance sheet or income statement and a pleasant perkiness in the share price.
I believe that with each quarterly syndicate forecast, the market is putting together a more accurate picture of just how much SVB's discountinued units are going to cost them. If the Q3 figures please, I expect a gradual re-rating of the shares. But the really interesting bit here is the possibility SVB could offload it's discontinued business as some point in the future by paying someone to take the liabilities off their hands. And if they can pay less than they have left in the kitty, this money would flow straight through to profits and depending on the size of the payment, SVB could conceivably double.
For me to be rewarded to such a level that justifies my purchase rules however, I'd only need the shares to hit net tangible asset value of 38p. This would leave SVB still trading at a substantial discount to the market but would leave me some margin of error. SVB may be required to increase their reserves after all.
The Artful Dodger
I've long maintained that SVB's share price is wildly dislocated from its value. I believe the market assumes the 2004 reserving decision, taken to address the previous management's expensive foray into US liability insurance, did not accurately forecast future payments and that further reserving against shareholders funds will be required in the future. From the information we have, I reckon this unlikely. First, SVB have had numerous opportunities to revise the decision made over a year ago and has not considered it necessary. Second, when new management is installed at a plc they frequently take the opportunity to 'kitchen-sink'. This is the process whereby as much as possible is blamed on previous management by writing down the value of investments or acquisitions. The result is a sharp, temporary decline in earnings. The company share price suffers as the extent of prior difficulties are laid bare to the market and confidence in the company evaporates and is replaced by the fear that a similar loss could occur again in the future. To cover themselves against this, new management often 'kitchen-sink' the figures, increasing loss estimates to the maximum margin of error and safety - reducing the likelihood of any further embarassment. The kitchen sink often carries a silver-lining - that any excessive caution displayed in the write-down will later become apparent resulting in a second adjustment to the balance sheet or income statement and a pleasant perkiness in the share price.
I believe that with each quarterly syndicate forecast, the market is putting together a more accurate picture of just how much SVB's discountinued units are going to cost them. If the Q3 figures please, I expect a gradual re-rating of the shares. But the really interesting bit here is the possibility SVB could offload it's discontinued business as some point in the future by paying someone to take the liabilities off their hands. And if they can pay less than they have left in the kitty, this money would flow straight through to profits and depending on the size of the payment, SVB could conceivably double.
For me to be rewarded to such a level that justifies my purchase rules however, I'd only need the shares to hit net tangible asset value of 38p. This would leave SVB still trading at a substantial discount to the market but would leave me some margin of error. SVB may be required to increase their reserves after all.
The Artful Dodger
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