Motley Fool Money - First Citizens Bank Soars on SVB Asset Purchase

Episode Date: March 27, 2023

Shares of the Raleigh, NC-based bank rose more than 50%.   (0:20) Jason Moser discusses: - First Citizens Bank buying (at a discount) $72 billion worth of Silicon Valley Bank's assets - Four tools (two free, two with a subscription fee) he uses in his investing research - The balance of weighing a company's information with the financial media's reporting on that information (10:30) Buck Hartzell talks with Michael Kehoe, CEO of Kinsale Capital Group, about the specialty insurance landscape and his company's competitive advantage.   Send your investing questions to [e-mail] Companies discussed: FCNCA, KNSL   Host: Chris Hill Guests: Jason Moser, Buck Hartzell, Michael Kehoe Producer: Ricky Mulvey Engineer: Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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What? Oh boy. Fantastic. You guys go hard, man. Daredevil Born Again, official podcast Tuesdays, and stream season two of Marvel Television's Daredevil Born Again on Disney Plus. We've got a couple of ideas to help with your investing research. Motley Fool Money starts now. I'm Chris Hill joining me today. Motley Fool senior analyst, Jason Moser. Good to see you.

Hey, thanks for having me. We're going to start in Raleigh, North Carolina, which is the home of First Citizens Bank. This morning, the FDIC announced that First Citizen will buy $72 billion worth of Silicon Valley Bank's assets. They are doing so at a discount. And I am assuming, they're doing this at a discount that is viewed by some investors as an outright steal, because shares of First Citizens Bank are up 50 percent, as you and I are talking right now. Yeah, I mean, it definitely feels like it's a good solution to what has obviously been a very difficult problem here, reminiscent of what we saw back in 2008, 9 and 10, right?

When the FDIC really kind of had to jump in there and make these offers a bit more enticing so that healthier institutions could roll up all of these failed institutions without having to really take so much risk on right now. Thankfully, in this case, this is a much smaller situation in that it is not as many banks, but I mean, it is something that it's worthy. I got to keep reminding myself. These are two of the biggest bank failures in history. Maybe it's because we were so traumatized like 15 years ago, Chris. I mean, I still remember that very well, right? The great financial crisis, I mean, and how that played out on the financial sector in particular, it's still very fresh, I'm sure, for a lot of us. And so it is, it's interesting,

to see this kind of happening again, but it does feel like it's a decent solution that helps keep First Republic from taking on too much, or First, this is and sorry, taking on too much risk while letting the FDIC get in there and flex its muscles as well. Yeah, just reminded me of something Ron Gross said on last Friday show where you're talking about how, you know, a recession doesn't make him nervous, a bare market doesn't make him nervous. Bank contagion. That's going to get the nerves up a little bit. And I think you're right, because I'm right there with you. I am old enough and have a vivid enough memory of what we all went through 2008, 2009, 2010 to look at this and almost, I don't want to say jaded because that's

not the right word, but because that was so bad and so systemic beyond the banking industry, tied up into housing and the overall economy, there is a point at which I just sort of look at this and say, oh, well, this appears to be just contained to part of the banking industry, which leads to this question. Do you view what First Citizens is doing here? Do you view this? I am taking this as a net positive, not just for shareholders of First Citizens Bank, although, congratulations, if you happen to be one of them, but I'm viewing this as a net positive for all investors. This is something that adds a little bit more clarity, a little bit more positivity and containment. Am I wrong to do that? Am I, is this a rose-colored glasses situation? Or do you also view this as,

no, this is a net positive for all investors? Yeah, I definitely do not think you're wrong. I mean, I think you used a word there that strikes me in containment. And in what we've seen over the past several weeks here, it's been fascinating. You know, there's so much psychology at play when it comes to a run on a bank, right? You see these deals that are forged to ultimately contain, you know, these issues. These are. These deals are meant to inspire, right? To bring more confidence to the market. The intentions are clearly to instill confidence, and yet they're having kind of the opposite

effect. Investors, depositors alike, look at it and say, oh, my goodness, this could be a sign of another shoe to drop. And again, going back to 8, 9 and 10, it felt like there were a lot of shoes that dropped. And so it's been nice to see they've been so in front of this. It's nice to see they're working with the industry itself. I think the number I saw here after all of a sudden done, the estimate right now, the FDIC estimates the cost of the Silicon Valley bank failure to its insurance fund is going

to be approximately $20 billion. Now, that exact cost will come at a later time, but that's kind of a back-of-the-involute math right now. And if you remember, the solution to this was ultimately going to require a special assessment on the banks themselves. And so, I mean, I think that's important to keep in mind, too, is this is really something that is keeping within the industry, which I think is important. And it's requiring cooperation. It's requiring forward thinking. And it's requiring a sense of urgency that I think has really helped this from becoming more systemic. Because like Ron said, I think he's right there. Recessions come and go, right? I mean, bear markets come and go. But when you see a systemic, widespread issue permeate the banking

industry, I mean, that can just snowball so quickly. And we saw a couple of examples of that with Silicon Valley and with First Republic. So I do feel like in this case, you know, you You know, it's a real positive that we've seen regulators and industry insiders alike being so proactive and trying to keep a lid on this. Our email address is Podcasts at Fool.com. There's an S at the end there. Podcasts at Fool.com. We got a question from Taylor in Florida who writes, what tools or platforms do you use to get the data that has talked about on the show?

I'm familiar with Edgar, and I know I can go to a company's website and go to the investor the relations section and then find the most recent filings, but is there an easier way to do this? I use the Yahoo Finance app to check the price of a stock, but I'm not sure the rest of the data on there is accurate. I love this question. I love the Taylor's doing the research. We'd love to see that sort of thing. And two things before I hand it over to you, Jason. First, this is a question that's a nice reminder that the phrase real-time stock quotes does not mean that every data point is being updated in real time. And the other that Taylor hints at is something I've mentioned before. Some companies make the IR section of their website very friendly to investors.

And there are companies that just do not. Some do not. And that's really frustrating to me. I love the question I think, Taylor. You're right. Are there easier ways? Yes, there are. Now, the thing is, the caveat is we pay for a lot of that. We, as a company, we pay for certain research outlets and platforms that give us. Some additional insight, information links. One of the platforms we've used here, really, for as long as I can remember, S&P Capital IQ, just a tremendous platform where you can look up any given business, information is endless there, and they make it very accessible as well. With transcripts, SEC filings of all kinds, investor presentations, analyst estimates, you name it, they have it. So, S&P Capital,

IQ is one that we use a lot here, really fun, pretty user-friendly, and one that is similar to that we also use. This is a little bit of a newer relationship we have, but it's a research platform called Centio. And Centio is something that we as an investing team have really dug into over the last year and learning how to use. And again, very similar to Cap IQ, massive platform, lots of information. You can build your own dashboard that keeps you up to speed with real-time company filings, industry research, Twitter feeds, Yada, yada, yada. And so Centio and Capital IQ stand out to me is two of the platforms that we probably get the most use out of. But again, they are paid services. So I don't think they're

terribly accessible just to the general public. One that I find myself using more and more recently is an app called Quarter and it's spelled Q-U-A-R-T-R. I'm sure a lot of listeners know quarter. Still relatively new, but they're really good about getting earnings calls and company presentation calls up on their app. Very user-friendly because it's so mobile first. You can be a nerd like me and listen to an earnings call in your car as you're driving into work. If you don't have to drive to work, then maybe you just have to sit on your couch and listen to the call through your laptop. But regardless, Quarter, I think, is another fun app because of its accessibility. And really, you can tell the way it was designed. It is reaching out to that younger demographic of

investor that's coming up. And then another one that just, I participate with this company sometimes and little one-off presentations they'll have on their app, but it's an app called public.com. It's a brokerage, actually, first and foremost. But what they've done is they've really started incorporating a lot of research and a lot of content into the app. And again, because it's mobile first, very user-friendly, a lot of information there, a lot of fun personalities. Those are four that come off off the top of my head. But I really think Taylor landed a real winning idea with things like Edgar, going to companies, investor relations sites. Those are just really great resources because ultimately you're getting

them from the source. And I think at the end of the day, that's the one thing that probably everybody on our investing team I think would recommend. I certainly will. Get your insight from the actual source of the information, right? Don't tell me about company XYZ's earnings report from reading the article on the Wall Street Journal. That's editorialized. Go to the source of the information, read it, parse that information yourself. Now, it's okay to cross check. You to different media outlets, to see different perspectives. Well, and I would also say, you want to get more than one source because companies are absolutely, and as they should, they're going to tie a bow on their earnings report.

No matter what they do, they're going to basically say, hey, here are the highlights. Here are the things we think they did great. And so you definitely want to get at least one more source to be like, was it really that great? There's no question there. I totally agree. I mean, when you think about it at the end of the day, investing at its core, It's just one big disagreement, right? I mean, you've got a buyer on every sale and a seller on every buy, and each party thinks

they're doing the right thing or they have their own reasons for doing it. And so, yeah, it's always nice to get a number of different perspectives because that can certainly help feed the ultimate opinion that you end up building. Jason Moezer, great talking you. Thanks for being here. Yeah, you got to thank you. Michael Kehoe is the CEO of Kinsell Capital Group, a specialty insurance company that focuses on excess and surplus policies, which tend to be riskier and more difficult to price. Think small

construction companies or equestrian shows. I know insurance isn't the sexiest business in the world, but maybe this will get your attention. Over the past five years, Can Sales annualized return is 40%. Motley Fool senior analyst Buck Hartzell caught up with Kehoe to talk about Can Sale Capital's competitive advantage and market landscape. So let's talk a little bit about the business because this isn't Starbucks. with coffee or Coca-Cola selling a soda. Insurance is hard for some of our members to wrap their heads around and insurance is such a big industry. So I'm going to give you a couple numbers and you can and you talked about the 1% but if we say the property casually market, six to 700 billion dollars

roughly, you guys play in a smaller subsection of that called excess and surplus. That's, I'm going to put numbers around here. You know them better than I do, 50 billion or so roughly. And you guys do a billion or so of premiums. Can you tell me a little bit about the market and the space that you're in within that excess and surplus spot? And you mentioned, you've grown using the same playbook for many years. What's that summary of that playbook for folks? Yeah. So in terms of the market, if you add in the personal lines with the commercial, I think it's probably closer to a trillion dollars. Maybe off by $100 billion or so. I'm not sure exactly. But it's a big mature industry. Commercial side is probably half that. And

E&S is about $100 billion last year, given the growth prospects, probably $120-ish billion in 2023. I would characterize it this way. ENS is a, I'm sorry, insurance in general, PNC insurance is a large mature industry that tends to grow with the economy, maybe a little bit faster if you consider that tort costs or we call them loss costs grow a little bit faster than GDP. E&S is growing with the economy, but it's also taking market share from the standard lines. I think if you go back 10 or 20 years, E&S was maybe 3% of the broader PNC market. I think now it's about 7%, it's more than doubled. If you look at it as a percentage of the commercial lines market, it's the same story.

I think it's gone from 10 to around 20%. We see it as a more attractive growth opportunity. and then historically the profitability has been better too. We write higher risk business, and that means you're more likely to have a loss or claim. We offset that hazard level with a combination of higher premiums to the customer and more restrictive coverage in order to make that an attractive risk trade, if you will, for the risk bear, the insurance company. I would say can sales model kind of augments that basic industry level starting point in some material ways. And maybe I should just quickly highlight that.

So Can Sale does a couple things differently. We focus on the E&S or the non-standard market exclusively, higher margins, higher growth prospects. We focus on small to medium-sized accounts. So our average policyholder pays about $12,000 in premium. That's considered a pretty small account. And really, that's for the same reason. The margins on small accounts historically have been a lot better

than the margins on medium and large, right? the bigger the account, the more intense the competition. And then this next point is really critical. We control our own underwriting. And I think it's underappreciated outside of our business sometimes. What a high volume of transactions we have to manage. In 2022, we had over 600,000 new business submissions. These are risks that come in from our brokers around the country that say, hey, please quote a liability insurance policy on this or a property policy on that. And we sent out over 400,000 quotes, we bound between new and renewal, about 100,000 policies. There's tens of thousands of changes of those policies over the course of the year. And we have 457 employees a year at.

That's what I was saying. And you have about 240 underwriters. And I think you mentioned in your 10K, 90 people working in your technology department. That's unbelievable to do 400,000 quotes with 240 underwriters. And technology has to be a big part of that, right? Technology is a huge part of it, and it's also a huge part of the difference between can sale and the competition. Every single competitor we have that writes small accounts does so in part or in whole by contracting out that underwriting to commission salespeople, right? There's brokers around the industry that specialize in underwriting on behalf of insurance companies. We call them typically managing general agents or MGAs. And the problem with outsourcing the underwriting is the MGA gets paid a commission based on premium volume.

Our underwriters are largely paid based on profitability. But a lot of our competition, their technology is such a mess. I had a competitor tell me one time, we can't afford to underwrite small policies. And so the only way they can access this attractive market is by outsourcing it. By controlling our own underwriting, we drive a much more accurate process. process. And that's a long-winded way of saying, we're going to have a lower loss ratio. So that's the can-sale model. Focus on the small-account E&S market, control our own underwriting, and then the last part is we provide the best level of service in our industry. We quoted last

year right at 70% of those 600 and some thousand submissions. The typical insurance company only gets around to quoting 10 or 15 or even 20%. So that dramatically higher quote ratio, helps drive business. And then, well, we don't, I don't know if we put it in the K or not, but we also quote much more quickly. So our service model, along with those other things I mentioned, is really driving our underwriting operation. And then behind that is this idea that, hey, we operate a much lower cost platform. If you look at what Geico and Progressive have done over 20 or 30 years in the personal auto space, they do a lot of great things. But one of the principal advantages those two companies have is their low-cost operators in a commodity business.

They run circles around their competition in terms of efficiency. And what have they done with it? 25 years ago, they each were around 2.5% market share in the personal auto space. Today, they're about 13 or 14%. So huge growth in market share combined with great returns. That's what we're doing in the E&S market. We're using that 20% expense ratio. We're competing with people in the mid-30s. Some of our competitors are above 40% expenses. And it's just, again, it's a commodity business for your customer. Sometimes all they care about is the cost. As always, people on the program may have interest in the stocks they talk about,

and the Motley Fool may have formal recommendations for or against. So, don't buy yourself stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.