Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

The pricing of <a href="https://www.smartkarma.com/entities/credit-suisse-group-ag" target="_blank" data-smartkarma-citation="entities:22253:1" rel="noopener">Credit Suisse Group (CSGN VX)</a> bonds does not fully reflect the risks, complexity, and low capitalization of the firms’ underlying business model; nor does it capture potential franchise impairment from increasing reputation risk. The recent suspension of redemptions from certain CS funds is at best an embarrassment and at worst a signal that controls remain in need of considerable attention. This is unfortunate, as CS is highly geared to the business cycle and could outperform peers, if it can get its house in order. However, CS’s long-dated Additional Tier 1 bonds already trade tight relative to the challenges facing the firm. Please see: <a href="https://www.smartkarma.com/insights/credit-suisse-perfection-priced-into-long-dated-at1" target="_blank" data-smartkarma-citation="insights:48461" rel="noopener">Credit Suisse – Perfection Priced into Long-Dated AT1</a>. As such, we place an Underweight recommendation of CS notes.As Credit Suisse aims to increase its Asset Management (AM) business, the firm is caught between a rock and a hard place with its fund investors. CS froze $10 billion of AM funds linked to assets sourced from Greensill Capital. Known as CS Supply Chain Finance Funds, more than 1,000 institutional and professional investors cannot redeem their holdings in these funds. This also affects all pending redemption requests filed prior to the CS announcement of 1 March. This is not the first blemish on CS’s reputation as it has repeatedly stepped-in it over the last few years and we are increasingly concerned that it may not be the last. In this instance, however, there are reputational and fiduciary issues which could have a more detrimental impact on the franchise. Fortunately, CS cited its fiduciary duty in barricading fund redemptions. This irony seems lost in the marketplace.Taken together, this cannot endear investors in Asia to entrust their wealth with the firm. Asia is Credit Suisse’s targeted growth market. Other wealth managers may capitalize on the repeated missteps.  Furthermore, we also note that both CS and <a href="https://www.smartkarma.com/entities/ubs-group-ag" target="_blank" data-smartkarma-citation="entities:22590:1" rel="noopener">UBS Group (UBSG VX)</a> long duration bonds sold-off more than others during last week’s Treasury Tantrum. Bad volatility is not beneficial for CS’ or UBS’ wealth management franchises. However, CS widened by more than UBS and, unlike UBS, it did not tighten enough to offset the price decline. Taken together we perceive CS bonds as being at a greater risk of repricing downwards as the year progresses.

The pricing of Credit Suisse Group (CSGN VX) bonds does not fully reflect the risks, complexity, and low capitalization of the firms’ underlying business model; nor does it capture potential franchise impairment from increasing reputation risk. The recent suspension of redemptions from certain CS funds is at best an embarrassment and at worst a signal that controls remain in need of considerable attention. This is unfortunate, as CS is highly geared to the business cycle and could outperform peers, if it can get its house in order. However, CS’s long-dated Additional Tier 1 bonds already trade tight relative to the challenges facing the firm. Please see: Credit Suisse – Perfection Priced into Long-Dated AT1. As such, we place an Underweight recommendation of CS notes.As Credit Suisse aims to increase its Asset Management (AM) business, the firm is caught between a rock and a hard place with its fund investors. CS froze $10 billion of AM funds linked to assets sourced from Greensill Capital. Known as CS Supply Chain Finance Funds, more than 1,000 institutional and professional investors cannot redeem their holdings in these funds. This also affects all pending redemption requests filed prior to the CS announcement of 1 March. This is not the first blemish on CS’s reputation as it has repeatedly stepped-in it over the last few years and we are increasingly concerned that it may not be the last. In this instance, however, there are reputational and fiduciary issues which could have a more detrimental impact on the franchise. Fortunately, CS cited its fiduciary duty in barricading fund redemptions. This irony seems lost in the marketplace.Taken together, this cannot endear investors in Asia to entrust their wealth with the firm. Asia is Credit Suisse’s targeted growth market. Other wealth managers may capitalize on the repeated missteps.  Furthermore, we also note that both CS and UBS Group (UBSG VX) long duration bonds sold-off more than others during last week’s Treasury Tantrum. Bad volatility is not beneficial for CS’ or UBS’ wealth management franchises. However, CS widened by more than UBS and, unlike UBS, it did not tighten enough to offset the price decline. Taken together we perceive CS bonds as being at a greater risk of repricing downwards as the year progresses.

Credit Suisse: Greensill Sows Reputation Risks, Underweight CS Bonds

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Thematic (Sector/Industry)

*Texas Storms = Japan Risk:Insurers could suffer record 1Q20 catastrophic (CAT) losses after the historic State of Texas (and beyond) winter storm Uri, which crippled Texas’ electrical grid and caused extensive property damage. Most directly exposed would appear to be Sompo (~2%), and Tokio Marine (1%); and*Watch Your Reinsurance: The risk of this Uri event hitting reinsurance layers is quickly rising given the fluid events and the creep in losses. The situation looks to be quite dicey given the economic impact estimate of between USD 45-50 bn. Add this to Texas’ poor handling of COVID-19, and no doubt this CAT event will result higher bankruptcies across retail energy power companies, energy drillers, etc. which should be additive to reinsurance losses.

*Texas Storms = Japan Risk:Insurers could suffer record 1Q20 catastrophic (CAT) losses after the historic State of Texas (and beyond) winter storm Uri, which crippled Texas’ electrical grid and caused extensive property damage. Most directly exposed would appear to be Sompo (~2%), and Tokio Marine (1%); and*Watch Your Reinsurance: The risk of this Uri event hitting reinsurance layers is quickly rising given the fluid events and the creep in losses. The situation looks to be quite dicey given the economic impact estimate of between USD 45-50 bn. Add this to Texas’ poor handling of COVID-19, and no doubt this CAT event will result higher bankruptcies across retail energy power companies, energy drillers, etc. which should be additive to reinsurance losses.

Japan Insurers – Texas, Don’t Hold ‘Em

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

In this Insight, we look at Asian financial pairs that normally trade in a tight band versus each other and are now trading at levels that are close to an extreme, making it likely that there could be a short term reversal.These are all large cap financials that trade in excess of US$20m a day, so implementing the strategy should be possible using stock borrow or single stock futures.These ideas are based purely off the stock price history and we recommend investors use a fundamental overlay to determine if the price action is reflective of changes in the sector that benefit one company at the expense of the other, or benefit one company more than the other.

In this Insight, we look at Asian financial pairs that normally trade in a tight band versus each other and are now trading at levels that are close to an extreme, making it likely that there could be a short term reversal.These are all large cap financials that trade in excess of US$20m a day, so implementing the strategy should be possible using stock borrow or single stock futures.These ideas are based purely off the stock price history and we recommend investors use a fundamental overlay to determine if the price action is reflective of changes in the sector that benefit one company at the expense of the other, or benefit one company more than the other.

*Reversing Course Again: On April 3, 2020, the European Insurance and Occupational Pensions Authority (EIOPA) - the European Union’s financial regulatory body which replaced the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) – in the context of the corona virus, released a statement urging insurers to “temporarily suspend all discretionary dividend distributions and share buybacks aimed at remunerating shareholders” in order to preserve capital. In an odd reversal of course, EIOPA has updated its commentary surrounding European insurance capital management; and  *Asia-Pacific Insurers Still At Risk: Asia-Pacific insurance counterparts previously acted in capital solidarity with their Western peer during COVID-19. Many Asia-Pacific insurers purchased USD-denominated assets in their desperate search for yield in this low/negative rate environment where the impact of credit default and ratings agency downgrades on their investment portfolios is likely to continue to be outsized and challenge capital their ratios. We are hopeful that the Asia-Pacific insurers - particularly in Japan, Australia, Taiwan, and South Korea – don’t behave as desperately as their European counterparts have.

*Reversing Course Again: On April 3, 2020, the European Insurance and Occupational Pensions Authority (EIOPA) - the European Union’s financial regulatory body which replaced the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) – in the context of the corona virus, released a statement urging insurers to “temporarily suspend all discretionary dividend distributions and share buybacks aimed at remunerating shareholders” in order to preserve capital. In an odd reversal of course, EIOPA has updated its commentary surrounding European insurance capital management; and  *Asia-Pacific Insurers Still At Risk: Asia-Pacific insurance counterparts previously acted in capital solidarity with their Western peer during COVID-19. Many Asia-Pacific insurers purchased USD-denominated assets in their desperate search for yield in this low/negative rate environment where the impact of credit default and ratings agency downgrades on their investment portfolios is likely to continue to be outsized and challenge capital their ratios. We are hopeful that the Asia-Pacific insurers - particularly in Japan, Australia, Taiwan, and South Korea – don’t behave as desperately as their European counterparts have. 

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Positive COVID vaccine news has since led to bullish inflections in a staggering number of countries, ACWI-US included. Our current outlook is bullish. Buy dips. In this report we outline key technical levels across markets and highlight actionable ideas within our Financials &amp; Energy Sectors.

Positive COVID vaccine news has since led to bullish inflections in a staggering number of countries, ACWI-US included. Our current outlook is bullish. Buy dips. In this report we outline key technical levels across markets and highlight actionable ideas within our Financials &amp; Energy Sectors.

Japan

MS&AD Insurance Group Holdings, Inc. is a holding company established through reorganization of Mitsui Sumitomo Insurance Company, Limited.  The Group writes marine, fire, casualty, automobile, life, and allied insurance policies. MS&AD Insurance Group also operates financial services and agencies.

Sompo Holdings, Inc, is a holding company established through the integration of Sompo Japan Insurance Inc. and NIPPONKOA Insurance Company Limited. Through subsidiaries, the Company provides non-life insurance including marine, fire, and automobile, as well as life insurance.

The Dai-ichi Life Insurance Company Ltd. underwrites and sells life, health and annuity insurance to groups and individuals. The Company offers a wide variety of insurance products to suit different needs, ranging from children's school tuition to emergency funds for the elderly.

T&D Holdings, Inc. is a holding company established through the merger of Taiyo Life Insurance, Daido Life Insurance, and T&D Financial Life Insurance. The Company manages life insurance operations for its subsidiaries.

Japan Post Insurance Co. Ltd. operates life insurance business. The Company offers whole life insurance, education endowment, ordinary endowment, medical insurance, and special endowment insurance. Japan Post Insurance provides services for individuals and businesses throughout Japan.

LIFENET INSURANCE COMPANY provides a wide range of life insurance products and services. The company mainly provides the products and services through the internet. The company also provides asset management services.

Anicom Holdings, Inc. is a holding company which was established through the merger of Anicom Insurance, Inc., Anicom Frontier, Inc., Anicom Pafe, Inc. The Company provides health insurance policies for pets and operates insurance agency through internet, personal visiting. Anicom Holdings also researches and provides pet business information.

Dream Incubator Inc. nurtures venture companies.  The Company supports companies by providing strategic insights and other consulting services.

Advance Create Co., Ltd operates insurance agency through newspaper advertising, internet, visiting, telemarketing.  The Company operates consulting and advertising services.

SBI Insurance Group Co., Ltd. operates as an insurance company. The Company offers life, non-life, short-term, and other insurance products. SBI Insurance Group provides its services in Japan.

American International Group, Inc. is an international insurance organization serving commercial, institutional and individual customers. AIG provides property-casualty insurance, life insurance and retirement services.

MetLife, Inc. provides individual insurance, employee benefits and financial services with operations throughout the United States and the regions of Latin America, Europe, and Asia Pacific. The Company's products include life insurance, annuities, automobile and homeowners insurance, retail banking and other financial services to individuals as well as group insurance.

China Life Insurance Company Ltd. offers a wide range of life, accident, and health insurance products and services.

China Pacific Insurance (Group) Company, Ltd. is an integrated insurance services provider. The Company offers life and property insurance products through its subsidiaries.

Arthur J. Gallagher & Co. and its subsidiaries provide insurance brokerage, risk management, employee benefit, and other related services to clients in the United States and abroad. The Company's principal activity is the negotiation and placement of insurance for its clients. Gallagher also specializes in furnishing risk management services.

Aon PLC is a professional services provider. The Company is comprised of risk and insurance brokerage consulting. Aon's services include helping manage risk for clients, negotiating and placing insurance risk with other carriers, and advising clients related to health and benefits, retirement, compensation, strategic human capital, and human resource outsourcing.

The Travelers Companies, Inc. provides commercial and personal property and casualty insurance products and services to businesses, government units, associations, and individuals.

Ping An Insurance (Group) Company of China Limited provides a variety of insurance service in China.  The Company writes property, casualty, and life insurance.  Ping An Insurance also offers financial services.

Chubb Limited operates as a property and casualty insurance company. The Company provides commercial and personal property, casualty, and personal accident and supplemental health insurance, reinsurance, and life insurance to a diverse group of clients.

Prudential Financial, Inc. provides financial services throughout the United States and several locations worldwide. The Company offers a variety of products and services, including life insurance, mutual funds, annuities, pension, and retirement related services, as well as administration and asset management.

Tokio Marine Holdings, Inc., through subsidiaries, offers property, casualty and life insurance, and asset management services.

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Tokio Marine Holdings (8766 JP)

Credit Suisse: Greensill Sows Reputation Risks, Underweight CS Bonds

CS bonds do not fully reflect the risks, complexity, and low capitalization of the firms’ underlying business model; nor do they capture potential...

Hank Calenti, CFA

Japan Insurers – Texas, Don’t Hold ‘Em

JAPAN INSURANCE: Insurers could suffer record 1Q20 catastrophic (CAT) losses after the Texas winter storm. Most directly exposed are Sompo (~2%)...

Thomas J. Monaco

Pairs Trading Ideas - Asian Financials

We look at liquid and large cap pairs from the financials sector that exhibit mean-reversion and are currently trading at or near an extreme based...

Brian Freitas

Asian Insurers – Mea, Mea EIOPA

ASIA INSURERS: On April 3, 2020, EIOPA temporarily suspended capital management activities," but just reversed course. Many Asia-Pacific insurers...

Thomas J. Monaco

Bullish Inflections Around The World

In this report we outline key technical levels across markets and highlight actionable ideas within our Financials & Energy Sectors.

Vermilion Research

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