The Business School Student Who Proved Hedge Funds Were Right About a Fraud
Elite investors had the hunch that Conseco and Reliance would fail, but they needed an outsider to find the proof in the paperwork.
Joys of Compounding · Todd Combs - Investing, The Last Liberal Art - [Art of Investing, EP.1]In his first week at Columbia Business School in 2000, Todd Combs, a former data scientist at Progressive Insurance, walked into meetings with New York hedge fund managers and asked for documents they had never heard of.
Combs had spent about three years at Progressive, where he was responsible for about 40 percent of the company's premium. He loved the company and had an open ticket to return as a product manager if business school did not work out. He had come to Columbia because it had the best investing program, and because he thought his knowledge of insurance, which he called arcane and Byzantine, might give him an edge.
Progressive did not hold earnings calls or give guidance, as most companies did then. Two general managers who had written his recommendations told him to turn that silence into an advantage by talking to Wall Street analysts hungry for information about Progressive. They introduced him to Weston Hicks, the top ranked Wall Street analyst covering insurance, who was fascinated by what Combs knew from inside the business.
Hicks told Combs about four firms started by former employees of Julian Robertson, the founder of Tiger Management. The firms, Blue Ridge, Viking, Maverick, and Lone Pine, were known as Tiger Cubs. They knew investing, Combs said, but they were circling big insurers and could not prove what they suspected.
The Cubs were shorting insurers including Conseco and Reliance. They had the intuition that the companies were in trouble, but they did not have the paper trail to make the bets bigger, and Combs had it because he knew how to tear apart statutory blanks and yellow books, the dense financial filings insurers must submit to state regulators.
"Where are the stat blanks," he asked, "and where are these things?" The investors said, "what, what are you even talking about?" Combs told them what to pull and checked the figures against each other. His verdict was blunt: this is a total fraud. He was right. Both companies later went bankrupt.
The connection came full circle years later. Hicks went on to become chief financial officer of Chubb and then chief executive of Allegheny, the insurer that Berkshire Hathaway, Combs's later employer, acquired last year.
Questions people ask
What is a statutory blank?
Insurers must file detailed financial statements with state regulators, often called statutory blanks or blue and yellow books. Unlike earnings releases, they show reserves, claims, and assets on a strict accounting basis meant to prove the company can pay policyholders, which makes them useful for spotting hidden weakness.
What does it mean to be short a company?
Shorting means borrowing shares and selling them, hoping to buy them back later at a lower price. If a company collapses, the short seller profits, but losses can be large if the stock rises instead, so managers usually want strong proof before making a big bet.
Who were the Tiger Cubs?
Tiger Management was a leading hedge fund firm founded by Julian Robertson in 1980. When Robertson closed it in 2000, former employees started their own firms, including Lone Pine, Viking, Maverick, and Blue Ridge, and Wall Street called them Tiger Cubs.