Reasons NOT to own what I own - Part III - Turkish Insurance companies

Not really stock advice, just collation of my learnings

My closest friends do not trust me with the choice of ice cream toppings and never risk saying “Surprise ME!!” as they look for parking. You shouldn’t be looking for any insights from such a guy. Reader skepticism is highly encouraged as the author presents a biased view of his favorites and this writeup is NOT to be construed as a BUY, SELL or HOLD decision. I am not your tax, accounting, investment or financial advisor. Definitely not your hair dresser or a wise-looking uber driver. Look at this writeup as if you accidentally stumbled upon it on craigslist because in your judgement it was okay to hunt a babysitter there for your first-born.

Reason 1 - Geopolitics

It has been generally accepted wisdom to stay away from regions with social and geo-political unrest. This is why hedge funds and Wall Street exit out of politically unstable regions and this has been the case with Turkey for the past decade. These storms can make for good fishing waters because part ownership in equities around the globe is like musical chairs. Someone has to occupy the seats as soon as these empty. I got the seats cheap when everyone ran out in a fire sale and I plan on sitting around for a while. Geo-politics is out of scope these write-ups. As is religion. The most religious discourse we will probe on here is the Mac vs. Windows debate. Maybe we can venture into debating the place of pineapple in Italian kitchens or vegans by the Bosphorus. I can tell you this - Turks are members of NATO and also flirt with BRICS. Turks be pro-Ukraine, without being anti-Russian. Finally, the Persian region, at the time of this writing is facing huge political turmoil with a shift in power at the horizon. If gene is the unit of transfer in biology. A meme is a unit of transfer in culture. Gather around kids, spreading esoteric memes is my area of expertise. This will be my only legacy.

Reason II - Hyperinflation

Turkey is also experiencing hyperinflation. It sits at 78%! Western countries were upset when it touched the 4-5% range. The folks need to occasionally dip their feet in a little misfortune occasionally or as Gen Z calls it ‘touch grass’ every once a while. Anyways, the only way to avoid the impact of hyperinflation is to own something that has its operating costs in the Lira and revenues in the dollars or Euros. Or, underwrite insurance in present day lira and the policy would limit the future underwriting losses because the currency would have run up. In these rare cases, hyperinflation is an advantage for the business. In almost all other cases, downside of hyper-inflation is comparable to that of a war-inflicted region, for businesses and economy.

Reason III - Frictional costs

If those are not good enough reasons for you to stop reading, you would probably have to spend ~$200 to start and close a trade and 2% frictional cost will accompany any position, excluding taxes. So entering Turkey has to promise a minimum 5% returns over the index-performance to make the bet worth your while. The best in the game will shy away with such high huddle rate. Alternatively, you can think of it as an access to an exclusive club. If you have been to one, you may know that what you find there is often far from exclusive. It is just a lot less crowded.

Speaking of crowding, indexing the SP500 is a no-brainer that all successful investors recommend but rarely follow. However, indexing Sp500 now is likely to give you the least returns since the beginning of times and Turkey is a cheap alternative with younger demographics, relatively cheaper labour in Europe, and has an economically strategic geographic location with equal proximity to Africa, Europe, the Americas, and Asia via established trade-routes. Would you pay ~2% frictional costs or would you buy a pricey SP500 basket because everyone is doing that? (Don’t believe me? See below the Shiller ratio of SP500.)

Reason IV - Late to the party

A lot of appreciation has already happened and maybe the runway is over for a year-long anomaly that occurred once in a decade when the Turkish ETF (TUR) beat the SP500 (VOO) over a 1-to-3-year period.

Reason V - Need for translation services

Paying the premium subscription of DuoLingo is not going to help with the earning call transcripts. (I have tried.) You will have to rely on other services. Maybe I found a real use case for all this AI buzz that the tech giants are trying to peddle around by each end of quarter. Gen AI is a notch better than blockchain and metaverse. It may end up having use cases that cause businesses and consumers to unclutch their purses.

The Turkish Insurance Bets

Despite these reasons, I ventured into Turkey and while I watch the macro with the same intrigue I watch the palm reader that lives in my grandpa’s village, the basis of the below thesis is purely based on the neocortex, unless as Kahneman might put it, my System I is masquerading as System II.

You probably want to see the picks if you have stuck around this far. I hope to stick with these Persian ladies longer than a typical Western marriage as the breakup will be costly (See III above) . Long-time readers know that as far as equities go, Asian relationships for me overseas have been a little bumpy although a Chinese blind date has turned out quite well.

The 1st bet — AGESA.IS (or AVISF)

Agesa, not to be confused with Geisha (but the pronunciation rhymes) is short for AgeSA Hayat ve Emeklilik Anonim Şirketi. Agesa stands out as Turkey’s top pension asset manager, actively involved in life protection insurance as well. With a trading valuation at 6 times adjusted earnings per share (EPS), Agesa operates as a joint venture between Ageas from the Netherlands and Sabanci Holding in Turkey. The company's pension asset management segment is experiencing rapid annual growth of 25%, while life protection premiums are seeing annual increases exceeding 20%. Agesa leverages a solid partnership with Akbank, Turkey's foremost private commercial bank, which enhances its distribution capabilities and broadens its customer base significantly.

The millennials and Gen Z Turks will likely not have govt. sponsored insurance or pensions so the personal insurance and pension industry is just about to take off in the region. Avid followers of Buffett and Berkshire letters will know the great flywheel effect float generated by premiums, specifically the float. 80% of this company is also owned by two entities with complimenting expertise maintaining a symbiotic relationship, balance of power and an international know-how fof a leading global insurance provider. Only 20% of the company is up for grabs and I own a meaningful slice, a portion this high for an average retail investor won't be possible for a publicly traded company in the Americas. (Please double check the numbers much like how you would if you were buying a car.)

The 2nd bet — ANHYT.IS (or AUHYF)

We will talk about is the tongue tickler by the name Anadolu Hayat Emeklilik Anonim Şirketi. With very similar business dynamics as the first bet, this is Turkey’s first Insurance company owned by the Bank of Turkey (Türkiye İş Bankası). The largest bank owning this is helpful, it creates a monopolistic default choice for borrowers who are forced to buy insurance on their loans. Homeowners would know the pain of buying insurance and the amount of thought typically put behind it at closing. If you are one these people, you would also know that you probably forgot the terms the day before you stepped in the house. Who wouldn’t want to be at the receiving end of the cheque? Anadolu Hayat Emeklilik leads Turkey’s private pension and life insurance market, which is heavily influenced by credit-linked term life insurance tied to consumer loans. With Turkey now mandating pension savings and a growing demand for private pensions among its youthful population (35 million under 40), the company anticipates robust growth over the next decade. Currently, Anadolu Hayat Emeklilik is trading at a 2024 estimated price-to-earnings ratio of 8, offering a dividend yield of approximately 7%. (Again, please double check the numbers. Much like hoe you would be judging the next school for your kid.)

Conclusion

This is no place for beginners. Definitely NOT for any sane person who believes in the dollar. Unless you are worried about the mounting US debt, there is no need to diversify outside ’Murica! The dutch guild or the pound sterling did not lose their crown of the world’s reserve currency overnight. It took a long long while and a lot of denial and delusion. Isaac Newton's famous phrase regarding his experience with the stock market is: "I can calculate the movement of the stars, but not the madness of men." Newton reportedly uttered this phrase after losing a substantial amount of money (around £20,000 or over $3 million in today's value) by investing in the South Sea Company stock during the South Sea Bubble of 1720. Having said that, I must disclose more than 18% of my liquid networth is in these two names and I trim the positions as they have mushroomed since my entry less than a year ago.

Want more on Turkey? Stay tuned for the next newsletter or click below if you prefer binging right away.