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June 20, 2007


David Merkel

If you are into warranties, the company to look at is Assurant, who is #1 in the US on warranties by a wide margin, and probably the world leader as well. I don't know if they do the warranties for Best Buy; I think the answer to that is no, but that they did do the warranties for BBY's Canadian subsidiary as late as 2004.

Assurant is one of the best run firms in the insurance industry, and the valuation is modest compared to the ROE.

Disclosure: I own a decent amount of AIZ

Bond investor

David and ZeroBeta, I am also long Assurant. AIZ's presentation at a Merrill conference in February '07 had logos of their customers. FutureShop (BBY's Canadian unit) was on the list, as well as CC, RSH, HD, SHLD and CompUSA. I like the extended warranty business, but am more excited about the creditor-placed homeowner's insurance unit.

More on-topic: ZB, I think you should distinguish between the free extended warranties employees get and the warranties that customers pay for. They appear to be buying them in fewer numbers, or with a lower margin for BBY. The key is which cause is more important:

Lower-margin warranties may be made up with higher volumes in the long run.
Fewer warranties sold in general is probably the scarier cause. Customers are buying cheaper goods that last longer, on average, so are more willing to bear replacement-cost risk.

Flat-panel TVs and continued purchasing of "cocooning" technology make BBY a long-term buy, in my opinion.

Zero Beta

David and Bond Investor,

Thanks for the comments. I appreciate both your insight. I would not think that Best Buy would go through someone like Assurant. Not that you implied that they did. I used to work in reinsurance in the Cat area structuring deals between insurance and reinsurance companies and the capital markets.
Every now and then, however, we would get a large corporation that would want to try to go straight to the market. After Katrina, most large refiners had to go to the market to buy insurance for their refineries and drillers because their shareholders made them, although it would be cheaper for them to just keep the risk on the books. Shareholders did not want to sit on that fat tail risk. Since Best Buy is essentially the market for consumer electronics risk, and Circuit City as well as some larger names - if times got tough, would they possibly come to a point at which they basically insure themselves and capture whatever profits that Assurant makes off of them? It seems to me someone like Best Buy, Sears, Circuit City, who sell a variety of products from a variety of companies don't have that much risk tied up in one single product - or enough to justify ceding some or all to Assurant. I am not too familiar with the underlying distribution of the risk. Or, do you think in a soft market for this insurance (consumers not buying warranties), a Best Buy wouldn't want to keep this risk at such a low price and just cede it to Assurant? I don't know as much about AIZ as you do but those are my thoughts. Let me know what you think.

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