FRMO Corp. Q3 2014 Conference Call Transcript (4/17/2014)

Questioner 3

I just wanted to ask you two questions. The first is a very broad question, but where do you see FRMO Corp. over the next 5-10 years? The second is: At any point in time would you or the management team every consider buying an insurance company to create a more permanent base of capital?

Murray Stahl – Chairman & Chief Executive Officer

Those are two good questions. I’m going to take the latter one first, because the second one is a little more complicated, but I’ll answer them both, of course.

We’ve considered the question of being an insurance company or buying an insurance company. As you know, we now have a status in Bermuda, we’ve investigated Bermuda a lot. They’ve got it down to the point where it is a turnkey business. We could go down there and we could very quickly create a reinsurance company or some other insurance company. We could do it.

And, after deliberation and due consideration, we rejected that idea. Not that it doesn’t come up from time to time, and not that people don’t approach us and offer us means and modalities to do that. Every time we talk about it among ourselves, Steve and I, we end up rejecting it. Here is why: because, even though we’d have a bigger permanent capital base, quicker than we otherwise would, the problem with it is we are exposed to the odd event.

There is Hurricane Katrina or Hurricane Sandy or whatever other such event occurs; not that we have to be in catastrophe insurance; we can be in some other kind of insurance. But we don’t like the idea that, because of some three-sigma event, our shareholders’ equity could decline by a meaningful amount, and thereby disrupt our growth plans for years—because we would be, at least to the extent that would happen, drained of that much capital, and it might take years to replenish that. We just don’t like that.

We came up with—and now we get into where we want to be in the next 5-10 years—we came up with a better deal, at least I think it is a better deal. So, what I’m going to do is I’m going to compare and contrast the Wealth Masters Index—in success mode, because it doesn’t necessarily have to be a success—but let’s compare it in success mode to the insurance business. Now, in the insurance business, of course, you earn float. And it is positive income to you until such time as you have the calamity. And then you pay out, and that is a certainty—if you didn’t have the calamity every now and then, no one would pay you the income. So, there is a recourse among the insured parties to your balance sheet.

Now, let’s compare and contrast the Virtus Wealth Masters. We get X basis points on the AUM balance. And we don’t have to pay agents to sell our insurance, and we don’t have to pay a whole bunch of lawyers to figure out are we or are we not violating some insurance law. We don’t have to answer to insurance regulators, and we don’t have to worry about our capital that is going to be drained. We get X basis points.

Steven Bregman – President & Chief Financial Officer

I would add to that, when we were seriously investigating, more than once, the possibility of establishing some kind of insurance subsidiary, I was given a long tutorial one afternoon by someone who had actually built one from the ground up for another investment firm that had done just what we were talking about. And, indeed, they had avoided—because they were also a conservatively-oriented firm, they wanted to avoid issues of undue periodic risk. And they went into a low-risk bread-and-butter type of insurance business, with short lives, just workaday niche type of insurance and so forth. And many purveyors will even send you a team that will do this for you.

And I think he did it successfully. But, as he explained it to me, what became apparent was there was so much effort involved not merely in setting it up and managing it, but you also have people involved, and you have your underwriters, and you have lawyers—the distraction clearly was great. And this fellow, who was very bright, who set it up for his boss, the head of this investment company, who was supposed to step into it once, set it up, and leave it—it is now his full-time job. So, he no longer is involved in investments; he is involved in insurance.

So, there is this issue—it is an easy word to say; you read it sometimes about various companies—management distraction. It would be a very big management distraction, because there is a lot of inherent risk and people involved, and you would have to oversee that.