WhoIsWarren

I read Stephen Catlin's book a couple of years ago. Catlin set up Catlin Insurance in the 1980s and built it up into a major specialty insurer out of Lloyds, before selling out to XL Insurance in 2015. You may have seen that he's at it again, setting up Convex Insurance in 2019. As insurance books go, it's a light and enjoyable read, but there are enough learnings in it if you are not an insurance expert already. I liked it because it was written by a practitioner - I don't think there aren't too many of those books around. Whether it helps you with insurance turnaround stories is another matter (personally I think that is a very difficult if not dangerous pursuit). https://www.goodreads.com/book/show/35607655-risk-reward

I'll read of the MTB letter with interest. One thing is for sure, the First Citizens' letters are bland so bland.

Hi CorpRaider, Yes I'm still involved. Regarding your concern, I don't believe any compensation arrangement is perfect. If there are bad actors and a weak Board then whatever the metrics used they can be gamed. Regarding growth in TBVPS as a yardstick of how the bank is doing, I think it's as reasonable as you're going to get. It's over 3 years and is not very aggressive (max payout 36% growth over period, 11% p.a.). Intangibles are not a big feature of the b/s. And while ROE is not explicitly mentioned, growth in tangible book value per share is a function of RoE. There have been acquisitions it's true, but not that much really especially considering its strong b/s. In fact, the bank has bought back c.10% of shares outstanding in the last 18 months or so at above book value. I imagine they could have gotten more growth in book value through acquisitions? Finally, note the low level of management pay compared to other banks. CEO gets paid a modest basic $1m a year and his total comp is capped out at $3m. If they really wanted to screw shareholders, bumping up basic pay a maximums would be the first port of call. So overall I see is no evidence of abuse - in fact, quite the opposite. As you mention, the Holding family members collectively owns over 50% of the company, a stake worth almost $3bn today. CEO and Chairman Frank B. Holding Jr. owns at least 15% (maybe 20%?). So protecting (and safely growing) capital must be to the forefront. If they were stuck for cash, increasing the dividend (payout ratio less than 5%) would be an obvious first step.

I think this might be the one: https://www.cnbc.com/video/2019/02/25/why-warren-buffett-sold-berkshires-stake-in-oracle.html

I hope you're right there. I know they haven't become stupid of a sudden, but my confidence in their investment decision-making is wavering. Oh, me of little faith!! :o Thanks for your comments.

Maybe you're right that it's not a big deal, but it's not a theoretical risk. If the capital situation got bad enough they might have to raise capital (or at least have the threat of it hanging over them). They could cut back on underwriting / increasing inwards reinsurance, but it might be precisely when insurance pricing is really attractive. Mark-to-market can have a detrimental effect. If I'm not mistaken, a whole host of insurers (Europeans?) got into trouble in the early 2000s as a result of having too much equity exposure. I just hope management has run the scenarios and carefully considered the possible consequences.

Regarding Toys R Us Paul Rivett said: "we got a business that was making over 10 years $100m of EBITDA year after year....the company continues to generate EBITDA...." Unless I missed a clarification somewhere else, I took that to mean $100m was a 10 year average. Isn't it likely that more recent years have been tougher? $100m might not be a good benchmark for the future at all. I am also very wary of the idea that they got valuable real estate with a toy business thrown in for free - if the liabilities from one can transfer over to the other, then it's just wrong to talk about them as two parts. They know this too and when they make such statements I feel violated. I'm also interested in what you guys think about the last question on the earnings call, which was about the level of equity securities on the balance sheet and whether a mark-to-market of their securities in a -50% stock market environment could wipe out 50% of Fairfax's equity capital. He was giving rough numbers here of course, but it's a point worthy of serious consideration. Not just a question for Fairfax mind you, but compare and contrast with Berkshire (a lot of wholly-owned businesses). Paul's answer was pathetic -- this is "a stock picker's market", "we've got value stocks", we are "conservatively positioned", "we think there is....a potential for a trade deal that will extend the runway in the US..." -- but I will give him the benefit of the doubt for being caught on the hop. Even if they are right that their equity investments are cheap long-term, mark-to-market can have real business implications in the short term. Perhaps a hedge or, more simply, perhaps less equities is the answer? A separate but related point is why insurance companies are run with debt. I think there's enough risk in the business without it. Bundled up in there is a question about how much insurance underwriting risk is being taken on, how much risk has been laid off to reinsurers etc., so it's a complicated topic. It's not a free lunch though and I would personally prefer less than more. Perhaps this topic has been discussed somewhere else, if so apologies.

My quote was taken from the earnings call.....where Prem specifically says we "live in a mark-to-market world and we wanted to take risk out". I've never heard him equate risk and mark-to-market. Could you elaborate? Petec, I also think that Fairfax has likely made great improvements in its insurance operations in the last 5+ years. So why isn't it enough for management to let those insurance results shine through and to implement a comparatively simpler investment process (like Markel)? It just seems to me that they are trying a bit too hard on the investment side. They have the appearance of naive high-rollers at the casino looking for a couple of long-odds big paydays (the deflation swaps, the equity hedges). Trading out of long-dated Treasuries looks to me like they are being too clever by half. Don't get me wrong -- I also have concerns about the health of the global macro backdrop. But how do you judge the probability of the doomsday scenario occurring? And what's your opportunity cost os sitting in a cave with your tin of beans and an opener? Correct me if I'm wrong, the bread and butter of Fairfax's investment track record is buying underpriced securities. Singles and doubles. The CDS bet was something of a departure from that, but it was still based on fundamental analysis of individual securities or a class of securities. As we know, it paid off big time but this was because of the asymmetry of the payoff. However the deflation swaps bet seems to be mainly based on 2 historic scenarios (Japan, the Great Depression) that may or may not be relevant to the current situation (check out Modern Monetary Theory for an alternative view of how the system works).

I find the sale of their long term Treasuries a bit perplexing. Here's Prem on today's earnings call: "We don't know who is going to win the elections......in the long term we still have questions about [the health of the US economy, I think he means], but we do live in a mark-to-market world and we wanted to take risk out and so we've done that." Since when did Fairfax ever mind so much about mark-to-market on a quarterly basis? I mean, take Prem's opening statements on the call where he says: "I emphasize on these calls always, with IFRS accounting, where stocks and bonds are recorded at market and subject to mark-to-market gains or losses, quarterly and annual income will fluctuate widely and investment results will only make sense over the long term." I dunno, seems like at Fairfax there's way too much focus on the investment side of the business. Compare and contrast with Markel.....

Ok ok, hold on everyone. Nothing but plaudits for Jamie D so far. Does no one else smell the BS?? Don't get me wrong, he's clearly very smart and able. He is such a smooth and convincing speaker, certainly draws you into his loving arms. But the I'm-trying-to-do-my-bit-for-mankind-as-CEO-of-a-bank stuff??? ??? ::) That is really stretching it. Bankers are reviled these days. He's on the charm offensive, on behalf of JPM and the industry. That was a beautiful story about all the good folks at JPM doing the Lord's work for the good folks in Detroit. Actually despite my tone, I do think that is very beneficial work. But are they doing this because they really love the good folks in Detroit, or because they want the hate mail to stop (and to get Elizabeth Warren off their case)? I guess we'll never know, but Jamie's a born politician (arguably his main job as a lobbyist in Washington). And he would probably make a good real politician.....except he'll never be one because his name is tarnished: he's a banker. Banks survive / thrive on confidence and the goodwill of central bankers / regulators / politicians. Jamie said JPM didn't need to take TARP money; perhaps so. But he needed the banking system to take TARP or there was a risk that the fear contagion would directly or indirectly spread to them in time. And it didn't seem possible that others could take it without JPM taking it. Ergo JPM had to take it, no? He made an interesting point about Bear Stearns though - who in their right mind would take on a struggling bank in the future as they're possibly on the hook for fines down the road? I dunno, maybe the bank that's told by the Fed "You're doing it!". He said the problem is that you're not doing a deal with another person.....rather you're doing a deal with a body where people come and go and the rules change. That sounds like he's taking down his whole business model, deals or no deals! Banks are such complex beasts -- operationally, politically etc. Life's too short.....

Interesting stuff, thanks for posting :)

Well I don't know if you're speculating on this or not, but if it's true it reflects very poorly on the governance of the company. Even if it's not, they asked for money from shareholders (capital raising) last year and *now* they want to be left alone. These guys just aren't my cup of tea......

Yeah, I know. Tessenderlo was my first choice, but as I said in my OP they are not meeting with investors for the rest of 2015. In my experience, such a response is very unusual and frankly not at all satisfactory. If that's their attitude, the stock becomes 'uninvestible' for me (as I know so little about the company / management, meeting with them to get a better understanding of what they are doing would be essential). I know others won't necessarily feel the same way and that's ok too.

I'd like to remind you that this is a business trip, no need for his employer to find out about his er....hobbies. ;D Indeed. My firm's internet firewall is already on to me. Security will be next. So sir, you say you are doing "research"......

peter buffet / cubsfan, thank you very much for those suggestions. I will have a look at each of them. I'm based in Ireland. There are a couple I would suggest are worth a closer eye. Abbey PLC. A small house builder that is totally under the radar. Around 2/3rs of activity in the UK and 1/3 in Ireland, as well as a small operation in the Czech Republic. Those numbers aren't exactly right, as output from the Irish division is below norm given the backdrop for the Irish economy in the last few years, but it's rebounding strongly. The company is 74% owned by the Gallagher family, who are very long term, sensible and very risk averse (and did a superb job of curtailing activity in Ireland before the Irish property crash. Minorities are well treated. Around 20% of the market cap in cash. Liquidity is very tight. Looks very cheap to me. DCC is ostensibly a UK company but is very much an Irish company (domiciled here, HQ'd here). It's one I have followed for more than 10 years. It's in the distribution business - of energy, IT and healthcare products. Energy dominates, as does the UK. Excellent returns over time, despite adding a lot of capital through acquisitive growth. Management is excellent - conservative (see balance sheet) and very hard working. Expect more of the same going forward I would suggest. A year ago the stock listing was moved to the UK and it has become much more "known", which unfortunately has resulted in a material re-rating of the stock, though one could certainly argue that DCC will grow into it's valuation within a relatively short period of time. Anyway, if the valuation is too rich for you now, get to know the company now and wait for an opportunity to buy at lower levels (in volatile times in the past it has sold off a lot, though its new-found 'fame' might limit that in the future). I have one more that I believe is very interesting and is currently very cheap, but I can't discuss it for the moment. I will revert. Hope these comments help and revert if you have any questions.