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FRFHF - no bump because of tax reform?


shalab
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Both seem reasonable.  From my short experience relative to most on this board, FRFHF seems to zig while others zag...

 

There was the hedges, then hurricane losses, and now they are sitting in a fat pile of cash on the sidelines with zero benefit in tax reform.  The cash makes me sleep better at night but a lot of folks are waiting to see how and when they can put it to use.

 

I think that each quarterly report and maybe the annual letter will cause some boost to the price.  We are about to receive $$ from the First Capital sale, buybacks are happening at a low P/BV, and we have lots of cash to deploy.

 

In this expensive market I am planning on buying more.

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My thoughts are that the excess cash sitting on the sidelines will probably be used for bonds/fixed income investments.  I guess they are waiting for interest rates to peak (I have no idea when that will be).

 

I believe the cash from First Capital will be moved to the Holdco (I think I read that somewhere).  Since the holdco already has more than the desired $1B (it was at $1.5B at last look), it is basically surplus.  To my knowledge, surplus cash at the holdco has never been invested in Bonds. Heck, they already have $15B in bonds and another $10B in short term investments in their portfolio's at the operating companies.  All their major bond moves have been done with the cash that are in the reserves at the operating insurance companies.  They have debt at the holdco at 4.5+% or so, so I doubt they will invest in bonds when they are paying interest on them as well.  They will likely buy marketable investments or entire companies (like Allied World, AIG Chile, etc.) or do unique lending that has an equity kicker attached to it (ie. lend at 8% to a distressed company and then have equity warrants of some type).  I would think they will be targeting something above a 10% rate of return, certainly not 5%. 

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It would be nice if they increased the dividend in Jan.

 

In addition, I think they should wind down their CPI bet - clearly, it is losing money and likely will continue to lose money for another two years atleast. (till the next recession) In retrospect, it was smart of them to wind down their equity hedges, they would have lost another couple of billion if they had kept their bet alive.

 

 

My thoughts are that the excess cash sitting on the sidelines will probably be used for bonds/fixed income investments.  I guess they are waiting for interest rates to peak (I have no idea when that will be).

 

I believe the cash from First Capital will be moved to the Holdco (I think I read that somewhere).  Since the holdco already has more than the desired $1B (it was at $1.5B at last look), it is basically surplus.  To my knowledge, surplus cash at the holdco has never been invested in Bonds. Heck, they already have $15B in bonds and another $10B in short term investments in their portfolio's at the operating companies.  All their major bond moves have been done with the cash that are in the reserves at the operating insurance companies.  They have debt at the holdco at 4.5+% or so, so I doubt they will invest in bonds when they are paying interest on them as well.  They will likely buy marketable investments or entire companies (like Allied World, AIG Chile, etc.) or do unique lending that has an equity kicker attached to it (ie. lend at 8% to a distressed company and then have equity warrants of some type).  I would think they will be targeting something above a 10% rate of return, certainly not 5%.

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I was thinking more stuff like this...

 

Seaspan Announces Letter Of Intent For Potential $250 Million Unsecured 5.50% Debenture And Warrant Investment From Fairfax Financial Holdings Limited

 

http://www.seaspancorp.com/press-release-post/seaspan-announces-letter-of-intent-for-potential-250-million-unsecured-5-50-debenture-and-warrant-investment-from-fairfax-financial-holdings-limited/

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I was thinking more stuff like this...

 

Seaspan Announces Letter Of Intent For Potential $250 Million Unsecured 5.50% Debenture And Warrant Investment From Fairfax Financial Holdings Limited

 

http://www.seaspancorp.com/press-release-post/seaspan-announces-letter-of-intent-for-potential-250-million-unsecured-5-50-debenture-and-warrant-investment-from-fairfax-financial-holdings-limited/

 

This is THE David Sokol btw

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My thoughts are that the excess cash sitting on the sidelines will probably be used for bonds/fixed income investments.  I guess they are waiting for interest rates to peak (I have no idea when that will be).

 

I believe the cash from First Capital will be moved to the Holdco (I think I read that somewhere).  Since the holdco already has more than the desired $1B (it was at $1.5B at last look), it is basically surplus.  To my knowledge, surplus cash at the holdco has never been invested in Bonds. Heck, they already have $15B in bonds and another $10B in short term investments in their portfolio's at the operating companies.  All their major bond moves have been done with the cash that are in the reserves at the operating insurance companies.  They have debt at the holdco at 4.5+% or so, so I doubt they will invest in bonds when they are paying interest on them as well.  They will likely buy marketable investments or entire companies (like Allied World, AIG Chile, etc.) or do unique lending that has an equity kicker attached to it (ie. lend at 8% to a distressed company and then have equity warrants of some type).  I would think they will be targeting something above a 10% rate of return, certainly not 5%.

 

That may be true of holdco cash but the bulk of the cash is at the insurecos and must stay there against future claims - they are quite restricted on how they can invest this and I suspect a lot has to stay in bonds. But, the bond+equity kicker route can be used there and they seem to like it.

 

I also read that they were increasing the holdco cash requirement to $2bn given the size of the company, and they've said AW was the last big deal at least for now.

 

Overall I doubt the bulk of the cash gets put to use any time soon. Which is fine by me.

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It would be nice if they increased the dividend in Jan.

 

In addition, I think they should wind down their CPI bet - clearly, it is losing money and likely will continue to lose money for another two years atleast. (till the next recession) In retrospect, it was smart of them to wind down their equity hedges, they would have lost another couple of billion if they had kept their bet alive.

 

 

Please don't start the dividend discussion again! ;)

 

The CPI bets are not losing any appreciable amount of money. They are already on the books for almost nothing and can't be worth less than zero. That wasn't the case for the equity total return swaps. The CPI hedges are much better structured. There is no point selling them now - they are a true "heads I win, tails I don't lose much" proposition.

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I was thinking more stuff like this...

 

Seaspan Announces Letter Of Intent For Potential $250 Million Unsecured 5.50% Debenture And Warrant Investment From Fairfax Financial Holdings Limited

 

http://www.seaspancorp.com/press-release-post/seaspan-announces-letter-of-intent-for-potential-250-million-unsecured-5-50-debenture-and-warrant-investment-from-fairfax-financial-holdings-limited/

 

This is THE David Sokol btw

 

I love these deals - the deb+warrant structure seems much nicer to me than a convertible bond. A $250m debenture plus warrants to buy $250m of shares at $6.50...with the share price at $7.05 today that is an instant gain of $21m, which you could think of as an additional 8.5% in interest on the debenture, compensating you for the fact it's a relatively low grade bond at a below market rate. Downside largely protected unless Seaspan gets into real trouble, plus a fat equity kicker.

 

In the last letter, Prem mentioned investing in the craft spirit brands company Davos Brands "in partnership with our good friend David Sokol".

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