2017 Annual Letter

[Dazel]

 

There was a lot of discussion on bond losses that Fairfax would possibly take on their bond portfolio after the sell off that has occurred in the bond market. Fairfax hedged the portfolio in 2016 and again in 2017...100 basis point rate increase would be $150m loss (page104 2017 annual). As suspected they are in a position to take advantage  of higher rates unlike many others with large bond portfolios that will take large losses to their principal. Most reached for yield....their earnings of the past will be inflated where as as the earnings power of Fairfax has been hidden by their large cash balance and hedging of rates. Great job once again Mr. Bradstreet! 2018 looks very promising.

[Cardboard]

"Can someone please comment on Brian Bradstreet’s bond record it’s astonishing And there is no one close globally over 5,10,20, 30 years!!!!! No one. He is a legend and no one will comment on it..."

 

"Great job once again Mr. Bradstreet! 2018 looks very promising."

 

Dazel, you seem to have a lot riding on Mr. Bradstreet. I would suggest that maybe you should read between the lines. The guy is about to retire:

 

"With Roger Lace, Brian Bradstreet and I having worked together for over 40 years, we felt it was time to begin the

transition to a younger group for the management of our investment portfolios, of course supervised by the three of

us."

 

Cardboard

[ourkid8]

I did a quick search of the last 10 years of shareholder's letters and Prem only referenced that he plans to repurchase stock in the last 2.  Last year they were digesting the acquisitions + unlocking value (ICICI/First Capital) and this year I strongly believe Prem will keep to his word and repurchase stock with FCF.  I understand your doubts as actions speak louder than words so we will have to wait until Q1 earnings are released. 

 

Without using the capital that was unlocked from ICICI / First capital, I do not see them aggressively repurchasing stock via a tender offer.  They will slowly repurchase shares in the open market which is rather unfortunate especially at the current price however that is what he is guiding. 

 

"Having said that, we are raising our threshold for acquisitions now so as to benefit from the ones we have already made – and to buy back our stock." -March 10, 2017 annual letter

"Henry Singleton, at Teledyne, reversed this trend, as you know, and over the next ten years we expect to do the same – use our free cash flow to buy back our shares!" - March 9, 2018 annual letter

 

It would make sense.  I'm struggling a bit with his mentioning Teledyne.  Singleton bought back shares because they were cheap and he lacked a better use of capital.  How can Fairfax know whether their shares will be cheap at any point other than the near term?  Buybacks should be done opportunistically.  I'm willing to give him the benefit of the doubt that he'll only make repurchases are attractive prices, but laying out a long-term plan to reduce share count doesn't make a lot of sense to me.

 

Agreed, but he hasn't made a commitment and they are value monkeys at heart. My guess is they will be very disciplined. I think of it more as a floor, like the Buffet 1.2x BV floor.

 

That said he clearly thinks IV is well above book so it will be interesting to see where they stop!

 

 

Prem talking about buybacks is a bit like a teenager talking about sex.  They both engage the subject with a great deal of enthusiasm, but when the rubber hits the road (or something!), they don't actually do it anywhere near as often or as successfully as their optimistic plans would suggest.  Working from memory, Prem has made enthusiastic references to buybacks in about half of the annual letters -- on some occasions promising to go on offence while on other occasions trying to contextualize a share issuance.

 

My observation is that Prem is a serial acquirer, picking up a new meaningful sub every second year or so.  As long as that's his approach, FFH will be capital constrained.  There will be no meaningful buyback unless he runs out of insurance subs to buy and actually allows cash to accumulate for a couple of years.

 

While I'm not shy to criticize Prem's management when I think it is merited, in this case it amounts to a question of the relative value proposition of buying your own shares vs buying somebody else's.  He mostly finds reasonably priced subs to acquire, so it's not obvious that buybacks would necessarily have been better.

 

Going forward, my sense is that FFH could throw a Bil at buybacks during 2018 if it so desired.  A tender offer for 2m shares at US$550 would likely get the desired response.  But, I would be shocked to see it happen.  I'm guessing that the over/under for sharecount in 2023 would be 30m.

 

 

SJ

[Dazel]

 

 

Cardboard,

 

Wouldn't that be nice if Prem et all retired! Then we would have that new culture we are looking for!

LOL.

Bradstreet has another $10b in him before he is done...the math is on his side!

 

Cheers!

[Dazel]

 

That's $10b in bond gains...Bradstreet was buying more shares in August...the Fairfax team is putting on the foil! They are a competitive bunch a couple of strong years will put them in performance in per share book value growth and market appreciation of a handful companies in history have achieved. Bradstreet's record alone to me is just amazing. Make no mistake this is a tight team though. They are bruised not beaten.

I have been loud and proud...but it's the numbers that matter...we will see.

[racemize]

Fairfax who have supposedly lost their touch because most want to forget their long term record...have missed the fact Bradstreet has remained at the top of his game in any time period you want to look at over the last 32 years (In 1999 and 2000 he would have underperformed) the dismal last 9 years for HW he has destroyed Gundlach’s Double line record  since inception it’s inception. Bradstreet is the bond king!

 

Many of us want's to ignore their long term record (from the beginning)  because they're influenced by their first two years in business which were anomaly (fraud).

 

I realize you appear to only post in FFH to bash Prem and the investments, but just for everyone else who is interested, compounding rate for book value per share excluding the first two years is ~15%.  Seems pretty good to me.

[racemize]

On the topic of sharebuybacks, I have all the letters, so I searched over the whole period for buyback/repurchases (similar to ourkid over last 10 years).  Here's what I found:

 

From 1988-1992 they repurchased 34% of outstanding shares.  Discussion of this buyback happened afterwards mostly.

 

Mentioned buybacks again in 1996/7, first mention of Singleton.  Did not emphasize they would do it, just that they would consider it first.

 

In 1999-2000, they talked about repurchase similar to 1988-1992 period.  Looks like they repurchased ~1,000,000 shares.  Then had to issue shares to 2005 due to the well-known issues.

 

Repurchased 1,000,000 shares in 2008.

 

In 2010, they said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."

 

Then in 2016 buybacks were mentioned and in 2017, there was a strong emphasis on buybacks that we all read.

 

So, outside of 1999/2000 it doesn't seem like they overpromised and underdelivered on share buybacks given what they said.

[Viking]

On the topic of sharebuybacks, I have all the letters, so I searched over the whole period for buyback/repurchases (similar to ourkid over last 10 years).  Here's what I found:

 

From 1988-1992 they repurchased 34% of outstanding shares.  Discussion of this buyback happened afterwards mostly.

 

Mentioned buybacks again in 1996/7, first mention of Singleton.  Did not emphasize they would do it, just that they would consider it first.

 

In 1999-2000, they talked about repurchase similar to 1988-1992 period.  Looks like they repurchased ~1,000,000 shares.  Then had to issue shares to 2005 due to the well-known issues.

 

Repurchased 1,000,000 shares in 2008.

 

In 2010, they said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."

 

Then in 2016 buybacks were mentioned and in 2017, there was a strong emphasis on buybacks that we all read.

 

So, outside of 1999/2000 it doesn't seem like they overpromised and underdelivered on share buybacks given what they said.

 

Thanks for doing the research... always good to get the facts :-)

[StubbleJumper]

On the topic of sharebuybacks, I have all the letters, so I searched over the whole period for buyback/repurchases (similar to ourkid over last 10 years).  Here's what I found:

 

From 1988-1992 they repurchased 34% of outstanding shares.  Discussion of this buyback happened afterwards mostly.

 

Mentioned buybacks again in 1996/7, first mention of Singleton.  Did not emphasize they would do it, just that they would consider it first.

 

In 1999-2000, they talked about repurchase similar to 1988-1992 period.  Looks like they repurchased ~1,000,000 shares.  Then had to issue shares to 2005 due to the well-known issues.

 

Repurchased 1,000,000 shares in 2008.

 

In 2010, they said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."

 

Then in 2016 buybacks were mentioned and in 2017, there was a strong emphasis on buybacks that we all read.

 

So, outside of 1999/2000 it doesn't seem like they overpromised and underdelivered on share buybacks given what they said.

 

So, if I've understood you correctly, your money is on repurchases rather than acquisitions?  I'm clearly on the other side as Prem always seems to find a target that he finds attractive.To buy back say $1b of shares, the normal course issuer bid hardly seems adequate.  I guess we'll see whether there's a tender offer.  Time will tell

 

 

 

SJ

[Dazel]

 

Value2...short it...hopefully the price drops for you.

Gotta love the stock market.

 

 

[ourkid8]

They are authorized to repurchase 2,672,504 (Daily limit of 15,318) common shares. At the current market price, that's around C$1.7B.

 

They have also entered into an automatic share purchase plan with a designated broker to allow for the purchase of its Subordinate Voting Shares under the NCIB at times when Fairfax normally would not be active in the market due to applicable regulatory restrictions or internal trading black-out periods. (Second link)

 

http://www.fairfax.ca/news/press-releases/press-release-details/2017/Intention-to-Make-a-Normal-Course-Issuer-Bid-for-Subordinate-Voting-Shares-and-Preferred-Shares/default.aspx

http://www.fairfax.ca/news/press-releases/press-release-details/2017/Fairfax-Enters-Into-Automatic-Share-Purchase-Plan/default.aspx

 

On the topic of sharebuybacks, I have all the letters, so I searched over the whole period for buyback/repurchases (similar to ourkid over last 10 years).  Here's what I found:

 

From 1988-1992 they repurchased 34% of outstanding shares.  Discussion of this buyback happened afterwards mostly.

 

Mentioned buybacks again in 1996/7, first mention of Singleton.  Did not emphasize they would do it, just that they would consider it first.

 

In 1999-2000, they talked about repurchase similar to 1988-1992 period.  Looks like they repurchased ~1,000,000 shares.  Then had to issue shares to 2005 due to the well-known issues.

 

Repurchased 1,000,000 shares in 2008.

 

In 2010, they said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."

 

Then in 2016 buybacks were mentioned and in 2017, there was a strong emphasis on buybacks that we all read.

 

So, outside of 1999/2000 it doesn't seem like they overpromised and underdelivered on share buybacks given what they said.

 

So, if I've understood you correctly, your money is on repurchases rather than acquisitions?  I'm clearly on the other side as Prem always seems to find a target that he finds attractive.To buy back say $1b of shares, the normal course issuer bid hardly seems adequate.  I guess we'll see whether there's a tender offer.  Time will tell

 

 

 

SJ

[Spekulatius]

If the thesis plays out and FFH shows 15% book value growth or anything close to it for a couple of years, there won’t be any buybacks because most likely the P/B will be too high to warrant buybacks. In the end it will be the organic book growth that determines if the investment  thesis works, not buybacks.

[StubbleJumper]

They are authorized to repurchase 2,672,504 (Daily limit of 15,318) common shares. At the current market price, that's around C$1.7B.

 

They have also entered into an automatic share purchase plan with a designated broker to allow for the purchase of its Subordinate Voting Shares under the NCIB at times when Fairfax normally would not be active in the market due to applicable regulatory restrictions or internal trading black-out periods. (Second link)

 

http://www.fairfax.ca/news/press-releases/press-release-details/2017/Intention-to-Make-a-Normal-Course-Issuer-Bid-for-Subordinate-Voting-Shares-and-Preferred-Shares/default.aspx

http://www.fairfax.ca/news/press-releases/press-release-details/2017/Fairfax-Enters-Into-Automatic-Share-Purchase-Plan/default.aspx

 

On the topic of sharebuybacks, I have all the letters, so I searched over the whole period for buyback/repurchases (similar to ourkid over last 10 years).  Here's what I found:

 

From 1988-1992 they repurchased 34% of outstanding shares.  Discussion of this buyback happened afterwards mostly.

 

Mentioned buybacks again in 1996/7, first mention of Singleton.  Did not emphasize they would do it, just that they would consider it first.

 

In 1999-2000, they talked about repurchase similar to 1988-1992 period.  Looks like they repurchased ~1,000,000 shares.  Then had to issue shares to 2005 due to the well-known issues.

 

Repurchased 1,000,000 shares in 2008.

 

In 2010, they said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."

 

Then in 2016 buybacks were mentioned and in 2017, there was a strong emphasis on buybacks that we all read.

 

So, outside of 1999/2000 it doesn't seem like they overpromised and underdelivered on share buybacks given what they said.

 

So, if I've understood you correctly, your money is on repurchases rather than acquisitions?  I'm clearly on the other side as Prem always seems to find a target that he finds attractive.To buy back say $1b of shares, the normal course issuer bid hardly seems adequate.  I guess we'll see whether there's a tender offer.  Time will tell

 

 

 

SJ

 

 

Yes, I saw those pressers too.  But, it strikes me as a wee bit impractical to absorb a quarter of the daily volume over almost a whole year to buy back $1b of shares.  The price would likely end up moving enough that you might need to rethink the magnitude of that kind of buying programme.  For that kind of large buyback, a reverse auction tender offer capped at say 1.1 or 1.15x bv (ie, us$550 or a shade higher) seems to me a more realistic way of actually getting that many shares at a price that FFH might actually be prepared to pay.

 

 

SJ

[petec]

The buyback history might also suggest it will be opportunistic. There is a very high chance of a material market selloff in the timeframe we are discussing (5-10y). That's when I'd expect to see material activity. Otherwise it will be an FCF-driven slow burn.

[Cardboard]

If they want to buyback shares in large quantity without a tender offer, they can buy from a single seller within 5% of market price for any quantity. That is an allowed exemption.

 

There are funds that do liquidate, change in mandate, etc.

 

Cardboard

[racemize]

On the topic of sharebuybacks, I have all the letters, so I searched over the whole period for buyback/repurchases (similar to ourkid over last 10 years).  Here's what I found:

 

From 1988-1992 they repurchased 34% of outstanding shares.  Discussion of this buyback happened afterwards mostly.

 

Mentioned buybacks again in 1996/7, first mention of Singleton.  Did not emphasize they would do it, just that they would consider it first.

 

In 1999-2000, they talked about repurchase similar to 1988-1992 period.  Looks like they repurchased ~1,000,000 shares.  Then had to issue shares to 2005 due to the well-known issues.

 

Repurchased 1,000,000 shares in 2008.

 

In 2010, they said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."

 

Then in 2016 buybacks were mentioned and in 2017, there was a strong emphasis on buybacks that we all read.

 

So, outside of 1999/2000 it doesn't seem like they overpromised and underdelivered on share buybacks given what they said.

 

So, if I've understood you correctly, your money is on repurchases rather than acquisitions?  I'm clearly on the other side as Prem always seems to find a target that he finds attractive.To buy back say $1b of shares, the normal course issuer bid hardly seems adequate.  I guess we'll see whether there's a tender offer.  Time will tell

 

 

 

SJ

 

Mostly, it seemed you were making a few assertions about how often FFH has talked about buybacks and whether they followed through, so I wanted to see if that was accurate or not.  It seems to me they haven't talked a big game and not followed through before, as you suggested.

 

[StubbleJumper]

On the topic of sharebuybacks, I have all the letters, so I searched over the whole period for buyback/repurchases (similar to ourkid over last 10 years).  Here's what I found:

 

From 1988-1992 they repurchased 34% of outstanding shares.  Discussion of this buyback happened afterwards mostly.

 

Mentioned buybacks again in 1996/7, first mention of Singleton.  Did not emphasize they would do it, just that they would consider it first.

 

In 1999-2000, they talked about repurchase similar to 1988-1992 period.  Looks like they repurchased ~1,000,000 shares.  Then had to issue shares to 2005 due to the well-known issues.

 

Repurchased 1,000,000 shares in 2008.

 

In 2010, they said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."

 

Then in 2016 buybacks were mentioned and in 2017, there was a strong emphasis on buybacks that we all read.

 

So, outside of 1999/2000 it doesn't seem like they overpromised and underdelivered on share buybacks given what they said.

 

So, if I've understood you correctly, your money is on repurchases rather than acquisitions?  I'm clearly on the other side as Prem always seems to find a target that he finds attractive.To buy back say $1b of shares, the normal course issuer bid hardly seems adequate.  I guess we'll see whether there's a tender offer.  Time will tell

 

 

 

SJ

 

Mostly, it seemed you were making a few assertions about how often FFH has talked about buybacks and whether they followed through, so I wanted to see if that was accurate or not.  It seems to me they haven't talked a big game and not followed through before, as you suggested.

 

 

With respect, you've looked at the sharecount over the past 20 years, right?  Do those numbers suggest to you that buybacks have truly been a goal, or do those numbers suggest to you that acquisitions have truly been a goal?  So, yes Prem has talked about buybacks on several occasions and the sharecount keeps trending up.

 

With that observation, I take his comments about Teledyne with a hefty dose of salt.  As I said, my money is on more acquisitions rather than buybacks.  And, as I noted, this isn't necessarily a bad thing.  If your own shares aren't the best use of your cash, then don't buy them.  Allocate cash to the best opportunity available.

 

Finally, if the world does evolve as Prem has suggested, in the short term a good chunk of the $2.5b cash held in the holdco could be used for a buyback.  I've thrown out the round number of a Bil, but it wouldn't be outrageous to bump that to $1.5 Bil which would still leave a respectable holdco cash balance.  For that kind of magnitude there's a practical decision to be made about the vehicle.  The normal course issuer bid is a boiler plate filing every year, but it could actually be used in this case.  I just think a tender might work better for the potential volumes that I've posited.  On the other hand, if it's just us$400m or something, the normal course issuer bid would probably work fine.

 

 

SJ

[racemize]

Mostly, it seemed you were making a few assertions about how often FFH has talked about buybacks and whether they followed through, so I wanted to see if that was accurate or not.  It seems to me they haven't talked a big game and not followed through before, as you suggested.

 

 

With respect, you've looked at the sharecount over the past 20 years, right?  Do those numbers suggest to you that buybacks have truly been a goal, or do those numbers suggest to do that acquisitions have truly been a goal?  So, yes Prem has talked about buybacks on several occasions and the sharecount keeps trending up.

 

With that observation, I take his comments about Teledyne with a hefty dose of salt.  As I said, my money is on more acquisitions rather than buybacks.  And, as I noted, this isn't necessarily a bad thing.  If your own shares aren't the best use of your cash, then don't buy them.  Allocate cash to the best opportunity available.

 

Finally, if the world does evolve as Prem has suggested, in the short term a good chunk of the $2.5b cash held in the holdco could be used for a buyback.  I've thrown out the round number of a Bil, but it wouldn't be outrageous to bump that to $1.5 Bil which would still leave a respectable holdco cash balance.  For that kind of magnitude there's a practical decision to be made about the vehicle.  The normal course issuer bid is a boiler plate filing every year, but it could actually be used in this case.  I just think a tender might work better for the potential volumes that I've posited.  On the other hand, if it's just us$400m or something, the normal course issuer bid would probably work fine.

 

 

SJ

 

Just to be really clear what we're talking about here.  You said this:

 

Prem talking about buybacks is a bit like a teenager talking about sex.  They both engage the subject with a great deal of enthusiasm, but when the rubber hits the road (or something!), they don’t actually do it anywhere near as often or as successfully as their optimistic plans would suggest.  Working from memory, Prem has made enthusiastic references to buybacks in about half of the annual letters -- on some occasions promising to go on offence while on other occasions trying to contextualize a share issuance.

 

He didn't talk about it anywhere close to 50% of the letters.  He didn't promise a bunch of buybacks like he is now and not follow through as you suggested.  That's all I was addressing as it didn't sound right to me.  I'm not making any assertions other than to address specifically what you asserted with the facts of what he said in the letters.

 

 

Moreover, I didn't say he didn't issue shares--he did.  I'm saying he didn't before say "we are done with buying companies and are going to start reducing sharecount".  In fact, as I quoted, in 2010, he said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."  So, to me, it seems pretty clear that he talked about acquisitions and then made some.  Now he's saying those are no longer necessary, and he's talking about buying back shares.  This all seems reasonable to me and does not show a pattern of talking one way and doing another with respect to share buybacks.

[StubbleJumper]

Mostly, it seemed you were making a few assertions about how often FFH has talked about buybacks and whether they followed through, so I wanted to see if that was accurate or not.  It seems to me they haven't talked a big game and not followed through before, as you suggested.

 

 

With respect, you've looked at the sharecount over the past 20 years, right?  Do those numbers suggest to you that buybacks have truly been a goal, or do those numbers suggest to do that acquisitions have truly been a goal?  So, yes Prem has talked about buybacks on several occasions and the sharecount keeps trending up.

 

With that observation, I take his comments about Teledyne with a hefty dose of salt.  As I said, my money is on more acquisitions rather than buybacks.  And, as I noted, this isn't necessarily a bad thing.  If your own shares aren't the best use of your cash, then don't buy them.  Allocate cash to the best opportunity available.

 

Finally, if the world does evolve as Prem has suggested, in the short term a good chunk of the $2.5b cash held in the holdco could be used for a buyback.  I've thrown out the round number of a Bil, but it wouldn't be outrageous to bump that to $1.5 Bil which would still leave a respectable holdco cash balance.  For that kind of magnitude there's a practical decision to be made about the vehicle.  The normal course issuer bid is a boiler plate filing every year, but it could actually be used in this case.  I just think a tender might work better for the potential volumes that I've posited.  On the other hand, if it's just us$400m or something, the normal course issuer bid would probably work fine.

 

 

SJ

 

Just to be really clear what we're talking about here.  You said this:

 

Prem talking about buybacks is a bit like a teenager talking about sex.  They both engage the subject with a great deal of enthusiasm, but when the rubber hits the road (or something!), they don’t actually do it anywhere near as often or as successfully as their optimistic plans would suggest.  Working from memory, Prem has made enthusiastic references to buybacks in about half of the annual letters -- on some occasions promising to go on offence while on other occasions trying to contextualize a share issuance.

 

He didn't talk about it anywhere close to 50% of the letters.  He didn't promise a bunch of buybacks like he is now and not follow through as you suggested.  That's all I was addressing as it didn't sound right to me.  I'm not making any assertions other than to address specifically what you asserted with the facts of what he said in the letters.

 

 

Moreover, I didn't say he didn't issue shares--he did.  I'm saying he didn't before say "we are done with buying companies and are going to start reducing sharecount".  In fact, as I quoted, in 2010, he said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."  So, to me, it seems pretty clear that he talked about acquisitions and then made some.  Now he's saying those are no longer necessary, and he's talking about buying back shares.  This all seems reasonable to me and does not show a pattern of talking one way and doing another with respect to share buybacks.

 

 

You seem seized upon my intro that, working from memory, buybacks were mentioned in about half the letters.  That's the danger of working from memory of course, but I am away from my office for two months in some interesting, but rural places.  I cannot peruse 20 years of letters, so rough recollection, as good or poor as it is, must do.

 

The broad message, however, doesn't change.  I fully expect the serial acquisitions to continue, and I fully expect a higher sharecount five years from today.  And, that's not necessarily a bad thing.  There'll be buybacks just as there are small repurchases every year, but I'm not holding my breath for a Teledyne model, because that's just not Prem's style.

 

 

Cheers

 

SJ

[flesh]

Gokou3 - You need to take into account Corporate expenses, runoff, interest expenses and preferred dividends.

 

Vinod

 

How do I back into corporate expenses that aren't included in combined ratio? Is a tax rate of 25% conservative considering most business is done in countries that have a lower effective tax rate? If doing a steady state/owners earnings type of analysis isn't it safe to assume runoff is replaced with organic growth at least?

 

If we assume 25% cash (2 years or less), 50% bond(and divi/interest paying instruments), 25% equities, with 40b in investments (inclusive of holdco cash) and a conservative (based on recent five years) 98% combined ratio on 12b premiums written and a 25% tax rate.

 

10b cash @ 2%        = 200m

20b bond @ 4.5%    = 900m

10b stock @ 7%      = 700m

 

underwriting profit    =240m

+non insurance profit=?

                              = 2040m

-corporate/what else?

- 242 m interest        = 1798m

-25% tax                  = 449m

                                = 1348m

 

-67m preferred          = 1281m

 

Trying to wrap my head around this from a what will I be paid, conservatively, in the next few years standpoint. I'm still digging into this, just thought I might accelerate the answering of these questions by farming it out here.

 

 

                         

[petec]

Reading all three letters I am really struck by the quality of managers these guys are able to attract. E.g. the guys they've hired to build Digit (who previously built Bajaj Allianz and then spent 5 years in Munich at senior levels in Allianz)) and the guy they have running Philafrica Foods (ex CEO Nestle China). There are impressive people just about everywhere.

[LightWhale]

Has any of you had a look at Eurobank?  Trading at 1/4 to book, Prem in the letter argues it's one of the cheaper stocks in the world

[petec]

Yes. There are some good presentations on the investor website and you can make a case that Greece will start reflating soon which would be great news. However the ECB stress tests in May will be key. Even if capital levels are ok the ECB and Berlin may insist on dilutive capital raises - they want Greece to exit its bailout this year and they don't want it to collapse back into bailout in a couple more years.

 

Now, you might argue that even if they issued 100% more shares you'd still only be at 0.5x book...but that's the risk.

[TwoCitiesCapital]

Has any of you had a look at Eurobank?  Trading at 1/4 to book, Prem in the letter argues it's one of the cheaper stocks in the world

 

I have taken a speculative starter position in it again around EUR 0.80. The problem is the last time Greece looked like it was making progress, there was a political surprise and investors lost 99% of their investment. I'm betting it won't happen again, but you never really know...

 

Once bitten, twice shy.

[FairFacts]

Kyle Bass of VC Hayman Capital (macro, event driven focus) reckons that Greece will break out in 2018 with a likely change in leadership. He predicts that Tsipras will be ousted before year end and replaced by the far more business friendly Mitsotakis. He says there is tons of money on the sidelines waiting to flood back into Greece.