Author Topic: 2017 Annual Letter  (Read 20183 times)

Viking

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Re: 2017 Annual Letter
« Reply #10 on: March 10, 2018, 09:58:32 AM »
Reading the letter, it appears to me that Prem is less promotional and more fact oriented. Nice to see.

Can someone explain to me what impact the following transaction will have on Thomas Cook India and also Fairfax?

From page 9: “Quess has had a phenomenal run since we acquired our interest in it in 2013. Thomas Cook India invested $47 million in Quess in 2013, sold 5.4% last year for $97 million and retains 49%, which is currently worth over $1 billion. Because of Quess’ great success, Thomas Cook India intends to spin its holding in Quess out to its shareholders during 2018 so that Quess can be run independently as a public company under the leadership of Ajit Isaac. A big thank you to Madhavan Menon for nurturing Quess under the Thomas Cook India umbrella as it became large enough to be a freestanding company. Today, Quess is India’s leading integrated business services provider. With over 250,000 employees, the company has a pan-India presence with 65 offices across 34 cities, along with an overseas footprint in North America, the Middle East and South East Asia. It serves over 1,700 customers across five segments – Industrials, Global Technology Solutions, People and Services, Integrated Facility Management and Internet Solutions.”


FairFacts

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Re: 2017 Annual Letter
« Reply #11 on: March 10, 2018, 10:43:37 AM »
"Can someone explain to me what impact the following transaction will have on Thomas Cook India and also Fairfax?"

I think that it goes like this:

FFH owns 66% of Thomas Cook India
Thomas Cook owns a majority of Quess, I think it might be down to 49% now.
If TC spins out Quess it will no longer own, nor consolidate Quess in its numbers.
FFH will now own 66% of the 49% of Quess Stock which means FFH wil have a direct holding of 32.3%.

FFH will not consolidate Quess and thefore the gain will be recognised which until now was an unrealized gain in Thomas Cook.

Also, FFH can directly sell off Quess shares as and when it pleases.

We would see and imediate uptick in Book Value if this goes ahead.

FairFacts

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Re: 2017 Annual Letter
« Reply #12 on: March 10, 2018, 10:45:55 AM »
Interesting that the Debt and Warrant Deal on page 21 doesn't show the warrants held in Blackberry (I believe $500 mil of them).

Viking

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Re: 2017 Annual Letter
« Reply #13 on: March 10, 2018, 11:37:35 AM »
I worry that they are bullish at the wrong time ( market and valuation at highs). I think their portfolio of companies and operating performance is better than their earlier years, but their investing performance has been sub par .

They are not bullish. They still hold lots of cash. That is why they will never be able to achieve 15% with yields as low as they are today.  But if they even achieve 10% priced at book value today, and hoping for a rerating at one point in time to 1,5 times book, that would still be a great investment.
Investment performance has been poor on the equity (and hedging) side, but on the bond portion of the portfolio they are amazing.  The fact that they sold everything just before Trump got elected when long term yields were at 1,5% is a master stroke.  For an insurer the fixed income part of the portfolio is essential, and with Fairfax you have the best.

Steph, yes, FFH has absolutely excelled with their bond portfolio decisions over the past 18 months. Their total portfolio is about $40 billion. Only $9 billion is currently in bonds; of this amount only $1 billion is 5-10 year duration and $2 billion is more than 10 year duration.

It will be very interesting to watch where US interest rates go in 2018. If the long end (10 year plus) continues higher then bond losses will start to hit insurance companies book value when they report Q1 earnings. In a rising rate environment the size and average duration (years) of bond portfolios will become very important metrics for investors moving forward. Fairfax’s investment portfolio is ideally positioned for a rising rate environment.

If long bond yields increase enough, and spreads widen on junk debt, it may hit book values enough to support a harder market in insurance pricing.
« Last Edit: March 10, 2018, 01:01:12 PM by Viking »

TwoCitiesCapital

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Re: 2017 Annual Letter
« Reply #14 on: March 10, 2018, 11:44:09 AM »
Interesting that the Debt and Warrant Deal on page 21 doesn't show the warrants held in Blackberry (I believe $500 mil of them).

Correct me if I'm wrong, but there are no warrants in Blackberry. Just plain old common shares and $500M in convertible notes?

gokou3

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Re: 2017 Annual Letter
« Reply #15 on: March 10, 2018, 12:23:30 PM »
I too liked the expansion of the investment team and the additional responsibilities of the younger members.

PW restated the investment goals and 15% increase in BV target.

'With $40 billion in investments, a current run rate of $11.5B in net premiums written and $12.5B in common shareholders equity, we need an investment return of approximately 7% in order to achieve an annual increase in 15% in BV per share, assuming a consolidated combined ratios of 95%"........."We have drilled deeper and by analysing each of our 21 insurance companies we have estimated the investment return needed for each company in order to achieve our 15% target. We have delegated investment responsibility for each of our insurance companies to one member of our investment team".


Could someone check my math:

95% combined ratio on $11.5B = $575M underwriting profit
7% return on $40B investments = $2800M return

Underwriting + investment return = $3.375B pretax or say $2.36B after-tax assuming 30% tax rate

After-tax ROE = 2.36/12.5 = 18.9% >> 15%?


I think it's difficult to have 95% combined ratio (including catastrophes) over long-term.  In fact, page 17 says their combined ratio since inception is 100%.  They may have gotten better over the years though.  On the other hand, 7% return on a mostly-bond portfolio may not be so easy either in the medium term given rising but still low interest rates.


vinod1

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Re: 2017 Annual Letter
« Reply #16 on: March 10, 2018, 12:38:33 PM »
Gokou3 - You need to take into account Corporate expenses, runoff, interest expenses and preferred dividends.

Vinod
The fundamental algorithm of life: repeat what works. –Charlie Munger

vinod1

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Re: 2017 Annual Letter
« Reply #17 on: March 10, 2018, 12:42:46 PM »
Need to break down the 7% returns.

Fairfax has averaged 23% / 50% / 27% for Cash/Bond/Stock Allocation between 1986 to 2014 (when I last calculated them).

Assuming a 25% 50% 25% cash bond stock allocation.

If you assume 2% returns for the cash portion, 5% returns for bond portion, to get to 7% investment returns on total portfolio, the stock portfolio has to return 16%.

Even assuming 6% for bond portfolio would require the stocks to deliver 14% annually.

Vinod
« Last Edit: March 10, 2018, 12:44:31 PM by vinod1 »
The fundamental algorithm of life: repeat what works. –Charlie Munger

FairFacts

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Re: 2017 Annual Letter
« Reply #18 on: March 10, 2018, 12:47:40 PM »
TwoCities

You are absolutely right, my bad, there are no BB warrants.

gokou3

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Re: 2017 Annual Letter
« Reply #19 on: March 10, 2018, 01:54:16 PM »
Need to break down the 7% returns.

Fairfax has averaged 23% / 50% / 27% for Cash/Bond/Stock Allocation between 1986 to 2014 (when I last calculated them).

Assuming a 25% 50% 25% cash bond stock allocation.

If you assume 2% returns for the cash portion, 5% returns for bond portion, to get to 7% investment returns on total portfolio, the stock portfolio has to return 16%.

Even assuming 6% for bond portfolio would require the stocks to deliver 14% annually.

Vinod

Vinod,

Thanks for correcting my calculations.  Seems to me it's a tall order to get to 7% return in this kind of market (high stock AND bond valuations).