Author Topic: 2017 Annual Letter  (Read 21443 times)

petec

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Re: 2017 Annual Letter
« Reply #40 on: March 12, 2018, 10:32:59 AM »
I think the structure of the Brit deal with OMERS is:
- They don't have to pay a dividend but if they do it all goes to OMERS up to a hurdle, and above that it goes to FFH holdco.
- They can buy OMERS out over several years at cost plus an incentive which I seem to remember being about 7% a year.

So if the BV compounds at >7% the p/bv falls and if not, it rises.

AW has clearly had a rotten start to that but I suspect we are a few years from them buying the stub and it's got a great record of BV growth so time is on their side.


petec

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Re: 2017 Annual Letter
« Reply #41 on: March 12, 2018, 10:35:30 AM »
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!

Spekulatius

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Re: 2017 Annual Letter
« Reply #42 on: March 12, 2018, 10:37:53 AM »
Yes, doing a Teledyne only makes sense if shares are quite undervalued and there is no wayside knowing how Mr. Market will value FFH going forward.
Talking about a huge buyback in context of above makes sense.
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StevieV

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Re: 2017 Annual Letter
« Reply #43 on: March 12, 2018, 11:08:00 AM »
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).

My earlier post on this should be ignored.  I was reading and posting too fast.  7% for the equity portion of the portfolio and 7% for a blended portolio is much different.  A 14-16% return for the equity portion isn't plausible.

I need to look more closely at this later today.  The numbers below are a little hasty.

It looks to me as though the book value is about $12.5B US.  A little under $10B CAD.  (most I see are per share; so perhaps I have this total book value incorrect).

If there are $40B in investments, at a 95% combined ratio, why would they need a 7% return to grow book at 15% (about 1.8B USD)?

Anyway, I've gotten myself confused here and need to take a fresh look.

I guess I need help here.  Here is the quote from the letter.

"With $40 billion in investments, a current run rate of $11.5 billion in net premiums written and $12.5 billion in
common shareholders’ equity, we need an investment return of approximately 7% in order to achieve an annual
15% increase in book value per share, assuming a consolidated combined ratio of 95% at our insurance operations.
"

7% return on $40B is $2.8B.  $2.8B would much greater than a 15% increase in the book value.  It seems to me as though they are subtracting from the $40B in investments to get the 7% number, but I don't understand the steps.  Some of the 40B is certainly necessary for claims, but they should keep the investment returns.  That being said, they don't have a free hand on the entire 40B given the necessity to be able to pay out claims.  Is that what they are taking out, or is there something else?

Thanks in advance for any assistance.

gokou3

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Re: 2017 Annual Letter
« Reply #44 on: March 12, 2018, 11:26:25 AM »
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).

My earlier post on this should be ignored.  I was reading and posting too fast.  7% for the equity portion of the portfolio and 7% for a blended portolio is much different.  A 14-16% return for the equity portion isn't plausible.

I need to look more closely at this later today.  The numbers below are a little hasty.

It looks to me as though the book value is about $12.5B US.  A little under $10B CAD.  (most I see are per share; so perhaps I have this total book value incorrect).

If there are $40B in investments, at a 95% combined ratio, why would they need a 7% return to grow book at 15% (about 1.8B USD)?

Anyway, I've gotten myself confused here and need to take a fresh look.

I guess I need help here.  Here is the quote from the letter.

"With $40 billion in investments, a current run rate of $11.5 billion in net premiums written and $12.5 billion in
common shareholders’ equity, we need an investment return of approximately 7% in order to achieve an annual
15% increase in book value per share, assuming a consolidated combined ratio of 95% at our insurance operations.
"

7% return on $40B is $2.8B.  $2.8B would much greater than a 15% increase in the book value.  It seems to me as though they are subtracting from the $40B in investments to get the 7% number, but I don't understand the steps.  Some of the 40B is certainly necessary for claims, but they should keep the investment returns.  That being said, they don't have a free hand on the entire 40B given the necessity to be able to pay out claims.  Is that what they are taking out, or is there something else?

Thanks in advance for any assistance.

See http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/2017-annual-letter/msg326836/#msg326836

StevieV

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Re: 2017 Annual Letter
« Reply #45 on: March 12, 2018, 11:34:15 AM »
I see.  My bad.  Taxes, expenses, etc.

Dazel

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Re: 2017 Annual Letter
« Reply #46 on: March 12, 2018, 05:20:33 PM »


Fairfax used the 2007 and 2008 CDS winnings to buy back ORH, NB, Zenith and others....they were some of the best investments Fairfax has ever made (I have recently seen other posters still calling Prem a thief because of how good the deals turned out for Fairfax). They are the reason that FFH is undervalued. I believe they will do the samething  going forward but buybacks will be the priority. If they make a extra couple of  billion on Blackberry or Greek investments etc...Then you will see them buy back more of Brit and Allied.
Are we not all glad they did not own all those two companies last year! For some reason memories are short right now with Fairfax....nature of the beast.

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...
Someone do the work and try to find someone close please! Crazy.

vinod1

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Re: 2017 Annual Letter
« Reply #47 on: March 12, 2018, 08:03:42 PM »
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...
Someone do the work and try to find someone close please! Crazy.

You are measuring against the wrong benchmarks.

A couple of years back I am trying to answer the question of why they are outperforming so much in the bond markets. Equity I can understand and we can see the major investments and how they played out.

In bond markets the alpha has to come from (a) security selection or (b) making correct macro calls on interest rates.

No doubt there is some of both. But it still does not explain such a large out performance. What I realized is that they are including non-stock investments such as convertibles and possibly warrant deals into the fixed income segment. Nothing wrong in that. But they have a different risk profile and you cannot then measure up against pure bond benchmarks.

Vinod

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

StubbleJumper

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Re: 2017 Annual Letter
« Reply #48 on: March 12, 2018, 11:56:42 PM »
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
« Last Edit: March 13, 2018, 12:13:26 AM by StubbleJumper »

Dazel

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Re: 2017 Annual Letter
« Reply #49 on: March 13, 2018, 02:52:43 AM »




Gundlach is the bond king....tell me that his portfolio has not had the opportunity to  similarly weight to Bradstreet’s....so take the bench mark out compare their numbers.
https://doublelinefunds.com/wp-content/uploads/core-fixed-income-fund-fact-sheet.pdf?c=1520932995

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!

P.s I love Gundlach and listen to all he has to say...