Author Topic: 2018 shareholders letter  (Read 13683 times)

KFS

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« Last Edit: March 08, 2019, 02:22:02 PM by KFS »


investmd

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Re: 2018 shareholders letter
« Reply #1 on: March 10, 2019, 07:37:53 AM »
Prem Watsa is an eternal optimist & infectious about it.
Anticipated returns of 15%/year - can hope that works out.

What do folks think of approx $1.5B/yr in buybacks? About 8% of market cap.

Spekulatius

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Re: 2018 shareholders letter
« Reply #2 on: March 10, 2019, 11:56:08 AM »
BIAL (Bangalore airports) seems like a nice business. I wish there was a direct way to invest in it.
To be a realist, one has to believe in miracles.

StevieV

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Re: 2018 shareholders letter
« Reply #3 on: March 10, 2019, 12:22:07 PM »
Some unstructured thoughts:

(1) The underwriting seems to be under control and going reasonably well.

(2) I like the mea culpa on shorting.  Good to acknowledge mistakes and learn from them.

(3) I generally don't like exclamation points, and didn't care the sprinkling of them here.  Just say what you want to say.

(4) Nice dividend and interest income.

(5) The 15% "target" seems more of an aspirational target than a mid-range or average result target.  I'd prefer they communicate this differently.  Perhaps a range of possible returns depending upon equity, fixed income and underwriting returns.  They achieved neither the underwriting "target" or the investment target.

(6) Sort of a swing for the fences portfolio.  I own KW myself, and consider that more of a steady performer.  But, a lot of the others are more volatile businesses.

(7) Also not a fan of the opening - we would have done great, except we didn't.

(eight) I think the dividend and interest income, plus reasonable underwriting should be a good baseline driver of returns.  Equity returns will be a wild card.


----------------

Edited to write out the "eight".  Not sure why, but the board was automatically changing my number 8 to an emoji.  It wasn't showing up when I typed it, so I was not sure how to edit.  In any event, the last point is simply another of my thoughts, and I meant no special meaning for the last point.
« Last Edit: March 11, 2019, 06:34:37 AM by StevieV »

shalab

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Re: 2018 shareholders letter
« Reply #4 on: March 10, 2019, 06:17:34 PM »
With FRFHF reporting, I always dig deeper. The headlines, including Prem's comments are unfortunately misleading.

Here is an example:

In page 11, Watsa says:

Henry Singleton from Teledyne was our hero as he reduced shares
outstanding from approximately 88 million to 12 million over about 15 years. We began that process by buying back
1.1 million shares since we began in the fourth quarter of 2017 up until early 2019 about half for cancellation and
half for various long term incentive plans we have across our company

Page 83 of the annual report:

Diluted number of shares at the end of 2018 - 28.397 million
Diluted number of shares at the end of 2017 - 26.1 million

Using the diluted shares, I get a book value of 414 at the end of 2018. Reducing 10 dollars paid out as dividend, the book value is at 404.

2018 shareholders letter

https://s1.q4cdn.com/579586326/files/doc_financials/2019/2018-Shareholders-Letter.pdf
« Last Edit: March 10, 2019, 06:38:52 PM by shalab »

shalab

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Re: 2018 shareholders letter
« Reply #5 on: March 10, 2019, 06:32:02 PM »
Regarding BIAL ( or KIA ) being a good business, yes it is. However, many parts of the business is regulated by the government and rightly so.

Here is an article about the profit it made in 2017-2018. There is pressure on the government to reduce or cut the UDF (usage development fee) which has been the major source of profit.

https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/bengaluru-airports-profit-soars-33-to-rs-848-crore/articleshow/67037829.cms

chrispy

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Re: 2018 shareholders letter
« Reply #6 on: March 11, 2019, 07:41:15 AM »
BIAL is also discussed further in the Fairfax India report.

The letter from Prem is fine, and I like it more then previous years. But, mentioning that value has been losing to growth and value will someday outperform again is a little ridiculous in this context. Their investment results aren't just trailing the indices by a percent of two, their picks have been bad. Hence why he always has to justify them.
Buy profitable, simple companies and stick to reasonable position sizes.

petec

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Re: 2018 shareholders letter
« Reply #7 on: March 11, 2019, 08:53:44 AM »
Buy profitable, simple companies and stick to reasonable position sizes.

That easy, huh? ;)

I'm kinda kidding. Kinda.

StubbleJumper

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Re: 2018 shareholders letter
« Reply #8 on: March 11, 2019, 09:07:58 AM »
I read the letter on Saturday and refrained from commenting for a couple of days.  A few opinions:

1) If Prem wants to emulate the people in Omaha and write a 20-page letter, he badly needs to hire an editor.  There's no shame it in, Warren has used an editor for years.  At times, the letter seemed to be effectively a stream of consciousness listing every little company that FFH owns, irrespective of whether anything interesting happened at those companies during 2018.  It's nice to get a bit of colour on those companies, but if there was a theme or message that was intended through that shotgun approach, it escaped me.  The repeated silliness stating, "the best is yet to come!!!!!!!!!!!" was very tiresome.  I could do with less pumping and exclamation points, and more operational performance. 

Could a guy like Rob Carrick or somebody like that help Prem to tighten up his prose?


2) There wasn't a great deal of broader insight transmitted in this letter.  Now, that's no criticism of Prem, but in past letters there have been observations or nuggets about the industry or financial markets that I have found useful (FWIW, I didn't find that I obtained much broader insight from BRK's letter this year either).


3) What can you say about a letter that basically says, "We would have done better if we hadn't made so many shitty investments."  It's pretty tough for Prem to polish that turd.


4) Prem did a pretty good job telegraphing FFH's operating earnings potential.  That, IMO, is the base upon which higher valuation will be achieved.


5) Why is there still conflicting messages about hedging?  On the CC, the CEO mishandled a discussion about a potential drawdown in equity markets.  Prem's letter went to great lengths to communicate that there would be no more equity hedging because FFH learned its lesson.  It also observes that US economic growth has been strong, rates have bumped up, inflation looks like it's bottomed out, there's a long runway, etc, but despite those clear and obvious conditions, FFH will continue to hold CPI derivatives worth a notional $114 billion.  About this, I am perplexed.  It's only a $25m market value, but if you are trying to communicate that you are moving on from hedging mistakes in the past, why not liquidate this position.  That large notional value demonstrates that FFH was only speculating on inflation to begin with (ie, if you were hedging you would choose a hedge ratio and then buy your protection...the CPI derivatives exceed FFH's combined assets and gross revenue for a year).  If Prem and Brian have changed their perspective about world markets (which is a legitimate thing to do, and there's no shame in changing your mind), just sell the damned things and recoup the $25m, which happens to be about $1/share of capital.


6) How did the India/Pakistan conflict escape mention?  What percentage of FFH shareholders' capital is in India, to what extent has the conflict recently affected asset valuations, and what's the way forward?  I understand that the Indian culture is somewhat more fatalistic than western culture, but I would have expected some sort of reflections from FFH about the situation and whether it at all changes their approach on a going-forward basis.


7) Underwriting has been good, even though cats pushed up the CR a little.  Did anyone else take a peek at the loss triangle in the annual (it was nice when the loss triangles of all the major subs were included in past years)?  The reserve redundancies have become ridiculous.  Now, this is better than the alternative where adverse development is ridiculous, but seriously, they have been systematically overestimating their accident year claims by ~10% (see page 70 of the AR).  As I said, this is better than the alternative, but at what point does an auditor call bullshit on this?  Or is it a happy circumstance where the current accident year is overestimated, but that is offset by reserve releases from previous years?


8) Am I alone in thinking that many of the smaller international insurance acquisitions look pretty shitty (see page 15 of the letter)?  I get that many of these countries are demonstrating rapid economic growth, which portends well for the size of the future insurance market.  But, stealing a term from President Trump, if you are going to invest in "shit-hole" countries, wouldn't it at least be nice if the investment was profitable?  Seriously, Prem has listed 15 international subsidiaries and when you round the numbers, 12 of them have a CR of 98 or higher.  Do you go to a shit-hole country for a CR of 98?  Return on invested capital doesn't look great (see page 59 of the AR).


9) I like the table presenting FFH's lottery tickets (see page 20 of the letter).  Chances are that FFH ends up taking a ~10% bath on that portfolio of higher-risk debt, but all it would take to offset that would be one or two good wins on the lottery tickets.  Currently, it looks like FFH's number is coming up for Seaspan, but it's still early.  Hopefully they'll match 5 or 6 numbers to hit the jackpot on a couple of those.


10) Am I alone in finding it ironic that Prem should mention Bitcoin and General Electric on the same page, but with different conclusions?  I find that both are impossible to value and have steered well clear!  Prem seems to hold one in disdain but embraces the other.  Interesting.



I've spent less productive Saturday mornings doing other things than reading the letter and perusing the AR, but nothing much changes for me after this release.  It's time for FFH to drop the excuses and to execute.  The market is from Missouri and is saying,  "Show me."



SJ
« Last Edit: March 11, 2019, 09:14:28 AM by StubbleJumper »

petec

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Re: 2018 shareholders letter
« Reply #9 on: March 11, 2019, 09:52:26 AM »

5) Why is there still conflicting messages about hedging?  On the CC, the CEO mishandled a discussion about a potential drawdown in equity markets.  Prem's letter went to great lengths to communicate that there would be no more equity hedging because FFH learned its lesson.  It also observes that US economic growth has been strong, rates have bumped up, inflation looks like it's bottomed out, there's a long runway, etc, but despite those clear and obvious conditions, FFH will continue to hold CPI derivatives worth a notional $114 billion.  About this, I am perplexed.  It's only a $25m market value, but if you are trying to communicate that you are moving on from hedging mistakes in the past, why not liquidate this position.  That large notional value demonstrates that FFH was only speculating on inflation to begin with (ie, if you were hedging you would choose a hedge ratio and then buy your protection...the CPI derivatives exceed FFH's combined assets and gross revenue for a year).  If Prem and Brian have changed their perspective about world markets (which is a legitimate thing to do, and there's no shame in changing your mind), just sell the damned things and recoup the $25m, which happens to be about $1/share of capital.


Haven't read the letter yet, but thanks for your summary - useful.

I'm not sure relating the notional to revenues or assets is useful. They'd only make the notional if absolute CPI went to zero, IIRC, and that seems unlikely! They could have made a couple of billion, maybe more in a depression, but nothing like the size of the notional. My major complaint is not that they hold this but that they should have structured their hedges this way: deep out of the money derivatives that offer outsized gains on low probability outcomes for (relatively) low absolute cost.

Re the other insurance operations, no, you're not alone, although several of these are in places where you can earn high real interest rates in fixed income with relatively little risk (e.g. Brazilian sovereign bonds). That transforms the economics of a 98% CR. Also, some of these businesses will probably benefit from operating leverage as they scale.