giofranchi

I have doubled my firm's investment in BH today. And I will buy as many shares at $265 as possible! giofranchi

At first glance, the idea of buying into Lloyds would seem to be a wash or a small negative for most outside insurers, like a babe going into the woods. But for Lancashire it appears to be an opportunity to leverage Lancashire's (and Brindle's) nonpareil reputation. Think of Brindle as being the best Poker player in the world who is a net winner in four out of five of the poker tournaments he enters. Up till now he has refused to enter the biggest tournaments because he doesn't want to pay the usual rake off fees the house takes on the action. A funny thing happened in the meantime, Brindle has developed quite a following, people who want to pay him to be allowed to bet alongside him, people with lots of money who need more action that can only be provided by the biggest casino in the world, with all sorts of interesting side games that are very profitable for a good player. Cathedral is very good at attracting capital from names. They have a great underwriting record, better than almost all except Lancashire. Their manager has a record that goes back 20+ years when Brindle was also establishing his reputation among the players and names at Lloyd's. Cathedral's outstanding underwriting record is not quite so good as LRE's, but their ROE is higher at 26% compounded because of the somewhat non recourse leverage available through the Lloyd's platform. It will be interesting to see how this works out in the future . I have bought more LRE at 775 pence today. Now LRE is 18.5% of my firm's portfolio. If Mr. Brindle pays 1.6 x BV, I can too. And I am quite confident a lot of cash will be generated from this acquisition: a larger market, little higher CRs, with a little more leverage = more opportunities for growth, always keeping a ROE in the high teens / low twenties. giofranchi

finetrader, I like this post of yours very much! With all the talking about FFH equity hedges, one thing is clear to me: each one of us should always "assess risk in the market and economy and act accordingly." All the rules and quotations won't be enough, if you don't have a very well defined strategic plan, and the discipline to always reassess it, and then follow it. Just because the economy isn't important 95 times out of 100, doesn't mean it is prudent to overlook it the remaining 5 times... Of course, to live by "fixed and immutable rules" (i.e. The economy doesn't matter) is easy and comforting... But I would rather think and come to a reasoned and justifiable conclusion in each different situation: the answer will almost always be the economy doesn't matter, but I won't be fooled the rare time when that rule doesn't apply. And of course, to find rules that are ALWAYS true is very suspicious in engineering and science too, let alone investing!! Btw Mr. Munger in recent years seems to be much more worried about the economy than he has ever been. I am in Elba Island for some vacation! So, see you all back at the end of the month! Cheers! giofranchi

Hey, no problem! After all, your are doubling your money with ALSK, while I am stuck with FFH... So, yes! Of course, I am silly!! ;D ;D ;D Cheers! giofranchi

Thank you for posting this. I will read it with much attention. Anyway, if there is a person I don't see taking overconfident, undue risks, that person is Mr. Einhorn. Actually, I think he is one of the best risk managers out there! ;) giofranchi

Nothing to be exited about… do I give the impression of being exited about $billions in losses…?! If so, I am sorry: not my intention! ;) I just want to put the right numbers on the equity hedges. giofranchi

As you can see on page 15, Al is right about the S&P500 average level of the equity hedges. My math wasn’t right, because I arrived at a total original notional amount of 7,014.25 million, when it actually is worth $6,520.9 (see page 15). Anyway, $3.5 billion are short the Russell2000 at an average level of 662.22, while at the end of Q2 2013 that index was at 977.48. So, more than half of the losses could be recouped with the Russell2000 declining little more than 30%. Only $1 billion is short the S&P500, with $1.6 billion short individual equities. giofranchi 2013-Q2-Interim-Report-Final.pdf

Packer, do you know something more about management, other than what can be found on ALSK’s website? Thank you very much, :) giofranchi

Thank you Ben! 1200 is much more consistent with the math that leads me to think a 30% decline in the market should be required to recoup all the losses from the equity hedges (1700 x 0.7 = 1190). Maybe Al is right and my math is wrong, but I still don’t understand where my error lies… Other very good points as well. :) giofranchi

Well, low PEs might be caused both by inflation and by deflation… Current 12 month real EPS for the S&P500 are 88: http://www.multpl.com/s-p-500-earnings/ I think Mr. Shilling is putting a multiple on that number. And he is not thinking about a single episode or market swoon. giofranchi

Of course! And far from me saying we will repeat such dramatic events! Anyway, nothing so dramatic happened in Japan during the last 20 years, right? Now, let me ask you a question: do you know of some deep value investor, who invested solely in the Japanese stock market from the early ‘90s until today, and reaped significant returns? My point is: I know that value investing empowers you with the strength to swim against the tide, but could exist a tide so strong that even value investing stops being very effective? By “stops being very effective” I mean that, although you surely do much better than the average, you’d still fail to build wealth at a satisfactory compound rate. I am not saying I know the answer… all I am saying is that historically the answer is not very clear… what is clear from history is only that the tide doesn’t matter 95% of the times. giofranchi

It might be… Anyway, Mr. Shilling puts the sustainable earning power of the S&P500 at 80 (and he sees it bottoming at a 10x multiple: he puts the S&P500 bottom at 800). If the S&P500 gets to 2,426, it will have reached a multiple of 2,426 / 80 = 30x… I know it might happen… and your reasoning about the great rotation makes sense… being cautious doesn’t mean I will be hurt by such an occurrence… on the contrary, I will thrive! It just means I won’t thrive as much as you! ;) giofranchi

By no means. We check it every week. It's still on a tear as shown in the graph. A significant amount is finally finding an exit into M2, the main economy. When the tap finally gets turned down. . . Watch out! Please note the big (for then) uptick right before Y2K. Greenspan thought it was a good idea to put liquidity into the system because of the scare stories approaching the end of millennium. When that proved to be unnecessary, the withdrawal of that stimulus by early 2000 tipped the market into it's big slide. Two questions, twacowfca: 1) If a significant amount of liquidity is finally finding its way to the real economy, why isn't velocity picking up? As of May 2013 the Core PCE Index was revisiting its lowest point, therefore velocity must be still slowing, not picking up. Also as of March 2013 the M2 money multiplier was at its lowest level since 2008… what has changed in the meantime? 2) I understand that it is never pleasant to withdraw any kind of stimulus… but what are we supposed to do, if that stimulus doesn’t work? It is 5 years now we have been continuously fed by the largest stimulus in human financial history… result: velocity of money isn’t picking up, real GDP growth isn’t picking up, employment (aside from governmental statistics: they don’t take into consideration the participation rate, which is still dropping) isn’t picking up, the real median household income isn’t picking up, the personal saving rate isn’t picking up. When will enough be enough? How many more years will it take us to realize if something is truly working, or vice versa should be cast aside as a failed experiment? In the meantime assets prices are soaring… And I strongly fear that assets prices are a self fulfilling prophecy: when they become too detached from any real economic sense, they will fall back down, whatever policy is in place… then, it will become almost impossible to fight deflation… giofranchi

Well, of course “not surviving” is euphemistic… but it surely was not pleasant at all! Take, for instance, Mr. Keynes: his net worth in 1936 was £506,522 and he had loans worth £299,347. So, though he used a certain amount of debt, he surely wasn’t too leveraged! And yet his net worth declined to only £171,090 in 1940, and in 1945 at £411,238 it was sill well below its peak of 1936. And the reason we know what happened to Mr. Keynes is because he undoubtedly was one of the shrewdest investors of the first half of the last century! I seriously doubt a lot of people fared as well as he did! So, I am sure he “survived” those times, but try to imagine what it is to suffer a decline of 66% in your net worth over the course of 4 long years… think about the psychological drama… anyone would be forced to question his/her beliefs… And that’s why, like Yogi Berra said: giofranchi

I don’t think FFH is all that leveraged! Look at the picture in attachment: FFH has a portfolio of investments worth circa 300% its surplus. Therefore, while certainly more leveraged than the average insurance or reinsurance company, it is just a little bit more leveraged! Another point is that, before the merger with Alterra, MKL had a portfolio of stocks larger as a percentage of equity than FFH’s. So, troubles with the stock market would have entailed a more serious hit to MKL’s equity than to FFH’s. Even without taking into consideration the equity hedges put in place by FFH! Things changed with the acquisition of Alterra, because a huge amount of cash and short term bonds suddenly became available to MKL, and that’s why I invested in MKL also, as soon as the merger was announced (the drop in share price also helped!). giofranchi Insurance_Leverage.bmp

Eric, 1) As I have already said the average level of their hedges must be higher than 1060. So that a 30% decline in the market will be enough to recoup all their losses. They will have then a huge amount of capital to scoop up bargains. And don’t forget they have also hedged against the Russell2000, which, if a correction comes, I see falling like a stone! 2) Most important, don’t assume that just because you are shrewd and nimble enough to get in and out of the market, everyone can be as successful as you… to paraphrase Mr. Klarman, the market is a “revolving door”: if the market drops 40%, the great majority of people will see their wealth go back to where it was, when the market was 40 percent points lower… And this also applies to organizations like BRK, MKL, and FFH: what’s the duty of those organization is to be careful when others are greedy, and to be greedy when others are fearful. The exact time when people stop being greedy, and the exact time when people stop being fearful, are things you might be able to time much better that practically everyone else! 3) At the end all that matters is the CAGR in BVPS 10 years from now: and I think FFH’s will be higher than both BRK’s and MKL’s (choose any time frame you prefer!). giofranchi

We simply cannot know yet. As Mr. Watsa has said during the conference call, it took 5 years for deflation to set in in Japan... Likewise the New Deal policies worked for 5 years in the '30s, before they worked no more... So, probably we still must wait 2 more years, before knowing for sure. What I am positive about is that, even if there were only a small chance to repeat the '30s experience, seriuos and reliable people should have looked for ways to protect themselves and their companies against such an outcome... Of course, you might argue that FFH's protections have been too extreme and not really justifiable... We will see! giofranchi What we cannot know yet is whether or not FFH will be right on their macro call. However, what I am criticizing FFH for is rejecting the idea that if you focus on valuation (taking into account possible adverse economic scenarios), you can essentially ignore macro forecasts. I adhere to the "don't spend too much time on macro when it comes to investing" school -- Munger style. So even if there is a risk of another deflationary period in the US, the only "risk" is the market pricing your companies at low valuations. At which time you buy more of them! Especially if you have cash coming in a la BRK and MKL. (Incidentally, I don't agree that today is like the 30s -- I believe we learned from that period, and our policy makers have acted differently today to prevent such an occurrence.) Well, to have really learnt from the past would have meant not to get into so much debt anymore, living for two decades beyond our means, squandering precious resources. Instead, we have already let our (US and Europe) debt out of control. We can do things differently, but we cannot assume there is an easy way out. At least not until there is enough evidence! As far as how well value investing worked during the '30s, or in Japan during the last 15 years, the evidence is far from clear... Mr. Graham himself said that only 1 out of 100 managers survived the '30s, among those who weren't already bearish in 1925. Also Mr. Keynes saw his personal worth significantly reduced for many years after 1937. And we are talking about 2 of the most brilliant investment minds of last century! That's why, although I generally agree with you, I don't like very much fixed rules... I want to always keep an open mind and adapt my thinking as circumstances dictate. giofranchi

Well, GreenlightRe, with Mr. Einhorn managing a value long, short investment program, had a positive investment return in Q2 2013, while practically every bonds portfolio suffered losses due to increased rates. giofranchi Are there any quarters where Mr. Einhorn's strategy underperforms bonds? I'm sure it's not such a slam dunk that one quarter of data suggests. I have not said one strategy is better than the other, or vice versa. What I meant to show is that the two strategies are different and may lead to different results. Moreover, FFH already has a large bonds portfolio. giofranchi

We simply cannot know yet. As Mr. Watsa has said during the conference call, it took 5 years for deflation to set in in Japan... Likewise the New Deal policies worked for 5 years in the '30s, before they worked no more... So, probably we still must wait 2 more years, before knowing for sure. What I am positive about is that, even if there were only a small chance to repeat the '30s experience, seriuos and reliable people should have looked for ways to protect themselves and their companies against such an outcome... Of course, you might argue that FFH's protections have been too extreme and not really justifiable... We will see! giofranchi

Well, GreenlightRe, with Mr. Einhorn managing a value long, short investment program, had a positive investment return in Q2 2013, while practically every bonds portfolio suffered losses due to increased rates. giofranchi

Sincerely, I don’t understand what Mr. Clooney is complaining about… Mr. Loeb thesis about Sony is very well exposed in his Q2 2013 investor letter… and he points out that Such a poor management of business operations clearly should and could be addressed, right? giofranchi

I don’t follow ALSK, so forgive me if my questions have already been answered! Reading some of these posts I have understood that ALSK is in a turnaround and that management is doing an excellent job. As always, I am intrigued by a great management with a sound strategic view! So, I would like to know: 1) What’s their track-record? I know they have started just a little more than 2 years ago at ALSK, but what had they accomplished before? (Mr. Brindle, for instance, before founding Lancashire, had sustained a track record of 19% ROE for more than 15 years at the helm of Syndicate 488, which grew to be among the largest syndicates at Lloyd’s. Can something similar be said about Mr. Vadapalli or Mr. Graham?) 2) How much of the company is owned by the management who has engineered the turnaround? Thank you, :) giofranchi

This I will never understand… In a past conference call Mr. Watsa clearly said that he was very satisfied with all the capital they had put together until now trough the years, and what they were trying to achieve with all the hedges in place was to protect that capital. Not to grow it, but to protect it! If you want to grow your capital fast, look somewhere else… I can understand that! But now people say they will buy FFH at $200… which would entail a major decline in BV… So, you are probably investing in a myriad of companies whose management has zero skin in the game, and explains what they do, how and why, half as well as Mr. Watsa & Co. have been doing for more than 25 years… Yet, you are betting that those managers will be successful and will fulfill their promises, while Mr. Watsa & Co. will fail… It might happen! Everything might happen! But to me it makes no sense at all! giofranchi

Hi WhoIsWarren, can you tell me where you find the transcripts of the conference calls? :) Thank you, giofranchi

Ross, sorry, but I disagree with you here. 1) “once in a lifetime opportunity to pick up some fantastic bargains”?! Why?! Two years ago the market in general wasn’t particularly cheap… On the contrary, it already was quite expensive… Therefore, I don’t see why we will never see those fantastic bargains again… There is really no reason at all not to expect other bargains that will be at least as lucrative in the future! 2) As far as equity hedges are concerned, everyone has different opinions: I still think a lot of people will suffer much larger opportunity costs down the road, when they lack the cash to scoop up even better bargains than those available two years ago… You and others, instead, think only about the opportunity costs FFH has already incurred… I guess we won’t have to wait much longer to know who is right about equity hedges! 3) Maybe you are right about bonds… what matters to me is that those bonds were bought below par with an after tax yield of 5.79%, and are insured by BRK. If held to maturity, interests received plus appreciation will get very close to that 7.5% annual return needed to compound BVPS at 15% per year. So maybe their fall in value is real, but only because they increased in value too quickly before… that certainly doesn’t make them a bad investment… but I am sure you don’t really think they are a bad investment… nobody would think that! 4) I don’t understand your comparison with a company that makes widgets and breaks… equity hedges are not a bad acquisition… equity hedges are a strategic decision to protect your capital, instead of growing it fast. I have already said it could turn out to be a wrong decision… but I have also already said that I don’t think so! And that is the reason why I invest in FFH, because I agree with what they are doing. If that decision truly is the wrong one, once there is evidence about that, they will change course. But they need evidence! They won’t and shouldn’t change course just because you and others don’t agree with their reasonings! 5) Finally, also regarding FFH underwriting results there are many different views… personally, I have a tremendous amount of respect for Mr. Barnard and I think underwriting results are very strictly linked to the quality of management. If you prefer to rely on history, well then look no further than OdysseyRe’s history! If Mr. Barnard succeeds in duplicating for FFH as a whole what he has achieved at OdysseyRe, the good underwriting results certainly won't be only a one time event! giofranchi And Ross, this is how Mr. Watsa commented the bond losses during the conference call: giofranchi