giofranchi

I don’t think they posted unsatisfactory results for 2014… The market punished them yesterday, but for no good reason imo. They managed to increase BVPS by 10% in 2014, and their CR was slightly above 100%... Now they are selling for 1,01 x BVPS. Very cheap imo! ;) Gio

Congratulations, twacowfca! And thank you for another good idea! :) Cheers, Gio

I agree 100%. Cheers, Gio

Q4 2014 Conference Call Transcript Gio greenlights-glre-Q4-2014-conference-call.pdf

ni-co, thank you for the nice discussion! My view is the US have gone through QE1, QE2, and QE3 in the last 4 years… They have printed lots of money, and have also prompted the EU to do the same. Now what?! Finally the EU has decided to follow suit, and the US already starts complaining because the USD is getting too strong?!… ??? The USD is getting stronger, and imo will continue to do so, because it is a safe haven among currencies… And in a deleveraging there might be a lot of volatility, but ultimately safe havens will be sought out and coveted. I simply don’t see a way to stop this process. Everyone, the US, the EU, Japan, China, etc. must print money. If they refuse to do so, their economies stagnate, like it has happened in the EU and Japan before they both started printing money. Now, if everyone is printing money, which currency is going to get stronger? The USD (imo). Gio

I think Prem Watsa said something very interesting on the subject of this thread during the Q4 2014 Fairfax Conference Call. I quote: Protection on the downside… Given the fact all our investments depend somehow on what the market does, protection on the downside should be paramount in choosing what to buy or not to buy. In this regard I think it is very difficult to invest without taking a look at the general picture too (at least some macro reasonings): for instance, a bank or an auto company might seem very cheap compared to its ttm earnings, only to discover that in a recession those earnings get halved… Gio

That’s why I said the situation is scary… Think about it: the best solution you see is for the 3rd largest bond market in the world to leave the Euro… Wow! We better expect a lot of turbulence…!! ::) Gio

Well, I just don’t see how… If the US say to the EU: stop printing, because the Euro has been devalued too much! And as a consequence Draghi stops buying Italian government bonds, and the creditworthiness of Italy then starts to matter once again… well, Italian government bonds yields will spike up like they did in 2011… but this time what’s going to bring them down? And, given the shape it finds itself in, Italy simply cannot afford paying high interests on its debt… Gio

This makes a lot of sense... though its consequences are a little scary... Gio

Thank you, LakesideB! :) Gio

I mean: in Japan not even pension funds are buying government bonds anymore… The Japanese Central Bank right now is the market for government bonds! How could their price not be manipulated?! ??? Gio

I don’t think I agree 100% here… What I wanted to say is that imo it is no longer a matter of creditworthiness… Imo interests rates are clearly being manipulated, in order to relieve highly indebted governments from the burden of interests that otherwise would be unsustainable. Do you think anyone truly believe Japan would ever be able to repay its debt?! I don’t… Do you think anyone truly believe Italy would ever be able to repay its debt?! I don’t… Most observers by now think that France is in big trouble too... Things in Europe just get messed up by the fact we pretend we are a nation, but we are not, and probably will never be… So interest rates get manipulated also as a mean to reproach those countries which don’t conform diligently to what Germany dictates… Sorry to say this, I know you are from Germany, but I simply don’t see how else to read the EU situation right now… I repeat: it is no more a matter a creditworthiness: as long as inflation or deflation permit government and central banks to keep interests rates suppressed, they will stay very low and even get lower. Gio

Insane?!… Maybe!… Until you realize that governments, so much into debt as they are, will do anything to keep rates as low as possible for as much time as possible. Imo it all revolves around inflation: if it keeps going down, rates will follow suit. And if we finally experience deflation, rates might get near zero like Japan (and Germany already!). Gio

Could anyone post a pdf file of the transcript? Thank you! :) Gio

I think b) might be a very good guess! ;) Gio

They call 1.6x a “rich multiple”… Prem Watsa and “rich multiple” don’t go easily on the same page… We will see! ;) Cheers, Gio

Yes! You are right. But imo the fact this transaction is immediately accretive to Fairfax on the investments per share metric, with underwriting operations that are very much profitable, justifies the multiple paid. If you can make a 12%-15% return on tangible assets through underwriting operations, then send the float to HWIC for investments, I guess you can achieve very interesting overall results! Cheers, Gio

Closing adjusted net tangible assets per share at the end of 2014 first half was 179.4 pence. If we use that number, the multiple paid is: 305 / 179.4 = 1.70. If Brit PLC during the second half of 2014 has achieved results in line with the first half, net tangible assets per share might be 10% higher, therefore the right multiple paid might be: 305 / 197.3 = 1.55. Gio

From a brief glace I have given to the 2014 First Half Results of Brit PLC (see attachment), I like what I see: - Annualized return on net tangible assets of 25%, - Combined Ratio of 88.3%, - Premium growth of 4.5%, - Investment returns (non-annualised) of 2.1%. To be able to purchase such good results for less than 10 times earnings is something I cannot but like very much. Their investment portfolio surely is conservative, but now that they are backed by the Fairfax Balance Sheet, the managing of their investments could be left in the capable hands of HWIC. This would further enhance return on net tangible assets. It reminds me somehow of Lancashire: managing through a difficult environment, while waiting for a market shift to show once again their true capabilities and potential. This is exactly the time when you want to invest in companies like these. Cheers, Gio 2014_Half_Year_Full_Report.pdf

+1 - huge thanks twacowcfa, it is a long term holding for me based in significant part on what I have learned from you. To answer the question in your last post: Kinesis? Yes, Kinesis is the big elephant outside the door that could step into the parlor quickly if there is an event that moves the financial or underwriting markets. We saw this in 2008 when the financial markets crashed and funds flowed to Lancashire's stock with its practically no risk balance sheet even after they had a big loss after hurricane Ike. There were few places for funds to hide then, and the prospect of great returns going forward after catastrophe rates had spiked was appealing. It didn't hurt that Lancashire's losses after that big hurricane were much less than the losses of their peers with similar catastrophe exposure. That's why Lancashire's recent strategy of reinsuring half or more of the risk of very large losses should have magnified impact on their bottom line and share price after a large disruption. Their funds management business is very profitable, but most of that profit doesn't show up immediately when they put outside funds to work. Look at the recent Q10 results and add up all the ways they make money on this business. That's on a base that has averaged about $300M of managed funds. Darren said on the recent conference call that they could attract a billion dollars very quickly after a market moving event. It seems that Lancashire has taken a type of business in a P&C sector that is fragile with lots of tail risk and turned that Pig's ear into a silk purse that could become more valuable when something bad happens. Their bespoke products are unique and provide exceptional value for capital relief that is largely absent with cat bonds and other parameter based vehicles that have basis risk, ie. not covering all aspects of risk. This is exactly what I am looking for, and now I am much more comfortable with management too. :) Gio

+1 Cheers, Gio

I agree with this 100%. Except that again in action we differ: I prefer to make implicit macro bets, instead of explicit ones. Meaning that I still prefer to invest in businesses that will thrive if my macro bets turn out right, instead of playing the game of asset allocation. I find asset allocation too hard, because I never can muster confidence enough to average down in a position that is going against me. And whenever I cannot do that, I know something is wrong. Gio

Very interesting! Thank you! :) Gio

The problem I have come to realize I have with a “cash pile” is that for me to hold it would implicitly mean I believe I could do better with it than Watsa or Marks (or, if you want, Dalio). It is true both Watsa and Marks lead large organizations with lots of capital, while I have small size which favors me… But besides this they have all kinds of advantages working for them! And it just seems a bit hazardous to make the assumption I will be able to manage my market hedges and my cash pile to a better final outcome than they would… Do they agree with your thesis of a slow growth environment? Mostly yes! Like I do. In action, though, we differ: while you hedge and keep a cash pile, I prefer to invest in those companies which imo have prepared themselves to thrive in a slow growth environment. Do you worry about valuations? General valuations, yes! And I share your worries. But the valuations of those companies which have prepared themselves to thrive in a slow growth environment are very much reasonable. And the reason why they are not expensive is precisely because they have prepared themselves to thrive in an environment the general public has not yet come to accept as inevitable nor even likely! Finally, in which currency to hold cash? Until a few months ago it was almost a no-brainer to hold USD: practically all the companies I am interested to own have assets denominated in USD and the EUR was strong… Right now, though, things have changed: the EUR has much depreciated against the USD… If I keep USD, I risk a paper loss as the EUR might rally against the USD… If, instead, I keep EUR, and in a market crash the flight to safety makes the USD further appreciate against the EUR, the purchasing power of my cash pile might still get significantly diminished… So, who really knows? Gio

ni-co, I don’t understand: if no great business might work in the future, how is Bridgewater supposed to work?… Bridgewater is a business itself! What I am saying is very simple: if you think Bridgewater might work in the future, very well then: invest in Bridgewater! Or in anything which share with Bridgewater similar characteristics! Do you envision instead a world in which no business might work in the future? Well, if that is the world that awaits us, I am sure Bridgewater will go bust. Gio