twacowfca

Lancashire’s exceptional value is hiding in plain sight. The insured industry losses from the HIM trio of hurricanes exceeds any modeled loss adjusted for current property values after the hypothetical impact of any hurricane season going back to the 1880’s. The projected hit to LRE is well within their modeled parameters, about 12% of BV, leaving them in good shape to hold their current ratings and take advantage of opportunities. Rates should firm up nicely with alternative capital trapped in cat bonds awaiting a reckoning that will take months to sort out. Their big almost risk free way to make money will be through their unique Kinesis vehicle. They’ve said LRE could collateralize $2 billion dollars of coverage through Kinesis when rates increase after a major loss season. Their Kinesis investors are ready to provide capital and take the risk while LRE collects fees and commissions. That amount of coverage would be about seven times what LRE’s written through Kinesis in recent years. I guesstimate the equivalent of ten to eighteen percent of Kinesis premiums should flow to LRE’s bottom line on average in low to medium loss years. FYI Lancashire’s Chairman increased his LRE holdings substantially using his own money to buy shares after Lancashire announced estimated cat losses for H2.

Q1 headline earnings were so so at $26M, but ROE, meaning change in fully converted BV/SH was excellent at +3.8%. Some of their gains on swaptions and other unrealized gains are not run through the income statement. Last year's contraction of their top line, mainly from their insuring upstream deep water platforms, has stabilized. They are down to their profitable core business in all lines, projecting flattish premiums for the rest of the year. They have only lost one account as a consequence of the not unexpected departure of Cathedral's founders at the expiration of their noncompete agreements this year along with three senior underwriters. Almost all of Cathedral's Lloyds business is now dependent on broker relationships rather than direct relationships with clients. Lancashire has excellent relationships with the brokers. Therefore, very little of the value of Cathedral walked out the door with the founders who are a generation older than Alex and Paul. Absent a big, industry wide loss event that would cause a dramatic spike in rates they could exploit, they are on track to pay this year's earnings out in a large dividend EOY.

Here's my two cents, and that won't help Valeant's balance sheet. Their IBS drug works, but it has significant potential side effects. Erythromycin is an old drug long out of patent that works almost as well treating IBS. It's side effects are so low that it has been seriously considered for classification as a non prescription drug. The US health system is all about increasing costs, but that is not the case in other countries. Projections for sales of their drug in other countries may not be realized when physicians realize that a generic drug that costs pennies a tablet works almost as well with lower side effects,.

That's a great memo. And I think IRR is the correct metric by which to judge the performance of someone like an individual investor, who is completely in control of his/her own capital. IRR, or something that's abstractly similar (ROIC, ROE, etc.), is what we all use to judge all of these companies we're investing in. Why wouldn't we use it on ourselves? The time weighted metric just seems like a way to avoid the truth. Most individual investors are absolutely not fully control of their own capital. You can't change when you receive your salary, or when you get an inheritance or a gift etc. If you got a big gift in 2009 you just got lucky, while if you got it in 2007 you got unlucky. If you don't try to time the market does it make sense to try to measure that? Agree with this, that is unless people are literally hoarding money, storing it away without ever intending to use it that timing is really out of our control. I have no idea how I did in 2015, calculating it will be a mess because money was moving in and out throughout the year. We purchased a house halfway through the year and I sold some stocks to facilitate the purchase. Would I have done better if I hadn't sold them? Maybe, but then again I wouldn't be living where I want to. In my view the purpose of money is to work for you, and in this case investing enabled us to buy a place we wanted. I'd like to think I can control the timing of my account, but I can't. When we found a house I couldn't wait until the year end to make performance nice and tidy. We bought a cottage. My total losses could have been even worse. I probably would have lost the value of what we spent using the same percentages. Not whining about my first world problems, thats for sure. Stocks will come back. About + 25% while holding 50 % of the portfolio in cash most of the year. That's an amazing risk adjusted return, but it's totally misleading taken out of context. Most of that return was from the recovery of a large, leveraged position that had gone south the year before.

Yup! The 10% decrease in WSBASE over the last three weeks, culminated with a 6% drop in the week ended last Wednesday. That is not unprecedented, but the Saint Louis Fed series only records three other declines of similar magnitude over many decades. All three of those huge WSBASE declines were closely associated with corrections in the market in 2010, 2011 and 2014. We more than hedged our market exposure early last week with February SPY puts. Our portfolio value actually increased last week. Nice. I didn't hedge, just went to 60% cash and removed all leverage so it still went down. Might go back in this week, though just as a short term trade. We have also been @ 50% cash most of the time during the last year as WSBASE and and the S&P 500 flattened. Surprisingly, 2015 has been one of our best years ever as we closed out the last of our BRK leaps early in the year with a gain that was almost a double and converted another leap-like total return derivative on our largest holding at near the highest price during the last couple of years to remove that leverage while maintaining the position. We also managed to make a little money on our index options in a market that was flat overall by referencing what was happening to the internal divergences of the indexes. This turnover isn't the usual type of value investing, but those trades were not typical short term herd following trades either. Instead, the trades were anchored to the underlying values of those holdings, buying low and selling high around the underlying intrinsic value. That seems appropriate in a market that is pricey while we also hold a lot of cash. :)

Yup! The 10% decrease in WSBASE over the last three weeks, culminated with a 6% drop in the week ended last Wednesday. That is not unprecedented, but the Saint Louis Fed series only records three other declines of similar magnitude over many decades. All three of those huge WSBASE declines were closely associated with corrections in the market in 2010, 2011 and 2014. We more than hedged our market exposure early last week with February SPY puts. Our portfolio value actually increased last week.

Yes, more on the economics of both LNG projects will be appreciated. Thanks

Has Weschler bought any more stock recently?

It's the same MO, but their sweet spot is being ready to write a check to buy the whole company quickly when there is an otherwise good financial company in short term distress. :)

This is where the back of the envelope calculation helps: math so simple all it takes is the back of the envelope to explain it, even if the figures are approximate. I remember reading an 80+ page presentation on Sandridge right after Ward spoke at the FFH AGM a few years ago. After reading it, I was farther away from a thesis using simple math that supported buying the stock than before reading their presentation. Nowhere in those 80 pages was there simple quantification showing what their edge was or how much that edge was worth. Later, a little digging revealed that Chesapeake with acreage not too far away was pumping twice as much oil per well drilled than Sandridge was. A decisive analysis didn't even require the space of the back of an envelope. That one astonishing fact was sufficient to falsify all the BS in their self serving, 80 page report.

Yes. The U.S. Court of Federal Claims has limited jurisdiction to monetary claims brought under federal statute (and various other Government related laws and actions). So the U.S. Court of Federal Claims, for instance, couldn't hear a case that deals with whether a U.S. Government agency overstepped its bounds by sidestepping Delaware corporate law, which is a matter of state law and is not purely a monetary damages issue. That's a good explanation. It may be somewhat similar to the NextWave vs the FCC case that went all the way to the U.S. Supreme Court. NextWave won a ruling that U.S. bankruptcy court was the proper venue for valuing and disposing of the spectrum rights that NextWave bought in a FCC auction, not the FCC which tried to repossess those rights. Will the minnow state of Delaware tweak the dragon's tail???

That's the way the documents read. The $188B the U.S. has put into F&F entitles the U.S. to receive 10% per annum on cumulative preferred shares. Those accumulating dividends that have not been paid compound at 10% per annum, adding to what is owed the U.S. Pro forma, what would be owed the U.S. annually without the sweep is considerably more than $18.8 Billion, and the mountain of arrears in addition to the $188 principal amount is growing at a rate of 10% per annum as we speak. So that's what I was hoping to tease out with my question. Why would the dividends accumulate but for the sweep? Because but for the sweep, the companies were making tremendous profits (even aside from the mountain of non-cash DTAs that were recognized because of that profitability). And the non-2013 profits above understate the companies' cash earning abilities because the DTAs would have kept cash taxes low, which means even more dividend paying capability for the GSEs. Alternatively, I suspect that, to the government, trading DTAs for dividends is probably just as good to them as cash, but that's a leap that doesn't need to be made because cash profitability would have been enough to continue to pay the $18B in dividends. Am I missing something here? Do you have a link to this? I'd be curious to see who that might have been. It looks to me that any settlement is going to have to come from the Administration because the Treasury holds the GSEs by the balls via the covenants in the SPSPA, and I'm not optimistic that this Administration would be willing to make any move unless forced to do so by some development in the legal courts. (Which is why I was asking for the reason you think a settlement might have been in the works.) I think both Pelosi and Reid both issued statements several days ago back pedaling on their previous opposition to any deal that would give something to the public preferred holders or the common holders. When that happened it looked like there might be something nice in prospect for public preferred holders, and I considered getting back in for our fourth possibly multi bagger round trip. However, the Jumpstart bill seems to throw a monkey wrench into the works. With the loss from their balance sheet of the funds taken in the sweep, dividends would not prudently be paid to the public preferred holders until that balance sheet is rebuilt. Profits are now normalizing for F&F, and their latest year's earnings don't even provide enough to pay the annual dividends on the U.S. preferred,according to the chart. Does anyone think the Administration is going to return the swept profits to F&F and restore their balance sheets? In an election year? Would that help their election chances next fall? If the answer is yes, well --- there's this bridge over an important river I would like to sell you. I am not seeking confirmation of my latest view. I would be delighted to hear a credible way the administration can cut a deal now that is favorable to preferred holders. Well theoretically there are 2 ways this can work out for shareholders. 1. The administration sees enough evidence or tries to save face and settle. 2. Gov is forced by court decision to work out settlement or return funds. This of course could be appealed but if any of the courts find the net sweep, delaware preferred law illegal etc funds have to be return regardless of the omnibus bill, what the administration thinks etc correct? It may not be this administration but eventually whoever is the president may not have a say in what $$$ is given back and how much. Is there a good reason why jurisdiction in the U.S. Court of Claims would not trump all other venues?

That's the way the documents read. The $188B the U.S. has put into F&F entitles the U.S. to receive 10% per annum on cumulative preferred shares. Those accumulating dividends that have not been paid compound at 10% per annum, adding to what is owed the U.S. Pro forma, what would be owed the U.S. annually without the sweep is considerably more than $18.8 Billion, and the mountain of arrears in addition to the $188 principal amount is growing at a rate of 10% per annum as we speak. So that's what I was hoping to tease out with my question. Why would the dividends accumulate but for the sweep? Because but for the sweep, the companies were making tremendous profits (even aside from the mountain of non-cash DTAs that were recognized because of that profitability). And the non-2013 profits above understate the companies' cash earning abilities because the DTAs would have kept cash taxes low, which means even more dividend paying capability for the GSEs. Alternatively, I suspect that, to the government, trading DTAs for dividends is probably just as good to them as cash, but that's a leap that doesn't need to be made because cash profitability would have been enough to continue to pay the $18B in dividends. Am I missing something here? Do you have a link to this? I'd be curious to see who that might have been. It looks to me that any settlement is going to have to come from the Administration because the Treasury holds the GSEs by the balls via the covenants in the SPSPA, and I'm not optimistic that this Administration would be willing to make any move unless forced to do so by some development in the legal courts. (Which is why I was asking for the reason you think a settlement might have been in the works.) I think both Pelosi and Reid both issued statements several days ago back pedaling on their previous opposition to any deal that would give something to the public preferred holders or the common holders. When that happened it looked like there might be something nice in prospect for public preferred holders, and I considered getting back in for our fourth possibly multi bagger round trip. However, the Jumpstart bill seems to throw a monkey wrench into the works. With the loss from their balance sheet of the funds taken in the sweep, dividends would not prudently be paid to the public preferred holders until that balance sheet is rebuilt. Profits are now normalizing for F&F, and their latest year's earnings don't even provide enough to pay the annual dividends on the U.S. preferred,according to the chart. Does anyone think the Administration is going to return the swept profits to F&F and restore their balance sheets? In an election year? Would that help their election chances next fall? If the answer is yes, well --- there's this bridge over an important river I would like to sell you. I am not seeking confirmation of my latest view. I would be delighted to hear a credible way the administration can cut a deal now that is favorable to preferred holders.

That's the way the documents read. The $188B the U.S. has put into F&F entitles the U.S. to receive 10% per annum on cumulative preferred shares. Those accumulating dividends that have not been paid compound at 10% per annum, adding to what is owed the U.S. Pro forma, what would be owed the U.S. annually without the sweep is considerably more than $18.8 Billion, and the mountain of arrears in addition to the $188 principal amount is growing at a rate of 10% per annum as we speak. I think there was a deal in progress because certain leading Democrats issued clarifications recently that they were no longer adamantly opposed to giving the public preferred holders anything in some sort of reorganization. F&F used to be the Democrat's champion cash cow to fund their political campaigns. The former chairman of Fannie Mae led Obama's fundraising in his 2008 campaign. It seems that the Jumpstart bill puts that in check. But that's not checkmate. However, with the Jumpstart bill, I don't see a clear way for a significant recovery for preferred shareholders until 2018 at the earliest if ever. I appreciate thoughtful comments, not wishful thinking about possibly favorable court decisions. How might a favorable settlement happen in view of the Government's preferred shares being ahead of the other shares, assuming there's not a dramatic, favorable court ruling for other shareholders.

The US Court of Claims should wind up with jurisdiction, notwithstanding mosquito bites in other courts. In the unlikely event that plaintiffs get a favorable ruling, it is very likely that the ruling will be that the sweep is legal, but the plaintiffs have a claim. That claim would be based on what would have occurred had the sweep not happened. 10% annual compounded interest on a growing principal amount is beyond the normalized dividend capacity of F&F in various future interest rate scenarios. And, F&F would not be able to pay dividends to other preferred shareholders until their capital built up to levels much higher than before the crisis. Plus, no more goosing their results with mark to myth accounting. In the meantime the the ten percent dividend arrears the U.S. is due keeps on compounding and likely adding to the principal amount owed the U.S. in the years ahead that may not be highly profitable. That compounding freight train will keep pulling ahead of the normalized earnings of the dynamic DUO of F&F.