Circle Of Competence Issue #8

April 22, 2018

Department of Special Situations

 

Elliot Advisors Urge Spinoff of Costa Coffee

Could be the start of an interesting spinoff situation to come later.

 

Pentair Spinoff of nVent

Stockspinoffs.com feature on the above deal. Good site for keeping track of company distributions and spinoff situations.

 

Tropicana Entertainment Merger

Short but excellent article on basics of Carl Icahn's latest deal - selling Tropicana Entertainment - with Gaming and Leisure Properties (GLPI). In general I have found Clark Street Value blog to be a wonderful resource and starting point on special situations opportunities.

 

 

Department of Startups

 

Softbank's Billions Spur Startup Funding Race

How Softbank is driving private valuations higher and forcing the hand of more VCs to raise bigger funds and write bigger checks... bubbly vibes abound in VC-land (just my opinion). Just as when Amazon and Google came out of the internet bust of 2000-2002, there will be those who survive this cycle of over-funding as well. 

 

How John Doerr Keeps Companies On The Right Track

OKRs - Objectives and Key Results - are what one of the greatest VC's of all time uses to drive startup companies forward.

 

The Boring Company Raises $113M in Equity

Musk is at it again with The Boring Company's new equity raise.

 

 

Department of General Finance

 

Netflix: Future of Entertainment or House of Cards?

Professor Aswath Damodaran's (NYU Stern School of Business) take on the value of Netflix. Interesting.

 

My Berkshire Hathaway Reflections

Wonderful blog (Farnam Street) for all types of resources. I love Shane Parrish's articles. This is a simple read but lays out the timeless principles that the best investors exhibit - delayed gratification, integrity, generosity, trust, and lifelong learning.

 

How Hedge Funds Hide

Interesting, in-depth article on how Baupost structured shell companies to own various types of distressed debt and their reasoning for - and opponents' opinion on - using them.

 

The Evolution of Moat Analysis

Wonderful piece on the evolution of moats derived from tangible capital to intangible capital.

 

The Rockefeller's Art Collection - Over $1B?

What an inheritance...

 

The Yield Curve is Flattening 

Interesting article on where we are from a macro perspective based on the yield curve. 
 

Farnam Street's Mental Models

A wonderful list of SO many mental models (if you're unfamiliar with this term, I suggest you read a copy of Poor Charlie's Almanac and learn what Charlie Munger means by 'mental models').

 

Alphabet Valuation - Aswath Damodaran

Excellent synopsis of Google’s valuation drivers from Aswath Damodaran.


 

Department of Real Estate

 

Competition Intensifies for Value-Add Assets

Basic article outlining how competition for assets in the commercial real estate industry is moving from core/core plus (top tier, lower return, more stable assets) to value-add (repositioning an asset, build outs, redevelopment, etc.). 

 

 

Department of Letters

 

Euclidean Technologies' Q1 2018 Letter to Investors

Interesting research being done at Euclidean on how to use cutting edge machine learning (deep neural networks) to better predict companies' forward financials in the hopes of improving long-term investment returns.

 

Exor 2017 Letter

Their best year since 2009 based on NAV. Worth following this holding company - 22% compounded book value over past decade.

 

Interesting sections on Fiat Chrysler, their insurance company PartnerRe, India's economic prospects, Juventus' latest accomplishments in the Italian Cup, and their debt reduction. 

 

Greenlight Capital Q1 '18 Letter to Investors

Greenlight Capital letter for Q1 2018. Tough quarter with just about every big position running against them. This is when the long term perspective is truly tested. Worth a read. 

 

Fairfax 1994 Shareholder Letter

Notes and lessons from Prem Watsa, Chairman of Fairfax:

 

- Operating leverage (i.e. capital capacity or ability to write premiums) - leave some on the table for when underwriting environment has shortage in capacity (capital looking for premiums).

 

- Issue shares only when you get as much as you give in acquisitions.

 

- Use debt conservatively.

 

- Underwrite for profitability ideally. 

 

- Great section on stock exposure of p/c insurance companies and how their portfolio is comprised of roughly 30-35% exposure to common stocks.

 

- They like to stress test their capital position by simulating a market environment in which they are down 50% commons and down 30% bonds/preferred portfolios for regulatory purposes (can’t write premiums over a certain ratio of premiums to statutory capital).

 

Highlighted Company - Renaissance Reinsurance (and a few notes)

 

Renaissance Reinsurance 2002 Shareholder Letter

- 19% growth in book value from '85-'02.
- 13% compound growth operating earnings 85-02.

 

Renaissance Reinsurance 2003 Shareholder Letter

- Operating return on equity of 29%.

 

Renaissance Reinsurance 2004 Shareholder Letter

- Wonderful operating returns on equity from 95-2003 but hurricanes and catastrophes occurred in 04 that caused returns to drop.

- However they still did not record a loss despite these large catastrophes.

- ~5% ROE.

 

Renaissance Reinsurance 2005 Shareholder Letter

- First annual loss of -15% ROE. Back to back years of tough catastrophe conditions. P/C losses worse in 2005 than 2004.
 

Renaissance Reinsurance 2006 Shareholder Letter

- Near record ROE of 38% - this seems to characterize catastrophe reinsurance industry - erratic returns on capital. 

- Also had their CEO removed in an SEC class action investigation into restating precious financial statements. Fishy.

 

Renaissance Reinsurance 2007 Shareholder Letter

- Portfolio statistics given in this letter. Nearly 90% in high quality fixed income. Other portion in hedge funds and private equity - somewhat of a barbell strategy. Very conservative with some high volatility small placements to round out  the portfolio. Seems as if most of the returns generated by Renaissance are by solid underwriting. 

- Great ROE of >30%.

 

Renaissance Reinsurance 2008 Shareholder Letter

- Net ROE of 7.4% despite an absolute loss of 2.5% in investment portfolio and hurricanes Gustav and Ike. 15% growth in book value since founded in 1993. 
 

Renaissance Reinsurance 2009 Shareholder Letter

- Book value increased 38%.

 

Renaissance Reinsurance 2010 Shareholder Letter
- 22% increase in tangible book value and 22% over time since 93.

 

Renaissance Reinsurance 2011 Shareholder Letter

- Small operating loss due to large property and casualty catastrophe events such as earthquakes in New Zealand, flooding in Australia and Japan, etc.
 

Renaissance Reinsurance 2012 Shareholder Letter

- Tangible book grew by 17%.

 

Renaissance Reinsurance 2013 Shareholder Letter

- Book value growth of over 20% over 20 years.

 

- ROE of 21% average over time.

 

Renaissance Reinsurance 2014 Shareholder Letter

- Acquisition of Platinum to balance catastrophe exposure because a lot of alternative money coming into long tail cat reinsurance industry and compressing prices.

 

- ROE of 13% book value growth of 13%.
 

Renaissance Reinsurance 2015 Shareholder Letter

- 11% ROE.

 

- 5% book value growth but after returning almost 10% of shareholder capital through buybacks.

 

- Well run company that isn't afraid to return shareholder capital with buybacks at attractive prices over time if they cannot redeploy into the business at attractive returns.

 

Renaissance Reinsurance 2016 Shareholder Letter

- Tangible book plus accumulated dividends increased 11.4%.

 

- Returned $361M to shareholders via buybacks and dividends.

 

Renaissance Reinsurance 2017 Shareholder Letter
- Repurchased $190M of shares. 

 

- Tangible book plus accumulated dividends decreased 7.2%.

 

- Record losses in P/C insurance industry. 

 

 

Book Value plus Accumulated Dividends Change (per shareholder letters)

 

2002: 19% compounded book value growth from '85 - '02

2003: (29% operating ROE, unsure book growth)

2004: 2%

2005: -19%

2006: 40%

2007: 18%

2008: -6.9%

2009: 38%

2010: 22%

2011: -1.8%

2012: 17%

2013: 19.7%

2014: 13%

2015: 5% 

2016: 11.4% 

2017: -7.2% 

 

Compound growth of book value plus dividends of  ~11% per annum. 

 

Renaissance Re seems to be a well-run reinsurance operation that seeks capital preservation through risk mitigation and solid underwriting while taking little risk on the investment portfolio side. This seems to be par for the course for most reinsurance operations due to the nature of lumpy underwriting results in catastrophe premiums - they need consistent fixed income portfolio results to serve as an anchor to uncertain underwriting results from year to year. 

 

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