Business: FSR is a Luxembourg based Reinsurer/insurer with lines of P&C, short tail specialty, casualty, marine liability, engineering and aviation. They carry an A- AM Best rating, A3 rating with Moody's and A- from Fitch. P/TBV of 0.6(diluted BV of 13.34/share), with limited BV growth since inception but revenue growth of 29% for four years.
Their investments are interesting compared to the majority of insurance firms. They basically strive for indexing of investments through futures. This is great except when its not. In 2008 they got absolutely crushed seeing investment losses of (272M). For fixed income 8.7% of their portfolio is BBB and this has risen from 6.3% in 2009. Their desire to mitigate catastrophic meltdowns has resulted in moving assets to what everyone else has...corporate bonds. T-bills have gone from 59.7% of fixed maturities in 2009 to a mere 17% in 2010. With such a low exposure its no wonder they jumped >5% on 7/29. It will be interested to watch the overall effect the debt ceiling debacle has on them versus AHL or other insurers who clearly retain higher amounts of T-bill exposure.
Overall: What I think is strange and fairly myopic is; yes they do have low exposure to T-bills but they are so closely interwined with the general markets. What if the US defaults, T-bills swing erratically but then so do world equity markets? A drop in T-bills would likely resolve itself should congress see the damage they have done (if any, I'm not predicting simply playing out a scenerio).
The WSJ had an interesting article discussing the merits of defaulting. My fear is that it could seriously derail futures and their values. Whether or not this will be an issue is unknown. I remain on the sideline waiting for a greater discount to TBV. That coupled with the lack of history and poor BV growth (understanding that yes they did indeed start up during the last cycles peak) leaves me anxious and not terribly comfortable with a long term holding. They seem destined for disaster.
Sunday, July 31, 2011
Wednesday, July 20, 2011
Endurance Specialty Holdings ENH
Continuing with my tourist session of insurance holders. ENH is an insurer/reinsurer located in Bermuda and operates globally. Insurance constituted 1.1B of premiums in 2010 and consisted of Agriculture, professional, casualty, property and healthcare liability lines. Reinsurance premiums totaled 941M and consisted of catastrophe, casualty, property, aerospace & marine, and Surety/other specialty.
Stats: 0.7 P/TBV, 6.4 EV/EBITDA, 2.7% dividend, 8 year average ROA 5.32% vs current 1.79%, ROE has averaged 12.77% vs current 8.5%. BV has grown by 11.6% annually since 2003. Combined ratio 90.6% since inception.
The Good: Nice wide diversification (exposure?) to multiple lines. Agricultural line gives it a great play that most P&C insurers can't match. Their investment portfolio carries few derivatives and the portfolio duration (cash +fixed income) was 2.39 years in 2010 and has averaged <2.5 years for the past three years. Net earned yield= 3.32%, 4,97%, 2.35% for 2010, 2009, 2008 respectively. Blackrock owns 8.3% of SO and advises some of the investment management. Fidelity (Pyramis Global Advisors) owns 10.1% and offers the same advice. BV has greatly increased due to substantial share buybacks over the past year.
The Bad: The buybacks were mostly the result of Richard Perry selling his stake back to the company at 44.99/share. A large portion of their insurance line is tied to agricultural prices. Lower crop prices = more liabilities. Even with crop prices staying as high as they are combined ratio for Q1 2011 was 139.3%.
Conclusion: I haven't dug into management as much as AHL. There are some nice aspects to ENH and to a certain extent the investment risk seems slightly less (100bp rise in interest rates equals -127M for ENH vs. -197M for AHL). With that said the scary thing is why did Richard Perry sell his huge stake back? And why at a lower price than BV? Presumably he's a smart guy who gets the insurance industry, why on earth would he sell at such a discount? Coupled with the issues concerning crop prices being very high and the combined ratio being higher than most insurers I will pass. With diluted BV at 51.52 currently under 35/share will warrant more investigation. No position.
Stats: 0.7 P/TBV, 6.4 EV/EBITDA, 2.7% dividend, 8 year average ROA 5.32% vs current 1.79%, ROE has averaged 12.77% vs current 8.5%. BV has grown by 11.6% annually since 2003. Combined ratio 90.6% since inception.
The Good: Nice wide diversification (exposure?) to multiple lines. Agricultural line gives it a great play that most P&C insurers can't match. Their investment portfolio carries few derivatives and the portfolio duration (cash +fixed income) was 2.39 years in 2010 and has averaged <2.5 years for the past three years. Net earned yield= 3.32%, 4,97%, 2.35% for 2010, 2009, 2008 respectively. Blackrock owns 8.3% of SO and advises some of the investment management. Fidelity (Pyramis Global Advisors) owns 10.1% and offers the same advice. BV has greatly increased due to substantial share buybacks over the past year.
The Bad: The buybacks were mostly the result of Richard Perry selling his stake back to the company at 44.99/share. A large portion of their insurance line is tied to agricultural prices. Lower crop prices = more liabilities. Even with crop prices staying as high as they are combined ratio for Q1 2011 was 139.3%.
Conclusion: I haven't dug into management as much as AHL. There are some nice aspects to ENH and to a certain extent the investment risk seems slightly less (100bp rise in interest rates equals -127M for ENH vs. -197M for AHL). With that said the scary thing is why did Richard Perry sell his huge stake back? And why at a lower price than BV? Presumably he's a smart guy who gets the insurance industry, why on earth would he sell at such a discount? Coupled with the issues concerning crop prices being very high and the combined ratio being higher than most insurers I will pass. With diluted BV at 51.52 currently under 35/share will warrant more investigation. No position.
Monday, July 11, 2011
Valuation of GNI
GNI is a royalty trust with a great yield, clean balance sheet and one big problem. Its going to be dissolved no later than April 6, 2015, 3.75 years from now. I wanted to see in today's high dividend loving (it seems people are blindly going into REITs and other trusts with high yields) what GNI is actually worth taking simply the expected payouts in a couple of different scenarios. The expected final payout is $8.22 and this year payouts totaled $5.25.
I assumed three different rates of royalty payments.
Bull scenario assumes royalty rates increase by 10% compounded annually. The final distribution would be $10 and this year would generate an two more payments totaling $8.
Bear scenario assumes royalty rates stay the same, the final distribution is $8.22 and the next two quarters would equal the first 6 months distribution ($5.25).
Super bull scenario assumes royalty rate compound annually at 15%, the final distribution is $16.44(just double whats currently expected), and the next two quarters will total 8.84 (1.15*12.25-5.25).
So all things being equal it appears I completely failed to understand the business or there is a lot of weird buying going on. Perhaps I need to be more aggressive in my assumptions but I think this represents a pretty good short opportunity where people haven't fully understood their investment. "A good yield? Well then a good addition to my portfolio."
Of note too is that over 1/2 of their pension funds are placed in ETF's indexed against the S&P 500. As the S&P 500 goes so does their pension plan. Any fall in a broad based index would increase total liabilities. They have numerous treasury bonds and corporate bonds. Should interest rates begin to rise it is likely the value will fall. Unless they plan on holding until the last possible minute, in this case April 6, 2015. No position.
I assumed three different rates of royalty payments.
Bull scenario assumes royalty rates increase by 10% compounded annually. The final distribution would be $10 and this year would generate an two more payments totaling $8.
Bear scenario assumes royalty rates stay the same, the final distribution is $8.22 and the next two quarters would equal the first 6 months distribution ($5.25).
Super bull scenario assumes royalty rate compound annually at 15%, the final distribution is $16.44(just double whats currently expected), and the next two quarters will total 8.84 (1.15*12.25-5.25).
So all things being equal it appears I completely failed to understand the business or there is a lot of weird buying going on. Perhaps I need to be more aggressive in my assumptions but I think this represents a pretty good short opportunity where people haven't fully understood their investment. "A good yield? Well then a good addition to my portfolio."
Of note too is that over 1/2 of their pension funds are placed in ETF's indexed against the S&P 500. As the S&P 500 goes so does their pension plan. Any fall in a broad based index would increase total liabilities. They have numerous treasury bonds and corporate bonds. Should interest rates begin to rise it is likely the value will fall. Unless they plan on holding until the last possible minute, in this case April 6, 2015. No position.
Thursday, July 7, 2011
MERC Mercer International
Business/Thesis: MERC operates as a producer of pulp kraft, processing softwood and hardwood pulp. Notoriously cyclical business but a recent pull back in prices and the small cap nature leaves me interested. They operate three mills, two in Germany and one in Canada. They are a Seattle based company that reports all results in Euro's (just confusing enough to deter some investors). I believe this could be a valuable alternative energy play, especially now that German is trying to eliminate nuclear energy.
Stats: EV/EBITDA 4.21, P/S 0.36, P/B 1.23, P/LFCF 10.3. 1 director bought shares in the past month. P/E is a bubblicious 3.4. 5 year revenue growth has averaged 2.6%.
Cyclical thoughts: So 22% of global softwood pulp demand is directly related to Chinese consumption. W. Europe is 28%. Softwood is the more expensive of the two and as that may be, end producers have been trying to substitute hardwood in for softwood. This has disadvantages though and there is a "floor" for the amount of hardwood that can be introduced.
Demand/capacity ratios for the industry are 93%, 91%, 89% for 2010, 2009, and 2008 respectively. The big concern with this ratio is that worldwide it was estimated that 5.3million tons of NBSK were indefinitely closed 2006-2009, but 1.9 million tons were restarted from late 2009-2010. Should pulp prices remain high additional capacity can be added on. How quickly is an unknown. Its a classical cyclical nonetheless.
Why MERC? A lot of paper/pulp companies are trading at low valuations currently, to me indicating a peak in the cycle (analysts have begun to justify these and others because of their low P/E's...). I can't jump on pure pulping companies like UFS based simply on dirt cheap relative valuations and optimistic outlooks that Chinese consumption will remain strong in the face of inflation. MERC for me is going to be tied to the price of pulp on the market and for a while will continue to fluctuate as prices drop/rise.
To me though there is one big caveat that is relatively unknown, the energy producing facilities. All three mills of MERC produce their own energy from internally generated black liquor. All three mills create a surplus to the tune of 520,005 MWh in 2010. With the Celgar mill revamped expected production is >700,000 MWh. Last year energy production was Euro 44.2million, at 2008 (lowest demand for pulp in many years) sill sold 456,059 MWh to the grid. With the newly enhanced Celgar mill I calculate that energy productions could add total ~59M Euro of revenue. No other paper/pulp producer that I found was even as close to net energy positive as MERC.
The beauty of this to me is two fold. First and foremost it truly is renewable energy coming from trees. Second because its coupled to an actual profitable industry its going to be economically feasible. Two of the mills are located in Germany, with Germany recently banning nuclear the lost energy will have to be made up somehow. Typical carbon sources and renewable energy will fill the gap. A large portion of MERC's energy capex has been subsidized by the Canadian and German government and with the new legislative movement I see no reason why that will stop. Even if it does MERC in my eyes still represents the cheapest renewable energy source, which people will pay a slight premium for.
Debt covenants have severely restricted debt issuance on MERC, resulting in a company that needs to reduce Debt to EBITDA ratios from 13X to 4.5X in 2017. Obviously a lot can happen but with the energy production relatively stable and incredibly high margin (they would pay for it anyways) I think it warrants a good look to see if debt begins to decrease. Already it has dropped from 1039M in Dec 2010 to MRQ 975. Most of their employees are covered under union contracts, seem to have good relationships. Pension is underfunded by 24million.
Management has good levels of insider ownership at 6.2% SO, Chairman/CEO since 1992 owns 1.986M shares, took home 1,047,610 in compensation last year. At 11/share a lot of his wealth/motivation is intertwined with MERC shareholder returns, almost 20 years of salary.
Overview: I think this is a good company to play several macro trends but hesitate currently with high spot pulp prices. A multi-currency hedge is offered and upon a deleterious sell-off I would enter. With estimated energy revenues expected to generate Euro 59M soon a 10X valuation on 40% margins would give a MC of ~300M (10x EBIT seems to be a good starting common valuation for some energy producers). At this price you get the paper business for free. Even right now the electric business itself is worth ~200M (10X 40% margins on the Eu 44.2M generated last year). Currently with MC of 500M, you get the pulp business for 300M. No position.
7/12/2011: Talked it out and ran some new models. Its cheap just not extremely cheap. (Net income+D&A-CapEx)/EV gives numbers roughly in line with other pulp producers. A nasty correction below 8/share offers a compelling risk factor. Until then I'll hold off.
Update 7/13/2012
Mercer's shares have been creeping down. I spoke with their CFO at a conference in January and his words were "We're basically waiting for some of the high cost mills in Scandanavia to shut down and we should regain pricing power."
We are starting to see evidence that the high costs of pulping are indeed taking out some of the high cost producers, just not yet in in Scandanavia. This week a Tembec mill in Chetwynd, British Columbia announced they will be shutdown. This takes out 240,000 tonnes of capacity. This is 0.3% of all pulping capacity in the world based on 59.4M mt of capacity (page 6).
Tembec's EVP Chris black stated "At today's price levels, it is virtually impossible to maintain viable operations given the current cost structure of the Chetwynd mill." The pulp used at this mill is commonly used in printing and writing papers and tissue and towelling. Similar end uses as NBSK, Mercer's product.
Stats: EV/EBITDA 4.21, P/S 0.36, P/B 1.23, P/LFCF 10.3. 1 director bought shares in the past month. P/E is a bubblicious 3.4. 5 year revenue growth has averaged 2.6%.
Cyclical thoughts: So 22% of global softwood pulp demand is directly related to Chinese consumption. W. Europe is 28%. Softwood is the more expensive of the two and as that may be, end producers have been trying to substitute hardwood in for softwood. This has disadvantages though and there is a "floor" for the amount of hardwood that can be introduced.
Demand/capacity ratios for the industry are 93%, 91%, 89% for 2010, 2009, and 2008 respectively. The big concern with this ratio is that worldwide it was estimated that 5.3million tons of NBSK were indefinitely closed 2006-2009, but 1.9 million tons were restarted from late 2009-2010. Should pulp prices remain high additional capacity can be added on. How quickly is an unknown. Its a classical cyclical nonetheless.
Why MERC? A lot of paper/pulp companies are trading at low valuations currently, to me indicating a peak in the cycle (analysts have begun to justify these and others because of their low P/E's...). I can't jump on pure pulping companies like UFS based simply on dirt cheap relative valuations and optimistic outlooks that Chinese consumption will remain strong in the face of inflation. MERC for me is going to be tied to the price of pulp on the market and for a while will continue to fluctuate as prices drop/rise.
To me though there is one big caveat that is relatively unknown, the energy producing facilities. All three mills of MERC produce their own energy from internally generated black liquor. All three mills create a surplus to the tune of 520,005 MWh in 2010. With the Celgar mill revamped expected production is >700,000 MWh. Last year energy production was Euro 44.2million, at 2008 (lowest demand for pulp in many years) sill sold 456,059 MWh to the grid. With the newly enhanced Celgar mill I calculate that energy productions could add total ~59M Euro of revenue. No other paper/pulp producer that I found was even as close to net energy positive as MERC.
The beauty of this to me is two fold. First and foremost it truly is renewable energy coming from trees. Second because its coupled to an actual profitable industry its going to be economically feasible. Two of the mills are located in Germany, with Germany recently banning nuclear the lost energy will have to be made up somehow. Typical carbon sources and renewable energy will fill the gap. A large portion of MERC's energy capex has been subsidized by the Canadian and German government and with the new legislative movement I see no reason why that will stop. Even if it does MERC in my eyes still represents the cheapest renewable energy source, which people will pay a slight premium for.
Debt covenants have severely restricted debt issuance on MERC, resulting in a company that needs to reduce Debt to EBITDA ratios from 13X to 4.5X in 2017. Obviously a lot can happen but with the energy production relatively stable and incredibly high margin (they would pay for it anyways) I think it warrants a good look to see if debt begins to decrease. Already it has dropped from 1039M in Dec 2010 to MRQ 975. Most of their employees are covered under union contracts, seem to have good relationships. Pension is underfunded by 24million.
Management has good levels of insider ownership at 6.2% SO, Chairman/CEO since 1992 owns 1.986M shares, took home 1,047,610 in compensation last year. At 11/share a lot of his wealth/motivation is intertwined with MERC shareholder returns, almost 20 years of salary.
Overview: I think this is a good company to play several macro trends but hesitate currently with high spot pulp prices. A multi-currency hedge is offered and upon a deleterious sell-off I would enter. With estimated energy revenues expected to generate Euro 59M soon a 10X valuation on 40% margins would give a MC of ~300M (10x EBIT seems to be a good starting common valuation for some energy producers). At this price you get the paper business for free. Even right now the electric business itself is worth ~200M (10X 40% margins on the Eu 44.2M generated last year). Currently with MC of 500M, you get the pulp business for 300M. No position.
7/12/2011: Talked it out and ran some new models. Its cheap just not extremely cheap. (Net income+D&A-CapEx)/EV gives numbers roughly in line with other pulp producers. A nasty correction below 8/share offers a compelling risk factor. Until then I'll hold off.
Update 7/13/2012
Mercer's shares have been creeping down. I spoke with their CFO at a conference in January and his words were "We're basically waiting for some of the high cost mills in Scandanavia to shut down and we should regain pricing power."
We are starting to see evidence that the high costs of pulping are indeed taking out some of the high cost producers, just not yet in in Scandanavia. This week a Tembec mill in Chetwynd, British Columbia announced they will be shutdown. This takes out 240,000 tonnes of capacity. This is 0.3% of all pulping capacity in the world based on 59.4M mt of capacity (page 6).
Tembec's EVP Chris black stated "At today's price levels, it is virtually impossible to maintain viable operations given the current cost structure of the Chetwynd mill." The pulp used at this mill is commonly used in printing and writing papers and tissue and towelling. Similar end uses as NBSK, Mercer's product.
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