petec

+1 Exactly correct.

Why is the investment up 50% on net income growth of 20%, which would still put them way behind the guidance in that table? Did I miss something?

Agreed, yet in the long term it is the only thing that matters.

I totally agree but this does make me laugh - half of these things were seen as negative 4 years ago, when Prem had lost it in the eyes of this board.

Exactly. The money they are making now was earned years ago, when everyone thought they were idiots.

That is certainly not what I meant. What I said was that FFH in 2020 had macro options embedded within it. In other words, IF rates rose it would benefit mightily. The price reflected nothing for this, but it seemed highly likely to me. As a result, it is fair to say that rising rates NOT management action has driven much of the recent increase in earnings. Management action, however, has determined earnings POWER over time. In particular their willingness to wait rather than chase premiums and yield. They deserve a TON of credit for that. But those decisions were taken years ago.

This will be a controversial post, but I have 5 core holdings which make up 60% of my liquid net worth. One is Berkshire itself. One is Microsoft. Three are things that I think one way or another look like younger Berkshires: FFH, PSH, and BN. I'm just waiting for the silver fox to buy and insurance company

I don't disagree with any of that. I perhaps ought to clarify that when I say 1.1x isn't crazy cheap, what I mean is I don't necessarily expect the market to value it a whole lot higher. However I do think that at 1.1x (and even 1.5) FFH can compound at a very attractive rate for a long time (which I define as 5 years minimum and really 10+ years). In other words, I kind of expect this to stay "cheap", and that's one of the things I like about it, because I think that allows it to compound nicely for me.

Unlike you, I don't see that as super cheap. It is certainly good value, and allows for solid compounding from here, but insurance companies don't generally sustain multiples *much* higher than this. I mean, it's not like they trade at 2x or 3x book long term. 1.4-1.5x, maybe. For me it's just because FFH has gone from a deep, deep value to a compounder-type value. As the share price has closed on IV, so my position size has doubled, despite the rest of the portfolio doing well. So it is now less good value and a much bigger position. That warrants action so long as there I have other good ideas. But I emphasise that I am not selling much. I am topping the position on share price spikes but I retain most of what I owned at the low in 2020, because I DO see strong performance from here. I am a *very* long term holder of this stock (16 years so far and hoping for I'm only a quarter of the way through). BTW one area where you and I slightly differ, as we have discussed before, is on how much execution has improved. It definitely HAS improved, and there was a big focus on this after years of investment underperformance. But the things that have really moved the needle are outside management's control: higher interest rates (drives earnings on float and Eurobank's NIM), lower combined ratio (which is clearly and I think mostly driven by higher interest rates because rates have impacted BV at most other insurers and because capital is no longer flooding into the industry in sidecars etc.), and higher commodity prices (which helps a lot of the investment book). All of these things were valuable options 4 years ago; today they are realities and are increasingly (but not fully) priced in. But improved execution hasn't affected these things. In fact, the *really* good execution was *before* these changes happened, when FFH kept the bond portfolio short, kept their underwriting discipline in the soft market, invested in undervalued commodity stocks (much to the chagrin of many here), and waited while Eurobank slowly dealt with their NPLs. Their patience *then* is what is driving today's earnings, more than their execution *now*, it's just that they didn't get credit *then*, but now they do because the market can see the benefits. I see much greater continuity in management's decision-making than you do, and I think this affects how we think about the stock today: you see great execution as something that is likely to continue, whereas I saw FFH *partly* as a bundle of undervalued macro options 4 years ago, and those options are less undervalued now. That said, I also see FFH *partly* as an excellent management team which I want to compound with forever. And I do recognise that in certain key areas execution has transformed, most notably eschewing broad hedging and finding ways out of losing investments rather than holding them forever (although even here, few things have actually been monetised - the bigger thing has simply been positions getting smaller as the portfolio grows). Sorry - longer post than I intended.

Personal view but I think the board has a good handle on the facts, but the psychology has swung about 70% of the way from focussing on the bad to focussing on the good. We aren't talking much about the risks (big ones for me would be falling interest rates, which impact the terminal value of float and which I believe are correlated with lower combined ratios for a double hit to earnings, and a major cat loss). We are talking lots about how good the investments are, forgetting (maybe?) that these are often the same investments we dissed 5 years ago, but they're more expensive now (Eurobank and Stelco come to mind here - I am not sure the earnings power of either business has improved much over the last few years, but the share prices sure have). None of this is a criticism - there's some great work on the board. But the mood has swung, as it so often does, procyclically. We have got more exited as the stock has got closer to intrinsic value, not less. Weird how the human brain works. You can argue that the risks have fallen because the certainty of outcomes has risen. I agree, to a degree. But 5 years ago FFH was a Faberge egg, with value inside value inside value. All it needed was patience. Now, it needs things to keep going right. I am fairly sure they will, and this remains my biggest position at 17%, but I am shifting into the "when do I reduce" mode rather than "how can I buy more".

My guess is it is quite likely the money is invested for anywhere from 2-7 years depending on the investment, and is then returned. So the IRR could be *well* above the gross return, if that makes sense. And on returns: how do you know what's a good return if you don't know the underlying risk? 15% is an *excellent* unlevered equity return, well ahead of any long term index return. It's much weaker if it is levered; it's brilliant if the investment is structured with downside protections. We just don't know enough to judge, do we?

If you're looking at me, you misunderstand. I am not suggesting they ignore these. But the list I responded to had nothing about value, so it does not in any way guarantee good returns (and 10% is a good return). Plus FFH are value investors - why hope they will become something they are not? If you're looking for that, look elsewhere, would be my advice.

Exactly why I *don't* want them to use this list.

Yes. I am sure this is how it is meant to work.

I think BIAL is the *last* asset they'd sell, because it does seem clearly undervalued. No - Digit is an insurance company. They'll always be done by FFH. FIH is meant to do everything else.- I am pretty sure they laid this out on a call a year or two back. So Digit is not a proof-point, actually. I'm guessing a combination of FIH equity, plus OMERS, plus FFH lending to FIH (either straight debt or pref+warrant, but the warrant would have to be designed not to f*** over FIH minorities). Potentially a nice way to deploy a few billion of the fixed income portfolio at a decent spread backed by the entire FIH portfolio.

The very fact they can issue this tells you how far they have come. Exceptional piece of finance.

I find it highly unlikely that FIH would sell a crown jewel asset like BIAL to buy a struggling bank. It would also distort FIH to the point of absurdity. This is too big. It's a FFH+OMERS deal IMHO, with FIH participation. Could be wrong. BTW I don't *think* they have ever committed to doing *everything* in India through FIH. Correct me if I am wrong.

Not sure I follow? I assume you're referring to OMERS, but I could also see FFH doing a pref+warrant deal with FIH to get the deal done. Or maybe that is what you mean.

A good point I had not considered. Especially with a massive equity issue coming up for the bank deal (Joke, in case anyone thinks otherwise...)

On a separate topic, is anyone else bemused as to why they took the FIH fee in cash? If it is so undervalued should they not (given the FFH board's fiduciary duty is to FFH shareholders) have taken it in shares?

I would just use the FD SHO in the annual report. I do think FFH are a bit naughty using basic shares as their denominator for reported bvps.

I think this is correct. So over time, the carrying value is quite likely to diverge from the market value to a greater degree.

Only if they're prepared to pay an inflated price to make you look good (and risk looking bad themselves). I highly doubt that.

Yes, exactly.

I was also interested to note in the letter that Recipe has started its expansion into India. The FFH spider's web is growing!