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ap1234

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  1. Does anyone know what percentage Valeant is of the PSH NAV (either at Dec. 31st or more recently)?
  2. Dazel, I attended a presentation with Prem and Paul. The question was asked about the composition of their hedges and whether they have been beneficiaries of their bearish views on China. It sounds like their short book consists of individual short positions on some natural resource stocks (BHP, Rio, etc.) as well as highly valued "tech" stocks (Tesla, etc.). They said their gains from the natural resource shorts were relatively small (it didn't sound overly material). The reason they didn't make a larger bet on the China short was that they couldn't find a cheap way to get exposure to the idea. In contrast, they built a large deflation position because they felt the cost was relatively modest in relation to potential payoff if their thesis played out. As an aside, I got the impression that the deflation swaps have likely reversed some losses from last quarter and they are quite optimistic about the value of these positions over the next few years. In terms of the Russell hedges, they are in place not for a 5-10% market correction but because they are worried about a 30-40% correction. They are unlikely to reduce the hedges until we see a meaningful drop in equity prices. They use the Russell hedge for two primary reasons: 1. Protect their balance sheet. If you aren't careful you will need money at the wrong time. 2. They worry about a market correction at the same time the insurance cycle hardens and they want to have the capital to double their premiums when their competitors are shrinking. Hard markets don't last long and you need to be in a position to write more business when capital is leaving the industry. Full disclosure: Long Fairfax. Ap1234
  3. Dazel, As always, thank you for your contributions to the board! I always enjoy our posts. Similar to you, I am long FFH. I like the fact that the company acts as a unique diversifier/uncorrelated bet within my portfolio. Today’s valuation is not particularly expensive and there is a lot of embedded optionality given their defensive positioning. That said, you made a few interesting comments about Fairfax making a killing on their bond portfolio/equity hedges right now and suggested we could potentially see a 10% up day in the stock at some point. Can you provide some more color on why you think Fairfax is currently making a killing in this environment? Based upon their disclosed positions, I don’t see Fairfax’s BV growing meaningfully since Q2. I’d be interested to know whether I am missing anything? My thoughts are below: 1. Equities: Prem has said in the past that during a market downturn, Fairfax’s equity portfolio will hold up better than the market (i.e. they will make a profit on their equity hedges). Based upon their disclosed equity holdings (US holdings in 13F + Bank of Ireland + Greek equities), it doesn’t appear that Fairfax is outperforming the market on the way down (i.e. their disclosed equity positions have dropped more than the Russell 2000 in Q3). Without knowing the exact nature of the individual equity hedges, it's hard to know how it is has performed over the past few months. 2. China: Fairfax has been publicly warning about the risks in China for many years. They have discussed at length the property bubble, the super cycle in commodities, etc. However, their equity hedges aren’t directly correlated to their views on China. Based upon previous conversations with management (unless anything has changed over the past few months), my understanding is that they didn’t use equity hedges to directly profit from a Chinese slowdown. Instead, their view was that if China slows down there will be contagion around the world and the most expensive stock markets (ex. Russell 2000) will be impacted. They have some smaller individual equity hedges that are more direct bets on a China slowdown but these are reasonably small in relation to their overall hedges and the size of their investment portfolio. 3. Fixed income: The majority of their bond portfolio is in US muni bonds. Less than 20% is in US Treasuries. Based upon QTD moves in US Treasuries + the performance of the muni bond index (as a rough proxy), I don’t see a significant gain. They also have some corporate bonds as well as acquired fixed income portfolio from Brit but it still doesn’t make a huge dent based upon my back of the envelope math (i.e. not significant in relation to the company's BV). While I would love to wake up and see Fairfax up 10% in a day, nothing as of yet leads me to believe it will happen. Of course if the market collapses from here (a very real possibility) and Fairfax covers the hedges and puts their cash to work, the company’s BV/share will grow materially. Some investors may begin to pay up for this optionality in advance but QTD returns on their investment portfolio don’t suggest to me that they have grown BV materially. If I am missing anything, I'd love to hear your analysis.
  4. No_free_lunch, If you get a chance, it’s worth reading the earlier posts on this thread as there is a discussion of the company’s history as well as the methodology they use to report their NAV. You can’t analyze Onex based upon their financials used for accounting purposes (i.e. income statement, balance sheet, etc.). Metrics like P/BV are meaningless. That said, on a quarterly basis, Onex provides disclosure of their invested capital along with a breakdown of their net asset value (NAV). See the link below (How We are Invested Schedule) for more info: http://www.onex.com/How_We_Are_Invested.aspx Onex’s reported NAV is not a perfect science but it’s a reasonable proxy for what they think their investments are worth. Don’t forget that Onex uses the same NAV for outside shareholders and their LPs (i.e. they don’t have an incentive to game the system). In a rising P/E market, Onex’s NAV is likely understated and in a declining market it is likely overstated. Today, it is relatively easy to value Onex given that approx. 50% of their NAV is sitting in cash (they have made an investment in both Onex Partners and ONCAP since Sept 30th). The reported NAV is $52.77/share USD or $59.50/share CAD. The stock price is $62 or 1x NAV. What is not included in the reported NAV? This is not an inclusive list but a good starting point: 1. Value of the asset mgmt. business: If you think they will generate more fees than their overhead (salaries, bonuses, etc.), then you get the asset mgmt. business for free at today’s price. 2. Future carried interest: Onex’s NAV includes the current carried interest based upon the fair value marks they apply to their P/E portfolio. As they deploy their cash into new ideas, it will likely generate future carried interest which you aren’t paying for at today’s price. 3. Future growth in NAV/share: Onex has historically grown NAV/share at healthy rates (see discussion above). If the P/NAV multiple stays at 1x forever, your holding period return will approximate the NAV/share growth (their dividend is very modest). 4. USD appreciation: If you think the USD will continue to appreciate relative to CAD, then NAV/share will grow. If you think the opposite, then NAV/share will decline. 5. Share buybacks: Onex is sitting on a lot of cash and has been repurchasing shares in the open market. In addition to putting some cash to work at attractive rates, the fact that management is buying back stock at or above 1x NAV highlights what management thinks about the value of the business (insiders are the largest shareholder group after all). As I noted in my previous post, I think the returns of the past 5 years are unlikely to be repeated over the next 2 years. The company has monetized many of their investments (which was the right thing to do) but it also means they are sitting on lots of cash earning nothing. Even if they find stuff to do with the cash (which is difficult), it will take some time for their new investments to increase in value (i.e. increase the NAV/share). Also, attractive P/E deals are still hard to come by today (it’s still more of a sellers market than a buyers market). If you have a 5+ year horizon, I think it is an attractive investment idea at today's price. If you have a 12 month horizon, I would think there are better investment opportunities. If you are interested in analyzing Onex further, I would highly recommend watching their last Investor Day which provides a good overview of their business.
  5. I would be VERY surprised if Berkowitz exited his Fannie/Freddie prefs in Q3. That wouldn't make any sense given what he has said publicly since that time not to mention the current Sweeney court case. Merkhet and I attended the Graham & Dodd breakfast in late October (after Q3 filings). Berkowitz was one of the panelists and spoke very candidly (and with a lot of conviction) about Fannie/Freddie. In short, he reiterated his stance: either Judge Lambert is dead wrong or the law is unconstitutional. He went on to say that what the government did breaks securities law, it breaks corporate law and it breaks the fifth amendment of the constitution. Similar with Ackman, he believes there is no substitute for Fannie/Freddie and as such a compromise with shareholders is likely to be reached (whether it is in or out of the court system). As an aside, I remember a few months ago when Eddie made the loan to Sears backed by some of the company's real estate. There was lots of discussion on the board about whether Bruce was going to sell his stake as a result. Fairholme ended up participating in the real estate loan and added to its position in SHLD afterwards. That said, I think it's worth noting...IF the reason you are invested in Fannie is solely because Berkowitz is investing, then I think it makes more sense to invest directly in the Fairholme fund. You should ask yourself this question: if Berkowitz exited Fannie/Freddie tomorrow, would I still be comfortable holdings shares? There is absolutely nothing wrong with following Berkowitz. He is a great investor. But if you are going to make your decisions solely based upon his actions, it will be very dangerous going forward as Bruce won't be disclosing his positions in Fannie/Freddie. Instead, if you invest in his fund, you only pay a 1% fee and get to participate in his buys/sells in real time. I am not a Fairholme unit holder. As such, I accept the risk that Bruce may change his mind about any of his holdings at any given time. For those that wouldn't be comfortable if Bruce sold tomorrow, there is nothing wrong with that but they should probably invest directly in his fund and not try and coattail his individual holdings with imperfect information.
  6. Is anybody going to be in LA the evening before the AGM (Tuesday, Sept. 9th)? If you want to grab dinner, let me know. I'm from out of town and would be happy to meet up with other people the night before.
  7. What are the details (day/location) of the Pabrai AGM? I would be interested if it was close to the Daily Journal AGM. Is it open to the public?
  8. Does anyone have thoughts on the Delaney, Carney and Himes reform legislation? This seems to be the best proposal to date (better than the Johnson-Crapo bill, etc.). I know nothing is likely to be resolved before mid-term elections but this proposal seems to be a potential long-term solution to housing reform. http://delaney.house.gov/news/press-releases/delaney-carney-and-himes-introduce-housing-finance-reform-legislation The Delaney bill attempts to preserve the 30 year fixed-rate, prepayable mortgage as well as keep home ownership affordable. These were both the arguments for why Fannie/Freddie can’t be replaced (i.e. previous private market solutions would be disruptive to the housing recovery by increasing the cost of home ownership). I would love to hear anyone’s thoughts on what the Delaney bill and what this could mean for Fannie shareholders (i.e. is Fannie common worthless if the Delaney bill is passed)?
  9. I have been a shareholder for the past 5 years. The company actually just held their Investor Day this week. It is worth looking at the slides/reading the transcript to get a better understanding of what makes Onex different from other P/E firms. In previous years they focused on discussing the companies they were investing in. This year’s focus was on the franchise value of Onex Corp. and why it is an attractive business model. Even if you aren't interested in investing in Onex, I would still recommend checking out the presentation. The valuation of Onex no longer as attractive as it once was (it went from a large discount to NAV to a 20% premium to NAV) and the trajectory of NAV/share growth over the next few years is likely to be slower than it has been for the past 5 years (the company is sitting on a pile of cash and many of the large holdings have already been sold/monetized). That said, I continue to hold my position as my view is the company can compound capital at attractive rates over the next 5-10 years (even if the next 2 years have the potential for lower returns).
  10. A couple of potential headwinds to be cognizant of: 1. Short-term: Equity markets have been robust and P/E firms have been very active monetizing their existing assets (i.e. P/E firms are net sellers of businesses). As the CEO of Apollo commented a while back, "We're selling everything that is not nailed down." When you monetize a lot of your assets in a short period of time you generate a lot of carried interest which inflates your current profitability and leads to above-average distributions. The question to figure out is what is a normalized level of earnings power for these businesses (i.e. you might need to adjust for the elevated carried interest)? 2. Long-term: P/E firms are people businesses (they don't have a lot of hard assets) and rely on recruiting and retaining talent. In the early days when P/E firms were private this was less of an issue and the majority of the economics (i.e. carried interest) went to the employees. As public companies, a significant % of the economics now goes to shareholders. This probably won't be a problem for many years but you should try and figure out whether publicly traded P/E firms can retain talented employees if a large % of the carried interest goes to outside shareholders and not to the young people doing the deals. My guess is this is not as much of an issue for the Blackstones of the world because they have become 'branded' companies or household names in the marketplace. As such, they will likely be able to continue to raise lots of money even if they lost some talented young people and their returns diminish over time.
  11. BG2008, I wasn’t investing in the early 1970s so I can’t comment on the other points. But here are my quick thoughts on your point # 2 re: Munger’s performance. 1. Everyone has a different definition of value investing. My version of value investing is focusing on avoiding permanent impairment of capital (not even at the individual stock level but on the portfolio level). I don’t spend anytime thinking about avoiding volatility but I spend a lot of time thinking about margin of safety. Your reference to Munger's 50%+ drop in ‘market’ prices is a question of high volatility not high risk. It is true that some value managers tend to perform very well in down markets (ex. Buffett or Klarman). Other value managers tend to perform poorly in down markets (ex. Chou or Pabrai). It’s not as simple as saying one type of value investor is more authentic than the other. All four of the managers above are value investors. All of them believe in having a margin of safety. But some approaches lend themselves better to low volatility than others. 2. Munger has actually specifically addressed your comment in a BBC interview in October 2009. Q: How worried are you by the declines of the share price of Berkshire Hathway? Munger: "This is the third time Warren and I have seen our holdings in Berkshire Hathway go down, top tick to bottom tick, by 50%. I think it’s in the nature of long term shareholding of the normal vicissitudes, of worldly outcomes, of markets that the long-term holder has his quoted value of his stocks go down by say 50%. In fact you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.”
  12. West, that's a great idea! I recently started looking at the Potash industry for the first time. Have you come across any interesting industry reports that you found insightful?
  13. Great analysis LakesideB! In my opinion, I think you captured the salient points of the Fairfax investment thesis. The only things I would suggest if you do more analysis are: 1) Fairfax's 10 year average accident year CR is 96%. But the past 10 years is not necessarily a good proxy for a full insurance cycle. You have the benefit from a VERY hard market following 9/11 (which may or may not be repeated over the next cycle) and then a prolonged soft market from 2006-11. It seems that a combination of a few hard market years and a long soft market would equate to a full insurance cycle but I'm not certain that is the case with the past 10 years. If I were analyzing their underwriting, I would break out their individual accident year CR's as opposed to looking at a 10 year average. In other words, I don't think they really earned 96% CR over a 'full cycle'. Then you can decide whether 96% is a better proxy for the next cycle assuming no more troubled acquisitions, Andy Barnard's leadership, a renewed focus on underwriting discipline, etc. I would pick an insurance company that you think has a better underwriting culture (ex. Markel). Compare Markel's 10 year average CR to Fairfax's 10 year average CR. You can decide whether you think Fairfax has any competitive advantages in their insurance business relative to an insuarance company with a more sustainable moat. If they don't, what is a reasonable CR they can generate over the next full cycle. 2) You suggested that Fairfax can generate 7-9% returns with a market neutral strategy. I think this is the wrong conclusion. If you're going to use Fairfax's long-term returns, you might want to look at what their asset mix has been over time and what the asset class returns were (i.e. what was the return on bonds, stocks, cash, etc.). Then go through each component and test the reasonableness of achieving those returns in the future. I don't mean predicting 1 or 2 year returns. I mean what do you think each component of Fairfax's investment portfolio (stocks and bonds) can earn over the next 5-10 years. For example, Over the past 30 years corporate bond returns have been 8% (this coincides with Fairfax's history as a public company). If you think corporate bond returns will be 8% over the next 10 years, then Fairfax's investment capabilities should generate similar returns (i.e. start with 8% then add Fairfax's alpha). If you don't, then you need to have a view on how the portfolio would look different so they can still generate 7-9% returns when the massive tailwinds of declining int. rates are gone. Even a 6.5% investment portfolio return with 25% in equities and 75% in cash/bonds may or may not be optimistic over the next 5-10 years. Everyone will have a different interpretation on what future investment returns will be but I think it's important to dissect why they achieved the returns they did in the past and what is the likelihood that similar returns will be generated in the future.
  14. I had lunch with another investor at the end of 2008. He was a Google shareholder at the time and recommended that I read Planet Google. I finished the book on a Sunday and bought the stock on Monday morning. It's the first (and last) time I've ever done that before. Granted, it helped that stocks were selling at fire sale prices and Google was at $300. I read the book 4.5 years ago and Google's business has changed quite a bit since then. However, at the time Planet Google left quite an impression on me. I remember thinking at the time that the book clearly laid out the company's moat. That wasn't the author's intent (i.e. it wasn't an investment book) but it was clear after reading the book why Google had surpassed some of the earlier search engines and why at the time Google's competitive position seemed firmly entrenched. The other thing I remember about Planet Google was the section on potential threats to Google's business. One of the chapters talked about the threat of Facebook. At the time, I thought it was really strange to think of Facebook (a social networking site) being a direct threat to Google's core search business. The two business models seemed mutually exclusive. After reading the book, I had a much better appreciation for the long-term threat of open vs. closed networks. As a Google shareholder, I used to worry that one day Facebook would announce a search partnership with Microsoft Bing and that users would not have to leave the Facebook network as they could perform their searches while logged into their Facebook profile (i.e. effectively blocking Google products from infiltrating the network). The more time you spent inside Facebook's closed network, the less time you were touching one of Google's products (i.e. less advertising revenues for Google). Anyways, the book was written in 2008 and probably isn't that relevant today given the pace of change in the industry. But if you're interested in a good general read on the business and the company's history, it's not a bad place to start. I read In the Plex as well. The book provides some interesting insights into how search engine algorithms have evolved as well as the economics behind Google's different types of ad revenue models. That said, I agree with the earlier comments that the book was somewhat off a puff piece.
  15. Gio said: 2) At year end 2012 BRK had only 7% of its total assets in bonds. In what probably is going to be a secular bear for bonds, Mr. Watsa will shape FFH to resemble BRK structure more and more. If bonds are no longer an attractive vehicle for investments, Mr. Watsa will choose other asset classes to get a decent return on FFH’s total assets. Gio, I think it might make more sense to think about the allocation to bonds in relation to Fairfax's book value as opposed to a % of assets given the leveraged business model (i.e. investment portfolio is 3-3.5x the size of book value). At the end of 2012 Fairfax has an investment portfolio of $26.1 billion. 43% of the investment portfolio was in bonds. This implies that Fairfax held $11.2 billion in bonds. According to the annual report, it appears that the duration of the bonds is between 7-10 years. Fairfax’s book value at the end of 2012 was approx. $7.5 billion. The bond portfolio is more than 100% of Fairfax’s book value. Naturally, the 30% of the investment portfolio sitting in cash has a duration less than 1 which lowers the overall portfolio duration. However, I think it is clear that Fairfax has a significant allocaiton to bonds (and likely always will) and will face the headwind from the int. rate environment.
  16. Gio said: "In such an environment you must proceed with caution, either you are finally proven right or wrong. It doesn’t really matter. You might argue: we don’t care about macro, and WEB has said this and WEB has said that... (or Peter Lynch, or whomever!)… But let me also tell you this: I don’t think general rules are of much help to asses specific risks. I mean, just because macro is useless 99% of the times, doesn’t mean that to be “stubbornly blind to macro no matter what” is a sensible course of action. Because 1 time out of 100 you will be terribly wrong. Imo, instead, the sensible course of action is to be always aware of macro, meaning what’s going on around you and your businesses, and each single time decide if it is relevant or not. That’s exactly what Mr. Watsa and his team seem to be doing. In fact, he has stated many a time that they think we are living trough a once in a lifetime period of deleveraging, much similar to the US in the ’30, or Japan in the ’90." Gio, I love your approach to investing. Sticking with a concentrated portfolio of owner operators who have a great long-term track record, a repeatable process, with skin in the game, incentivized to create value on a per share basis who are still just as motivated about making the next $ as they were about the last one. That said, I'm not sure I agree completely with your comparison on Fairfax vs. Berkshire. I understand your view on Fairfax being defensive. And I agree with you. Given current equity prices and the # of things that could go wrong in any part of the world, a defensive posture seems to makes sense. Having 30% cash in your investment portfolio is a nice asset to have to buy securities at lower prices in the future. And hedging the equity portfolio limits the mark-to-market fluctuations of their portfolio and still lets Fairfax generate some alpha by maintaining their equity exposures (i.e. similar to a market neutral hedge fund). However, I would just suggest that Fairfax's defensive positioning is not nearly as strong as Berkshire. To me defense comes from your balance sheet (i.e. capital) and your earnings power. In that respect, BRK seems to win hands down. The company has a fortress balance sheet and huge amount of earnings power. As Buffett noted, Berkshire's operating businesses are 'firing on all cylinders.' So Buffett may not think about 'macro', but in my opinion he has built a much better arc than Fairfax. And ultimately it's not about predicting the rain but having the best arc for when the rain comes. In terms of Fairfax, the investment portfolio is very defensively positioned. But their balance sheet is weaker than Berkshire. And they have extremely low earnings power today directly as a result of their defensive investment positioning. From a balance sheet perspective, Fairfax has $1.1 billion in cash/ST investments at the holding co level. But they also hold $3 billion of debt. And while there are no material debt maturities for the next 5 years (a good thing), the cost of the debt is very high. The interest expense on an annual basis is approx. $200 million. The interest expense alone is approx. 2.5% of Fairfax's BV. From an earnings perspective, the company generates income from underwriting and investing. If we assume they write at 100% (better than their long-term average), they have no underwriting profits. Even if you give them a 98% CR, they have only $120 of underwriting profits ($6 billion premiums X 0.98). From the investment perspective, the company has approx. 500 million pre-tax in income (interest + dividends). With the equity markets hedged, there isn't much in the way of capital gains unless you think they will outperform the market by a significant margin (they have done this historically but not sure you'd want to count on it happening every year). Fairfax has a lot of expenses: $200 million of corp. overhead + runoff costs, $200 million of int. expense, $65 million and they will have to pay taxes as well. In 2011, Fairfax had $1 billion in cat losses. If we got hit with similar cat losses in 2013, I'm not sure how Fairfax would have $1 billion in earnings power to cover the losses. In this scenario, BV would actually go down. Anywyas, I like Fairfax and think it is an interesting investment. But I just wanted to highlight my perspective (which you could completely disagree with) that Fairfax might worry more about the macro picture than Buffett, but I think Berkshire is a much safer business if things go wrong. As such, Buffett doesn't need to worry as much about the macro because his ark is so much stronger.
  17. "He's not going to buy back before 0.90 - 0.85 x BV. Check when was the last time they bough back shares... I believe it was in 92." BeerBaron On the topic of share repurchases, I believe Fairfax has repurchased 2.3 million shares @ an average cost of $230 over the past decade. The most aggresive buyback was in 2008 when the company repurchases 1.1 million shares o/s. If I'm not mistaken, I bleieve that Fairfax repurchased shares every single year over the past decade with the exception of 2012. As you are all aware, despite the share repurchases the share count increased from 14 million shares o/s to 20 million shares o/s over the past decade. Fairfax issued 4 million shares in 2004/2005 to shore up the balance sheet to survive the 7 lean years. In 2009/2010, Fairfax issued further equity to private Odyssey Re and purchase Zenith. The topic of share buybacks was raised at the 2013 AGM. The question was why Fairfax has not repurchased shares at current levels (i.e. P/B of 1x) given that Prem has suggested the company is undervalued. It appears that management is very focused on the financial position of the company. They don’t want to do anything that would come at the expense of the holding company cash/marketable securities (i.e. always maintain $1 billion at the parent corp.). Over time, I would expect management to reduce the share count but at the moment their first priority is the safety of the business especially given Prem’s concerns about the macro environment. Also, given Prem’s focus on having sufficient capital to expand the level of insurance premiums during a hard market, I can understand why Fairfax would be cautious about touching their capital base.
  18. Has anyone followed American Safety Insurance Holdings? I'm not familiar with the business. Based upon a very cursory glance, I notice the business has generated underwriting losses for 4 of the past 5 years while at the same time growing in a soft market. Does anyone have any thoughts on the quality of American's underwriting business (excl. the reinsurance business that is being sold)? Is this a turnaround business or a higher quality business that has been impacted by a prolonged soft market?
  19. Gio, I hope this helps: If you go to pg. 54 of the 2012 annual report you will see that Fairfax holds $11.4 billion in bonds. There are $6.9 billion in municipal bonds ($5.3 billion tax-exempt, $1.6 billion). $4 billion of those bonds are insured by Berkshire. The yield on these bonds is approx. 4.6% (320/6,900). The $1 billion of California bonds are a small part of the total muni bond position. If we set aside liquidity, imagine you could buy muni bonds (predominantly insured by Berkshire) today yielding 4.6% and trading at par. The average maturity of these bonds is 10 years. The 10 year US treasury is yielding 1.7%. I do not follow the bond space closely but I have a hard time believing that bond investors would not rush to buy these muni bonds yielding 4.6% especially when they are GUARENTEED by Buffett. In fact, your return will be better than 4.6% if you buy these bonds at par because of the tax exempt status of these bonds. My guess is that the reason investors don't buy these bonds today is because they are trading above par and the yield to maturity is much lower than 4.6%. In other words, the return to an investor who buys the bonds today is not 4.6% because you have to buy the bonds above par. It is true that Fairfax has a large amount of unrealized gains on the muni bonds to date. But going forward, it seems likely that the unrealized gains will shrink as these bonds are held to maturity. The only thing you care about as a FFH shareholder are the future gains/losses NOT the gains that were made in the past.
  20. Fairfax acquired muni bonds that were yielding 6%+ during the financial crisis. The majority of these bonds were insured by Berkshire. Today, these bonds are yielding 4.9%. When Fairfax purchased these bonds they likely traded at a discount to par. Today, I can't imagine the muni bonds yielding 4.9% are trading below par. The reason Fairfax does not sell the bonds is because they want the income. The investment income of the investment portfolio is extremely low in the current int. rate environment. With the equity hedges in place (Fairfax pays the dividends on the indices they are short) and 25-30% of the portfolio in cash, Fairfax needs as much income as possible. If they sold the muni bonds yielding 4.9%, they would need to replace that income. However, you can't buy any investment grade bonds yielding anything close to 4.9% in today's environment. I believe the average maturity of the muni bonds that Fairfax holds is 10 years. I imagine they will hold these bonds to maturity. As these bonds approach maturity, they will go down in value (i.e. drop from above to par to par by the time of maturity). Brian Bradstreet and his FI team are very talented. Over time, I expect their resutls will outperform the overall FI market. But I don't see how they can do magic with their bond portfolio. You can't sell your long treausuries and sit on a lot of cash in a low int. rate environment and still collect 4% yields on your bond portfolios. After all, the 10 year US gov't bond is yielding 1.75%. The only way to do this is to keep bonds you previously purchased at attractive prices and hold them to maturity even if it means triggering capital losses on the bond portfolio.
  21. Giofranchi said: "And what’s unrealistic in saying that it is HIGHLY UNUSUAL for FFH to post a loss on its bonds portfolio? And that it therefore could be just noise?" Gio, I don’t have much experience in bonds (I’ve never owned one!) so I could be totally off base. But when I look through the 2012 AR it doesn’t’ seem unreasonable that Fairfax will have capital losses on their bond portfolio over time (even if rates don’t increase). Fairfax’s bond portfolio generated a pre-tax yield of 4.1% in 2012 (ignoring the tax impacts of the tax-exempt munis). It appears the muni bonds are yielding approx. 4.9%. I would imagine that given the yields these bonds are trading above par. As the bonds mature, would it not be fair to say that these bonds will mature at par and trigger a capital loss?
  22. Lakside B said: Also the OP of this thread wants to know how to get the accident yr numbers for different subs. These are detailed quiet lucidly in the annual report for each sub. For instance, for northbridge accident yr loss triangle is on page 157. You can see from the loss triangle the development based on accident year which should reconsile with average numbers Prem gives out in his letter. Lakeside, thanks for your comment. Can you please elaborate? I have looked at the reserve development triangles on an accident year basis but I'm not sure how to get the data for the accident year CRs. For example, where would I find the 2004 accident year combined ratio for Northbridge? Thanks!
  23. Since Fairfax has owned Zenith, the loss ratio has been flat (80.2% - 2010, 78% - 2011, 77.9% - 2012). The expense ratio (excluding commissions) was 37% in 2010, 35% in 2011 and 28% in 2012. I looked at the 2009 Zenith annual report. The net premiums earned in 2005 were $1.1 billion. in 2011, the net premiums earned were $500 million. This should explain why the expense ratio is so elevated as premiums shrunk by 50% and expenses did not shrink proportionally. In terms of comparable loss ratios, I'm not sure it makes sense to compare the loss ratio of Zenith and Crum as they are very different business lines. Overall, the workers comp business does not appear to be a good business (although I imagine there are benefits given the float generated from very long-tailed business). However, Zenith has one of the best long-term track records amongst the peer group and have been able to generate a 30 year average CR of 95% despite the difficult industry conditions. When Zenith says they have the best loss ratio in the industry, they are referring to the workers comp industry peers (specifically California workers comp). In the 2009 annual report, there is a table comparing the loss ratios of Zenith vs. the industry average dating back to 1978. Zenith has had a lower loss ratio vs. the industry average every single year. At the recent AGM, Faifax noted that prices are increasing at Zenith (they are price leaders). When the market turns, they do not expect to generate a mid 90s combined ratio. They expect to generate a much lower CR. If their 30 year average CR is 95%, they need much lower results given the past few years elevated underwriting losses to return to their long-term average. Does anyone follow the trends in workers comp? It's interesting to look at the loss ratios before Fairfax acquired Zenith (see below). Since Fairfax has owned Zenith, loss ratios have been at 80%. I assume this is typical for the entire industry but would be interested to hear people's thoughts? 2002: 55% 2003: 37% 2004: 27% 2005: 26% 2006: 32% 2007: 38% 2008: 43% 2009: 50%
  24. Thank you Parsad and Giofranchi for your replies!! That was very helpful. I really appreciate you sharing your insights on how to think about Fairfax. This is what I love about the board. I agree with both of you. That is why I own Fairfax. The market looks at things statically (i.e. assumes cash will be 30% forever, hedges will be on forever, etc.) and sees no BV/share growth. Fairfax tomorrow could look very differnet from Fairfax today. HOWEVER, at the end of the day, to buy Fairfax at 1x BV today I need to believe that BV/share growth can be 10%/annum. I wouldn't pay more than 1x BV for a very lumpy 10% return. And the investment returns (while extremely difficult to forecast) are the single biggest input into Fairfax's BV/share growth. Without a view on investment returns (even a range), I am not sure how you can invest in Fairfax. If the return on the portfolio changes from 5%/year to 7%/year, that has a huge impact on the long-term returns of the stock. I don't want a precise #. But I do want to get a sense for what is reasonable going forward. To be clear, I am NOT looking for 1 year or 2 year invesmtent returns. I am looking for what people think is a conservative range of investment returns over the next 5 or 10 years. I understand the opportunistic approach of Fairfax. I have met several members of the HWIC investment team. They are very talented people. However, I can't understand how the past 25 years of declining int. rates did not provide a significant tailwind for fixed income returns. This was not a cyclical run in the bond markets. This was a multi-decade secular trend. Given the starting point of int. rates today, you can't repeat the tailwind again. So if Fairfax can do 10%/year in fixed income, it will be almost pure alpha. Parsad and Gio, my (long-winded) follow-up question is: 1. The reason I segregate returns on bonds and equities is that Fairfax is an insurance company as opposed to a hedge fund that can invest in any asset class they want in any quantity. That are using float and debt to leverage their returns. Today they have $378 in BV/share and $1,289/share in investments. Are there any restrictions on how much of the portfolio Fairfax could invest in equities? Can they go 50%+ in equities. Today, if they were 50% in equities, they would have $645/share in equities or 1.7x BV. If the market dropped 20% and they were unhedged, they would wipe out $130/BV (pre-tax). If Fairfax can't invest in any asset mix they want, I need to make an assumption of a max weight for equities. That means the majority of the portfolio will always be in bonds/cash whether or not Fairfax thinks that's the best place to invest. As such, I wanted to get a sense for reasonable level of returns on the cash/bond portfolio over the next 5-10 years? Gio, just to put some #'s around your suggestion I did a back of the envelop BV/share growth assuming 7.5% pre-tax investment returns (this was your return assumption). I looked out 1 year and didn't include any float growth. Am I missing anything obvious? If not, Fairfax needs an investment return of 7.5% to get 15% BV/share growth today. 7.5% returns seems pretty high if Fairfax can't invest their entire portfolio in equities (unless equities drop significantly allowing a lower starting point to invest). Net premiums earned: $6 billion Combined ratio: 100% (better than their historical record) Underwriting profit: 0 Investment (total return): 7.5% Investment portfolio: $26.1 billion Investment income/cap gains: $1.96 billion Corporate overhead/runoff: $200 million Interest expense on debt: $200 million Pre-tax income: $1.56 billion Taxes: $383 (assuming 25% tax rate – might be different because some of gains might be unrealized, etc.). Net income: $1.18 billion Dividends on prefs: $55 million Net income to shareholders: $1.13 billion (EPS - $55/share) Book value/share (initial): $378 Book value (ending): $433 BV/share growth: 14.5%
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