giofranchi
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Posts posted by giofranchi
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Nope, seeing #1, #2 and #3 simultaneously would be a historical accident. If you get decent investment returns, then the obvious thing to do is to expand your book by underwriting at a loss. As long as your cost of float is reasonable, just keep writing more business to grow the float.
I am not so sure... Have you ever found an insurance company which was able to "engineer" a CR in between 100% and 102%?
In my experience, either you get a good underwriter (CR of 95%) or you get a bad one (CR of 105%). And if I had to choose, I would like FFH to keep underwriting profitably, even if that would mean to grow its float more slowly.
Cheers,
Gio
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This is the thread each year where I give thanks to Sanjeev and the many great posters from years past. I moved to Toronto for business reasons about 15 years ago and discovered this board and Fairfax as an investment. Good advice from many others on this board, good decisions, dumb luck and time all combined over many years to put me in a position financially that I was able to quit my day job and spend quality time with my young family (10 years now and counting). I have since moved back to Vancouver and in hindsight one of the greatest gifts of taking the job in Toronto was that I discovered this board and Fairfax; a great example of unintended positive consequences. I have no doubt that if I had not discovered this board and FFH I would still be working for someone else (when asked, I tell people that I am a financial planner with one client... my family). Thank you to Sanjeev, bsilly, cardboard and ericopoly to name just a very few; many more have helped me. I will always be very thankful.
To all posters: thank you. By taking the time to post your thoughts you give others the opportunity to learn and benefit financially. Have a great holiday and a prosperous new year!
Hi Viking,
Thank you for shedding some light on your experience with the board, your financial goals, and your personal life.
I surely like your posts very much!
Merry Xmas to all board members and enjoy your holidays!
Cheers,
Gio
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I thought I'd start a new thread here, since the other one is long and has gone off in a few different directions.
1) Fairfax is both a runoff entity, and an ongoing insurance/reinsurance entity. Runoff entities seem to have marketable value somewhere around 70% book. As a result, directly comparing book value multiples for Allied & Fairfax is a bit misleading. If you back out the runoff operation from Fairfax market cap, and just look at ongoing operations, I think you find the book value multiples similar. I do not think Fairfax is giving away much, if any, relative value by using shares as currency.
2) Allied has a 10 year average combined ratio of 87, Fairfax was running about 99 (as reported, not accident year) last time I checked. So the pro-forma entity would be running about 95. Allied is a much better underwriter, and that is the benefit of the deal going forward for Fairfax. It improves the overall underwriting profile and cements their transition from an industry laggard, to industry leader.
I like what I am seeing on the underwriting side, now if they can just get their act together (and story straight) on the investment side...
+1
Gio
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I like anything that makes me think Prem is still very motivated to do well and grow the company.
Will we ever witness a 5 years period in which:
1) Bond returns are strong,
2) Equity returns are strong,
3) Underwriting returns are good?
Of course I cannot tell, but I am sure we won't if Prem, Mr. Bradstreet, Mr. Barnard, etc have lost the drive to achieve great results.
Though I don't know if this new Africa fund is a good idea or a not so good one, at least imo it shows that FFH's management is still eager to work hard and (hopefully) do well.
We'll see!
Cheers,
Gio
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Hopefully these comments assist you in deciding what to do with your FFH shares.
Yes! They certainly do! Thank you.
Cheers,
Gio
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Empire building doesn't have to necessarily mean wealth creation. Risk avoidance does.
I agree: I like North America, large cap cos, strong balance sheets, lots of fcf, great brands.
Cheers,
Gio
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What edge do they have in India?
I don't think they need an edge in India. The demographic story is compelling enough to justify the investment imo. (Just look at the money AMZN is spending in India!)
Cheers,
Gio
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Looking at a $1 billion fund to invest in Africa.
Could you explain? Another FFI, this time called FFA? India I understand and like. In Africa what is their edge?
Cheers,
Gio
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+1
I just sold 15% of my position in FFH. I am now below my core position in the company for the first time since I initiated the position in November 1999. I did this after much thought, reflection and discussions/debate with individuals I trust.
I echo the comments made by both Uccmal and Benhacker---something is not right at FFH and hasn’t been for a VERY long time. Seriously---would anyone actually hold Blackberry, Resolute Forest and Eurobank as their 3 largest equity positions? Prem owes us (the shareholders of the company) a detailed explanation for what the exit strategy is for these and other underwater equity holdings. Simply saying that over the long term everything will work out is inadequate at best. The statement is meaningless without defining what “long term” means.
As outlined by Benhacker---the deal financing strategy being deployed recently by FFH (buy first / finance second) also concerns me greatly. Bringing in outside investors to finance these deals greatly changes the metrics and not favourably from a FFH shareholder perspective.
I remain a large shareholder of FFH however it was appropriate for me to reduce my equity exposure to the company because of the real concerns I have. Prem is now on a very short leash---it will be much easier for me to sell my remaining shares should he not deliver in short order.
As for capturing the animal spirits that have supposedly been unleashed by the Trump victory (I remain a huge skeptic) ----- I would suggest that holding shares of Goldman Sachs, AIG and Cheniere Energy would give you a much better opportunity to do this than by holding shares in FFH.
BP6
Thank you BP6,
If I have understood correctly, the main risks you see are:
1) Their stock picking performance will continue to generate very poor results,
2) They are financing the acquisition of Allied in a way that won't maximize shareholders' return.
You said you have discussed a lot about FFH with people you trust and who know FFH very well. And you have come to the conclusion there is something wrong at FFH.
Do you see other risks beside 1 and 2? I am really interested to understand if people who know FFH very well see risks that I might have overlooked.
Cheers,
Gio
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I am a very recent shareholder (5% position) and I just sold my shares today. Rarely ever had an investment left me as befuddled as Fairfax in such a short time after I bought.
Thank you for sharing your decision!
Could you be a little more precise about the risks you see going forward?
I am trying to understand if I am missing something really important here.
Cheers,
Gio
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I really don't get it, how can you play defense for years and now that the cycle is long in its tooth and valuations are very high go on the offense?
To keep investing in insurance companies, which might perform satisfactorily in a bear market and which by the way are their true circle of competence, while keeping lots of cash, is imo to play defense... Simply they are no longer playing defense against a 1 in 70-80 years event, but they are playing defense like they should be doing at the end of a regular business cycle.
That's at least my point of view on their recent moves.
Cheers,
Gio
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But there haven't been any actions. Some of the above is going to get snarled in congress, and have long lag times. I am sticking my neck out but I figure we get a full on bear market soon. All of the above will keep the US afloat but it will become a matter of minimizing damage rather than future growth forever more. No one is using any data points, because there aren't any. Fairfax is operating on a feeling.
Al,
don't you think insurance is a good business to be in during a bear market? In 2008 BRK's BVPS decreased much less than the general market because its insurance businesses saved the day.
And I don't think FFH is rushing all of a sudden into the stock market: they have taken away the equity hedges, probably because they think a pro-business government in the US might drastically reduce the chance of something very bad and very long hitting the stock market, but they still have nearly $10b of cash. And I guess they will keep the flexibility to take advantage of opportunities that might arise in the future.
Should a 30-40% correction in the stock market come, FFH stock price will surely go down with the market, but they might still be in the position to take advantage of lower prices, while their insurance companies might (hopefully) go on generating underwriting profits.
Is it such an uncomfortable/risky position to be in right now? Especially with FFH stock price that already is low?
Cheers,
Gio
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But about that stockpicking... Here I feel criticism is warranted. In particular I don't understand why they didn't buy all of the JNJ, KO, PEP etc. shares they could - buying such companies at the prices available in 2009-2011 would have guaranteed reasonable absolute returns if the world muddled through (which it did) but also great relative returns if we'd revisited 1933. Instead they bought BKIR which would have gone bankrupt in a 1933 revisit. Does the fact that it worked make it right? I don't think so, but no-one ever seems to mind that decision!
I couldn't agree more! Actually they had bought JNJ and WFC... unfortunately they also sold them... I have never really understood why. I remember Watsa commenting about JNJ in 2010: "We like JNJ very much: today it seems nobody wants to hold a company that can gradually but steadily increase EPS 10-15% annualy. JNJ is such a company and we are happy to hold it". Then, just a couple of years later FFH sold its investment in JNJ...
Cheers,
Gio
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If you read what he's said carefully, he hasn't done a 180 on the US markets but on the US economy.
The hedges were not mainly explained in valuation (e.g. CAPE, Tobin's Q) terms. They were explained in terms of protecting the company from another 1929-33 type selloff, which would have destroyed the company in the absence of the hedges.
They now feel that that kind of catastrophe has reduced in probability, because we have a quantum shift from a world in which politicians over-regulate and rely on central bankers to promote growth via leverage, to one in which (maybe) government gets out of the way and productivity drives gdp.
So the hedges have gone. Doesn't mean they think the market goes up. All they've said on that front is that it will become a stockpicker's market again. Value starts to win again.
Pete,
I agree. And basically I think the change is an healthy one and should be welcomed.
Many people though disagree. And that's why I would like to know if they see risks that I might have overlooked.
What can go wrong? How probable is it? And which will be the consequences on the whole company?
Cheers,
Gio
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Oh my,
Prem is still making these macro forecasts? No lesson learned from these huge losses? He's bearish when the market is low and bullish when the market is high?
For the first time in 13 years, I will seriously consider reducing or eliminating my position in FFH. I can handle a lot, but this is difficult.
Partner24,
Since 2011 these are the results:
EQUITY (cumulative): $628 million
HEDGES (cumulative): -$3112 million
BONDS (cumulative): $2950 million
CPI (cumulative): -$570 million
UNDERWRITING (cumulative): $1333 million
It seems to me that, if we are to blame Watsa for something, it is because FFH has been a very poor stock picker in the last 6 years: the idea of a 100% hedged stock portfolio should be that your stocks go 1%-2% higher than the stocks you have shorted. Of course you would expect to make a very meager profit overall, but still a profit... not a loss of -3112 + 628 = -$2484 million.
In other words, if FFH had been a good investor in stocks, and equity gains equaled losses from hedges, in the 6 years from 2011 to today FFH would have earned 2950 + 1333 - 570 = $3713 million. Starting in 2011 with an equity of $7.4 billion. Not bad!
Watsa has always said he was worried about a 1 in 70-80 years event that could shock the markets... Sincerely, were you sure that event was never to come? I know I was not, and I don't blame him for protecting FFH. Instead, what I would surely like to know are the reasons why they have chosen equities that performed so poorly...
Furthermore, those $3 billion of earnings in bonds imo were very much related to their macro views: FFH held onto long term US bonds for at least three years after Buffett started calling them the worst investment. And the reason was they thought yields could continue decreasing because of disinflation in the US and deflation in Europe. Finally, they have picked almost the best time possible to sell those bonds, just before Trump got elected. Another macro call that turned out to be right.
This is how I view the recent past. But, as I have said, I would prefer to talk about what lies ahead.
Cheers,
Gio
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The presentation has pro forma BVPS at $421, but I can't tell if that includes the divs out to Allied World shareholders.
Joel,
if I have understood correctly, Allied shareholders will receive $5 in cash per share as a special dividend from Allied + $5 in cash from FFH. Those $10 per share won't stay inside the combined company and therefore should not be included in its BVPS calculation.
Of course, I might have misunderstood!
Cheers,
Gio
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i tend to not think i'm buying a stock but rather buying a business. the best defence is offence. so a business that can grow for a sustained period of time should prove to be a better investment over the long term. just my view
Of course I agree, Gary!
Just look at my portfolio: they are all businesses and/or industries which have grown a lot in the past and which imo still have much room to grow in the future.
The fact is also FFH could grow! If only Prem & Company would make the right decisions...
And this I am interested in talking about: which decisions are they making NOW (not 6 years ago... we all know the bad decisions they made 6 years ago) so bad that could sink the boat even from these already depressed levels?
Cheers,
Gio
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Gio
i think a company that has not much down side risk but at the same time not shown significant ability to grow is in itself at risk of under performing the market-- i think some call this a value trap
amazon is expensive but look at how much it has grown. same with facebook.
Gary,
downside risk is important imo, because in this market I don’t see many good bargains as FFH is right now. If downside risk is somewhat mitigated from the current share price level, I can keep my shares until some good bargain comes along. Then I might decide to sell some FFH shares and invest the proceeds elsewhere.
Not so if there are good reasons why FFH’s multiple should compress further, or FFH should start posting unexpected losses.
Therefore I would like to know if someone sees threats that might have escaped me.
Cheers,
Gio
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It is undeniably true that lots of things have changed. And I am considering what to do with my FFH shares.
I would like to know where people see the most downside risk today:
1) Valuation: I don't think so, FFH shares are not expensive.
2) Balance Sheet risk: lots of cash, manageable debt, I don't see a great cause for concern here.
3) Investment performance: it seems to me that a lot of pessimism is already priced in.
4) Uncertanty regarding this new acquisition: Allied has an average 90.5% CR since inception (15 years), and an average ROE of 12.4%. 1.3x BVPS doesn't look too expensive a price for a company with such a good and long track record. Am I wrong?
5) Has Watsa lost his mind? Is this where the most downside risk lies? Do people think Watsa will lose the trust of FFH employees and as a consequence of FFH shareholders?
6) Other reasons? Would you elaborate?
Cheers,
Gio
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The string of insurance acquisitions evidence that FFH is bootstrapping its insurance business. Nothing wrong in that.
Last time out this didn't go so well; they had more to lose - and they almost lost the business. History tends to rhyme.
What do you mean exactly?
It seems to me that from Zenith to Brit they have made a series of great acquisitions in the insurance field. Their investment abilities in stocks can be very much critiqued of course. Not their abilities in buying good insurance companies at fair prices, imo. By now they have proven many times their focus has rightly shifted from poor insurance businesses for a price well below BV to good insurance businesses for a premium to BV. And Allied seems to perfectly fit this healthy change.
Cheers,
Gio
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Think it adds to BVPS simply because shares are being issued at a premium to book. Doesn't mean it's accretion to value.
If FFH issues $4 billion in stocks, there will be 8.7 million new stocks outstanding (assuming today's price of US$461). As of September 30, 2016 there were 23.2 million stocks outstanding. That would bring the total up to 31.9 million stocks outstanding. Net income combined is projected to be $740 million. Therefore, EPS after the acquisition will be $740/31.9 = $23.2. EPS before the acquisition are $443/23.2 = $19.1.
Of course, you might argue that FFH + AWH deserves a lower multiple of EPS than FFH alone... But I would not be sure why: if anything, the combined entity looks to me as a more diversified, better financed, and stronger company than FFH alone.
Cheers,
Gio
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If Prem is paying 1.3x BVPS to acquire Allied, he probably thinks Allied's FV is higher.
If he were signaling that FFH is not cheap, it would mean that he thinks FFH's opportunities for BVPS growth going forward are much smaller than Allied's.
I don't think that is the case. Imo it is still more of the same: Prem wants to keep the flexibility that cash gives him.
As for why now, maybe Viking is right... or maybe simply because Allied's management was not willing to sell the company while its stock was too cheap...
Cheers,
Gio
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Of course, I don't like further dilution... But:
1) Insurance is their business, and very few people know it better than FFH. Therefore, the risk of a major mistake is very much mitigated imo.
2) Allied seems to be a very high quality company: average CR during the last 10 years of 87%, and a CAGR in BVPS of 14%.
3) As shown in slide 14, the transaction seems to be accretive to BVPS after considering the impact of new shares issued, while also decreasing the total debt / total capitalization ratio.
Cheers,
Gio
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I would also consider VSCIX, or another ETF of US small caps.
A requisite before investing in a company for me is a long and successful track record of reinvesting its earnings for growth.
Most probably after successfully reinvesting its earnings for 10-15 years, a company is no longer a small cap.
Therefore, it is very rare that I invest in a single small cap company.
But a basket of them is another story, and I surely would like some exposure to small caps: many will fail, but some will turn out to be 10x baggers. Overall I believe results will be satisfactory.
This being said, I clearly don't think it is the right time to invest in VSCIX, and I would wait for a serious correction.
Cheers,
Gio
Fairfax nears deal to buy Allied World for $4.9B
in Fairfax Financial
Posted
I have sold some shares for two reasons:
1) To open a position in JPM: I am late, but if Mr. Dimon is right about an "American Renaissance" in business, I think the next 5 years might be very good for the whole financial sector. And JPM imo is the best among big banks.
2) To increase cash: I have used FFH until now as a "good substitute for cash". Now I don't think that thesis is defensible anymore.
FFH remains a meaningful position in my portfolio.
Cheers,
Gio