link01

yea, markel ventures invested a good chunk of change in them at the get go, btw

You talked about the company doubling or tripling in a hard market, due to what is effectively an excess of capital. Paying it out now to reduce the share count will reduce future opportunity. The company you'd have left would be more levered, so better short-term returns, but during the hard market you'd be less able to expand and thus wind up with relatively higher combined ratios (relative to the lower ones that would come with expanding business at great pricing). That would be my take on why you aren't seeing them buying shares. eric, i think you hit the nail on the head. all p/c insurance co's need to weigh these 2 different dynamics aginst each other when contemplating share buybacks. but i think they should also be mindful of the possibility of fat tails like 911 & katrina & thus require a larger margin of safety. this really hit home with me when i was following white mt closely & by extension montpelier re who they had a big investment in. mrh was buying back shares hand over fist at a big discount to book, increasing book val per share at a clip to make your avg dyed in the wool value investor smile, then bang! katrina (i think it was that one) hit the industry for a loop. and mrh was particularly hard hit. all those buybacks at a discount to book turned out to be a mirage after katrina, & exposed them as one of those who were swimming naked when the tide went out, tho they didnt even know it at the time.

what a truly horrible idea, passing the costs of cust credit card usage fees onto your waitresses! ugh... biglari is turning out to embody the worst traits of unbridled capitalism run amuck. his sense of entitlement at the expense of others seems to know no bounds.

here's another take re the end of qe2, asset prices, & the effect on the real economy: Effect of QE2's End May Be Greatly Exaggerated Like news of Mark Twain's death, QE2's impact on the economy, has been greatly exaggerated, contends David A. Levy, chairman of the Jerome Levy Forecasting Center. The economy's acceleration was well under way when Fed Chairman floated the idea of QE2 in late August, he points out. Moreover, no serious economist doubts the dictum that monetary policy works with long and variable lags. Indeed, gross-domestic product growth slowed to a 1.8% annual rate in the first quarter, from 3.1% in the fourth quarter of 2010. Treasury yields actually rose after the Fed began purchasing notes in early November. While prices of risk assets such as stocks and junk bonds increased, the value of homes, investment-grade corporate and municipal bonds and government securities fell in the fourth quarter, leaving households less well off, Levy says. That undercuts the so-called wealth effect, the presumed positive effect of QE2. Inflation expectations did rise, as the Fed desired, but bank lending didn't, he adds. All in all, Levy likens QE2 to chicken soup — "it couldn't hurt." The most important impact may have been psychological; because the market participants thought QE2 was affecting prices, they did. And so the dollar fell in response to the Fed's securities purchases, mainly because that's what traders, expected, he concludes. the rest here: http://finance.yahoo.com/banking-budgeting/article/112772/QE2-effects-barrons?mod=bb-budgeting&sec=topStories&pos=4&asset=&ccode=&sec=topStories&pos=6&asset=&ccode=

they got a good price for it. they grew it very nicely from the ground up but i'm shocked at how badly operated it, & the underwriting losses they sustained (last time i checked). at 1 point i thought it would prove to be their gem in the rough.

.. Since then M2 has risen at almost a 6% annual rate. Forget the thought of a balance sheet recession if M2 continues this rate of expansion. If The Fed, however, pulls back, run for cover because Koo is right about everything being propped up by the Fed. twa, i thought you were more focused on growth in the monetary base (m3?) than m2. in your estimation will the monetary base follow m2 down if the fed pulls back & withdraws qe2 liquidity?

those are some ugly no.'s, no 2 ways about it. even more so on a relative basis compared to avg retailer results since the 2008 trough.

wow, thats quite the eye opener, thx

great job, those are some seriously good notes. many thanks!

wow, that chart is almost parabolic. maybe its just the compressed scale. i cant wait to see how the end of QE2 will affect the verticle angle of the M2 & WS base. or how the continued rabid printing of money in whatever form finally fuels the pile-on of our national debt to the point where its growth overshadows that of the monetary base & spooks sane people.

inflation/deflation/stagflation? too many smart people on opposite sides of this argument, which has enough paradoxal elements to make your head spin. we're approaching the crossroads but it doesnt seem fore-ordained yet which direction we go. hence, the fence where i'm concerned.

yea, there's alot of leverage there as a % of equity. which is probably a major reason why they hedge out such a big amount when they deem risk assets to be genarally overvalued & vulnerable to reversion to the mean.

lol, you guys are chasing a chimera here. but the accounting concept of goodwill is no more or less subjective or scientifically accurate that other accounting measures. what about instances of aggressively acqusitive co's that habitually take "the big accounting bath" & write off the value of their goodwill? no more intangible goodwill fluff on the balance sheet now to mess up our favorite analytical tools now, right? and, wow, look at their current ROE! for every dollar of equity employed they're earning 20 shiny cents! that's a 20% roe, what a gem!! not! really, tangible book value is is only a useful measure of a co's probable worth in liquidation, not as an on going concern. and with an insurance co even tangible book has serious limitations because there's so much subjectivity involved in estimating the liablities. it seems to me that value, like goodwill, is in its very essence an intangible thing. goodwill & its amortization over x years may be imperfect at capturing the nuances & the 1000 different changing variations of reality, but so are many other accounting measures. i still we are better off with it than without it, and i dont see anything better being offered in its place.

yes, wtm writes much less cat insurance as a whole (combined ratio 105%), but how about their white mt re division (132 CR)? they said they intentionally wrote less cat ins in japan, tho they didnt elaborate why....could have simply been the fact that its a small, densely populated country thats prone to earthquakes & typhoons and relies heavily on nuclear plants for lights & power. so wtm's estimated cat losses were not higher,tho modelled on higher est industry losses than ffh's, either in the aggregate or in their reinsurance divisions. not this time around... unapologetically long ffh, cheers!

i've only noticed that when there's a catastrophic loss... actually, no. gamma is a measure of the rate of change of an options' (or other derivatives) delta. a stokcs delta is always 1 if you're long, -1 if you're short. no delta, no gamma. care to share your own insight? maybe i'm missing something? the joke perhaps? oh, but an insurers business is similar to being short options, yes, so in that sense they are short gamma. and by extension, i suppose, an investor in an insurance co is also short gamma...was that your slant?

intersting to compare wtm's eanrnings with ffh. interestingly, wtm catastrophic losses were very much less than ffh's, & they were modeled on a higher industry loss estimate of 35 bil vs 30 bil. <<HAMILTON, Bermuda, April 29, 2011 /PRNewswire/ -- White Mountains Insurance Group, Ltd. (NYSE:WTM - News) reported an adjusted book value per share of $447 at March 31, 2011, an increase of 1.6% for the first quarter of 2011, including dividends. Ray Barrette, Chairman and CEO, commented, "It was a good quarter, as we grew adjusted book value despite big earthquakes in Japan and New Zealand. White Mountains Re's combined ratio was 132%, driven by catastrophe losses. However, the much weaker U.S. dollar boosted results, offsetting a good part of those losses. OneBeacon posted a strong 3.5% growth in book value per share and a 94% combined ratio. Esurance's adjusted combined ratio improved to 102% and premiums grew 6% on strong new policy sales at both Esurance and Answer Financial. Investment returns were good. We bought back almost 250,000 shares in the quarter, adding about $3 to adjusted book value per share." Adjusted comprehensive income was $34 million in the first quarter of 2011 compared to an adjusted comprehensive loss of $51 million in the first quarter of last year, while net loss was $28 million compared to $40 million in the first quarter of last year. ... White Mountains Re White Mountains Re's GAAP combined ratio for the first quarter of both 2011 and 2010 was 132%, as both periods were significantly impacted by catastrophe losses. Catastrophe losses in the first quarter of 2011 included $80 million related to the Japan earthquake and tsunami, $42 million related to the February 2011 New Zealand earthquake and $3 million related to floods and cyclone Yasi in Australia. Catastrophe losses in the first quarter of 2010 were principally from the Chilean earthquake and European windstorm Xynthia. The first quarter of 2011 also included 5 points of favorable loss reserve development compared to 3 points for the first quarter of last year. White Mountains Re's recorded property losses from the earthquake and tsunami in Japan are currently estimated principally using third party and internal catastrophe models, applying overall estimates of industry insured losses to White Mountains Re's exposure information. The modeled portion of the property loss estimate is based upon an industry loss event of $35 billion, currently the upper end of the AIR and RMS estimates of insured losses. The overall loss estimate also includes estimated losses for marine, accident and health, aviation and contingency lines. Catastrophe exposure modeling and loss estimation is inherently uncertain, and as claims are reported and settled, White Mountains Re's estimates could change, maybe materially. Allan Waters, CEO of White Mountains Re, said, "While the extent of the devastation in Japan makes our initial loss estimate particularly difficult to pin down at this point, the impact will remain manageable under any foreseeable scenario. We were intentionally underweighted in Japan, New Zealand and Australia. We continue to be strongly capitalized and well positioned to take advantage of underwriting opportunities in the market." Gross written premiums were down 4% for the first quarter of 2011, while net written premiums were down 1%. These decreases were primarily due to property lines, where ceding companies are reducing their writings and restructuring programs to retain more net exposure. >> http://finance.yahoo.com/news/White-Mountains-Reports-prnews-1116477800.html?x=0&.v=1

Does the lack of the goodwill on the other 80% of ORH imply that it's inferior to the richly valued 20%? I really don't mean to imply anything by writing off the goodwill. I just want to put apples-to-apples. You could be accused of undervaluing the first 80% of ORH by not demanding to upvalue the goodwill by 5x. The goodwill is just a balance sheet tombstone: "Here lies the premium to book paid for 20% of ORH. RIP." It tells me nothing of the value there... just as the lack of goodwill on the first 80% of ORH tells me nothing about the value. Only the earnings power tells me that, and insurers get their earnings power from their tangible assets. Let's put it this way -- the cash premium paid reduced potential statutory capital. Can we agree on that? When the hard market hits, intangible asset cannot be used to grow premiums. Therefore, the combined companies can write less business than they could before... so keeping that intangible asset around at full value as if it were still cash is hard for me to swallow. do alot of value investors still pay attention to goodwill as if it were the be all & end all of valuation yardsticks. if not, this discussion is kind of like a tempest in a teapot. if you are willing to buy a co that has a demonstarted long history of earning 20 on its stated equity, with 20% growth, would you insist on waiting until that co traded down to book val until even considering an investment in it? or should you be open to paying 2x stated book val, which gives you a 10% return on your purchase price (your purchase price goodwill), compounding at 20% a year going forward? after all, that investment earns superior returns to paying 1 x stated book val for a co earning 10% on it equity & growing at 10%, doesnt it? no one value yardstick can be applied to all investments, including book val with goodwill or without it.

does anybody know what the total statutory surplus of this 'industry' is, where a 30 bil loss is estimated?

nice summary, onyx. thx. here's some comments on the same wrb cc from another board: <<I just finished listening to the conference call with William Berkley at Berkley Insurance. I like the way he thinks about markets in that he favours behavioural economics over nobel prize winning models and openly suggests that. He said that he saw numerous signs of the insurance market starting to harden and that it always happens slowly. I think he quoted something like the industry running at a combined ratio of 115% on aggregate, running at a huge loss on aggregate, and that it cannot continue to do this so either prices rise or many people go bankrupt, i.e. prices rise. Berkley Insurance is running with a combined ratio of about 100 which is better than the majority as they have almost a mandate, not merely preference, of preferring to shrink over accepting losing policies. They also use a 15% after tax return on investment measure for just about everything they do (stock has also averaged 15% since they started). - Manlobbi >>

thank you for the terrific summary! as you said, it was very surprising but particularly gratifying to see so many of the top managers from ffh's investee co's show up. i'd say that that kind of support goes a long way in showing how much prem & his team inspire respect & goodwill in equal measure, a la buffett. its a pretty rare thing to behold, at least to that degree. i hope you're right about prem being poised to adopt the brk (& now mkl) model of acquiring non insurance businesses in the next decades to come!

i had bought a large position a bit more than a year ago at 20 & sold in dec at 46. i was making room for some other stocks at the time, most notably vrx, & it had appreciated so far so fast that it seemed like the thing to do. now i've just sold a truck load of vrx & find myself with a 35% cash holding & very few ideas.....til your thread here, which perked up my ears. i had all but forgotten about ftp but it looks interesting again at the price i just sold it for 5 months! i feel foolish, but what it is what it is :(

i know munger has sounded off on this same theme more than a few times too

'Moment of Truth' Coming Soon for 2011 Investments: CEO "What does the economy really have when you take away the stimulus and the QE2? QE2 was obviously designed to help the economy," Jeffrey Gundlach said. "If it [QE2] helps the economy and it helps stocks and it helps commodities, ergo when you take it away you might go in the other direction, which I think will be the case," he added. In addition, Gundlach went on to say, if lawmakers remain serious about attacking the budget deficit you will start to see an austerity program. "Austerity is negative for the economy. GDP [gross domestic product] in the United States is about forty-five thousand dollars per capita and what we're really doing is living like a fifty thousand dollars per capita by printing or borrowing 10 percent of GDP essentially." "All you really need to do is cut your standard of living by about 10 percent in the United States ... we need to do this soon or the compounding curve really does kick in," Gundlach said. rest at link: http://www.cnbc.com/id/42589181

ah yes, garcadia. leucadia has a name that marries other names so musically!

yea, maybe so. i remember amazon last qtr provoked the same short term reaction for similar reasons....followed by a quick re-evaluation!