SafetyinNumbers

It’s 7 shares. Someone probably made a mistake

Most important to me is the golden rule.

No pals of mine. Both take advantage of investor ignorance and psychology. Lots of Canadian investors in particular will never buy FFH because Morningstar is their screen or the screen of their investment advisor.

I think they are two totally unique kinds of grifters

I think that’s called expected value. They expect to be wrong a third of the time unlike Buffett’s #1 and #2 rules for investing.

What would you say are the last 5 low quality positions they have purchased?

I think FFH is an expected value investor while BRK is a quality value investor. Expected value investors do everything but I suspect they will look a lot more like BRK going forward for the vast majority of the non-fixed income portion of the portfolio. That being said they can still do deals like Dgit, Ki and Blizzard Vacatia which risk small amounts of capital with potential for VC type returns. Ultimately, FFH has a better mouse trap. Partially this is because of the higher leverage to the insurance business. Part of that is because FFH hasn’t been as profitable on the non-fixed income investments but also because they have been able to use so much of the excess capital to buyback stock instead of building equity investments on the balance sheet over the past 8 years.

They locked up the biggest minority shareholder so that makes it harder.

Look what happened a few years after 2010. I wonder if the last three quarters are like 2012 in the chart and reserve releases could really accelerate over the next 36 months. FFH was growing premiums really fast so I think the odds are decent.

Chance of a bump? I like how they are adding leverage at Recipe after paying down debt for 3 years. Maybe they even take a dividend to relever it to 4x debt to EBITDA. All very accretive.

I think most executives are actually incentivized to have higher short term profits so the incentives are usually against the best interest of long term shareholders but arguably to the benefit of short term shareholders. I think it’s probably pretty easy to “pad” reserves in a hard market because the market is usually hard for a fundamental reason like high claims. It’s a very complicated process but I think about it as FFH trying to lock in business at the same margin in a soft or hard market. Effectively they assume markets are efficient and that’s probably easy to clear with auditors and regulators.

Great analysis Viking. I think the reserve releases you pointed out are worth highlighting. Historically, that number has a lot of momentum and premiums were growing fast 4 years ago. It can be a real tailwind to underwriting earnings but delayed one quarter by the unusually high cat losses.

The insider information is only valuable if one knows the trade. I was just curious if there was consensus on that. If there is selling, what could be some of the beneficiaries? What’s the right multiple for BRK i.e. when is it a buy again?

What’s the trade?

You can check yourself but in previous SIB circulars ELF has said they are not a PFIC. That makes sense since they control Empire Life.

To be fair to them, they are playing a different game and it’s worked for a long time. Quant investing is a big data exercise and is not about picking the best idiosyncratic stocks. It does hurt FFH’s valuation as most large asset managers and retail brokers use quant screens so they can’t own FFH and ultimately stock prices are just supply vs demand. The beauty is FFH is taking advantage and scooping up stock.

Morningstar’s analysis shows FFH doesn’t screen well for quants. It’s partly why the stock trades cheap as a it’s a huge source of demand that doesn’t own the stock.

If they raise money inside Anchorage with help from arms-length party like OMERS that should solve for your concerns and increase book value.

Estimates look very beatable. I think analysts are predicting losses on the equity portfolio and Cat losses in California without any offsetting reserve releases.

I assume they are raising money at Anchorage to support these investments if they come to fruition. Could that lead to a significant increase in the mark on BIAL?

I think the insurance against that is at the high end of that range, FFH, still likely would not lose money in the FTM period that it happens. $5bn of pre-tax cat losses is basically the sum of conservative estimates of investment income, underwriting income and associates income. The combined ratio would be around 110 for the year which is high but very survivable. If it were to happen, the stock would likely have a big drawdown as uncertainty would be high. FFH probably couldn’t take advantage of the drawdown to buyback stock as they would need all of their capital to write business in the resulting hard market. They might tap their credit lines or add leverage on some of their controlled holdings like Recipe as it’s deleveraged post acquisition. Forward ROE should increase enough to make up for the short term hit to returns. The best case scenario is that it happens when FFH has a much higher valuation such that it could issue equity at a big multiple of book and really take advantage of the hard market.

They have dollar limits on exposure so it’s not open ended as many investors think. If it happens with their excess capital, they will be able to take advantage of the resulting hard market better than most and earn back their losses.

The narrative that Prem is a “cigar butt” style investor is incorrect in my opinion, I think he and Fairfax are expected value investors. EV investors can do anything precisely because they don’t have a style. The narrative will change over time as it’s clear they are now focused on quality.

https://whalewisdom.com/filer/fairfax-financial-holdings-ltd-can It’s a tiny position on the 13F

Ultimately, buying FFH is making a bet on expected value investing and most investors are deterministic so they can’t get comfortable. For the last 16 years, buying quality has come with growth and multiple expansion so there has been no reason to change tactics.