Viking

I found the underlined part of this quote in the article to be very interesting... If true and FFH continues to grow BV and insurance pricing remains soft looks to me that meaningful share repurchase are likely... "Watsa, referred to as the “Buffett of the North” by publications such as Forbes magazine, will take over Zenith’s assets, valued at $2.4 billion at Dec. 31, and add them to the $29.8 billion Fairfax already manages. He told Fairfax shareholders at the company’s annual meeting today the insurer doesn’t need to make any more acquisitions."

Zenith has posted Q1 results and they are pretty much as expected. I was surprised that BV only fell slightly (due to $0.50/share dividend). No end in sight to soft pricing. I believe April 29 is when they meet to vote on FFH purchase. www.thezenith.com/investors/investorinfo/press/page36126.html

Smazz, I currently hold a sizable chunk of FFH for similar reasons. FFH is like a hedge fund. Why would I think that I am able to earn a better return than Prem and his team? With the stock once again trading at about BV this has historically proven a decent time to invest with Prem and Co. The moves they have been making the past 5 or 6 years have simply been outstanding. One area I was hoping they would get better at was underwriting... the purchase of Zenith (outstanding underwriters) should improve their skill set in this area moving forward. They really are positioned to do well in so many different areas. And the best part is we know they will continue to pull rabbits out of the hat in the coming year and year(s)... It has been fun to watch them perform their magic. But I do believe their best is yet to come.

Regarding insurers, I believe many will prove to be good to very good long term holds (at current pricing levels). However, before valuations take off the industry likely needs an event to move from a soft to a hard market. When this happens expect a great amount of volatility. For most insurers underwriting is deteriorating (as business is shrinking and the expense ratio is increasing). Interest and dividend income is low. Realized/unrealized gains will be minimal. Reserve releases will be slowing. But most are overcapitalized. We need something to happen to soak up a bunch of that capital (like an above average catastrophe season). The event will likely result in a drop in prices of insurers setting up a one in 10 year buy opportunity. Absent an event we likely will get chinese torture... a 12 to 24 month process of slowly declining results with the stocks going no where.

I was reading RBC's most recent report on non-life insurers. Interesting because there was a lot of discussion around Q1 catastrophies, CR's and reserve releases and impact on Q1 results. Very little discussion on investment results and potential impact on BV. (Although I have found RBC has been presenting some pretty fair commentary on FFH lately). As per usual we will find out what's what when they release Q1 results next week (with a little more colour perhaps at the AGM). ;D

I spent a couple of hours to build a summary of FFH's Canadian Equity holdings (rough approximation of 13F available for US equity holdings). And yes, this may be quite inaccurate. I started with p12 of 2009 AR where Prem provides year end values for H&R, CWB, Mullen & GMP. I then went through past news releases which provided details for BRK.UN, IFP, JAZ, RCL, SFK & TS. I did not include Mega Blocks given that transaction happened in Q1. Here are the numbers: Dec 31 March 31 Change Canada $983,000 $1,081,000 $98,000 10% US $3,678,000 $4,074,000 $396,000 10% So far in April the Canadian portfolio is up another $119 and the US is up $250 million. Weave it all together and we get very rough gains on equities of $494 (to March 31) and $863 to April 21. Add in gains in international equities and corporate bonds and we should be safely over $1 billion. Take out 30% hedge and taxes and perhaps the increase in BV = $30/share??? In reviewing the AR what jumped out at me was the size of the write offs that FFH has taken on their many, many holdings the past two years. As risk markets continue to stabilize we may start to see some write ups which would then likely make my estimate above much too low. My purpose in pulling this together is not too try and peg the exact number but rather to try and get a general directional estimate of what is going on with the FFH investment portfolio and the possible impact on book value.

The Bank of Canada today in its statement has indicated that rates will likely be going up with the first increase in June (from 0.25% to ???). The past few years, the housing market in Canada had followed a similar path to that in the US (up lots and then down fast). But then last year the US market kept going down and the Canadian market (as rates went crazy low) went crazy again. Today house prices in Canada are back at peak levels. The government of Canada 5 year bond today is at 3.21% (up 14 basis points); a couple of weeks ago this same bond was at the 2.5% level. Most banks have taken their 5 year fixed rate up 100 basis points in the past few weeks (from about 3.6% to 4.6%). More importantly, todays announcement from the bank of Canada likely means that we have seen the bottom in mortgage rates and rates will be moving higher. Inflation today is slightly over their target level... should inflation actually go higher the bond market (and mortgage rates) may get ugly. Given how insanely high real estate prices are once again, given that personal incomes are not increasing, given the new (more stringent) mortgage rules for first time buyers, given the number of new listings currently hitting the market and now given the high likelihood of still higher mortgage rates it looks to me that the bull market in Canadian real estate is now running on borrowed time. My previous outlook was for prices to go sideways for an extended period. With interest rates increasing materially only a price correction makes any sense to me now (but not starting until August as the 120 day preapprovals will likely keep things frothy in the short term). It does boggle my mind at the amount of debt home buyers are taking on in the Greater Vancouver area today. Materially rising interest rates are a game changer...

Buffett's number one rule is don't lose what you got. I find giving other people suggestions a VERY tricky thing. What everyone should have learned from the past 18 months is higher return strategies carry higher risk (even US treasuries). I only give (a small number of) people ideas that I consider very fat pitches. Right now there are not alot of very fat pitches so I would suggest leaving the $ earning 1.5% and wait for things to get ugly again (which they likely will in the next 6 to 12 months).

Grenville, I am expecting ORH to report some losses regarding Chile and Europe Windstorms (impacting most reinsurers). C&F will likely post ugly underwriting results given past quarters and continuing soft market in US P&C. NB will likely also post poor results, driven by soft pricing and FOREX (although it looks to me that pricing in Canada P&C may be firming). Zenith also will likely post poor underwriting results (although FFH does not own them yet this is now relevant). We have a classic catch 22 situation. The industry has too much capital chasing too few premiums. What they need is a really ugly year on the loss side to soak up some capital. I also think that William Berkley is a smart guy and he feels insurers have been under-reserving and also aggressively using prior year development to report a low CR. I will be watching results to see if large reserve releases continue. With interest rates so low ( = low interest & dividend income) and the conservative nature of most investment portfolios (= limited investment gains) when CR's move above 100 many P&C companies will see their earnings plummet. This is when we will find out who has been swimming naked. We should know what is going on by the end of the year (especially if we have an above average hurricane season).

While this is not an exact science, below is from p83 of 2009 AR. Hedge was set when S&P was at 1,062 and today it was at 1,210 = 14% increase. Of interest FFH US portfolio is up 18% (from Dec 31 to today). -------------------------------------------------------------------- The table that follows summarizes the potential impact of a 10% change in the company’s year-end holdings of equity and equity-related investments (including equity hedges where appropriate) on the company’s other comprehensive income and net earnings for the year ended December 31, 2009. Based on an analysis of the 15-year return on various equity indices and the company’s knowledge of global equity markets, a 10% variation is considered reasonably possible. Certain shortcomings are inherent in the method of analysis presented, as the analysis is based on the assumptions that the equity and equity-related holdings had increased/decreased by 10% with all other variables held constant and that all the company’s equity and equity-related holdings move according to a one-to-one correlation with global equity markets. Change in global equity markets/Effect on other comprehensive income/Effect on net earnings 10% increase 333.1 (89.5) 10% decrease (333.1) 93.5 Generally, a 10% decline in global equity markets would decrease the value of the company’s equity and equityrelated holdings resulting in decreases, in the company’s other comprehensive income as the majority of the company’s equity inv stment holdings are classified as available for sale. Conversely, a 10% increase in global equity markets would generally increase the value of the company’s equity investment holdings resulting in increases in the company’s other comprehensive income. For the year ended December 31, 2009, approximately 30% of the effect of changes in global equity markets on other comprehensive income would have been offset by the effect on net earnings resulting from the company’s equity hedges effected through short positions in equity index total return swaps and equity total return swaps.

I looks to me that FFH is (once again) getting to look like a pretty fat pitch. Jim Rogers said the way you make money is when you see a $20 bill lying on the ground you pick it up. Since January, FFH's US stock holdings are up about $650 million. Add in gains from Canadian holdings and corporate bonds (US and Canadian) and my guess is the number is likely in the $800 million range = $40 per share pre-tax. Yes, they have hedged 30% of equities and there is a cost and we do not know what they have done in the past 4 months. My view is at current levels FFH is a great way to play the current bull market in risk assets. Should corporate Q1 earnings surprise to the upside (as Intel did today) there is more room to the upside. I also just read Stanley Zachs (Zenith) letter to shareholders in 2009 Annual report. This company appears to be a gem and will drive solid earnings growth for FFH in the future. I expect underwriting to disappoint (for most insurers); however, interest & dividend income will be very good and realized & unrealized gains will be very good (much better than competitors). FFH looks to me to be a pretty compelling value trading today at book value (in US & CAN $). And in the past, when the stars have aligned (as they look to be doing right now), this has also been a very profitable time to buy.

Anyone buying Shoppers (SC-TSE) given the recent sell off? For those not aware, Ontario (largest province in Canada slashed prices pharmacies can earn on generic drugs). About 1/2 of Shoppers profits are driven by its pharmacies (the other 1/2 by retail operations). It is trading at $38.25 (down from $43). RBC is estimating it will earn $2.94 this year and $2.95 next year = PE = 13 (after taking account of drop) Going into 2012 it should then resume its growth. It certainly is in the right space. This environment may also allow them to pick up other pharmacies in Ontario at very attractive prices. The key risk is if other provinces follow Ontario's lead and slash prices paid for generic drugs (further hurting earnings). Looks to me that Mr. Market is expecting the worst already. And you get a decent dividend while you wait for profitability to reset. Others thoughts?

Most people get anchored by what has happened in the previous one/three/five/ten year trend. They then extrapolate. Buying treasuries yielding 14% was, at the time, a contrarian position. I remember in University in the early 90's being taught that the US model was broken and in decline and that the Japanese model was the new paradigm. While I love to think about the macro environment and am certainly influenced by it (perhaps too much) I try to keep Buffett/Lynch in my brain... buy well run companies trading at a deep discount to their intrinsic value and hold for the long term. Right now I still think insurnace/re-insurance offers the best value (as a sector) compared to anything else I am comfortable with...

Relatively easy decison for me... I would chose cash. No other asset class gives me the margin of safety I need right now. I would be happy to sit in cash and wait for some asset class to melt down and then I would get greedy.

Burry made one of the great trades in recent memory. I believe that it is possible to spot bubbles with a fair bit of accuracy. However, my view is it is impossible to predict when they will burst (on a consistent basis). I identifed the tech bubble in 1996 and this view was not validated until 2000. I also saw the bubble in the general markets in the late 90's and in 2006-2008. My guess is Vancouver real estate is a bubble. I also think interest rates on government debt looks to be pretty bubblicious. To me the real question is should the government be in the game of deflating bubbles? Very tricky. As a small investor, I continue to agree with Peter Lynch that we have many built in advantages to large institutional investors. If we see a bubble and wish to withdraw and protect our capital we can. That is one very important lesson I learned in 2000 (I owned no teck stocks then). I then re-applied this lesson with a little leverage in 2008 (by being out of the market in general and owning FFH who would benefit if markets imploded).

With this sort of speculative purchase Prem and co must have been buying management. Since their purchase the company has morphed from a natural gas play to now more of an oil play. Hard to understand how you now value the company and come up with a margin of safety type analysis. Or perhaps the purchase was simply a hedge.

Dazel, I agree. FFH has taken some massive write-downs the past two years on many of its highly speculative positions. As the economy stabilizes and risk markets improve and companies are able to repiar their balance sheets and stabilize their business there exists the opportunity for some very nice gains to be reported.

omagh, I agree that FFH may use excess cash to make more aquisitions. There is a chance that over the next quarter the economic data from the US could suprise to the upside and risk assets could continue to rally and as a result FFH may decide to monetize some of those massive gains. What to do with the excess? I think it is more likely they will purchase their own shares (below book, lets say at 90%) than make a large external aquisition at 1.3xBV. I do not expect them to buy back 25% of outstanding shares... but I could see a repurchase in the order of 5 to 10% should the stars align. Many insurers / reinsurers are currently buying back lots of shares and most are trading at more than 0.9xBV (not that that says alot)... As per usual, just a guess...

Nnejad, my estimate is simply a starting point to get the discussion going. The only number I am clear on is the interest and dividend number. Yes, realized and unrealized gains have the potential to be much higher than my number. I also view underwriting income as a risk. Put it all together and I would not be surprised to actual results reported by FFH tobe higher. I am hoping that were people have better visibility (i.e. Brick) they let us know and help sketch a more complete picture. Thanks for sharing!

Here is my edited post from Dec 15th (stock value update is attached). Q1 increase in BV = $15/share; take out $10 dividend and March 31 BV = $375/share. Analysts are expecting earnings of $6.00 (last year was -$3.55) so ‘optics’ should be good (i.e. they should be able to beat). I expect FFH to have realized some of their equity gains. In the near term the key catalyst for a pop in the share price would be if FFH aggressively buys back shares (not likely until after the Zenith purchase). The risks to the down side include the insurance soft market getting worse or a sell off in risk assets. For 2010 I think it reasonable to assume FFH will increase BV by $20/share ($30 including Q1 dividend) with Dec 31 ’10 BV = $390. With shares trading today at US$373.24 the company is cheap but not crazy cheap. Here is my very rough calculation of what FFH should earn in Q1: 1.) Underwriting income (CR = 102) = - $25 mill 2.) Int / Div Income (Q4 $172.4) = $175 Operating Income = $150 3.) Net Gains on Invest = $350 (incl unrealized gains) 4.) Interest Exp = $50 5.) Corporate Overhead = $25 Pre Tax Income = $425 6.) Inc Taxes (28%) = $305 Increase in Bv = $306 = $15/share Q4 BV = $369.80 BV Growth = 4% Assumptions - CR = 102. Soft market continues; Q1 saw significant cat activity. - stocks were up $400 million in Q1 (this is 30% hedged); hard to know what was sold. I expect muni bonds to have been flat and corporates and alternative stuff to be up. - insurance hard market? Looks like it will not be happening soon (still to much capacity). When this happens this could really juice FFH BV growth. - Q2 will see the close on the Zenith acquisition which will help grow the top line going forward. - one catalyst for FFH continues to be possibility of share buybacks. FFH has been quite predictable so far in what they are doing with their excess cash (bought NB, ORH & ZNT). I think the next big move will be share buybacks, assuming earnings stay reasonably strong and shares trade at or below book value. The only question is when do they start?

I do enjoy reading stuff and thinking about inflation/deflation... Currently, nothing jumps out at me. My best guess is we see deflation in the short term perhaps followed by some inflation 4 or 5 years out. Something I am thinking a little more about these days than inflation/deflation is how expensive the current market averages are versus historical averages. I believe that consensus opinion is markets are expensive and a sell off is long overdue. This leads me to believe that the market will likely continue higher in the near term... As a result of all this, I am happy to try and continue to find well run companies trading at fair to cheap valuations. There look to me to be quite a few profitable, well run companies with solid long term prospects trading at a PE of 15 or less with a decent dividend yield. Perhaps these companies will not be home runs; however they likely will be solid singles (deliver returns of 8 to 10% per year).

I have initiated a small position in Shaw (SJR-NYSE / SJR.B-TSE). The shares are trading (CAN $ details) at just over $20.00 - current dividend is $0.88/yr = 4.4% (payout ratio = 67%) - F2009 earnings = $1.19; P/E = 16.8 - F2010 earnings forecast = $1.45; P/E = 13.8 Shares have sold off recently due to Shaw's likely start up of wireless business at end of 2010 and the uncertainly around how much they will chose to spend. Reading through the quarterly report etc and it certainly appears that Shaw is a well run business. Management also looks to be very shareholder friendly with earnings (high dividend yield and share repurchases). similar to FFH, the shaw family has clear voting control. Their current businesses are performing exceptionally well and they have a very good historical return on equity. I believe Shaw management is calling for earnings to grow by 11% this year. Their main competitor out West is Telus; my personal experience is Telus' customer service is a train wreck. In cable/internet, Shaw also appears to have the much better technology. Bottom line, this stock looks to be a solid bet to deliver me 8 to 10% per year (between dividend and price appreciation). As I have said before I am looking to find a basket of these types of opportunities to hold in place of a portfolio of bonds... Anyone else have an opinion on Shaw?

I am in the process of wading back into the Greater Vancouver real estate bubble. fortunately, I will be looking to buy in Langley where prices are a little cheaper... Currently, in Canada one can get a 5 year fixed mortgage for 3.79%. Let's say a house costs $700,000 and a family has a $100,000 down payment. Amortized over 30 years and your monthly payment is $2,782 = $33,384/year (interest is about $22,740/year). This is not onerous. This is extermely cheap. And this is clearly what is feeding the bubble in Canada. Until 2 to 5 year rates increase significantly (to 5 to 7 %) the market in Canada will likely continue on its merry way. Further, holding debt as a part of your assets (say 30%) is not a bad decision if one is looking for an inflation hedge. 5 years at 3.79%? My belief is that housing prices in Greater Vancouver are in bubble territory. I also think the most likely outcome is they will stay high the next few years as interest rates stay low... One can be right on a trade. Getting the timing right is the hard part...

The lesson that jumped out at me (personally) the most was: 9.You must buy on the way down. There is far more volume on the way down than on the way back up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy. My experience the past 15 years (since current management took over to coin a phrase I love) I have been quite good at this 'lesson'. However, I need to continue to get better at the hold part of the equation (not that I am complaining too loudly).

I think the FFH could have written many of the lessons. However, there are a couple that appear at odds with FFH (and even Buffett): Lesson 16.Financial stocks are particularly risky. Banking, in particular, is a highly leveraged, extremely competitive, and challenging business. A major European bank recently announced the goal of achieving a 20% return on equity (ROE) within several years. Unfortunately, ROE is highly dependent on absolute yields, yield spreads, maintaining adequate loan loss reserves, and the amount of leverage used. What is the bank's management to do if it cannot readily get to 20%? Leverage up? Hold riskier assets? Ignore the risk of loss? In some ways, for a major financial institution even to have a ROE goal is to court disaster. False Lesson 7.In a crisis, stocks of financial companies are great investments, because the tide is bound to turn. Massive losses on bad loans and soured investments are irrelevant to value; improving trends and future prospects are what matter, regardless of whether profits will have to be used to cover loan losses and equity shortfalls for years to come. I think this is exactly the logic Buffett has used to explain his support for Wells Fargo... future earnings will cover current losses...???