Viking
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What is everyone thinking about insurance companies in general?
1.) It appears we are in a soft pricing environment and it could remain this way for a couple of years
2.) Most well respected insurers are shrinking their business; underwriting results will likely continue to deteriorate (as CR's increase)
3.) Interest & Dividend income likely has peaked (as interest rates are low and stocks are now more fully valued)
4.) Investment gains have likely peaked (as stocks and bonds look to be fully valued)
The big picture is not good. Having said all that, insurers and re-insurers are trading at historically low metrics (i.e. price to book).
Here is my take on three that we all follow quite closely:
BRK: solid returns to be expected going forward.
FFH: higher risk but also much higher return potential; still needs to re-establish track record and investor trust.
MKL: somewhere in between the other two. Better future returns than BRK but less than FFH; management more trusted than FFH.
Does this mean that insurance companies are cheap, offer a good margin of safety at current prices, and should be purchased by conservative investors (and held for the long term)? Especially if a couple are purchased? Near term risks are pretty clear (large catastrophe hits, market softens further etc). I am having a problem seeing any near term catalysts (other than consolidation or share re-purchases)?
What do people think? time to get aggressive? Or are they not as cheap as they appear?
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While I trust that BRK purchase of Burlington will, with time, prove to be a wise decision, I do find a few parallels between this and the Kraft deal - primarily, using what appears to be undervalued stock to make an aquisition. Has anyone come across Buffett's answer to this question (given that he was so critical about the Kraft purchase for this reason)?
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Great minds must think alike. I did re-establish a position in FFH a few minutes ago (8%).
Insurers are trading at low multiples to book as everyone is expecting underwriting in 2010 to be challenging and interest & div income to be flat at best = poor operating earnings (compared to PY). Most analysts do not look at investment gains, although it appears to me the easy money has been made.
FFH at current price is cheap (about 0.9xBV) but not crazy cheap. As well, given all the activity in Q4 (ORH closing etc) it really is quite difficult to peg BV.
FFH was trading as low as US$210 last year. Since that time it added $105 in shareholders equity (incl my estimate for Q4). That gives me a price of US$315, which is not much below $336 (where it was trading today). Just another way of looking at valuation and margin of safety.
Should it continue to fall in price then I will be happy to continue to add. It will be interesting to see what changes they have made to the portfolio when they report Q4 results. Should markets continue to go sideways I expect FFH to do OK. Should markets continue higher and risk spreads continue to narrow then FFH will do quite well. Should markets sell off and risk spreads widen FFH will not do so well (BV will decline) but I am sitting in so much cash this will not be so bad.
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Al, I got the numbers from going to the company's investor site. Go to page 13 for a summary of FFH most recent purchases. Open the most recent filing (Jan 29 SC13D).
http://www.thezenith.com/investors/investorinfo/sec/page36124.html
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Looks like FFH added 1.2 million shares in Dec (at $30) and just under 1 million in Jan (at $29.70). This is in addition to the 991,000 they held at the end of Q3 (up from 554,000 at end of Q2).
Results reported today looked pretty ugly (underwriting loss and falling dividend and interest income). Outlook for future is bleak (business will continue to shrink and underwriting will likely remain over 100 until economy improves which is going to be when???).
Shareholder equity = $28.25/share.
Shares (ZNT) closed today at $27.90 Let's see what Mr. Market thinks about results on Monday...
For those who have not followed FFH for long, FFH owned a significant portion of ZNT a few years back and sold much of that stake for a nice gain when they needed cash. FFH understands this company very well and perhaps this is simply another situation where they are re-establishing postions in stuff they had to sell in the 7 lean years...??? Anyone have an update on HUB???
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Today my guess is Buffett has definite views on the US$, inflation (macro stuff) etc when making investments; not this year or next year but 5 or 10 years out. His rationale for the Burlington purchase was 'an all in wager on the future of the US economy'. Sounds like a macro call to me.
I enjoy reading Gross, Lacy Hunt, Grantham etc. These are bright people who think long and hard about this stuff.
I also am not of the opinion that buy and hold is a great investment strategy (although it certainly is better today than it was in 2000, especially if you are a US investor). I am happy to buy stuff that others hate (or dislike... I relaxed my standards a little later last year and bought US large caps KFT, JNJ, WMT & BRK-B). And I will likely sell on strength and look to repeat as I expect we will have a very choppy sideways market until we get further clarity on the economic situation (back into recession or slow recovery).
And just to state the obvious, my forecast is likely to be just as dumb as the next guys...
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A likely lesson here is Buffett feels re-insurers are very cheap................... ????
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A question to make value investors shudder, is anyone aware of any studies that talks about the short term effect to a stock's price of being added to the S&P? I notice an 8.5% pop in BRK-B after hours (although after hours quotes are notoriously volatile)...
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Specific to FFH, I estimated in a previous post that Dec 31 BV = $378. Current BV = $368 ($10 div). Current price = US $348; P/BV = $348/368 = 0.95
http://cornerofberkshireandfairfax.ca/forum/index.php?topic=1605.0
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Uccmal, currently most insurance/reinsurance stocks are trading at very low multiples. Why?
1.) we are still in a soft pricing environment; with the rebound in risk assets insurers/reinsurers balance sheets have rebounded and there is lots of excess capacity. No catastrophes in 2009 (large payouts) also allowed everyone to post great underwriting results adding further to profitability.
2.) underwriting is expected to be challenging at best in 2010; there is a perception that many insurers dipped into reserves heavily the past few years to juice underwriting results and that this cannot continue in coming years.
3.) with interest rates at historic lows, interest & dividend income for the group will be flat
4.) with the recent run up in risk assets, and given that they are reflected in BV, it is prudent to assume that BV has more downside than upside in the near term (look at what happened to FFH and the rest of the industry in Q1 '09 when the markets sold off).
When you weave it all together, what is the catalyst in the insurance/reinsurance sector to drive investor interest?
Having said all that, insurance/reinsurance is becoming a sector that people do not like. I have built a core position in BRK-B. Should FFH continue to sell off I will be happy to own at under 0.9xBV.
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BRK appears to be priced at an attractive level today to deliver reasonable returns going forward. I am trying to decifer if it is cheap or VERY cheap. I have ready the standard reports and also done a fair bit of searching on the internet to get as much input as possible. My thinking is (as Buffett said): better to purchase a great company at a reasonable price than a reasonably run company at a great price.
Peter Lynch has a great line about how doctors love to invest in commodity plays and those working in the commodity sector love to invest in health care. I have a small position in BRK (5%). I am trying to decide if I should move this to 7.5% or perhaps even 10%. Given that this is a BRK website, I was wondering if others have an opinion regarding the investment merits of BRK. Or has anyone come across an analysis or web site that they can link me to? Thanks.
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Value 2, do not worry about your english... we all have thick skin. I appreciate the opportunity to explain what I am doing.
Here is the simple answer why I hold 82% cash.
1.) I do not feel compelled to be 'fully invested' (i.e. to be holding something). The investment industry does a great job saying one should put their 'money to work' and that earnings 1% will not fullfill ones retirement objectives. My current investment advisor has been trying to get me to buy anything with the belief that holding such a large amount of cash is almost sinful.
2.) I will only put my money in something new if the margin of safety is very large. And I have to understand the investment reasonably well.
3.) Rightly or wrongly I also have a macro view that happy times are NOT back. FFH hedging 25% of its equity portfolio is interesting to me.
Wrapping the three together, keeping what I have is job #1.
Right now I do not see a bear market in any asset class or valuations in any specific security that I understand to get me excited. So I will wait.
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My current portfolio is 82% cash and 18% US large cap (BRK, JNJ, KFT & WMT) bought a couple of months ago. I am looking for these holdings to give me 6 to 10% per year on average (i.e. not expecting much).
The one stock I am thinking about increasing my position in is BRK (again, as a stallwart, holding it in place of a bond) with the goal of getting 6-10% per year.
Should the CAN$ continue to strengthen I will likely buy more BRK.
Currently, I do not see much that is priced today that gives me the margin of safety that I want. The past has taught me to be patient... at some point we will have another bear market in either a sector I like or in the market overall. As Buffett says the beauty with investing is you get more than 3 strikes. The trick is having the discipline to wait for your perfect pitch...
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It appears to me that Buffett and Watsa now apear to be singing off the same song sheet...
1.) inflation not a large short term concern
2.) US debt not a large short term concern (citing the Japan experience)!
3.) stock markets are not overvalued (notice he did not say they were cheap).
Nice to see some clarity!
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Here is a nice short summary regarding the current bid for Cadbury etc: http://finance.yahoo.com/banking-budgeting/article/108396/as-cadbury-chances-fade-kraft-looking-tasty
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For those who are wondering how the FFH stock portfolio is doing (as reported in 13F), here is an updated spreadsheet. As of today (Dec 16) it is down $16 million or 0.4% (basically flat).
Does anyone know when the Burlington Northern deal will close? Proceeds for FFH will be $200 million (5% of their equity holdings) and the gain will be reported as net income.
Does anyone have an opinion of what has happened to muni and corp bond yields in the last quarter?
I expect that interest and dividend income will increase again due to the bonds purchased in Q4.
In Q3, by hedging 25% of the equity portfolio and also selling some positions (i.e. Alcoa, BCE) FFH has been getting much more conservative. It will be interesting to see what they were doing in Q4 and if this trend of being a net seller of equities continues.
These moves certainly give investors some insight into how FFH views financial markets (valuations and near term prospects).
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8 months ago they would have been out of luck trying to raise any equity. My guess is they are doing what they are doing because the market is receptive. And $25 looks OK. What if the US goes into recession again next year... the banks will again be under pressure. I also wonder about Buffetts comments regarding the health of Wells Fargo and their earnings power. If things were so rosy, even after the gov't made reporting losses less painful, why do they need to raise so much money?
FFH issued debt and sold stock because the rates were attractive, especially given the current environment. You get this stuff when the market is willing not when you need it.
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I just started to review this very thing yesterday. I have edited what I posted a few months back... looks to me that not much has changed. In the near term the key catalyst for a pop in the share price would be if FFH aggressively buys back shares. The risks to the down side include the insurance soft market getting worse or a sell off in risk assets. With shares at $346 the company is cheap but not crazy cheap (given the risks).
Looking out 12 months I think it reasonable to assume FFH will earn $24/share, driven mostly by interest & div income (I am assuming underwriting and investment gains will be a small positive). And yes, I am trying to be conservative. This implies a 6.3% growth in BV.
Here is my very rough calculation of what FFH should earn going forward. Please correct me as you see fit. This is also an annual estimate and quarterly results will vary dramatically.
1.) Underwriting income (CR = 100) = $0 mill
2.) Int / Div Income (Q2 $184.5x4) = $740
Operating Income = $740
3.) Net Gains on Invest (see below) = $960
4.) Interest Exp ($152 + 30 new debt + 14 pref) = $200
5.) Corporate Overhead = $100
Pre Tax Income = $1,400
6.) Inc Taxes (28%) = $392
Net Earnings = $1,008 = $49/share
Q3 BV = $372
BV Growth = $49 = 13.2%
Where this gets a little more interesting is when you overlay what many have talked about previously.
- I am assuming CR = 100. Given the soft market, this is likely not conservative enough for the next 12 to 24 months.
- 9% return on investments may be a little too aggressive looking out 12 to 24 months given how much risky assets have appreciated (stocks, corp & muni bonds). However, given the market (lots of volatility) is in Hamblin Watsa's sweet spot as they tend to trade and not simply buy and hold. The hedges put in place will also cost some $ if the market goes sideways for a while.
- I also expect that will all subs under one umbrella there will be some restructuring that will improve results to the bottom line (over time).
- insurance hard market? Looks like it will not be happening soon (to much capacity). When this happens this could really juice FFH BV growth.
- and lastly... what rabbits will Prem and team pull out of their hats next (they are there!)?
- one catalyst for FFH will be share buybacks. FFH has been quite predictable so far in what they are doing with their excess cash (bought NB & ORH). I think the next big move will be share buybacks, assuming earnings stay reasonably strong and shares continue to trend down. The only question is when do they start?
- The dividend announcement will be out in early Jan and I expect $10 to $12/share (up from $8); this may result in a short term pop in the share price.
- I expect the delist from NYSE will reduce demand for FFH and this will have a near term negative impact on FFH price. Not a bad thing for FFH if you are sitting on a bunch of cash and you are wanting to reduce your shares outstanding in a meaningful way.
- for Q4 I expect a CR = 100; solid int & div income and flat investment gains/losses = about $6/share
- note, FFH may realize some gains so earnings per share may be higher (offsetting comprehensive income); I am expecting BV to grow about $6.00/share.
- weave it all together... Q4 BV = Q3 BV $372 + $6 (my est for Q4) = $378
- cost today $346 for 14% grower with nice long term upside potential... pretty good buy.
- and, yes, fasten your seat belts; as we learned in Q1, the ride will not be for the faint hearted!
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Net Gains on Investment
- total portfolio investments = $18,887 (p9 of Q2) = $924/share
- 10 yr avg return = 9% x $18,887 = $1,770
- Net Gains = I/Div Income $740 - $1,700 = $960
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How do people feel about Kraft Foods?
Current Price = $26.65
2009 Earnings Est = $1.97 (perhaps will come in a little higher)
PE = 13.5
Div = $1.16 = 4.4%
EPS Growth Target (mgmt) = 7-9%
Berkshire owns 10% of KFT, purchased largely in Feb 08 at about $29 to $30 / share.
FFH owns KFT, purchased early in 09 at about $27/share.
- Altria sold their 80% stake in early 2008.
- Kraft is ATTEMPTING to transition into more of an entrepreneurial company, able to grow its top and bottom line more in line with other top tier packaged goods companies.
- They have just completed a three year restructuring where they spent heavily to exit unprofitable businesses, close facilities and reduce workforce size.
- They are currently bidding to purchase Cadbury, which is currently hurting their share price (on concerns they will overpay).
I view Kraft as a possible good core long term holding (instead of holding a bond). Cheap, reasonably stable business, good dividend yield. They should be able to earn $2.00 plus per year going forward. Given his 10% stake, Buffet appears to be exerting some influence regarding strategic direction and financial metrics. The kicker is if the tournaround actually works we get both higher earnings and a higher PE multiple.
The wild card is the Cadbury situation. Fortunately, Buffett has made his thoughts know (i.e. do not overpay).
Being a Canadian investor, with the CAN$ at $0.94, I am generally neutral on the exchange rate.
KFT currently holds a 5% weighting in my portfolio and I am trying to decide if I should move it to 10% (other stallwarts I currently hold include JNJ, BRK & WMT).
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Interesting topic as I have been thinking about what has happened in the markets and the decisions that I made.
Bottom line is I am not sure, yet, what the lessons are. I think we are still in the middle of this thing with more surprises to come.
here are a few thoughts:
1.) Don't lose what you got. I have been very skittish the past couple of years, holding large amounts of cash and this paid off in that I experienced very little down side.
2.) Be greedy when others are fearful. I was greedy, but not nearly greedy enough (this is perhaps the greatest lesson I will take away from recent history)
3.) Patience. Wait for the right opportunity in your circle of competence... it will happen. Also, with overall valuations so much lower I may become more of a buy and hold investor and less of a trader :-)
4.) Keep learning. I have been slow to add a few new tricks to my bag (i.e. leaps) and this has cost me a couple of points of return.
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If you are Canadian, Canadian Moneysaver has had some very informative insurance articles over the years. Buy an on-line subscription and do a search... [ftp=ftp://http://www.canadianmoneysaver.ca/]http://www.canadianmoneysaver.ca/[/ftp]
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I would be surprised if the dividend does not increase from last year. I believe Prem has stated on numerous occasions that the dividend payout will be tied to results and the results this year should be stellar again. Having said that, given that FFH pays it in one shot, my read is this will attract short term buyers looking to get the one time payment.
It is difficult to use NB as the model that should lead to higher FFH valuation. NB underwriting has been quite ugly (in aggregate) the past few years. This demonstrates to me the variability that is possible in even the most conservatively managed insurer. Until the hard market arrives, I do not expect insurer multiples to improve in a meaningful way.
I have not read a great deal lately, but it looks to me that we need something big and ugly to happen to insurers to bring on the hard market. Like a big catastrophe or for global financial markets to sieze up. Not something you would want to bet the farm on right now.
Near term regarding FFH, I wonder if the delisting in the US will have more of an impact on the share price than underwriting, interest & dividend income or realized investment gains. Hard to make a meaningful investment with so much noise going on.
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I have not yet completely wrapped my head around this one. Bottom line is FFH may no longer need to tap US investors for $ (i.e. US listing was ALL about being able to raise $ to repair the balance sheet and more recently to buy back the subs).
If FFH continues to post strong results my guess is they will begin to aggressively re-purchase FFH shares. Perhaps getting all the trading on one exchange makes this future move easier?
All things being equal, I see this move as lowering demand for FFH shares (US investors) = lower price. I wonder if FFH will be viewed as a true blue chip in the coming years. Their business WILL NOT BE PREDICTABLE in a way that analysts like. Regarding future trading patterns, I also wonder if this move will change things.
If the stock moves to below .9 of current BV (it is getting close) I will likely start nibbling. Underwriting will be poor; interest and dividend income will be very good and investment returns will be a crap shoot. The only near term catalyst I see is FFH buying back stock and this will only happen if the price drops (likely well below the $345US they just issued equity at). I do agree that in 5 years the stock will be significantly higher and it is for this reason I would like to get a core position re-established.
Anyone Buying Toyota Stock?
in General Discussion
Posted
To ask a question a few on this board have likely thought about... Is anyone purchasing Toyota stock at current prices? Since their brake problem came to light, the stock has fallen from $92 to $73 = 21% decline. My read is I don't have enough information yet so to purchase right now would be more of a speculation that an investment (and the stock is not cheap enough to get me interested ihn speculating. My guess is they will get through this and the company and stock will bounce back. Not exactly like the salad oil scandal and AMEX. Anyone working in the industry with any thoughts?
http://stocks.investopedia.com/stock-analysis/2010/Toyotas-Recall-Isnt-A-Company-Killer-TM-F-DAI-HMC-FIATY0203.aspx?partner=YahooSA