Viking
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I also decided today to sell all my ORH shares. The price was $62.50 and being Canadian was not liking continued large exposure to the US$. I also had 50% of my net worth in ORH (before Q2 results) and will sleep better tonight. Fortunately all shares held were in non taxable accounts (RRSP, RESP & TFSA) so I do not have any tax consequences.
Having sold my FFH shares a few weeks ago, I am now back to 100% cash.
Just like others have metioned, time to find another fat pitch... Which probably means wait for the markets to sell off and put it back into FFH at 0.9xBV...
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FFH has invested an enormous amount of energy to set the table to take ORH private. If the independent committee recommends a higher offer and FFH says no they lose their ability to take back ORH.
What happens? As has been posted, BV for ORH today is about $52 + $3 = $55. Add in ICICI Lombard and it is closer to $56 or even $57. Valuations for insurance companies will likely increase the end of October as we get through slow (so far) hurricane season. A hard market in insurance is coming at some point in the next year and ORH is ideally positioned to materially grow their business. Early next year there is a very good chance that BV of ORH will be over $60 and re-insurers/insurers will trade at a multiple above book (perhaps 1.1x). Bottom line, early next year ORH will likely trade higher than $60.
If FFH walks today how do they come back to the table to do a deal in the future? And what do they do with all this $ they have raised? They will look silly if they do not get this thing done.
Having said all this I have no idea if their takeout price will be higher.
I will be very surprised if the indepedent board approves of the $60 offer.
Also relevant... NB was taken out in Canada. ORH is being taken out in the US. I think litigation risk in US also supports higher takout price than $60...
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Reminds me of Jim Rogers line about how to make money in investing (something like this): "when you see a $20 bill lying on the ground you pick it up".
This also has a very large element of luck... timing is pretty much impossible to get right even some of the time.
Ladies & gents, lady luck was also smiling our way on this one...
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If FFH was to say that they want to purchase ORH at a discount due to the fact that their 20% ROE was due primarily to HWIC then I would understand the low valuation. They are not saying this.
Based on the release they are saying that they are paying a fair price at $60 for ORH. Period.
I am not a securities lawyer. Perhaps parents are allowed to take out subs with low ball offers (and justify it in many different ways). I just hope that they put this in the prospectus when they spun off ORH in the IPO.
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Also, re-insureres typically trade at a lower valuation (price to book) during hurricane season than after. We are also in a soft market and this is also depressing valuations...
As mentioned, ICICI Lombard needs to be factored in as well as quarter to date gains.
What about all the surplus capital they are sitting on? How many of their peers have the balance sheet strength they currently have and are poised to grow like stink during the impending hard market?
Perhaps ORH should use up some of its surplus and give existing shareholders a one time distribution?
What would you pay for a company that has grown BV by 20% per year since 2001 and has a balance sheet and surplus position that is significantly better than any of its peers?
If FFH put is up for sale what multiple to BV do you think it would fetch?
Add it all together and I believe $60 is a steal.
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I am looking forward to the conversation I will be having with my new financial advisor who felt (strongly) that I was too overweight in ORH shares. It will be interesting to see what happens to FFH and ORH shares on Monday. I am surprised a little at the price that FFH has offered... $60 is a steal; if ORH was a stand alone company and put itself up to be aquired it would fetch a much higher multiple. I wonder how the market (and the few large institutional holders) will respond. It would not surprise me to see FFH offer a slightly higher amount (although I do not expect it).
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FFWatcher, I hold ORH because I think they are a good value and offer terrific upside:
1.) there is a good chance book value will grow better than 20% this year and 15% in coming years
2.) hard market in insurance will likely come in next 24 months
3.) should FFH continue to grow cash at hold co buying 30% of ORH they do not own becomes more likely (if ORH continues to trade around 0.9BV).
I would not own ORH to wait for FFH takeout.
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Pushing out the 2012 debt is also a smart thing to do if they are planning to buy back ORH...
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T-bone, nice post. I have a question regarding the following comment:
"2) I think FFH has a higher combined ratio than some competitors right now because of their expense ratio not their loss ratio. I believe that they are writing good business, they just have an organization that is sized to write more business. I think this is an asset and that when the market hardens, we will benefit both from lower loss ratios and lower expense ratios (because the expenses will be spread over more business) at the same time."
Regarding underwriting I simply would like to understand why it appears their numbers at NB & C&F are higher than one would expect given Prem's continuing statements regarding underwriting discipline. I get that written premiums are falling (this is similar to other companies). I still do not know why their combined ratio at these two subs is higher than their peer group. Possible reasons:
1.) peer companies are downsizing their cost structure aggressively keeping their expense ratio lower
2.) peer companies are releasing reserves from prior years to keep reported loss ratio lower
3.) NB & C&F are average underwriters
As with much in life we will only find out the answer with the passage of time. It would be nice if Prem would provide a little more clarity on this question in a future conference call.
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Sharper, I believe Mr. Market IS now valuing FFH and ORH at as higher multiple when you compare to their peer group (than it was in past years); and, yes, FFH is still trading below the top group (such as Markel). I also see both FFH and ORH getting more press in analyst reports regarding investment gains/losses (not just operating income).
The key issue right now with both FFH and ORH valuations is:
1.) insurnace/reinsurance stocks are in a multi-year soft market
2.) credit market has been unfreezing
3.) investment gains/losses in Q2 have markedly improved for most insurers
4.) hurricane season has been a non event (so far)
A number of insurers were on the ropes in March. The possible catalysts for a hard market (no access to capital, wosening of financial markets, catastrophes) have not happened.
My guess is FFH and ORH will continue to come back into favour over time and move up the insurance food chain and command a higher multiple.
One piece (not to beat a dead horse) that I do not understand is why the CR is above 100 at NB and C&F. I am having a hard time understanding that it is simply becasue they are holding on to their good people in anticipation of the hard market. Many other well run insurers have a CR well under 100 and their business is shrinking and they are unlikely to be firing people they need when the hard market comes. My amateur guess is the various companies reserve quite differently. FFH had little in the way of prior year reserve releases to assist CR this quarter. Other companies continue to post solid CR numbers and many continue to have large reserve releases.
Perhaps the answer is simply that other companies are dipping in to prior year reserves aggressively to hold up their CR and maintain their operating income numbers (given investment income is falling quite dramatically due to extremely low bond yields). Listening to the Q&A from the WR Berkley conference calls the past two quarters was interesting as old man WR has the perception that more than a few insurance companies are swimming naked (under-reserving) and once the tide goes out (an event happens or enough time goes by) the hard market will be here...
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Bottom line is both companies performed unbelievably well in Q2. And, yes, in terms of book value growth FFH outperformed ORH. As to which one prefers, each offers somewhat different strengths & weaknesses; with FFH trading at closer to BV and ORH at about 0.9xBV I would currently call it too close to call (meaning I will be quite happy to simply maintain my overweight positioning in ORH).
At current prices both remain quite cheap and investors will likely be rewarded over the near and long term. If the stock market continues to increase then BV will grow meaningfully in Q3 (and both will blow by analyst expectations).
After listening to many insurance company conference calls what has surprised me a little is how sentiment has changed regarding the outlook for a hard market. Last quarter there were some very optomistic comments regarding pricing firming as we got into Q4 2009. What I 'heard' this quarter was less optomism that reinsurance pricing is firming or that insurance pricing is firming. It appears that the soft market may last well into 2010. This poor outlook will likely impact analyst optomism regarding insurance stocks and the multiple they attach to BV.
I would not be surprised to see a pop in reinsurance (and perhaps insurance) stocks as we get through August and Sept if the hurricane season remains muted. But in terms of analysts and investors getting excited about a hard market in reinsurance/insurance stocks we may need to wait until 2010 (which will give people lots of time to build positions at reasonable prices in their favourite insurers).
With perception that the hard market not imminent we should see insurnace companies buying back shares (as the most efficient use of excess capital). ORH confirming this is what they have been doing was nice to see. Assuming ORH continues to buy back their own shares, perhaps all the way to 80%, and with earnings strong and capital plentiful at FFH I think it more likely that FFH will buy ORH back. If ORH buys back to 80% then FFH would have 10.5 million shares to repurchase. Lets assume they pay 1.2xQ4BV = 1.2x$55=$66x10.5=US$700 million. This should be very doable. I was disappointed that this opportunity was not asked about during the conference call.
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http://phx.corporate-ir.net/phoenix.zhtml?c=129394&p=irol-newsArticle&t=Regular&id=1314639&
Highlights for the second quarter of 2009:
- Shareholders’ equity of $3.14 billion as of June 30, 2009, an increase of $310.6 million, or 11.0%, compared to December 31, 2008, and a 15.7% increase compared to March 31, 2009;
- Book value per common share(2) of $51.90 as of June 30, 2009, an increase of $6.53, or 14.4%, compared to December 31, 2008, and an increase of $8.10, or 18.5%, compared to March 31, 2009;
- Total invested assets and cash of $8.1 billion as of June 30, 2009, an increase of $197.6 million, or 2.5%, compared to December 31, 2008; and
- During the second quarter of 2009, 1.2 million shares of the Company’s common stock were repurchased and retired at an aggregate cost of $47.5 million; 532,000 shares of the Company’s common stock were repurchased and retired from July 1 through July 29, 2009 at an aggregate cost of $21.6 million.
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I would think mergers would lead to firmer pricing and this would be a good thing for ORH. I also wonder what ORH will do with their excess capital should the reinsurance hard market not live up to expectations (and if they realize a sizable portion of the equity gains)... Perhaps this will be discussed during the Q2 conference call.
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Here is an article discussing investment gains and insurers: http://finance.yahoo.com/news/US-insurers-to-get-2ndquarter-rb-2775308674.html?x=0&.v=1
I do find in amazing what Hamblin Watsa has accomplished the past 9 months:
1.) sold CDS (realizing gains)
2.) sold equite hedges (realizing gains)
3.) sold Treasuries (realizing gains)
4.) bought municipals (tax free & insured by BRK)
5.) bought stocks
6.) bought corporate bonds
The best part is the investment community still does not understand the size of the gains coming (AGAIN). Analysts look only at operating earnings (underwriting and interest & dividend income) when building their earnings estimates.
Regarding the US equities (reported via 13F), we just passed the $1 billion mark in gains today!
March 31 $2.685
April 24 $3,142 $456 17%
June 30 $3,484 $798 30%
July 23 $3,724 $1,039 39%
I look forward to not only seeing what changes Hamblin Watsa has made to their investment portfolio in Q2. I also look forward to seeing what rabbits they pull out of their hat...
I remember an line from Jim Rogers about how to make money and he said "when you see a $20 bill lying on the ground you pick it up." Yes, FFH & ORH have traded higher in recent weeks (moving in tandem with the general market and other insurance stocks). I think I see (once again... just like last year and the year before and...) a $20 bill lying on the ground....
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jegenolf, no problem... that is why I share this stuff... for others to use and for all of us to debate.
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ORH = 55%
FFH = 12%
Cash = 33%
Regarding opportunities, I look forward to seeing what Hamblin Watsa has been doing in Q2 regarding asset allocation.
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"But for some reason (and perhaps someone could share their opinion) the Fed and Treasury have been protecting bondholder's claims at all costs."
John Hussman has been railing about this for some time... I read somewhere that we will not see hyperinflation because the bond market will not allow it. I also read that hyperinflation has not happened in an ecomony with a strong bond market (i.e. the article said Germany back in the 20's did not have an efficient mature market). I wonder if the bond market is not being treated with kid gloves because they really DO rule the roost.
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I also took a quick look at Advent and wondered why FFH would spend their scarce resources here instead of other places. The two things that stood out to me were:
1.) they already own 66%; they can now run it as they see fit
2.) re-insurance operations: this is the part of the insurance business where pricing appears to be improving first
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Should we see earnings per share in this range, growth in BV would be:
$50 / $255 = 19.6%; $75 / $255 = 29.4%.
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Mungerville, here is a little more detail:
Regarding bonds, my 'read' is muni yields came down quite aggressively to mid April and then a little more in May (most of the gains were likely in Q4 and Q1). At the same time, Treasury yields were rising. Since May both Treasury and Muni yields have come back up and it looks to me that Muni yields are higher than they were April 24 (implying the bond gains at FFH are likely lower than $200 million). The wild card is I believe FFH communicated on their conference call that they had after March 31 purchased 1 billion in corporate bonds... if this is indeed the case then bond yields should be greater than $200 million in Q2 (I am unable to locate a transcript from the Q1 FFH conference call... can anyone help me out here???).
Here is what US Treasuries have done in Q2... pretty ugly. I wonder how this will impact the investment results of insurers who exited risky assets in Q4 and Q1 and moved to the 'safety' of US treasuries. One has to be impressed with the decisions coming out of Hamblin Watsa!
Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
03/31/09 0.17 0.21 0.43 0.57 0.81 1.15 1.67 2.28 2.71 3.61 3.56
04/24/09 0.07 0.10 0.31 0.50 0.99 1.38 1.96 2.56 3.03 3.99 3.89
06/30/09 0.17 0.19 0.35 0.56 1.11 1.64 2.54 3.19 3.53 4.30 4.32
Another really important point is all of this stuff I am communicating is really just an educated guess. I expect that FFH has continued to make changes to the investment portfolio's and these I am not able to see... Perhaps they realized some gains early in the month? So please take all that I am communicating with a few grains of salt (I do!). Bottom line is we should see large investment gains from FFH and ORH in Q2... how great we will have to wait and see.
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Crip, to state the obvious, I expect ORH investments to outperform FFH on a percent basis (not absolute). As well, I expect the outperformance to be a small amount. The reason I like ORH more right now is when I add all the 'small' amounts up (underwriting, income, investments gains, pricing power) I get a large enough number to like ORH a little more (given it is also trading at a lower P to BV ratio).
this is not an exact science. FFH stated in their Q1 earnings release that as of April 24, investments had appreciated by $900 million; equities by $700 and debt by $200. C&F also communicated that investments had appreciated by $230 million; equities = $152 and debt = $78 million (p 34 of their 10Q). ORH simply said investments had appreciated a 'material' amount more than the Q1 loss in BV.
Here is my logic:
1.) bonds: most of the gains in bonds were likely driven by US municipals (not Canadian gov't bonds which are held at NB). ORH holds a higher percent than FFH of what has appreciated in value; hence they should benefit much more on the bond side of the equation.
2.) equities: the largest gainer on the equity side has likely been Wells Fargo and we know that a disproportionate amount of the new position is held at ORH (7.6 of 16.5 million purchased in Q1 = 46%).
So to summarize, I expect equities at ORH to perform in line with FFH as a whole and bonds to outperform = slight outperformance at ORH on investments.
The US equities that FFH reports in its 13F were up 17% to April 24 and 30% to June 30. The reported gains at C&F to April 24 on equities was 15% ($152 million/$1.0 billion) which is very close to the 13F number. Using this logic, I think it is reasonable to assume that ORH will see a 30% lift in their equity portfolio in Q2 = 30% x $1.5 = $450 million. Add in $100 million for bonds (hard to know as yields have come up some since April 24) and we could see investment gains of $550 million. And yes, this is my optomistic scenario. Enclosed is my updated investment tracker of the stocks reported in the 13F (March 31, April 24 and June 30). FYI, as of today 13F portfolio is up just under 2% to June 30 close.
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Below is the link to an article referencing information from MarketScout: "MarketScout insurance exchange reported that the U.S. property and casualty market remained soft, as rate declines for risk placements continued moderating at a slow but steady pace."
Here is a quote I found interesting: Mr. Kerr advised that “smart insurers are retaining their capacity until sensible risk return ratios are available,” and “poor underwriting results are pending for some major insurers. Expect significant market movement in the next twelve months with clear winners and losers.”
There is a perspective that pricing has not been hardening fast enough in the past 12 months as some insurers have been underpricing.... if this is the case, C&F will be in an ideal position as some insurers begin reporting reserve issues and rates harden.
http://www.property-casualty.com/News/2009/7/Pages/PC-Market-Rates-Down-6-Reductions-Lessen.aspx
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Regarding buying back ORH, I think FFH should first build up their cash reserves. Q2 will hopefully show this happening as C&F sent $100 million after Q1 close (as reported previously by Ben H I believe)and my guess is runoff can afford at least $100 million special dividend given all the realized gains from last year. We also know in Q2 very large gains in the equity portfolio will be reported (if any were realized we will see). Investment gains may be very large over the next 12 to 18 months. ORH also has the ability to buy back more shares. As earnings continue and if the hard reinsurance market is delayed utilizing surplus to buy back stock (below book) makes sense to me. FFH could find itself in another 12 months with much more cash on hand and fewer shares of ORH outstanding to purchase.
The risk to FFH is BV for ORH will grow rapidly and perhaps more quickly than for FFH. If reinsurance pricing continues to firm more quickly than insurance pricing ORH's share price may also command more of a premium than FFH. Holding off may result in FFH paying materially more to bring ORH back in.
What I find interesting is NB did nor repurchase any shares (of significance) in period preceding the FFH aquisition (6 or was it even 12 months) even though they were also trading very cheaply and they had the cash to do so.
I do not expect FFH to buy back ORH. However, it would not surprise me if they did.
Currently I hold much more of ORH that FFH because:
1.) cheaper on P/BV (ORH=0.93; FFH=0.96)
2.) I expect current underwriting at ORH to be more profitable in near term (reinsurance doing better than insurance)
3.) ORH portfolio yield is higher
4.) I expect near term investment portfolio gains at ORH to outperform FFH
5.) I expect pricing trend for reinsurance is better than insurance
6.) I expect ORH to report reserve redundancies higher than FFH
Yes, ORH is much more exposed should a catastrophe occur. And the stock is quite illiquid and thinly traded which has resulted in the past in it staying undervalued for long periods of time.
I like FFH; I just like ORH a little more right now (even given the higher risk).
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I think this link will let you view the entire article without registering...
market timing is a trap
in General Discussion
Posted
I am learning to be highly suspicious of academics... Efficient Market Theory comes to mind. Personally, if I had simply bought and held FFH in 2002 when I first learned about the company I would have done OK but not nearly as well as I have done since then by buying and selling once or twice during the year. ORH is another great example (buy at 0.8xBV in April/May and sell at 1.15xBV in Sept).
Hamblin Watsa are also macro market timers. Their time horizon looks to be 3 to 5 years. Look at the short term concentrated bets they have made over the years (long US Treasuries, CDS, muni bonds and now equities). That is not buy and hold investing.
Personally, I have no appetite to follow Buffett's long term buy and hold strategy. I much prefer something more along the lines of Watsa/Templeton... buy stuff people hate (that is in your circle of competence, selling for $0.50 but worth $1.00) and when it comes back into favour (trading closer to $1.00) sell... repeat as often as possible.
I love the line in the Rothschild book on bear markets..."there is always a bear market somewhere".