Viking

Perhaps with all the overleveraged companies with slowing business out there the shorts no longer need to manufacture (short and distort) the bust and therefore are in the process of moving on to easier kills... ;)

Here are some things I found interesting: Southeastern looks to be pretty bullish on outlook for P&C insurers & re-insurers: Partners Fund: added Berkshire "We bought a new position in Berkshire Hathaway. For the first time in our careers the stock fell and remained far enough below intrinsic value for us to buy. The company’s misunderstood derivative contracts created optically messy short-term results. In addition, some of Berkshire’s recent investments have been hotly debated, though it is far too soon to judge their ultimate outcome. The company’s book value (as well as our appraisal) incorporates the market price of Berkshire’s public equity stakes, which we believe are also selling for significant discounts to their intrinsic worth.We therefore are getting a double discount for a company that is financially and competitively advantaged, has a proven record of terrific insurance underwriting, owns a number of great brands in non-insurance businesses, and has two of the world’s best capital allocators at the helm." Small Cap: hold 9% in Fairfax (3 P&C companies =21% of total portfolio) - FFH, Everest Re & Markel "Fairfax, the Fund’s largest holding and best performer in 2008, pulled back 15% in the first quarter, making it the biggest detractor from results. Fairfax declined after reporting somewhat weaker than expected fourth quarter insurance and investment results. The company has never been as strongly capitalized and is well-positioned to benefit from current investment and underwriting opportunities. Volatility in quarterly results is a price worth paying for the superior long-term investment returns that Prem Watsa and his team have delivered to Fairfax shareholders." "The Small-Cap Fund sold for less than 40% of appraised value at quarter-end.We own companies that have staying power through the recession due to their financial and/or business strength. Many will gain advantage over weaker competitors. For example, the capital positions of Fairfax and Everest Re should enable each to attract more policies while other underwriters struggle with weaker balance sheets." International: hold another 9% in Fairfax (3 P&C companies = 24% of total portfolio) - FFH, Nippon Koa & Sompo "Owner-operators KS Li, Florentino Perez, Prem Watsa, Lorenzo Zambrano, and KT Lim have spent their lifetimes creating value by acting intelligently for the long-term while many around them fret over current events.We do not know when the market will turn, but we do know that most of the gains will accrue to those investors with the courage to invest when all others are fleeing."

With the 'black tar' subsidy that US pulp producers are currently getting and the CAN$ close to $0.90US the Canadian pulp producers have to be a little shell shocked. SFK is a great company (as is Canfor Pulp). Goes to show that just because you have a strong business model/good management and are well run that you can't get gorged by a partner or global events... I will be sitting this one out, but believe pulp will be a solid investment at some point in the next 12 to 24 months.

swf, my favourite currently is ORH, which is trading below 0.9 x BV (US$38.55/$43.80). We know ORH is sitting on sizable investment gains and also that their ICICI Lombard stake is undervalued. As well, reinsurance pricing is moving higher (more so than insurance pricing). Looks to me to be lots of safety and also several catalysts to drive share price moving forward. I am waiting for FFH to fall to 0.9 x Q1 BV = US$253 = US$228 = CAN$256 At this price, similar to ORH, we know there is $900 million in mark to market gains (about $30/share) and ICICI Lombard is undervalued. Regarding directly comparing ORH to FFH, yes, it is difficult. Here are a few thoughts (would appreciate others): FFH Strength (versus ORH) - size... more diversified - runoff... further large distributions to parent likely coming this year - investment leverage (I believe FFH has more than ORH) - less dependent on US market/impacted less with dollar weakness (important for CAN investor) ORH Strength - simpler business to understand - reinsurance pricing is firming faster than insurance - possibility that FFH purchases 30% it does not own (likely at 1.2 x BV or higher) A major weakness with ORH is the small float (given FFH 70% ownership). However, as the company continues to grow and the investment community comes to appreciate its business model/management this may not be the issue is was in the past. The fact that it is currently trading at a multiple to BV that is higher than most of its peers tells me it may be getting a little more respect these days...

Here is a great summary article on reinsurance from Aon Benfield (players, size, 2008 results compared)... ORH performance sure stands out. www.aon.com/attachments/ABAFY2008.pdf

I wonder how the oil sands will fare 5 or 10 years out given the building outcry regarding the environmental concerns (and Obama's negative view). Perhaps our petro currency is not so pumped up...??? Cardboard, I have a hard time understanding how the CAN$ will move much north of parity to the US dollar (for any length of time). Right now there is a perception the Canadian economy is doing OK (versus the US). Wait until unemployment here gets going as manufacturing continues to get hollowed out. And all the spending cutbacks in the resource industry really begin to hit. My chief concern is what happens if there is a stampede out of the US$ (an accelerated version of what we have seen the past month or so). Perhaps this is what you are getting at... something that happens quickly and destabilizes fiat currencies...

Woodstove, I agree, I think you have to look at each individual move that FFH has made with respect to how it fits into the whole. And given that we have a less than perfect view of the whole it becomes very difficult to understand the individual moves. Last year, I tried a strategy of piggy backing on the ideas of FFH/Chou etc. It worked OK and I now have a decent understanding of many companies that I may chose to invest in again. Currently, I will be content to buy ORH (at current levels) and if FFH falls much more I will again be a buyer.

Crip, I have done a bit of a deep dive with the medium sized reinsurers over the past 6 weeks and it has helped me better understand their differences. One thing that stands out is how conservative almost all investment portfolios are. Part of this is due to the type of business written. Those companies writing short tail business (one to two years out) really should stay away from equities. Bottom line is yields at most insurers is going to be very low for the forseeable future. And because Treasury bond yields are now pretty much as low as they can go (actually moving the other way), there will be no further realized investment gains due to falling interest rates for Treasuries. With historically low interest and dividend income and limited opportunity for realized investment gains, to hit ROE return targets insurers are going to have to have stellar underwriting. The fellow at WR Berkley said that given the level of pricing the past 12 months (not great) he was surprised with the CR numbers being reported. I think he was suggesting that insurers over the past few quarters were pulling large numbers from prior year reserves and reporting underwriting numbers that were a little (or a lot) inflated. Bottom line, the cushion (prior year reserves) has likely shrunk quite a bit the past 6 quarters and companies will have even less wiggle room on a go forward basis. One of the insurance executives (Veritus?) was asked why he was not buying back stock in the current environment (with company stock trading at around 0.8 of BV) and he said that when the hard market hits and you grow premiums they tend to be sticky - meaning the new business normally stays with you for three years on average - and profitability of this business (quite high) then drives serious book value growth over a two or three year period. I set up a portfolio of the mid sized re-insurers in Google to compare stuff and what amazed me was how many of these companies are trading at a price to book that is lower than ORH = 0.9 (most). Looks to me that ORH is starting to get some respect and the level it is trading at is more a reflection of how poor the investment community views the reinsurance industry right now. The catalyst for reinsurance stocks will be confirmation that the market is hardening. Year to date, the signs are positive. Next on the watch are June 1 renewals in Florida and then July 1 renewals in general. As Mungerville mentioned perhaps the best thing we could hope for is a terrible year regarding hurricanes. I have little doubt that if that happened most insurers do not have the capital and with the capital markets largely closed the hard market would be here in full force. AIG is one company that may really screw things up. It was mentioned that they were historically the price leaders. Right now they are a mess and the fear is they could hold pricing too low for too long (who cares if they cheat a little bit on the underwriting when the losses will not show up for a few years). One scenario regarding AIG is parts of their business could simply implode as companies view them as too risky to do business with (insurance, just like banking is built on faith and trust). So perhaps a wounded AIG slows the arrival of a hard market... all this likely does is ensure they (AIG reinsurance) will dramatically shrink a little later as reserving issues do them in (all these re-insurers are sharks and will not hesitate to kill off one of their own). I loved the question posed to one company CEO that asked in the Bermuda reinsurers were openly telling customers that they were not willing to write business with AIG as a partner. The insurance exec said that they have an obligation to their shareholders to only partner with companies that are financially sound, have an ability to pay AND an ability to process claims properly (meaning Uncle Sam's backing is not enough... their underlying business model cannot be impaired as they lose people etc). It sounds to me that there are large cracks appearing in the AIG reinsurance business model and many customers are rethinking how they utilize reinsurance and the role that AIG will play in the future. Bottom line is AIG is in deep trouble. Regarding ORH: - they write longer tail business (on average) and therefore can put equities into their portfolio as a 5 year time horizon is fine. When I look at the equities, the current BV = $43.80 pretty much locks in most of the downside risk. They likely are sitting on $5 or $6.00 in pretax gains (including bonds). My guess is we will see FFH take profits on part of the equity positions (i.e. be opportunistic) as they were in Q1 when it looked like they had about 15% turnover. Why not sell some Wells Fargo at $25 and reinvest in some stallwart with a high dividend yield. When the markets sell off again, sell the stallwart and buy Wells Fargo again. We will see. - their current before tax portfolio yield (interest & dividends) of 4.55 to 5% (not sure which) is at the very high end of their peer group. - the fact they hold no US Treasuries may prove to be brilliant (should Treasuries continue to sell off in the coming months). Yes, at some point all bonds will be impacted... my guess is corporates and municipals will not move up as fast (spreads will continue to narrow). - they currently have $550 million they could use to buy back stock. The fact they are not right now with the stock trading at 0.9 x BV (closer to 0.8 x May 23 BV - my estimate) is very telling. They must be expecting a hard market to get started very soon. - I think ORH is licking their chops right now. They have an industry leading yield on their portfolio. In Q2 they backed up the truck and purchased corporate bonds and more equities and are now sitting on some pretty large gains. The reinsurance market is LOOKING like it will harden at any time and they have the surplus capital to grow a great deal. - the key to me will be their underwriting results on a go forward basis. As I have posted before, there is a decent chance that the legacy issues (pre-2001) are done. As well, they earned so much the past two years from investments their prior year reserves SHOULD be in great shape as they did not need reserve releases to help (yes, I know insurance companies do not manage their business this way... and I don't buy it!). We should see average CR's and decent prior year reserve releases. In other words their underwriting should start to move to the front of the pack (instead of being at the back). Before people get their back up, if you look at ORH overperformance since 2002 it has come via investment gains. Period. What I am saying is with better than average yield, continued better than average investment gains AND NOW better than average underwriting as we enter a hard market this will be a $100 stock in the next couple of years. I think that is the bull case (that has been gestating in my mind the past few weeks). Will all factors come together? Perhaps not... however, I do like the risk reward. Please feel free to rain on my parade (I have thick skin) and sorry for the long post. PS: and for other Canadians (like me) should the CAN $ continue to rise and ORH stay below $39US then the opportunity gets even better. PS 2: if anyone has come across any good articles or write ups where AIG or the re/insurance industry is going please point me in the right direction. Thanks!

Cardboard, the Canadain dollar has been on my mind lately as well. I wonder how Canadian manufacturing (particularly in Ont/Que) will be able to cope. As an investor, I do not like what it does to my current US holdings (i.e. ORH). However, other companies that I would like to hold, like BRK, are now much cheaper and I like that. Net/net, given that I can increase me US holdings I will be able to use the stength of the CAN $ to my advantage (note, the CAN$ would need to move to the $0.95 range before I seriously start thinking about buying US stuff to take advantage). Regarding the near term outlook, David Rosenberg is of the opinion that we are seeing a bear market rally and when fear returns to the market (and stocks and commodities sell off) the Can$ will also sell off again. This makes sense to me as likely. Regarding the medium term outlook, I do think China and their demand for commodities going forward will provide a somewhat new dynamic for Canada's resource producers (less linkage to US). I think our healthier balance sheet will also result in 'less bad' stuff happening up here. Having a strong Can$ over time helps not only maintain our purchasing power but actually increases it (good for most investors, unless one is maxed out with US holdings today). Cardboard, I also think about the Remnimbi. I think this is the currency to hold long term. Do you (or others) have any thoughts about the Chinese currency? Any thoughts on how to get exposure?

WR Berkley aslo presented at the UBS conference. They expect the market to harden into Q4 and 2010 due to two basic reasons: 1.) pricing is too low today 2.) balance sheets need to be repaired The Q&A session at the end of the call was very interesting: ir.wrberkley.com/events.cfm They also are struggling with the current investment climate and were asked if they will begin to hold more equity securities: 1.) "We make money in insurance business" 2.) "Have to make sure the capital account is not jeopardized from a statutory point of view" 3.) "Equity securities will jeopardize capital account" 4.) "High quality fixed income securities will not" 5.) "Capital account lets you write insurance business... thing that generates return" VERY different business model than FFH... There was a question regarding AIG and why they were not shrinking faster. The answer was the shrinkage is gaining momentum and they are being asked to write less business and pretty much all of their good people are actively looking to leave. WR Berkley feels they have not seen so much opportunity before them as they currently do!

For what its worth UCP, looks like Controlled Greed may be thinking along the same lines as they just initiated a position in EGI... [www.controlledgreed.com//url]

Sanj, my experience is very similar to yours... I find MANY people want to get better investing results. But they have NO interest in learning about value investing. Instead they are looking for a 'get rich quick' idea. Makes me think of the old line: "when the student is ready, the teacher appears." Not the other way around. When I managed a sales force I used to buy them a different investing book as a Christmas present every year (Intelligent Investor, One Up On Wall Street, Warren Buffet Way, Random Walk Down Wall Street etc). I would tell them "you beat me up over a $500 raise; learn how to save and invest and in 15 years your investments will earn you more than your salary". I know I made people more aware... not sure that many took my message to heart. Perhaps because personal finance is not taught in schools perhaps it is a skill set that is hard for most people to pick up later in life... not sure. Or perhaps the answer is you either get it or you don't. It is sad, really, that more people are not able to develop a financial skill set. I have started doing some fun stuff with my young kids to hopefully help them develop an interest in this stuff.

Mungerville, it looks to me that investors do not like the outlook for re-insurance stocks: 1.) underwriting results are OK (not great) 2.) interest/dividend income is falling 3.) investment gains/losses has been killed Sum this up and you have near term pcture that is ugly and ROE that will be sub par. The near term outlook is similarly poor: 1.) given the recession, insurers are not accepting price increases 2.) low Treasury yields will ensure interest income stays very low 3.) investment gains/losses will remain low as portfolio managers are stuck like a deer in the headlights (making small changes to portfolios) Interesting thing is the above does not describe ORH at all, but the market does not see it or they do not believe it. Worst case scenario (driven by another ugly equity selloff with the S&P falling to lower lows), I see ORH finishing the year with positive book value growth (perhaps from $45 to $46). Best case scenario (and not wildly optomisitc), the market for reinsurance hardens by year end, interest income will be solid and equity markets rally another 20% from here and FFH books some nice gains which results in book value increasing by $10 from $45 to $55. They are very well positioned and FFH has demonstrated that they will be very oportunistic with the investment portfolio. At some point Mr Market will figure it out and the stock will run up... patience is the key.

Partner Re gave a presentation on reinsurance industry at UBS conference on May 12. For those wanting a good review of PRE and the industry here is the link to the web cast and powerpoint presentation: phx.corporate-ir.net/phoenix.zhtml?p=irol-eventDetails&c=63283&eventID=2220143 Key takaways (made at end of presentation during Q&A): 1.) maintaining a triple 'A' investment portfolio and achieving a 10% ROE is not possible (with risk free rate = 2%) 2.) re-insurance business is pretty stable 3.) most critical decision today (that will drive future ROE) will be regarding investment portfolio 4.) Partner Re will be looking to increase risk in investment portfolio moving forward (have not yet done so) to increase investment income My guess is many of their peers are in the same boat (still sitting on very conservative investment portfolios). ORH looks to, again, be sitting in a very enviable spot having already shifted bonds from Tresuries to Municipals and Corporates and also having increased stock portfolio (assuming changes at FFH reflect what has happened at ORH). Both Partner Re and ORH are trading at about 0.90 x book. ORH is likely sitting on about $5.00 (after tax) in unrealized gains & Q2 earnings (taking them close to 0.80 x book). An interesting story is developing at ORH that Mr. Market once again appears to be missing (just like CDS position). Being in Canada, the recent 10% runup of the CAN$ vs the US$ has not helped my current ORH position. Perhaps it is time to get more aggressive and taker advantage of: 1.) high CAN$ 2.) decent ORH price to current BV ($39.56/$43.5 = 0.91) 3.) $5.00 of 'hidden value' (that will continue to be very volatile)

I actually liked reading Snowball. Almost everything we read regarding Buffett discusses his successes (usually in glowing terms). In Snowball I liked reading about Buffett the human and discovering that, yes, he has had his fair share of adversity (business and personal). The book did nothing to lessen my admiration for the man's accomplishments but it was nice to discover that he is indeed human afterall! For beginner investors, I also liked 'The Warren Buffett Way' by Hagstrom (liked 1st edition better than second).

Mungerville, no, I do not have anything for ORH. Any idea where to go to find the info?

Is it possible to get the same (or similar) report (13F) for ORH? If someone can point me in the right direction I would appreciate it! Thanks.

watsa-is..., thanks for letting us know this was out as I also was interested in seeing the changes. I dropped the new info into my spreadsheet and to provide a slightly different take on what has already been posted. I have tried to attach the Excel spreadsheet so you can understand my comments below. - it appears FFH is not simply buying and holding all positions. I calculate they sold 13% of portfolio value in Q1, which is not a small number. They also added 23% new positions (or net 10% new positions). - regarding sectors, they sold a number of stallwarts (KFT) and Pharma (J&J, PFE) to raise cash to buy primarily two financials (WFC & USB). They also sold all of Progressive and initiated positions in USB (very large), BCE (small) and LUK (very small). - regarding changes in value (I am missing a few things like GE PUT and Preferreds? on list): FFH communicated when they released Q1 results ALL investments were up $900 million to April 24. This summary allows us to see where some of those gains were from. - it appears investment gains are tracking ahead of what FFH has comminucated. - bottom line is FFH appears to be continuing to be very opportunistic and not afraid to make big decisions with the portfolio (i.e. adding financials). - what does all this mean? With adding muni bonds in Q4 and then increasing their equity and corporate bond exposure they look well positioned to, at a minimum, maintain their long term return on average investments = 9.8%. March 31 carrying value of investments = $17.1 billion x 9.8% = $1.68 billion = $55/share (after minority interest and taxes). March 31 to April 24 = + $456 million = + 17% March 31 to May 14 = + $615 million = +23% - as was pointed out earlier, Wells Fargo is the big dog, up $144 million to April 24 and $230 million to May 14. As of May 14, WFC was worth a staggering $515 million (their share of ORH is worth about $1.7 billion)! - I also calculate current yield on stocks held is 3.5% (using March 31 prices), which is significant! 1.) sales: sold 10 positions and raised about $350 million (March 31 share price) - intel - 9,027,000 shares = - 56% (total holdings) = - $135 million (amount raised) - J&J - 808,000 shares = - 10.5% = - $43 million - Progressive - 2,881,000 shares = 100% = - $39 million - Dell - 2,685,000 shares = - 10% = - $25 million - Kraft - 1,000,000 shares = - 9% = - $22 million - Pfizer - 1,618,000 shares = - 9% = - $22 million - Frontier - 3,026,000 shares = - 16% = - $22 million 2.) purchases: bought 6 new position at cost of $606 million (March 31 share price) - Wells Fargo + 16,514,000 = + 470% = + $235 million (amount spent) - USG + 15,838,000 = new = + $231 million - BCE + 3,180,000 = new = + $63 million - Burl North + 784,000 = + 60% = + $47 million

It looks to me that the subs are not participating in all of these deals equally. The Canadian deals (Mega Blocks, Canadian Western Bank, Canwest) are likely financed through Northbridge float and the US deals (USG) are financed through ORH, C&F & Runoff.

returnonmoneycapital, I agree that those holding federal government debt are not faring well in this run up. Those who purchased municipal goverment debt and corporates are doing very well as spreads narrow. It looks like FFH has effectively found a way to significantly outperform the 'index' with their timely move. I wonder if US gov't yields continue to rise and muni's continue to fall at some point does FFH make the switch back...???

As one who does not work in the financial industry, I really liked Malkiel's 'A Random Walk Down Wall Street' (not that I agree with his conclusions).

vinod1, I have been trying to diversify the list of stocks that I would like to buy (and not rely so heavily of FFH or how concentrated I have been in the past). In March I did purchase Berkshire for the first time in my life, as well as Wells Fargo, GE, AMEX & Markel (all we would call value picks). All have been sold (some weeks ago) at a level I was happy with and, as I said earlier, ORH was then purchased (dropped to a price I liked) and is now my largest holding. Yes, if I continued holding all of mu original stocks my gains in aggregate would have been much higher today but I do not let that bother me ("Is there a lesson here" I do ask myself). My cash pile is now larger and I am up again at bat.

vinod1, your questions are very close to the same ones that I have been grappling with for the past few years. My simple answer today is I know that I will never be a Buffett, Lynch, Watsa etc. However, they offer many great lessons that I can then overlay onto my psychological makeup, intellect and work ethic. And hopefully what comes out is an investment style that works for me (my long term return is just under 20% and last year was in that same range - thanks to FFH selling as low as $220 and then running to $400). Here is what I have learned holding FFH since 2003. The stock makes simply enormous moves up and down. I am content to buy at 0.8xbook or lower and sell when it makes a big move up. Right now I have bought a chunk of ORH (it is trading at about 0.9xbook, is sitting on about $4.00 to 6.00 in unrealized investment gains, has a 5% tax effective yield and solid underwriting). If ORH was to suddenly move up 30% or 40% I likely would exit and book the profit. A hurricane will then hit the US, insurance stocks will get hit and ORH will again be selling at 0.8x book (perhaps 0.7xbook next time) and I will be happy to buy again. I am not worried about 'missing' anything. I am simply waiting for fat pitches. And with the volatility we are seeing they keep coming month after month (i.e. some asset class gets taken out behind the woodshed). Perhaps in another 12-18 months as the current mess begins to clarify itself perhaps volatility will ease and buy and hold will become more important... I also try to keep learning and to get better every year. The 'buy value and hold forever' strategy does appeal to me (way less work!). I am not ready to embrace it yet. But it keeps rattling around in my head, acting like my alter ego!

I think people who were having trouble sleeping when the market bottomed out in March have been given a wonderful opportunity to make some adjustments. My read is that this is a dead cat bounce (perhaps similar to 1930). My porfolio is 75% cash with ORH currently being my largest equity position. If markets continue to rally, ORH will do phenominally well. If markets drop I have the cash to once again get aggressive. If markets go sideways ORH simply does very well. Risk/return tradeoff works for me. I still believe that capital preservation continues to be the priority. It will take years for this mess to play itself out. I expect extreme volatility to continue and over time expect that this is what will finally cause the avg investor to bail (i.e. stop the pain as their gains keep turning into worse losses). Until I see clearer signs of capitulation I will continue to be cautious. With patience I am confident another fat pitch will come along this year...

A couple of comments stood out to me. She is very happy to be working for the person she admires the most (not the company she admires the most). _____________________________________________________________________________ "He doesn't want to pressure a business into doing anything that inflates volume or profits and isn't long-term in nature," she says. "He wants you to and allows you to run a business the right way without the pressure of Wall Street, the banks and all of the other things Berkshire takes care of. "It's not that he doesn't expect results, but he's understanding of the environment and has realism in the time frames of what can and cannot be." Her biggest fear is disappointing him. But she believes her shot at corporate glory has arrived. "I've had my ups and downs in my career, and none of them have been secrets," she says. "Everything I've done has just been rewarded by getting the most amazing job in the industry working for the person I admire the most. I'm having the time of my life.