Viking

Sanj, I hear you on JNJ. I do like the company; it just does not look to me to be as cheap as some of the other big pharma's (and, yes, part of the reason JNJ is trading at a higher multiple is its business is more diversified and therefore revenue losses are less of an impact due to drugs losing patent protection). If JNJ was to fall closer to $55 (=4% div yield) I would likely be a buyer!

I have been spending a fair bit of time reading up on big pharma. Most of these companies trade at a PE under 10 and have healthy dividend yields. Some have little debt, some have lots. Some have solid drug pipelines, some less so. Most will see revenue hits at some point in the next few years due to patent losses. Demographic trends are very favourable. Not sure how changes in the US impacts all this. I like the idea of buying someone in Europe/UK given the dramatic fall in the Euro/GBP. Buffett owns a little Sanofi-Aventis (French) and the stock looks to be a very reasonable value. I am less excited by JNJ; not as cheap, much larger and not likely to grow any faster. There are a bunch of others: GlaxoSmithKline (GSK), Astra Zeneca (AZN), Novartis (NVS), Novo-Nordisk (NVD) and also in the US: Eli Lilly (LLY), Merck (MRK), Pfizer (PFE) and Forect Labs (FRX). Given current valuations I like the idea of allocation 5% of portfolio to the top 2 or three players. Does anyone have an opinion of who the leaders are in this field? I am looking for suggestions on who to research further...

Sanj, I think your article is from 2008. The stock dropped $1.00 yesterday because Steve Ballmer expressed concerns about lack of property rights protections in China and suggested Microsoft may need to shift some production to India (I think). The stock went up $1.00 today due to 4 different brokerages reiterating their buy rating on the stock (which made me think a little as I normally am not on the same page as analysts). 20ppy, I think you very nicely summarized what the stock trades at a PE = 12.5 despite what look to be pretty good financial picture and near term outlook. MVP, the growing cash hoard also has me mystified. Does anyone know what they are going to do with the $40 billion in cash (and growing)? Yes, they are buying back stock and, yes, I would expect they will increase the dividend. But even after that they will still be growing their total cash holdings. Given the strong link to Buffett I would hope they do not blow it on a bad aquisition...

I established an initial position in MSFT today. I think it has become a very boring stock... Price = $26.00 2010 Earnings = $2.05 to $2.10 (lets say $2.07); PE = 12.5 2011 Earnings = $2.20 (could easily come in higher should the economy continue to stabilize) Dividend = $0.52 = 2% Cash on hand = $5.00 per share; No debt to speak of. With earnings buying back meaningful amounts of shares and I would expect the dividend to continue to increase. Can$ = $0.95 (relatively high, which is important for a Canadian investor) Shares were trading at $31.38 in April; down almost 18% in a month. Here are a few more good points from controlledgreed.com: April 19, 2010 More on Microsoft from Fred Hickey in Barron's Microsoft (MSFT) is a major holding in my portfolio. So Alan Abelson's column in Barron's (scroll down) caught my eye when he wrote about Fred Hickey (of The High-Tech Strategist newsletter) and Hickey's continuing bullish view of the company: Not only has the company's Widows 7 proved a big winner (in contrast to its predecessor, Vista, which was a disappointment for sure and even a borderline bust), but Fred has high hopes for the new operating system that he confidently expects to enjoy a wave of demand from business buyers. He also believes the upgrade of what he calls Microsoft's other cash cow, Office, shipments of which are slated to start in June, will meet a warm reception. Moreover, he is quite enthusiastic about relatively recent and promising new additions to the product line, like the SharePoint server, Bing search engine and Microsoft's "Project Natal" for the Xbox 360 game console, scheduled for unveiling June 13. He contends that the stock (ticker: MSFT) is still something of a steal at 16 times depressed trailing earnings. Fiscal third-quarter profits, you might take note, are due to be released Thursday. As Fred points out, Microsoft's software is firmly entrenched in most large business enterprises and its sundry software offerings are "complex and interoperable," while Google's comparable products just aren't in the same league. "In this overpriced, dangerous stock market," he says, "I regard Microsoft as a great gift." Despite his usual aversion to hyperbole, he calls it "the most valuable tech stock in the universe." And, he waxes on, "Microsoft generates huge cash flows, pays a nearly 2% dividend, has a stock price upside of, say, 50% if the bull market continues to run, and limited downside if it does not." I agree this is an overpriced and dangerous market. But an upside for MSFT of 50%? I don't know about that, yet would love to see it come about.

Stubble, I hear you on the call for a hard market. It likely will not happen until a catalyst comes along. In 2008 and early 2009 falling asset values would have done the trick but risk assets came roaring back so fast capital was not permanently removed. I do believe that underwriting has deteriorated to the point that companies now rely on reserve releases to make their CR. Clearly this game cannot go on indefinitely. When you look at accident year combined ratio's (over 100) and low bond yields we have an accident waiting to happen. Should we get an above normal accident year things should accelerate. Should we get another below average accident year the hard market will be delayed. Bottom line, most companies are driven by hitting quarterly and annual numbers = raise, promotion and big bonus payout. And as we all know these things can be fudged for a time... My guess is Berkley's call on hardening in Q4 to be optomistic (i.e. I am not counting on it to make my investment decision). I do think a hard market is coming sooner rather than later.. I am also quite surprised by the number of companies who are buying back an enormous amount of stock. This does suggest that perhaps capital is plentiful. But this action is also taking it our of the system.

ok22, we can all agree that underwriting results for FFH will be poor (with a CR over 100). Interest and dividend income will be quite good. At this point in time, realized and unrealized investment gains are likely quite ugly (with the portfolio dropping in value more than it was up in Q1). And hurricane season starts June 1 (and the forecasts I read call for an above average number of hurricanes). When I weave it all together I get lots of near term risks (looking out 3 to 6 months) and as a result I am not surprised FFH has sold off; I am actually surprised that it has not sold off more. As I have said before, I expect FFH to not be as volatile as in the past now that it is no longer listed on NYSE. Unless the stock gets crazy cheap, I will wait to see what happens to equity markets before buying. Crazy cheap to me is trading at 90% of BV. My guess is BV today is about US$360. If the price dropped below US$330 I would be interested. I also expect that FFH has been active in the markets since reporting Q1 results (either selling or hedging further).

Goldman Sachs currently looks to me to be a solid buy today. Shares are trading at $136 (down $53 = 29% from recent high). Should earn +$20 in 2010; PE = 6.8; Div = $1.40 or 1%. Notwithstanding the current noise from the justice department, the company is in much, much better shape than when Buffett made his investment 0n Sept 23, 2008 (when the stock was trading at $125.05). Its profitability has rebounded. Its competitive position is better as a few of its competitors are gone. Its capitalization is also much better. And Buffet, who did not hesitate to throw Kraft under the buss (in the press and by selling shares) and has extensive experience with the Solomon fiasco has actually come out in support of GS. Oh, and S&P has a sell recommendation on GS. And I also expect that most of the 'smart money' are busy selling shares so GS does not show up on any list of equity holdings (that they then have to justify). What am I missing? Sept 24, 2008: “Goldman Sachs is an exceptional institution,” he explained yesterday. “It has an unrivalled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.” May 2010 OMAHA, Nebraska (BH Annual Meeting) — Berkshire Hathaway CEO Warren Buffett said Saturday he has no plans to sell his company’s stake in Goldman Sachs Group Inc. as the investment bank fights civil fraud charges. Buffett and Berkshire’s vice chairman Charlie Munger both praised Goldman Saturday as Berkshire held its annual meeting. Both executives said they’re happy with Goldman CEO Lloyd Blankfein’s leadership. And they don’t view the Securities and Exchange Commission’s charges against Goldman as a reflection against Blankfein. Buffett has been one of Goldman’s biggest supporters before and after the SEC filed its civil lawsuit against the bank on April 16. It charged the investment bank with misleading investors about a deal involving complex mortgage-related investments that later plunged in value. During an expected five hours of questions from shareholders, Munger noted that the SEC vote to file the charges was 3 to 2. He said that if he had been a member of the SEC, he would have voted against the suit. On Friday, Goldman stock plunged 9 percent on reports that the Justice Department had opened a criminal investigation of Goldman. Buffett told shareholders that Berkshire’s $5 billion of preferred stock in Goldman is a good investment because it generates 10 percent interest a year. He said the investment includes warrants that can convert the preferred shares into regular stock at $115 a share, a discount from Goldman’s current price of $145.20.

Crip, thanks for the kind words. Regarding my spreadsheet, there are a number of flaws. Regarding the US holdings, the largest flaw is we do not know what changes they have made to the portfolio since March 31. I also only track common stock holdings and they do report other securities (such as the new CITI purchase). The summary of Canadian holdings is even more flawed as purchases and sales of these stocks are not updated quarterly; the details in this list were obtained from news releases from the past year. As time passes we can expect the Canadian list to become less and less accurate. So I will leave the Canadian stuff on the list and may continue to update the prices but I do not like to include them in the changes section because the information is too innacurate. Board members can then decide how they want to use the information provided. The bottom line is my plan is to continue to update the US list as it provides pretty accurate information. Just as important, I also like to have a summary of past transactions (so I have not deleted prior quarter updates) to see what FFH has done to the portfolio over time. If we get confirmation of changes to the Canadian portfolio I will update as well but likely will not add to the US stuff as it is too inaccurate. I also need to update the dividend section to the right as this has not been done since last year...

Currently I am going over my list of favourite companies and re-reading quarterly and analyst reports so I am ready should markets continue lower. Many of the companies I like are US based; I am Canadian. One thing I am noticing is in troubled times (like now, and over the past year) is the CAN$ falls (versus US$) about as much as the US stocks I like = in CAN$ terms I am in the same place as before the fireworks started. And then when markets improve the opposite happens... my US$ purchases increase nicely but the gain is offset by the CAN$ appreciating versus the US$. One solution is to focus more on Canadian stocks. A second is to try and find a hedge for my US purchases.... something I have been resistant to do up til now. My view is I do not want to start speculating on currency movements. But I am beginning to wonder if doing nothing (not hedging in some way) is not actually speculating in the end...???

nonub, my previous post was not very clear... by selling the equities I held in my portfolio I was able to realize a 5% return on my total portfolio for YTD 2010. With 93% in cash, my return over the final 7 months of the year may be tiny, which I am just fine with; with my cash I park it only in cashable GIC's (CDIC insured) as I am not after return but rather something safe. It makes me laugh when I hear 'you have to put your cash to work'. All this approach does is put pressure on the holder of cash to buy some risk asset. Rather, people should be told to 'put their cash to work when quality is dirt cheap'... if not, holding cash is the most intelligent thing to do (even for a year or longer)!

I have updated my spreadsheet and here is my take (I only track common stocks): 1.) total sales in Q1 = $825 mill = 21% reduction 2.) total purchases in Q1 = $15 mill = 0.5% (this does not include CITI purchase = $49 mill) FFH has realized a large chunk of the gains in their equity portfolio which we saw in Q1 results. I estimate the equity portfolio was up about $280 million in Q1 (assume all sales happened Jan 1, which is not accurate). Specifically: 1.) partial sales: Dell = $167; WFC = $161; GE = $139; USB = $102 2.) 100% sales: MGA = $242; LUK = $10 3.) partial purchases: no positions were added to 4.) new purchases: SPMD = $15; CITI (preferred?) = $49 At May 19, the portfolio is valued at $2,925 = -$140 million = -4.6% (compared to March 31). Given the deterioration in the market since FFH conference call the end of April I would expect that FFH has sold more securities or hedged more of the portfolio. I like the fact that they are actively managing the equity portfolio and realizing gains.

Cardboard, in times like these (when stocks have had a great run) I think about Buffett's rule #1 = don't lose what you have. Over the years, I likely have been WAY too cautious. Yes, I have missed lots of potential gains. However, I also have missed pretty much every major sell off since the mid 90's. My portfolio has compounded at just over 20% per year. Currently, I do not like risk/reward trade off. Stocks and risk assets have had a simply amazing run. However, the amount of debt out there, which is causing the problems, is not really going down (simply shifting from the private sector to the public). Economic growth is low. Unemplyment is crazy high (in the US). I have ordered the Reinhart/Rogoff book (It's Different This Time)... my understanding is they say that history teaches that debt binges always end ugly and take many years (not 18 months) to be rectified. Bottom line is history has taught me there are times when it pays to be in cash. As I said in an earlier post, I am currently 93% cash and 7% equity (one position - GVC). If I am wrong (and risk continues in a bull market) I will have to be happy with a 5% return this year. If I am right (and we get a strong market correction in the mext 6 months) I will be in the perfect position to buy low... I also find it instructive to see FFH selling as material amount of equities and maintaining a 30% hedge (in Q1); who knows what they are doing in Q2 but my guess is they are likely net sellers of risk assets.

A couple of years ago I used to look forward to reading the monthly commentary of a person named Enrico Orlandini. The articles were entertaining, well written, quite pessimistic and touted gold. I then moved on to other things and the articles appeared less frequently. Today, for no reason I decided to do a search and get an updated letter from Enrico. I was sad to read that Enrico Orlandini is actually a pen name for one Eric Bartoli who is wanted by the SEC for fraud. It appears he has struck a second time in the past decade. Fortunately, I have never felt compelled to invest with these sorts of situations (he lives in Peru). The lesson is it pays for one to do their due dilligence to ensure there is a legit business behind the tout... http://www.sec.gov/investor/alerts/bartoli.htm

oldye, I agree insurance is very volatile on an annual basis. Especially at the start of hurricane season; everyone seem to get skittish. However, the big reason I like insurance stocks is it appears to me that they are getting close to the start of a multi year run. I remember reading 'Reminisces of a Stock Operator' and Livermore saying that the real money is made by waiting for general conditions to be favourable, to take a position and then to stick with it. "It is the big swings that make the big money for you."

As I have stated earlier I believe well reserved insurers / reinsurers will be a great buy at some point later this year (and who knows, we may be there today!). Should risk markets continue to correct, insurers will see some impairment to their capital due to investment writedowns; should we see an above average hurricane season, capital will be further constrained. The trick will be separating the pretenders from the real deal. For those who want to get the bull argument, you may want to listen to the presentation from WRB at the UBS conference on May 11th (still calling for a hard market by the end of the year): http://ir.wrberkley.com/events.cfm

I thought it would be useful to start a post reviewing key movers. What is amazing to me is all of the moving parts. They certainly have been opportunistic. I am surprised they have not yet increased the hedge (although selling a chunk of the equity portfolio has a similar effect). Should markets continue higher their Q2 gains could once again be quite large! 1.) equity hedge did cost FFH $105.8 million in Q1 - my guess is they are now effectively hedged March 31 level of the S&P - did not increase 30%; Prem said on conference call they review this regularly - offsetting this loss were equity total return swaps, call options and warrants gains = $116 million 2.) sold a significant amount of stocks (likely at C&F); we will find out when they release their 13F - common stock holdings on consolidated balance sheet FELL from $4.9 billion at Dec 31 to $4.6 billion at March 31 even though they appreciated significantly - looking at cash flows they had $320 million in purchases and $1.4 billion in sales! - nice to see them realizing some gains 3.) established an inflation hedge (top p13): "As an economic hedge against the potential adverse impact on the company of changes in price levels in the economy, the company has purchased inflation-linked derivative contracts referenced to inflation indices in the geographic regions in which the company operates. As at March 31, 2010, the derivative contracts had a carrying value in the consolidated balance sheets of $80.3 (December 31, 2009 – $8.2) and a cost of $92.4 (December 31, 2009 – $8.8)." 4.) interest & dividend income = $182 million or $209 million on a tax equivalent basis (from conference call)

T-bone, you have hit the nail on the head. There is too much capacity today. That is causing the soft market. Until capacity falls materially then we will not see a hard market. I have listened to a couple of insurer/re-insurer conference calls: - the Q1 cat losses are an income statement event NOT a balance sheet event (not bad enough to lead to higher pricing). - the rig disaster should lead to higher pricing in that segment - the chile earthquake should lead to higher pricing in that region - almost EVERYONE has been buying back large amounts of shares; this is shrinking some capacity! - almost everyone has been announcing very large reserve releases (AND THEY ARE SHRINKING year over year) Cardboad, yes, posted CR are not nearly as bad today as they were in 2000. However, bond yields were much, much higher in 2000 especially on the short end of the yield curve (as many insurers have an average portfolio duration of about 3.5 years). On an accident year basis, Berkley is currently underwriting at 100%. He feels the P&C industry is underwriting at about 110% (they just do not know it yet). He is calling for the hard market to begin in Q4 of this year. Who knows? I know that Berkley knows more than me... I will be happy if we get a hard market in the next 24 months. Publicly traded companies have a huge incentive to hit the quarterly numbers. They are not focussed on growing book value over the long term. At this stage in the insurance cycle they have a huge incentive to post favourable CR's so why would we expect anything different. Fortunately, at some point the losses will show. We will see in the coming year who has been swimming naked. In the meantime FFH continues to buy time with the exceptional return on its investment portfolio.

I think we can all agree that underwriting is not yet a strength of FFH. I also do not expect them to finish the year with a CR = 111%; it will be better than this. Q1 2010 was off the chart in terms of catastrophes so I can accept a CR that is off the chart. It is instructive to me that C&F is paying the largest share of the Zenith purchase ($130 in Q1 and $350 in Q2 = $480 million). I think we can all agree that Zenith has solid underwriting. This purchase gives me confidence that underwriting overall at FFH will improve in future years.

Al, FFH states any remaining funds required for the Zenith purchase will be dividended up from the subs by the end of Q2. Yes, when I saw the underwriting CR I was disappointed. And then I saw the investment results and was blown away. BV = $383.83 We can also estimate Q2 BV gain is likely in the $15 range which gives us a current BV close to $400. Shares are trading at $370. P/BV = 0.925. Cheap. That is much better than what I was hoping.

I like the topic... I just wish we were able to get a more definitive answer (perhaps it is in the comments... I just do not have a good enough understanding to put it together)! One red flag for me has been the underwriting challenges at NB the past few years. Back when I started following FFH, within FFH the underwriting track record of NB was held up as the model that the other subs aspired to. I get a quarter or two of challenges... I don't get a couple of years of challenges (unless competitors with massive capacity were so uterly reckless that they dropped pricing through the floor). When I look at C&F I wonder if their business model is as profitable as BRK, MKL or WRB. I also wonder how FFH lower ratings impacted the business they were able to access. I like the Zenith purchase because it brings in a skill set FFH can use. The question I would like answered (was asked earlier) is what does 'conservative reserving' mean at FFH. I know what it means at BRK, MKL & WRB. My HOPE is that over time we will all learn that it means that FFH has been underwriting business with an accident year CR that is closer to the better underwriters in the business. If they are able to demonstrate this then we will see the P/B multiple expand (my guess is this is years away).

Watching the clip, I am reminded that timing is pretty much impossible to predict, whether it be tech in the second half of the 1990's or housing in the US in the second half of the 2000's, or the turn in the current insurance cycle. We may still be years away (or not)! ;)

swf83 1.) I do not have much detail regarding the investment portfolio other than it is skewed to fixed income with a short duration (very much more traditional insurance co holdings). 2.) regarding price, you will need to make the call on that. WRB bought back 3.8 million shares at about US$25.00 and I would expect the company to be a buyer in the US$25 to $26 range going forward so I would be surprised if it went much below this price. If you wait, insurers may sell off as we are getting close to hurricane season. If you wait, the key risk is if it appears the market is hardening and Mr. Market decides it is time to buy insurers and they run away on you. I also suggest you listen to the conference call, if you have not, to get a feel for management. Each quarter you can then start to paint a picture of if you trust them etc...

Partner, the primary reason why I like WRB is because of their exceptional underwriting. That alone (they write a CR about 10% better than the industry) allows them to deliver a very good long term ROE. I consider their approach to provide me with some level of diversification versus FFH (within the insurance segment). I just listened to the converence call: 1.) still expect cycle to turn at year end with "price increases of a substantial amount in the 4th quarter". Expects redundancies to shrink and unfavourable development to increase. Longer tail businesses (casualty) will continue to report more reserve releases than shorter tail business (property). Insurance market pricing is driven by emotion, not logic. Those walking from business today are feeling short term pain in their quarterly results (as expense ratios climb); those writing business over 100 are still able to report what look to be solid quarterly numbers. Fear will eventually hit the market as those underpricing will eventually have to pay the piper. When fear hits, market pricing will harden. 2.) 15% ROE still expected this year; on the hook for $5 million in Q2 as a result of the oil platform sinking in the Gulf of Mexico 3.) Q1 CR (accident year) = 100%; with conservative reserving - feels industry (commercial lines) = 110% 4.) favourable development = 7% (bringing reported CR to below 95%) - this is the piece that is missing from FFH. Prem says they are running at 100% CR with conservative reserving. If this is true, and the issue is pre 2002 development, then we should see FFH start to report more favourable development or hold at the 100% level (versus creaping towards 105%). 5.) Portfolio yield is 4.3% (was 4.5% in Q1 09)

I did enjoy reading Grantham's piece this quarter. Low interest rates (and they will likely stay low) may fuel risk markets more than most expect. FFH is a great way to play this possibility. I am looking forward to Q1 earnings this week to see what is going on.

Bargainman, WRB is one of my top three holdings so let me give you what I like and I also would like to hear what omagn says... Summary: very cheap; solid long term track record; trust management; shareholder oriented; set to grow rapidly when insurance markets harden. 1.) the stock is cheap: my guess is they will earn $3.00 this year, in a very soft market. With the stock trading at $28 this gives us a PE of under 10. BV = $23.80. P/BV = 1.18 which is FAR below their long run average. 2.) I think they understand insurance. They have been in business since 1967 and have what looks to me to be a pretty decent track record. 3.) I trust management. Yes, the father / son routine is a red flag for me. However, as long a Bill Sr is there I am happy. 4.) They appear to be very focused on making an underwriting profit; I believe their people are paid bonus over multiple years based on what their policies actually earn (not by the volume they write). 5.) They are poised for near term and long term growth. They are sitting on excess capital; currently they are buying back large numbers of shares. Last year they invested in starting up some new ventures they feel will do well when the insurance market turns.