Viking

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.

Here is a pretty good summary (from Aon Benfield) of the current state of the re-insurance industry. Another solid reason to be optomistic about ORH results the next few years. www.aon.com/attachments/AON_Reinsurance_Market_Outlook_2009.pdf www.aon.com/attachments/AB_April_1_Renewals_and_Outlook.pdf

FFH appears to be an animal that most are not able to understand. Two years ago when it was sitting on CDS and gov't bonds and the financial world began falling apart few were interested (but they got very interested at the end of last year). Now they have done a complete about face and they are sitting on muni and corp bonds and stocks, including some financial names like Wells Fargo and GE. Their positions make their investment portfolio much more volatile than most any other insurer. It appears to me that after 7 lean years they again 'have their groove back.' Yes, I would like Mr. Market to attach a 1.2xbook (or 1.5!) value to the shares and keep it there, but this is not going to happen. Instead Mr. Market will continue to fall in and out of love with FFH and we will continue to get great entry points to purchase stock below BV. And at some point in the next year the stock price will run-up again... I am learning to enjoy the ride... I wonder what rabbit FFH mgmt will pull out of their hat next?

My understanding is the reference was Dec 31st to March 31st. This will improve yield and also set up the opportunity for capital gains in future years... Another brick in the wall!

Here a few random notes I took: 1.) 'More recently' they have been purchasing corporate bonds as they feel they are now being paid for the risk. Going forward this will help interest income and operating income. - tax free muni's have increased from $4.1 to $4.4 billion (Dec 31 to March 31) - corporate bonds have increased from $16 million to $1 billion - US treasuries have decreased from $700 million to $415 million - annualized portfolio yield in Q1 was 3.55% (not adj for taxes)... I am not sure if this amount includes dividends... 2.) Regarding OTTI: - once a security is written down you can't in future quarters write it up. If the value rebounds, it will benefit OCI and not earnings. When it is sold the benefit will flow through earnings. - once a security is written down if it falls in the next quarter it must be written down again. 3.) Plan to hedge stock position? No, not right now. But do review on regular basis 4.) Share buybacks? Will not do and sacrifice financial position. Look at cash levels and stock price. As demonstrated over the years, this is their 1st option to deploy excess cash. 5.) 5 year inflation outlook? Not an issue near term; deflation is. 20% (gov't) is spending. 80% is deleveraging. Can 20% change the trend with 80%? Didn't in Japan. Monitor carefully and will likely have a better sense in a year.

Yes, the print media is undergoing a very large change. However, the companies with the biggest problems also have a massive amount of debt (LBO or, like Canwest, they bought at the top off the market). Is print the real problem or is it a balance sheet issue? A small media company I hold a small position in is Glacier Ventures (GVC). Among other things, they publish local newspapers in many small communities in Western Canada. Lots of free cash flow that they are using to either pay down the small amount of debt they have or to make aquisitions. Got this one from Francis Chou (one of his holdings in both Asia and Europe funds).

FFH Watcher, my guess is if they did not communicate the $900 million increase in market value Mr. Market would have punished the stocks of FFH and ORH (still might... we will find out tomorrow). If FFH and ORH do sell off (to below .8 x BV) I think they will begin to purchase shares quite aggressively. If they had not communicated the $900 million and in Q2 purchased significant shares on weakness knowing what they know they may have gotten grief. You said that people can estimate the gains but I think it is quite difficult given the incredible changes in portfolios the past 6 months. Everyone is on the same page right now and able to make intelligent decisions. I am thankful they communicated this information (and also get your point that it is not usual to do this).

Q1 report was pretty much in line with expectations. 1.) Solid operating income = $0.95/share 2.) Investment Losses = $99 million = $1.65/share - not great, but expected and should now be behind us (i.e. Abitibi bonds writedown etc) 3.) Comprehensive loss = $93 million = $1.55/share - not great, but the stocks ORH own simply went on sale in Feb/March 4.) BV = $43.80 (down from $45.37 or $1.57) It appears to me that ORH is evolving. Its operating earnings are becoming more predictable (5% portfolio yield and good CR) and to me this is the big positive out of this earnings release. The unexpected bonus is the communication in the FFH release of $900 million increase in market value from March 31 to April 24. ORH represents 40% of FFH total portfolio which suggests they could represent $360 million = $6/share pretax! It is interesting... last year you held FFH or ORH because of their CDS and US Treasury holdings (bearish stance). Now you hold FFH or ORH because of their municipal bond and equity holdings (bullish stance).... Bizarre! Other notes: 1.) interest and dividends = $78 million x 4 = $312 = 4.2% yield (before tax considerations) - guidance of after tax yield = 5% appears bang on - total investments and cash = 7.5 billion - with additional purchases of bonds and stocks in Q1 we can expect portfolio yield to be a little higher! - this now represents an important relatively stable source of earnings going forward - when they were holding US treasuries the past few years the portfolio yield was coming down steadily, which in turn impacted operating earnings - the analysts should love this as they largely only forecast operating earnings. Perhaps this will get ORH a little more respect and this may help the stock price trade at a multiple closer to that of its peer group 2.) CR = 96.5%, looks to be OK - we will find out more tomorrow but from the conference calls I have listened to it appears the hard market for re-insurance is beginning to develop a little quicker than expected and slow improvements in pricing expected each quarter and continuing until early next year. Bottom line is this is positive news going forward... how positive we have to wait and see. 3.) Investments: looks to me that they spent just over $400 million of cash on bonds and stocks in Q1 which should help portfilio returns going forward.

Smazz, yes we seem to keep coming back to this topic... but I can't help myself! Regarding ORH, now that FFH ownership has grown from 60% to 70% it would appear to make a takeout more likely (30% is much easier to come up with than 40%). Let's apply the same takeout valuation for NB = 1.2xBV = 1.2x$45.37x18 million shares = US$980 million. ORH has $540 million that could (?) be passed up as a dividend (if they were wholly owned). Looks possible but my guess is this sort of thing would compromise FFH financial position too much which would not be great in the current environment. Perhaps what we will see over the next 12 months is for FFH to have a solid year and continue to re-build their cash holdings back up to $1.5 billion (based on 2008 year end earnings they should be able to get solid dividend payments from Crum, NB and runoff should also be paying a special dividend again this year). One concern I have with ORH is that their small float will stop large investors from buying and that this will hold back the share price. On the more positive side, ORH has the ability to purchase another 10 million shares. If shares trade much lower and earnings come in decent this year they will be able to buy at .8 x BV which should put a nice floor price under the shares. Regarding which is cheaper (ORH or FFH), ORH is cheaper when simply looking a share price to book value. However, they are quite different animals when it comes to insurance and I am not sure how one would value runoff at FFH.

basl1, my guess is what we are seeing is the natural ebb and flow. Extreme pessimism followed now by some optomism. But are we out of the woods (i.e. actual recovery in 2H)? My money says no. When realization sets in that this recession (asset deflation) is far different than past recessions and will likely take years to play out I expect more fireworks on financial markets (October?). For now, enjoy the rays of sunshine (afterall, its spring)! I continue to be cautious about the near term outlook for the economy and markets in general.

Given muni bonds is where FFH and subs have much of their bond portfolio I thought it would be useful to understand what has been going on since their purchase in November. Just as I thought, although yields on US Treasuries are trending upwards, yields on tax free AA muni bonds has been coming down. www.munibondadvisor.com/market.htm http://latimesblogs.latimes.com/money_co/2009/04/california-today-became-the-biggest-issuer-so-far-of-a-new-type-of-municipal-bond-that-has-caused-investors-to-rethink-the-mu.html

I wonder how the Quebec government will impact the process. You have an facility that has spent considerable money to remain relatively current and efficient; they just need chips at reasonable cost. What I am learning is how, during one-in-50-year storm, things can go south fast on well run companies. Amazing!