Viking

Cherzeca, what i like about Gundlach’s presentations is the detail. It is a pretty thorough review of many of the current economic data points. I find he is much less opinionated the last 6-9 months. My key take away today is he thinks economic growth may tick up a little to start the new year; i have hear the same from other analysts. If this happens stocks should do well; bond yields should also increase a little.

Gundlach had another presentation today. His crystal ball has been pretty murky the past 18 months (like lots of people). Bottom line, my impression is he expects the US economy to continue to chug along in 2020. A few things that stood out to me: 1.) US economic data may pick up in new year as prior year numbers were quite weak (will not take much to get better) 2.) expects lots of leading indicators to turn up moving forward (not gangbusters but still positive) 3.) as a result of 1 and 2, pegs chance of US recession in 2020 at 35% (he was at 65% earlier this year, which was due at the time to many of the leading indicators deteriorating) 4.) US 10 year bond will likely slowly move a little higher 5.) US$ is peaking (he has been sayng this for a while) 6.) corporate bonds are an area to avoid (not rated properly) 7.) US will not have negative interest rates like Europe and Japan (based on Powell’s comments) 8.) politics: does not feel any of the Democrats currently running (including Bloomberg) will be able to defeat Trump

I have done this in the past, in a significant way, by initiating or increasing the position, on three or four occasions. Part of the motivation was because FFH was felt to be an anchor holding that could be held for the long term and part of the motivation was because I thought it was possible to take advantage of the temporary mismatch. I now come to the conclusion that I was wrong with the short term predictive power (process) even if the outcome has always been positive. Maybe others can do this effectively but I come to the conclusion that FFH price had a tendency to go up and luck explains the result. Your post though brought back a nice souvenir when I was planning to do this in November 2012 and, in fact, materially increased my position a certain day which was related to technical selling or something. Then again, if I were a brighter trader, I would have kept the trading chunk for longer as the realized gain on the incremental investment was about 20% vs 100% if I had waited another 2 years or so. Interestingly, I found that this was discussed in 2012. https://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/fairfax-down-8-this-morning/60/ Edit: Here's the link to the first page of the thread: https://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/fairfax-down-8-this-morning/ I see that Viking indicated that he was back in the saddle again and felt that things looked good for the next year or two. Nice call! As Yogi Berra said (versus decision making): When you come to a fork in the road, take it! Cigar, as an update, i did sell 1/2 of my position on Friday (I was way overweight). I was happy to lock in a quick 8% avg return in less than 2 weeks. Very lucky. If the stock continues higher in the coming weeks i will continue to lighten up (as i am still overweight). As i said at the outset, Fairfax for me is a trade. As i continue to get reaquainted with the company i may hold a small position (5%) as a longer term holding (especially if i see sgns the global economy is stabilizing as we enter 2020 which would ge good for their equity holdings).

Thirfty, i used to closely follow what Fairfax was doing from an invesmtent standpoint (i also used to follow Francis Chou) and sometimes made purchases. I generally stopped about 4 or 5 years ago. Today i prefer large cap; quality; out of favour. Fairfax’s style is generally not a good fit for me these days (deep value... declining industries... sometimes declining companies). I am following their investments today more to understand how it is impacting Fairfax book value than to invest directly. Having said that Fairfax India does look interesting at $11.50... Sharper, i agree, the upcoming $10 US dividend is another (small) near term benefit for current owners :-)

Here is a snipet of what RBC had to say in their weekly report today. I have to say i am pretty happy with RBC and their coverage of the insurance industry; lots of good information that really helps to understand the complex issues at play. “For obvious enough reasons the interest rate narrative showed up most strongly on life insurance results and conference calls... ...interest rates declined about 40 basis points in the quarter and more than 100 basis points from a year ago. ...The impact...showed up in two main forms – actuarial assumption review changes and impact on net investment income and/or related spreads. The assumption change narrative is very straightforward, multiple companies lowered their long-term interest rate assumption, often to 3.75%. ...In general these changes had minimal impact on GAAP results, manageable impacts on statutory reserves/capital and minimal ongoing implications for earnings. The more impactful part of the narrative was the impact on spread based businesses...investment income earned in the quarter was down. The net result of all of this is that, as expected lower interest rates are already impacting earnings both in the 3Q and prospectively over however long one wants to assume rates will remain low. ... The impacts tend to be small, companies have suggested maybe 1-3% of earnings per year, but that does add up, particularly if ‘forever’ is your answer to how long longer is. The other part of the narrative is what companies are doing about it. Some have been pretty successful with hedging. Most have repriced products... For most companies its only 7-10% of their portfolio that gets exposed to reinvestment so this is a narrative that less resembles a freight train and more resembles a steam roller. It’s possible to outrun a steam roller, at least for awhile. So our bottom line on interest rates is they are having an impact, the size of the impact is manageable but the duration of that impact is uncertain. That might be sufficient to make valuations across the life insurance sector look attractive, it’s probably not sufficient to provide them a catalyst to get better.”

Thrifty, there are three keys to Fairfax: 1.) underwriting 2.) bond holdings 3.) equity holdings Their low stock price is not due to poor underwriting. Their bond portfolio is also very conservatively positioned (quality and short duration). It makes sense to me that the stock has massively underperformed (peers) due to Mr Market not liking Fairfax’s equity holdings (and past under-performance in this area). It currently has significant exposure to emerging markets (Thomas Cook India, CIB, Fairfax India and Africa etc). If we see a return to risk-on in equity markets and emerging markets take off then this should help FFH stock. (This would also likely mean higher US bond yields which is also good for FFH). For those looking for exposure to ‘risk-on’ trade FFH might be a good fit; perhaps this is a factor driving the 10% jump in the past week. https://www.marketwatch.com/story/why-a-noted-stock-market-bear-turned-upbeat-on-cyclicals-2019-11-08?siteid=yhoof2&yptr=yahoo

10-year Treasuries are at 3-month highs. Fairfax trades where it did 3-months ago. It's not a perfect correlation, but I continue to believe that we need to see sustained higher yields before Fairfax can consistently deliver an attractive ROE. Twocitiescapital, yes, higher bond yields would be immediately helpful to Fairfax. However, low bond yields are hitting all insurers hard and appear to be an important driver in what looks to be a hard market with pricing. Also, all insurers were being negatively impacted by bond yields falling this year and Fairfax was a massive relative underperformer (in terms of stock price). I think the key reason FFH spiked 10% in a week is sentiment changed; it was deeply oversold and its underlying business was actually chugging along. The rubber band is snapping back.

gary17, the stock was pretty hated going into earnings last week. It is up 10% in the past week (since they released results). Not sure what the driver is but we will see in the coming weeks if this move has legs; perhaps the technical picture is improving and this is helping. Fairfax stock does have a history of moving quickly when a new trend is established (up and down). Bottom line, with the stock trading at about BV it is still cheap.

Petec, thanks again for getting this thread started and posting your summary :-) I have spend a couple of days of my life trying to figure out what the actual size of each of the various positions are (in $US). So I can understand magnitude and compare positions. I also want to be able to track them to understand how they will impact FFH results at quarter end. I have tried to determine the actual amount of shares Fairfax currently holds, what the share price is (local currency), total value of holding, currency conversion to $US etc. For those who like detail look at the attached Excel spreadsheet; hopefully it is not too confusing :-) Please let me know if you see and errors; for starters I am not sure if I have calculated Fairfax India and Africa correctly given what is reported on the Balance Sheet. And feel free to copy and use the spreadsheet to fit your needs. My plan is to try and get position sizes for as many holdings as possible, including private holdings (Toys 'R Us etc) so stay tuned. Value (in millions) of Stock Holdings as of Nov 6 (all in $US). Percent = share of listed 15 holdings. 1.) Eurobank = $1,156 = 22% (C = common stock on balance sheet) 2.) Seaspan = $873 = 17% (A) (not including 25 million $8.06 warrants) 3.) Blackberry = $259 = 5% © (not including convert; it would be top 3 if included) 4.) Recipe = $467 = 9% (A = investment in associates) 5.) Fairfax India = $451 = 9% (A) 6.) Thomas Cook India = $441 = 9% (A) 7.) CIBank - Egypt = $402 = 8%© 8.) Quess = $346 = 7% (A) 9.) Kennedy Wilson = $308 = 6% © 10.) Fairfax Africa = $155 = 3% (A) 11.) Resolute = $123 = 2% (A) 12.) Stelco = $99 = 2% © 13.) IIFL Wealth = $80 = 1% (A) 14.) IIFL Finance = $50 = 1% (A) 15.) IIFL Securities = $11 = 0% (A) Total 15 positions = $5,504 = 100% Some takeaways: - the big 3: Eurobank, Seaspan and Blackberry. All 3 have interesting stories with significant upside potential. - the India positions have been crushed over the past year (TCI, Quess, IIFL, FIH). If they are half as undervalued as FFH thinks there is big upside potential. - given its very small size we can put a pitchfork in Resolute = 2.4%. Bad purchase (happens). Time to move on - surprised with size of CIB; looks to be very well run. Chug chug holding (solid grower). - KW: another chug, chug holding (solid grower) Fairfax_Equity_Holdings.xlsx

With all the chatter about their investments, it is easy to forget that Fairfax is at its core an insurance company. Q3 results had lots of good news. Performance of the insurance businesses was better than expected. It is also growing net written premiums better than expected and this growth is expected to continue into 2020. This is likely why we are seeing the share price of FFH up nicely post earnings. Fairfax appears poised to deliver operating earnings (underwriting plus interest and div) of about US$30/share moving forward. Shares are trading at US$440. Regarding the investment portfolio I think it is fair to say that Fairfax is a company in transition. Results for 7 years (2012-18) were terrible. The good news is management appears to have learned some important lessons. It is likely they will remain deep value investors (high risk/high reward type plays); not what Warren Buffett does but this is FFH and not BRK. As an investor it is easy to get anchored in the big mistakes made and it becomes very difficult to look at the current situation in an unbiased way. I am slowly working my way through each of Fairfax’s largest equity positions. It has been a very good exercise as i am learning lots. Most importantly, it is helping me construct a more accurate picture of this part of Fairfax’s business (and improving my understanding of Fairfax as a whole). I am seeing much more that i like (especially given where the various businesses are priced today) than what i dislike. If the global economy continues to chug along at current growth rates and avoids a recession in the next couple of years then Fairfax could see some nice outperformance on the equity side of its business. The US jobs report on Friday was above consensus and the US consumer continues to spend which suggests the US economy is chugging along. We likely also have a management team that is very unhappy with how low the shares are trading today. Management likely views this as an opportunity. In the past management has been very creative in coming up with solutions to problems. This is a potential catalyst for current shareholders that i think is under-appreciated. (I am not suggesting Fairfax does something to pump up their stock price; rather, they do something to take advantage of the gift Mr Market is giving them.) When i find an investment that looks undervalued it is ideal if there exists a few catalysts that, if they happen, could help drive the share price higher. Here are four potential catalysts for Fairfax: 1.) hard market will drive operating earnings higher into 2020 (this one is happening...) 2.) global economy continues to chug along, equity positions perform well 3.) management team gets creative and takes advantage of low share price. The asset dispositions may help in this regard; these could be listed as a separate catalyst (as proceeds may be beneficial but not be used to but back stock). 4.) improved investor sentiment. I think it is safe to say that sentiment in Fairfax today is at an all time low today and the shares are priced accordingly. As Fairfax executes it will begin the process of healing with the investor community.

Does anyone have an opinion of what positions Fairfax is looking to monetize next (stock holdings, affiliates etc)? This has the potential to be a nice short term catalyst for the shares. Here is what the company had to say on the Q3 conference call. Paul Holden (CIBC): "...you referred to monetizations and process. I was wondering if we can kind of get a status update on that monetization and process and just a characterization of how far you think you're along in that process. Is there still a lot to potentially do there?" Paul Rivett (Fairfax): "...So we're quite far along in the process. There -- we've got the whole Hamblin Watsa team from Prem right through working with us. A number of these things are close to fruition. A few that are more at the earlier stages. But as you can imagine, we can't give you specifics on it, but we're very happy that we're close to being able to get a few things across the line in the fourth quarter. ICICI Lombard was part of that. So you saw that we can act fairly quickly. But also, it's a -- we want to get best price and best execution, right? So we're working to -- we're getting -- we're working to do that for our shareholders."

RBC just released its most recent report on FFH. Pretty balanced assessment (and might explain some of the increase in the shares as they started moving up just when the report hit my in box). “Price target: We’re keeping our price target at $600 (C$790) which still applies approximately a 1.2x multiple to estimated 2020 book value. We recently commented in our weekly newsletter that Fairfax is probably the most overlooked story in the P&C insurance universe, we still strongly believe that. While we appreciate that the company’s investment portfolio is different than most, operating results have been good, reserves have proved strong and growth is clearly accelerating. We don’t think the market is pricing for much of this right now and that represents an opportunity in our view.”

So Berkshire’s largest equity holdings (Apple and big US banks) are on fire. And we look to be entering a hard market in isurance (which will benefit diciplined operators like BRK in a big way). US economy continues to chug along... all this = price cut for BRK. :-)

Just finished listening to the Q3 conference call. Here are a few takeaways: 1.) on ‘monetization’ of some investments; how far along are they in the process? - far along in the process - a number of opportunities are close to fruition - ICICI sale was one example (cash proceeds of this sale are at holding co) 2.) on hard market; what is driving it? - low interest rate environment, social inflation, capacity coming out (like Lloyds), historically large catastrophe years (2017). - ‘A whole generation of underwriters need price again.’ 3.) on social inflation - they fell they are ahead of the curve on this issue and feel good about reserving 4.) on use of cash - priority is to support business growth at subs - need to take out minority holders at Brit and Eurolife in coming months - Q3 can be a big cat quarter so little stock was repurchased this quarter 5.) Fairfax India - Bangalore Airport was recently approved to construct a third terminal; this increase value of investment in quarter. Value of asset may be increased further (something having to do with land lease for airport). 6.) Toys R Us: retail operations mildly underperforming; value of asset is real estate. Feel good about investment and prospects. 7.) Q4 Hagibis catastrophe loss estimates? ‘No indication’

Cigar, thanks for posting your thoughts on the underwriting side of their business. Very informative. I think WR Berkley has also seen a shrinkage in reserve redundancies over the years and i think they have been very close to zero the past couple of quarters. Even so, WRB reported CR is still very good (and hence their share price supports a very high P to BV). It is impressive to see the growth of Net Premiums Written. The underwriting side of the business looks to be growing nicely. And the majority of the investment portfolio (in bonds) is positioned very conservatively (short and quality). The issue for this company is the toxic mix of equities they own. They have absolutely been crushed over the past three months (when the overall market was doing ok). One has to think that the bleeding has to stop at some point. The problem is many of the investments they have made are not that easy to understand or track or they are turnaround plays. So it comes down to do you trust management... and the answer here is a clear no. Their track record with equities is so bad the past 7 years a person would have to be a fool to say they have any confidence in Fairfax’s ability to pick good equities. Fortunately, i have only recently started following Fairfax again. And i do like the stock at US$425.

Thomas Cook India stock was down a bunch this quarter; this decline is not reflected in Book Value Per Share calculation Book Value Per Share (page 68 of Q report): "Common shareholders’ equity at September 30, 2019 was $12,417.2 or $462.98 per basic share (excluding the unrecorded $561.8 pre-tax deficiency of fair value over the carrying value of investments in associates and certain consolidated subsidiaries) compared to $11,779.3 or $432.46 per basic share (excluding the unrecorded $48.3 pre-tax excess of fair value over the carrying value of investments in associates and certain consolidated subsidiaries) at December 31, 2018" Thomas Cook India Fair Value $473 Carrying Value $928 Deficiency $455 (Fair Value June 30 was $826)

Below is a summary of a number of Fairfax stock holdings that dropped in value a bunch in Q3. The good news is these low prices are now baked into the current book price of Fairfax of $463. The stocks are looking more and more fair valued (some perhaps even under valued) :-) Sept 30. June 30 Blackberry. $5.25. $7.46 us$ Resolute. $4.70. $7.20 us$ Stelco. $9.26. $15.20 can$ Fairfax Africa. $6.30. $7.78 can$

Overall, looks like a solid quarter to me. 1.) CR = 97.5; lots of commentary about companies being under-reserved; good result 2.) growth of Net Premiums Written at Odyssey, Crum and Allied +20%. Hello hard market. 3.) a number of Fairfax’s equity investments were down massive amounts this quarter (Blackberry, Stelco etc). I was wondering if this was going to drag them into reporting an earnings loss for the quarter. This did not happen. Looks like the ICICI gain on sale helped (with a second large gain to come in Q4).

Cigar, thanks for taking the time to share your thoughts and provide a framework of how to look at underwriting (across 4 buckets). I am not an insurance analyst and this helps. Overall, is your assessment that FFH is a little above average when it comes to underwriting (6/10 on average)? You give them a 3/10 on 'D-Capital structure and financial flexibility that allow to opportunistically pound the hammer when the hardening occurs'. Do they not have a fair bit of capital at some of the subs like Odyssey which should let them take advantage of a hardening market? Perhaps they are wanting to continue harvesting more of their equity gains (like ICICI Lombard) to give them a greater ability to write more business should the market continue to harden. _____________________ Here is what Fairfax had so say on the topic of reserves on their Q2 conference call (Aug 2): Question from Jeffrey Fenwick (Cormark Securities): And just generally, I know Allied was a factor in this, but in terms of reserve development, historically Fairfax -- I know you've taken a conservative approach to underwriting. You've always benefited by, I think, roughly 5 to 8 points a year in terms of favorable development. And that seems to have tapered off for a couple of quarters, not just Allied but Odyssey and maybe the others stand out there. Are we entering a period here where maybe that favorable development starts to taper a bit in aggregate? Or what's your view on that? Answer by Paul Rivett (Fairfax): So I think as an industry, we're starting to see generally maybe redundancies come down a little bit. But within our portfolio of reserves, we continue to be very prudently reserving as we're adding new business. And our reserve redundancies are still going to be relatively strong, and most of those redundancies come out in the third and fourth quarter in any event. So we're feeling good about it. But I think it's a fair question. As an industry, I think it is starting to become a little less redundant, but we still have quite a bit in our portfolio. And everything we're adding, we're being very prudent to make sure that we'll have those redundancies in the future.

Interesting that Fairfax stock price is down so much YTD; about 10%. Especially when compared to peers, some of which are up significantly (some are up as much as 40% YTD). The relative difference in performance of the stocks is 50% in some cases. What has changed at Fairfax in the past 10 months to warrant such dramatic underperformance (they are the clear outlier)? I can’t think of anything (investment portfolio rebounded from Dec low, underwriting results have been ok, bond portfolio has not seen any big changes). Could it be sentiment? Did a bunch of long term investors decide they had waited long enough and it was time to sell and move on? My guess what is driving most insurance stocks higher is because we are in a hard market (ex workers comp) and prices are moving higher. Fairfax has been taking advantage of the hardening market the past couple of quarters (growing their top line). The hard market may also be in its early innings. There has been lots written about FFH needing to get to a CR of 95 or below to be able to hit its ROE targets. The hard market should help move FFH in that direction over time. The hard market should also be a nice catalyst for Fairfax shares over time. Lots of people would like Fairfax to buy back shares with the stock trading at 0.9xBV. It appears Fairfax is prioritizing growing its business (taking advantage of the hard market). We will get more clarity when they report results in early Nov. Reserving will be a key factor to watch. There is lots of commentary about costs outpacing estimates (for the industry). Fairfax has a pretty good history of reporting reserve releases in its various divisions. Hopefully this continues when they report in Q3. As companies release results we will now start to find out who has been swimming naked (as our friend W. Buffett likes to say). ——————- A quote from WR Berkley Jr. on their Q3 conference call yesterday (stock is up 40% YTD): “It is without a doubt a challenging moment for the industry. It is going to be particularly challenging for those that have not been both paying attention and taking action. The combination of low interest rates along with Mother Nature that doesn't seem to want to leave us alone on the cat front, and then really the big nut out there being social inflation, this is a pressurized situation. We think that we will be disproportionately less impacted relative to many of our peers because of the type of business that we operate and our approach to running the business. ...We think this shift in the marketplace is not going to be akin to what we saw in 2011. And while no cycle is a mirror image of other cycles, there certainly are some of the fundamentals that are lining up that would suggest that while it may not be like '86, it certainly could be in some ways akin to 2002, 2003. This will undoubtedly create opportunity and benefit for the specialty space and in particular meaningful opportunity for the E&S space, which as you all know is a significant and important part of our business.” https://s22.q4cdn.com/912518152/files/doc_financials/2019/q3/3Q19-Earnings-2019-10-22.pdf —————— Another Hard Market Harbinger: U.S. Commercial Lines Prices Up 4% in Q2 https://www.insurancejournal.com/news/national/2019/09/12/539617.htm —————— Reinsurers Maintain Upward Pricing Momentum—But Will It Last? https://www.insurancejournal.com/news/international/2019/10/24/546458.htm —————— Brokers expect hard market into 2020 (Canada) https://www.canadianunderwriter.ca/insurance/brokers-expect-hard-market-into-2020-1004169173/

What a mess. Alberta is so screwed; who in their right mind would think about putting new money into oil and gas in Canada?

Vinod, FFH for me is also a trade at this point in time. 1.) regarding insurance, Brit and Allied are the watchouts for me. Past experience shows it can be a bumpy ride for a few years post aquisition. 4.) my understanding is their long term bond results are among the best in the industry. Have they perfectly timed the changes in rates the past 2 years? No. 5.) FFH investment team is a big watch out. I do like the exposure to India and i do think this is a good fit. I have started reading up on Seaspan and the company is executing its plan well (and FFH has done well on its investment). Eurobank looks well positioned; if the Greek economy does ok this investment could perform very well. Blackberry trading at $6.50 does not look expensive to me and it is in the right spaces (QNX and cybersecurity). Many of the issues have already hit BV. Moving forward, yes, if the economy falls off a cliff their investments will take a hit. Or perhaps we bump along for a few years at 1.5% GDP growth... in this scenario their invesments should perform ok to very good. 6.) if bond yields stay low this will affect everyone in the industry. I think we can assume CR come down (perhaps this is what is driving the current hard market).

Pete, my guess is bond yields and combined ratio are connected. If bond yields in the US stay at current low levels or drop more then this will force all insurance companies to achieve a lower CR moving forward. Perhaps this is the key driver of the current hard market (not sure). This will take years to play out. So based on current yields and the outlook for the future i would expect FFH to get to a 95 or better CR in the coming years (similar to all companies they compete with). I read both the Q1 and Q2 conference call transcripts and was happy with the presentations and the answers to questions (and minimal promotion). I do have a certain level of trust in management and that is why i bought shares. I have found that over the years Fairfax has made decisions that appear to be focussed on making the company bigger (empire building) with the long term impact on shareholders a secondary concern. There has also been lots of discussion around corporate governance (family control and bringing the kids into the fold) that feed the ‘not shareholder friendly’ narrative. Is Prem’s number 1 focus to drive shareholder value? No, i don’t think so. Is it important to him? Yes.

Is Fairfax a $20 bill laying on the street that everyone is walking by? Lots of former investors in Fairfax have such a long history with this company it is easy to let emotions cloud the decision making process. It is sometimes difficult to separate past experiences and what you do not like about a company from where it is today and more importantly where it is going tomorrow. The calculus shifted for me over the weekend. There are lots of great threads regarding Fairfax (thanks to Petec, Stubblejumper and others) to help get up to speed on the company. Bought a big chunk of FFH today. The summary provided by Woodlock House pretty much sums up my thoughts on the company (i copied a chunk of it below). In addition, ex workers comp, we look to be in a hard market and Fairfax is growing its business nicely (it is after all an insurance company). Shares are trading today at US $420 P/BV ($465) = 0.9 look cheap to me. - Positives: Shares are trading at a 5 year low (absolute price and P/BV, sentiment might be at all time low, we are in a hard market, bond portfolio is positioned very conservatively. - The jury is still out: on equity investment decision process; saying better things, amd brought in some new blood but time will tell. - Negative: i am not sure the company is run in the best interests of shareholders. That alone might make this purchase a trade for me. - Impending: i am expecting news on taking out minority partners in the coming months (Brit and Eurolife). Down the road they need to do the same with Allied World. - stock buybacks: one big catalyst for the shares would be if managment decided buying back stock trading at 0.9X BV was a top priority. Right now it is clear that they would rather use excess cash to grow the business and taking out their minority partners. My hope is they get creative here and find a way to do a meaningful buyback. From Woodlock House letter: http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/woodlock-house-blog-post-about-ffh/ “Most of the investors I’ve talked to about FFH will bring up Watsa almost immediately as, basically, someone they no longer trust to make good decisions or deliver good returns. I can understand why. (The baffling macro bets of some years ago cost FFH shareholders billions of dollars. Watsa said he not would make such bets again. But the damage was done.) The insurance side of the operation has been strong for FFH in recent years. But even there, operations are below Watsa’s target of a 95% combined ratio. FFH’s Q2 number was 96.8%. Profitable – anything below 100% is profitable – but below target. So, as you can see, the valuation is not such a cut-and-dried matter. FFH has had some issues. Nonetheless, we own the stock at a price below book value. The most important reason is that the downside seems low. The valuation protects you, the company appears well-financed and management seems honest and well-intentioned. These are not small things. Moreover, I think the assets collectively could generate a ~10%-type ROE. Watsa has made a public goal of hitting 15%. (FFH’s ROE was 15% in the second quarter, thanks to investment gains). He says a 95% combined ratio and a 7% return on FFH’s investments gets to a 15% ROE. But in a low-interest rate environment, and given a large bond portfolio, a 7% return seems unlikely. But possible. Sustaining a double-digit ROE is key. (FFH can reach 10% by following a number of roads. For example, one road requires a ~95% combined ratio and ~5% return on its portfolio. That seems do-able.) Anyway, a consistent 10% would grow book value at a decent clip and then you’d likely get an additional lift from the valuation even if the stock moved just to 1.2x book. As RayJay reports, a comparable set of North American insurers with an 11% ROE trades for 1.7x book value per share. I admit, FFH is not exciting. It’s not fake meat or pot or sending billionaires into space. But it shouldn’t hurt you and has potential to deliver a very nice return.” https://www.woodlockhousefamilycapital.com/post/the-horse-story

I just listened to the WR Berkley Q2 call and Rob Berkely stated they feel pricing is firming. Fairfax said on the Q2 call that growing the business at their operations is a priority (to take advantage of the hard market that is developing) and you can see this in the growth they are posting. Fairfax also mentioned they are required to take out minority stakes in Brit and Eurolife in 2019. They also need to take out OMERS and their minority stake at Allied World at some point and this will be a big use of cash. So i am not expecting aggressive share repurchases until we get more clarity on how much new business they can write in the hard market and timing and cost on the minority buyouts. They also appear focussed on harvesting some gains (ICICI Lombard) and also exiting some positions (Reitmans). If they do more of this then perhaps they will get more aggressive with share buybacks.