Viking

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.

Globe & Mail: www.theglobeandmail.com/globe-investor/fairfax-not-hunting-for-acquisitions-watsa/article1543428/

This takes them from 6,527,000 at Dec 31 to 11,203,600 as of today (todays closing price = $7.59) = $85 million = less than 2% of their equity holdings (pretty small position).

I found the underlined part of this quote in the article to be very interesting... If true and FFH continues to grow BV and insurance pricing remains soft looks to me that meaningful share repurchase are likely... "Watsa, referred to as the “Buffett of the North” by publications such as Forbes magazine, will take over Zenith’s assets, valued at $2.4 billion at Dec. 31, and add them to the $29.8 billion Fairfax already manages. He told Fairfax shareholders at the company’s annual meeting today the insurer doesn’t need to make any more acquisitions."

Zenith has posted Q1 results and they are pretty much as expected. I was surprised that BV only fell slightly (due to $0.50/share dividend). No end in sight to soft pricing. I believe April 29 is when they meet to vote on FFH purchase. www.thezenith.com/investors/investorinfo/press/page36126.html

Smazz, I currently hold a sizable chunk of FFH for similar reasons. FFH is like a hedge fund. Why would I think that I am able to earn a better return than Prem and his team? With the stock once again trading at about BV this has historically proven a decent time to invest with Prem and Co. The moves they have been making the past 5 or 6 years have simply been outstanding. One area I was hoping they would get better at was underwriting... the purchase of Zenith (outstanding underwriters) should improve their skill set in this area moving forward. They really are positioned to do well in so many different areas. And the best part is we know they will continue to pull rabbits out of the hat in the coming year and year(s)... It has been fun to watch them perform their magic. But I do believe their best is yet to come.

Regarding insurers, I believe many will prove to be good to very good long term holds (at current pricing levels). However, before valuations take off the industry likely needs an event to move from a soft to a hard market. When this happens expect a great amount of volatility. For most insurers underwriting is deteriorating (as business is shrinking and the expense ratio is increasing). Interest and dividend income is low. Realized/unrealized gains will be minimal. Reserve releases will be slowing. But most are overcapitalized. We need something to happen to soak up a bunch of that capital (like an above average catastrophe season). The event will likely result in a drop in prices of insurers setting up a one in 10 year buy opportunity. Absent an event we likely will get chinese torture... a 12 to 24 month process of slowly declining results with the stocks going no where.

I was reading RBC's most recent report on non-life insurers. Interesting because there was a lot of discussion around Q1 catastrophies, CR's and reserve releases and impact on Q1 results. Very little discussion on investment results and potential impact on BV. (Although I have found RBC has been presenting some pretty fair commentary on FFH lately). As per usual we will find out what's what when they release Q1 results next week (with a little more colour perhaps at the AGM). ;D

I spent a couple of hours to build a summary of FFH's Canadian Equity holdings (rough approximation of 13F available for US equity holdings). And yes, this may be quite inaccurate. I started with p12 of 2009 AR where Prem provides year end values for H&R, CWB, Mullen & GMP. I then went through past news releases which provided details for BRK.UN, IFP, JAZ, RCL, SFK & TS. I did not include Mega Blocks given that transaction happened in Q1. Here are the numbers: Dec 31 March 31 Change Canada $983,000 $1,081,000 $98,000 10% US $3,678,000 $4,074,000 $396,000 10% So far in April the Canadian portfolio is up another $119 and the US is up $250 million. Weave it all together and we get very rough gains on equities of $494 (to March 31) and $863 to April 21. Add in gains in international equities and corporate bonds and we should be safely over $1 billion. Take out 30% hedge and taxes and perhaps the increase in BV = $30/share??? In reviewing the AR what jumped out at me was the size of the write offs that FFH has taken on their many, many holdings the past two years. As risk markets continue to stabilize we may start to see some write ups which would then likely make my estimate above much too low. My purpose in pulling this together is not too try and peg the exact number but rather to try and get a general directional estimate of what is going on with the FFH investment portfolio and the possible impact on book value.

The Bank of Canada today in its statement has indicated that rates will likely be going up with the first increase in June (from 0.25% to ???). The past few years, the housing market in Canada had followed a similar path to that in the US (up lots and then down fast). But then last year the US market kept going down and the Canadian market (as rates went crazy low) went crazy again. Today house prices in Canada are back at peak levels. The government of Canada 5 year bond today is at 3.21% (up 14 basis points); a couple of weeks ago this same bond was at the 2.5% level. Most banks have taken their 5 year fixed rate up 100 basis points in the past few weeks (from about 3.6% to 4.6%). More importantly, todays announcement from the bank of Canada likely means that we have seen the bottom in mortgage rates and rates will be moving higher. Inflation today is slightly over their target level... should inflation actually go higher the bond market (and mortgage rates) may get ugly. Given how insanely high real estate prices are once again, given that personal incomes are not increasing, given the new (more stringent) mortgage rules for first time buyers, given the number of new listings currently hitting the market and now given the high likelihood of still higher mortgage rates it looks to me that the bull market in Canadian real estate is now running on borrowed time. My previous outlook was for prices to go sideways for an extended period. With interest rates increasing materially only a price correction makes any sense to me now (but not starting until August as the 120 day preapprovals will likely keep things frothy in the short term). It does boggle my mind at the amount of debt home buyers are taking on in the Greater Vancouver area today. Materially rising interest rates are a game changer...

Buffett's number one rule is don't lose what you got. I find giving other people suggestions a VERY tricky thing. What everyone should have learned from the past 18 months is higher return strategies carry higher risk (even US treasuries). I only give (a small number of) people ideas that I consider very fat pitches. Right now there are not alot of very fat pitches so I would suggest leaving the $ earning 1.5% and wait for things to get ugly again (which they likely will in the next 6 to 12 months).

Grenville, I am expecting ORH to report some losses regarding Chile and Europe Windstorms (impacting most reinsurers). C&F will likely post ugly underwriting results given past quarters and continuing soft market in US P&C. NB will likely also post poor results, driven by soft pricing and FOREX (although it looks to me that pricing in Canada P&C may be firming). Zenith also will likely post poor underwriting results (although FFH does not own them yet this is now relevant). We have a classic catch 22 situation. The industry has too much capital chasing too few premiums. What they need is a really ugly year on the loss side to soak up some capital. I also think that William Berkley is a smart guy and he feels insurers have been under-reserving and also aggressively using prior year development to report a low CR. I will be watching results to see if large reserve releases continue. With interest rates so low ( = low interest & dividend income) and the conservative nature of most investment portfolios (= limited investment gains) when CR's move above 100 many P&C companies will see their earnings plummet. This is when we will find out who has been swimming naked. We should know what is going on by the end of the year (especially if we have an above average hurricane season).

While this is not an exact science, below is from p83 of 2009 AR. Hedge was set when S&P was at 1,062 and today it was at 1,210 = 14% increase. Of interest FFH US portfolio is up 18% (from Dec 31 to today). -------------------------------------------------------------------- The table that follows summarizes the potential impact of a 10% change in the company’s year-end holdings of equity and equity-related investments (including equity hedges where appropriate) on the company’s other comprehensive income and net earnings for the year ended December 31, 2009. Based on an analysis of the 15-year return on various equity indices and the company’s knowledge of global equity markets, a 10% variation is considered reasonably possible. Certain shortcomings are inherent in the method of analysis presented, as the analysis is based on the assumptions that the equity and equity-related holdings had increased/decreased by 10% with all other variables held constant and that all the company’s equity and equity-related holdings move according to a one-to-one correlation with global equity markets. Change in global equity markets/Effect on other comprehensive income/Effect on net earnings 10% increase 333.1 (89.5) 10% decrease (333.1) 93.5 Generally, a 10% decline in global equity markets would decrease the value of the company’s equity and equityrelated holdings resulting in decreases, in the company’s other comprehensive income as the majority of the company’s equity inv stment holdings are classified as available for sale. Conversely, a 10% increase in global equity markets would generally increase the value of the company’s equity investment holdings resulting in increases in the company’s other comprehensive income. For the year ended December 31, 2009, approximately 30% of the effect of changes in global equity markets on other comprehensive income would have been offset by the effect on net earnings resulting from the company’s equity hedges effected through short positions in equity index total return swaps and equity total return swaps.

I looks to me that FFH is (once again) getting to look like a pretty fat pitch. Jim Rogers said the way you make money is when you see a $20 bill lying on the ground you pick it up. Since January, FFH's US stock holdings are up about $650 million. Add in gains from Canadian holdings and corporate bonds (US and Canadian) and my guess is the number is likely in the $800 million range = $40 per share pre-tax. Yes, they have hedged 30% of equities and there is a cost and we do not know what they have done in the past 4 months. My view is at current levels FFH is a great way to play the current bull market in risk assets. Should corporate Q1 earnings surprise to the upside (as Intel did today) there is more room to the upside. I also just read Stanley Zachs (Zenith) letter to shareholders in 2009 Annual report. This company appears to be a gem and will drive solid earnings growth for FFH in the future. I expect underwriting to disappoint (for most insurers); however, interest & dividend income will be very good and realized & unrealized gains will be very good (much better than competitors). FFH looks to me to be a pretty compelling value trading today at book value (in US & CAN $). And in the past, when the stars have aligned (as they look to be doing right now), this has also been a very profitable time to buy.

Anyone buying Shoppers (SC-TSE) given the recent sell off? For those not aware, Ontario (largest province in Canada slashed prices pharmacies can earn on generic drugs). About 1/2 of Shoppers profits are driven by its pharmacies (the other 1/2 by retail operations). It is trading at $38.25 (down from $43). RBC is estimating it will earn $2.94 this year and $2.95 next year = PE = 13 (after taking account of drop) Going into 2012 it should then resume its growth. It certainly is in the right space. This environment may also allow them to pick up other pharmacies in Ontario at very attractive prices. The key risk is if other provinces follow Ontario's lead and slash prices paid for generic drugs (further hurting earnings). Looks to me that Mr. Market is expecting the worst already. And you get a decent dividend while you wait for profitability to reset. Others thoughts?

Most people get anchored by what has happened in the previous one/three/five/ten year trend. They then extrapolate. Buying treasuries yielding 14% was, at the time, a contrarian position. I remember in University in the early 90's being taught that the US model was broken and in decline and that the Japanese model was the new paradigm. While I love to think about the macro environment and am certainly influenced by it (perhaps too much) I try to keep Buffett/Lynch in my brain... buy well run companies trading at a deep discount to their intrinsic value and hold for the long term. Right now I still think insurnace/re-insurance offers the best value (as a sector) compared to anything else I am comfortable with...

Relatively easy decison for me... I would chose cash. No other asset class gives me the margin of safety I need right now. I would be happy to sit in cash and wait for some asset class to melt down and then I would get greedy.

Burry made one of the great trades in recent memory. I believe that it is possible to spot bubbles with a fair bit of accuracy. However, my view is it is impossible to predict when they will burst (on a consistent basis). I identifed the tech bubble in 1996 and this view was not validated until 2000. I also saw the bubble in the general markets in the late 90's and in 2006-2008. My guess is Vancouver real estate is a bubble. I also think interest rates on government debt looks to be pretty bubblicious. To me the real question is should the government be in the game of deflating bubbles? Very tricky. As a small investor, I continue to agree with Peter Lynch that we have many built in advantages to large institutional investors. If we see a bubble and wish to withdraw and protect our capital we can. That is one very important lesson I learned in 2000 (I owned no teck stocks then). I then re-applied this lesson with a little leverage in 2008 (by being out of the market in general and owning FFH who would benefit if markets imploded).

With this sort of speculative purchase Prem and co must have been buying management. Since their purchase the company has morphed from a natural gas play to now more of an oil play. Hard to understand how you now value the company and come up with a margin of safety type analysis. Or perhaps the purchase was simply a hedge.

Dazel, I agree. FFH has taken some massive write-downs the past two years on many of its highly speculative positions. As the economy stabilizes and risk markets improve and companies are able to repiar their balance sheets and stabilize their business there exists the opportunity for some very nice gains to be reported.