Viking

omagh, I agree that FFH may use excess cash to make more aquisitions. There is a chance that over the next quarter the economic data from the US could suprise to the upside and risk assets could continue to rally and as a result FFH may decide to monetize some of those massive gains. What to do with the excess? I think it is more likely they will purchase their own shares (below book, lets say at 90%) than make a large external aquisition at 1.3xBV. I do not expect them to buy back 25% of outstanding shares... but I could see a repurchase in the order of 5 to 10% should the stars align. Many insurers / reinsurers are currently buying back lots of shares and most are trading at more than 0.9xBV (not that that says alot)... As per usual, just a guess...

Nnejad, my estimate is simply a starting point to get the discussion going. The only number I am clear on is the interest and dividend number. Yes, realized and unrealized gains have the potential to be much higher than my number. I also view underwriting income as a risk. Put it all together and I would not be surprised to actual results reported by FFH tobe higher. I am hoping that were people have better visibility (i.e. Brick) they let us know and help sketch a more complete picture. Thanks for sharing!

Here is my edited post from Dec 15th (stock value update is attached). Q1 increase in BV = $15/share; take out $10 dividend and March 31 BV = $375/share. Analysts are expecting earnings of $6.00 (last year was -$3.55) so ‘optics’ should be good (i.e. they should be able to beat). I expect FFH to have realized some of their equity gains. In the near term the key catalyst for a pop in the share price would be if FFH aggressively buys back shares (not likely until after the Zenith purchase). The risks to the down side include the insurance soft market getting worse or a sell off in risk assets. For 2010 I think it reasonable to assume FFH will increase BV by $20/share ($30 including Q1 dividend) with Dec 31 ’10 BV = $390. With shares trading today at US$373.24 the company is cheap but not crazy cheap. Here is my very rough calculation of what FFH should earn in Q1: 1.) Underwriting income (CR = 102) = - $25 mill 2.) Int / Div Income (Q4 $172.4) = $175 Operating Income = $150 3.) Net Gains on Invest = $350 (incl unrealized gains) 4.) Interest Exp = $50 5.) Corporate Overhead = $25 Pre Tax Income = $425 6.) Inc Taxes (28%) = $305 Increase in Bv = $306 = $15/share Q4 BV = $369.80 BV Growth = 4% Assumptions - CR = 102. Soft market continues; Q1 saw significant cat activity. - stocks were up $400 million in Q1 (this is 30% hedged); hard to know what was sold. I expect muni bonds to have been flat and corporates and alternative stuff to be up. - insurance hard market? Looks like it will not be happening soon (still to much capacity). When this happens this could really juice FFH BV growth. - Q2 will see the close on the Zenith acquisition which will help grow the top line going forward. - one catalyst for FFH continues to be possibility of share buybacks. FFH has been quite predictable so far in what they are doing with their excess cash (bought NB, ORH & ZNT). I think the next big move will be share buybacks, assuming earnings stay reasonably strong and shares trade at or below book value. The only question is when do they start?

I do enjoy reading stuff and thinking about inflation/deflation... Currently, nothing jumps out at me. My best guess is we see deflation in the short term perhaps followed by some inflation 4 or 5 years out. Something I am thinking a little more about these days than inflation/deflation is how expensive the current market averages are versus historical averages. I believe that consensus opinion is markets are expensive and a sell off is long overdue. This leads me to believe that the market will likely continue higher in the near term... As a result of all this, I am happy to try and continue to find well run companies trading at fair to cheap valuations. There look to me to be quite a few profitable, well run companies with solid long term prospects trading at a PE of 15 or less with a decent dividend yield. Perhaps these companies will not be home runs; however they likely will be solid singles (deliver returns of 8 to 10% per year).

I have initiated a small position in Shaw (SJR-NYSE / SJR.B-TSE). The shares are trading (CAN $ details) at just over $20.00 - current dividend is $0.88/yr = 4.4% (payout ratio = 67%) - F2009 earnings = $1.19; P/E = 16.8 - F2010 earnings forecast = $1.45; P/E = 13.8 Shares have sold off recently due to Shaw's likely start up of wireless business at end of 2010 and the uncertainly around how much they will chose to spend. Reading through the quarterly report etc and it certainly appears that Shaw is a well run business. Management also looks to be very shareholder friendly with earnings (high dividend yield and share repurchases). similar to FFH, the shaw family has clear voting control. Their current businesses are performing exceptionally well and they have a very good historical return on equity. I believe Shaw management is calling for earnings to grow by 11% this year. Their main competitor out West is Telus; my personal experience is Telus' customer service is a train wreck. In cable/internet, Shaw also appears to have the much better technology. Bottom line, this stock looks to be a solid bet to deliver me 8 to 10% per year (between dividend and price appreciation). As I have said before I am looking to find a basket of these types of opportunities to hold in place of a portfolio of bonds... Anyone else have an opinion on Shaw?

I am in the process of wading back into the Greater Vancouver real estate bubble. fortunately, I will be looking to buy in Langley where prices are a little cheaper... Currently, in Canada one can get a 5 year fixed mortgage for 3.79%. Let's say a house costs $700,000 and a family has a $100,000 down payment. Amortized over 30 years and your monthly payment is $2,782 = $33,384/year (interest is about $22,740/year). This is not onerous. This is extermely cheap. And this is clearly what is feeding the bubble in Canada. Until 2 to 5 year rates increase significantly (to 5 to 7 %) the market in Canada will likely continue on its merry way. Further, holding debt as a part of your assets (say 30%) is not a bad decision if one is looking for an inflation hedge. 5 years at 3.79%? My belief is that housing prices in Greater Vancouver are in bubble territory. I also think the most likely outcome is they will stay high the next few years as interest rates stay low... One can be right on a trade. Getting the timing right is the hard part...

The lesson that jumped out at me (personally) the most was: 9.You must buy on the way down. There is far more volume on the way down than on the way back up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy. My experience the past 15 years (since current management took over to coin a phrase I love) I have been quite good at this 'lesson'. However, I need to continue to get better at the hold part of the equation (not that I am complaining too loudly).

I think the FFH could have written many of the lessons. However, there are a couple that appear at odds with FFH (and even Buffett): Lesson 16.Financial stocks are particularly risky. Banking, in particular, is a highly leveraged, extremely competitive, and challenging business. A major European bank recently announced the goal of achieving a 20% return on equity (ROE) within several years. Unfortunately, ROE is highly dependent on absolute yields, yield spreads, maintaining adequate loan loss reserves, and the amount of leverage used. What is the bank's management to do if it cannot readily get to 20%? Leverage up? Hold riskier assets? Ignore the risk of loss? In some ways, for a major financial institution even to have a ROE goal is to court disaster. False Lesson 7.In a crisis, stocks of financial companies are great investments, because the tide is bound to turn. Massive losses on bad loans and soured investments are irrelevant to value; improving trends and future prospects are what matter, regardless of whether profits will have to be used to cover loan losses and equity shortfalls for years to come. I think this is exactly the logic Buffett has used to explain his support for Wells Fargo... future earnings will cover current losses...???

Interesting to see what he is holding. I am pretty familiar with Glacier (GVC) but not the other names. Glacier looks to be pretty cheap. The challenge to their share price in the near term is what will be the catalyst? Our portfolio at 31Dec2009 looked approximately as follows: Indigo Books & Music Inc. 14% Glacier Media Inc. 14% EGI Financial Holdings Inc. 9% TimberWest (units & convertible debentures)7% Sun-Rype Products Ltd. 6% Arlington Asset Investment Corp.5% 12 Other Canadian Holdings 23% 5 Other Foreign Holdings 8% Cash and Net Working Capital 14%

ubuy2wron, I decided to look into EL Financial tonight and while their long term track record looks to be pretty decent, their past 6 quarters look pretty miserable (in aggregate). Most importantly looking into the future, their underwriting results look quite poor and their investment results also do not inspire a lot of confidence. Of interest, their general insurance results are especially poor; I wonder if E-L is not one of the companies in the Canadian P&C space that has been undisciplined on the underwriting side as they are actually growing their business and posting an increasing underwriting loss. I am not trying to be too critical but can you help me understand why you view this co is a good investment? Q4 results should come out soon and that will help us understand if underwriting is a problem or if the trend is improving.

I also hope the Zenith purchase is a turning point in their evolution. I would much rather they pay 1.3xBV for a company like Zenith than pay 1xBV for an average insurance company. My guess is we will find out in the next 12 to 18 months; if WRB is correct and US P&C companies are underreserved then many will be available for cheap. One of the reasons I like WRB is most of their grow is through internal growth and small aquisitions... quite controlled. Looking out, I wonder what will become of AIG. As they continue to shed units and lose their best people it makes sense to me the units they have left will shrink in size and also become less profitable. The wild card is given Uncle Sam owns 80% who cares? I wonder if this dynamic will extend the soft market for US P&C insurers beyond what we might normally see. Longer term, I think there is a reasonable chance AIG will actually disappear (step one will be continued shrinking and step two will be an eventual take out by someone of what is left) and this will really benefit the remaining well run, profitable players.

Beerbaron, I agree that insurers are a good buy right now. They are trading at historic lows (price to BV) and appear to provide a solid margin of safety at currently levels. Yes the near term is cloudy. But the is looking VERY good looking out 1 to 3 years. My portfolio now has about 30% insurance (17% FFH, 7% WRB and 5% PRE), 10% US multinationals (mostly KFT & JNJ and a little WMT) and 60% cash. I sold my BRK recently and bought more FFH and established positions in WRB & PRE (all below or slightly above BV). I am looking to add to insurers should they sell off but would like to diversify into a few more names; hence my repeated requests for insurers others like that I can research (like Lancashire).

Smazz, with the shares no longer listed in the US my guess is we will need more time to get a handle on how the shares will trade in the short term. I am expecting less volatility (i.e. 20% moves in a week or two in both directions). It does not surprise me to see the shares trending lower currently. First, delisting from the NYSE likely has reduced demand; given the higher supply of shares price drifting lower makes sense. Also, we are currently in a soft market where underwriting results will be poor. Yes, interest & dividend income will be OK; however, runoff continues to be a drag. And the equity portfolio appreciation has been captured in current BV per sahre. And the reinsurance and P&C insurers are severely out of favour with Mr. Market. The only thing I can see today that will move the shares higher in a meaningful way are share buybacks by FFH and that does not appear likely given that they just issued $200 million at US$355. However, if the shares continue lower at some point FFH will buy a bunch and we will see the stock move much higher and quickly. Medium term (12 to 24 months out), there is a reasonable chance that the market will turn from soft to hard and then times will be good again. Or perhaps the equity markets will surprise to the upside and BV growth in FFH will grow...

The economic damage is severe. It will be interesting to see what the cost to insurers is and who has exposure.

for those interested in learning more on specific companies in the insurance/reinsurance sector I recoomend you listen to the companies presenting at the Merrill Lynch Conference. In particular, WR Berkley is quite insightful (you will need to decide if you agree with Bill's forecasts) I also liked the Ren Re presenation. WRB: www.veracast.com/webcasts/bas/insurance2010/id27059870.cfm Ren Re: investor.renre.com/phoenix.zhtml?p=irol-eventDetails&c=65065&eventID=2739453 There are lots more companies presenting. Insurance/reinsurance is currently the sector that I like the most looking out 12-24 months.

DCG, I also wonder at some of the companies FFH has purchased. I try not to judge investment results Q by Q as the volatility is way too large (and FFH clearly states it prefers a lumpy 15% ROI to a smooth 12%). When I look at the entire basket of holdings in the FFH portfolio then the individual holdings make more sense (pretty diversified) although not something I am comfortable doing. Most importantly, when I look at the annual returns of the investment portfolio FFH continues to hit home runs. Their long term track record is simply outstanding and my guess is they will continue to outperform their peer group (on investment results).

Regarding valuation, it looks to me that FFH is cheap but not crazy cheap today (based on where other insurance companies are trading). For example, most well run re-insurance companies are trading well below book value today. Most insurance companies are trading at multi-year lows: Markel is trading at 1.2xBV WR Berkley is trading at 1.1xBV. Given this environment, Prem is doing exactly what he should be doing... buying great companies at multi-year lows (i.e. cheap prices). He is taking what Mr. Market is giving him. Yes, I would like it better if he was issuing FFH shares at 1.5x BV and buying other well run companies at 1.3xBV but that option is not available today. Period. Most of the purchases have been funded via earnings; the amount of dilution has been more than acceptable to me and I accept the price as a necessary evil. To join the ranks of the elite insurance companies FFH cannot rely solely on investment returns. At some point underwriting results must also join that elite group. I like the Zenith purchase because they appear to be a very good underwriter and this is a skill set FFH needs to get better at. We will only know if this will happen given time; until then I do not see FFH shares trading at a tier 1 multiple to BV (that is not to say that we will not see some volatility in the share price). The good news is we all should have time to accumulate shares. The bad news is price appreciation will be driven by earnings and not a multiple expansion (as long as the soft market continues). When the market hardens I expect most insurance companies will see a nice pop in price as Mr. Market decides it is time to buy..

Dynamic, I liked the tables... paints a pretty clear picture about how the company has improved its financial position dramatically on just about every metric. What is not so clear are all the investments it has made in the past 15 months: NB & ORH, Advent, Polish Re, and the longer term stuff in China and Brazil. And now Zenith. When the next hard market arrives (WR Berkley feels we should be there come December) we should see the insurance business outperform and begin to deliver over time significant profits. We then could see solid underwriting, interest & div income and investment gains (see the company hitting on all three cylinders) some thing we have not yet seen. From the conference call: Op Co Shareholders Equity (Billions) 2009 2008 ORH $3.55 $2.83 C&F $1.52 $1.16 NB $1.41 $1.38 Bottom line, even after Zenith purchase, Op Co's look to have decent dividend capacity (given that premiums are shrinking). Effective tax rate = 33% - 6 to 7 % for tax adv municipals - a little more for tax loss carry forwards C&F business looks to have stabilized. Investment portfolio ended the year at $21.3 billion.

The 12 month results for FFH have been very strong and the company has made a number of moves that positions it very well for the future. Unfortuantely we investors in FFH have been spoiled the past 2 years. FFH has overdelivered (to put it mildly) on the investment side and we on the board have know about massive gains that others (apparently) did not (first CDS, then municipal bonds, and then stocks). There was always a catalyst. Life was rather grand. We are now in a more normal period. FFH in the near term will now resemble an insurance company and not a hedge fund. It will make money in one of three ways: 1.) underwriting (I think it is safe to say 2010 CR will be over 100, given how elevated the expense ratio is and given how soft the market in aggregate remains) 2.) interest & dividend income (this should stay flat or grow modestly in 2010) 3.) investment gains (given how elevated markets are this may only grow modestly, to give FFH the benefit of the doubt) Wrap it all together and FFH will chug along until the market hardens. Their earnings will likely disappoint in the near term as other insurers do a much better job at 1.) and a similar job at 2.) and 3.) looks to have no visibility in the near term. I do not expect shares to sell of dramatically because the hold co has enough cash to buy back a chunk. And I do not expect the shares to rocket higher as I do not see a catalyst. Great buy at current levels for long term holders. I have to remind myself that FFH is an insurer and not a hedge fund.

FFH has certainly been opportunistic over the past year with their purchases. They continue to get larger and diversify their business, which for an insurer is a very good thing. They also need to grow in the US and it was nice to see them talking about synergies with C&F (I expect C&F underwriting results to be less than stellar in Q4). One red flag I see with this purchase is if they do not have enough cash at the holding company to repurchase their own shares when the next sell off comes (perhaps volatility will decline now that there is no US listing). I would not be surprised to see them raise more $ later this year should the capital markets be willing to give it to them at low cost. My guess is we will find out that Zenith has significant dividend capacity. On a separate note, I have no issue with the dividend that FFH pays because they have communicated quite clearly for many years that they will pay a dividend and its size will be driven by results. They are simply doing what they say they will do and I will not fault them for that.

Canadian real estate certainly looked to be following the US trend lower 12 months ago. Primarily crazy low interest rates (I hear rates last year went as low as 2% for variable loans) seemed to stoke animal spirits and prices are again at record levels. Pretty much anyone can afford a $500,000 mortgage at 2% = $10,000 per year in interest! Does look like a bubble to me. But until interest rates go higher this thing could continue on its merry way. My dilemma is I will be moving to Langley (Greater Vancouver) at the end of the school year. I can afford to buy (small mortgage) but I have been trained to NEVER buy assets at what appear to be peak valuations. I also want my family to settle and be happy. Money is the servant not the master. Nice problem to have!

It appears Sandridge Energy is one of the few companies FFH is purchasing in a material way at the present time. I took a quick look and decided the company is too small and the field (natural gas & oil) out of my circle. Does anyone care to speculate why FFH finds this company so attractive? Could it be a hedge against the the US$? As the $ devalues the price of nat gas and oil should continue to rise making a company like SD more profitable...??? I wonder if the thesis for International Coal is similar?

One other things that hit me is how concentrated the portfolio is. 11 securities = $3,391 million of total = 92% of total! The 11 securities are also pretty spread around (finance, pharma, consumer staples, communication, resource).

I just dropped the new information into my Excel spreadsheet (attached, as usual). Here are my key takeaways: Portfolio changed in value - 7.4%; -6.5% was driven by net sales; -0.9% driven by price changes - sold $426 million; purchased $169 million = -$257 million = -6.5% - given they hedged 25% of the equity portfolio in Q3 and prices continued higher in Q4 (S&P) it does not surprise me that they were net sellers. Tells me they view equity market as fully valued at current levels (in aggregate). - large sales BNI, Intel & King Pharma; small sale of Magna interesting (wonder if they sold more in Q1)? - purchases Sandridge, ICO & Zenith (we know they purchased more in Q1) - securities sold should add materially to reported net income in Q4 (and reduce comprehensive income) with little impact to BV. Not a bad thing to book some investment gains (less uncertainty). - total portfolio value of remaining securities looks to be flat. Bottom line, what I see is consistent with a company that is happy with the amount of risk it has on its books and is being opportunistic with what Mr Market is offering.

Partner, after I read the post my thoughts mirrored those of yours, although I am hopeful it does not last for decades as life is too short ;)