Viking

oldye, I think your answer is quite simple. We all know three things drive insurance earnings: 1.) underwriting 2.) interest and div income 3.) investment gains / losses Each company out there has a competency in one or two areas. I see none today, except perhaps BRK when it was smaller, that excells in all three areas. FFH has for sure underperformed in #1 (check out C&F or Northbridge CR's the past few years..). WRB, as another example, excells at #1 and does OK at #2 (and my guess is, given the short tail nature of its business, does OK at #3). They have a skill set and business model that is very different than FFH and appear to be doing a very good job (delivering on their stated ROE target of 15% per year... sound familiar?). FFH can make the bets it does with equities because it has some longer tail business which means it can wait 5 or more years for Mr Market to catch up to their appraisal. Someone please correct me if I am wrong. Thanks!

Biaggio, I think that FFH and BRK are solid companies. My question with this post was whether or not a basket of 3 or 4 other insurers would not make an attractive long term purchase (for perhaps 10% to 20% of ones portfolio). My goal is to purchase stuff in my circle of competence that is trading at an attractive margin of safety. WRB looks to be dirt cheap right now and a quality company (even though they come across as being quite arrogant). MKL is also on my radar as well as PRE. I am trying to cycle through as many companies as possible to find a couple to add to my portfolio and appreciate the suggestions people are thowing forward. If people also want to get into more detail on any of the names I am all for sharing what I think and would look forward to seeing what others think.

I would like board members to help me understand something. Are a number of insurance companies not crazy cheap right now (I am looking out 3 to 5 years, not the next 6 months)? I will not be discussing FFH or BRK (covered already). I have followed WR Berkley for a couple of years now, but have never purchased. They just released results today. BV = US$22.97. Stock is trading at US$24.25. Price to BV = 1.05 which is multi-year low (ingoring how low all stocks went in March 09 which in my mind is an anomaly). The company should earn $2.50 to $3.00 this year in a very solf pricing enviroment. Their underwriting is very conservative. Investments are reasonably conservative. VERY GOOD long term track record. Upside: as AIG shrinks, companies such as WRB will grow. The insurance market will firm at some point in the next year or two and WRB has excess capital and will grow like stink. They have repurchased 5% of outstanding shares in the past 4 months (best use for excess capital). WRB looks to me to have the ability to double in price the next 3 to 5 years due to earnings and the market attaching a higher multiple to those earnings (something Lynch looked for). Reasonable risk and very high return. What am I missing? A second stock I am also looking at is Partner Re. Similar story to WRB; higher risk by also a very high potential return. Would a basket of these sorts of companies not make sense?

One lesson was I was too cautious in the size of my buys. I did get WFC, GE and AMEX near their lows; I just did not get aggressive enough with how much I bought. I also should have increased my weighting in equities (likely closer to 70 or 80%). Especially once it became clear that FFH had switched gears and were loading up on equities. And I did sell stuff too early. Having said all that I am very happy with my returns last year (30%) the previous year (17%) the previous year (47%) etc etc, . I am very cautious. My focus now is what to do going forward...

If anyone is looking to purchase MKL, read the conference call transcripts. Very impressive organization; I can see why they trade at a premium to book. MKL should perform very well over the long term (next year is a crap shoot for all insurers).

I used to watch this show (years ago) when I lived in Toronto. I saw the spanking by Embry... yes, a classic. I loved it when Brian stated 'model price' like it actually meant something. My read on Brian was that must be good at sales because the logic behind his stock picks certainly was lacking. Nice to hear he is still going strong; gives me confidence that most on this board can continue to outperform... :)

Buffett appears to want to be much more in the public eye these days. Do a google search for how much he is on CNBC etc with lengthy interviews. Whether he likes it or not he is now like a star athlete. He basks in the spotlight (otherwise, why is he there so much... and, please, don't say he is doing this to save capitalism). He should not be surprised that many people (with too much free time) now have become interested in every aspect of his personal life. Schroeder appears to me to simply be filling a need. God bless America; remember, Buffett loves his country :-)

To ask a question a few on this board have likely thought about... Is anyone purchasing Toyota stock at current prices? Since their brake problem came to light, the stock has fallen from $92 to $73 = 21% decline. My read is I don't have enough information yet so to purchase right now would be more of a speculation that an investment (and the stock is not cheap enough to get me interested ihn speculating. My guess is they will get through this and the company and stock will bounce back. Not exactly like the salad oil scandal and AMEX. Anyone working in the industry with any thoughts? http://stocks.investopedia.com/stock-analysis/2010/Toyotas-Recall-Isnt-A-Company-Killer-TM-F-DAI-HMC-FIATY0203.aspx?partner=YahooSA

What is everyone thinking about insurance companies in general? 1.) It appears we are in a soft pricing environment and it could remain this way for a couple of years 2.) Most well respected insurers are shrinking their business; underwriting results will likely continue to deteriorate (as CR's increase) 3.) Interest & Dividend income likely has peaked (as interest rates are low and stocks are now more fully valued) 4.) Investment gains have likely peaked (as stocks and bonds look to be fully valued) The big picture is not good. Having said all that, insurers and re-insurers are trading at historically low metrics (i.e. price to book). Here is my take on three that we all follow quite closely: BRK: solid returns to be expected going forward. FFH: higher risk but also much higher return potential; still needs to re-establish track record and investor trust. MKL: somewhere in between the other two. Better future returns than BRK but less than FFH; management more trusted than FFH. Does this mean that insurance companies are cheap, offer a good margin of safety at current prices, and should be purchased by conservative investors (and held for the long term)? Especially if a couple are purchased? Near term risks are pretty clear (large catastrophe hits, market softens further etc). I am having a problem seeing any near term catalysts (other than consolidation or share re-purchases)? What do people think? time to get aggressive? Or are they not as cheap as they appear?

While I trust that BRK purchase of Burlington will, with time, prove to be a wise decision, I do find a few parallels between this and the Kraft deal - primarily, using what appears to be undervalued stock to make an aquisition. Has anyone come across Buffett's answer to this question (given that he was so critical about the Kraft purchase for this reason)?

Great minds must think alike. I did re-establish a position in FFH a few minutes ago (8%). Insurers are trading at low multiples to book as everyone is expecting underwriting in 2010 to be challenging and interest & div income to be flat at best = poor operating earnings (compared to PY). Most analysts do not look at investment gains, although it appears to me the easy money has been made. FFH at current price is cheap (about 0.9xBV) but not crazy cheap. As well, given all the activity in Q4 (ORH closing etc) it really is quite difficult to peg BV. FFH was trading as low as US$210 last year. Since that time it added $105 in shareholders equity (incl my estimate for Q4). That gives me a price of US$315, which is not much below $336 (where it was trading today). Just another way of looking at valuation and margin of safety. Should it continue to fall in price then I will be happy to continue to add. It will be interesting to see what changes they have made to the portfolio when they report Q4 results. Should markets continue to go sideways I expect FFH to do OK. Should markets continue higher and risk spreads continue to narrow then FFH will do quite well. Should markets sell off and risk spreads widen FFH will not do so well (BV will decline) but I am sitting in so much cash this will not be so bad.

Al, I got the numbers from going to the company's investor site. Go to page 13 for a summary of FFH most recent purchases. Open the most recent filing (Jan 29 SC13D). http://www.thezenith.com/investors/investorinfo/sec/page36124.html

Looks like FFH added 1.2 million shares in Dec (at $30) and just under 1 million in Jan (at $29.70). This is in addition to the 991,000 they held at the end of Q3 (up from 554,000 at end of Q2). Results reported today looked pretty ugly (underwriting loss and falling dividend and interest income). Outlook for future is bleak (business will continue to shrink and underwriting will likely remain over 100 until economy improves which is going to be when???). Shareholder equity = $28.25/share. Shares (ZNT) closed today at $27.90 Let's see what Mr. Market thinks about results on Monday... For those who have not followed FFH for long, FFH owned a significant portion of ZNT a few years back and sold much of that stake for a nice gain when they needed cash. FFH understands this company very well and perhaps this is simply another situation where they are re-establishing postions in stuff they had to sell in the 7 lean years...??? Anyone have an update on HUB???

Today my guess is Buffett has definite views on the US$, inflation (macro stuff) etc when making investments; not this year or next year but 5 or 10 years out. His rationale for the Burlington purchase was 'an all in wager on the future of the US economy'. Sounds like a macro call to me. I enjoy reading Gross, Lacy Hunt, Grantham etc. These are bright people who think long and hard about this stuff. I also am not of the opinion that buy and hold is a great investment strategy (although it certainly is better today than it was in 2000, especially if you are a US investor). I am happy to buy stuff that others hate (or dislike... I relaxed my standards a little later last year and bought US large caps KFT, JNJ, WMT & BRK-B). And I will likely sell on strength and look to repeat as I expect we will have a very choppy sideways market until we get further clarity on the economic situation (back into recession or slow recovery). And just to state the obvious, my forecast is likely to be just as dumb as the next guys...

A likely lesson here is Buffett feels re-insurers are very cheap................... ????

A question to make value investors shudder, is anyone aware of any studies that talks about the short term effect to a stock's price of being added to the S&P? I notice an 8.5% pop in BRK-B after hours (although after hours quotes are notoriously volatile)...

Here are a couple of articles.. www.reuters.com/article/idCNN1516567620100115?rpc=44 www.gccapitalideas.com/2010/01/03/rates-retreat-as-capital-rebounds-global-reinsurance-renewals-at-january-1-2010/

Specific to FFH, I estimated in a previous post that Dec 31 BV = $378. Current BV = $368 ($10 div). Current price = US $348; P/BV = $348/368 = 0.95 http://cornerofberkshireandfairfax.ca/forum/index.php?topic=1605.0

Uccmal, currently most insurance/reinsurance stocks are trading at very low multiples. Why? 1.) we are still in a soft pricing environment; with the rebound in risk assets insurers/reinsurers balance sheets have rebounded and there is lots of excess capacity. No catastrophes in 2009 (large payouts) also allowed everyone to post great underwriting results adding further to profitability. 2.) underwriting is expected to be challenging at best in 2010; there is a perception that many insurers dipped into reserves heavily the past few years to juice underwriting results and that this cannot continue in coming years. 3.) with interest rates at historic lows, interest & dividend income for the group will be flat 4.) with the recent run up in risk assets, and given that they are reflected in BV, it is prudent to assume that BV has more downside than upside in the near term (look at what happened to FFH and the rest of the industry in Q1 '09 when the markets sold off). When you weave it all together, what is the catalyst in the insurance/reinsurance sector to drive investor interest? Having said all that, insurance/reinsurance is becoming a sector that people do not like. I have built a core position in BRK-B. Should FFH continue to sell off I will be happy to own at under 0.9xBV.

BRK appears to be priced at an attractive level today to deliver reasonable returns going forward. I am trying to decifer if it is cheap or VERY cheap. I have ready the standard reports and also done a fair bit of searching on the internet to get as much input as possible. My thinking is (as Buffett said): better to purchase a great company at a reasonable price than a reasonably run company at a great price. Peter Lynch has a great line about how doctors love to invest in commodity plays and those working in the commodity sector love to invest in health care. I have a small position in BRK (5%). I am trying to decide if I should move this to 7.5% or perhaps even 10%. Given that this is a BRK website, I was wondering if others have an opinion regarding the investment merits of BRK. Or has anyone come across an analysis or web site that they can link me to? Thanks.

Value 2, do not worry about your english... we all have thick skin. I appreciate the opportunity to explain what I am doing. Here is the simple answer why I hold 82% cash. 1.) I do not feel compelled to be 'fully invested' (i.e. to be holding something). The investment industry does a great job saying one should put their 'money to work' and that earnings 1% will not fullfill ones retirement objectives. My current investment advisor has been trying to get me to buy anything with the belief that holding such a large amount of cash is almost sinful. 2.) I will only put my money in something new if the margin of safety is very large. And I have to understand the investment reasonably well. 3.) Rightly or wrongly I also have a macro view that happy times are NOT back. FFH hedging 25% of its equity portfolio is interesting to me. Wrapping the three together, keeping what I have is job #1. Right now I do not see a bear market in any asset class or valuations in any specific security that I understand to get me excited. So I will wait.

My current portfolio is 82% cash and 18% US large cap (BRK, JNJ, KFT & WMT) bought a couple of months ago. I am looking for these holdings to give me 6 to 10% per year on average (i.e. not expecting much). The one stock I am thinking about increasing my position in is BRK (again, as a stallwart, holding it in place of a bond) with the goal of getting 6-10% per year. Should the CAN$ continue to strengthen I will likely buy more BRK. Currently, I do not see much that is priced today that gives me the margin of safety that I want. The past has taught me to be patient... at some point we will have another bear market in either a sector I like or in the market overall. As Buffett says the beauty with investing is you get more than 3 strikes. The trick is having the discipline to wait for your perfect pitch...

It appears to me that Buffett and Watsa now apear to be singing off the same song sheet... 1.) inflation not a large short term concern 2.) US debt not a large short term concern (citing the Japan experience)! 3.) stock markets are not overvalued (notice he did not say they were cheap). Nice to see some clarity!

Here is a nice short summary regarding the current bid for Cadbury etc: http://finance.yahoo.com/banking-budgeting/article/108396/as-cadbury-chances-fade-kraft-looking-tasty

For those who are wondering how the FFH stock portfolio is doing (as reported in 13F), here is an updated spreadsheet. As of today (Dec 16) it is down $16 million or 0.4% (basically flat). Does anyone know when the Burlington Northern deal will close? Proceeds for FFH will be $200 million (5% of their equity holdings) and the gain will be reported as net income. Does anyone have an opinion of what has happened to muni and corp bond yields in the last quarter? I expect that interest and dividend income will increase again due to the bonds purchased in Q4. In Q3, by hedging 25% of the equity portfolio and also selling some positions (i.e. Alcoa, BCE) FFH has been getting much more conservative. It will be interesting to see what they were doing in Q4 and if this trend of being a net seller of equities continues. These moves certainly give investors some insight into how FFH views financial markets (valuations and near term prospects).