Viking

8 months ago they would have been out of luck trying to raise any equity. My guess is they are doing what they are doing because the market is receptive. And $25 looks OK. What if the US goes into recession again next year... the banks will again be under pressure. I also wonder about Buffetts comments regarding the health of Wells Fargo and their earnings power. If things were so rosy, even after the gov't made reporting losses less painful, why do they need to raise so much money? FFH issued debt and sold stock because the rates were attractive, especially given the current environment. You get this stuff when the market is willing not when you need it.

I just started to review this very thing yesterday. I have edited what I posted a few months back... looks to me that not much has changed. In the near term the key catalyst for a pop in the share price would be if FFH aggressively buys back shares. The risks to the down side include the insurance soft market getting worse or a sell off in risk assets. With shares at $346 the company is cheap but not crazy cheap (given the risks). Looking out 12 months I think it reasonable to assume FFH will earn $24/share, driven mostly by interest & div income (I am assuming underwriting and investment gains will be a small positive). And yes, I am trying to be conservative. This implies a 6.3% growth in BV. Here is my very rough calculation of what FFH should earn going forward. Please correct me as you see fit. This is also an annual estimate and quarterly results will vary dramatically. 1.) Underwriting income (CR = 100) = $0 mill 2.) Int / Div Income (Q2 $184.5x4) = $740 Operating Income = $740 3.) Net Gains on Invest (see below) = $960 4.) Interest Exp ($152 + 30 new debt + 14 pref) = $200 5.) Corporate Overhead = $100 Pre Tax Income = $1,400 6.) Inc Taxes (28%) = $392 Net Earnings = $1,008 = $49/share Q3 BV = $372 BV Growth = $49 = 13.2% Where this gets a little more interesting is when you overlay what many have talked about previously. - I am assuming CR = 100. Given the soft market, this is likely not conservative enough for the next 12 to 24 months. - 9% return on investments may be a little too aggressive looking out 12 to 24 months given how much risky assets have appreciated (stocks, corp & muni bonds). However, given the market (lots of volatility) is in Hamblin Watsa's sweet spot as they tend to trade and not simply buy and hold. The hedges put in place will also cost some $ if the market goes sideways for a while. - I also expect that will all subs under one umbrella there will be some restructuring that will improve results to the bottom line (over time). - insurance hard market? Looks like it will not be happening soon (to much capacity). When this happens this could really juice FFH BV growth. - and lastly... what rabbits will Prem and team pull out of their hats next (they are there!)? - one catalyst for FFH will be share buybacks. FFH has been quite predictable so far in what they are doing with their excess cash (bought NB & ORH). I think the next big move will be share buybacks, assuming earnings stay reasonably strong and shares continue to trend down. The only question is when do they start? - The dividend announcement will be out in early Jan and I expect $10 to $12/share (up from $8); this may result in a short term pop in the share price. - I expect the delist from NYSE will reduce demand for FFH and this will have a near term negative impact on FFH price. Not a bad thing for FFH if you are sitting on a bunch of cash and you are wanting to reduce your shares outstanding in a meaningful way. - for Q4 I expect a CR = 100; solid int & div income and flat investment gains/losses = about $6/share - note, FFH may realize some gains so earnings per share may be higher (offsetting comprehensive income); I am expecting BV to grow about $6.00/share. - weave it all together... Q4 BV = Q3 BV $372 + $6 (my est for Q4) = $378 - cost today $346 for 14% grower with nice long term upside potential... pretty good buy. - and, yes, fasten your seat belts; as we learned in Q1, the ride will not be for the faint hearted! __________________________________________ Net Gains on Investment - total portfolio investments = $18,887 (p9 of Q2) = $924/share - 10 yr avg return = 9% x $18,887 = $1,770 - Net Gains = I/Div Income $740 - $1,700 = $960

How do people feel about Kraft Foods? Current Price = $26.65 2009 Earnings Est = $1.97 (perhaps will come in a little higher) PE = 13.5 Div = $1.16 = 4.4% EPS Growth Target (mgmt) = 7-9% Berkshire owns 10% of KFT, purchased largely in Feb 08 at about $29 to $30 / share. FFH owns KFT, purchased early in 09 at about $27/share. - Altria sold their 80% stake in early 2008. - Kraft is ATTEMPTING to transition into more of an entrepreneurial company, able to grow its top and bottom line more in line with other top tier packaged goods companies. - They have just completed a three year restructuring where they spent heavily to exit unprofitable businesses, close facilities and reduce workforce size. - They are currently bidding to purchase Cadbury, which is currently hurting their share price (on concerns they will overpay). I view Kraft as a possible good core long term holding (instead of holding a bond). Cheap, reasonably stable business, good dividend yield. They should be able to earn $2.00 plus per year going forward. Given his 10% stake, Buffet appears to be exerting some influence regarding strategic direction and financial metrics. The kicker is if the tournaround actually works we get both higher earnings and a higher PE multiple. The wild card is the Cadbury situation. Fortunately, Buffett has made his thoughts know (i.e. do not overpay). Being a Canadian investor, with the CAN$ at $0.94, I am generally neutral on the exchange rate. KFT currently holds a 5% weighting in my portfolio and I am trying to decide if I should move it to 10% (other stallwarts I currently hold include JNJ, BRK & WMT).

Interesting topic as I have been thinking about what has happened in the markets and the decisions that I made. Bottom line is I am not sure, yet, what the lessons are. I think we are still in the middle of this thing with more surprises to come. here are a few thoughts: 1.) Don't lose what you got. I have been very skittish the past couple of years, holding large amounts of cash and this paid off in that I experienced very little down side. 2.) Be greedy when others are fearful. I was greedy, but not nearly greedy enough (this is perhaps the greatest lesson I will take away from recent history) 3.) Patience. Wait for the right opportunity in your circle of competence... it will happen. Also, with overall valuations so much lower I may become more of a buy and hold investor and less of a trader :-) 4.) Keep learning. I have been slow to add a few new tricks to my bag (i.e. leaps) and this has cost me a couple of points of return.

If you are Canadian, Canadian Moneysaver has had some very informative insurance articles over the years. Buy an on-line subscription and do a search... [ftp=ftp://http://www.canadianmoneysaver.ca/]http://www.canadianmoneysaver.ca/[/ftp]

I would be surprised if the dividend does not increase from last year. I believe Prem has stated on numerous occasions that the dividend payout will be tied to results and the results this year should be stellar again. Having said that, given that FFH pays it in one shot, my read is this will attract short term buyers looking to get the one time payment. It is difficult to use NB as the model that should lead to higher FFH valuation. NB underwriting has been quite ugly (in aggregate) the past few years. This demonstrates to me the variability that is possible in even the most conservatively managed insurer. Until the hard market arrives, I do not expect insurer multiples to improve in a meaningful way. I have not read a great deal lately, but it looks to me that we need something big and ugly to happen to insurers to bring on the hard market. Like a big catastrophe or for global financial markets to sieze up. Not something you would want to bet the farm on right now. Near term regarding FFH, I wonder if the delisting in the US will have more of an impact on the share price than underwriting, interest & dividend income or realized investment gains. Hard to make a meaningful investment with so much noise going on.

I have not yet completely wrapped my head around this one. Bottom line is FFH may no longer need to tap US investors for $ (i.e. US listing was ALL about being able to raise $ to repair the balance sheet and more recently to buy back the subs). If FFH continues to post strong results my guess is they will begin to aggressively re-purchase FFH shares. Perhaps getting all the trading on one exchange makes this future move easier? All things being equal, I see this move as lowering demand for FFH shares (US investors) = lower price. I wonder if FFH will be viewed as a true blue chip in the coming years. Their business WILL NOT BE PREDICTABLE in a way that analysts like. Regarding future trading patterns, I also wonder if this move will change things. If the stock moves to below .9 of current BV (it is getting close) I will likely start nibbling. Underwriting will be poor; interest and dividend income will be very good and investment returns will be a crap shoot. The only near term catalyst I see is FFH buying back stock and this will only happen if the price drops (likely well below the $345US they just issued equity at). I do agree that in 5 years the stock will be significantly higher and it is for this reason I would like to get a core position re-established.

I like to run and hide from stuff that is in a bubble. Rather, I like to find stuff that is in a bear market and unloved. Other than perhaps the US$, not alot to chose from...

Yes, we currently are not sitting on massive gains in book value that most everyone seems to be missing making the purchase pretty much a no brainer. Perhaps we have been spoiled in the past. Looking at the current price of the stock which is trading at a small discount to BV my view is FFH is a decent buy. On a go forward basis, they will have OK underwriting, very good interest and dividend income and strong investment returns. One will likely generate satisfactory returns buying FFH at current levels. If global stock markets plumb new lows and corporate yield spreads widen significantly then FFH BV will have some near term issues. However, what if stock markets continue to rally? FFY will outperform. What if the soft market gets worse? What if a mega cat hits? Who knows what will happen tomorrow? Bottom line is there are many moving parts. Each person will need to weigh the individual pieces and make a decision. Currently I do not own FFH. However, should it fall below CAN$370 I will likely again be a buyer. The single biggest reason I will be is my respect for how FFH is navigating through the current turmoil. I KNOW they are much smarter than me and I will be happy to have them manage some of my money at a nice discount to current BV.

I think the quickest driver of FFH's share price would be multiple expansion (I do not think this likely in the near term). At some point in the next few years it would not surprise me to see it trading at 1.2 or 1.3 x BV. Currently the whole insurance sector is out of favour and multiples are low. A key challenge today is the soft pricing environment. As a result CR's next year will be BAD to UGLY (industrywide) especially if a few large hurricanes hit. Interest and dividend income will be good. Investment returns will be ??? Should stocks continue upward (very possible), FFH will easily hit 15% target. Best thing that could happen for FFH is a bad year next year for catastrophes. Yes their share price would get hit. However, they have more excess capital than most. We would then have an instant hard market and FFH would then start to see some serious growth on the insurance side.... underwriting profit, good interest and div income and investment results for a few years. You will want to be holding FFH when this happens.

I think where you live (home currency) definitely has to be a factor in ones decision making process. I live in Canada and am of the opinion that the CAN$ should do well on a relative basis. As such I am not unhappy to hold CAN$ (currently 85%) and wait for opportunities. If I was a US investor I am not so sure I would be as happy holding a large % of my portfolio in US$ and waiting for opportunities as it appears to me that the unofficial US government policy is to devalue the currency. The 15% I have recently purchased BRK-B, KFT, JNJ & WMT. If the CAN$ continues to strengthen (i.e. to parity with the US$ or better) I will continue to look to the US for well managed, large companies selling a reasonable valuations...

kawikaho, I do not say this to be cruel, but you may have a better chance finding the tooth fairy or santa claus (I have young kids) ;D

ECCO, thanks for sharing the numbers provided by FFH for ORH; 12.8% increase for one quarter is excellent! So far this year FFH earnings have been much more volatile than ORH (underperforming on the downside and outperforming on the upside). My guess is this is because they hold more risky assets at FFH and ORH has a relatively speaking more conservative holdings. Based on recent history I would expect FFH to outperform ORH in Q3. Looking at Q2, FFH BV increased 24% while ORH increased 18.5%. If ORH grew BV 12.8% in Q3 perhaps FFH increase 16% = $50 Bottom line, with all the moving parts, it is impossible to precisely caclulate the change in BV. From where I sit, my best guess is FFH BV has increased $40 to $60. Not too shabby... BV ORH FFH Dec 31 $45.37 $278.28 March 31 $43.80 $254.95 June 30 $51.90 $315.91 Sept 30 $58.56 est ???? The BULL case for buying FFH today (at roughly BV): 1.) they are very conservatively reserved (minimal PY reserve releases) 2.) underwriting is OK (one area for improvement) 3.) interest & dividend income now is VERY healthy 4.) operating earning should be solid 5.) gains on investments will continue to outperform peer group (total portfolio return of 9%) 6.) hard market is coming in next year or two (FFH will grow its top line business dramatically) 7.) market will fall in love with insurers/re-insurers We will get higher BV at the same time Mr. Market attaches a higher multiple to those earnings. My experience is those are the situations you see only rarely and are VERY profitable. And what is the BEAR case? Easy... Markets tank 30 to 40%... FFH will get punished. (Should this happen I will bet that FFH then begins a massive share buy back).

Here is my very rough calculation of what FFH should earn going forward. Please correct me as you see fit. 1.) Underwriting income (CR = 99) = $40 mill 2.) Int / Div Income (Q2 $184.5x4) = $740 Operating Income = $780 3.) Net Gains on Invest (see below) = $960 4.) Interest Exp ($152 + 30 new debt + 14 pref) = $200 5.) Corporate Overhead = $100 Pre Tax Income = $1,440 6.) Inc Taxes (28%) = $400 Net Earnings = $1,040 = $51/share Q2 BV = $315 BV Growth = $51 = 16% Interesting that FFH has 15% target and if you simply drop in some basic assumptions you get 15% growth. Where this gets a little more interesting is when you overlay what many have talked about previously. - I am assuming CR = 99. This definitely should be beaten by FFH OpCo's over time. - 9% return on investments may also be lite as the current market (lots of volatility) is in Hamblin Watsa sweet spot as they tend to trade and not simply buy and hold. - I also expect that will all subs under one umbrella there will be some restructuring that will improve results to the bottom line (over time). - insurance hard market? When is happens this could really juice FFH BV growth. - and lastly... what rabbits will Prem and team pull out of their hats next (they are there!)? - weave it all together... Q3 BV = Q2 BV $315 + $60 (my est for Q3) = $375 - cost today $355 for 15% grower with nice upside potential... pretty good buy. - and, yes, fasten your seat belts; as we learned in Q1, the ride will not be for the faint hearted! __________________________________________ Net Gains on Investment - total portfolio investments = $18,887 (p9 of Q2) = $924/share - 10 yr avg return = 9% x $18,887 = $1,770 - Net Gains = I/Div Income $740 - $1,700 = $960 Shares Outstanding = 17,564 + 2,882 = 20,446

Note: I have corrected an error in J&J in the spreadhseet and re-posted. I thought I would also take a stab at FFH earnings for Q3. I will post updates as I continue to cycle through stuff. 1.) Underwriting: should be solid (low level of catastrophes) 2.) Interest & Dividend Income: should be comparable to Q2 3.) Investment Gains: should be comparable to Q2 (upside potential) - US stocks: increased $529,000 ($807,000 in Q2) See spreadsheet below for details. - 10yr Municipal Bond Yields: look to have come down around 80 basis points (35 bp in Q2) - 10yr Corporate Bond Yields: look to have come down around 130 basis points (?? bp in Q2) I am not sure how to overlay ORH onto this so I am ingoring the ORH aquisition for now. Looks to me that mark to market BV has a chance to grow by a similar amount to Q2, which would be huge.

scorpioncapital, I read your comment: "And as the article says, nobody knows the answer to any of these questions. Really, there is only one actionable piece of intelligence I found in the article (from an investing standpoint) and that is to not invest using too much debt. Other than that, what else can you do except wait it out, whether it takes one year or ten years?" I am pretty sure that should my inverstments fall 85% from their high that I would NOT be able to hold on until they came back (i.e. for 10 years). The chance that we are in the middle of a repeat of the '29 crash and depression is the highest it has ever been since then. If it happens (85% fall in S&P) and one is fully invested they are likely wiped out financially AND EMOTIONALLY. It is this remote scenario that has stopped me from staying fully invested and it has worked very well so far...

'During the Depression, optimism was ruinous.' Things that make you go hymmmmmm. Definitely NOT the thinking today!

Here is another link that does not require sign up: www.nytimes.com/2009/10/17/business/17nocera.html

A light bulb went on for me today (kind of scary as it only happens a couple of times a year)... I have been thinking lately about what asset classes are in a bear market right now... not government bonds, corporate bonds, stocks (in general) or commodities. One thing that does look quite ugly right now is the US$. I was looking at the list of companies that FFH owns and two jumped out at me KFT & J&J. Both are up only a small amount since June 30 (KFT +5% & J&J +7%) in US $ terms. I am a Canadian investor; when you overlay currency things get interesting... Let's dial back to the March lows when the CAN$ was at about US$0.80: 1.) KFT = US$21.00 = CAN$26.25 2.) J&J = US$48.00 = CAN$60.00 Fast forward to today, where the CAN$ is about US$96.50: 1.) KFT = US$26.63 = CAN$$27.60 = 5.1% increase 2.) J&J = US$60.94 = CAN$63.15 = 5.25% increase With most global stock markets up 50% since the March lows, here we have two companies up only 5% (in CAN$ terms). Are they worthy long term investments? These two companies represent 17% of FFH's US stock holdings and BRK also holds both of these companies so I think we can assume two of the saviest investors around like them. Both sport very good dividend yields with KFT at US$1.16 = 4.4% and J&J at US$1.96 = 3.2%. My thinking is to take advantage of the level of the CAN$ to invest in some large US multinationals. Should the US$ continue to fall these companies will report stronger earnings (US$); should the US$ rise then I will get the currency gain. Should we get abroad based sell off in global stock markets there likely will be a flight to quality and multinationals and the US$ will likely do well... My financial advisor called me recently with the idea of 'putting at least some of my cash to work' and floated the idea of an 8 year TD bond with a yield of 5% (I said, thanks, but no). My thinking is to perhaps build a portfolio of 20% or so of these kinds of companies in place of holding bonds. Am I simply playing with numbers on this one???

For those interested in souce documents, here is the link to the piece by Fisher "The Debt-Deflation Thoery of Great Depressions" that is referenced in the article. I have just started and it is relatively easy, short read (21 pages). fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf

2008 = +17%; 2009 = +29% Lesson 1: importance of capital preservation Lesson 2: keep things simple (invest in what you know and what works) Lesson 3: concentration works Lesson 4: be very, very patient (given time, logical analysis will usually work out) Lesson 5: keep learning (history does not repeat exactly, but it does usually rhyme) Uccmal, I am in a similar situation as you; my investments are now large enough that I do not need to have a day job (but not large enough that I can officially say that I am retired). In the past, I have gone as high as 80% in FFH (when it fell to $70 years ago and a second time when it fell to $100 a couple of years back). I am doing my best to not be so concentrated as I no longer am comfortable with the risk/return. FFH juiced my returns in 2008; I backed the truck up in Q2 & Q3 when they were sitting on all the CDS and long US Treasury gains. My FFH gains covered over some smaller lossed from earlier in the year like SFK Pulp). In 2009, I loded up on ORH - 50% - this year. The big difference versus 2008 is I have had a number of smaller winners earlier this year. Moving forward I will continue to try and limit my best positions much more (perhaps to 25%)? Bottom line, the last three years have been great years... I look forward to the coming years. I am of the opinion that: 1.) we continue to be in a bear market rally 2.) the economy will get worse before it gets better 3.) deflation will emerge as the primary concern (over inflation) And this will keep me cautious.... I will need very fat pitches to get me to risk my capital.

No nub, thanks for clarifying... in my haste I obviously did not understand what I was reading! I will still give it a test drive for the first 12 issues as I can cancel whenever I want...

For those interested, the Economist is offering a Professional Discount Rate in Canada of CAN$15.00 for one year (12 issues and access to their on-line site). I have not subscribed before and decided to start a subscription. The get the special rate you need to go to www.economist.com/mail/ca and enter promo code 99C3 You also will automatically be signed up for their automatic renewal so will need to call in 12 months to stop service. If you are not able to access, please let me know and we can remove the post.

hy, I have been rewarded tremendously over the years with a very simple strategy of basically buying stuff that people hate (buying low) and then selling when it comes back in favour. Rarely have I held any position for more than a year and in some instances my holding period has been weeks (FFH a couple of times). Yes, March was the mother of all buying opportunites and I was fortunate enough to participate wth purchases of BRK, WFC, GE, AMEX & FFH. And yes I sold, with hindsight, too early. And thanks to ORH I have had one of my best years ever. (The icing on the cake has been the appreciation of the CAN$ (living in Canada); with it approaching $0.95 to US$ my cash now buys much more - compared to US investors - than a few short months ago when the rate dropped below $0.80.) And the past is now in the past. My thinking is now focussed on what to do moving forward. What is it that people hate today? Stocks are up 60%. Bonds yields are again approaching historic lows. Commodities have had a good run. Gold is up dramatically. About the only think people seem to hate today is the US$. Bottom line, I do not see any fat pitches (I mean really fat). Greed is again taking over. I believe the current downturn is not behind us. What if the Japan experience is in our future? What if our stock market averages are down 70% from their peak 20 years later? Buy and hold? I keep telling myself to be patient and simply wait for something I understand to go on sale.... it has worked for the last 10 years. I see no reason why it will not continue to work. (I also try and continue to learn from the past and tweak what I am doing...)

ERICOPOLY, first up, what do you think of the book? I have been thinking alot about forecasting (and forecasters). Bottom line, I think it is normally pretty unreliable. What does one do when various (reliable, respected) people are making very different calls? Things today (and the past 18 months) are about as murky as I can remember... I am in cash. Two organizations I greatly respect (FFH, BRK) are largely invested. Follow the money? I am content to wait for a fatter pitch (brought on by a broad based sell off). Time will tell if that forecast pays off...