StubbleJumper

I kinda figure that MW is done. Their first attempt was so pathetic that I can't imagine that there would be any uptake from the investment industry in a second attempt. SJ

This might present an interesting opportunity. A guy could go (or remain!) extremely overweighted in FFH until the end of May or early-June with the hope of catching lightning in a bottle from this IPO. And then whether or not the IPO triggers a price response in FFH's share price, a guy could dump his surplus shares in mid-to-late-June before the hurricane season begins in earnest. With FFH trading at 1.1x BV, that strikes me as a "heads I win, tails I probably don't lose" type of proposition. In my case, it would be a "remain extremely overweighted" because I seized the Muddy Waters opportunity three weeks ago. Basic risk management dictates that I should probably give my position a significant haircut, but perhaps it's worth letting it run for another 4 months. Wouldn't be the first time that I did something dumb in pursuit of money that I didn't really need! SJ

What can I say. Okay, let's get down to it. Who fucking cares about Muddy Waters? Either you made money from their folly or you didn't. In my case, every dollar that I will spend in 2024 has already been made from our good friend, and it's only February! No need to belly-ache about somebody who helps you. Time to move on to something more interesting. SJ

Well, you don't have to agree with how I've described the phases. What's important is to not blindly take the historical 17.7 percent cumulative average growth in BV as something that would necessarily be indicative of FFH's future. The first dozen or so years exert a great deal of leverage on the average outcome. I've suggested that some of those were start-up years and are unlikely to be replicated...and you've taken the perspective that those were years with a small asset base and a particular set of circumstances that are unlikely to be replicated. Okay. I'm not sure that I underestimate FFH management's abilities in comments about the second phase. I described it as lacklustre results which I viewed as a pretty charitable term given the numbers. Lots of things went on during those years outside of FFH's control (as you said 9/11, the KRW year, and the four horsemen of the apocalypse) and there were a few unforced errors. But, that's the insurance industry. In the end, it was 20 years where BV growth fell short of the 15% annual bogey. If you get 3 or 4 years in a row of great underwriting conditions and good investing conditions, it is well worth going back and looking at the company's historical financing differential and its history of BV growth. SJ

No, I would never be so brave as to try to model things out past a few years for a company like FFH. You've been pretty courageous to construct your forecasts for even a few years! The purpose of making observations about the long-term ROE or long-term rate of growth in BV is that this is really the question that puts a boundary on valuation. Personally, I figure FFH might be worth 1.2x or 1.3x as a going-concern, but others figure it might merit a much richer valuation. Well, that view needs to be informed by the type of BV growth rate that would be required to justify the higher valuation. And that table that Prem publishes every year in his letter should be a bit of a reality check on how enthusiastic we ought to be! Well, you are braver than me if you are going out five years! Every year that FFH shoots the lights out it becomes more difficult to attain the 15% bogey because capital accumulates and needs to be reinvested in something that will provide roughly a 15% ROE if they want to continue to make that bogey. With the rapidly growing book, it's been pretty easy for the insurance subs to soak up pretty much all of the capital provided from their annual earnings and reinvest it in writing more business. But, 2023 is a bit concerning because that process growing the book seems to have slowed, meaning that we will likely see a fair bit of excess capital in those subs when the annual report comes out next month. Unless there's a quick turnaround in underwriting, that capital will need to be deployed elsewhere. So the usual thing would be to dividend it to the holdco which would then do something like buy a new business, repay debt, repurchase shares or, as was done, increase the dividend. Most of those options strike me as having a lower return than expanding the book has provided over the past 3 or 4 years! Compounding is great as long as your flow of investment opportunities is attractive. In the end, I hope you are correct about 15% for the next five years, but it won't be easy. With FFH trading near adjusted-book, the market is basically saying that there's not much value to the company being a going-concern. It's basically saying that shareholders would be equally well off to break up the company, sell off the parts at their carrying value (or run off the business), pay off the debts and distribute the cash. I'd say that's a little too pessimistic :-). FFH definitely has more value as a going-concern than it does as a collection of assets. The easiest thing to do at this stage is what we did all throughout 2023. Don't worry about valuation too much because at 1x BV it's probably undervalued anyway. Just take your estimate of earnings for 2024 and maybe 2025, add it to current BV and decide whether you'd be satisfied if the stock price were at your forecast BV for 2024 and 2025. In the short term, it looks like an adequate return can be obtained with no growth in valuation. And if there is an expansion to 1.2x or 1.3x, so much the better. SJ PS, Our friend, Brett Horn, who figures it's worth CAD$970 per share, but for some reason hasn't recommended liquidation even though BV is ~30% higher than that. Strange, that.

I would say that what you are describing is the business. The actual asset is the statutory capital that the insurance company maintains on its balance sheet, and it is that asset which enables the insurance company to write policies. That definitely is an asset. The float itself and the financing differential is the mechanism to generate profit from that statutory capital. If you want to argue that $100m of statutory capital is actually worth $150m or $200m as long as the business is a going-concern, then I guess that's okay as it's akin to arguing that an insurer should trade above book. You are assuming that underwriting will be profitable across a cycle. That is not always the case for insurers, and hasn't always been the case with FFH. Certainly we hope that they will be able to experience underwriting profits over, say, a 10 year period but that is not always the case. SJ

To be worth 1.5x BV, effectively, you need to argue that the long-term ROE on a going-forward basis will be high enough. We know that the first dozen years of FFH's existence were characterised by an absolutely ridiculous run of consistently high growth in BV (see the table on page 20 of Prem's annual letter from last year). But following that start-up phase that began in 1986 and ended a dozen or so years later, there has been a period of about 20 years with much less convincing growth in BV. And then there's been the past 3 or 4 years. It's really interesting to take that table that Prem publishes every year and monkey around with it a bit. Erase 1986 and 1987 on the argument that you can't "start up" twice and then recalculate compound annual growth. Break the series into the growth phase from 1986-99 and the lacklustre phase from 2000-2019 or 2020, and calculate the compound growth rates for each of those phases. When you do this exercise, you might view the 17.7% historical average growth in BV on that table in a somewhat different light and you should certainly question whether that series can be replicated going forward. That then leaves the really difficult task of guessing what all of that means for the future. My take is that the economics of the insurance industry will not allow FFH to routinely achieve its bogey of 15% growth in BV on a going forward basis. I'd be happy if they could grow BV by 12%, but suspect that it may be more like 10% over the long term. That's not a knock on FFH, it's just a tough industry. If they actually do routinely achieve that 15% goal, I'll be the happiest guy around. But, turning to valuation, if you pay 1.5x BV for something that grows its book by 15%, you are basically getting a 10% earnings yield with relatively rapid growth. But, if you paid 1.5x BV and FFH grows BV by 10%, you are getting a 6.7% earnings yield and decent growth...and I'd say you'd have slightly overpaid, but not terribly so if the earnings are rock-solid, regular and predictable (in other words all of the things that the insurance industry is not!). At this point it's trading at a shade over 1x BV, which means that the market finally figures that FFH is worth more alive than dead (ie, if it trades at <1x BV, in theory it's worth more dead than alive, so just break it up, sell off the pieces or run them off, and give the proceeds to the shareholders!). I'd say that it's definitely worth 1.2x but I guess we'll see over the coming months whether the market agrees with that. Maybe it'll rattle off 8 or 10 years of fabulous returns that will make me think it's worth 1.5x? Time will tell.... SJ

First off, float is definitely valuable, there's no question about that. That's what tends to attract value investors to the insurance industry. To correct a couple of points in your post, float does show up on the balance sheet as investments (ie, we take policy holders' premiums and invest them and that's where the float goes) and as policy liabilities. What is more, float is not always at zero-cost or better, as there have been many years when the CR exceeded 100. But life is definitely grand when that zero-cost or better situation prevails! How much "credit" we should give to it in a company's market valuation is yet another question. Buffett proposed that float is effectively money that you borrow from somebody else, but as long as your insurance company is a going-concern and never shrinks its book, you never need to repay that money that you borrowed. He then went one step further and stated that if you borrow money, never need to pay it back, and can do whatever you want with it, then that's akin to equity. Personally, I have always had a quibble with this because a regulated insurance company can't just do whatever it wants with float. There's a reason why FFH's portfolio allocation has traditionally been two-thirds to three-quarters fixed income and that's because you always need to be able to pay indemnities. The downside of that is that we know that long-term returns on fixed income have traditionally lagged equity returns by a considerable margin. To me, I don't buy Buffett's argument that we ought to value a dollar of float at the same value as a dollar of unrestricted equity because I'm effectively forced to put 66 cents or 75 cents of that dollar of float into an inferior investment vehicle. Over the past 3 or 4 years, underwriting conditions for FFH have been fabulous. The cost of float has been negative (ie, CR<100) and, more recently, sovereign debt rates have soared, resulting in a financing differential that has been out of this world. This makes float look like an astoundingly good deal! But, it hasn't always been the case. Every year in his annual letter, Prem publishes an excerpt of a table that depicts FFH's cost of float, prevailing government bond rates, and the resulting financing differential. The average financing differential over most lengthy time periods has been about 4.5%. That's good, but nothing even close to what we've seen during 2023, which by my eye-ball estimate was a whopping 10.3%! I believe that was FFH's most favourable financing differential since 1991. If you want to value FFH, think about the company's long-term return on equity, the ability to reinvest at that long-term ROE, and select a P/BV that is appropriate. If you assess the long-term ROE high enough and you believe that FFH can reasonably reinvest at that ROE, you can easily make the argument that the company is worth 1.5x BV. But, when doing that exercise, it is important to remain mindful of the financing differential table and the growth in BV table that Prem publishes every year in his annual letter. SJ

This is an interesting question. The past 3 or 4 years have been fascinating because even with BV growing at 15% or 20%, FFH has been capital constrained. If your insurance subs had an ROE of 15%, they pretty much needed to retain the totality of that income if they wanted to grow their book by 15%+ the next year (which they did, over and over!). Every dollar that the insurance subs retained enabled them to write $1.70 or $2 of new premium, which earned 7% from underwriting profit last year plus roughly 4-5% from interest (Treasury bond rates), meaning that the capital retained in the insurance subs could basically earn an ROE of 20%-ish. In short, over the past few years, the insurance subs were able to basically suck up pretty much as much new capital as FFH could earn, and it was effectively reinvested in growing the book very profitably at a rapid pace. Okay, so what about 2023? The insurance book grew 4.8% in 2023, which is far lower than the return on equity for the year. Unless we see FFH suddenly put the pedal to the metal on underwriting, the insurance subs won't be sucking up nearly as much capital in 2024 to be invested in growing the book at the delicious ~20% ROE. So, now maybe FFH will have to take a step or two down on the hierarchy of capital uses in 2024 by dividending more money to the holdco to be used for something else. But, whatever that "something else" is, it will probably have an ROE lower than 20%. Let's just hope that the underwriting accelerates in 2024. SJ

I have the annual letter in my Downloads directory because I like to read it multiple times during a year. When I open the .pdf file, the meta-data says it was created on 15 March 2023, so presumably it would have been released within a day or two of that. SJ

There are probably some people who took the opportunity to add last week and are lightening up before the long weekend. I increased my position by 30% about five minutes after I read that amateurish report. I went from being unwisely concentrated in FFH to being bat-shit-crazy concentrated in FFH. I really should have been trimming the position in 2024, but have instead increased it significantly. At some point, reason will have to prevail and I'll put in a sell order for the shares that I bought last week. High conviction is high conviction, but stupid is stupid. SJ

Yep. Go pound sand!

If interest rates change between now and when the bonds mature, unrealized gains could increase or decrease as a result. But, one thing is certain. If they hold those treasuries until maturity, FFH will receive par for them at maturity ($1,000). Any unrealised gains or losses will disappear between now and then. SJ

Did I read this right? Today's release states that FFH's share of Exco's profit for 2023 was $129.1m and the Q3 release indicates that its carrying value on FFH's books was $418.3m, and those clowns are grousing that the position should be written down? I must confess that I wouldn't even know how to write down a position with that income number and that carrying value! SJ

I love it! A homework assignment for FFH! Prem is going to tell them that there is more than enough disclosure that has been provided over the years and that they should go pound sand. SJ

That's good to see, but it is important to do a bit of school-boy arithmetic about the post-dec 31 transactions. So, prior to Dec 31, FFH floated US$400m of notes and that will appear in today's balance sheet. On January 29th, FFH redeemed US$279m of notes. Then on or about Jan 19, FFH paid a US$15/sh divvy on about 24m shares. Then on Jan 12, FFH floated an additional US$200m in notes. Finally, yesterday FFH announced that it will redeem CAD$349m in notes on March 15. So, take that Dec 31 number released today, and net out all of the items that occurred subsequent to quarter's end and the holdco cash balance currently is a bit higher than it was at the end of Q3, but not drastically so. But, let's take any improvement that we can! SJ

Well, with the bil of unrealised fixed income gains, if you hold those bonds to maturity (as I hope they will!) you will get the interest payment every year, but then the unrealised gains unwind as the bond gets closer and closer to maturity. So, accounting rules force them to recognize a bil in gains in 2023, but then that bil would appear as a combination of unrealised and realised losses over the next 7 or 8 years. That's why I say low quality of earnings now because it will be offset by a low quality of losses later. SJ

I never particularly like the Q4 release because it doesn't provide all of the details that are usually published during a quarter. We will have to wait another month to get all of the details that we like to see. That being said, the headline EPS number in the quarter is great. The market should respond favourably to it in the coming week and the putzes that have been stirring up shit should return to the woodwork. When you dig into the numbers a bit more, it's a bit of a mixed bag. -The most obvious point is that there's basically one bil of unrealised gains on fixed income, and it is unlikely that those bonds will be sold any time soon. We will see a nice pile of interest and divvies over the coming years, which is outstanding. But the $997m of unrealised gains on the bonds is low quality of earnings. I do, however, like how the fixed income port is structured for the coming years. -UW earnings are fantastic. That being said, the Gross Written numbers seem to be slowing. Crum grew its book during 2023, but it looks like the book grew at the cost of its CR. NB, Zenith and Allied had much smaller growth in Gross written, which probably means that price was the entire driver and that they actually wrote fewer policies (ie, if price is up 8% but your gross written is up 6%, that means you non-renewed 2% of your policies). ORH and Brit obviously dumped some business, and I guess we have to accept that it was a rational decision. Looking at company-wide core underwriting CRs, the lack of cats in 2023 appears to be a good thing, otherwise the consolidated CR in 2023 would have been higher than 2022. The only real bright spot were the international insurers which both grew their book and shrunk their CR. It will be interesting to listen to the conference call to hear whether the execs at FFH figure that the hard market still has legs because the numbers are really starting to slow. -Nice to see the share-count drop and looking forward to the more verbose report next month. SJ

Yes, they flow through the income statement. SJ

No, it's not apples to apples at all because it's comparing existing 1-yr debt vs. the new 10-yr debt. But, it is a cash for cash difference, in that if they had waited a year to refinance and if prevailing interest rates remained the same (ie, if they are still able to float debt for 6% next year), they'd have saved a bit more than US$2.5 million in interest. Of course, that comes with a certain level of risk, and managing the debt-maturities is all about managing risk (and rarely is risk management free!). SJ

It's always nice to see them proactively managing the debt maturities, but this one is a little funny as they are redeeming debt that costs 4.95% one year early, while last month they were floating new debt at 6%. I guess managing maturities costs a bit of money. SJ

It's interesting that the events of last week haven't seemed to have triggered much angst about the holdco cash flow aspect of the TRS. Those clowns managed to push the share price down by 10-ish% for a few days (thank you very much!) and then it rebounded a couple of days later like nothing ever happened. But, a short attack by some clowns isn't the only thing that can drive a considerable drop in the share price. Other events could do so, and it could be considerably more than 10%. As a basic exercise, people should consider some wacko event in financial markets that result in FFH's share price dropping by, say, 25% in a day (eg, October 19) and that credit markets freeze up (ie, like the financial crisis or early in covid). What happens to the FFH holdco? Well, if the share price crashes by 25%, even for silly reasons, the holdco needs to write a cheque to the counter party for about US$250/share, or about US$500m. Everyone should take a look at Note 5 to the financial statements and consider what that means for holdco cash. Now, people will say that FFH can just send some dividends from the insurance subs to the holdco and all is well, but don't forget that the insurance subs' equity holdings would also be marked to market by perhaps -25% in the event of a broad-based crash. That then leaves the revolving line of credit, providing that the bankers don't think of a good reason to cancel it... Jen Allen seems like a pretty sharp cat and has probably done a bit of thinking about this, but it seems to me that FFH needs to carry much larger holdco cash balances (true liquidity, not some of the bullshit portrayed in Note 5) if it wants to continue to carry those TRS. SJ

LOL, a short-selling firm that prides itself on its research capabilities, and they can't even find an e-mail address or telephone number! Do these guys have any network at all? SJ

One year around that time, FFH's valuation was bat-shit crazy and FFH issued a boat load of shares. Then the price tumbled a year or two later and they bought back a boat load at a much lower price. I don't recall the specific years that occurred, but your mentioning a large drop in shares outstanding does not come as a surprise. One of the complaints about FFH in late-90s and early-00s was that a large chunk of the shareholders' equity was created by issuing an repurchasing rather than simply making money the old fashioned way. I never really viewed that criticism very favourably as you make money however you can.... SJ

Yes, you are right. The Watsa family does not control roughly half the shares, but rather roughly half of the voting rights in a dual share-class structure. It's an important distinction because the Watsa family's economic interest is nowhere near half. SJ