StubbleJumper

The numbers are far better than you could ever dream. Look far back in time. :) Well, that's sorta the problem. With Lancashire you cannot really look far back in time as this outfit was put together after the KRW storms of 2005. Having been in business for only four accident years, it's really difficult to get a handle on what a normalized CR would look like or whether their reserving tends to be accurate (ie, it's short tail insurance, but with such a brief history there is no historical loss triangle for us to evaluate). To date, this has been a wonderful little company, but we've also had four relatively light cat-years. When you look at their financials at the table that shows the 1-in-100 and 1-in-250 year events, it becomes more clear that their CR could easily spike..... Interestingly, they did not estimate what type of loss they might have incurred from the four horsemen of 2004 or KRW in 2005 (would that be 1-in-250?). It is also interesting that terror insurance is one of their lines of business, and I do not recall seeing an estimate of what the WTC attack of September 2001 might have cost them (RenRe got lucky on this, but not all insurers were so fortunate). Anyway, the only purpose of this disjointed post is to urge caution in evaluating this company's long-term prospects. I can pretty much guarantee that they will not be able to write a 40 CR every year! If you do the arithmetic assuming a normalized CR of 80 and net written of about $500m, you might get normalized EPS of slightly less than $1.00.... At current prices that's not too bad, but you need to be adequately compensated for the risk of a permanent loss of capital (ie, KRW). SJ SJ

I would observe that we have seen meaningful buybacks from FFH in 2008 and 2009. In fact, they bought back all of NB and ORH. This was big bucks, and it was done opportunistically when the share prices were relatively cheap. It would not surprise me at all to see a large FFH buyback at the holdco level if the price were right and if excess cash were available. In fact, given the current market valuation for FFH and current valuations for the stock market more broadly, I suspect that share buybacks would figure prominently in FFH's strategy if they had an extra billion or two of capital laying around.... In any event, IMO nothing major will happen for 2010 or 2011 as they need to finish digesting the $1b ORH buyback and the $1.3b Zenith acquisition....both of those blew some serious capital out the door. SJ

The stock is up 30% today, or about 50 cents per share. Does that mean that the market views Lincoln General to be worth negative 50 cents? Pretty pathetic. SJ

Given how the stock jumped by about $10/sh at the end the trading day yesterday, I actually believed you for a second.... Then I quickly realized that $3.5b/ 20m shares = $175/sh before tax. We would have gotten a bigger bounce than $10. But it was good joke! On a serious note, does anybody have a view on the last minute stock price increase yesterday? Is this just window dressing for institutional holders who are dicking around with their March 31 NAV? SJ

I really like the accident year tables. First, since FFH went on a bit of an acquisition binge about 10 years ago, it helps show progress on "cleaning up" the underwriting shop. When you are dealing with long-tail business, adverse development on reserves can arise due to a bad decision (or a series of bad decisions) a great many years ago. It would be wrong to attribute this unpleasant outcome to the current management team. With C&F in particular, much of their adverse development of the past was the result of asbestos and environment claims. Policies that were written in 1978 came back to bite them on the ass in 2005. The accident year data at least go some of the way to isolating management decisions and actual outcomes. In those accident year triangles from FFH's statements, you can see clearly that management has hauled ass in the underwriting shops that they acquired.... SJ

That sounds like a great plan. FFH has made sooooo much money off Canwest and Torstar already, it's probably about time to increase the investment. ??? ??? ??? ??? ???

And Im not talking Tiger Woods type swinging. Ummm... Tiger Woods appears to do several different types of swinging, and only rarely is a golf club involved! ;D ;D SJ

Based on the numbers I've seen, I'd be completely comfortable to join you for a ride in your Prius or in any other Toyota. There are probably far more accidents every day involving Toyota drivers that are caused by texting while driving than there are accidents in a year due to unwanted acceleration in Toyotas. The fact that it makes headlines does not make it a meaningful risk. SJ

The part of the AR that I always love the most is to look at the "loss triangles" that describe how reserves evolve over time. The reason for this is that the easiest way for an insurer to screw an investor is to lie about underestimate its reserves. When you look at the triangles that were constructed on an accident year basis, FFH's underwriting discipline is obvious and compelling. I sleep well at night, with no worries about adverse development! SJ

Insurable losses of $2-8 billion gives a mid-point of about $5 billion. That would be roughly like Hurricane Charley? Charley was only one of the four horsemen of 2004. It'll take a lot more than Chile to make a dent in the industry CRs. SJ

There's still too much competition in major Canadian markets like Toronto. The Star is carving the market up between itself, the Sun, the Globe and Mail, and the National Post. It would be helpful if the Post would simply give up the ghost. However, with four major participants, suddenly the economics become pretty grim even in a town of 5 million people. Montreal is even worse with the Gazette, Le Devoir, La Presse, and Le Journal.....plus the Globe and Mail and the National Post for those who want a business-oriented paper. All of these papers are hammering the same market of about 3 million people. How does anybody ever make money in a fractured market like this? SJ

Almost certainly reduced liquidity/demand after delisting from NYSE. Contrast to BRK's increased liquidity/demand after B shares split and announcement of joining S&P 500. Yeah, the reduced liquidity and trading volumes may make for quiet price action. On the other hand, the US$10 divvy effectively puts a floor on FFH's trading price. Once that dividend yield heads north of 3% it starts to become something of a dividend stock and attracts a different collection of buyers!

I too bought a smidgeon of BRK over the past couple of months. I keep about a 5% position in the baby-Bs. Maybe I should bump that up to 10% or more, but over recent years I've seen more value in other securities.....including FFH! I love BRK because every few years Mr. Market gets depressed about how WEB has lost his touch, which provides a nice buying opportunity. SJ

As usual when the media get involved, this situation is characterized is a ridiculous amount of over-reaction to a very small number of fatalities spread over a very large number of Toyota drivers. The last numbers that I've seen suggested that unwanted acceleration in Toyotas in the US may have caused just under 20 deaths over the past 10 years. That's only 2 per year. It sucks if you or your family happens to be one of the two, but this is trivial in the broader context of the risks that we all willingly accept every day when we get behind the wheel. To put this risk in context, it is perhaps interesting to note that every year 30-40 people die from snowmobiling accidents in Ontario alone. There are a hell of a lot more Toyota cruising the highways in the US than there are snowmobiles in Ontario. And people who own a Toyota tend to spend a hell of a lot more time in their car than anyone could ever expect to spend on a ski-doo. This whole re-call issue is pure garbage perpetuated by the media. Toyota will recover from this in a few years, but it is a crying shame that their business will be hurt for a few years due to such a minor issue. SJ disclosure: I don't own shares, but I do own a Toyota. If I ever have unwanted acceleration, I'm pretty sure that I'll be able to step on the clutch to avoid drastic consequences.

I think it's risky, too, partly because announced government policy changes can change market prices dramatically against you if they run counter to your opinion and will exacerbate the problem you perceive (because they don't see it like you do). However, if you wait until they make such grave errors, you might get a good entry point. And if deflation of the money supply does continue (raising the value of every dollar), low interest cash isn't bad to sit with in the mean time, even if consumer prices don't go down in unison with the money supply (because the companies need to keep the profits coming to pay down debt). However assuming an environment of reduction of the money supply, for an Intrinsic Value investor, companies with powerful brands, low costs and little or no debt compared to their competitors will obtain advantages if competitors must prioritize fixing their balance sheets by ploughing profits into debt pay-down rather than compete for brand-awareness and sales. Massively powerful intangible economic assets like brands will retain or grow their value in real terms (whether or not they're on the balance sheet) regardless of inflation or deflation of money supply. So the question really comes down to: As an investor who believes this thesis, should I carry on patiently waiting to buy high quality dollars for 50 cents with low risk of loss, or can I gain more without much more risk of loss from what I see is inevitable credit contraction using some other means. Is there just as much to be ganed from patient value investing, merger arbitrage etc as from some leveraged bet that might carry a much bigger downside? Just because you can feel clever by playing your macro idea and making 50% in two years, you might still be worse off than had you done the boring thing of buying value stocks at 50 cents on the dollar and selling at 80c, for example, to gain 60%, and if you required leverage, you might have exposed yourself to greater risk too. Like Warren and Charlie say, you don't get added return for "degree of difficulty". Someone like Prem Watsa might be able to identify the likely area of disruption (housing last time) and some idea of over what period the bubble must burst, whose ratings it would affect most, and that the gains when it happens provide a good compound return over the period, and the claims would be paid by the counterparties or that the CDS could be sold to someone else and that there's no risk of being forced to liquidate your position against your will (like a margin call). I'm not sure I could find those opportunities. Cheers. I wouldn't base an investment plan off this type of thesis either. However, it is one more indicator that suggests there may be some downward pressure on markets in general over the next couple years. That's the exact same reason why I look at other broad macro indicators such as PE10. You need to get an idea of whether there is a distinct possibility of the market clocking you with a left hook that you should have seen coming. The approach I take for security selection is roughly the same in high markets and low. That is, look for inexpensive securities that appear to offer a favourable risk adjusted return. The only real difference in selecting securities in a high vs low market is that it's a great deal more difficult to find screaming bargains today than it was in February 2009 (there was actually one day last year when I bought preferreds from a subsidiary of the Bank of Montreal that had a dividend yield north of 20%!!!! It's the Bank of Montreal operating under Canadian regulation, not the Bank of Afghanistan operating in a war zone!). The macro stuff ends up unconsciously driving my portfolio allocation to a certain extent. This occurs because I have difficulty finding obvious bargains in high markets which effectively forces my cash holdings up and I also tend to be a little more cautious about keeping some dry powder when it looks like market reversion is a possibility. Last spring it was so easy to find bargains that I even margined lightly.... and in retrospect, with S&P~600-700, I should have margined much more heavily in response to the macro environment. SJ

So, to resurrect this thread, the baby-Bs have hit $79 this afternoon. Where have people situated their limit-orders? As I suggested earlier, I kinda figure IV might be somewhere around $100, but BRK trading at IV is about as common as seeing Halley's comet. Is $85 too low for a limit-order? SJ

FFH bought a large pile of BRK insured munis at about this time last year. Does anyone doubt that Prem is the smartest guy in the room?

I had a grand time clicking on lawyer ads served up by google here. I love making the jackals pay for a good forum. ;D ;D ;D Everybody's gotta have a hobby.... ;D ;D ;D

Hmmm....they publicly declared that the guy is a pedophile? Well on the bright side, at least they didn't send an anonymous letter to the man's church claiming that he's a fraud artist and stealing the church's funds. On that basis, it appears that their tactics have strangely become more honourable.... What a bunch of slime-bags!

I've never figured it out either. I understand the cost side better than the commodity price side. I just toss the whole industry onto the "too hard" pile. I'd love to understand it and be more confident. But I just ain't smart enough. SJ

Well, here's the thing. Prem figures that he can grow book value by 15% per year. Apply the rule of 72. If Prem is right, then this thing is a double every 5 years. In that context, who cares about a temporary 5-10% pop from splitting the shares? With FFH, we must get used to volatility. It is both frustrating AND it's an opportunity. Over the years, I cannot tell you how much money I've made from people who have given up on ORH and FFH at absolutely silly prices. It's been great for me! At one point, Prem was completely focussed on growing shareholder value (ie, IV). There were no quarterly conference calls, and he did not give a sh*t about what analysts thought. That was roughly 10 years ago. Reality has hit home, and he is more of a salesperson than in the past. But I think that he was correctly aligned in the beginning, even if those days are now past. We need his brainpower, not salesmanship. The salesmanship will support this beast in the short term, but his brain, his composure and humility is what pushes book value forward over the long-term. And over the long-term, Prem costs me a hell of a lot in capital gains taxes... Screw the NYSE! SJ

AXP was a no-brainer. I too failed to make a purchase, which is one of the worst specific errors of omission that I made last year. Even at the time, it was obvious that AXP was ridiculously undervalued but I chose other securities instead. Beyond the specific errors with AXP, WFC, MMM, etc, in retrospect, I made a fairly serious allocation error. By the end of March when the S&P was 600-700, I was -10% cash, and about 110% equities. My margin interest rates were only a shade over 2% and dividend rates for a whole host of companies were well over 2%. With market valuations at that level, the allocation question was really a binary question. Either the entire world economy goes into the sh*t-hole or it doesn't. In either case, more leverage would be justified because if the world economy did go into the sh*t-hole and the S&P collapsed (ie: S&P~300-400) having my investment account blow-up would have been the least of my problems....on the other hand, if the market had held steady or recovered (as it did) a bigger dose of leverage would have made a significant difference in my ultimate wealth. So maybe I should have been cash -50% and equities 150%. SJ

SJ, Looks like you were right... But it hasn't hit the 80's yet. :) Dan Yeah, I haven't unloaded yet either. Missed opportunity, or is this a brief interlude before a longer term climb? Time will tell! SJ

In the eternal words of Yogi Berra: You better cut the pizza in four pieces because I'm not hungry enough to eat six.

I seem to recall that Prem's original shares and the shares held by Sixty-two are multiple voting shares. On the other hand, the shares that he bought in recent years would be the same subordinate voting shares that anyone can buy on the TSX. While the economic interest may be the same, the voting element is an important distinction.