Cigarbutt

"If I were running Fairfax I would have taken massive reserves this year....what an opportunity." It's OK to keep your opinion on the topic. I just want to underline that the decision to invest or not in Fairfax would be very easy if reserves would be "adjusted". BTW, in the news release, they document the net prior years reserve development (for the different subs). My take is that the 2017 numbers are in line with previous years and do not show what could be considered opportunistic over-reserving. YoY, the reserve redundancy is lower and that is well explained by the single casualty surprise at Allied World in Q4 and by the general decline of reserves released at the industry level. From the owner's manual (Mr. Buffett): "At Berkshire you will find no “big bath” accounting maneuvers or restructurings nor any “smoothing” of quarterly or annual results. We will always tell you how many strokes we have taken on each hole and never play around with the scorecard. When the numbers are a very rough “guesstimate,” as they necessarily must be in insurance reserving, we will try to be both consistent and conservative in our approach." (my bold)

Welcome FairFacts, I assume you refer to FFH numbers released recently. Many reasons drive the retention ratio. An interesting exercise would be to look at the insurance and reinsurance subs segmented data that will be reported in the annual report and try to identify with sub/line contributed to the change and try to define the reason(s) why it was felt that more premiums had to be ceded in exchange for reinsurance protection. Looking forward to that discussion.

Sure. Will keep going in this thread as it is relevant to FFH also. AHL (Aspen Holdings) is now trading at a slight discount to book value. The relatively long operating history, relatively low NPW to equity and relatively high investment per share (at +/- 3$ per share at end of 2017) would suggest that the shares are undervalued. The following comments will focus on the underwriting side and not on the investment side of AHL. -The positives. They seem to show discipline in the sense that they have not grown tremendously in the last few years in a market that has been quite soft and in the sense that they have often backed words with action by switching capital around different opportunities (within insurance lines and allocation between insurance vs reinsurance). AHL has a relative focus on specialty niches. -The negatives. My take is that, over time, AHL has not produced combined ratios significantly better than the industry and has had its fair share of negative underwriting results related to catastrophes. In the last few years, the trend in their underwriting result has been unfavorable and has included positive reserve developments which can not be considered to be fixed features. Overall, on the underwriting side, I think it may be reasonable to expect that AHL will continue to be an average performer or slightly better. However, AHL has existed (since 2002) in a period where industry net reseve movement has been favorable (very unusual period in terms of extent and duration of phenomeneon which would imply a very soft market). One would have to assess how AHL would differentiate itself from the industry if reserve deficiencies would become the norm for a while, especially for the longer tail liabilities. In a tougher environment, they would have to compete with survivors and with parties coming with "clean capital" just like they did when they formed in 2002. To link with the present topic, unlike FFH, AHL has grown organically. FFH has grown mostly through acquisitions and that comes with its own set of challenges but FFH combined ratio numbers from the last 5 to 7 years compare favorably to AHL. The biggest differentiator may lie in the capacity for Fairfax to fully participate in a hardening market. Makes sense?

This post is about the underwriting side of the business. Specifically trying to see the significance of results reported for the Allied World sub (Brit also). When you see larger than expected losses in the catastrophe area, it can arise simply because of the unexpected nature of events. However it may reveal a problem going along a spectrum from simply exposure, to temporary inadequate pricing to a more widespread poor underwriting/reserving culture. Actions to correct the problem should be in correlation to the severity of the problem. My understanding, from numbers reported now and before, and from specific comments made on the conference call, for Allied World (and Brit), is that the problem is likely one of exposure in the property market with catastrophe exposure. Fairfax historically has worked in a decentralized fashion for the insurance and reinsurance subs but, over the years, they have built some kind of oversight (Andy Barnard) with a focus on the underwriting/reserving culture. Once again, OdysseyRe had a very strong year in 2017 despite a very unusual year for the reinsurance industry as a whole. My take is that the exposure problem can be dealt with and I don't think that Allied World (and Brit) were bad acquisitions. It means though that the relatively favorable combined ratio profile that Allied World (and Brit) reported before the recent acquisition did not adequately reflect their "true" normalized combined ratio during an unusually quiet period for the catastrophe market. So, the implication is Fairfax may have paid too much for the acquisition. In retrospect, it would have been better to wait before making the acquisition :). But: In theory, there is no difference between theory and practice but in practice there is (Yogi Berra?). My opinion is that Fairfax has been able to build an unusually strong assembly of global players in the insurance and reinsurance segments poised to grow in the right environment and I think that the relatively unexpected numbers shown by the more recent acquisitions are likely to disappear over time. Results in the catastrophe space are lumpy and fit well with Fairfax philosophy in general. You just have to make sure that you can survive and it is best to use the cycle to your advantage. Underwriting problems can be more profound (Fairfax has had its share of exposure to this phenomenon a while ago) and here's a link discussing new developments at a company I have followed for a long time. 2017 was unusual in terms of frequency and severity of catastrophes and this has caused the tide to recede to some degree and has helped in defining the severity of the underlying issues. https://www.insurancejournal.com/news/international/2018/02/16/480985.htm Dazel, with all due respect, I submit that a "good business" would maintain a healthy reserving discipline whatever labile tax changes that may occur. I understand that firms may use timing but cooking the books, in my own evaluation, tends to cause a very significant dent in the intrinsic value calculation.

"US workforce? 20+ years of stagnating incomes coming to an end, maybe?" Just finished Homo Deus, by Yuval Harari: https://www.amazon.com/Homo-Deus-Brief-History-Tomorrow/dp/0062464310 Of course, who knows the future but his take would imply that advancing technology will tend to increase the divide between those who bring value and the regular Joe.

Good points. Employee turnover appears to be high at Amazon but I'm not sure about the age profile. Amazon is apparently even encouraging workers to quit with a 5000$ "offer". https://www.theatlantic.com/business/archive/2018/02/amazon-offer-pay-quit/553202/?utm_source=feed "Officially called “The Offer,” this proposition is, according to Amazon, a way to encourage unhappy employees to move on." The jobs are physically demanding and many stay on the job for the health insurance coverage. Concerning self-insured firms and the captive market, a practical experience (read from the scientific journal USA Today): "As the founder and CEO of a mid-sized company that employs 180 people in the United States, I know this well. In 2018, we will pay $2.8 million to insure our workers and their families. Year after year, we have wrestled with the costs of our health care plans. And despite trying every trick in the book, our per-employee costs have tripled over the past 14 years. A family plan in 2018 will cost us $27,000, which is higher than the annual salary of one-third of all working Americans. To put it another way, we are paying $13.50 per hour per employee just to cover the health care benefit. It’s a model that’s completely unsustainable, and needs to change." Employers, self-insured or not, (and the government) want to pay less. Patients are not satisfied with the value proposition. Providers are looking for more efficient processes and technology. Insurers (who now connect all these actors) don't see ingredients for meaningful change. Still early in the game and a lot of resistance expected but a potential for change. Example: https://www.apple.com/newsroom/2018/01/apple-announces-effortless-solution-bringing-health-records-to-iPhone/

"Somehow I personally consider this initiative an employer-owned PBM, that will be running on some kind of non-profit basis. Attached is a part of note 1 from Novo Nordisk Annual report 2017 released yesterday. It's ludicrous... What US politics haven't been able to fix so far, will eventually be fixed by Corporate America." John, Your last post was a source of reflection and research. This post lies halfway between this thread and Novo Nordisk (more on that later). Concerning your non-profit basis comment, some say that this has been a key long-term characteristic of Amazon :). Notwithstanding the "profit" part, because of Amazon, I keep receiving on my doorstep, delivered rapidly and reliably, affordable specialized equipment that comes from far away places. Somehow, I get connected with sellers and delivery people who otherwise would have been outside of my reach. I started looking at Novo Nordisk. If I understand you well, you seem to imply that the rebates etc are rising and affecting NVO's profitability in the context of a challenging pricing environment. Politely submitted, in my present limited understanding, it seems that the "value" of an american diabetic patient remains still relatively higher than other patients in general (ie Europe) even if pricing there is felt to be more "publicly" regulated. It seems also that the rebates and others are not passed on to the end user (the one who needs the product). Concerning your "fix" comment, It seems that what a lot of the present players are saying is: "if it ain't broken, don't fix it". This cost containment issue has been around for a long time and pharmas such as Novo Nordisk have always managed to preserve (and even increase) their profitability so this is nothing new perhaps. To help assess the cost pressure trends, here's a link related to a hot off the press report. If short on time, read the executive summary, the conclusion and the other Bloomberg link which gets the flavor of the report. https://www.whitehouse.gov/wp-content/uploads/2017/11/CEA-Rx-White-Paper-Final2.pdf https://www.bloomberg.com/news/articles/2018-02-09/drugmakers-dodge-another-bullet-in-trump-s-drug-pricing-report Government reports are, by nature, political (we don't want to get into that, don't we?) so issues may not assumed head on and the plan may change but, for what it's worth, my opinion is that 1-we may reach a point (soon?) when significantly more pressure will be applied on the profit margins 2-pharmas will need to "prove" the value of their products and 3-now there is an added component aimed at the reduction of "free-riding abroad". I understand that Novo Nordisk has a focus on diabetes (and obesity). Long term, diabetes industry dynamics may be changed by revolutionary new products (who knows when but the discovery of insulin itself is instructive in terms of the difficulty to identify where threats will come from and when) and pricing pressures may increase. However, the diabetes "market" will likely increase (a lot). Thinking of morbidity and mortality, did you know that, despite what the healines say, the global percentage of people dying violently has gone down tremendously in the last century and now, relatively, more people die from direct complications of diabetes (which is mostly a preventable disease, at least type 2)? Sugar (excess) is dangerous. One would think that preventive measures may eventually decrease demand for diabetic meds but, if history is any guide, when tobacco products were determined to be deadly products, tobacco companies were on the eve of long term stellar returns. Sometimes I wonder about the usefulness of these general discussions so, when I read more about Novo Nordisk and if I become bright enough, I may try to contribute to that specific thread. Final words related to your "political" comments and a way to go back to the essence of this thread. Health care costs have gone up ++ and, in many ways, this is not sustainable (tapeworm argument). Two links below using essentially the same data and coming to vastly different conclusions. The first link suggests that governments are too intrusive. The second link (Baumol's disease) suggests that the high prices we pay for health care may be in correlation to our relative affluence. http://www.aei.org/publication/chart-of-the-day-century-price-changes-1997-to-2017/ https://www.vox.com/new-money/2017/5/4/15547364/baumol-cost-disease-explained

A partner or a fox? If your thesis lies on the assumption of more of the same, the CEO’s assessment is reasonable. I would say that this status quo reasoning reinforces a false sense of security, an ideology of cautionary principles and stationary states. If your thesis lies on a coming disruption with many small, unknown and bold players waiting to deploy their ideas, given the opportunity, then the big-three announcement may signal that the door is opening. It may be reasonable to think that Amazon will set up some kind of technology-based transparent marketplace for the providers and the “consumers”. Something like a consolidated middleman. A relevant example is what happened with the transportation logistics revolution that occurred since the early 80’s, although few people realize it was a revolution and it is often a neglected factor in the economic growth of the last few decades. Transportation logistics specialized in maximizing efficiency at all levels: from the order, to temporary storage, to the coordination of carriers, transfers, warehousing and delivery. Most transportation firms (asset-heavy) have an in-house logistics hub but this side of the business has been somewhat overtaken by asset-lite specialized entities (CH Robinson, Expeditors, etc) who became sophisticated brokers (middlemen). Transportation is not healthcare but nobody would go back in time in the transportation industry. Transportation costs are way down and these specialized brokers have been very profitable investments. My humble take on the article and on the position of the “industry” is that if they want to partner with the big-three project, I see it more as a Trojan horse situation. The crafty Odysseus was able to bring the horse right in the middle of the city of Troy. Not a technology expert but I understand that a “Trojan” is used in the techno area as a trick or strategy that creates a context where the “virus” is spontaneously loaded into a protected or secured bastion and then fashioned to induce the host to willingly activate and use it.

One would have to define market timing. I remember reading the following which really helped with perspective: http://brooklyninvestor.blogspot.ca/2014/03/buffett-market-timer-part-1-partnership.html There are five parts.

On the potential squeeze and potential transformation, we appear to be very early in the game. There will be certainly pressure on the suppliers but demand will have a strong tendency to go up. Potential winners may the ones able to position themselves to achieve satisfactory rates of regulated returns and gain market share. DVA seems to be a good example. Simply getting to move at the speed of an elephant may be a comparative advantage to slow moving dinosaurs. The "customer" cost/value proposition can be improved.

Dynamic, I always read your posts with interest. Impressed by the level of internal consistency and transparency. Question: "Last night we checked our household budget and brought forward and increased our usual cash subscription to add another 1.5% to our portfolio, which should be available to invest today or possibly as late as Monday. I'm also considering switching our 4% position in Wells Fargo to BRK.B, so might well do both on the same day and add about 5.5% to our BRK.B weighting soon somewhere in the $191 region (GBP £137)." Is this simply a one time adjustment in the saving/investing dynamic or is it some kind of periodic and opportunistic dollar cost averaging?

"Took another look now. Looks like things haven't been going so well for rails since 2014. I'm not sure their current valuations are justified." "Freight revenue per ton-mile has held up actually, but returns have converged. The industry has pricing power, but volumes have gone down materially." and: If you look at CNR PE now, it is in the historical low range. So a firm/industry hit by short term issues with good long term prospects. Value investing? This may belong to a separate thread, but a few comments about CNR: -consistent operating history -leader in efficiency -main transportation alternative for many (inescapable for some) -asset base resulting in very high barriers to entry -long term comparative advantage to other forms of transportation This is not a high level growth company and the capex burden is high. Also, pension liabilities are getting larger. But, if I would go fishing for 10 to 15 years, this stock/industry would be on my target list.

Whenever I go back to this topic, I look at: https://www.aar.org/ Every year, they come out with Class I statistics: https://www.aar.org/Documents/Railroad-Statistics.pdf Railways have a great past and great future and will likely remain as a privately owned infrastructure.

"A correction is healthy and probably inevitable after such a strong start to the year. But basically we've just retraced the 2018 gains and are back to where we were at the end of 2017. And predictably we are already starting to see the "buy the dips" mentality kick in. After strong returns in 2016 and 2017 it wouldn't be surprising if the S&P 500 went sideways this year with more volatility than we've been used to. But unless inflation really kicks off or growth really disappoints it is difficult to see anything resembling a market crash. Even if interest rates drift up towards 4-5% that would still support a PE ratio of around 20 and by the time interest rates get there S&P 500 earnings will probably be more like 120-130 so I can't see us drifting too far from the current level of 2600-2700." mattee2264, Thanks for the comment and guidance. I wish I could show this degree of confidence for the short term outlook. I respect what you mention but have to reconcile with the following quote from Professor Shiller: "Stock prices are likely to be among the prices that are relatively vulnerable to purely social movements because there is no accepted theory by which to understand the worth of stocks….investors have no model or at best a very incomplete model of behavior of prices, dividend, or earnings, of speculative assets." I guess this is why value investing is so fascinating.

"I've never understood the modern fetish for positive emotions. We are the products of thousands of years of evolution. If negative emotions were not important they would have been bred out of us a long time ago. Almost every single important step in my life was proceeded by a lot of depressive and negative thinking. And many of the greatest people were enormously negative...Lincoln, Churchill, a tonne of artists and writers." This may relate to investing and to the ability (sometimes innate) to show contrarianism. You make want to reflect on the interaction of mood and attitude, or vice-versa. You may also enjoy reading about William James, the philosopher and mathematician. Here's a quote, when he discusses the inadequacy of healthy-mindedness: "...because the evil facts which it refuses positively to account for are a genuine portion of reality; and they may after all be the best key to life's significance, and possibly the only openers of our eyes to the deepest level of truth." BTW, I have read a lot about Lincoln and Churchill and don't quite agree with your "negative" conclusion. I would submit that they were often inhabited by bouts of melancholy and each suffered their share of sad events and failures but Lincoln worked very hard at forging a positive attitude in the worst of times and Churchill is the one who said the following: "A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty" and "Attitude is a little thing that makes a big difference". If you want to "enjoy" reading about another Ivar but real, go for Goethe, the writer (Faust), statesman and scientist. You won't be disappointed. Disclosure: optimist but complacency and oblivion can ruin your day. :)

One of the things I admire most about Mr. Buffett is his unique ability to act rationally, whatever the circumstances. On the question of spotting opportunities, making "stupid" mistakes and buying stocks after significant price appreciation: "We've done it before". Now, he is sitting on a pile and as far as I know, he hasn't pulled the trigger. It is fair to say that BH would not bet against Amazon but they also would not invest in it at this point. I think that represents a reasonable position. https://www.cnbc.com/2017/05/08/warren-buffetts-one-word-answer-for-why-he-hasnt-purchased-amazon-shares.html

@gary17 "rb can you explain for those without economics degree why when China runs trade surplus they need to buy T bills?" rb's answer is the classical answer and quite satisfactory. If you're looking for something more "visual", you may want to try: https://www.khanacademy.org/economics-finance-domain/macroeconomics/forex-trade-topic/current-capital-account/v/why-current-and-capital-accounts-net-out If you aim for a more "folksy" answer: http://archive.fortune.com/magazines/fortune/fortune_archive/2003/11/10/352872/index.htm A certain investor said that "a solution must come" as he saw an unfavorable trend. The article was written in 2003. In macro, it may take a long time to find an explanation or for an explanation to find you. :)

"Amazon seems like a nice elephant." I'm not sure what you mean? Are you referring to the elephant acquisitions that Mr. Buffett talks about? If that's the case, maybe there is something to learn. My understanding is that Mr. Buffett always carries his loaded elephant gun but is known to have said that he enjoyed shooting fish in a barrel. He does not seem to use an enterprise value to revenue ratio as a selection criteria. In many ways, what Amazon has accomplished in the last 20 years is nothing short of extraordinary. I submit though that it is priced now for more of the same. Here is a link that I read earlier today that is superficial and sensational in nature but that nonetheless helps to put things in perspective: https://thefelderreport.com/2018/01/31/amazon-adds-a-mcdonalds-in-market-cap-in-the-month-of-january/ Funny because there may be some interesting parallels between Jeff Bezos and Ray Kroc.

https://finance.yahoo.com/news/one-qualification-warren-buffett-like-berkshires-next-ceo-172054448.html Modest and motivated. Rare breed.

Interesting topic. So many variables, including sentiment. Not clear though how this can "impact" investment decisions/outcomes. Maybe should spend the time reviewing DaVita instead. The theme is to assess the possibility of "restructuring" and how to position to have protection or to benefit. Trying to connect some dots after reading an interesting report that is relevant to the US government 10 year bond yield. http://en.dagongcredit.com/index.php?m=content&c=index&a=show&catid=88&id=4937 The complete report (bottom of page) has some nice graphs. I understand that the analysis may be biased but isn't it interesting to learn about competitors' assessment? Especially if they are major owners of the very paper (electronic entry) they are holding? So, can the US government default? The answer is very likely no in the classic sense given the ability to "print" its own currency and given our present risk-free environment. But the default definition can be elastic. Interestingly, in January 2009, Mr. Market (the credit default swap spread market) assigned a probability of US government default at 6% (!) over the next 10 years. (Amazed by this phenomenon as one had to rely on a counter-party ???) Since then, I understand that the measure has remained below 1%, and often a small fraction of 1%. end 2008: total public debt/GDP=73,5% Q3 2017: total public debt/GDP=103,8% The US has never failed to repay its debt. But there were two episodes where the elastic definition applied. First in 1790 (interest deferral in a venture capital spirit) and in 1933 with the gold devaluation that petec referred to. At this point with the economy firing on all cylinders, the public deficit stands at about 3,5% of GDP (growing trend) and private savings rate (December 2017) is at 2,4% (low point and declining). More questions than answers at this point. In 2018, -What is the standard of value? -What is the (real) price of debt? -If you represent the standard of value and you need somehow to devalue, how can you devalue without "partners" doing the same? One can hope that the underlying economy can reach its full potential. Interesting times for the 10 Year Bond.

"How does it impact the overall healthcare system in the US? We'll find out." We will indeed. The intent is long term but the short term focus will be on the cost/quality curve for their own employees. Private firms have had the option of outsourcing the health care benefit management. The decision is becoming more costly and it appears more and more to be a poor value proposition. For those interested in comparing their own premiums with averages, here's an interesting link: https://www.kff.org/interactive/premiums-and-worker-contributions/#/ The "premium" is the total cost and you can adjust the graph for single/family status and can "compare" with employee contribution which is a fraction of total cost. Interesting to note that the total cost, even if the trend has somewhat improved comparing to the 1980's-90's period, continues to grow at relatively high rates. Also interesting to remember that rising health costs have been only one of the few items keeping CPI above zero in our (still) largely disinflationary world. The "big three" announcement has been met with some doubts: "The new company will have to align itself with main industry players". Helpful to remember that many previous attempts have failed but, lately, many similar endeavors are coming to life. Intel has made some regional progress on this front. Also, in 2016, many self-insured employers (including American Express, BNSF, Coca-Cola, Verizon...) have formed the Health Transformation Alliance. The essence of these initiatives, at this point, is to "cooperate" and gain scale/leverage. So far, these groups show some promise but have not been able (so far) to address the fundamental cost drivers of unnecessary care and avoidable complications. In a way, health care is a puzzle of components that are essentially commoditized. The way the incentives are set up, at this point, prevents competition and the associated downward pressure on prices as ill-defined collusion forces make prices "sticky". Also, over the years the third-party "shield" (on a net basis, obviously not the case if you have to deal with higher deductibles and higher co-payments) has become larger, delaying the impetus for significant reform as many participants tend to think that there is a free lunch somehow. The new "project" spearheaded by Amazon likely will target the whole supply chain. Some analysts have mentioned that the fear of healthcare disruption will have to be reconciled with today's reality. The treatment of a tapeworm infection rests on the necessity to evacuate it. But first, you have to put it to sleep.

Interesting to note that Mr. Buffett and Mr. Munger have been unusually vocal concerning the financing aspect of healthcare and seem to back a single-payer system. But the internal focus will initially be on the health benefit cost per employee aspect in a way perhaps that is related to how 3G capital would look at every step along the way to cut cost. The bottom line would include the value that the employee would perceive as the end result in terms of health benefits. Friction expected along the way but a potential win-win. And then, the model could be expanded, whoever pays the bill at the end of the line.

This is great news. What analysts describe as a relative disadvantage (new player with a yet undefined vision) may be one of its greatest entrepreneurial strengths. The idea of starting with a cash flow negative pilot project makes sense before a scalable model is deployed. Healthcare is based on science but its delivery is far from scientific. Just comparing regional variations would meet the definition of haphazard. A lot of what is considered “complex” could be simplified with the introduction of efficiency and discipline. The timing is excellent as true “reform” will likely take precedence over idleness factors. It appears that there is great potential to increase quality and satisfaction (patient, provider, insurer) AND to decrease cost. If that is achievable, the “profit” can be shared. Creative destruction at work. Bring it on.

Perhaps a good time to re-visit as the above-mentioned book was as much a biography of the man as a story of the famous brand. http://www.irishnews.com/news/worldnews/2018/01/28/news/ikea-founder-ingvar-kamprad-dies-aged-91-1243700/ It seems that his successes had a lot to do with energy, flair and focus, combined in an unusual intensity. On a related note about a piece he wrote in 1976: http://www.ikea.com/ms/en_US/pdf/reports-downloads/the-testament-of-a-furniture-dealer.pdf

Aberhound, Yes, interesting read. Not sure, I follow you down the conspiracy path against the oligarchs but believe in cycles, and sometimes wonder about collective intelligence. Your post reminded me of a quote I recently came across: "Economic life is not a race, nor a game. It's simply housekeeping, and getting maximum enjoyment from available resources." If you like to read, you may enjoy the biography of Bernard Baruch by James Grant. It is long but meticulously researched and you may discover some surprises.