oec2000

I held a small position in KFS for a brief period in 2008. Bought it because of its significant discount to book and took mgmt's remarks at face value that their Lincoln problems were in the past and they had adequately reserved for those. A couple of quarterly reports later, it became apparent that mgmt's comments/excuses re reserves did not square with the actual numbers. I decided that mgmt could not be trusted and got out. The main risk in insurance investing comes from the subjectivity in estimating reserves and this gives mgmt a lot of wiggle room in reporting. THis combined with leverage can be a dangerous thing. When problems strike, the temptation to fudge numbers to maintain credit ratings is great. Sometimes, they get lucky if the pricing cycle turns around in time and the problems resolve themselves. The key to spotting serial undereserving is to study the loss development triangles in the notes to the accounts.

Cardboard, No time to look at detailed numbers but here's a quick and rough response. Over time FFH's cost of float has been about 3%, their bond returns about 10%, and equity returns at least 15% (I think it is 20% but as I'm not 100% sure, I'll just go with 15%; and it is not clear how much the recent CDS gains will add to this). These numbers show that the insurance businesses add value. The preferreds and bonds issued during "the lean years" were more expensive and may have added less value but they are being/will be replaced with cheaper issues. As for the ratio of equities to book value, this is a function of the degree of leverage they have and as this leverage drops, they will be able to raise the ratio of equities to book, as we have indeed seen recently. So, while what you point out may be true of the 7 lean years, the prospects looking forward are quite different because of their now more fortress-like balance sheet. The perverse thing about the insurance business is that the weaker your balance sheet, the more difficult it is to maintain underwriting discipline (because you need to sustain the cash flow) when the right thing to do is actually the opposite. I believe that FFH's underwriting performance will improve because of their increased financial strength.

Where is the fault in that? Is it unethical to sell FFH above fair value? What if he unloads his WFC stake above fair value, is there a duty to tell the buyer that he is getting ripped off? Has Warren ever sold anything above fair value, taking advantage of some rube? Exactly! And, how is selling high above fair value any different from buying way below fair value in terms of ethics? Frog, should we impugn Buffett's integrity because he charged Goldman an arm and a leg for the preferreds?

Even if the United States held all the gold in the world, it would only amount to about $20,000 per person. The total value of all gold stocks is, I believe, about US$6 trillion. The monetary base of the US, even after the recent "helicopter Ben" surge, is only $2 trillion. So, technically, there is still enough gold to back the USD. In my view, there is something to be said for having the discipline of a gold standard - to prevent irresponsible politicians from debasing the currency. Even Buffett and Watsa, who are clearly not gold bugs, feel that govts will tend to succumb to the temptation of inflating their way out of debt rather than take the politically much tougher option of fiscal austerity. On the other hand, history has taught us that a fixed gold standard can wreak havoc on an imploding economy - which is why the system was dumped. I have a problem understanding how it makes sense to tie the hands of monetary policy to the supply of an arbitrary commodity. What happens, for example, when we run out of gold? Does that mean that money supply has to remain forever fixed? I've followed Ron Paul and Peter Schiff for some time now. I agree that not everything they suggest is practical. However, I will say that I am convinced they are much smarter than most of the people making decisions today. As with most things in life, I suspect that the right path is one that lies in the middle somewhere. The people at the extremes, like Schiff and Pauls, are just trying to sell books or get elected. When buying a used car, the last person whose advice I would trust is that of the used car salesman! Note: I'm no economist but my two-handed impersonation should count for something. ;)

I reread my post and realise that my comment "this is no way to invest" was not clear. I wasn't referencing FFH's investment in Ridley; rather, I was referring to Ourkid8's remark that it is an "almost safe bet" to partner with PW.

Try telling this to those who partnered with him in Canwest and Abitibi! I'm a great fan of Prem Watsa but this is no way to "invest." Ridley is a very small position for a company with $20b of investments.

There is a very famous investor who believes that stock splits do nothing to increase the intrinsic value of a company. This investor has become one of the richest men on earth by having 99% of his wealth invested in the most expensive stock (price per share) in the world. I think there are 40 billion reasons to trust the investor more than the newsletter writer.

Isn't the whole point of a good college education to learn how to think for yourself and not just drink all the kool aid you are served?

This is the McClatchy description of the series: "A five-month McClatchy investigation reveals how Wall Street colossus Goldman Sachs peddled billions of dollars in shaky securities tied to subprime mortgages on unsuspecting pension funds, insurance companies and other investors when it concluded that the housing bubble would burst." "Unsuspecting pension funds, insurance companies"? Gimme a break! These are not widows or orphans; they are big boys who are paid big bucks to do a good job.

Age of Socrates, Interesting moniker but find it hard to think that it is appropriate for our times with all the irrationality around! :) You are right about democracy being the best form of govt despite its flaws. Niebuhr said it best: "Man's capacity for justice makes democracy possible but man's inclination to injustice makes democracy necessary." You mentioned the success of Taiwan and Korea.* But they were no more democratic than S'pore. Add Hongkong, Dubai (the UAE, technically) and China which are not democracies. Chile is another. These countries have the most outstanding growth records in the 20th century and they did it BECAUSE they were not full-fledged democracies. Benevolent dictatorships work spectacularly well - of course, the problem with dictatorships is that you don't get to choose your dictators! Philosophical arguments aside, I think history will judge LKY very favourably in that he did much more good than bad. He turned a chountry with few resources into one with world class education, healthcare, infrastructure and financial systems. Poverty is low, home ownership is high and corruption is one of the lowest in the world. Just compare how her peers in the 1960s (Malaysia, Thailand, Indonesia, Phillipines) have done inspite of having more natural resources. It's true e has used heavy handed (but legal) tactics against the opposition but Chia Thye Poh's case is different. Chia subscribed to communist (and therefore undemocratic!) ideals and refused to renounce the use of violence to overthrow the govt. This was the only condition that prevented his early release. Singapore would not be what it is today if not for LKY and his uncompromising style (it might even be a junior state in Malaysia!). I agree with you that S'pore has to "lighten up" going forward - they are already doing that (the youtube videos of comedians making fun of the govt would have been unthinkable a few years ago.) Regards, oec *Singapore's success came not from riding on the back of the other Asian tigers but from adopting a similar strategy of exporting to the West.

I'm sure Ross is right to some extent but let's not forget that he is also talking his book. Isn't he waiting to scoop these assets cheap with the help of the govt?

So, you mean private hospital emergency rooms are obliged to take care of these people? Who pays for the services then? What about cancer treatment or dialysis or HIV? These are not emergency procedures - where do these patients get their treatment on an ongoing basis? What about major organ transplants - are the uninsured simply told to go home and wait to die?

Common! We are entitled to better quality analysis on this board. Firstly, your figure should be $1,658 billion, not trillion. Secondly, if you are talking about $5 per barrel, then your number needs to be divided by 42 (the number of gallons in a barrel) giving only $40b! Thirdly, a $5/bbl increase in the price of crude does not translate into a $5/bbl increase in the price of gas (it would be more). A simple reasonableness analysis should have alerted you to the error. Oil prices shot up about $100/bbl to $150 in 2008. If your number were right, the impact on the consumer would have been $33 trillion! Your father may be richer but is it for the right reason? I don't have the price of crude in Nov 2007, but I believe it was not that much higher than it is now ($80-90 maybe). The markets collapsed because of problems in the financial system.

I hope this is not a dumb question because I'm not too clear how Medicare or Medicaid work in the US. If someone without health insurance gets cancer or a heart attack or has kidney failure, does he truly have no access to any healthcare at all? Is he left to die without treatment?

Exactly! Which is precisely why I was so impressed by the panel discussion on CNN. Packer, the 3rd path suggested by you is one of the recommendations brought up on the panel discussion. That's why I recommend anyone who has not watched the show or read the transcript to do so - it will broaden your perspective on the debate. On an issue as important as this, individuals need to take a more active role to understand the issues and problems directly rather than simply relying on and empowering and enriching the spin merchants and pundits out there. Believe me, they don't have your best interests at heart! In Canada, we also have similar ideological debates about one-tier (public only) and two-tier (public and private) health systems and it drives me crazy to see people acting like 3rd graders - while the healthcare customers suffer. Unfortunately, there is not enough momentum here right now for reform to work. It's good that there is lots of momentum for reform in the US - the problem is that it is being handled in the most asinine of ways. You guys should make Lee Kuan Yew a honanry citizen and then appoint him the Health Czar - he'll fix the problem in no time! (He'll just deny healthcare to those who do not support him!) ;D ;D ;D

Hey, I know someone who might be able to help you out. Call 1-800-786-6426 and ask for Ajit. If he's not available, Warren might be able to give you a quote. Caveat: They might actually ask for your millions! ;D

Txlaw, couldn't agree with you more. Although I live in Canada, I worry about how America's economic well-being could be affected if this problem is not handled well - this can have a huge impact on Canada. I posted the CNN discussion here because I was impressed by how productive conversations can be when it is carried out by non-partisans who genuinely care for the healthcare customer. I am frustrated by how the debate is being carried on in the media and the political arena because the public is influenced by it. It's as though people, once they put on either their conservative or liberal hats, become anchored to only one point of view. The objectives of cutting costs down and improving access can't seem to be discussed without demonising either the govt or the private sector. Why should it matter whether this is achieved with or without a public option or a combination of the two? But no, the politicians just draw the line at their ideological borders which they are not going to cross, come hell or high water. It's a world turned upside down when you have China, once the most ideological of states (during the Mao years), ditching their socialist baggage to go for growth any which way; and the US, arguably the most open of all states, bogged down by ideology. America would do well to take a page from China's book when they embarked on the road to economic reform. Deng Xiaoping, the architect of China's economic miracle, famously said, "It does not matter whether it's a black cat or not, as long as it can catch mice." (Translation: It does not matter whether it is a marxist or capitalist cat, as long as it can catch the mice of economic prosperity.) Why aren't people looking around the world to learn from systems that work (as opposed to looking around to find a system that supports their point of view a la Michael Moore)? I should stop ranting. I'm beginning to sound like grumpy old Lou Dobbs. ;D Oh, I should address the question someone posed about Canada's healthcare system. Well, the system works well if you have a life or death type situation; if not, you learn to be a very very patient patient! ;D It's not bad but it's not great either. My friends in the heathcare system worry about its sustainability. Doctors are grossly underpaid while other healthcare workers are overpaid (unions). In BC, I believe doctors get paid $28 per patient. So patients get 8 minutes with their doctor - tough if you've just got a diagnosis of cancer!) Btw, the system is not exactly free. A typical family of 4 pays about $1300 a yr in premium to the govt. in BC and many costs -some drugs, physiotherapy, routine check-ups, etc - are not covered by the system. Many people, if they are not covered by their employers, pay several thousand $ more to have supplemental insurance cover.

Someone asked a question about the fair value of ICICI Lombard. (I thought he was interested in why the value had dropped sharply. He didn't even know that fair value is disclosed! ???) Anyway, I thought it was odd that neither Prem nor Greg used the opportunity to explain the sharp decline in value. Am I reading too much into this?

Thanks, Mikenhe! :)

There's this brief article on Globeinvestor - mentioned Prem's CC comments and quoted a few things from yesterday's press release. http://gold.globeinvestor.com/servlet/ArticleNews/story/GI/20091030/escenic_1345263/stocks/news/&back_url=yes It's a subscription site so not sure whether you'll be able to open. Check the globe and mail to see whether you can find the same article - but nothing that we don't know already. Apparently, on the CC, Prem said that future acquisitions will be limited to "very strong companies." Guess they have learned an important lesson. I can't help but feel that they would have taken over ING Canada if they (FFH) were in their current strong postion last year when ING went on the block. That would have been a great buy at a good price when the C$ was lower. Did anyone catch the CC? Anything interesting?

You're right! But this is CNN - their goal is not to argue effectively - or even reconcile their seemingly disparate arguments. It would seem that the objective here is to sway public opinion against government healthcare by providing a buffet of arguments - choose whichever one you'd like to embrace Joe the Plumber. It sounds like you have dismissed the discussion without reading/watching it - just because it is CNN! Isn't this precisely the behaviour Dr Carson was criticizing? I find the the degree of partisanship in the US worrying especially when the partisans drown out the voices of reason. The extreme wings of both parties seem intent on breaking the country apart. It's ironic that they do this while proclaiming that they're doing this for the sake of the country. To me they are no different from Wall Street bandits. It's all about personal enrichment - if the system should collapse in the process, so be it, who cares? Limbaugh, Coulter, Hannity, Beck and their counterparts on the left spew dumb rhetoric not because they are dumb and believe everything they say. They do it for ratings and to sell books. Any thinking person can see that they are no voices of reason. At a time when the US is at a critical juncture in its life as a political and economic superpower, this mindlessness is in danger of running the country aground just when it should be doing everything it can to stay ahead of the emerging powers. No one doubts that China will eventually overtake the US. Why make it easier for them?

If you read Note 2: Summary of Significant Accounting Policies, you will see that they have changed their accounting to remove the distortions caused by fx fluctuations. The CR's could not have been affected by fx losses. On a separate matter, the fair value of ICICI Lombard seems to have dropped by more than $200m. Has anyone figured out why?

Caught this quite by accident as I do not normally watch Lou Dobbs (He comes across as a bitter, angry old man. He was much better as a business anchor.) http://transcripts.cnn.com/TRANSCRIPTS/0910/29/ldt.01.html However, I found this discussion on healthcare reform to be thoughtful and sensible and a nice change from the senseless partisan commentary that we normally get. I don't follow the healthcare situation in the US that closely so found the discussion really enlightening. Some comments that resonated: "Medical practices spend 20-30% on billings and collections; if the paperwork were done elctronically, these could be reduced to 2-3%." "40-50% of healthcare dollars per capita are spent during the last 6 months of a person's life." "One of the sadnesses about medicine these days is that doctors don't have time to talk to their patients when they find out they have cancer." "I'm a nonpartisan, an independent. I would hope at some point that we would grow up and stop acting like 3rd graders. I appeal particularly to the representatives." (And, the House democrats just came out with a 2,000 page bill to be read in 3 days!) Lee Kuan Yew (a topic of discussion on another post) spoke highly on Charlie Rose of America's unique ability to respond to challenges which made him confident that America would remain an economic power for years to come. The panel discussion on Lou Dobbs demonstrated this point - that the healthcare problem was a solvable problem in the hands of the right people, if only the politicians would get out of the way. Would like to hear what our US friends think.

The premium shows up as an asset -- goodwill. Given that ORH's BV would have been close to $60 in Q3, the goodwill should be less than $100m - not material. The goodwill on the NB acquisition was more - as at 30 Sep, FFH had $330m goodwill on the books. For a true apples to apples comparison of how FFH's BV has changed since last year, one should adjust goodwill from BV. Against this, there is the $150m undervaluation of equity accounted investments. So, $360 is probably a fair BV number to go by; close enough to reported book anyway.

I used to feel the same way as you do - that the US had to show to the world that it was an honorable power by building a newer and better Afghanistan. But LKY may be right. It may not be that he doesn't care about Afghanistan. He may simply understand the reality of the situation better. If the Afghans, even after experiencing the brutality of Taliban rule, still do not realise the urgency of preventing a Taliban resurgence, no amount of US support can change anything. Right now, it seems like the Afghan leaders are content to let the US do the heavy lifting while taking advantage of the security provided to enrich themselves. So, perhaps he is looking at the bigger picture and thinking that the US should conserve its limited political and financial capital for more promising causes - the Israeli-Palestinian problem for starters. Unfortunately, this is not a SAT question and there are no simple answers.