Cardboard
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Posts posted by Cardboard
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Oldye,
"Even if the long term cost of float is 5%, their long term return on assets is about 10, that spread has allowed them to multiply capital over 300x during my lifetime."
I think that we are getting toward what I am talking about. I don't have anything against that if that is their choice or objective, but please let's make it clear to all shareholders and let's stop the drum beat about: focus on underwriting profitability.
I have been following, investing and even pushing others to invest in this company for about 7 years now. I have heard Prem repeating over and over again about the need to be disciplined on underwriting. Truthfully, that part really disappoints me. I thought that we were on the other side now after all the under-reserving charges, asbestos, commutations. Then all I have to do is to check Chubb and see them outperforming massively on that front. Then I turn around and check Travelers and what do I find? That they are too. How many more regular P&C insurers are there doing better on the combined ratio? When I hear sound and clear that top priority is underwriting discipline then I expect us to reach the top at some point. We can't say that mother nature was really tough with us in the 1st and 2nd quarter.
Some will say that I am impatient. Sorry, but I am not the one who proclaimed a while ago the end of the 7 biblical years. How much more time do I need to wait before I see us moving ahead of the average P&C Co.? If not, what is the issue? Costs, insurance model, size, ratings?
What is the real model of this firm? Try to break even in low catastrophe years on the underwriting side to hopefully outperform enough on the investment side to make it worthwhile?
If you do the math with their statements and assume little acquisitions, you will find that this is a problem and that it makes their goal of 15% growth in book value over the long term almost unreachable. At least very risky and highly uncertain. It comes from the fact that we will experience once in a while really bad years on underwriting. That is unavoidable. The cure is to make money in good years to absorb the losses. You also need to outperform the competition. If not, they will drag you in the mud during soft years with a rising combined ratio for the industry. If you drop from 85 to 90 or 95% that is fine, but going from 100 to 110 or 120% is no good.
Another big issue with insurance is regulation. You are forced to hold investments that you don't like. And that proportion is significant actually, huge especially if your ratings are average. Again, the benefit of outperforming your peers. Doing better there would likely help the investment group do better and since size is now not negligeable, to help maintain their historical returns, every bit of flexibility will help.
Cardboard
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Longinvestor,
I am sorry to disappoint you, but unless Fairfax valuation starts to improve soon, it will be bad for the company long term. I mean not as good as what it should be. It is great for me (value trader?), but bad for you (long term holder?). You will get a 10 to 12% grower instead of a 15 to 20%. What made Fairfax what it is, was the ability to use well priced shares to acquire other insurers. Similar at Berkshire. Moreover, well priced shares mean low cost of funding via debt. The confidence game again: if the shares are good, the debt must be good. I think Soros calls this reflexitivity.
This company was not built on underwriting income. It was acquisitions combined with solid investment performance. So one part of the engine is shut for now. To get back to proper valuation at their size they will need real underwriting discipline and then the engine will be able to restart on all cylinders. What I still see is an addiction to more policies for more float.
Ericopoly,
The combined ratio here can't be explained totally about staffing level vs business level or operating expenses.
Northbridge:
1- 2nd quarter combined ratio 105.1%
2- Net premiums written decreased by 7.1%
3- Benefited from 0.5% in net favourable development
Odyssey Re:
1- 2nd quarter combined ratio 96.5%
2- Net premiums written decreased by 8.7%
3- Hurt by 0.2% in net favourable development
So what is Andy doing that others don't? I mean look at operating expenses divided by net premiums written. The percentage is pretty consistent over time. This can't explain the big discrepancy. The big driver is always losses on claims and that is where underwriting discipline and knowing what you are doing makes a difference.
Also, I always find funny the comment about hail, tornadoes and windstorms in the U.S. southeast impacting Crum's results. Isn't a yearly event that can be somewhat factored in into policies?
Uccmal,
Look at Chubb results. Combined ratio of 85.9%... Now, that is underwriting discipline under duress! And you think that these guys won't be ready to jump on business when it will turn?
Cardboard
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Fairfax has $3.53 in investments per $1 of shareholder equity while Odyssey Re has $2.66. There is no way that Odyssey Re can outperform Fairfax during such a period of massive investment gains.
It is the runoff that creates this boost, but it also creates a drag in earnings when there is no big gains. Until it is gone, which will take quite a while, it will be a problem for Fairfax preventing analyst and institutions to give them a fair valuation. They rely heavily on operating earnings in their analysis.
Northbridge and Crum & Forster are also turning into real dogs. If they are that selective with underwriting, then someone will have to find real good arguments to convince me that these numbers are normal. They are not the numbers of disciplined underwriters. They don't walk the talk.
You may think that this is unimportant looking at the 1985 to 1999 period valuation, but your are not comparing apples to apples. Back then Fairfax was a fast grower via acquisitions. While they will grow in the future, at their current size it will be slower and I assume more internal. So people will compare them to Chubb and others. To get premium valuation, they will need stability in earnings and underwriting profits.
Cardboard
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Very happy with the book value number! They certainly did not disappoint this time around and did beat the majority of expectations that I have seen.
I hope that Prem will provide some kind of color in the conference call tomorrow as to what is book value currently. This was a great piece of information to have with the 1st quarter report. Investments value is the most volatile item within Fairfax and one that greatly matters.
I think that the table is set for the buyout of Odyssey Re. I mean what other justification could there be for Fairfax to not buy back at ton of shares when the stock went down to the $250 level? $250 divided by $316 equals 0.79, $40 divided by $52 equals 0.77. Very similar undervaluation relative to book and much more agressive repurchasing at ORH with 1.2 M in the quarter + 532,000 shares in July!
Cardboard
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"I remember going through this argument/exercise last time on the old Berkshire board, with regards to FFH.
And same thing came up: if you held stock (not the option) for $40K and it stayed flat forever, your only cost is broker commission. If the stock price went up to $29 you'd make 16% i.e. 6.4K, on the option you would only break even."
This goes to the heart of what I briefly mentioned in my previous post. Investors are complacent with stocks. If they stay flat, they don't care too much.
I prefer to see things with a greater sense of urgency. I like Dengyu's term of being "at war". I don't want to take this too far and to expect all my stocks to go up every day, but I would say that if a stock has not moved in my direction within 2 years that there is likely a problem. Some small caps are so unknown that 2 years may not be enough, but a $5 billion or more company? No way!
I can't recall too many cases where I made good returns and it did not happen quite quickly. If it is undervalued (50% or more) and attractive others will notice quite quickly enough.
It may be another benefit of options with their built-in cost and expiration: they force you to really do your homework on the underlying before entering the trade.
Cardboard
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IMO, the expiration risk perceived here is way over-rated with the following.
If you own long term, in or at the money calls and the underlying has stayed flat or went down and your thesis is still valid then all you have to do is to reload with new calls at expiration. It is like selling and buying back the stock right away. What is the economic loss other than paying the premium again? At least with the option, you will be allowed to book your loss for tax purposes while with the stock (if it is down) you will have to wait 30 days before buying it back. It could go up in the meantime.
It is also wrong to believe that because you have bought a stock and 18 months after it is still flat that you are even. You lost money. There is a cost to dormant capital. There is also a high likelihood that your thesis is wrong. Liquid options are typically available only for decent size companies. This means that these stocks are followed by analysts and others and if they still don't see what you are seeing after 12 to 18 months, then there is a chance that they will never see what you are seeing. That is why I like them for large caps and using them won't force you to go on margin or to displace small caps with more punch in your portfolio if you are fully invested.
With options, you know your cost going in: it is the premium paid and the loss of dividends. When you buy the common outright, your cost could end up being 50% or more of invested capital if your thesis turns totally wrong. With margin this has pretty nasty implications. The debt has not gone away and it could result in forced selling if your other positions are also down. People also often ignore the risk of rising interest rate.
However like anything else, you have to understand what you hold. If you were thinking to put 10% of your capital into a stock and then you decide instead to put 10% of your capital into at the money calls of the same stock, you don't hold the same kind of weapon. You have to control your greed with options.
Out of the money calls and a short duration options are also totally different animals.
Cardboard
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Thanks for the help guys! On Natenberg, I did not find on Amazon:"Options" by Natenberg, but I did find: "Option Volatility & Pricing" by Natenberg. Is this the one?
I probably should have given more information as to what I am looking for.
I am not interested to trade options or to find arbitrage between them. What I am looking for is information on how to pick my options better and what to do once I have entered the position.
The first point is about pricing and volatility. Options go up and down in price sometimes even if the underlying stays flat and decay has not changed much. I suppose that this is based on supply/demand for this option and specific stock/index volatility, but I would like to comprehend more on how market makers adjust the price for that. It could help me to reduce the premium I pay.
The second point is about optimizing my trade once I have purchased the option (mostly calls). For example, I own FFH Jan 2010 strike $200 calls. When I bought them, it seemed that the duration and premium was reasonable vs the underlying. The calls have moved up nicely in price, but what to do now if I believe that the underlying has more to go? Stay put until the underlying goes to where I believe, replace with a higher strike call, hedge? So, I am looking for ideas or strategies to optimize my capital and to reduce risk.
Cardboard
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I have been using options for a long time, but never learned much about how they are priced, the Greeks and more complex strategies such as straddles, condors and the like.
There are two books that I am looking at: Options for the Stock Investor and Trade Options like a Professional. They are both from James Bittman and I like the fact that they come with a software to plot your P/L and it gives you the greeks values.
Which one do you recommend? Any better recommendation?
Thanks
Cardboard
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I think that you are right Broxburnboy and that we should greatly worry about that. I don't think that I have ever seen "free entreprises" growing so rapidly from nothing in the States including Google, but anyway...
These damn republicans and conservatives... By the way, Goldman Sachs is a huge democratic supporter. If it is any consolation, I will send you a t-shirt once GS share price does what I think it will do with the following written on it: "I love Goldman Sachs". ;)
Cardboard
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Look guys. Goldman Sachs was the only one among the top 5 independent U.S. investment banks that did anticipate the burst of the housing bubble AND who protected itself against it. Yes, just like Prem, they avoided CDO's and bought credit default swaps. It posted a quarterly loss only in the 4th quarter of 2008. It has always been profitable otherwise. Pretty hard to find such performance and it seems to me that they had good risk controls and avoided being greedy like their peers and most of the banks.
We can argue that bailing out AIG was a huge help to them, but I would say that it was also a big benefit for me as for probably any of us since it would have likely lead to a financial disaster for many large financial institutions. At some point they had to stop the daisy chain. Maybe you preferred to see the end of the financial system and going back to fishing, hunting and gardening for a living?
Regarding Goldman's financing, they paid quite a hefty price for this crisis which was not of their own doing, issuing $10 billion in stock at $123 and $5 billion to Berkshire paying 10% accompanied by $5 billion in warrants exercisable at $115. The TARP was not free either. They paid $426 million to the government in dividends on the $10 billion which has now been repaid and gave them warrants for 12.2 million shares exercisable at $122.90. Goldman did not steal anything from the American tax payer. JPM either. They will make money with them. It is the Citigroup, AIG, Fannie Mae, Freddie Mac and GM of this world that are not repaying their debt.
So if you can get passed the conspiracy theory stuff and the high compensation, this company is so well positioned, cheap, with an ultra sound balance sheet that you should take a serious look. 09 EPS will be in the $20 range, 10 EPS will approach if not meet $30. The analysts are way... way behind with their estimates, but they are moving them up. I cannot find any large cap ($10 billion or more) trading so cheaply with such a clear earnings picture. If you like big companies with a moat at an attractive valuation this is it.
Finally, we may see some government restrictions on risk taking, but I think that they are prepared with a Tier 1 ratio of 13.8% and much less competition in their industry. They won't have to do crazy things to make money. They are already #1 worldwide in M&A. I also think that this attitude to "punish" Goldman will disappear once financial markets gain some ground.
Cardboard
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"They didn't spend enough lobbying GOLDMAN SACHS, who runs economic policy and the government. Congress is irrelevant."
How they got there could be questionable, but the reality is that Goldman now dominates the Wall Street scene. Morgan Stanley is miles behind and JP Morgan has to deal with consumer loans, credit cards and other dragging stuff.
At the current level, I think that Goldman Sachs is very attractive. I was listening to Cramer mentioning that they could earn $30 in 2010 and after being shocked, I took a look at their business, their latest quarter and I would say that yes, it is quite possible. The latest analyst poll forecasts EPS of $16.05 in 2010. This is going up currently and will reach $20 at the very least. FYI, their current annualized rate is $22.
Then, if you look at what this company traded at over the last decade with a multiple of the competition that they are facing today, you have to assume that they will be able to grow almost as fast and will need to trade at least at these averages. I am not talking crazy numbers: 13 times earnings, 2.2 times book. This stock could reach $300 faster than most realize.
IMO, this is a very solid opportunity. Low P/E, ROE north of 20%, competition cut in half, very little legacy issues, attracting most top talent. You may hate them, but their position is enviable in the financial sector. Even with possible new restrictions from the government it is hard to imagine them not doing well.
Cardboard
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I agree with most observations made by Hoisington. However, they are absolutely convinced on deflation and that it will be positive for long dated treasuries. I am not sure at all about that.
I think that the Japanese comparison is weak in the sense that Japan was the largest creditor nation in the world when it entered its crisis while the U.S. is the largest debtor nation. If you are making a comparison between the two cases I believe that this is too important of a fact to simply dismiss it.
There are actually many more differences which have to prevent this event from being exactly the same. In the end it could somehow look similar, but there are things that will behave wildly differently and this could include long dated treasuries.
Cardboard
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"Initial claims must remain below 600,000 for at least three weeks before it's safe to say the job market is recovering, she added."
http://money.cnn.com/2009/07/09/news/economy/initial_claims/index.htm?postversion=2009070909
I can't believe that "investors" are happy with new unemployment claims just below 600,000 a week. This is absurd. The reality is that unemployment keeps on rising and that 15% is now not out of the question. I cannot imagine overall corporate profits rising in the short term under such environment.
Sadly, this is looking more and more like the Great Depression. They say that it resulted from higher taxes, higher interest rates and protectionism. Bernanke is an expert on the topic and is trying his best to avoid it, but what I see is that it is being repeated differently despite his best intentions:
1- Taxes are climbing in various states because they are running huge deficits.
2- Interest rates are climbing on the long end, which is what really matters, because the federal governement is not raising taxes to pay for its deficits or cutting its spending. They are looking to even grow these deficits with new programs.
3- Protectionism is climbing with America putting pressure on the dollar to become more competitive, buy in America incentives and Asians looking for internal ways to grow. Asians are looking to get out of this circle of selling goods to the U.S. to acquire treasuries which longer term will impact #2.
Cardboard
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Thanks for posting the link Sanjeev. I have found the story fascinating.
Actually, I think that the end game for these "players" will not be some sentencing from the SEC or DOJ, but a massive class action lawsuit from people who died from prostate cancer during this "delay". Once this gets in motion, and I think that the odds are quite high once a few rich widows and families out there realize what has been going on and since Provenge is effective, it could turn out to be a liability comparable in size to asbestos! On top of that, it will be criminal.
Cardboard
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SFK is still in a very tough spot and a lot of it is outside its control. The "black liquor tax" offset is not effective yet in Canada, while the U.S. program is probably hurting them somewhat at their recycled pulp mills since they are not eligible. We are talking about a credit of $150-200 a ton on a product that currently sells for $672. That is absolutely enormous and I would say a clear violation of WTO agreements.
http://www.paperage.com/2009news/07_02_2009wood_chip_price.html
I don't know what it is in the States with this never ending support for their paper and timber industry. It is definitely not crucial to national interest to defend and retain this industry, consumers pay more and quality is inferior. No wonder that they are now talking about another "stimulus" program. If they were using the money properly, the country would be running full employment. All they are doing is keeping alive zombies such as Citigroup, GM, AIG and now high cost pulp producers.
Cardboard
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"Very different from the US."
I am sorry, but IMO it is not. The way it is happening is very different, but the belief that housing cannot go down is ingrained the same way that it was in the U.S. This inevitably leads to higher risk taking.
Prices in large metropolitan areas are way too high relative to income and the only way around it is to make loans more accessible to people who cannot possibly service them in the long run if anything negative occurs with these loans: higher interest rates, job loss, divorce, higher municipal taxes, higher cost of living, etc. Bring home prices high enough and these factors which should be calculated in loan loss provisions eventually make them totally inadequate.
Cardboard
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"...when he contemplated the countless millions that Niederhoffer had made over the years -- he could not escape the thought that it might all have been the result of sheer, dumb luck."
One lesson that I take from reading the article is that Niederhoffer continually ignored the small probabilities of a large discontinuity which eventually led to his failure. These guys are greedy and ignore the risk of returning to square one. You can never position your portfolio in such manner that low probability events could wipe you out.
The article mentions that Taleb does not have Buffett's confidence, but I believe that Warren always has an eye on the downside. He has talked about the risks of leverage before in investing. He is looking for a successor who is capable of thinking of events that never happened before. His super-cat bets are always capped so that "his cheques will clear". The margin of safety concept is also clearly oriented toward reducing the risk of wipe-out.
Regarding Taleb's approach, I find that my portfolio has grown mainly by 1 or 2 positions every year or every second one truly outperforming. I found over time that I don't have any ability to predict which one will outperform for certain. The margin of safety protects my downside on the positions that do not work or move little, but for the ones that really outperform it takes a massive valuation error from the market relative to what the company eventually delivers.
So while I consider myself an investor with my value approach, I find that Taleb's risk aversion strategy combined with many low cost "long shots" brings at the end very similar results.
Cardboard
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"there has to be another flight to quality coming in the bond market if states and municipalities start defaulting. "
I am right there with you. Although, I am constantly questioning where will this money go?
In 2008, treasuries were the place to be. Across the entire spectrum. The issue that I see this time is that people will start to realize that another U.S. crisis will simply mean again more debt being issued by the U.S. and again a Fed growing its balance sheet. The psychology will start to shift at some point that what the Fed and the Treasury are doing is not temporary, but is really levering up and hurting the country longer term.
If a crisis erupts this year, some will shift their assets into long term treasuries for sure (it has always worked...), but you will have a vast number of treasuries being issued at the same time to still deal with last year crisis. It was not the case in 2008.
Then if you look at short term treasuries, there is really no supply to deal with a surge in demand. They are still priced for crisis with the 3 month at 0.15%, 6 month at 0.29% and 12 month at 0.46%. A surge in demand will mean negative yields.
Contrarily to last year crisis, I am starting to believe that gold will not go down, but rally hard if another crisis develops. The U.S. dollar may not even be a factor since there are problems almost everywhere. Inflation or deflation may not even matter either. The issue becomes devaluation on a global scale: more layers of government debt to fund stimulus plans and to "help" constituencies and a race to devalue each others currencies to remain competitive.
Cardboard
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This situation kind of reminds me of General Motors at about exactly the same time last year. The data is there for everyone to see, but very few believe what is likely to happen. Complete denial. It is pretty obvious that the only turnaround possibility is a strong uptick in the economy and all the information available says that it will take a long time for that to occur.
That guy is pretty clear about what is next and he has been right before.
http://money.cnn.com/2009/06/25/pf/california_bonds_trouble.fortune/index.htm
Cardboard
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Where do you believe that Fairfax book value ended the quarter at?
Glad to see Brian buying. It really is his department that did move the needle this quarter. It is definitely not underwriting that will have moved book value. This just confirms our thinking that the market is not reflecting at all what has been going on. Insider trading or not, just use the retarded weakness in the stock today to your advantage.
I am also wondering since the departure of our short friends if the stock has not returned to be a TSX driven stock. Volumes are often higher on the TSX than on the NYSE. I was very surprised to see yesterday's move in New York completely wiped out today.
Also, I must admit that I did not follow that closely insiders buying at Fairfax over the years, but this seems like a very big purchase or out of the ordinary. Last time I recall really large insiders buying was in 2002. Please correct me if I am out to lunch.
http://www.fairfax.ca/Assets/Downloads/Press/fpr2002-09-25.pdf
Cardboard
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"Perhaps play it similar to the US Housing Crash. Short Banks, Long CDS"
I remember that housing in the U.S. was on the decline for almost 2 years before the crisis really erupted in the financial market. I am not sure if it would take that long in Canada if there was some signs of a retreat in housing. Although, it would really surprise me considering the higher degree of alertness by investors nowadays.
A big difference is that there is no massive securitization via CDO's and other exotic securities going on up here. There are a few players dependent on securitization such as Equitable Group, First National Financial Income Fund, Home Capital Group and Xceed Mortgage. One would have to investigate their individual lending practices/balance sheet to see who could get strapped for cash if a downturn was to occur.
On the other hand of the spectrum, the big Canadian banks stocks have experienced a massive run since late February. They are currently trading at 11 times 2007 earnings, 13 times 2010 estimated earnings and 1.9 times book value (2.3 times tangible). The dividends are attractive being north of 4% and 6% for CIBC. Although, here is a little secret: they have been quite agressive using dividend reinvestment plans lately to avoid paying out the dividend in cash which would reduce their equity ratio. And this means dilution.
If you believe that a pop is likely to occur in Vancouver real estate, then I am sure that it will have an almost immediate impact on Calgary, Toronto and Montreal. Once it gets in motion, the 5 big banks will take quite a hit since they are no smarter than American banks. Their earnings will vanish and you will find out that they are not as well capitalized as they claim. The only two reasons I can find why they fared much better so far is because Canadian real estate held up and because they are shielded from competition. Complacency seems very high.
In fact, institutional imperative is so great among them, that they pretty much do all the same things. Bonuses are built as such and they are as bureaucratic as you can imagine. You will hear that CIBC is more into U.S. capital markets, that TD is in U.S. discount brokerage, Scotia Bank in Caribbean markets, but this is such a small part of their capital that it means next to nothing. What happens to Canada is what counts for all of them.
Cardboard
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"We just sold our house which is in the Toronto Suburbs. We had multiple offers and sold above asking in less than 48 hours."
When you read stuff like that you cannot but recall the U.S. housing bubble. Plus you add to this the speculation going on in Vancouver as described in another post due to the Olympics and other reasons.
Some Canadians (I should say many) somehow think that our economy is now immune to the global malaise. They think that our banks are great and that nothing will derail our real estate market, not even the unemployment now perking up everywhere. Housing starts have declined quite a bit since 2007 and 2008, but prices are holding up if not going up. Last time I checked, Canadians on average were spending more of their income on housing than Americans and home equity represented a greater percentage of their total equity. I should add that this is a comparison of Canada today vs America at the peak of their bubble.
I would really like to ask risk managers at our 5 ultra smart big Canadian banks how they are prepared for a potential 15-20% pull back in real estate prices. Do you really believe that they have reserved for that properly? I would be also curious to ask them about credit cards and lines of credit.
But, why worry? It is only the Americans who are lending recklessly. Oh really?
Cardboard
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"Looks like Footstar has approx. $1.76 left to pay out and is trading for $1.00."
I looked at this situation recently because of this gap, but I found the following:
1- More severances or $11.4 M are to be paid to existing employees or $0.53 a share.
2- They will establish a reserve for contingencies. The size has not been disclosed.
Unless I understood wrong, I think that future distributions are in the $1.20 range and that is assuming that they will close shop quickly. If they don't, they may incur losses which will eat cash.
Cardboard
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Ericopoly,
You are absolutely correct. I had forgotten about this expectation of a large treasury gain. That is what kept the stock going in Jan and early Feb.
Once the hope for large treasury gains vanished with q4 announcement combined with a more agressive stance toward equities in what was a very difficult market then the stock took a hit.
Oldye,
Book value is not everything, but it sure is important for financial companies as it has been demonstrated so many times during this financial crisis. If this value is good, it is also a floor or what investors could expect upon liquidation.
Personally, I prefer to value a firm based on earnings or free cash flow. I don't know how long you have been following them, but I would say that Fairfax has earned terrible returns over the past 10 years. They were supposed to earn on average $30/share a year in the early part of this decade and we know now how this turned out.
I estimate current earning power in the $35-40 range based on their current structure which by the way is still short of what is necessary to reach their goal of 15% a year growth in book value. This estimate is based on some assumed returns over time on their portfolio which yours is as good as mine. Considering the uncertainty surrounding these estimates, it becomes quite understandable why the Street is keeping a close eye on their book value.
Cardboard
FFH or ORH: which do you like more right now?
in Fairfax Financial
Posted
IMO, Berkshire is not a good comparison for Fairfax. Here is why:
If we look at the Berkshire annual report for 1995 when Warren still disclosed its cost of float and where size between the companies was more comparable:
1- Berkshire insurance float was $3.6 billion in 1995. Fairfax float was $8.9 billion in 2008 (excludes runoff).
2- Berkshire had minimal reinsurance recoverables. Fairfax has $4.15 billion as of June 30.
3- Berkshire had $1.1 billion in debt, Fairfax has $2.0 billion (includes preferreds) as of June 30.
4- Berkshire had $26.4 billion in investments and cash, Fairfax has $19.8 billion as of June 30 (includes holdco).
5- Berkshire had 83% of its investments in stocks or $21.9 billion, Fairfax has 30% or $5.9 billion (includes derivatives and holdco stocks).
6- Berkshire had shareholders equity of $17.2 billion, Fairfax has $5.5 billion.
7- Berkshire had insurance premiums earned of $0.96 billion a year, Fairfax has $4.4 billion.
Looking at these figures, it becomes clear that Berkshire was not too dependant on the performance of its insurance results. A combined ratio of 110% would have meant a loss of $96 million with $17.2 billion in equity, while at Fairfax it means a loss of $440 million with $5.5 billion in equity.
I also see a vast difference in the model with Berkshire being capable to invest in whatever it chooses, while Fairfax is significantly constrained. Fairfax is forced to invest in things that they don't necessarily like or believe in (cash and U.S. treasuries at this time).
Think about the implications of these figures for a second: Berkshire had $1.27 in stocks for every dollar of common equity, while Fairfax has $1.07. Higher upside, much less risk? Should I also mention that Fairfax returns will be diminished by higher interest cost, runoff costs and non-controlling interest?
To be fair, Fairfax has $3.60 in investments for every dollar of common equity, while Berkshire had $1.53, but is it really worthwhile? Cash and treasuries will rarely move in tandem with stocks and expected returns are completely different. Corporate bonds and municipals are good for a pop like now, but over the long haul?
My conclusion is that Fairfax can still do very well, but it is a lot more complicated and risky than Berkshire. Also, combined ratios do matter at Fairfax. Costs over time can negate a lot of the benefits of obtaining any float.
While Warren focused on its main competitive advantage: his ability to invest. He used insurance to obtain "some" funds at a low cost.
Cardboard