bsilly

Insurance needs to be priced to reflect the current interest rate environment. With long term bonds in the sub 2% range, it is not reasonable to count on a 7% or even a 5% return on investments, given that insurance regulators (and general prudence) restrict equity allocation to something in the range of 25% of the portolio. In my opinion, the target for combined ratio in this environment should be 90 or below. Anything less, and/or hoping for high single digit investment returns, is just not facing reality. b.

I looked at OSTK a couple years back but passed - so now feeling a bit foolish myself. When I checked merchandise prices I found they weren't competitive on price (at that time anyway). Patrick was talking about Block Chain which I find very interesting, but I didn't know how it would play out as a business model. Anyway - I'm not one to chase...there's a heavy so speculative element now. Cahodes has broken ranks with the shorts & seems to have caused a bit of a panic. I woud feel a lot worse if I sat in the stock for 10 years and sold out at break-even :) Oh well - they made lots more on insurance investments in Asia.

Yep - good discussion in the Alleghany Q3. The report they referenced is a good read on hurricane stats. Anyway - on other subject Fairfax really blew the timing selling OSTK back in Q1. Whoops.

Adding to that - I don't think there is a better way to judge the company other than track record - which is good, and the CEO has been the same since 2004. The edge that Fairfax would have as an industry insider is to have seen their behaviour in the market place & have some knowledge of the management team. Ulimately I think there is a lot of faith involved.

I should add that the number is just an educated guess at this point. My point is that there shouldn't be anything particularly surprising. The surprise will come later when the actual claims get settled. There will be an adjustment & we'll find out how good the reserving was. In AWH case, they have a solid history of favourable reserve development. The caveat is they started the business in the hard market, so the future may not be as bright as the past.

If you look up AWH quarterly statements you will find estimates for probable maximum loss due to hurricane. The estimate for 1:100 year PML for a given year in the latest report was $392 million, which compares to $386 million of actual hurricane losses this year, just under 10% of total capital. Now I haven't crunched the numbers, but this has to be something close to a 1:100 hurricane loss year.

Cohodes is cocky and one sided that's for sure. He does admit he makes mistakes though - but I haven't seen him mention any specific ones, like Fairfax. He seems obsessed with getting respect, but often he doesn't give it. He has said shitty things about good people. I find him interesting to listen to nonetheless. He does do his homework, and sometimes you need to challenge yourself to listen to an alternative point of view. Just because you don't like something somebody says, doesn't mean they are wrong about everything. I think he does for the most part honestly believe what he is saying and in many cases, he's mostly right. But I think once he starts going in a certain direction he can only see the things that confirm his belief - twists/selects the facts to fit the theory. I have mixed feelings.

This may be of passing interest to some here, Patrick Byrne are apparently friends now :)

I'm just recalling that Fairfax bought an additional 9% interest at the end of 2015. They paid 5x book or $235m which seemed a bit pricey at the time. Anyway, they have now sold that stake for about $279m (9%×$3.1b), or about a 19% gain in 18 months.

Interestingly I just saw a clip of former Rocker Partner, turned chicken farmer, Marc Cohodes on BNN talking about Home Capital today & was reminded of our adventures with his ilk.

I thought I'd start a new thread here, since the other one is long and has gone off in a few different directions. 1) Fairfax is both a runoff entity, and an ongoing insurance/reinsurance entity. Runoff entities seem to have marketable value somewhere around 70% book. As a result, directly comparing book value multiples for Allied & Fairfax is a bit misleading. If you back out the runoff operation from Fairfax market cap, and just look at ongoing operations, I think you find the book value multiples similar. I do not think Fairfax is giving away much, if any, relative value by using shares as currency. 2) Allied has a 10 year average combined ratio of 87, Fairfax was running about 99 (as reported, not accident year) last time I checked. So the pro-forma entity would be running about 95. Allied is a much better underwriter, and that is the benefit of the deal going forward for Fairfax. It improves the overall underwriting profile and cements their transition from an industry laggard, to industry leader. I like what I am seeing on the underwriting side, now if they can just get their act together (and story straight) on the investment side...

Fairfax has always been enigmatic. I agree it is pretty hard to argue that that the Russell 2000 is cheaper today than 5 years ago. I'd like to see a good honest discussion of the hedging mistakes, and ultimately get out of the equity "hedging" business altogether.

I would like to point out that the two recent trades in treasuries and equity hedges have saved shareholders hundreds of millions so far. Possibly as much as half a billion. These weren't exactly "value" based trades, they were short term market calls, something I don't really do myself. I suspect it makes many of the value oriented shareholders somewhat uncomfortable. But the fact is that, recent equity hedging losses notwithstanding, on average they have juiced returns by a couple percentage points by doing this over the long haul. The fixed income portfolio has outperformed the bond market for their entire existance. I'd put the fixed income record up against Buffett or anyone for that matter. Since, as Cardboard says, an insurer must invest the bulk of its portfolio in fixed-income, this is a very important part of the equation. In fairfax you have a levered fixed income fund with one of the best records in the business, supplimented by better than average underwriting profits, and an equity/derivitives portfolio. I have found the hedging losses frustrating, but eventually they will subside, and maybe even reverse at some point. Regardless, the record indicates that they will do reasonably well going forward. So while the "market" based calls do not jive with my personal value of philosophy, I don't think it is necessarily an identity crisis. They've done it before and they'll do it again.

Just to correct a typo - my post above should read "<i>I'm <b>not</b> sure I agree 100% </i>" - which should be clear if you read the rest of it. Allow me to be clearer: - you cannot hedge equity with cash (agree cardboard) - the argument is moot because they had over $6 billion in cash anyway - Prem needs explain clearly, and admit the mistake of being overexposed to an adverse market move. I for one don't really buy statements about how the prospects for the stock market have changed under a Trump presidency. Nobody knows. Anyway - I still think Fairfax is a great company, but there are always lessons to be learned, and room to improve.

Thanks for the insights Parsad. I’m sure I agree 100%. At the end of the last quarter, before selling the long bonds, Fairfax had over $6 billion of cash, versus the mark to mark equity portfolio of $4.1 billion. I don’t think cash was a factor in decisions regarding the equity hedge. I think the reason for reducing the hedge is simple. With the mark to market equity portfolio down to $4.1 billion, the hedge was up at $7.6 billion. They were overexposed (net short), with no downside protection. As foreshadowing, they actually purchased $1.1 billion in S&P calls in the last quarter to limit the exposure. They are still maintaining a big hedge, it had just gotten out of whack with the size of the equity portfolio. So they right sized it. They were probably hoping to do this opportunistically and make a little money, but ultimately couldn’t hang on / got a bit uncomfortable with the exposure. I think it was the right move to cut it back. The mistake was to be in that position to begin with - and it was a bit costly for shareholders. But that is hindsight. That's my take anyway. All the best. I hope you are keeping well!