obtuse_investor Posted February 14, 2014 Share Posted February 14, 2014 I am, of course, pleased to see underwriting profits for 2013. I hope this continues into the future. This is foundational for a strong FFH. I am not happy with their hedging strategy, of course. Quite simply, they could have just parked money in cash and lived with <1% yield. Why the urge to be in the market if they see market as highly valued? Why the urge to be buying return swaps and other instruments, when they lead to a negative sum game? If they got into cash in 2010 and missed the rally since then, they would be in the exact same boat as today; i.e. nothing gained and nothing lost. They call these equity "hedges", but they really aren't hedges at all. They were and are directional bets. They just happened to lose the bet. If the market dropped another 50% from 2011 to 2013, they would have been slightly up, but not much. But relative to everyone else, they would have looked brilliant. They could have achieved the same result with far less stress and stayed in cash since 2010. I really hope, at least behind closed doors, Mr Watsa and his team are reflecting on what they did and how they could have done it better. I have a lot of respect for Mr Watsa and his team. I expect them to be introspective and self-critical, if not in public, then in private. Link to comment Share on other sites More sharing options...
obtuse_investor Posted February 14, 2014 Share Posted February 14, 2014 Just so we are all on the same page - $370 USD or CAD? USD :) Link to comment Share on other sites More sharing options...
A_Hamilton Posted February 14, 2014 Share Posted February 14, 2014 Just so we are all on the same page - $370 USD or CAD? USD :) Adjust for all of the unrealized gains this Q and subtract out the dividend that was paid and you are around $370-$375 in BVPS. Under $370 would be a decent bargain. Link to comment Share on other sites More sharing options...
vinod1 Posted February 14, 2014 Share Posted February 14, 2014 I am, of course, pleased to see underwriting profits for 2013. I hope this continues into the future. This is foundational for a strong FFH. I am not happy with their hedging strategy, of course. Quite simply, they could have just parked money in cash and lived with <1% yield. Why the urge to be in the market if they see market as highly valued? Why the urge to be buying return swaps and other instruments, when they lead to a negative sum game? If they got into cash in 2010 and missed the rally since then, they would be in the exact same boat as today; i.e. nothing gained and nothing lost. They call these equity "hedges", but they really aren't hedges at all. They were and are directional bets. They just happened to lose the bet. If the market dropped another 50% from 2011 to 2013, they would have been slightly up, but not much. But relative to everyone else, they would have looked brilliant. They could have achieved the same result with far less stress and stayed in cash since 2010. I really hope, at least behind closed doors, Mr Watsa and his team are reflecting on what they did and how they could have done it better. I have a lot of respect for Mr Watsa and his team. I expect them to be introspective and self-critical, if not in public, then in private. +1 It is good to see underwriting going in the right direction, but it is aided by $440 million reserve release. Accident year CR is at 100%. Vinod Link to comment Share on other sites More sharing options...
valuesource Posted February 14, 2014 Share Posted February 14, 2014 For those like me who have been clamoring for the underwriting to improve, we've been given a nice dose of that. For those who want to buy below $370, you may get your chance tomorrow. -Crip Well, it should go without saying that I've been surprised by FFH earnings and market reactions to them before. However, I don't think we're going to see a drawdown of that magnitude tomorrow. Just so we are all on the same page - $370 USD or CAD? I assumed Crip was talking about the USD price. So it would still mean a drawdown of $30 USDs which I feel is not likely to happen. Link to comment Share on other sites More sharing options...
A_Hamilton Posted February 14, 2014 Share Posted February 14, 2014 I am, of course, pleased to see underwriting profits for 2013. I hope this continues into the future. This is foundational for a strong FFH. I am not happy with their hedging strategy, of course. Quite simply, they could have just parked money in cash and lived with <1% yield. Why the urge to be in the market if they see market as highly valued? Why the urge to be buying return swaps and other instruments, when they lead to a negative sum game? If they got into cash in 2010 and missed the rally since then, they would be in the exact same boat as today; i.e. nothing gained and nothing lost. They call these equity "hedges", but they really aren't hedges at all. They were and are directional bets. They just happened to lose the bet. If the market dropped another 50% from 2011 to 2013, they would have been slightly up, but not much. But relative to everyone else, they would have looked brilliant. They could have achieved the same result with far less stress and stayed in cash since 2010. I really hope, at least behind closed doors, Mr Watsa and his team are reflecting on what they did and how they could have done it better. I have a lot of respect for Mr Watsa and his team. I expect them to be introspective and self-critical, if not in public, then in private. +1 It is good to see underwriting going in the right direction, but it is aided by $440 million reserve release. Accident year CR is at 100%. Vinod Do you still believe in their accident year combined ratios? They have to use the most conservative level that their auditors/independent actuary will allow. Here's a question for FFH management: How much inflation do you bake into your reserves and how is this level consistent with your view that deflation is likely across the western world? Link to comment Share on other sites More sharing options...
Crip1 Posted February 14, 2014 Share Posted February 14, 2014 For those like me who have been clamoring for the underwriting to improve, we've been given a nice dose of that. For those who want to buy below $370, you may get your chance tomorrow. -Crip Well, it should go without saying that I've been surprised by FFH earnings and market reactions to them before. However, I don't think we're going to see a drawdown of that magnitude tomorrow. My point is not that the value of the company has declined, it is that I can easily see the market overreact to the big loss. Examples are numerous including that one could have purchased Markel below $440 14 months ago IF one was able to ignore the noise and focus on the company. My crystal ball is a bit cloudy, but it would not surprise me to see a 10% decline here and there over the next few days. To those who were looking for an entry point, it is advisable to have your finger on the proverbial trigger. Regarding the results, certainly no one can be happy to see the massive losses on equity hedges. That said, for me to criticize Prem and Co.'s investing moves is like a reporter questioning Michael Jordan's performance on a given night. Hindsight is 20/20 and while it would be wonderful to have that $2B back ON the balance sheet, I do not see that this has changed the FFH story. The FFH story is that Prem and Co will invest well over time. This "mistake" notwithstanding, that has not changed. What MAY have changed is the underwriting. Granted that this year was rather benign in regards to CAT activity, but those results are really, really good. Time will tell whether or not this is a fluke but, historically, underwriting was a weakness of this company. If that does become a neutral, much less a strength, then the story changes for the better, dramatically so. Not selling, may be buying more on any overraction. -Crip Link to comment Share on other sites More sharing options...
Guest Dazel Posted February 14, 2014 Share Posted February 14, 2014 Results were better than I thought... Monumental hedging mistake... To look in the rearview mirror is also a mistake... Jan 1 2014...they have looked brilliant...bond portfolio has rebounded as well after being Trounced in 2013. Dazel. Link to comment Share on other sites More sharing options...
Guest longinvestor Posted February 14, 2014 Share Posted February 14, 2014 For those like me who have been clamoring for the underwriting to improve, we've been given a nice dose of that. For those who want to buy below $370, you may get your chance tomorrow. -Crip Well, it should go without saying that I've been surprised by FFH earnings and market reactions to them before. However, I don't think we're going to see a drawdown of that magnitude tomorrow. My point is not that the value of the company has declined, it is that I can easily see the market overreact to the big loss. Examples are numerous including that one could have purchased Markel below $440 14 months ago IF one was able to ignore the noise and focus on the company. My crystal ball is a bit cloudy, but it would not surprise me to see a 10% decline here and there over the next few days. To those who were looking for an entry point, it is advisable to have your finger on the proverbial trigger. Regarding the results, certainly no one can be happy to see the massive losses on equity hedges. That said, for me to criticize Prem and Co.'s investing moves is like a reporter questioning Michael Jordan's performance on a given night. Hindsight is 20/20 and while it would be wonderful to have that $2B back ON the balance sheet, I do not see that this has changed the FFH story. The FFH story is that Prem and Co will invest well over time. This "mistake" notwithstanding, that has not changed. What MAY have changed is the underwriting. Granted that this year was rather benign in regards to CAT activity, but those results are really, really good. Time will tell whether or not this is a fluke but, historically, underwriting was a weakness of this company. If that does become a neutral, much less a strength, then the story changes for the better, dramatically so. Not selling, may be buying more on any overraction. -Crip +1 Listened to the call just now and Prem credited Andy Barnard as the new Insurance chief for making this happen. It is early but encouraging. It will take another 3-5 years of demonstrating this to convince me. I sold FFH last year after holding for 11 years. Waiting for them to become a good insurance company, something they never have been besides Odyssey. They don't even come close to being like Berkshire' Insurance business, not yet anyway. I bought BRK with the FFH sale proceeds. Link to comment Share on other sites More sharing options...
vinod1 Posted February 14, 2014 Share Posted February 14, 2014 Do you still believe in their accident year combined ratios? They have to use the most conservative level that their auditors/independent actuary will allow. I did not quite understand why you would not believe the accident year CR. Could you please explain? Thanks Vinod Link to comment Share on other sites More sharing options...
SFValue Posted February 14, 2014 Share Posted February 14, 2014 Interesting to contrast (as of now) market's reaction to FFH vs AIG release compared to investors comments on the same. Link to comment Share on other sites More sharing options...
A_Hamilton Posted February 14, 2014 Share Posted February 14, 2014 Do you still believe in their accident year combined ratios? They have to use the most conservative level that their auditors/independent actuary will allow. I did not quite understand why you would not believe the accident year CR. Could you please explain? Thanks Vinod They sandbag the accident year reserve. If they think they are going to have losses of $100 on a policy they put $115 into the reserve. They say they are being conservative (which they very well may be, who knows what will happen between a reserve being established and claim identification/settlement. Courts could become more hostile to insurers, inflation could go up, an unforseen risk might not have been excluded from a policy). However, at a certain point you've reserved for the unknowns that I've bracketed and you are effectively setting up redundant reserves that you will bleed through calendar year combined ratios in future years. That is what FFH is doing...it's also what BRK.b and WRB are notorious for. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted February 14, 2014 Share Posted February 14, 2014 They have multiple parts: bond income underwriting income equities (hedged against indices) CPI thinging How did all four of them combine to just 2.8%? Did capital bond losses exceed all income generated over the period? Did equities underperform the index? Was there no net underwriting income? Which part was primarily responsible for dragging down the slugging percentage? Link to comment Share on other sites More sharing options...
vinod1 Posted February 14, 2014 Share Posted February 14, 2014 Do you still believe in their accident year combined ratios? They have to use the most conservative level that their auditors/independent actuary will allow. I did not quite understand why you would not believe the accident year CR. Could you please explain? Thanks Vinod They sandbag the accident year reserve. If they think they are going to have losses of $100 on a policy they put $115 into the reserve. They say they are being conservative (which they very well may be, who knows what will happen between a reserve being established and claim identification/settlement. Courts could become more hostile to insurers, inflation could go up, an unforseen risk might not have been excluded from a policy). However, at a certain point you've reserved for the unknowns that I've bracketed and you are effectively setting up redundant reserves that you will bleed through calendar year combined ratios in future years. That is what FFH is doing...it's also what BRK.b and WRB are notorious for. Thanks! FFH in the past had to keep adding to the reserves, so I would be glad to see this change going forward. Vinod Link to comment Share on other sites More sharing options...
vinod1 Posted February 14, 2014 Share Posted February 14, 2014 They have multiple parts: bond income underwriting income equities (hedged against indices) CPI thinging How did all four of them combine to just 2.8%? Did capital bond losses exceed all income generated over the period? Did equities underperform the index? Was there no net underwriting income? Which part was primarily responsible for dragging down the slugging percentage? Rhetorical question? Bonds had a $900 million loss and equities underperformed the hedges by $500 million. These pretty much accounted for the underperformance. Vinod Link to comment Share on other sites More sharing options...
ERICOPOLY Posted February 14, 2014 Share Posted February 14, 2014 They have multiple parts: bond income underwriting income equities (hedged against indices) CPI thinging How did all four of them combine to just 2.8%? Did capital bond losses exceed all income generated over the period? Did equities underperform the index? Was there no net underwriting income? Which part was primarily responsible for dragging down the slugging percentage? Rhetorical question? Bonds had a $900 million loss and equities underperformed the hedges by $500 million. These pretty much accounted for the underperformance. Vinod It's a little bit ironic that the bonds are the only thing they didn't hedge, and they're the biggest source of loss generation. They didn't hedge the interest rate risk. I think if they can live with $900 million in losses on bonds, they could also live with some amount of pain from equities losses -- for example, using out-of-the money puts to hedge against major market collapse. I know this is all hindsight, but I think it makes sense. Link to comment Share on other sites More sharing options...
obtuse_investor Posted February 14, 2014 Share Posted February 14, 2014 They didn't hedge it because it wasn't a hedge in the first place-- this was a directional bet. They expected bonds to rise (yields to fall). Link to comment Share on other sites More sharing options...
ERICOPOLY Posted February 14, 2014 Share Posted February 14, 2014 I suppose I'll just go ahead and state the obvious -- the lower the yield, the riskier that kind of thinking becomes... there isn't enough income generated to cushion the blow when you get the price direction wrong. Link to comment Share on other sites More sharing options...
jay21 Posted February 14, 2014 Share Posted February 14, 2014 They didn't hedge it because it wasn't a hedge in the first place-- this was a directional bet. They expected bonds to rise (yields to fall). As a very casual observant of FFH, this was always my issue. They call the equity and inflation positions hedges due to potential deflation. But if you combine those with a long duration bond book, you are making a directional bet. I suppose I'll just go ahead and state the obvious -- the lower the yield, the riskier that kind of thinking becomes... there isn't enough income generated to cushion the blow when you get the price direction wrong. Not only this, but duration alone make the bet's risk/reward poor imo. You have to get the probabilities right. Link to comment Share on other sites More sharing options...
LowIQinvestor Posted February 14, 2014 Share Posted February 14, 2014 I've always preferred Buffett's mentality of not trying to predict macro events and buying compounding machines. Cash is a good enough "hedge" for me. Interesting to see the stark contrast in results over the past 5 years: http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1392411600000&chddm=486406&chls=IntervalBasedLine&cmpto=NYSE:BRK.A&cmptdms=0&q=TSE:FFH&ntsp=0&ei=MT3-Uuj9LIfpqAGeiQE Link to comment Share on other sites More sharing options...
valuesource Posted February 14, 2014 Share Posted February 14, 2014 For those like me who have been clamoring for the underwriting to improve, we've been given a nice dose of that. For those who want to buy below $370, you may get your chance tomorrow. -Crip Well, it should go without saying that I've been surprised by FFH earnings and market reactions to them before. However, I don't think we're going to see a drawdown of that magnitude tomorrow. My point is not that the value of the company has declined, it is that I can easily see the market overreact to the big loss. Examples are numerous including that one could have purchased Markel below $440 14 months ago IF one was able to ignore the noise and focus on the company. My crystal ball is a bit cloudy, but it would not surprise me to see a 10% decline here and there over the next few days. To those who were looking for an entry point, it is advisable to have your finger on the proverbial trigger. Regarding the results, certainly no one can be happy to see the massive losses on equity hedges. That said, for me to criticize Prem and Co.'s investing moves is like a reporter questioning Michael Jordan's performance on a given night. Hindsight is 20/20 and while it would be wonderful to have that $2B back ON the balance sheet, I do not see that this has changed the FFH story. The FFH story is that Prem and Co will invest well over time. This "mistake" notwithstanding, that has not changed. What MAY have changed is the underwriting. Granted that this year was rather benign in regards to CAT activity, but those results are really, really good. Time will tell whether or not this is a fluke but, historically, underwriting was a weakness of this company. If that does become a neutral, much less a strength, then the story changes for the better, dramatically so. Not selling, may be buying more on any overraction. -Crip I hear you and I've certainly been suprised by market reaction in the past. I was merely saying that a $30 USD drawdown in reaction to what they just reported would BLOW ME AWAY. They lost 5.5MM in Q4 which is a rounding error and doesn't even include positions for which they equity account. (+643MM unrealized) Remember that the marjority of the 2013 loss was in Q3 which was already reported. So it's not really a surprise. I'm the stock drops more than $10 today, I'm going to add. -value Link to comment Share on other sites More sharing options...
obtuse_investor Posted February 14, 2014 Share Posted February 14, 2014 I've always preferred Buffett's mentality of not trying to predict macro events and buying compounding machines. Cash is a good enough "hedge" for me. Interesting to see the stark contrast in results over the past 5 years: http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1392411600000&chddm=486406&chls=IntervalBasedLine&cmpto=NYSE:BRK.A&cmptdms=0&q=TSE:FFH&ntsp=0&ei=MT3-Uuj9LIfpqAGeiQE True-- but if you click the 10y link, you see that they have been about the same. Long term is where it's at. Link to comment Share on other sites More sharing options...
Parsad Posted February 14, 2014 Share Posted February 14, 2014 There must be something I dont understand about those hedges. So the stock market goes up, FFH make money on their stock but lose that money because hedges lost value. So we are even. In 2 years, the stock market goes down as the stocks FFH own, but they make money on their hedges. We are even again. How do they expect to make money with that strategy? What is the trick I dont understand? They've been selling the stocks and reaping the gains as the market went up. Those gains won't disappear if markets correct. Cheers! Link to comment Share on other sites More sharing options...
obtuse_investor Posted February 14, 2014 Share Posted February 14, 2014 There must be something I dont understand about those hedges. So the stock market goes up, FFH make money on their stock but lose that money because hedges lost value. So we are even. In 2 years, the stock market goes down as the stocks FFH own, but they make money on their hedges. We are even again. How do they expect to make money with that strategy? What is the trick I dont understand? They've been selling the stocks and reaping the gains as the market went up. Those gains won't disappear if markets correct. Cheers! Based on my understanding, they had to realize hedge losses to keep that ~100% hedge stance. Those gains instantly disappeared. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted February 14, 2014 Share Posted February 14, 2014 I've always preferred Buffett's mentality of not trying to predict macro events and buying compounding machines. Cash is a good enough "hedge" for me. Interesting to see the stark contrast in results over the past 5 years: http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1392411600000&chddm=486406&chls=IntervalBasedLine&cmpto=NYSE:BRK.A&cmptdms=0&q=TSE:FFH&ntsp=0&ei=MT3-Uuj9LIfpqAGeiQE True-- but if you click the 10y link, you see that they have been about the same. Long term is where it's at. That chart is heavily influence by their decision to buy TIG and C&F, which had little to do with whether they have a hedging strategy or not. Link to comment Share on other sites More sharing options...
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