Fairfax Third Quarter Results

[petec]

When looking at p/b values for Markel and Berkshire I believe it is time for FFH to go to 1.4 -1.5 times book or between 550 -600 USD.

 

Is that so?

 

The last quarter confirmed that on the insurance side things are getting better

 

It did nothing of the sort.  I would take the opposite view: we won't know with any degree of confidence whether their insurance results have gotten better for another 5 years or more.  One quarter (or year-to-date).....in what was a light cat period....reveals nothing about the risks being run and how well they are being compensated for them.

 

Sorry don't mean to be a troll....and I'm long FFH and think they're great guys and all that, but steady on!

 

Actually, the loss triangles have been fully satisfactory which you might interpret as some degree of confirmation that FFH's underwriting has improved.  However, like you, I wouldn't mind seeing another 5 years of disciplined UW before getting too excited.

 

SJ

 

Yes I think the loss triangles and the accident year CR's tell a very strong story.  Which isn't to suggest that the question is proved, but I think the evidence is mounting.

[petec]

I'd say I waited until the last hour before my Monday purchase at $511:

 

Hi Eric,

 

The sense I have from your recent posts is that you respect the guys at FFH but haven't viewed it as particularly cheap and don't share their negative view of the world.

 

Is that sense right, and if so may I ask what made you buy the shares?

 

Thanks

 

Pete

[WhoIsWarren]

 

Yes I think the loss triangles and the accident year CR's tell a very strong story.  Which isn't to suggest that the question is proved, but I think the evidence is mounting.

 

 

Agreed: evidence mounting (I think I have argued the same myself on earlier posts).  But they've a while to go before they can convince me they can match Markel's (or Berkshire's) underwriting (i.e. cost of float) ability.

 

It just seemed to be rather obvious that it was almost inevitable that there would be a quick jump in share price.

 

Yes… Obvious…

 

;)

 

Gio

 

My goodness. Such confidence astounds me!  :o

 

There's very little that's obvious in investing......except maybe occasionally to Charlie Munger's well-educated (and clearly very intelligent) orangutan.

[cwericb]

"My goodness. Such confidence astounds me!"

 

Well that confidence just made ERICOPOLY over $100,000 in two days and earned me about 8% in four days. I take it you didn't have the same confidence in FFH? :)

 

"There's very little that's obvious in investing"

 

So very, very true. That is the point of the post I made yesterday.  There are very few occasions in investing that something seems obvious. In this situation it seemed reasonably predictable that FFH share price would rise again after the results. The results were better than expected and tended to indicate that FFH was on the right track and they also backed up their ratios from the previous quarter which was not necessarily expected. But the share price stayed relatively steady during the next day or so. But if I remember correctly there have been other times that the market has been very slow to react to FFH's results. So it was that delayed reaction that was surprising and afforded the opportunity to make a quick return. 

 

Similarly, if company A reported unexpected dismal results, wouldn't it be reasonably "obvious" that the share price would drop?

[Valuebo]

I guess we are now measuring people's investing skills over periods of barely a week. On the other hand I guess Fairfax can still be proven right on the hedges.

[Kraven]

I guess we are now measuring people's investing skills over periods of barely a week. On the other hand I guess Fairfax can still be proven right on the hedges.

 

A week?  That's a long time.  It now seems to get measured on the basis of hours or a day, but usually only in the case of Berkshire, Fairfax and Sears.

[cwericb]

Its amazing how comments on this board can get so twisted from their original intent.

 

The point here was simply an observation that, in a market that can react so drastically to some small rumor, that it is surprising to see that when FFH posts results - good or bad - there seems to be times when that same market can be quite slow to react when FFH releases results. This happened again this quarter. The observation from that is PERHAPS this may offer an opportunity to make money. I may have been under the erroneous impression that we were sharing observations to promote discussion and provide any insight into buying opportunities. Just my two cents worth.

 

Like PETC, I would like to know what prompted ERICOPOLY to pick Monday as a point to buy such a large position?

[Liberty]

Just seeing this now. Nice quarter, kudos to the FFH crew.

 

I'm also curious to learn more about Eric's thinking here. Was this just a quick trade that you'll get out of soon (if not already), kind of like MBIA, or is this an investment?

[ERICOPOLY]

Just seeing this now. Nice quarter, kudos to the FFH crew.

 

I'm also curious to learn more about Eric's thinking here. Was this just a quick trade that you'll get out of soon (if not already), kind of like MBIA, or is this an investment?

 

This is just the next iteration of buying it with the intention of holding it forever. 

 

3,000 shares is 1/8 of what my position was in June-Nov 2006, although in that case it was all options and no shares.  Now it's all shares and no options.

[Liberty]

This is just the next iteration of buying it with the intention of holding it forever. 

 

3,000 shares is 1/8 of what my position was in June-Nov 2006, although in that case it was all options and no shares.  Now it's all shares and no options.

 

I find this a bit surprising. You've been fairly critical of FFH and of insurers (leveraged bond portfolios) in the recent past. Was this you trying to kill your thesis and still finding it an acceptable investment despite the flaws that you highlighted, or did your thinking on their prospects change in recent months?

[ERICOPOLY]

Like PETC, I would like to know what prompted ERICOPOLY to pick Monday as a point to buy such a large position?

 

I am a psychic.  I was really bored as a phone operator, so I left that gig and started investing my retained earnings in stocks that I know will trade higher within a couple of hours.

 

[ERICOPOLY]

This is just the next iteration of buying it with the intention of holding it forever. 

 

3,000 shares is 1/8 of what my position was in June-Nov 2006, although in that case it was all options and no shares.  Now it's all shares and no options.

 

I find this a bit surprising. You've been fairly critical of FFH and of insurers (leveraged bond portfolios) in the recent past. Was this you trying to kill your thesis and still finding it an acceptable investment despite the flaws that you highlighted, or did your thinking on their prospects change in recent months?

 

I don't think I've been negative on them.

 

It wasn't negative when I said they were trading at 1.3x book after stripping out goodwill when others were claiming it to be 1.05x.  I pointed out that they were merely trading at the private-party, arms-length valuation that they themselves have paid recently for their own component parts.

 

I commented that it should always trade at a discount to IV if they are truly value investors -- I still hold that view. 

 

Mostly what got me to buy was the feeling that if the underwriting results keep coming in at these levels, it will result in higher valuation (the underwriting profits being capitalized and reflected in the stock price).  I could have made that decision last quarter, but as thing go I made the decision this quarter.

 

 

[Liberty]

Ok, thanks. Maybe I got the wrong impression from some of your discussions with Gio a while ago.

[ERICOPOLY]

Ok, thanks. Maybe I got the wrong impression from some of your discussions with Gio a while ago.

 

From where interest rates are today, and with the hedges, my point has been that needing "only" 7% on the portfolio is a tall order. 

 

Now, if underwriting kicks in (as it did last quarter) it changes the calculus.

 

15% isn't my goal though.  I will be happy to make 10% a year from this investment.  I think 10% will be easy if underwriting stays like this.

 

[benhacker]

From where interest rates are today, and with the hedges, my point has been that needing "only" 7% on the portfolio is a tall order. 

 

Now, if underwriting kicks in (as it did last quarter) it changes the calculus.

 

15% isn't my goal though.  I will be happy to make 10% a year from this investment.  I think 10% will be easy if underwriting stays like this.

 

I generally agree with your perspective Eric (7% investment returns is not a low bar - it's hard), and I think FFH does need underwriting to be respected by the market to get / earn a premium valuation.  I have been assuming for sometime that underwriting is sound, but it just hadn't shown through in the financials just yet.  I think your recent move is likely timely as you are more closely aligned with the likely catalyst for higher valuation (the presumption of both investment returns at an adequate level + underwriting working in tandem to deliver good ROE, and that result being apparent to Mr. Market).

 

I've held through all of this, but I can see the logic of really waiting for the catalyst as it were.  I think we can perhaps get a confluence of good events here (debt refi, underwriting staying sound, investment returns being good / reverting, and perhaps even some tail insurance events playing out partially in FFH's favor).  If it all comes together the rating agencies will act, and I believe those on the fence or unsure about Prem and team may have a change of heart in small numbers which could help to provide a revaluation.

 

All nice to have things (not necessary), but if book can grow in the low / mid-teens, and we get a more premium P/B multiple, it could be pretty nice.

[Liberty]

Ok, thanks. Maybe I got the wrong impression from some of your discussions with Gio a while ago.

 

From where interest rates are today, and with the hedges, my point has been that needing "only" 7% on the portfolio is a tall order. 

 

Now, if underwriting kicks in (as it did last quarter) it changes the calculus.

 

15% isn't my goal though.  I will be happy to make 10% a year from this investment.  I think 10% will be easy if underwriting stays like this.

 

 

That makes sense, thanks. Hurdle rate definitely matters.

[Cageyone]

With FFH at 49% of my portfolio, I'm OK with 10% keeping in mind the downside protection of the hedges and deflation bet!

[giofranchi]

From where interest rates are today, and with the hedges, my point has been that needing "only" 7% on the portfolio is a tall order. 

 

Now, if underwriting kicks in (as it did last quarter) it changes the calculus.

 

15% isn't my goal though.  I will be happy to make 10% a year from this investment.  I think 10% will be easy if underwriting stays like this.

 

I generally agree with your perspective Eric (7% investment returns is not a low bar - it's hard)

 

Well, I have never said 7% on their portfolio is easy, nor I said it is difficult… The truth imo is no one knows… Because I believe they are opportunistic and constantly on the lookout for something undervalued… How to predict they will find undervalued things from now on? I don’t think anyone can.

 

Instead, I just said that 7% is far below the historic average return on their portfolio (9%). That’s all I have said!

 

Now, of course, you might accuse me I invest with a rearview mirror… ;)

 

Gio

 

[ERICOPOLY]

Instead, I just said that 7% is far below the historic average return on their portfolio (9%). That’s all I have said!

 

Current interest rates are night and day from when Fairfax began operations.  They not only had the higher yields, they also got a tailwind from capital gains as rates fell.

 

We might very well wind up with low yields and capital losses as rates rise.  3x leverage on bonds returning 2% is only 6%.  Hmm...

 

 

[giofranchi]

Current interest rates are night and day from when Fairfax began operations.  They not only had the higher yields, they also got a tailwind from capital gains as rates fell.

 

We might very well wind up with low yields and capital losses as rates rise.  3x leverage on bonds returning 2% is only 6%.  Hmm...

 

Yeah! This is one side of the coin…

 

The other side follows: the yield of 10-years US Treasuries will fall to the France level, if not the German level, if not the Japanese level, giving Fairfax substantial capital gains. If that happens, it will be surely accompanied by lots of distressed debt situations. And Fairfax will redeploy its capital gains into those distressed debt opportunities. In the meantime also stock prices could have come down and equity hedges will no more be in place.

 

Which side of the coin will happen? I think no one knows.

 

Gio

 

[CorpRaider]

I need to compare the allocation to bonds and duration of the fixed income portfolios of FFH and MKL.  I guess if you live in a world where you believe real deflation is coming you would have more allocated to bonds.

[obtuse_investor]

I need to compare the allocation to bonds and duration of the fixed income portfolios of FFH and MKL.  I guess if you live in a world where you believe real deflation is coming you would have more allocated to bonds.

 

I'd love to see the comparison if you are willing to share it.

 

The only caveat is that Markel's current bond portfolio isn't because of an investment decision. It is largely the portfolio they inherited from their Alterra purchase last year. They have openly said that they are methodically reducing that bond portfolio and moving into equities. They aren't macro influenced investors, unlike FFH. (Neither is right or wrong-- just pointing out the difference).

 

If some major dislocation happens, FFH is bound to gain big, while Markel will trot along, albeit a little slowly.

 

Both MKL and FFH are major core positions for me.

[ERICOPOLY]

Which side of the coin will happen? I think no one knows.

 

Therefore, Mr. Market gets a pass for not recognizing their forthcoming unusual capital gains.  Long term shareholders will get paid either way.

[petec]

Which side of the coin will happen? I think no one knows.

 

Therefore, Mr. Market gets a pass for not recognizing their forthcoming unusual capital gains.  Long term shareholders will get paid either way.

 

It's worth adding the obvious point that if FFH's future returns are lower than their past returns because of the starting point of interest rates, so will everyone else's be.  Their returns relative to the market, the competition, and the other alternatives available to us might not be so different.  In fact they might have better relative returns than before, if the underwriting is finally sustainably reasonable.

[CorpRaider]

I need to compare the allocation to bonds and duration of the fixed income portfolios of FFH and MKL.  I guess if you live in a world where you believe real deflation is coming you would have more allocated to bonds.

 

I'd love to see the comparison if you are willing to share it.

 

The only caveat is that Markel's current bond portfolio isn't because of an investment decision. It is largely the portfolio they inherited from their Alterra purchase last year. They have openly said that they are methodically reducing that bond portfolio and moving into equities. They aren't macro influenced investors, unlike FFH. (Neither is right or wrong-- just pointing out the difference).

 

If some major dislocation happens, FFH is bound to gain big, while Markel will trot along, albeit a little slowly.

 

Both MKL and FFH are major core positions for me.

 

Of course I will.  If I come up with anything useful, that is.  Yeah, you know, I sort of started thinking about that after I posted and you're right.  They're almost a little like hedges for one another or at least somewhat complementary positions.  Not to mention a little currency diversification...hmm.