2015 results

[caprivenky]

http://s1.q4cdn.com/579586326/files/doc_news/2016/PRFFH-Feb-16-2016-YE-2015-Results.pdf

[TwoCitiesCapital]

http://s1.q4cdn.com/579586326/files/doc_news/2016/PRFFH-Feb-16-2016-YE-2015-Results.pdf

 

Wow! Those insurance units are really banging it out even in a softer pricing environment. I understand there have been limited catstrophes in recent years, but Fairfax has pulled in over $2B even while being hedged in equities and losing a pretty sum in Greece.

[racemize]

And they are right back to 100% hedged.  That decrease to 88% was short lived.

[TwoCitiesCapital]

And they are right back to 100% hedged.  That decrease to 88% was short lived.

 

I think the goal is to always remain at 100%, but given the mismatch in performance and TRS maturities, there are probably times when it's not.

 

My guess is they had TRS contracts that expired on 12/31 and they probably reinitiated early in Jan.

[obtuse_investor]

Increasing short exposure from 88% to 100% in the first 45 days of 2016 was certainly quite bad timing-- short exposure has been quite expensive to purchase with the VIX spiking.

 

They seems to have bought additional flood insurance when it started to rain a little bit.

 

I am sure that flood will come; just not sure when. And this expensive additional policy will dilute the eventual payoff.

[racemize]

I am sure that flood will come; just not sure when. And this expensive additional policy will dilute the eventual payoff.

 

Just like the last five years of pretty awful returns because of the hedges. 

 

They only get more attractive over time, but it has been very painful.

[Jurgis]

Insurance results are great, but overall results are not. Of course, 4.5% book value growth in a year of flat market is not bad, but you stack that on top of last 4+ years (with divs) and you get something like 5% annual, which is low.

 

If there was something way more attractive, I'd probably switch out of FRFHF. If market crash comes, I may even.

[benhacker]

Obtuse,

 

Increasing short exposure from 88% to 100% in the first 45 days of 2016 was certainly quite bad timing-- short exposure has been quite expensive to purchase with the VIX spiking.

 

They aren't buying puts.  I don't think VIX / Vol really impacts the cost of TRS.  The bigger factor in TRS is market liquidity and the size they are doing.  Pretty sure you can get off a few hundred million in TRS shorts without needing to pay much premium beyond the implicit borrow rate of the underlying indices you are shorting.

 

Not defending that shorting in Q1 was or was not a good idea, just clarifying that their positions aren't bad timing because of VIX, it's essentially irrelevant.

 

--

 

Overall, results seemed ok.  Their equity portfolio continues to really suck though into the new year...

[obtuse_investor]

Obtuse,

 

Increasing short exposure from 88% to 100% in the first 45 days of 2016 was certainly quite bad timing-- short exposure has been quite expensive to purchase with the VIX spiking.

 

They aren't buying puts.  I don't think VIX / Vol really impacts the cost of TRS.  The bigger factor in TRS is market liquidity and the size they are doing.  Pretty sure you can get off a few hundred million in TRS shorts without needing to pay much premium beyond the implicit borrow rate of the underlying indices you are shorting.

 

Not defending that shorting in Q1 was or was not a good idea, just clarifying that their positions aren't bad timing because of VIX, it's essentially irrelevant.

 

 

Ben,

I didn't mean to imply that they are buying puts or VIX options. I was mentioning high VIX as merely a sign of expensive insurance premiums.

 

Although, I did assume that the price of TRS would be hugely impacted during this time. Thanks for clarifying that that it doesn't move in a huge manner. I am certainly not an expert on the internal mechanics of a swap instrument.

 

 

 

 

Looking beyond the equity hedges, the underwriting profit has been exceptional. Recall, that is two years of record breaking underwriting profits. This is highly encouraging. As years progress, I want to see them maintain this sort of underwriting discipline.

[Phoenix01]

After the conf call, I just hit me that FFH not only has operations running at $700M profit in a soft market, but they have also realized 1.2B that they have not had to pay taxes on, because they are shielded by 1.4B in unrealized losses.  They realize 2B this year and only have to pay taxes on $500M!  These guys are geniuses.

 

 

[Crip1]

Obviously, the underwriting results are nothing short of terrific. Looking back to several years ago, the sentiment on this board, with which I agreed FWIW, was akin to “If they could only get their underwriting under control…”. Well, this seems to have happened, and happened better than I would have hoped for at that time.

 

Now the performance is being hampered by the investing results, which no one really saw coming. Prem and company know more about investing than I can ever dream of, there is no question on that. Accordingly, my criticizing their investing decisions are not unlike a high school freshman criticizing the coaching decisions of Bill Belachick. Back in 2007-2008 I openly called for them to sell their CDS positions when they had doubled in value which, if they did so, would have been a greater than $1B mistake. They simply know more than me.

 

In light of all of that, I would introduce a suggestion which is best articulated by Buffet: “To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over because we acquired any ability to clear seven-footers.” The investments in Blackberry and EXCO may still work out, but those are 7-foot hurdles. Holdings like JNJ and Wells Fargo are 1-foot hurdles. Running an organization, buying companies, strategic hedging decisions, exploring the market in India and various hedging decisions are all VERY difficult. It makes sense to me and has made sense to me for years, that keeping things relatively simple on the investing side, such that can be done, is a very attractive strategy. Hindsight shows that staying with Wells, JNJ and Berkshire would have served Fairfax far better than the more difficult analyses of EXCO and Blackberry would have been. Many have criticized the hedging of the equity position but I am not jumping on that bandwagon…I get the concept of doing so and, even if it does not work out in the end, the pros/cons analysis of to-hedge-or-not-to-hedge at the time that these were taken out was murky. I don’t think that the pros/cons analysis of 7-footers vs. 1-footers was nearly as murky…1-footers win in a heartbeat.

 

I’ve not sold a share of Fairfax in a long time, and do not anticipate doing so. I would hope that as they move forward, their equity investments move far more towards companies in the 1-footers camp.

 

-Crip

[Bog]

I agree with what you say. I also wondering why th quality discrepancy between fairfax investments and fairfax India. With India they have basically said from what I recall is we will buy great businesses with great management. Yet fairfax (outside of some good aquisitions) buys cigar butt investments.

 

 

 

Obviously, the underwriting results are nothing short of terrific. Looking back to several years ago, the sentiment on this board, with which I agreed FWIW, was akin to “If they could only get their underwriting under control…”. Well, this seems to have happened, and happened better than I would have hoped for at that time.

 

Now the performance is being hampered by the investing results, which no one really saw coming. Prem and company know more about investing than I can ever dream of, there is no question on that. Accordingly, my criticizing their investing decisions are not unlike a high school freshman criticizing the coaching decisions of Bill Belachick. Back in 2007-2008 I openly called for them to sell their CDS positions when they had doubled in value which, if they did so, would have been a greater than $1B mistake. They simply know more than me.

 

In light of all of that, I would introduce a suggestion which is best articulated by Buffet: “To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over because we acquired any ability to clear seven-footers.” The investments in Blackberry and EXCO may still work out, but those are 7-foot hurdles. Holdings like JNJ and Wells Fargo are 1-foot hurdles. Running an organization, buying companies, strategic hedging decisions, exploring the market in India and various hedging decisions are all VERY difficult. It makes sense to me and has made sense to me for years, that keeping things relatively simple on the investing side, such that can be done, is a very attractive strategy. Hindsight shows that staying with Wells, JNJ and Berkshire would have served Fairfax far better than the more difficult analyses of EXCO and Blackberry would have been. Many have criticized the hedging of the equity position but I am not jumping on that bandwagon…I get the concept of doing so and, even if it does not work out in the end, the pros/cons analysis of to-hedge-or-not-to-hedge at the time that these were taken out was murky. I don’t think that the pros/cons analysis of 7-footers vs. 1-footers was nearly as murky…1-footers win in a heartbeat.

 

I’ve not sold a share of Fairfax in a long time, and do not anticipate doing so. I would hope that as they move forward, their equity investments move far more towards companies in the 1-footers camp.

 

-Crip

[Uccmal]

Obviously, the underwriting results are nothing short of terrific. Looking back to several years ago, the sentiment on this board, with which I agreed FWIW, was akin to “If they could only get their underwriting under control…”. Well, this seems to have happened, and happened better than I would have hoped for at that time.

 

Now the performance is being hampered by the investing results, which no one really saw coming. Prem and company know more about investing than I can ever dream of, there is no question on that. Accordingly, my criticizing their investing decisions are not unlike a high school freshman criticizing the coaching decisions of Bill Belachick. Back in 2007-2008 I openly called for them to sell their CDS positions when they had doubled in value which, if they did so, would have been a greater than $1B mistake. They simply know more than me.

 

In light of all of that, I would introduce a suggestion which is best articulated by Buffet: “To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over because we acquired any ability to clear seven-footers.” The investments in Blackberry and EXCO may still work out, but those are 7-foot hurdles. Holdings like JNJ and Wells Fargo are 1-foot hurdles. Running an organization, buying companies, strategic hedging decisions, exploring the market in India and various hedging decisions are all VERY difficult. It makes sense to me and has made sense to me for years, that keeping things relatively simple on the investing side, such that can be done, is a very attractive strategy. Hindsight shows that staying with Wells, JNJ and Berkshire would have served Fairfax far better than the more difficult analyses of EXCO and Blackberry would have been. Many have criticized the hedging of the equity position but I am not jumping on that bandwagon…I get the concept of doing so and, even if it does not work out in the end, the pros/cons analysis of to-hedge-or-not-to-hedge at the time that these were taken out was murky. I don’t think that the pros/cons analysis of 7-footers vs. 1-footers was nearly as murky…1-footers win in a heartbeat.

 

I’ve not sold a share of Fairfax in a long time, and do not anticipate doing so. I would hope that as they move forward, their equity investments move far more towards companies in the 1-footers camp.

 

-Crip

 

Jeez Crip, Give yourself some credit.

 

FFH seems to have couple of blind spots.  They are caught somewhere between Graham and Buffett.  Graham's style is to diversify widely among stuggling companies, while Buffett leans toward concentration in really good companies.  Fairfax concentrates on struggling companies: BBRY, RFP, Greek Banks, etc.  - sometimes it works, sometimes it doesn't. 

 

Most of Buffett's investments work.  Its that simple - but perhaps not easy.  Buffett is a very good judge of character as well, which keeps him out of some ugly situations - Salomon Bros. not withstanding. 

 

Fairfax commits alot of unforced errors, and has along history of it.  This behaviour creates a significant hurdle to overcome. 

 

Personally, I am tending toward the Buffett model, after my share of unforced errors.  We will see how it goes. 

 

Al

[Crip1]

 

Jeez Crip, Give yourself some credit.

 

 

 

Al,

 

 

Overconfidence and arrogance have caused far more destruction of wealth than have humility and self-deprecation. Just playin' the odds...

 

 

-Crip

[captkerosene]

Remember Munger sitting on all that cash at DJCO? This is the same thing. When things get cheap PW will be sitting on a huge pile of cash with opportunities galore. Patience will be rewarded.

 

P.S. Love the underwriting results while we're waiting.

[bsilly]

There certainly isn't anything to complain about regarding the operating results. In fact that is what has carried the company for the past few years. The only sore point is investment results, the cost of the deflation and stock market hedges. I'm reminded here of Michael Bury in the Big Short. (Never mind the Fairfax was ahead of most of those guys). We've been here before.

 

As we move into 2016, the stars look to be lining up somewhat. Long bond yields are falling, the Russell 2000 is down, and forward inflation expectations are falling rapidly. As Prem mentioned on the call, even though the CPI is not falling (yet) these contracts could soon become quite valuable as the market wakes up to the real possibility of deflation. I leave you with the following from the St. Louis Fed.

 

https://research.stlouisfed.org/fred2/series/T5YIFR

[Luckyone77]

Obviously, the underwriting results are nothing short of terrific. Looking back to several years ago, the sentiment on this board, with which I agreed FWIW, was akin to “If they could only get their underwriting under control…”. Well, this seems to have happened, and happened better than I would have hoped for at that time.

 

Now the performance is being hampered by the investing results, which no one really saw coming. Prem and company know more about investing than I can ever dream of, there is no question on that. Accordingly, my criticizing their investing decisions are not unlike a high school freshman criticizing the coaching decisions of Bill Belachick. Back in 2007-2008 I openly called for them to sell their CDS positions when they had doubled in value which, if they did so, would have been a greater than $1B mistake. They simply know more than me.

 

In light of all of that, I would introduce a suggestion which is best articulated by Buffet: “To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over because we acquired any ability to clear seven-footers.” The investments in Blackberry and EXCO may still work out, but those are 7-foot hurdles. Holdings like JNJ and Wells Fargo are 1-foot hurdles. Running an organization, buying companies, strategic hedging decisions, exploring the market in India and various hedging decisions are all VERY difficult. It makes sense to me and has made sense to me for years, that keeping things relatively simple on the investing side, such that can be done, is a very attractive strategy. Hindsight shows that staying with Wells, JNJ and Berkshire would have served Fairfax far better than the more difficult analyses of EXCO and Blackberry would have been. Many have criticized the hedging of the equity position but I am not jumping on that bandwagon…I get the concept of doing so and, even if it does not work out in the end, the pros/cons analysis of to-hedge-or-not-to-hedge at the time that these were taken out was murky. I don’t think that the pros/cons analysis of 7-footers vs. 1-footers was nearly as murky…1-footers win in a heartbeat.

 

I’ve not sold a share of Fairfax in a long time, and do not anticipate doing so. I would hope that as they move forward, their equity investments move far more towards companies in the 1-footers camp.

 

-Crip

 

And you haven't even mentioned Sandridge or Resolute Forest Products. Those were 10 footers'. Absolute atrocious stock picking and total head scratchers. I sound like a broken record but I cringe lately when I hear people give them accolades for their brilliant stock picking. You're absolutely right that they'd be much better off had they stuck with the "great companies at a fair price" philosophy. I'm still in and they've had a helluva run this year but I sure hope they go to school on those mistakes. Wish they could've hedged their stock picking instead of their stocks.

[giofranchi]

Running an organization, buying companies, strategic hedging decisions, exploring the market in India and various hedging decisions are all VERY difficult.

 

You may be right. But in the perspective of a whole portfolio, not just a single company, I am grateful I can invest in a company that will do moderately fine if nothing bad happens, and that will perform far better than most other investments if something bad happens instead. Especially because a global deleveraging has historically always been a very treacherous environment for the financial markets.

To hold a large position in such a company right now is imo a 1-foot hurdle.

 

Cheers,

 

Gio

 

[petec]

Obviously, the underwriting results are nothing short of terrific. Looking back to several years ago, the sentiment on this board, with which I agreed FWIW, was akin to “If they could only get their underwriting under control…”. Well, this seems to have happened, and happened better than I would have hoped for at that time.

 

Now the performance is being hampered by the investing results, which no one really saw coming. Prem and company know more about investing than I can ever dream of, there is no question on that. Accordingly, my criticizing their investing decisions are not unlike a high school freshman criticizing the coaching decisions of Bill Belachick. Back in 2007-2008 I openly called for them to sell their CDS positions when they had doubled in value which, if they did so, would have been a greater than $1B mistake. They simply know more than me.

 

In light of all of that, I would introduce a suggestion which is best articulated by Buffet: “To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over because we acquired any ability to clear seven-footers.” The investments in Blackberry and EXCO may still work out, but those are 7-foot hurdles. Holdings like JNJ and Wells Fargo are 1-foot hurdles. Running an organization, buying companies, strategic hedging decisions, exploring the market in India and various hedging decisions are all VERY difficult. It makes sense to me and has made sense to me for years, that keeping things relatively simple on the investing side, such that can be done, is a very attractive strategy. Hindsight shows that staying with Wells, JNJ and Berkshire would have served Fairfax far better than the more difficult analyses of EXCO and Blackberry would have been. Many have criticized the hedging of the equity position but I am not jumping on that bandwagon…I get the concept of doing so and, even if it does not work out in the end, the pros/cons analysis of to-hedge-or-not-to-hedge at the time that these were taken out was murky. I don’t think that the pros/cons analysis of 7-footers vs. 1-footers was nearly as murky…1-footers win in a heartbeat.

 

I’ve not sold a share of Fairfax in a long time, and do not anticipate doing so. I would hope that as they move forward, their equity investments move far more towards companies in the 1-footers camp.

 

-Crip

 

And you haven't even mentioned Sandridge or Resolute Forest Products. Those were 10 footers'. Absolute atrocious stock picking and total head scratchers. I sound like a broken record but I cringe lately when I hear people give them accolades for their brilliant stock picking. You're absolutely right that they'd be much better off had they stuck with the "great companies at a fair price" philosophy. I'm still in and they've had a helluva run this year but I sure hope they go to school on those mistakes. Wish they could've hedged their stock picking instead of their stocks.

 

Correct as you both are in some regards, there are things that worked very well (Ridley) and JNJ/WFC, while they might* be one-foot-hurdles, haven't made a huge amount of money since Fairfax sold them if I have the timing right despite the storm of criticism that those sales generated on this board.  Clearly they have done better than BBRY, but the bottom line for me is that Fairfax have never said they aim to buy great businesses at fair prices.  They are out and out value merchants and that sometimes goes wrong.  The exception is when they buy operating businesses which they have done very well.

 

*It's fairly easy to argue they are not, given the impact of technology on healthcare and possible NIRP on banking.

[obtuse_investor]

2015 Annual Report and Shareholder Letter is out

 

http://www.fairfax.ca/financials/annual-reports/default.aspx