FFH results

[Jurgis]

During one of the AGM's I attended (2010?), Prem's stated goal was "15% long term return  from here on" (no more 20% was what he was actually saying). How's that coming?

 

Prem stated the same goal in last year's AGM.

[shalab]

There is another half a billion dollar of unrealized losses with CPI derivatives sitting on the balance sheet. After the upcoming dividend, the P/B is about 1.35 or so...

[wisdom]

http://finance.yahoo.com/news/edited-transcript-ffh-earnings-conference-023929504.html

 

[John Hjorth]

The net return over the last 2 years is essentially flat after inflation - similar story over the last 5 years.

The only constant has been the dividend, and macro bets that would have paid well - had the event materialized 

 

To the technically minded;

Isn't this really just  a high quality bond + a long straddle on the market?

Interest on a $450-650 bond (share price) less the cost of the straddle = the dividend? 

Dividend - inflation on the bond = roughly zero?   

 

If you have the expertise to do this yourself, the power to you; but if you don't - at least recognize that this is essentially what you are getting. There's nothing wrong in that.

 

FFH is a great training ground, but everyone eventually has to fledge.

 

SD

 

Duly noted, SharperDingaan, - great post - about cutting it to the bone.

 

Also H/T to especially Vinod and tombgrt in this topic [with regard to the last post from tombgrt, racemize not forgotten here]. I think it's time for me to move on here.

[TerryO]

Not forgotten should be that under uncertainty in the conditional outcomes of events the right decision can produce the wrong outcome. Hockey players who are unaware of this fact skate toward where the puck was rather than where the puck will probably be. Metaphorically speaking, Watsa and company have an extraordinarily successful record of skating toward where the puck will probably be.

[Valuebo]

The issue is that they positioned themselves as if their view was the only possible outcome. People, including myself, have been saying this for years.

[John Hjorth]

This somehow reminds me of Late Jens Otto Kragh, former Danish Premier Minister: "One has a view untill taking a new.".

 

The Shareholder Letter from Mr. Watsa to come in March will be an interesting read from this angle.

[vinod1]

Prem is a genuinely nice guy. I like him. I learned a lot from him and Fairfax has been a very profitable investment for me. So I am rooting for him and Fairfax.

 

I have been critical of him but that is because I hold him in higher regard that the vast majority of the other CEO's.

 

All I am asking is a bit of consistency and respect for the intelligence of its shareholder base. I understand that Fairfax had much success in the past by taking a point of view about the future, presenting pretty good reasons for that and optimizing the portfolio to take advantage of it. 

 

Just admit that this time it did not work out. That is the nature of macro bets. This inability to admit to mistakes has been a recurring theme the past few years on other things as well.

 

Vinod

[petec]

I didn't fully understand the hedges until I read Murray Rothbard's history of the Great Depression.  To put the opposite case, which is what I think Prem at al are seeing:

 

Debt deleveraging?

 

All done.

 

Debt deleveraging might finally start but in a positive way, by growing GDP faster than debt.  Fairfax were worried it would happen in a negative way, i.e. by paying down debt in an environment of no or negative growth.  Unlike the left, Fairfax seem to understand that growing GDP faster than debt cannot be done via stimulus; it can only be done by deregulating and letting free markets develop new products and services.  That might finally happen in the world's biggest economy.

 

"worried about the speculation in financial markets and the potential for a 50-100 year financial storm"?

 

No more.

 

"However, we have warned you many times in our Annual Reports of the many risks that we see and the great disconnect between the markets and the economic fundamentals."

 

No more.

 

They are still wary and stated on the call that Trump's protectionist policies might still trigger a depression.  They also stated clearly that 20-30% drawdowns might become normal (again).  But they also explained that if the US starts to grow strongly you need to worry less about Europe and China - which is right - and they have lots of cash and their deflation swaps if the worst happens. 

 

They are hardly going all in.  They are basically sitting on cash waiting for individual opportunities.  They're just saying that the risk of a depression is smaller when the President isn't trying to regulate and tax the life out of the private economy and replace it with public spending.  And they are right.

 

"Most investors consider the 2008/2009 recession and crash to be a once in a generation event – and it’s over! We differ because we think we escaped the serious adverse consequences of that recession as a result of huge fiscal stimulus from the U.S., even greater fiscal stimulus from China and the reduction in interest rates to 0% with massive monetary stimulus in the U.S., Europe and Japan through QE programs. There is nothing to fall back on now if the U.S. and Europe slip back into recession."

 

Now we have Trump!

 

The policy mix seems to have shifted completely.  It matters that you've fun out of monetary stimulus if monetary stimulus is all you've got.  Trump doesn't seem supportive of monetary stimulus.  In fact he would like to reduce it, and replace it with a booming private economy and a bit of upgrading infrastructure.  If he gets that right, the inability to cut rates further won't matter. 

 

"The potential for unintended consequences, and therefore of pain, is huge."

 

There can be no pain with Trump as president.

 

They clearly stated on their call that Trump's protectionism could start a depression and that the market might return to 20-30% drawdowns in the normal course of business.  They have their eyes wide open to the risks.  The point is that they think the risks of a depression have reduced - and they never cared about a 20-30% stock market selloff - in fact they probably want one.  (They were hedging against a 1929-33 style 90% selloff.)

 

I've spent a lot of time trying to understand these hedges and I buy the idea that they were to protect the company against a very specific risk, which has reduced.  I find it much harder to accept the crappy stockpicking, and I find it very hard to square some of the stockpicking with their views of the macro risks (in some cases their stocks would have gone to zero and the hedges would not have come close to fully covering the losses).  So while it may seem like I am mindlessly defending Prem, I'm not: I just think that those of you who are focussed on "the hedges were a bet and they haven't admitted they were wrong" are asking the wrong questions. 

[kilroy04]

For years and years the complaint was that the underwriting wasn't good. It was only the investing that saved them.  Now it's the opposite.  Somehow they made 10B investing.  It's hard to believe they won't make significant sums investing again. 

 

Regarding admitting being wrong, perhaps that word wasn't used but there was clear talk of results not being good.  Perhaps another way of saying it?

[chrispy]

Between holding cash and the CPI bet, they are still 'hedged' for a downturn compared to most others.  With the cash and focusing on acquiring insurance I think they are in a better position. 

 

While I agree it is a concern that they removed the equity hedges at the top of the bull market, something to think about is, if they maintained the hedges during this run up, what would folks be saying?  Would we have more or less faith in FFH?

 

He did mention in the earnings call that results have been bad and mistakes were made.  I too am hoping that there is some further discussion of this in the letter to shareholders. 

 

I thought it was interesting in the earnings call that Prem mentioned something like, "we are also less concerned about hedging our equities because many positions have already dropped ~30% and are less likely to now."  Did they drop because they were bad picks or because of Mr. Market?  Can they still drop further?  Have they hit bottom and will rebound significantly?

[Estimated Profit]

As far as underwriting is concerned... when was the last large catastrophe that negatively impacted FFH?

 

What will combined ratios look like when the next happens?

[StubbleJumper]

As far as underwriting is concerned... when was the last large catastrophe that negatively impacted FFH?

 

What will combined ratios look like when the next happens?

 

 

I'd say that FFH is so geographically diversified that there are few cats that would really affect their consolidated CR.  Maybe if we had another Katrina, or if we had a repeat of the four horsemen of the apocalypse (Charlie, Frances, Ivan and Jeanne), it would make a difference.  But what was the impact of the wildfires in Fort MacMurray?  Pretty small, despite the devastation.

[ICUMD]

Some interesting points about FFH's portfolio.

 

Tracking Prem Watsa's Fairfax Financial Holdings Portfolio - Q4 2016

 

Update https://seekingalpha.com/article/4047513?source=ansh

[A_Hamilton]

As far as underwriting is concerned... when was the last large catastrophe that negatively impacted FFH?

 

What will combined ratios look like when the next happens?

 

 

I'd say that FFH is so geographically diversified that there are few cats that would really affect their consolidated CR.  Maybe if we had another Katrina, or if we had a repeat of the four horsemen of the apocalypse (Charlie, Frances, Ivan and Jeanne), it would make a difference.  But what was the impact of the wildfires in Fort MacMurray?  Pretty small, despite the devastation.

 

They've bought significant catastrophe cover for medium sized events. Reinsurance markets are so soft right now they are becoming a buyer of cat cover rather than a seller. Go back and look - Fort McMurray would have been a larger for FFH absent its re cover.

[Luckyone77]

Their hedges were a big mistake, but if they had outperformed the markets with their stock selection there wouldn't be any problem.  The real problem is their disastrous stock selection of the last years.

 

Agreed 100%!

Last year again they lost money with their equity investments. It’s hard to believe…

I still like the business model of course, and I still like management (they have done a great job on the operating side of the business in recent years).

But insurance without good investment capabilities is clearly unsatisfactory: they should prove they can be good stock pickers again.

 

Cheers,

 

Gio

 

So, they've become an excellent insurance company but a horrible capital allocator. And I mean REALLY horrible. I've dumped the bulk of my Fairfax stock at this point. Hard to justify the results but, nevertheless, I don't blame them for the hedges. I shared their beliefs and it was a safe bet that simply didn't pan out. It happens. But no way you can justify some of these horrendous stock purchases. A 10 year old should have known several of them were losers with little potential and bad fundamentals.

 

Of course, now that I've sold my shares it's probably a good time for the rest of you to buy. The stock will probably take off!

 

 

[TwoCitiesCapital]

Their hedges were a big mistake, but if they had outperformed the markets with their stock selection there wouldn't be any problem.  The real problem is their disastrous stock selection of the last years.

 

Agreed 100%!

Last year again they lost money with their equity investments. It’s hard to believe…

I still like the business model of course, and I still like management (they have done a great job on the operating side of the business in recent years).

But insurance without good investment capabilities is clearly unsatisfactory: they should prove they can be good stock pickers again.

 

Cheers,

 

Gio

 

So, they've become an excellent insurance company but a horrible capital allocator. And I mean REALLY horrible. I've dumped the bulk of my Fairfax stock at this point. Hard to justify the results but, nevertheless, I don't blame them for the hedges. I shared their beliefs and it was a safe bet that simply didn't pan out. It happens. But no way you can justify some of these horrendous stock purchases. A 10 year old should have known several of them were losers with little potential and bad fundamentals.

 

Of course, now that I've sold my shares it's probably a good time for the rest of you to buy. The stock will probably take off!

 

I'm torn -

 

I loved them when they were hedged, but recognized that it severely constrained EPS unless if they were correct. Now, they're completely unhedged at a time that I think it's more obvious than ever that you'd want to be, and I clearly don't understand their investment thoughts/process at all, but EPS has the potential to improve meaningfully now that their investment results may not be constrained...of course, the latter point cuts both ways (EPS can move meaningfully downward too once the billions are invested).

 

I have bought more when prices were around $430-450 USD, but I'm far more uneasy about holding it long-term than I was prior to this year. More shares but in weaker hands I suppose....

 

 

 

[petec]

Now, they're completely unhedged

 

 

...But VERY long on cash and short on duration, and in no rush to invest it seems, so still very well positioned for a downturn.

 

(Reminds me of Parsad's smart observation when they took the first block of hedges off: who needs hedges when you have that much cash?)

[vinod1]

 

They clearly stated on their call that Trump's protectionism could start a depression and that the market might return to 20-30% drawdowns in the normal course of business.  They have their eyes wide open to the risks.  The point is that they think the risks of a depression have reduced - and they never cared about a 20-30% stock market selloff - in fact they probably want one.  (They were hedging against a 1929-33 style 90% selloff.)

 

I've spent a lot of time trying to understand these hedges and I buy the idea that they were to protect the company against a very specific risk, which has reduced.  I find it much harder to accept the crappy stockpicking, and I find it very hard to square some of the stockpicking with their views of the macro risks (in some cases their stocks would have gone to zero and the hedges would not have come close to fully covering the losses).  So while it may seem like I am mindlessly defending Prem, I'm not: I just think that those of you who are focussed on "the hedges were a bet and they haven't admitted they were wrong" are asking the wrong questions.

 

You say, Trump's policies might cause a depression. A depression!! But somehow a depression would only cause a garden variety stock market correction of 20-30%.

 

I do not think depression means what you think it means.

 

Vinod

 

 

[cwericb]

Criticizing Fairfax for hedging is like criticizing someone for buying fire insurance on their home. 

 

Then, five years later when the house hasn’t burned down they get criticized for wasting money on buying fire insurance.

 

With 20/20 hindsight they say that the insurance obviously wasn’t needed because the house didn’t burn down.

 

If memory serves me right, Prem initially stated the hedges were taken out as protection for a portion of their float. After all, they are in the insurance industry.

 

[vinod1]

Criticizing Fairfax for hedging is like criticizing someone for buying fire insurance on their home. 

 

Then, five years later when the house hasn’t burned down they get criticized for wasting money on buying fire insurance.

 

With 20/20 hindsight they say that the insurance obviously wasn’t needed because the house didn’t burn down.

 

If memory serves me right, Prem initially stated the hedges were taken out as protection for a portion of their float. After all, they are in the insurance industry.

 

No it is not.

 

There is difference between "hedging" and "insurance".

 

Vinod

[racemize]

Criticizing Fairfax for hedging is like criticizing someone for buying fire insurance on their home. 

 

Then, five years later when the house hasn’t burned down they get criticized for wasting money on buying fire insurance.

 

With 20/20 hindsight they say that the insurance obviously wasn’t needed because the house didn’t burn down.

 

If memory serves me right, Prem initially stated the hedges were taken out as protection for a portion of their float. After all, they are in the insurance industry.

 

If it were actually for protecting their float, then they couldn't take them all off now that "Trump" has happened. 

 

If they can choose when to put them on or off then they simply are not required.

[RichardGibbons]

If it were actually for protecting their float, then they couldn't take them all off now that "Trump" has happened. 

 

If they can choose when to put them on or off then they simply are not required.

 

Hmm. When my first kid was born, I bought life insurance when my death would put my family in a hard situation financially. I got rid of it a decade later when we had enough money that my death would be no more than an inconvenience.

 

So I guess my life insurance was never required since I chose to remove it later?

[racemize]

It is by definition not required if you can and do choose not to have it.

 

"essential, needed, or necessary--set out by rule; compulsory"

[petec]

 

They clearly stated on their call that Trump's protectionism could start a depression and that the market might return to 20-30% drawdowns in the normal course of business.  They have their eyes wide open to the risks.  The point is that they think the risks of a depression have reduced - and they never cared about a 20-30% stock market selloff - in fact they probably want one.  (They were hedging against a 1929-33 style 90% selloff.)

 

I've spent a lot of time trying to understand these hedges and I buy the idea that they were to protect the company against a very specific risk, which has reduced.  I find it much harder to accept the crappy stockpicking, and I find it very hard to square some of the stockpicking with their views of the macro risks (in some cases their stocks would have gone to zero and the hedges would not have come close to fully covering the losses).  So while it may seem like I am mindlessly defending Prem, I'm not: I just think that those of you who are focussed on "the hedges were a bet and they haven't admitted they were wrong" are asking the wrong questions.

 

You say, Trump's policies might cause a depression. A depression!! But somehow a depression would only cause a garden variety stock market correction of 20-30%.

 

I do not think depression means what you think it means.

 

Vinod

 

Perhaps I did not write clearly enough.

 

A depression - causing a 90% drawdown - is what they have been hedging against.

 

Trump's deregulatory policies reduce this risk.

 

However they still see clear risks.  One is that Trump's protectionist policies cause a depression.  Another is a 20-30% drawdown in the normal course of business (i.e. not in a depression).  This is my reading of what they said on the call.

 

This comment was in response to the idea that since Trump they do not see risks.  They do.  That is why they are at high cash levels and duration down to 1.  With that positioning, they no longer need the hedges.