Financial Results for the Year Ended December 31, 2009

[rogermunibond]

Redskin - this is called the fallacy of composition.  If the parts have property than the whole should have the same property.

 

Unfortunately, the 1.3x P/B in ORH and Zenith reflect a control premium that FFH pays to take over the entire enterprise.  That premium does not apply for valuing FFH however.

[goldfinger]

Sure, but Prem is not famous for overpaying either...

[Uccmal]

I would agree with Redskin on this point.  FFH as a collective of insurance companies is certainly not of lessor value than ZNT, ORH, or NB.  If it were put up for sale it would likely fetch about 1.4 x book itself in todays environment. 

 

Further, if you look on the back pages of any of the ARs it lists the closing BV and stock price each year.  The average price to book is 1.3 for 2000-2008 (9 years - including 5 of 7 lean years).  The lowest ratio was 2002 just after the NYSE listing during the first short attack.  That year it closed at 98% of book value.  There were only two years of hard market during that period.

 

In summary, the present price is ABNORMALLY cheap considering all the improvements. It should be at 1.4 x book, as a minimum, no matter what the state of the insurance market.  That gets me $518 per share. 

 

Either that or I am completely wrong and the prices from 2000 to 2008 were abnormally high. 

[omagh]

Roger,

 

Another insurance company buyer would certainly pay a similar valuation.  Seth Klarman wrote about this in Chapter 8 - The Art of Business Valuation in his book Margin of Safety.  It's worth the time to read if you can.  On this type of valuation, he writes: "While the stock market's vote, especially over the long run, is not necessarily accurate, it does provide an approximate near-term appraisal of value."

 

Similarly, Fairfax could be considered the sum of its parts and a control buyer would likely pay a similar premium.  It's an indicator of a discount to intrinsic value at current market prices.

 

-O

Redskin - this is called the fallacy of composition.  If the parts have property than the whole should have the same property.

 

Unfortunately, the 1.3x P/B in ORH and Zenith reflect a control premium that FFH pays to take over the entire enterprise.  That premium does not apply for valuing FFH however.

[Uccmal]

I am thinking that it doesn't help if Prem is issuing shares at 95% book every 4 months.  Right now the market is accounting for more below book dilution. 

[Viking]

Regarding valuation, it looks to me that FFH is cheap but not crazy cheap today (based on where other insurance companies are trading). For example, most well run re-insurance companies are trading well below book value today. Most insurance companies are trading at multi-year lows: Markel is trading at 1.2xBV WR Berkley is trading at 1.1xBV.

 

Given this environment, Prem is doing exactly what he should be doing... buying great companies at multi-year lows (i.e. cheap prices). He is taking what Mr. Market is giving him. Yes, I would like it better if he was issuing FFH shares at 1.5x BV and buying other well run companies at 1.3xBV but that option is not available today. Period. Most of the purchases have been funded via earnings; the amount of dilution has been more than acceptable to me and I accept the price as a necessary evil.

 

To join the ranks of the elite insurance companies FFH cannot rely solely on investment returns. At some point underwriting results must also join that elite group. I like the Zenith purchase because they appear to be a very good underwriter and this is a skill set FFH needs to get better at. We will only know if this will happen given time; until then I do not see FFH shares trading at a tier 1 multiple to BV (that is not to say that we will not see some volatility in the share price). The good news is we all should have time to accumulate shares. The bad news is price appreciation will be driven by earnings and not a multiple expansion (as long as the soft market continues). When the market hardens I expect most insurance companies will see a nice pop in price as Mr. Market decides it is time to buy..  

[DCG]

The only thing I'm not impressed with is the investment results for the quarter. Prem seems to still have a good chunk of cash invested in some crappy companies.

[Viking]

DCG, I also wonder at some of the companies FFH has purchased. I try not to judge investment results Q by Q as the volatility is way too large (and FFH clearly states it prefers a lumpy 15% ROI to a smooth 12%). When I look at the entire basket of holdings in the FFH portfolio then the individual holdings make more sense (pretty diversified) although not something I am comfortable doing.

 

Most importantly, when I look at the annual returns of the investment portfolio FFH continues to hit home runs. Their long term track record is simply outstanding and my guess is they will continue to outperform their peer group (on investment results).

[DCG]

DCG, I also wonder at some of the companies FFH has purchased. I try not to judge investment results Q by Q as the volatility is way too large (and FFH clearly states it prefers a lumpy 15% ROI to a smooth 12%). When I look at the entire basket of holdings in the FFH portfolio then the individual holdings make more sense (pretty diversified) although not something I am comfortable doing.

 

Most importantly, when I look at the annual returns of the investment portfolio FFH continues to hit home runs. Their long term track record is simply outstanding and my guess is they will continue to outperform their peer group (on investment results).

 

Agreed. I usually tell myself that Prem and crew must see something that I'm missing most of the time, although seeing companies like Dell (one of their largest holdings) reporting bad results quarter after quarter makes me question some of their recent decisions.