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At What Level is FFH considered a value?


ok22
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;) Title is an attempt at some BH humor given the volume of BH related posts.  No offense to anyone.

 

$375/sh US FFH pinks book value at 3/31/2010.  Stock at $360=0.96x Book

Year end book should be in the $350s at worst even if the stock and put portfolio is more negative.

Stock market decline should help with insurance hard market emergence as capacity is constrained and paper gains for other insurers investment portfolio disappear?

 

Who is selling at these prices?  Volume has spiked today.  Cannot imagine the big 3-4 shareholders needing to liquidate so it has to be the marginal but still not insignificant holders.  Pabrai types (just using an example not casting any opinion on Pabrai's abilities or situation) getting or planning for redemption calls given that their portfolios as reported on 3/31/10 have dropped a lot in the 2Q? 

 

The FFH and BRK share price drops make no sense to me.  Differing opinions are welcomed.  Just trying to start a meaty non-BH related discussion !!!

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ok22, we can all agree that underwriting results for FFH will be poor (with a CR over 100). Interest and dividend income will be quite good. At this point in time, realized and unrealized investment gains are likely quite ugly (with the portfolio dropping in value more than it was up in Q1).

 

And hurricane season starts June 1 (and the forecasts I read call for an above average number of hurricanes).

 

When I weave it all together I get lots of near term risks (looking out 3 to 6 months) and as a result I am not surprised FFH has sold off; I am actually surprised that it has not sold off more. As I have said before, I expect FFH to not be as volatile as in the past now that it is no longer listed on NYSE.

 

Unless the stock gets crazy cheap, I will wait to see what happens to equity markets before buying. Crazy cheap to me is trading at 90% of BV. My guess is BV today is about US$360. If the price dropped below US$330 I would be interested. I also expect that FFH has been active in the markets since reporting Q1 results (either selling or hedging further).

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I expect FFH to trade at about book value +/- 10%, which is where it has traded for a majority of the time over the last 10+ years.  When it gets a lot lower or higher than that, I think it is a good candidate to buy or sell (respectively).  They have always been fantastic on the investing side and "okay" on the insurance side, the combination adds up to a valuation based on tangible book value IMHO.

 

There was a great chance to buy it in early to mid 2009 when the stock was around $250 and it was pretty clear that book value was going to be at least $300, a rare opportunity to buy at an almost 20% discount to book.  That is where I recently bought some :-).

 

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Who is selling at these prices?  Volume has spiked today. 

 

Did you notice the large divergence in value between the TSX and Pink prices on the close yesterday when liquidity dried up for the pinks.  Tried to swap out of my pinks and into TSX but I didn't get the order in fast enough.

 

 

 

 

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Just to stir the pot!

 

We think it'll be somewhere around .75-.85x BV, with a downward/neutral bias vs upward - & by late October/early November; we also have our full position hedged. An illuminating exercize is to compare the closing price 2 weeks following an earnings release/to the reported BV, for each of the last 20 quarters (5 yrs). Then graph & add the significant events that were occurring at the various times. When Katrina hit the multiple was around .7x

 

We have the gulf coast full of oil slick, its warming up the sea (raising hurricane severity), we're coming into the hurricane season, & the head of Lloyds has pointed out that the industry is unduly stressed. High payouts funded by suddenly less liquid assets (eurobond investments) & delayed reimbursements (BP), is not a good combination in an average year .. & if this turns out to be an above average year?

 

Hopefully it doesn't happen.

 

SD

 

   

 

 

 

 

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I sold my FFH Leap today. In retrospect I should have exercised it at $399, collected the dividend and sold. I lost about 15% but have gained long term holding status. I see FFH treading water at best over the next 6 months and couldnt risk loosing my gains due to a hurricane or some other cat. Options are tough because you cant hold or really double down much.

 

I plan to buy a few shares, and will move in and build a full position on any weakness. Thanks for the advice guys, with my luck FFH will run to $400 on some strange news.

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We have the gulf coast full of oil slick, its warming up the sea (raising hurricane severity), we're coming into the hurricane season...

 

Maybe we will get to see a real life test of the old thesis: "Oil on troubled waters may stop hurricanes"  ???

 

http://www.newscientist.com/article/dn7726-oil-on-troubled-waters-may-stop-hurricanes.html

http://www.wunderground.com/blog/JeffMasters/comment.html?entrynum=1476

http://www.pnas.org/content/102/32/11148.full.pdf+html?sid=a18e764b-6527-4da3-8c8b-4085e647d998

 

Cheers

 

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Sell 1/2 the position into the market for cash, & sit on it. Repurchase (hopefully for less) at the end of the hurricane season. The cost is 2 commissions, offset by the cash difference of the hedge gain/(loss).

 

This time around we sold our entire position as (1) we see the P(x) of the industry going lower as being roughly 3-4x the P(x) of it going higher, & (2) we see continuing Euroland disruption over the next 6 months. Essentially we're raising contingency cash & targeting specific industries.

 

SD

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"There are 60,000 economists in the U.S, many of them employed full-time trying to forecast recessions and interest rates, and if they could do it successfully twice in a row, they'd all be millionaires by now."

-Peter Lynch

 

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I think we all agree that value analysis are more an art than a science. In case of FFH it is even more difficult because they are so many moving parts. Any way I tray to calculate IV of Fairfax (future cash flows, sum of internal parts, possible increases in BV) I am getting much higher value than current BV.

The question is why would you like to sell major position now?

It may be that as you said FFH can go lower as before, but what happen if you are wrong?

What happen if finally FFH gets valuations it deserves?

I know I am dreaming, but I am not as courageous as you are, every time I sell a little bit, because of my margin concerns, I fill sed, I am always afraid that I may not see it that low again.

 

Good luck to us all, Jack W.

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For me its highly related to the fact that I have leaps and I cant hold them forever. At some point they will be exercised and I dont have the cash to hold more than 10% of the shares. So my focus is not what is FFH worth, its more what will FFH trade at over the next 6 months. If I sell and FFH rallies over the next 6 months (as happened today, then I miss out on 10% - 20% of upside). If the market turns down, or we have a large cat then I avoid a 30% - 50% loss. Its just not worth it for me, because I cant hold through the cycle.

 

I am guessing FFHs book value is less than its current value and I believe it will trade down to reflect that. Top insurers (underwriters) are trading below book so I dont see FFH getting the multiple it deserves (1.2 - 1.5) BV. Its intrinsic value is far higher, but with options your investment game is timed. I would roll over the options, but there are no new 2012 leaps due to leaving the US exchange.

 

We also have what could be a very nasty hurricane season forming. We have had 2 non event seasons and I dont think that trend will continue.

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Top insurers (underwriters) are trading below book so I dont see FFH getting the multiple it deserves (1.2 - 1.5) BV.

In what way is underwriting more important than the way capital is managed and how do you get 1.2-1.5?

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Top insurers (underwriters) are trading below book so I dont see FFH getting the multiple it deserves (1.2 - 1.5) BV.

In what way is underwriting more important than the way capital is managed and how do you get 1.2-1.5?

 

 

My 2 cents:  there are a few exceptions eg BRK & FFH, but excellent underwriting earnings that are consistently good are thought to be more reliable and thus higher quality than high investment earnings that  may be the result of one off situations and may not be as reproducible going forward.

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Personally I just want a return on my money (underwriting or investing - cash is cash), but insurers seem to be valued on underwriting. Top underwriters seem to get better multiples to book value, sometimes getting up to 2x BV. Right now many top underwriters can be bought at underbook value. So I thought it was unlikely that FFH would be valued at IV.

 

1.2 BV - 1.5 BV is what I would be comfortable holding a top insurer at (either underwriting or investing, or both). Its not really IV, but I am fine at any point under that amount. Above that and things get a bit more complex, and I have to consider selling depending on whats available in the market and the outlook for the industry.

 

 

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Top insurers (underwriters) are trading below book so I dont see FFH getting the multiple it deserves (1.2 - 1.5) BV.

In what way is underwriting more important than the way capital is managed and how do you get 1.2-1.5?

 

 

My 2 cents:  there are a few exceptions eg BRK & FFH, but extraordinary underwriting earnings that are consistently good are thought to be more reliable and thus higher quality than high investment earnings that   may not be as reproducible going forward.

 

 

 

It is far more likely that Berkshire Hathaway and Hamblin Watsa will continue to earn satisfactory returns on investments than any particular insurer continuing to earn above average returns on underwriting.  Even the companies you think of as good underwriters that focus on a small % of the total market will face ever increasing competition and will likely earn less than their historic return on capital if they don't know how to allocate capital.    

 

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Myth, That of course is the problem with call options.  I would sell a chunk of my options today if I could roll over into the 2012s.  In fact, what I would likely do and have done in past years is get rid of the majority of my 2011s (save a few to exercise), and buy the next year out.  But we no longer have that choice so I have whittled my 2011 position down to a size that I should be able to handle when I exercise them. 

 

By the end of the summer I will likely have parted with all the highest strike options.  That will enable me to delay capital gains into 2011, or later. 

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Smart man, I wish I had more options with my options. I felt trap because I couldnt exercise to hold and was at the whims of the market. Many sold and collected the Div in Dec/Jan and that proved to be the smart move. I dont know how short term money managers do it. Value goes out the window and you really do try to time the market when you dont have the discipline to hold or simply cant for whatever reason. I prefer vanilla value investing.

 

Very interesting lesson. Now I have to buy and hold FFH the old fashion way via common. Hopefully we get a pull back soon so I can get started. Do you typically by Deep in the Money for some light leverage, or go for out of money expecting definite appreciation with options. I have a few other set of Leaps on some other investments.

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Sharper, DynamicPerception - at what level will you get back into FFH?  That is the tough question and why I have trouble selling FFH common. 

 

Though I view FFH as a long-term hold and believe it's still well below IV, the rumors of a worse-than-normal storm season have scared me, together with seeing FFH's trading pattern over the past 4 summers (I don't like to look at patterns either but ... the pattern is there, presumably resulting from human emotion and short-term traders, and these seem to control short-term prices).  So against better judgment, I sold some FFH for the first time in 10 years, parting with half my position in the past few days (though making sure not to sell the same day as Myth :-).  Perhaps I will regret it and not be able to buy them back, though I still hold half for that reason.

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Keep in mind that a lot of people on this board have a full position in Fairfax. I wouldn't fear to hold a large position, which in fact I do, with my 'preserve my capital' money, but $380 is not where I would place my 'don't tell your neighbors' money.

 

 

Well put as a turn of phrase!  :)

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