FFH or ORH: which do you like more right now?

[Mungerville]

The trust preferreds are economically debt instruments and are tax deductible so they are cheaper than preferred equity capital but a lesser form of capital.  Rating agencies, however, may view trust preferreds like preferred shares (although they are not) for capital purposes so if ORH can use these things to act like preferreds when they are not for the purposes of the rating agencies and also have them tax deductible then that is a more efficient way to raise capital relative to preferred shares.

 

Now, having said this, they may just want to raise capital now, keep the preferred shares, and build the capital base to really expand in a hardening market.

 

 

 

[StubbleJumper]

 

Now, having said this, they may just want to raise capital now, keep the preferred shares, and build the capital base to really expand in a hardening market.

 

 

That strikes me as a little counterintuitive.  Looking at their Net Written:Statutory Surplus ratio, I'd say they could increase their premiums by about 50% (ie, roughly $1b) without adding any new capital.

 

Very interesting move.  Looking forward to see whether Prem has an ace up his sleeve!

[oec2000]

Now, having said this, they may just want to raise capital now, keep the preferred shares, and build the capital base to really expand in a hardening market.

 

The amount needed to buy back the As is so small as to be insignificant in the bigger scheme. If they really wanted to build up capital, they could simply stop buying back shares.

 

[oec2000]

Stop buying back common shares, I meant.

[Guest ericopoly]

Stop buying back common shares, I meant.

 

They bought back zero shares in Q4 despite favorable prices.  So it looks like they've already taken that step.

 

[Myth465]

What is everyone doing with ORH.A

 

Any sellers at $20

[zarley]

What is everyone doing with ORH.A

 

Any sellers at $20

 

Hold.  My avg. cost is around $17.75, and the yield is still 10%.  I might get tempted to sell some if it got over $23 (or if something crazy happened with the common or FFH), but at the moment, I plan on holding indefinitely.

[watsa_is_a_randian_hero]

ORH bought back about 1/3 of the total amount of series B preferreds outstanding over the last quarter.  I think thats a better buy @ 13.  As soon as interest rates start to climb back to normal levels, this will have a higher coupon, and will climb closer to par.

[Myth465]

We are now closing in on $22, im getting close to selling. HRP-D seems like a decent replacement.

 

 

[basl1]

What is HRP_D and why do you like it? ???

[Smazz]

We are now closing in on $22, im getting close to selling.

 

no one ever went broke taking profits. ;)

[Myth465]

HRP is a convertible preferred for HRPT Properties Trust. HRP should be able to pay the div of 13% and the preferred acts as a LEAP for HRP. There is a thread about it in the regular board and I have a fair bit. The more I read and learn about it the more I like it. Seems like a safe 13% with an equity kicker. ORH-A is great but, not too much upside aside from the DIV.

[turar]

What about the common for HRP? Seems like it's yielding 11%.

[Myth465]

You get a higher yield and to me the preferred is safer. 13% or so, and the preferred seem to be tracking the common in terms of appreciation.

[kmukul]

So whats the point in favor of FFH i get the ORH is selling at much more discount then book value then FFH

[ragnarisapirate]

So, as of right now, after the earnings releases, which do y'all like more?

 

Personally, I am a slightly bigger fan of ORH; I am looking forward to seeing what will happen to their price tomorrow, since I was fortunate enough to have bought some shares today!

[ERICOPOLY]

A week or two ago some people were expecting ORH to outperform FFH in Q2.

 

Scoreboard for Q2:

 

ORH book  +18.5%

FFH book  +23.5%

 

 

[Cardboard]

Fairfax has $3.53 in investments per $1 of shareholder equity while Odyssey Re has $2.66. There is no way that Odyssey Re can outperform Fairfax during such a period of massive investment gains.

 

It is the runoff that creates this boost, but it also creates a drag in earnings when there is no big gains. Until it is gone, which will take quite a while, it will be a problem for Fairfax preventing analyst and institutions to give them a fair valuation. They rely heavily on operating earnings in their analysis.

 

Northbridge and Crum & Forster are also turning into real dogs. If they are that selective with underwriting, then someone will have to find real good arguments to convince me that these numbers are normal. They are not the numbers of disciplined underwriters. They don't walk the talk.

 

You may think that this is unimportant looking at the 1985 to 1999 period valuation, but your are not comparing apples to apples. Back then Fairfax was a fast grower via acquisitions. While they will grow in the future, at their current size it will be slower and I assume more internal. So people will compare them to Chubb and others. To get premium valuation, they will need stability in earnings and underwriting profits.

 

Cardboard

 

[Guest longinvestor]

Fairfax has $3.53 in investments per $1 of shareholder equity while Odyssey Re has $2.66. There is no way that Odyssey Re can outperform Fairfax during such a period of massive investment gains.

 

It is the runoff that creates this boost, but it also creates a drag in earnings when there is no big gains. Until it is gone, which will take quite a while, it will be a problem for Fairfax preventing analyst and institutions to give them a fair valuation. They rely heavily on operating earnings in their analysis.

 

Cardboard

 

 

It has been my great pleasure that analysts' 1-dimensional evaluation has given me the opportunity to accumulate FFH over many years. We have heard the line from WEB "Great businesses with one-time problems"....make that "great business with 1 -time problems but with many-years-of wrong evaluation" when it comes to FFH.

 

On a related note, the "primacy of the income statement" has ruled over the street for a decade or longer and in my career working for large public corporations, I have seen the resulting dysfunctionality on how they are run. Well, we know what we got for that right? Balance sheets which are so poor or so unreadable that corporations are being forced to hide them. I will betcha most of the bozo analysts covering businesses such as FFH cannot read a balance sheet in making their evaluation. More power to them, I would love for my FFH buying spree to continue. Or BRK-B for that matter.

 

[ERICOPOLY]

Northbridge and Crum & Forster are also turning into real dogs. If they are that selective with underwriting, then someone will have to find real good arguments to convince me that these numbers are normal. They are not the numbers of disciplined underwriters. They don't walk the talk.

 

What happens to the combined ratio when you write less business but your expenses do not go down?

 

They could fire some underwriters, but it would send the message that if you hold on prices and write less business then you will lose your job.  It would also leave them shorthanded when the market turns.

[KFRCanuk]

I get the feeling that over the long term, ORH is going to get gobbled up by FFH. Just like the Northbridge deal http://www.fairfax.ca/Assets/Downloads/Press/fpr2008-12-01.pdf, maybe you can expect a 30% premium based on the closing price before the offer.

 

I wish I had trading account that did not gouge me when buying USD's. Whether FFH buys ORH or not, I'd still get paid.

[Uccmal]

They could fire some underwriters, but it would send the message that if you hold on prices and write less business then you will lose your job.  It would also leave them shorthanded when the market turns.

 

I agree Eric... Keep the people, pay the salaries and wait it out.  Most of the companies that will explode out of this recession will do just that. 

 

If I thought I was going to get laid off because there wasn't enough business I would be furiously trying to write it which of course would lead to massively higher combined ratios. 

 

Cardboard, please show me a company somewhere that has stability in earnings right now.  The reason FFH is not trading up has little to do with any of your observations.  It has more to do with being at the start of Hurricane season.  As you have said before it consistently ends the year at about 1.25 book value, sometimes getting higher in the meantime. 

[Cardboard]

Longinvestor,

 

I am sorry to disappoint you, but unless Fairfax valuation starts to improve soon, it will be bad for the company long term. I mean not as good as what it should be. It is great for me (value trader?), but bad for you (long term holder?). You will get a 10 to 12% grower instead of a 15 to 20%. What made Fairfax what it is, was the ability to use well priced shares to acquire other insurers. Similar at Berkshire. Moreover, well priced shares mean low cost of funding via debt. The confidence game again: if the shares are good, the debt must be good. I think Soros calls this reflexitivity.

 

This company was not built on underwriting income. It was acquisitions combined with solid investment performance. So one part of the engine is shut for now. To get back to proper valuation at their size they will need real underwriting discipline and then the engine will be able to restart on all cylinders. What I still see is an addiction to more policies for more float.

 

 

Ericopoly,

 

The combined ratio here can't be explained totally about staffing level vs business level or operating expenses.

 

Northbridge:

1- 2nd quarter combined ratio 105.1%

2- Net premiums written decreased by 7.1%

3- Benefited from 0.5% in net favourable development

 

Odyssey Re:

1- 2nd quarter combined ratio 96.5%

2- Net premiums written decreased by 8.7%

3- Hurt by 0.2% in net favourable development

 

So what is Andy doing that others don't? I mean look at operating expenses divided by net premiums written. The percentage is pretty consistent over time. This can't explain the big discrepancy. The big driver is always losses on claims and that is where underwriting discipline and knowing what you are doing makes a difference.

 

Also, I always find funny the comment about hail, tornadoes and windstorms in the U.S. southeast impacting Crum's results. Isn't a yearly event that can be somewhat factored in into policies?

 

 

Uccmal,

 

Look at Chubb results. Combined ratio of 85.9%... Now, that is underwriting discipline under duress! And you think that these guys won't be ready to jump on business when it will turn?

 

Cardboard

[oldye]

Longinvestor,

 

I am sorry to disappoint you, but unless Fairfax valuation starts to improve soon, it will be bad for the company long term. I mean not as good as what it should be. It is great for me (value trader?), but bad for you (long term holder?). You will get a 10 to 12% grower instead of a 15 to 20%. What made Fairfax what it is, was the ability to use well priced shares to acquire other insurers. Similar at Berkshire. Moreover, well priced shares mean low cost of funding via debt. The confidence game again: if the shares are good, the debt must be good. I think Soros calls this reflexitivity.

 

This company was not built on underwriting income. It was acquisitions combined with solid investment performance. So one part of the engine is shut for now. To get back to proper valuation at their size they will need real underwriting discipline and then the engine will be able to restart on all cylinders. What I still see is an addiction to more policies for more float.

 

 

Ericopoly,

 

The combined ratio here can't be explained totally about staffing level vs business level or operating expenses.

 

Northbridge:

1- 2nd quarter combined ratio 105.1%

2- Net premiums written decreased by 7.1%

3- Benefited from 0.5% in net favourable development

 

Odyssey Re:

1- 2nd quarter combined ratio 96.5%

2- Net premiums written decreased by 8.7%

3- Hurt by 0.2% in net favourable development

 

So what is Andy doing that others don't? I mean look at operating expenses divided by net premiums written. The percentage is pretty consistent over time. This can't explain the big discrepancy. The big driver is always losses on claims and that is where underwriting discipline and knowing what you are doing makes a difference.

 

Also, I always find funny the comment about hail, tornadoes and windstorms in the U.S. southeast impacting Crum's results. Isn't a yearly event that can be somewhat factored in into policies?

 

 

Uccmal,

 

Look at Chubb results. Combined ratio of 85.9%... Now, that is underwriting discipline under duress! And you think that these guys won't be ready to jump on business when it will turn?

 

Cardboard

 

Soros is nuts if you ask me, the intrinsic value of the company doesn't change quarter to quarter.  

 

The guy from the conference call asking what multiple to book the stock should trade at cracked me up...the obsession with short term results is kinda retarded.  

 

I'm really surprised to see you calling Northbridge and Crum dogs after a few average quarters during the tail end of a soft market.  Even if the long term cost of float is 5%, their long term return on assets is about 10, that spread has allowed them to multiply capital over 300x during my lifetime.   

[Guest longinvestor]

Longinvestor,

 

I am sorry to disappoint you, but unless Fairfax valuation starts to improve soon, it will be bad for the company long term. I mean not as good as what it should be. It is great for me (value trader?), but bad for you (long term holder?). You will get a 10 to 12% grower instead of a 15 to 20%. What made Fairfax what it is, was the ability to use well priced shares to acquire other insurers. Similar at Berkshire. I still see is an addiction to more policies for more float.

 

Cardboard

 

Hardly disappointed, as I look at my portfolio, the ONLY position in the green is FFH over the past 5 years. Like 200% cumulatively. You reference 10-12% grower instead of a 15-20%....i simply like the term grower. I'd leave the % in FFH/Prem's capable hands. If Prem grew my money in the last 5 years thru all that, how about the next ten. No, hardly disappointed.

 

I know the history of acquisitions by FFH and surely Prem has learnt some valuable lessons from the proverbial lean years of 1998-2005. And oh, btw, FFH continues to acquire.....in Poland, India, etc.

 

Mr. Market will catch up on FFH's fair evaluation over time and I am willing to wait. In the mean time, I trust Prem & team to keep building the IV of FFH, be it investments, underwriting, acquisitions etc. My money is in good hands and thanks to Mr. Market, I got in cheap.