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

[Smazz]

 

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.

 

 

We've had some massive flooding problems here in Southern Ontario - the most populous  part of Canada. I wonder what kind of hit this will take on NB.

[Viking]

Bottom line is both companies performed unbelievably well in Q2. And, yes, in terms of book value growth FFH outperformed ORH. As to which one prefers, each offers somewhat different strengths & weaknesses; with FFH trading at closer to BV and ORH at about 0.9xBV I would currently call it too close to call (meaning I will be quite happy to simply maintain my overweight positioning in ORH).

 

At current prices both remain quite cheap and investors will likely be rewarded over the near and long term. If the stock market continues to increase then BV will grow meaningfully in Q3 (and both will blow by analyst expectations).

 

After listening to many insurance company conference calls what has surprised me a little is how sentiment has changed regarding the outlook for a hard market. Last quarter there were some very optomistic comments regarding pricing firming as we got into Q4 2009. What I 'heard' this quarter was less optomism that reinsurance pricing is firming or that insurance pricing is firming. It appears that the soft market may last well into 2010. This poor outlook will likely impact analyst optomism regarding insurance stocks and the multiple they attach to BV.

 

I would not be surprised to see a pop in reinsurance (and perhaps insurance) stocks as we get through August and Sept if the hurricane season remains muted. But in terms of analysts and investors getting excited about a hard market in reinsurance/insurance stocks we may need to wait until 2010 (which will give people lots of time to build positions at reasonable prices in their favourite insurers).

 

With perception that the hard market not imminent we should see insurnace companies buying back shares (as the most efficient use of excess capital). ORH confirming this is what they have been doing was nice to see. Assuming ORH continues to buy back their own shares, perhaps all the way to 80%, and with earnings strong and capital plentiful at FFH I think it more likely that FFH will buy ORH back. If ORH buys back to 80% then FFH would have 10.5 million shares to repurchase. Lets assume they pay 1.2xQ4BV = 1.2x$55=$66x10.5=US$700 million. This should be very doable. I was disappointed that this opportunity was not asked about during the conference call.

[smw397]

I would not be surprised to see a pop in reinsurance (and perhaps insurance) stocks as we get through August and Sept if the hurricane season remains muted. But in terms of analysts and investors getting excited about a hard market in reinsurance/insurance stocks we may need to wait until 2010 (which will give people lots of time to build positions at reasonable prices in their favourite insurers).

 

Toward that end, it looks at this point like we are very likely heading into an El Nino season.  There's no hard and fast rule on it, but historically El Ninos tend to result in more major tropical storms in the Pacific but fewer Atlantic hurricanes.  I look forward to that being baked into the cake!

[ERICOPOLY]

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

 

Correct, it can only be explained partially by business level.  However, double the volume of business in a hard market and I think the underwriting profits will fill in the underwriting losses we are now seeing. 

 

One quarter at CR of 90% in hard market with double the business will fill in a year of underwriting losses at CR of 105% at present volumes. 

 

But we don't know when it will happen.  I do know however that when you buy the shares for 10% below book (even after today's spike) you have a margin of safety against three years of 105% CR.

 

Market won't turn in three years?  Possible of course.

 

 

[ERICOPOLY]

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

 

I agree with Cardboard that a meaningful amount of Fairfax's historical growth came from issuing overvalued shares.

 

In this regard it is hard to argue against reflexivity.  The price that FFH trades at is determined by Mr Market, and if Mr Market is willing to pay an astronomical price to the Fairfax treasury it then does in fact grow intrinsic value.

 

There are religions however that believe the future path for all of us is chosen... in this sense intrinsic value doesn't change, only our perception of it does as we live life forward and it is revealed to our eyes.  In this case, only our estimates of IV change as our actions (including Prem's) were already decided by some God who know the IV all along, and that IV always included the peaks and valleys of Mr Market's mood.... thus Soros' reflexivity doesn't matter as this God took it into account already in his master plan of the universe.

 

 

 

[oldye]

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

 

I agree with Cardboard that a meaningful amount of Fairfax's historical growth came from issuing overvalued shares.

 

In this regard it is hard to argue against reflexivity.  The price that FFH trades at is determined by Mr Market, and if Mr Market is willing to pay an astronomical price to the Fairfax treasury it then does in fact grow intrinsic value.

 

There are religions however that believe the future path for all of us is chosen... in this sense intrinsic value doesn't change, only our perception of it does as we live life forward and it is revealed to our eyes.  In this case, only our estimates of IV change as our actions (including Prem's) were already decided by some God who know the IV all along, and that IV always included the peaks and valleys of Mr Market's mood.... thus Soros' reflexivity doesn't matter as this God took it into account already in his master plan of the universe.

 

 

 

 

As long as shares remain undervalued they'll have no trouble putting capital to work earning 15+%, yea they can do well issuing shares at 2.5 book to buy troubled insurers below book but so what?  How many of you had been factoring that into their future capital growth?

 

I think they'll achieve an adequate return from their current stock portfolio alone, everything else will be gravy.  They have a plateful of marked down assets that they will try to revive over the next few years, probably close to a billion dollars hiding here.  Then you have to consider what they will look like as insurance prices harden and premiums they collect double. 

 

The truth is we won't know the true intrinsic value, without hindsight.  But I know one thing for sure is that if you believe in a "intrinsic value" you're not spending one second thinking about whether its worth 1.2x or 1.4x.

[Cardboard]

Oldye,

 

"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."

 

I think that we are getting toward what I am talking about. I don't have anything against that if that is their choice or objective, but please let's make it clear to all shareholders and let's stop the drum beat about: focus on underwriting profitability.

 

I have been following, investing and even pushing others to invest in this company for about 7 years now. I have heard Prem repeating over and over again about the need to be disciplined on underwriting. Truthfully, that part really disappoints me. I thought that we were on the other side now after all the under-reserving charges, asbestos, commutations. Then all I have to do is to check Chubb and see them outperforming massively on that front. Then I turn around and check Travelers and what do I find? That they are too. How many more regular P&C insurers are there doing better on the combined ratio? When I hear sound and clear that top priority is underwriting discipline then I expect us to reach the top at some point. We can't say that mother nature was really tough with us in the 1st and 2nd quarter.

 

Some will say that I am impatient. Sorry, but I am not the one who proclaimed a while ago the end of the 7 biblical years. How much more time do I need to wait before I see us moving ahead of the average P&C Co.? If not, what is the issue? Costs, insurance model, size, ratings?

 

What is the real model of this firm? Try to break even in low catastrophe years on the underwriting side to hopefully outperform enough on the investment side to make it worthwhile?

 

If you do the math with their statements and assume little acquisitions, you will find that this is a problem and that it makes their goal of 15% growth in book value over the long term almost unreachable. At least very risky and highly uncertain. It comes from the fact that we will experience once in a while really bad years on underwriting. That is unavoidable. The cure is to make money in good years to absorb the losses. You also need to outperform the competition. If not, they will drag you in the mud during soft years with a rising combined ratio for the industry. If you drop from 85 to 90 or 95% that is fine, but going from 100 to 110 or 120% is no good.

 

Another big issue with insurance is regulation. You are forced to hold investments that you don't like. And that proportion is significant actually, huge especially if your ratings are average. Again, the benefit of outperforming your peers. Doing better there would likely help the investment group do better and since size is now not negligeable, to help maintain their historical returns, every bit of flexibility will help.

 

Cardboard

[ERICOPOLY]

If you do the math with their statements and assume little acquisitions, you will find that this is a problem and that it makes their goal of 15% growth in book value over the long term almost unreachable.

 

Today on the conference call they stated that they plan on holding their investments over the long term, and then stated that they expect them to be generating big gains within 3 to 5 years.  It sounded to me like they perhaps think of 5 years as "the long term" -- maybe not.

 

I should think that you certainly believe 15% is likely over the next 5 years.  They have a lot of cheap stocks, and they have a tailwind from the float.

 

It's hard to tell whether they can do it for the next 20 years though.

[Crip1]

Cardboard,

 

You and I have similar thoughts with regards to underwriting. The ability to underwrite at or even close to the levels of Chubb, Markel, etc, would result in Fairfax becoming an absolutely outstanding investment as opposed to a good/very good investment. The results at ORH are certainly encouraging, but NB is especially concerning to me. NB had been the shining star in the portfolio for several years but that star has dimmed recently. Remember a few years back when NB was able to underwrite in the low 90’s consistently and our concerns were more centered on whether NB could grow their premium base? I get that we are in a soft market now, but even so, a best-in-class player should be able to eek out a small underwriting profit. As well, Crum was remarked a couple of years ago to have been “fixed” and while Crum is certainly performing much better than it did in the first half of this decade, it is not what one would refer to as the pinnacle of underwriting discipline. Prem always preaches “underwriting discipline”, and the reduced premium levels do demonstrate this, but my idea of discipline is more in line with the Chubbs of the world, not what we have seen from FFH.

 

Counter-balancing this is, obviously, the investment performance. And considering that for every dollar of BV that we purchase, we are getting 82 cents worth of stock investments (give or take based on a few factors). Furthermore, this is arguably a better managed portfolio than the majority of the stock mutual funds out there. Interestingly enough, a few weeks back when FFH was in the US$250 area, we could have purchased MORE than $1 of stock investments for every $1 of market value. This is well understood so no need to belabor it (but it is nice to think about!). Assuming that the bond income can more than cover expenses, then the machine will be able to generate at least decent returns.

 

I temper the concern of underwriting with a wildcard that I see as the market in general. As has been mentioned on this board recently, there are signs that the current hard market may be artificially hard due to a few issues. The AIG article posted by eggbriar and earlier allegations that AIG is lowering pricing based on the fact that they are backstopped by the US Government are artificially lowering pricing. Furthermore, the assertion from WR Berkley that “In addition, new entrants in the specialty lines are behaving in an undisciplined manner in an effort to establish a market presence” suggests that when the music stops, much of the P&C Landscape will be without a seat on which to sit. If Fairfax is accounting for reserves conservatively (which is likely) and some of the competition is being aggressive in their reserving (which seems to be somewhere between possible and likely), then time is on our side. Then we get a double-whammy of hardening market (when the music stops) and a crapload of capital with which to write new business. Granted that this scenario (aggressive accounting on part of competition resulting in a rapidly hardening market) is an “if” rather than a “when”, but our worst case scenario for owning FFH is enjoying the investments and underwriting at breakeven which will still work our for shareholders rather well. The best case would work out remarkably well. Better said, FFH is a heads I win and tails I really win…not bad.

 

[jegenolf]

This is an interesting discussion, but I find it a little odd to be complaining about the combined ratio when 2 things are true: 1) they have excess capacity and 2) they are clearly making a return that exceeds their cost of float.

 

Would you rather they stop writing policies that are clearly profitable for them? That may result in a lower CR (or not as fixed costs are spread across fewer policies) but would certainly result in less profit.

 

When under-utilizing capacity, they should write any policy with a positive expected value assuming very conservative investment returns. (And they certainly have the right to assume higher investment returns than Chubb!) Once they are closer to full capacity, they can start culling the least profitable policies. Until then, I'd prefer they write any policy they deem to be profitable not to focus solely on the CR. (In fact, I'd say when you're under-utilized, ignore sunk costs when considering any given policy. The marginal cost is all that really determines profitability of that policy when you know opportunity cost of not taking another policy is 0.)

 

I also see no discussion of how long the tail is on the policies. A weighted average 3-year tail policy at 105 CR sounds pretty darn good to me when the float is in the hands of Hamblin-Watsa (I'm guessing weighted average for Fairfax is a little over 3 years based on the table in the quarterly report). Chubb makes something like 4% on their float. Fairfax does a good deal better than that. The better the investment returns, the higher combined ratio can and SHOULD be tolerated (until full capacity), and this difference gets magnified the longer the tail.

 

Anyway, zero-cost or negative-cost float is a wonderful objective, but it's not a profit-maximizing rule. I'm not at all suggesting relaxed underwriting standards, but I would much rather judge them on how well they assess the risk than what the CR is. I.E. I'm more interested in how accurate their reserving is than what the bottom line CR is (and this has certainly been a problem in the past...). If their reserving is reasonably accurate one has to assume that the CR they're writing policies at has a sufficiently positive expected value. Or at least they've earned that right in my eyes. The problem comes when they have no idea what the expected value of the policies are...

 

And in fact, one question that comes to mind is why Chubb isn't writing more marginal policies. It doesn't look like they're anything close to full capacity. Doesn't it seem like they're leaving some profit on the table at a CR of 85? I don't know anything about Chubb, but in their case, it's likely that they're playing in specialty markets and the markets simply can't handle more policies. Obviously the less commoditized the insurance product, the more underwriting profit will be available... But anyway, the point is I wouldn't think an under-capacity CR of 85 is the ideal answer. If Fairfax started doing that, I'd be mad not happy.

 

A secondary point is that conservative reserving is good for the tax bill. I'd rather have as much potential profit as legally possible buried in the reserves. Over-reserving is a no-cost loan from the government, under-reserving is a no-cost loan to the government. I hope Fairfax is over-reserving!

 

And if the argument is that a good CR will make Fairfax look better to investors which will raise the stock price which will in turn let them buy companies with overvalued stock, who here is actually going to wait around for that outcome to play out? Once it's significantly overvalued in our eyes, aren't we all gonna sell? When you pay in stock, you pay in intrinsic value. If cash is worth more than the intrinsic value of the same nominal amount of stock, I'll invest my money elsewhere. (That isn't to say you cannot pay with stock, but it better be because the selling company didn't want the cash...)

 

Anyway, I like the discussion, and I'm no insurance expert, but I just think it's better to look a little deeper than the headline CR.

[Parsad]

I think the board is overreacting to the combined ratios at NB and C&F.  You can't compare a company like Chubb to Northbridge or Crum & Forster.  Chubb's lines of business are more diverse and they also write significant business outside of North America.  A better comparison to Chubb is Fairfax's overall business, not its individual subs.  Based on that, Chubb's shareholder equity has been flat for over three years.  Fairfax's has doubled!

 

Investors should also remember that insurance is a very cyclical business.  There was a period from 1982-1992 where Berkshire's insurance business had nothing but combined ratios above 100% for eleven consecutive years!  Today, I'm certain that any insurance analyst would agree that Berkshire has the finest group of insurance businesses in the world, and they do a splendid job of underwriting and managing expenses.  Cheers!

[ERICOPOLY]

There was a period from 1982-1992 where Berkshire's insurance business had nothing but combined ratios above 100% for eleven consecutive years!

 

The interest rate environment in the 1980s was such that you could still be doing great even if losing a bit on underwriting.

 

 

 

 

[Grenville]

Nice points Jegenolf! It seems like there are a lot of subtleties to the insurance business that aren't entirely apparent to the untrained observer. I'll list some of the points brought up in the previous posts so we're all on the same page with regards to facts.

 

1. CR (combined ratio) is not a clean cut set in stone number. Its based on assumptions for reserves for future payouts on losses. Hard to compare CRs without looking at how actual losses turn out.

 

2. Different companies account for the present value of their future reserves. Fairfax doesn't discount their future reserves back to the present day. They just use actual losses they expect to pay out and don't discount them with any interest rate. This seems like the most conservative approach. How would one pick the discount rate for a present value calculation?

 

3. Better to over reserve than under reserve. The value of tax deferral is extra float to invest until favorable reserve development. Better to surprise positively than negatively. I would imagine there is a limitation set on how much one can over reserve.

 

4. CR is one piece of the puzzle, the investment returns needs to be factored in along with how much of capacity is being used. Some companies hedge out currency risk through the investments

 

5. Shareholder equity along with CR maybe a better way to compare business performance between different insurers

 

Feel free to question my assumptions here. I would prefer that we all get the fundamental facts straight to make the best conclusions here!

 

Great insight, much appreciated!

 

[Parsad]

The interest rate environment in the 1980s was such that you could still be doing great even if losing a bit on underwriting.

 

That's correct, but combined ratios were still over 100%.  Fairfax will rely on their equity investments, as well as their municipal bonds and preferred share investments since interest rates are so low.  Also remember that Fairfax can always refinance their debt at lower rates as well, offsetting the low interest they would get on treasuries.  They are in a much stronger position today, than they were when they issued their various long-term notes.  I have no doubt whatsoever that they will continue to increase book value in today's environment.  Cheers!

[Guest longinvestor]

This is an interesting discussion, but I find it a little odd to be complaining about the combined ratio when 2 things are true: 1) they have excess capacity and 2) they are clearly making a return that exceeds their cost of float...........................

 

Anyway, I like the discussion, and I'm no insurance expert, but I just think it's better to look a little deeper than the headline CR.

 

Thanks Jegenolf for the insight. I learned a few things about the insurance biz.

 

You are absolutely correct, the discussion has been around reported numbers, one which is a roll-up at the holding co level of several insurance companies writing policies across the globe. I suppose everyone here is trying help Prem and his insurance chiefs manage the holding co and the subsidiaries better. Ha! Maybe we should playing bridge while waiting for Mr. Market to catch up. ;D

 

 

[Cardboard]

IMO, Berkshire is not a good comparison for Fairfax. Here is why:

 

If we look at the Berkshire annual report for 1995 when Warren still disclosed its cost of float and where size between the companies was more comparable:

 

1- Berkshire insurance float was $3.6 billion in 1995. Fairfax float was $8.9 billion in 2008 (excludes runoff).

2- Berkshire had minimal reinsurance recoverables. Fairfax has $4.15 billion as of June 30.

3- Berkshire had $1.1 billion in debt, Fairfax has $2.0 billion (includes preferreds) as of June 30.

4- Berkshire had $26.4 billion in investments and cash, Fairfax has $19.8 billion as of June 30 (includes holdco).

5- Berkshire had 83% of its investments in stocks or $21.9 billion, Fairfax has 30% or $5.9 billion (includes derivatives and holdco stocks).

6- Berkshire had shareholders equity of $17.2 billion, Fairfax has $5.5 billion.

7- Berkshire had insurance premiums earned of $0.96 billion a year, Fairfax has $4.4 billion.

 

Looking at these figures, it becomes clear that Berkshire was not too dependant on the performance of its insurance results. A combined ratio of 110% would have meant a loss of $96 million with $17.2 billion in equity, while at Fairfax it means a loss of $440 million with $5.5 billion in equity.

 

I also see a vast difference in the model with Berkshire being capable to invest in whatever it chooses, while Fairfax is significantly constrained. Fairfax is forced to invest in things that they don't necessarily like or believe in (cash and U.S. treasuries at this time).

 

Think about the implications of these figures for a second: Berkshire had $1.27 in stocks for every dollar of common equity, while Fairfax has $1.07. Higher upside, much less risk? Should I also mention that Fairfax returns will be diminished by higher interest cost, runoff costs and non-controlling interest?

 

To be fair, Fairfax has $3.60 in investments for every dollar of common equity, while Berkshire had $1.53, but is it really worthwhile? Cash and treasuries will rarely move in tandem with stocks and expected returns are completely different. Corporate bonds and municipals are good for a pop like now, but over the long haul?

 

My conclusion is that Fairfax can still do very well, but it is a lot more complicated and risky than Berkshire. Also, combined ratios do matter at Fairfax. Costs over time can negate a lot of the benefits of obtaining any float.

While Warren focused on its main competitive advantage: his ability to invest. He used insurance to obtain "some" funds at a low cost.

 

Cardboard

[Uccmal]

Thanks Jegenoff, That was interesting.

 

Crip - Did you confuse this comment by any chance?

 

As has been mentioned on this board recently, there are signs that the current hard market may be artificially hard due to a few issues.

 

Did you mean the market has been artificially soft?

 

A.

[Crip1]

Al,

 

Thanks, you're right. Artifically soft.

 

-Crip

[Guest misterstockwell]

The CR issue has always bugged me as well. If you are proponents of disciplined underwriting, then no matter how long tail your business might be, the results should show, year after year. We haven't seen that, yet. I still hold out hope.

 

If we see that FFH can't underwrite business profitably, then is there really any reason to be an insurance company? Why not be a hedge fund? If you are paying for float, why not just borrow money and invest? It's much safer than underwriting risks that can bite you in the ass every so often, possibly in a big way. Buffett always talks about being paid for float, and what a great deal that is. He's right. If investments are the only source of income, then just invest. Investment results could get even better without insurance regulations limiting the possibilities.

[omagh]

http://www.fairfax.ca/Assets/.../2009_AGM_Slide_Presentation.pdf - slide 12

In 23 years under current management, float has been obtained 230 basis point cheaper than borrowing, including some periods where borrowing was impossible for FFH.  FFH also maintains a high cash component on its balance sheet to deal with some inevitable short term risks, including the ass-biting.  As a 10-year shareholder, there have been some bumps and lumpy returns, but the track record has been good and I've continued to invest new capital along the way.

 

-O

 

The CR issue has always bugged me as well. If you are proponents of disciplined underwriting, then no matter how long tail your business might be, the results should show, year after year. We haven't seen that, yet. I still hold out hope.

 

If we see that FFH can't underwrite business profitably, then is there really any reason to be an insurance company? Why not be a hedge fund? If you are paying for float, why not just borrow money and invest? It's much safer than underwriting risks that can bite you in the ass every so often, possibly in a big way. Buffett always talks about being paid for float, and what a great deal that is. He's right. If investments are the only source of income, then just invest. Investment results could get even better without insurance regulations limiting the possibilities.

[Cardboard]

By the way, my apologies to the Berkshire shareholders... On top of what I mentioned, back in 1995, Berkshire had $275 million a year in profits related to their operating businesses. This means extra cash and profits on top of the gains made with their investments. No difference in the equity or book value that I talked about, but more profits to go along.

 

Cardboard

[Cardboard]

Misterstockwell,

 

"If we see that FFH can't underwrite business profitably, then is there really any reason to be an insurance company? Why not be a hedge fund? If you are paying for float, why not just borrow money and invest?"

 

Tears are coming off my eyes... Somebody finally got my point. You had Hamblin Watsa predicting the Japanese bubble burst, the Internet bubble burst, the Housing bubble burst and then on top of that... timing exactly when to get in and out of treasuries for each. If that was not enough, they recently picked exactly when they should invest in solid common stocks and bonds...

 

What are they doing in the insurance business? At least in such a dependant way? Follow Warren. Use insurance to your advantage vs the opposite.

 

Cardboard

[ERICOPOLY]

Misterstockwell,

 

"If we see that FFH can't underwrite business profitably, then is there really any reason to be an insurance company? Why not be a hedge fund? If you are paying for float, why not just borrow money and invest?"

 

Tears are coming off my eyes... Somebody finally got my point.

 

 

Well I hope somebody finally gets this point:

 

You can invest your float for 5% per annum and hold onto it for 3 years.  That's 15% collected.  Then you have a combined ratio of 105% and you give back a third of your gains.

 

You still make 10%!  That's the point.

 

Please correct me if I'm totally wrong because it's better to be corrected now than to go in in the darkness of ignorance for longer.

[Parsad]

Folks,

 

I don't think many of you are grasping the exact reason why Buffett and Watsa run insurance businesses.  It's got nothing to do with zero cost float, and it is something that cannot occur within the hedge fund structure.  

 

Under the corporate structure, the shareholder equity is permanent capital.  No en masse redemptions ever!  It's the same reason Sardar is moving to the corporate holding company structure.  

 

For Berkshire and Fairfax, by writing long-tail insurance, they also create another near permanent form of capital, where they can do what they want with it for 10-15 years plus.  Whether that float is zero-cost or low-cost is irrelevant, as long as the cost is less than issuing debt.  Naturally, zero-cost would be preferrable though.  Cheers!    

[T-bone1]

I couldn't agree more. Even if float has a cost . ..  maybe a few percent per year over time . ..  it is a huge advantage for a long term investor like Hamblin Watsa. That being said, I think some of us are focused too much on the last few years and not enough on the next few.  In the spirit of Ericopoly's post, I posit the following points. If I am wrong on any of these, you would be doing me a great service to point that out. Thanks:

 

1) To roughly paraphrase Prem, reserves are in the best shape they have been in for years. I think the company is certainly overreserved at this point, which is both tax efficient and provides a hidden asset. This will improve the CR as excess reserves roll off

 

2) I think FFH has a higher combined ratio than some competitors right now because of their expense ratio not their loss ratio. I believe that they are writing good business, they just have an organization that is sized to write more business. I think this is an asset and that when the market hardens, we will benefit both from lower loss ratios and lower expense ratios (because the expenses will be spread over more business) at the same time.

 

3) After a couple of years of FFH holding safe low-yielding investments, we are now seeing what happens when they can finally reach (safely) for some yield. $10 per share, per quarter, in passive interest and dividend income is a beautiful thing.

 

4) While we are starting to enjoy "success mode" on the investment side (I don't mean capital gains, but the type of repeatable passive income that insurance company analysts look for in valuing a company), we still haven't seen "success mode" on the insurance side. We all patiently waited for FFH to deploy their treasuries into better investments, I don't understand why everyone is so impatient with the insurance operations. I think this is a huge asset that they will deploy (write more business) at the right time. When the market turns we will be in a position to write more business than ever, and likely at some of the best CR's in the industry.

 

5) The possible affect of writing more business at a 95% (or better) CR at the same time as earning an after tax 5% return (or better) on the FI portfolio is likely event at some point in the next few years. Over a float/asset base of $16B this would lead to 33% book value growth from operating income alone.

 

This isn't a hedge fund and this isn't "success mode" . . . FFH has made a lot of progress and I believe they have built the right vehicle, but they aren't at the finish line yet. I think FFH's insurance operations (and the income associated with the float) can add 10-20% to BV per year over the next few years.

 

As I have said before (and I still don't think anyone has agreed with me on this) I think FFH is a mutual fund (equities) plus an insurance company  (float and associated FI assets). If the insurance company adds 10% to the mutual fund's performance each year, and the mutual fund is well managed and will probably beat the S&P 500 on its own . . . then the question is, what should you pay to buy this mutual fund.

 

I think 10% from the insurance side will be an easy bogey to hit over the next few years. If the expected return of the stock market is less than 10% over the next few years (which is likely in my opinion) then I think you could say the insurance portion is worth as much as the mutual fund (tangible book) portion. This suggests to me that the company is worth 2X book value.

 

I am not suggesting anyone pay 2X book, but I am suggesting:

 

1) for this company to not trade at some meaninful premium to tangible book (adjusting both the goodwill and ICICI position - which basically cancel out) is very very silly

 

2) FFH is a slumbering giant in insurance right now. The current combined ratios should be critisized no more than the 3% yields they were getting on ten year treasuries. Safety and prepartion for a big opportunity is worth far more than a few percent per year.

 

I welcome (and even request) any and all criticism of the above