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Fairfax Negative Enterprise Value


Shane
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According to yahoo FRFHF.PK (FFH.TO) has $611 cash per share and an enterprise value of -2billion+.  I remember a thread in which most members did not consider the current valuation cheap enough.  I did a ,25m entity value screen (Is that enterprise value) and the only companies that I found with negative enterprise value either had a negative ROE, ROI, or were EXTREMELY small.  How is FFH not cheap given that information?  If you want to point me to a book because the answer would be too time consuming I'd be happy to take suggestions...

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Shane,

 

You have touched a phenomenon of great importance that most accountants would dismiss with a chuckle.  The apparent excess cash and marketable securities on Fairfax's balance sheet is of course needed to support their ratings and their implied ability to pay claims.

 

Generally, most assets have to be kept in fixed instruments with liquid, readily ascertainably market values in order to receive full credit from the rating agencies or regulators towards solvency.  Other assets are steeply discounted.  For example,  the more volatile market value of shares of common stocks is discounted 40% to 50% by rating agencies when they assess the adequacy of an insurance company's capital for paying claims.

 

Most insurance companies adhere to the norm and keep almost all assets in conventional, fixed income instruments, even when these sell for bubble prices, like the now 30 year bubble in treasuries.  When most insurance companies reach for more yield, they will suspend belief and buy things like the crummy MBS many companies bought a few years ago  if the rating on the securities is high enough to satisfy rating agencies.

 

The conundrum of how to effectively leverage insurance company assets explains why Prem hedges so much.  The large amount of  munis he bought is pure genius.  These should keep a high rating for full credit from the rating agencies and provide a higher tax adjusted return over time than Treasuries.  However, the stocks FFH bought probably require a hedge to enable FFH to keep an acceptable rating if there should be a bear market.  :)

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Interesting, I checked AIG and they also keep more cash per share than their market value... However, their enterprise value is positive and larger than market value (Which seems to indicate much higher debt).

 

  I am not sure I fully understand everything you said there twacowfca, but I'll spend some time trying to figure it out (I dont have a business education, still a student).

 

If I understand this should all be correct:

Most insurance companies invest in treasuries or other liquid debt obligations to invest their float, In order to maintain a good credit rating.  FFH has chosen to invest in a lot of municiple bonds for higher return as well as stocks, but hedge to maintain a high credit rating, hoping this strategy provides better return than just treasuries.

 

However - It still appears that with a negative enterprise value the stock has little debt and tons of cash available for investment.  I guess that maybe FFH has more active policies out than AIG and has to keep more cash on hand to keep a high credit rating and just has very little debt, which means the cash reported isn't available for investment unless they decide to risk losing credit rating?  Do I understand this correctly?

 

Do you all typically use P/BV to decide on buy prices for FFH?  Just tell me to shut up if I am asking too many questions here haha.

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Shane, I find enterprise value to be a fairly useless metric.  Most statistics in and of themselves are useless. 

 

The reason Fairfax has a negative enterprise value is because they have little debt and alot of cash.  AIG has alot of cash, but they have a ton of debt...more than equity...thus the positive enterprise value. 

 

Now if you were going to invest in one of those two companies, and you only looked at enterprise value, you would think that AIG was in better shape relative to valuation.  Not true.  As well, in insurance, the quality of the underwriting and future liabilities also have to be considered. 

 

Using a single metric is absolutely futile, and even using a few together is just as useless.  You really have to examine each financial statement, over multiple years, to get a good picture of what is happening to any business.  Cheers! 

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Hi Shane,

 

RE: buy prices for FFH - haven't bought any in a couple of years - just know when its cheap-okay right now

 

AIG vs ffh: AIG is trading at 30% of reported book - Berkowitz thinks its cheap  - He knows better than I - AIG's problems are gov't overhang and ongoing derivatives exposure.

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Hi Shane,

 

RE: buy prices for FFH - haven't bought any in a couple of years - just know when its cheap-okay right now

 

AIG vs ffh: AIG is trading at 30% of reported book - Berkowitz thinks its cheap  - He knows better than I - AIG's problems are gov't overhang and ongoing derivatives exposure.

 

Also, they seem to be selling their great businesses and keeping their value traps that are chronic low ROE or no ROE businesses.  Do they have any outstanding businesses left?

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