Andy Barnard to Oversee All of Fairfax's Insurance Operations

[Parsad]

Fairfax has put out a press release stating that Andy Barnard, CEO of Odyssey Re, will now oversee all of Fairfax's insurance operations.  I think you will see zero cost float in the next few years on a regular basis at Fairfax!  Cheers!

 

http://finance.yahoo.com/news/Personnel-iw-4054867507.html?x=0&.v=1

[Parsad]

I also suspect we aren't that far away from seeing Fairfax acquire entire non-insurance businesses or at least majority stakes.  Cheers!

[Guest Bronco]

Parsad, what makes you say that?  I am not debating the point, rather trying to gather insight.  Why would this move allow Fairfax to enter non-insurance businesses. 

Is it because the current management team can focus on investments?

[Zorrofan]

I also suspect we aren't that far away from seeing Fairfax acquire entire non-insurance businesses or at least majority stakes.  Cheers!

 

I hope so - BRK did it, MKL is starting to do it. It seems like an excellent "next step" for FFH. Fron your lips to Prems ears.....

 

;D

 

cheers

Zorro

[Liberty]

I also suspect we aren't that far away from seeing Fairfax acquire entire non-insurance businesses or at least majority stakes.  Cheers!

 

I hope so - BRK did it, MKL is starting to do it. It seems like an excellent "next step" for FFH. Fron your lips to Prems ears.....

 

I agree as long as that's the best allocation of capital (and I know I'm stating the obvious, but it must be said).

 

If insurance cos are cheap right now, that might be the best thing to acquire more of, but that won't always be the case and it would be nice to have a structure set up so that we know that capital can go to the best businesses available regardless of whether they are insurance or not, or publicly traded or not.

[Myth465]

Fairfax has put out a press release stating that Andy Barnard, CEO of Odyssey Re, will now oversee all of Fairfax's insurance operations.  I think you will see zero cost float in the next few years on a regular basis at Fairfax!  Cheers!

 

http://finance.yahoo.com/news/Personnel-iw-4054867507.html?x=0&.v=1

 

This could be a game changer. I was quite annoyed when Odyssey was stolen from me lol.

Underwriting is the one feather missing from the FFH cap and I am so happy to see some sort of Integration of the Insurance units.

Congrats to FFH. I look forward to adding to my 1 share and cant wait until FFH has LRE style underwriting with BRK style investing. 1+1 would then equal 3.

 

----

 

I support buying whole business but hopefully its not the turnaround sort we have been buying partials in. I wouldnt mind them buying FBK at $2 for shares and running it debt free. Its commodity but should do well.

[Liberty]

Does anyone have Od. Re's average combined ratio for the past 10+ years handy?

 

After a quick look, it seems to move between 95% and 110%, but that's just at a glance.

[Parsad]

Does anyone have Od. Re's average combined ratio for the past 10+ years handy?

 

After a quick look, it seems to move between 95% and 110%, but that's just at a glance.

 

You can take a look at past Fairfax annual reports on their website.  From what I understand, when Prem acquired Odyssey, it was primarily because he got Andy with it.  Since then, even with 9/11, Hurricane Hugo, earthquakes, etc., I believe Odyssey has a combined ratio close to or below 100%. 

 

He's a terrific leader and putting him in charge should allow Fairfax to focus on the one last facet that left them open to criticism and kept them out of that top tier with Berkshire...underwriting!  Cheers!

[txlaw]

Very exciting.  I'm looking forward to buying back in before/when the insurance cycle turns. 

[bluedevil]

Very exciting.  I do hope that Prem talks about this more in his upcoming letter.  The Press release is quite vague given that this is a whole new concept.  Will AB be responsible for some of the functions FFH has historically held-- setting the compensation of the other presidents, hiring/firing, shifting capital between them, finding acquisitions?  Will this lead to some consolidation among the subs?

[Uccmal]

I dont think that FFH should be buying whole businesses outside of the insurance sector.  So far I see nothing in their DNA that says they are good at this or will be good at this.  In fact I have seen just the opposite in the past with Midland Walwyn, and Lindsay Morden as a couple of examples. 

 

Their successes lie in the area of bond investment, equity turnarounds, macro/sector investing. 

 

Expanding in the insurance sector is their best bet and applying what they already know across the world in passive investing is what they will be really good at.  Prem would need to hire a Munger to offset his own group of Graham style investors. 

 

Finally as a shareholder of FFh I dont want them buying operating companies in whole.  I can buy operating companies anytime that are undervalued and ripe for a turnaround.  Do I really need FFH to do this for me?

 

Andy Barnard has been put in charge because he has 15 years of WORLDWIDE experience. 

[Uccmal]

I came to this line of thinking after Dazel posted about their biggest hits being in the fixed income side of the equation.  There is always so much focus on their equities on this board because that is what most of us do that we forget FFHs real drivers. 

[Zorrofan]

Uccmal,

 

With all due respect, you are wrong. I don't want to speak for others, but I am not talking about FFH buying 100% of some small micro-cap. They can put a portion of their equity portfolio in a stock like that. Insurance is cyclical and will go through hard and soft markets. There are times FFH can make a lot of money from bonds, other times from equities. But what about times like now, when it seems neither will generate those large gains we all like? A third leg is to purchase 100% of an appropriate sized business that throws off cashflow in good times and bad. WEB did this, it is what makes BRK so strong today - WEB gets those regular inflows of cash month after month. Markel is heading in this direction - and they are pretty sharp operators too. By moving into ownership of whole businesses FFH gives themselves a stable and growing income source regardless of market conditions. They don't need to be business managers - WEB says he only buys businesses that come with solid management in place. Why should FFH be any different? Why can't FFH buy some small, Canadian utility that will provide a steady, growing income stream? Seems so logical to me.

 

cheers

Zorro

 

I dont think that FFH should be buying whole businesses outside of the insurance sector.  So far I see nothing in their DNA that says they are good at this or will be good at this.  In fact I have seen just the opposite in the past with Midland Walwyn, and Lindsay Morden as a couple of examples. 

 

Their successes lie in the area of bond investment, equity turnarounds, macro/sector investing. 

 

Expanding in the insurance sector is their best bet and applying what they already know across the world in passive investing is what they will be really good at.  Prem would need to hire a Munger to offset his own group of Graham style investors. 

 

Finally as a shareholder of FFh I dont want them buying operating companies in whole.  I can buy operating companies anytime that are undervalued and ripe for a turnaround.  Do I really need FFH to do this for me?

 

Andy Barnard has been put in charge because he has 15 years of WORLDWIDE experience.   

[Guest Bronco]

Can someone still update me as to what indication there is that FFH will buy non-insurance businesses?

[Uccmal]

Hi Zorrofan, I respectfully disagree with your disagreement.  :P

 

I am not confident that FFH can buy a good business outside of insurance.  Buffett had to be persuaded to pay up.  I am way too concerned that FFH will botch it up as they have so many other acquisitions because they are not able to pay up. 

 

Right now they earn 180-200 M/ Quarter from dividends and interest.  There are not that many businesses you could buy that will generate that volume of cash every quarter.  If they buy a smaller business like FFH Weed and Feed (Ridley) the numbers get lost in the hugeness of the insurance ops.  If they buy a larger business that generates 50 M or more per Quarter then you are looking at an investment of 2, 3 Billion. 

 

At this stage in their evolution they are better off doing what they are doing IMHO.  When Buffett bought Blue Chip and Sees he was tiny as compared to the FFH of today. 

 

As per Bronco's comment I have never heard Prem indicate he is interested in buying whole operating businesses.  I have noticed a tendency to participate in private partnerships however, such as the US real estate company they partnered in.

 

 

 

 

[Myth465]

Not that my vote matters but, Uccmal is quite convincing. Do you work in sales?

[Guest Bronco]

Myth - don't be persuaded, he is using some Vodoo Ancient Chinese Secret Jedi Mind Trick Thing.

[Myth465]

Myth - don't be persuaded, he is using some Vodoo Ancient Chinese Secret Jedi Mind Trick Thing.

 

LOL

[Liberty]

I do have a few doubts. Here's my thinking:

 

The Fairfax ppl are very smart and their investing success lies in good part in their businesslike approach (they try to understand the businesses, instead of just the stocks as abstract things). These qualities that help them buy parts of businesses should help them make good choices when it comes to whole businesses.

 

What I'm worried about is that they'd go for messy turnarounds rather than quality businesses with durable competitive advantage and low capital requirements that come with a good management (a Canadian See's Candies or whatever).

 

But I'm not sure if my fear is rational. After all, if they're doing a good job of owning parts of messy businesses in their portfolio, maybe on average they would get equally good results with wholly owned messy businesses? Of course, it's harder to dump the whole business than dump a stock when it turns out you were wrong, and if things go really wrong, it'll take more resources to deal with (most important of all, the mental energy of FFH's top brains).

 

I think that's why I'd rather see them go the BRK/MKL way and stick with quality, but that's as long as whatever they buy has a higher expected return than a comparable investment in stocks or in an insurance co acquisition. That might not happen that often, but it could be more frequent as they become bigger...

[Cardboard]

I agree with Al on them buying whole businesses. The past indicates failure. A more recent one or Ridley which they own 71% has not been a stellar success either. They also seem to get in trouble whenever they start to own a large percentage of something or when they average down significantly. Think Canwest, Abitibi and others.

 

My opinion, for whatever it is worth, Hamblin Watsa should start being more "activist" towards their investments. That is where the low hanging fruit is. While they won't change what is going on at J&J or at other mega cap, they should have significant influence at smaller companies such as Fibrek, Level 3, The Brick and others to obtain the best value. If they had gone public on Canwest and tried to force them to sell the Australian business when everything was not lost it may have saved the company and their investment.

 

This laissez faire approach is not working with low quality businesses (cyclical or in secular decline, weak management teams, etc.) These businesses became cheap for a reason. They need a very good kick in the ass IMO. Give them more capital or invest in them and they will simply keep doing their old thing.

 

Cardboard 

[A_Hamilton]

 

 

What I'm worried about is that they'd go for messy turnarounds rather than quality businesses with durable competitive advantage and low capital requirements that come with a good management (a Canadian See's Candies or whatever).

 

Liberty (and others),

I don't understand the frequent question on this board about FFH purchasing messy turnarounds. I recognize that this makes up some of their portfolio holdings, but what about the massive positions in RIMM, USB, WFC, GE, JNJ, KFT, DELL? Also, I've never seen a more conservative fixed income portfolio from a credit perspective...

 

Additionally, Buffett and Berkshire are not against buying into difficult situations and have made a fortune on them over time: Johns Manville, Comdisco, USG, Level 3, not to mention Berkshire Hathaway itself. Buffett's also lost a ton by buying massive stakes in hugely distressed Irish banks.

 

I think Buffett's refrain is quality businesses because he has a responsibility to the public and doesn't want some guy with $50,000 of his net worth to go out and put 100% into LVLT...much better for the guy to own 100% of KO. I'd highly recommend differentiating between what Buffett says and what he does in investing (writing swaps on indexes ring a bell?).

Just my two cents, as I don't believe FFH is that into buying junk per se, it's just where the opportunities are sometimes...    

[Liberty]

A_Hamilton, that's kind of what I said in the next paragraph that you didn't quote.

 

I'm ok with FFH investing in messy stuff in its equity portfolio, and I'm not one of the people complaining about it because I know that they still have tons of quality stuff too, but for some reason, I'm a lot more nervous about them doing the same thing with wholly own subsidiaries.

 

As for WEB, I'm pretty sure that Buffett had said that he'd now have billions more if he had never bought Berkshire Hathaway, so that might not be the best example for FFH :)

[Zorrofan]

Uccmal,

 

You made me LOL with that one!  ;D  One of the many things I like about this board is the fact that we can disagree in a cordial manner. I understand your concerns, and I do agree that I don't want FFH buying FFH Weed & Feed types of businesses. But there must be some sort of reasonable-priced business FFh could buy 100% of - notice I mentioned a small utility. I want them to pay up for quality, and I have no problem with them investing $3 -$5 billion to do so. Out of a $22 billion dollar portfolio that is not unreasonable. I am confident that FFh can tell the difference between a Graham type of investment and a FFh sized version of See's. They are investing in partnerships so to me, they are almost there. They need that third leg, a quality company that can generate steady cashflow. To my way of thinking it just makes sense and I truly believe that is what helped tranform BRK into BRK.

 

cheers

Zorro

 

 

Hi Zorrofan, I respectfully disagree with your disagreement.   :P

 

I am not confident that FFH can buy a good business outside of insurance.  Buffett had to be persuaded to pay up.  I am way too concerned that FFH will botch it up as they have so many other acquisitions because they are not able to pay up. 

 

Right now they earn 180-200 M/ Quarter from dividends and interest.  There are not that many businesses you could buy that will generate that volume of cash every quarter.  If they buy a smaller business like FFH Weed and Feed (Ridley) the numbers get lost in the hugeness of the insurance ops.  If they buy a larger business that generates 50 M or more per Quarter then you are looking at an investment of 2, 3 Billion. 

 

At this stage in their evolution they are better off doing what they are doing IMHO.  When Buffett bought Blue Chip and Sees he was tiny as compared to the FFH of today. 

 

As per Bronco's comment I have never heard Prem indicate he is interested in buying whole operating businesses.  I have noticed a tendency to participate in private partnerships however, such as the US real estate company they partnered in.

 

 

 

 

[Zorrofan]

Cardboard,

 

In a roundabout why you are actually helping to make my point. The team at FFH does well finding the undervalued JNJs, the bond team is great, but they have not done so well with the Canwest & Abitibi types of investments.  That is why I think they must start looking at small, quality companies that are not cyclical or in declining industries. Ridley was not the right type of investment to buy a majority stake in. It was small & cheap. They need to step up and invest $3 - $5 billion in a quality company. MKL is taking this next step, following BRK, and for good reason. They are going after the steady, growing stream of cashflow. FFH can do it, they are highly astute, they just need to invest enough to get quality not just cheap!

 

cheers

Zorro

 

I agree with Al on them buying whole businesses. The past indicates failure. A more recent one or Ridley which they own 71% has not been a stellar success either. They also seem to get in trouble whenever they start to own a large percentage of something or when they average down significantly. Think Canwest, Abitibi and others.

 

My opinion, for whatever it is worth, Hamblin Watsa should start being more "activist" towards their investments. That is where the low hanging fruit is. While they won't change what is going on at J&J or at other mega cap, they should have significant influence at smaller companies such as Fibrek, Level 3, The Brick and others to obtain the best value. If they had gone public on Canwest and tried to force them to sell the Australian business when everything was not lost it may have saved the company and their investment.

 

This laissez faire approach is not working with low quality businesses (cyclical or in secular decline, weak management teams, etc.) These businesses became cheap for a reason. They need a very good kick in the ass IMO. Give them more capital or invest in them and they will simply keep doing their old thing.

 

Cardboard  

[Parsad]

Can someone still update me as to what indication there is that FFH will buy non-insurance businesses?

 

There is nothing to indicate that they will do so.  My hypothesis is based simply on that Prem once told me that they would consider buying entire businesses, but not for some time...that was about seven years ago.  Their asset base is getting pretty large.  At some point, you are going to find that the universe of opportunities is shrinking as Fairfax's capital base gets larger and larger...their portfolio is now $22B!  Add in their other current assets and they are over $29B!

 

Prem is getting older, Roger Lace is getting older, Brian Bradstreet is getting older...everyone on Hamblin-Watsa's investment team that has generated the stellar returns for the last 25 years is getting older.  You have Paul Ianni, Peter Furlan, etc and some of the other young leaders at Hamblin-Watsa on the analyst side, but they have yet to be given more significant roles.  Wayne Cadawallader has gone to his own fund.  Where are the ideas going to come from 10 or 20 years from now?

 

Insurance as Buffett says is a business built on the trust of your customers knowing that your checks will clear.  I would like to see Fairfax have at least an AA-credit rating.  They've already got runoff under control, and they've reduced both their asset/equity and debt/equity leverage.  The next step would naturally be to strengthen their underwriting across the board...I think adding Andy Barnard to oversee that adds that little bit of extra attention to the already terrific group of insurance executives the company has running their subs. 

 

Finally, the next logical step, at least in my little mind, is that you want an extra leg supporting the stool...adding stability to cash flows and less reliability on the Hamblin-Watsa team having to allocate forever more capital.  Berkshire knew this, Markel figured it out and I think Prem knows this too.  But at the same time, you don't want to leave your circle of competence.  So I think the next step may be to start wading into this...buy small companies...$100M-250M valuation...$15-30M in earnings.  Who knows?  Only Prem and his team know what they are going to do, but hey...if I can generate enough interest in the idea, maybe they will consider it more deeply!  ;D  Cheers!