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FFH AGM G&Mail Comments


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"Fairfax regrets Abitibi, CanWest deals"

"Prem Watsa says he underestimated the effect of the recession on newspapers"

 

http://www.globeinvestor.com/servlet/story/RTGAM.20090415.wfairfax0415/GIStory/

 

Similar comments to those from Francis Chou and this helps me understand things better. It is one thing to buy great companies that are trading cheap and to be early with your purchases as over time you will likely still do very well. Buying troubled companies early carries very different risks when you are early and their business model continues to deteriorate.

 

For those of you who were at the AGM, can we assume that both Abitibi and Canwest were largely written down in Q3 & Q4 or will their be further large write downs in Q1?

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It was a great question to ask to Prem and a candid answer from him. I appreciate that very much. There is no sin in telling mistakes openly, quite the contrary!

 

Regarding Abitibi and CanWest, since it is now official that it was a mistake to do it (at least that early), I  guess that a Buffett quote could underline a fundamental principle:

 

"Time is the friend of the great business."

 

With JNJ, Kraft and some others, we should have time on our side.

 

That being said, I'm overall very satisfied with the Fairfax investment style.

 

 

 

 

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and regarding this sentence:

 

Mr. Watsa also suggested that, in retrospect, he might have waited a few extra months before removing the hedges that Fairfax had in place on its stock exposure.

 

I do not expect Prem and team to predict the bottom of the market. To me, that would be foolish. I don't care if the market goes downer for the short term then when they removed their hedges. What count is the long term and that's, as a shareholder, where my focus is.

 

Cheers!

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That being said, I'm overall very satisfied with the Fairfax investment style.

 

I am also happy with the investment style, but the underwriting leaves something to be desired.

 

We normally get the "if it wasn't for this or that, our combined ratio and underwriting would have been better" story, but the underwriting discipline should anticipate things like Ike, Gustav, et al.

 

Were there any questions about how FFH is planning to bring better performance to their underwriting?

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Prem talked about ratios in the Q&A (I believe). He indicated that the commutation was a strategic decision for which he has no regrets.  By taking a loss of 4% the company was able to redeploy the cash most effectively with good purchases at good prices due to depressed market.  He reiterated that the company will continue to make these kinds of decisions because it takes a long term view.  He will not be swayed by the need to show strong results on each quarterly balance sheet.

 

D

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Prems admission to their mistakes is hard evidence that their investment style remains 'healthy' - & that they haven't been drinking the journalistic cool-aid over their CDS wins. Nice to see.

 

SFK/Abitibi/Canwest are essentially vertically integrated forestry investments, built around newsprint. They may well still work out, but it'll clearly be a lot more work than was originally thought. OK, so the sun dont shine everyday.

 

We can only see newsprint ... but maybe we should be looking at the humble paper bag.

Grocery bags were replaced in the millions by plastic, because they were cheaper, lighter, & less bulky to store. But today NA/European municipalities are banning them from landfllls, you pay 5c/bag, & you pay again to get rid of it. That paper bag is recycled fiber, almost entirely 'green', uses up a fair bit of pulp, & has a steadily/rapidly growing market attributable to municipal regulation. Moats.

 

Perhaps these investments may also turn out to be a lot better than everyone originally thought ?

 

Cheers

 

SD

 

 

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Fairfax underwriting is just fine for a soft insurance market.  They're demonstrating discipline by turning away business that doesn't adequately compensate them for the risk that they're taking.  That means fixed costs as a % of Cr are much higher today.  Don't hate the game.

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For those of you who were at the AGM, can we assume that both Abitibi and Canwest were largely written down in Q3 & Q4 or will their be further large write downs in Q1?

 

Yes, they are largely written down.

 

Were there any questions about how FFH is planning to bring better performance to their underwriting?

 

Prem reiterated that they would continue to shrink business if markets remain soft.

 

Although he did not mention it, I'm of the view that there is a trade off between underwriting and investment opportunity. When potential investment returns are poor, float is less valuable and the priority should be on reducing its cost; on the other hand, when investment returns are promising, you may not want to shrink the float too aggressively as long as you can keep the cost manageable. A 2-3% cost of float is not worth much when you are getting only 3% on treasuries; the same 2-3% cost becomes quite acceptable when you can invest in BRK-insured munis yielding a pretax equivalent of 8%.

 

The reality is that they are price takers in this highly competitive and price sensitive business. Too sharp a cutback in business will hit expense ratios and therefore CRs too. Also, turning away business aggressively now might position them less favourably when the market eventually hardens.

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