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FFH AGM Comments


Uccmal
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I'll start this off:

 

 

FFH specific: my comments in italics

- Averaged down on US megacaps into the winter

- FFH had the highest return on BV in 2008 in the P&C Universe/ AIG one of the lowest

- discussed mistakes - mostly ABH, TS.b, and CGS, & sfk.un - I am guessing - all have been written down on the balance sheet at year end

- 1.5 B in total equity write downs last year imagine if there were no hedges or CDS or bonds

- underwriting ok - looking for better but market hasn't hardened yet - ORH price drops have steadied - some clients are taking prices offered by NB even though they are higher than other quotes flight to quality?

- prepared to easily write double the business

- do not seem inclined to use capital to buy back shares in bulk or buy in ORH in this environment - wants to have alot of capital for any contingencies - buy backs will use up too much - this is after 400 m to bring in NB

- are spending money to develop new aquisitions - small amounts big payoffs - showed chart of the growth of ICICI-Lombard

- appear to be preparing to set up Polish Re and Arab Orient as hubs from which to grow like ICICI

 

 

Economic:

- US housing prices still above long term average - infllation adjusted

- stock markets have corrected according to market cap/GDP chart

- inflation not going to be an issue for years - bought up evidence of past pump priming - 1932, 1990s Japan - there have been no cases of a credit purge leading to inflation.  Very interesting perspective

- followers of Grantham and Van Housington - Van Housington manages some of the bond money.

 

An aside unrelated to this post:

We talked with Wayne C, an analyst from FFH - when he looks at companies he goes back at least 10 years in the annual reports and reads everything - he asked the group later how many people read the auditors report in the AR - a few keeners raised their hands and the rest of us kind of ducked sheepishly.

 

My take overall:

The FFH group is so far ahead of anyone else in terms of investing that they can keep a good portion of my money as long as they are around.  They will easily get the bogey of 15% going forward for a number of years.  Better investors than anyone else excepting the usual suspects (LUK, BRK....).

 

Stock took a jump today.  I wonder if announcing that most of the bad investments had been written down cleared away the fog around that side of the business.

 

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Reflections from my first FFH AGM:

 

First, Sanjeev is a very gracious host and I want to reiterate my appreciation for his making the effort to put on such a great evening on Tuesday. Dinner at Baldali’s was great and the conversation at our table and when Sam, Francis, et al showed up was terrific. It was great to meet several of the folks from the board there such as Al, James, Calonego, etc….wish I had taken a later flight home today so I could have met more after the meeting.

 

The main points that I came away with from the dinner were from Sam. He remarked that the investing landscape had changed dramatically in that when trying to assign an intrinsic value to a company, the possible range of values had expanded dramatically. Example, (my paraphrasing) that if you thought that a specific company’s intrinsic value was, say, $100, you could reasonably presume that the IV was somewhere between $85 and $115. Now, considering the current business environment, the range of IV could vary to a much greater extent, like between $70-$130. What this means is that one needs to look for a greater margin of safety from a pricing perspective now than before.

 

Again, when considering investments, Sam stressed that a strong balance sheet is imperative in this environment. Quality is vital and cannot be compromised upon. Also, echoing a theme from this board, one should move up the corporate food chain, the more senior the better. There are equity-like returns available from bonds but, of course, doing one’s homework is the key to make sure that if you buy a senior bond, for example, that it cannot be made subordinate by further corporate offerings.

 

Regarding Fairfax, Prem indicated what I believe was spoken of on this board. Specifically, FFH’s equity investments are close to the BV, meaning that you are getting (my paraphrasing again) one dollar of a well run mutual fund AND all of the subs underwriting, and all of the other FI investments (Less the incurred corp overhead, debt service, etc) for each dollar of BV one purchases. I remarked to the gentleman next to me that this (FFH) was turning into a machine. Prem also said that while he is not against buying non-insurance companies, a la Berkshire, his preference is buying more float-generating P&C (Not Life) Insurance companies.

 

There is a plethora of other items but those were the big ones in my book…I ask any other attendee to feel free to elaborate and/or correct as they see fit.

 

My final thought on my first visit to the FFH AGM regards the individuals from Fairfax. After hearing Sam, Francis, Brian, Wayne and Prem speak is that these guys are not in any way, shape or form clones of each other. Different backgrounds and definitely different personality types to be sure but they all certainly sing from the same songbook of hard work, thorough analysis, integrity and humility. Everyone was quick to point out the successes of others in the management team rather than themselves. There is a quiet confidence (of course, kicking the market’s butt for the past 18 months may have a way of enabling this) about them which is really refreshing. No arrogance, no cockiness, much humility and a genuine sense of thanksgiving for their success.

 

Oh yeah, the Baked Cheese Tortellini was terrific and I do not think that they bought more WFC

 

-Crip.   

 

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My recollection was that Prem said they started buying WFC around $20.  They continued to buy as the price fell.  This is where my recollection is foggy.  Prem either said that they picked up more at $14. or they got their avg. price down to $14.  Not sure which. 

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Can you guys clarify this part for me.

 

Prem said that any gain in the stock portfolio will go directly to shareholders equity.

 

THUS,

 

current stock portfolio is approx. 20B, current shareholders equity is 5B.

 

If the stock part doubles, that would increase the shareholders equity by 20B or 400%?  So the shares BVPS should infact go up 400% if this happens?

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Can you guys clarify this part for me.

 

Prem said that any gain in the stock portfolio will go directly to shareholders equity.

 

THUS,

 

current stock portfolio is approx. 20B, current shareholders equity is 5B.

 

If the stock part doubles, that would increase the shareholders equity by 20B or 400%?  So the shares BVPS should infact go up 400% if this happens?

 

The current stock portfolio is not $20 B

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current stock portfolio is approx. 20B, current shareholders equity is 5B.

 

Hi ValueBuff,

 

If the stock portfolio represents 100% of equity, that would mean approximately 5 billions. The remain portfolio is mainly in bonds. If the stock portfolio were to double, all else being equal, our book value would go up significantly (but I guess not by 100%, since there would be ultimately taxes on these gains and minority interest)

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My take on the Wells question:

 

I'm pretty sure Prem said that they averaged all the way down to $14 - meaning that $14 was the lowest price paid, not their average cost. They stopped buying after that because they were up against prudential exposure limits per investment.

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Sorry, In reviewing the post I realize that I was wrong above.  Prem did say that they bought down to 14 and then watched the stock drop lower after that.  The average price is probably around 17 if that was the case. 

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Mungerville, Partner, Basl,

 

I can understand your eagerness to know more but I am still "recovering" from the trip. I have more to add and will try to post over the weekend - unless someone else beats me to it.

 

For now, a few quick takes that I got:

 

a) Insurance mkts remain soft at the primary level; reinsurers showing more price discipline.

b) Mkt cap/GDP now close to long term average - but no reason why it cannot overshoot on the downside as shown in the long term chart.

c) Brian Bradstreet still bearish (but he is THE bear at HWIC; of course, he also got the CDS call right); Prem and Francis (I think Sam too) take the view that prices in Q4 were sufficiently attractive that risk was worth taking. Prem emphasised that they have been early (in the past with CDS and short equity positions) and could be early this time but that they will do well 5-10 years out. Francis still sees more value in bonds than in equities. Prem said that about 80-85% (I might be a bit off with this %age - could someone confirm or correct this?) of equities are in high quality companies (JNJ, KFT, WFC, DELL etc).

d) Brian said that the thing that kept him up at night was worrying what happens when helicopter Ben stops flooding the mkts with liquidity (and what will make him do this). Would this be when the economy really collapses?

e) Inflation and USD will likely be problems later on but not yet. Improvement in US current account deficit will provide support to USD for time being. Time will likely come when they hedge against USD weakness but not now.

f) Biggest headwind for US economy is that 80% of the economy (the private sector) is deleveraging vs the 20% (govt) that is leveraging to prevent a total collapse. Who is going to win this battle?

 

That's it from me for now.

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- do not seem inclined to use capital to buy back shares in bulk or buy in ORH in this environment - wants to have alot of capital for any contingencies - buy backs will use up too much - this is after 400 m to bring in NB

 

Prem also said that while he is not against buying non-insurance companies, a la Berkshire, his preference is buying more float-generating P&C (Not Life) Insurance companies.

 

Al and Crip, I seem to have missed these comments. Wld appreciate if you could elaborate in what context (and in response to what questions) these comments were made.

 

Can anyone else at the meeting add any colour to these comments please?

 

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I thought the reason Prem said he did not like life insurance was not because it did not generate float but because of the possibility of a run upon a downgrade and due to guaranteed returns provided in some policies which can be a dangerous liability in deflationary world. He also pointed out that in Japan all but the largest life insurer has gone into insolvency.

 

Packer

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Oec, A question was asked if Prem was happy with the debt to equity ratios and the capital stucture of the company.  He answered by saying that they had 1.5 B in cash and equivalents at year end, and then spent 350 on NB.  He then said they bought in 1 million shares of FFH last year.  He went on to say that even though the stock was below book they were not going to jeopardize the capital position in any way.  REad nother way - he is managing investor expectations downward in this regard. 

 

Myself and another board member surmised from this that buy backs, including ORH, were not a priority for now.  Having a huge amount of capital was. 

 

To be honest it would not surprise me if they issued some long dated debt this year. 

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