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FFH AGM slides - 2011


omagh
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A few things stand out for a long standing shareholder. (my initial acquisition of the stock was in the late 1990's when the multiple approached book value subsequent to that stratospheric rise)

 

1. Underwriting:   Slide 11.  Despite some concerning quarterly and annually reported combined ratios, fully developed combined ratios were all less than 100% for the years 2002-2010. Of particular note, underwriting combined ratio was 91.2% for ORH - its premium contribution was larger than all others combined.  These guys know how to underwrite  - and that hasn't been their reputation even on this board.

 

2.  Fairfax outside of North America:  Fairfax Asia was nothing - or nearly nothing when I started holding and building my holding.  It is now nearly 700 million in equity.  Looks like the same growth strategy will be playing out in the  Fairfax 'Other' category i.e. Kuwait, Dubai, Brazil and China. (slide 16). Fairfax is a 'within the company' segmental growth strategy and story.

 

3. Individual companies and organization:  Slide 17 is the best visual description of the company and how it is organized that I've seen.  Good to see the very clear organization and description of businesses.

 

4. Pent up Financial Power:  Slides 13 and 18 show Fairfax's potential.  Premiums/statutory surplus is 0.4-0.8.  They have room to double and triple premiums in a hard market - exactly what happen in the last hard market. (And there is actually more room than that in terms of legal statutory requirements)  It was dramatic to witness the top line growth real time in the last hard market.  It will be dramatic to see it again - as will be the effect on book value and stock price.  Barring another crazy capital gain (like from their consumer price index play) this is likely what will drive the stock price to double or go over 1,000.  Who knows when the next hard market will happen.  Events like the Japan tragedy or another shake up in the Dow could be a trigger.  When it happens - it will probably be a wrenching event to all.  Assuming it is not so catastrophic an event as to destroy the company, it will powerfully strengthen it.  Fairfax's risk management by track record has been very good.

 

5. Optionality: The CPI derivative contracts are powerful for safety and potential capital gains - Slide 34.

 

6.  A question for Fairfax:  This has partially been done, but a slide or summary table in the annual report showing the total cost of acquiring C&F and TIG as well as the associated costs related to the unforeseen (i.e. under reserving, runoff, floating part of ORH and NB as well as re-acquiring the same) vs the net financial benefit (capital gains from the float, business written, float growth, the CDS gains) to date of having acquired those two companies.  There is a sense that the balance is now positive and actually will explode to the positive in a hard market.  Can someone at Fairfax please provide a discussion of this on a running basis for a few years?  The question of whether acquiring those two companies was a mistake could be clearly answered and put to rest.

 

7. A wish:  I'm still hoping for the conditions (and level of commitment) that makes decreasing the share count a reality - either by long term open market acquisitions, or en bloc from large shareholders.  The total capital size is not yet limiting for growth, but will become that at some point.  A lower share count (under the right conditions) disproportionately enhances value for the long term shareholder. It would be good to see the share count back down in the low teens or even 10-12 million range.

 

It looks like there is a good chance that the cost of float will go below zero in the not too distant future due to the fact that the last 8 years have been excellent and the current capital will substantially outweigh the earlier smaller amounts where there was some cost to float.

 

To Prem Watsa and the Fairfax team - thank you for being exceptional stewards!  The long term trends, even including a half dozen difficult years, have been remarkable.

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7. A wish:  I'm still hoping for the conditions (and level of commitment) that makes decreasing the share count a reality - either by long term open market acquisitions, or en bloc from large shareholders.  The total capital size is not yet limiting for growth, but will become that at some point.  A lower share count (under the right conditions) disproportionately enhances value for the long term shareholder. It would be good to see the share count back down in the low teens or even 10-12 million range.

 

You talked about the company doubling or tripling in a hard market, due to what is effectively an excess of capital.

 

Paying it out now to reduce the share count will reduce future opportunity.  The company you'd have left would be more levered, so better short-term returns, but during the hard market you'd be less able to expand and thus wind up with relatively higher combined ratios (relative to the lower ones that would come with expanding business at great pricing).

 

That would be my take on why you aren't seeing them buying shares.

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I think Prem is an investment god and he is the best hedge fund mgr on the planet IMO and FFH is a hedge fund in my opinion without the 2 and 20. I do not own any right now but at the right price I am all in I post a chart of the relative performance of my largest and only insurance investment right now ELF.

http://finance.yahoo.com/echarts?s=ELF.TO+Interactive#symbol=elf.to;range=my;compare=ffh.to;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;

 

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Ericopoly - Agreed. It has to be the right circumstances and now that doesn't seem to be the situation. Additionally, they needed to buy in ORH and NB before it would be reasonable to decrease the share count appreciably.  I'd be satisfied with a serious buy in over 10 years i.e. whenever the FFH capital, FFH leverage and market value allowed for purchase of a high quality insurer (FFH) at something close to book value or less. Prem has mentioned that they are opportunistic.  He has also mentioned that this is on their radar.  In the early 90's they purchased a bloc of close to 25%!

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7. A wish:  I'm still hoping for the conditions (and level of commitment) that makes decreasing the share count a reality - either by long term open market acquisitions, or en bloc from large shareholders.  The total capital size is not yet limiting for growth, but will become that at some point.  A lower share count (under the right conditions) disproportionately enhances value for the long term shareholder. It would be good to see the share count back down in the low teens or even 10-12 million range.

 

You talked about the company doubling or tripling in a hard market, due to what is effectively an excess of capital.

 

Paying it out now to reduce the share count will reduce future opportunity.  The company you'd have left would be more levered, so better short-term returns, but during the hard market you'd be less able to expand and thus wind up with relatively higher combined ratios (relative to the lower ones that would come with expanding business at great pricing).

 

That would be my take on why you aren't seeing them buying shares.

 

eric, i think you hit the nail on the head. all p/c insurance co's need to weigh these 2 different dynamics aginst each other when contemplating share buybacks. but i think they should also be mindful of the possibility of fat tails like 911 & katrina & thus require a larger margin of safety.  this really hit home with me when i was following white mt closely & by extension montpelier re who they had a big investment in. mrh was buying back shares hand over fist at a big discount to book, increasing book val per share at a clip to make your avg dyed in the wool value investor smile, then bang! katrina (i think it was that one) hit the industry for a loop. and mrh was particularly hard hit. all those buybacks at a discount to book turned out to be a mirage after katrina, & exposed them as one of those who were swimming naked when the tide went out, tho they didnt even know it at the time.

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I think Prem is an investment god and he is the best hedge fund mgr on the planet IMO and FFH is a hedge fund in my opinion without the 2 and 20. I do not own any right now but at the right price I am all in I post a chart of the relative performance of my largest and only insurance investment right now ELF.

http://finance.yahoo.com/echarts?s=ELF.TO+Interactive#symbol=elf.to;range=my;compare=ffh.to;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;

 

 

It's the first time I hear of ELF. I can't even seem to find a website for them... Do you have a link and/or a short investment thesis?

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I think Prem is an investment god and he is the best hedge fund mgr on the planet IMO and FFH is a hedge fund in my opinion without the 2 and 20. I do not own any right now but at the right price I am all in I post a chart of the relative performance of my largest and only insurance investment right now ELF.

http://finance.yahoo.com/echarts?s=ELF.TO+Interactive#symbol=elf.to;range=my;compare=ffh.to;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;

 

 

It's the first time I hear of ELF. I can't even seem to find a website for them... Do you have a link and/or a short investment thesis?

 

Do a search on this forum. It's been discussed many times.

 

BeerBaron

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I think Prem is an investment god and he is the best hedge fund mgr on the planet IMO and FFH is a hedge fund in my opinion without the 2 and 20. I do not own any right now but at the right price I am all in I post a chart of the relative performance of my largest and only insurance investment right now ELF.

http://finance.yahoo.com/echarts?s=ELF.TO+Interactive#symbol=elf.to;range=my;compare=ffh.to;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;

 

 

It's the first time I hear of ELF. I can't even seem to find a website for them... Do you have a link and/or a short investment thesis?

Here is a link to their sedar filings.

 

http://sedar.com/DisplayProfile.do?lang=EN&issuerType=03&issuerNo=00001249

 

This co trades at around 65% of BV currently. The co. has generated returns to shareholders comparable to FFH over the long term. My biggest wet dream would be FFH taking them over in a share swap.

 

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I’m liking slide 12.

 

Reserve redundancies 2002-2009 nearly at 10% for the active companys.

 

I’ll take high reserves on the front end (which then looks bad in the combined ratio) in return for a few years of investment and then reserve redundancy later.

 

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Reserve redundancies 2002-2009 nearly at 10% for the active companys.

 

Sorry I am not up on the jargon, but when you say "10% reserve redundancies" do you mean they were able to release 10% of there reserves per year for the 2002-2009 period???  I assume this was because they were very conservative with there loss projections.

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