Suck It Up Boys!

[Parsad]

I'm reading lots of stuff on the quartely report, and I think people are over-reacting immensely.  Bigger the catastrophe loss, the bigger the combined ratio, the better it is longer-term for companies like Berkshire and Fairfax. 

 

You have incredibly low interest rates right now, volatile equity markets and insurance premiums that were incredibly underpriced for several years.  We are now entering a real hard market and as both Berkshire and Fairfax start to write more and more well-priced business, the combined ratios will go down as the new policies kick in and the old policies start to run-off. 

 

Fairfax's combined ratios aren't high simply because of losses, but because they don't fire employees left, right and center when pricing is not good...so the the actual operating and administrative expenses is what piles onto the loss years.  When business improves, you will see very good combined ratios.  We've been here about three times in the last 12 years, and now the cycle is going the other way.  Patience, patience!

 

And if any of you were waxing poetic in the past about how Fairfax should stick to only insurance and forget about whole non-insurance businesses, that third leg of the revenue stool like Berkshire's is looking pretty good right now, isn't it! 

 

I've received a few emails and read some posts on the bonds and hedges.  Again, while Prem may want to disagree, as well as others on this board, in my opinion, the hedges are a necessity because of the leverage Fairfax uses.  Why doesn't Berkshire hedge?  Because Berkshire's got whole operating businesses that steady their cash flows, use less leverage and keep more cash.  If Fairfax operated at two and half times leverage, kept $4B in cash (or even more cash in just the subs) and had more non-insurance businesses, they would not have to hedge.  You get a 20% drop in Fairfax's investment portfolio (bonds and equities), you get a $5B loss in equity.  If you get a 50% loss just on the equity portfolio, you get a $1.5B hit to equity.  That percentage hit to equity will not happen at Berkshire!  So the quarterly gains/losses you see from the bonds and hedges is the cost of that leverage...which works pretty damn well long-term if you do it right like Prem!

 

Finally, outside of Berkshire, you've got the most ethical, honest, shareholder friendly CEO I know of.  Whose been pretty damn open with this particular group of shareholders on here, and will be sending a host of his executives and investee CEO's to our dinner.  He's been almost as good as Buffett in teaching us about insurance and investments, and his humble, cautious attitude toward business has made many people very wealthy, including himself. 

 

My opinion...short-term shareholders, sell your damn stock if you're worried...long-term shareholders, suck it up if you are concerned.  And as always, only invest as much as you feel comfortable with, so you can get a good nights sleep.  If you are greater than 10% in Fairfax, you better be sure you are comfortable with that risk, because Prem is making a bet on the bond side.  Controlling your own emotions is the biggest part of investing.  If it wasn't difficult, everyone would be rich and beating the market all the time.  Cheers!

 

 

[Santayana]

About 20% in Fairfax and feeling very comfortable with it.

[cwericb]

Bought a little more today @$390. Hope it will slide over the next few weeks so I can pick up some more. Remember the bumpy forecast and FFH sure looks awfully good when the markets tank.

[Cardboard]

I may get some flak for this, but this is simply not accurate:

 

"Fairfax's combined ratios aren't high simply because of losses, but because they don't fire employees left, right and center when pricing is not good...so the the actual operating and administrative expenses is what piles onto the loss years.  When business improves, you will see very good combined ratios."

 

They never had good combined ratios, other than in Asia. One only has to compare with Chubb's U.S. division that does commercial insurance and Crum & Forster. I did not see them terminating much people at all during this soft market and I bet you that their combined ratio will only get better with the hard market, by the way they are already well below 100%.

 

So on the underwriting side of the business, one has to admit that Fairfax is agressive. The primary goal is not to make an underwriting profit, but to have lots available for investment purposes. Anyway, after many years watching them and seeing results from many other in the industries, that is my conclusion.

 

Regarding the hedges, it supports my thesis above. Since they generally do not write profitable insurance business on its own, then something has to protect the downside from investments.

 

I guess that at the end of the day it is a balancing act. If you are too strict on the underwriting side, then you let go a lot of funds to invest. They have been pretty good at balancing that so far. However, there is a major problem IMO. If you look at how much money is invested in common stocks, associates, hedge funds, shorts and derivatives (or the stuff that should make big money), this amount is inferior to shareholders equity. And the income coming from cash and bonds is basically used to cover the shortfall from interest expense, corporate costs and underwriting losses.

 

So the structure is not really ideal vs say a hedge fund or even Berkshire Hathaway. For example, if you look at Berkshire Q3, they had $160 billion in common equity and about $220 billion invested in common stocks and non-insurance assets. So unless bonds keep going up in value which IMO is a macro bet or not unlike what a Ray Dalio would do, then someday results could be disappointing because they won't have enough into productive assets vs shareholders equity.

 

What they seem to be doing is keeping a lot in cash, bonds and derivatives to try to make another coup and then will switch over to more stocks which will solve the issue that I mentioned above. However, isn't some sort of market timing?

 

Cardboard

[PlanMaestro]

One only has to compare with Chubb's U.S. division that does commercial insurance and Crum & Forster. I did not see them terminating much people at all during this soft market and I bet you that their combined ratio will only get better with the hard market, by the way they are already well below 100%.

 

Does anyone have a spreadsheet with the historic CORs of individual P&C insurance companies?

[Junto]

I may get some flak for this, but this is simply not accurate:

 

"Fairfax's combined ratios aren't high simply because of losses, but because they don't fire employees left, right and center when pricing is not good...so the the actual operating and administrative expenses is what piles onto the loss years.  When business improves, you will see very good combined ratios."

 

They never had good combined ratios, other than in Asia. One only has to compare with Chubb's U.S. division that does commercial insurance and Crum & Forster. I did not see them terminating much people at all during this soft market and I bet you that their combined ratio will only get better with the hard market, by the way they are already well below 100%.

 

So on the underwriting side of the business, one has to admit that Fairfax is agressive. The primary goal is not to make an underwriting profit, but to have lots available for investment purposes. Anyway, after many years watching them and seeing results from many other in the industries, that is my conclusion.

 

Regarding the hedges, it supports my thesis above. Since they generally do not write profitable insurance business on its own, then something has to protect the downside from investments.

 

I guess that at the end of the day it is a balancing act. If you are too strict on the underwriting side, then you let go a lot of funds to invest. They have been pretty good at balancing that so far. However, there is a major problem IMO. If you look at how much money is invested in common stocks, associates, hedge funds, shorts and derivatives (or the stuff that should make big money), this amount is inferior to shareholders equity. And the income coming from cash and bonds is basically used to cover the shortfall from interest expense, corporate costs and underwriting losses.

 

So the structure is not really ideal vs say a hedge fund or even Berkshire Hathaway. For example, if you look at Berkshire Q3, they had $160 billion in common equity and about $220 billion invested in common stocks and non-insurance assets. So unless bonds keep going up in value which IMO is a macro bet or not unlike what a Ray Dalio would do, then someday results could be disappointing because they won't have enough into productive assets vs shareholders equity.

 

What they seem to be doing is keeping a lot in cash, bonds and derivatives to try to make another coup and then will switch over to more stocks which will solve the issue that I mentioned above. However, isn't some sort of market timing?

 

Cardboard

 

Cardboard I am with you. I have not invested because the combined ratios historically are not good and his whole operating basis is to earn a larger investment return on the float than his losses on the insurance business.

 

[DCG]

Why not just hold cash/bonds instead of holding equities and hedging them if he is bearish? Long term record aside, their investment results have been very disappointing over the last several years.

[Santayana]

Flexibility around taxable gains and losses?

 

You might not like the investment results, but book value growth over the past 5 years has been great.

[ubuy2wron]

Flexibility around taxable gains and losses?

Plus have ya noticed some  corporate equities are yielding more than their debt. Also buying stocks and then hedging with the index is basically saying I can pick stocks I can ad alpha. If anyone can make this claim its Watsa Hamblin. As I have said before FFH is a hedge fund masquerading as an insurance company without the 2 and 20 vig and all partners locked in for ever. FFH is the perfect investment for scardy cat bulls right now. If the mkt is turning and about to get a lot harder then Prem will do just fine.  Now I am a shareholder again maybe I can make it to the annual meeting

[Guest valueInv]

I am hoping it will fall further, I am looking to double my holdings. That said, I have my doubts about some of his tech picks.

[Uccmal]

Why not just hold cash/bonds instead of holding equities and hedging them if he is bearish? Long term record aside, their investment results have been very disappointing over the last several years.

 

Several years... more like 1 yr. 

 

As usual, people are missing the point of equities, hedges, protecting the insurance float, etc. 

 

 

[Uccmal]

I will put this another way.  I have had 25% after tax gains over 8 years.  I have 40% thereabouts in FFH right now.  Part of the reason I have had such good returns is buying FFH on various pullbacks.  I expect ffh stock will grow in value by about 15% per year over the next 10 years, without taking undue risk. 

 

Can I exceed their returns on my own? Most likely, but that will be icing on the cake, so to speak.

[sdev]

Not to beat a dead horse, but I've been saying it for a while and I'll say it again - people are ignoring the quiet international expansion of Fairfax. They aren't giant game changing bets, but tally all of the individual investments and it turns out Fairfax now has minority stakes in leading insurers all over the world. Over the next 10 years, I expect these investments to come to life as these nations grow and insurance becomes a meaningful part of these economies.

 

One flat year for Fairfax - it's really no big deal!! I'd be angry if the steward of my capital was down 50% and dumped everything on the lows though!  :P

[Parsad]

Not to beat a dead horse, but I've been saying it for a while and I'll say it again - people are ignoring the quiet international expansion of Fairfax. They aren't giant game changing bets, but tally all of the individual investments and it turns out Fairfax now has minority stakes in leading insurers all over the world. Over the next 10 years, I expect these investments to come to life as these nations grow and insurance becomes a meaningful part of these economies.

 

One flat year for Fairfax - it's really no big deal!! I'd be angry if the steward of my capital was down 50% and dumped everything on the lows though!  :P

 

You're absolutely correct!  I remember talking about Fairfax Asia on the old message board several years ago, and at that time it was tiny, but growing rapidly.  No one cared or noticed that arm of the insurance business.  Today, it's got the best combined ratios of any Fairfax insurance arm, continues to grow like a weed, and Prem was way ahead of his peers.  He was also way ahead into India! 

 

I said many years ago that Fairfax is actually growing into the global insurance business that AIG was and should have been.  As long as they remain careful, Fairfax will be one of the top five property-casualty insurers in the world in the next 15-20 years.  Cheers!

[Crip1]

There are several themes to this discussion and to the company itself, so it helps to stratify:

 

Equity Investments: The heavy exposure to equities and concurrent 100% index hedging, as stated, means that shareholders are not receiving the returns on the equity portfolio, but are effectively receiving the delta between Hamblin-Watsa’s returns and the overall market. Based on my knowledge of Hamblin-Watsa, and their historical returns, I am very comfortable with this. Since even the best investors cannot beat the markets consistently in the short term (quarterly, annually etc.), this will occasionally cause results as shown in Q4 2011. We’re not going to hit a home run at every at bat, but I’ll take my chances with Hamblin-Watsa at the plate, so I am comfortable with this. I’m a long-term holder and will be more than happy to take the good with the bad, because over time the good will be much “gooder” than the bad.

 

Bonds: Obviously, the LT bonds are going to lose value once interest rates rise, and LT rates ARE going to rise, the timing of which is anyone’s guess… we know it’s coming. As long as the company has sufficient cash and ST capital to use so that there is no forced selling of these bonds and said bonds can hold until maturity, I’m comfortable with this as well. Implied with this is that the bonds will have a VERY SMALL default rate and, again, understanding the investment acumen within the organization, my comfort level is substantial.

 

International Exposure and Non-Insurance Business: This is the next step in creating a fortress of a company, so I endorse this strategy as well. Time will tell whether the aggregate of these investments will show to have an acceptable rate of return, but the strategy makes sense and I would be of the opinion that the execution of this strategy will be good, considering the team which is executing this strategy.

 

Underwriting: THIS IS THE AREA OF CONCERN! I am tired of hearing “ratio before bad stuff” on damned near every earnings release. The insurance business is the business of “bad stuff”. Yes, I understand that their fixed expenses as a percentage of premium will be higher because they are reticent to let people go, but the fact remains that FFH is not the only company to think this way but FFH’s combined ratios are not only substantially worse than the Chubbs and Markels of the world, but are substantially worse on a consistent basis. Quarter after quarter and year after year we’ve seen this and I don’t feel that FFH management properly acknowledges this. The results are simply unacceptable and I think that Prem should state this AND create and explain a strategy designed to make underwriting a strength of the organization, not a weakness. Maybe the company simply needs to write less business irrespective of how this flies in the face of the institutional imperative? In my professional life, I am responsible to pricing our product (the product being residential mortgages). In the fall we found that our competition was beating the pants off of our company as it relates to rates offered, so our volume dropped considerably compared to 2010. I was NEVER tempted to lower our pricing (margins) to get business (nor was I tempted to reduce staff). I could have had at least 20% more volume in the last 4 months of 2011 had I reduced our margins, but I didn’t. We are sized and positioned to skim the cream and leave the milk for our competition. Maybe it’s a matter of FFH having so much statutory capital that they feel that they need to write business. Perhaps it’s, as Cardboard indicated, that FFH writes policy “…to have lots available for investment purposes”. I don’t know for sure. But, I am confident that if FFH were focus efforts on achieving consistently great or even a good underwriting results, FFH would become an absolute powerhouse of an organization. This may mean shrinking operations, but I think that this should be considered. At bare minimum, I would like to see Prem acknowledge that underwriting results are the biggest issue for the company right now and to state that changes are being designed and will be implemented to address this issue. A man of his integrity should do so.

 

I’ve not sold my position and do not anticipate doing so any time soon as I feel that, in its present form, FFH will outperform the market over time and will provide, at minimum, a satisfactory return. That said, making compelling positive changes to underwriting will virtually ensure said satisfactory return and will afford Long-Term shareholders the best chance of achieving returns far above satisfactory.

 

-Crip

 

[PlanMaestro]

FFH’s combined ratios are not only substantially worse than the Chubbs and Markels of the world, but are substantially worse on a consistent basis. Quarter after quarter and year after year we’ve seen this and I don’t feel that FFH management properly acknowledges this.

 

I am not a shareholder and only follow Fairfax because they are smart and to track their equity portfolio. But what about this exchange? Is there truth to it?

 

 

Daniel Baldini - Oberon Asset Management: When I look at the results of a couple of these insurance companies that folks consider best-in-class like Arch or Markel or White Mountain or W.R. Berkley, their combined ratios over the past couple of years have been lower than Fairfax's and in Arch's and Markel's recent press releases they also talk about his extraordinary cat losses. So, I'm sort of interested to understand a little better how your underwriting strategy might be different from theirs? I mean are you pricing lower than them in expectation or hopes of acquiring more float, which you can vary cleverly invest are you may be intentionally taking more risk with the expectation that when things go well the payoff will be higher, and you get really interesting…?

 

V. Prem Watsa - Chairman and CEO: Daniel, that's a good question. But no, we definitely don't do that. We're pricing lower to get more business so that we can have a higher float so that we have money to invest. We definitely don't do that.

 

But when you look at some of the companies you quoted like Arch, Markel remember Odyssey Re is almost 50% of our business. So, we've got a company that's in the reinsurance business worldwide and it's about 50% of our business. So you have a catastrophe, you compare our results to Everest Re, you compare our results to Transatlantic and we give you results for Odyssey Re, so you can compare Odyssey to any of those companies or PartnerRe or Platinum or any of these other reinsurance company that are Bermuda based, you'll see Odyssey does very well.

 

Then if you look at each of these companies, they are good companies the one's that you mentioned, but you look at them on a five years basis and a 10 year basis and you look at them on a 15, 20 year basis our returns compare very well. In fact, we tend to exceed them over almost any long-term period. But those are good companies, they follow the same approach we do in terms of focusing on underwriting profit and reserving well and that's what we've done for 26 years and we continue to do that.

 

When the market's done as they seem to be doing today, we'll see our expense ratios come down and our loss ratios improve, and have good underwriting profit again. So in the last four years, Daniel, we've dropped our business, if you look at each of our companies Crum & Forster seen it, I mentioned Odyssey, premiums have come down, Northbridge, our premiums have come down, not gone up.

 

So we are definitely not interested in getting float for the sake of getting float. We look at the two sides separately. Our precedence are all focused on underwriting profit, no bonuses compensation for the top-line and no bonuses, compensation for generating float. It's all about underwriting profitability with good reserving.

 

[Cardboard]

Good underwriting at Fairfax means a combined ratio of 95% and that only happens in good years. In Asia it has been different from the start so maybe there is something special there. So when I hear and read things like: "It's all about underwriting profitability with good reserving." It is true in some ways since they are trying to be under 100%, but they are certainly not trying to be best in class as others seem to. It can't be the sole focus. Or if that is truly the best that they can achieve then what is the explanation for the weakness? Is the business that different?

 

So I have no problem with them writing business at close to 100%. However, I have a problem with the kind of statement that are being presented to investors who often don't spend enough time to understand and compare with what is going on elsewhere. Crip and I go back a long way in terms of following Fairfax and he has been a shareholder of Markel as well from which he can observe differences. So IMO some further clarification seems needed. Maybe that it will be hard to explain to non-insurance people, but I think it would be worth trying than just coming out with these statements that do ring hollow after a while.

 

The other issue that I have is that past results are not indicative of future results and what has made Fairfax better than other insurers over time are investment results. While book value has grown at quite a rate when you look from the depth of their issues, it is not phenomenal since the start of 09 even after factoring in dividends that have been received and likely some residual gains from 08. And remember that since early March 09, that the stock market had a phenomenal run. So if you exclude their major bond gains and the CDS bonanza before 09 where do we stand? Even Bill Gross seems to have lost his touch with treasuries and rates. Can it happen to Prem and Co.? Assymetrical bets and wins are also rare. I have had some and I can tell you that it created for me a psychological issue of wanting to repeat again.

 

So unless there is some huge gain coming due to deflation, the current structure and equity/business exposure combined with poor underwriting results will make it near impossible to achieve their stated goal of 15% growth in book value per share over the next few years. The other lever that could change that is being able to acquire businesses with stock. This is what has helped Buffett achieve such numbers, but his stock has been trading much higher than book for a very long time allowing him to use his "expensive" currency to then growth Berkshire per share book value. This is not an available tool to Fairfax currently and may not be for a long time. Where it is available now is to try to buy insurers trading below book while they are just above book. Tough to do IMO unless they are in deep trouble and I don't think that they want to repeat this experience.

 

It is all about the price you pay and what they should be able to achieve. You should see a decent return going forward. I simply see better values elsewhere.

 

Cardboard

[ShahKhezri]

40% of my portfolio in FFH, avg $230 ($200 dividend adjusted).  No plans to sell.  It was at 110% of my portfolio in 2007-08. 

 

I don't plan on increasing my position in FFH, portfolio is currently very overweight insurance with FFH at 40%, MKL 10%, Y 5%, and contemplating a 10% position in L.  The idea behind the overweight insurance is two fold: 1) I started my career in insurance and have a lot of friends that echo the 5-10% rate increases, and 2) I don't see the JNJ, PG and other 3% yielders attractive to my investment strategy but float generating businesses with locked up capital will benefit immensely 10 years down the road by investing there.  Also, having MKL, Y and L at a combined 25% vs. FFH at 40% is a barbell strategy of inflation vs. deflation.  That's how I look at it, the quarterly numbers are just noise to me. 

[kilroy04]

We've had this hand wringing vortex regarding FFH underwriting numerous times on the board.  The fully developed last 8 year record suggests that perhaps we forget.....

 

From the 2011 AGM - Slides 11 and 12:

 

Fully developed 2002-2010 ratios

 

NB - 95.6% - redundancy 02-09 = 7.6%

CF - 99.8% - redundancy = 8.9%

ORH - 91.2% - redundancy = 9.6%

Asia - 88.0% - redundancy = 2.6%

 

Fairfax is very conservative in reserving.  There were a lot of bad quarters and some bad years in that time frame - including Katrina. What they report in a quarter and what then fully develops are very different numbers. Far better to under promise and over deliver. The data suggests that they are very good underwriters when you factor in the under promise and final outcome after reserve release.

 

Here is a link that has a bit of a discussion around the underwriting issue and the implications of a hard market.  Within that thread is a link to the AGM slides.

 

http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/ffh-agm-slides-2011/msg44800/#msg44800

[Parsad]

You guys need to compare apples to apples.  A fellow boardmember contacted me yesterday, and we talked about Fairfax's underwriting.  My comment's are below:

 

I think investors have to keep a longer term view on the undewriting.  Fairfax has constantly acquired poor insurance businesses, and it has taken 3-5 years to turn them around and get the underwriting culture in line with Fairfax's standards.  During that time, the businesses usually have large losses due to poor past premium pricing. 

 

Outside of GenRe, Berkshire hasn't really acquired a substantial insurance business in years, and Markel's business delves into specialty lines and more short-tail business, where there is more control over premium pricing and less volatility.  If you look at acquired Fairfax insurance businesses over 10-15 years, they've written at or below 100%.  So some of the ratios in large insurance businesses that don't look appealing right now, will show better long-term ratios as time passes.

 

Chubb, Markel and what have you all fall into the same category.  Their insurance business is much more diversified than Fairfax's, and they don't rely so heavily on their reinsurance business.  Markel's business is remarkably different than Fairfax's.  Neither company also makes it a habit of acquiring poor insurance businesses and turning them around.  Fairfax has changed that behavior after their experience with TIG and C&F, but what you are seeing in higher legacy combined ratios over the last decade, is a result of skewed combined ratios from higher loss years for the first few years after acquisition.  If you look at the long-term performance of Fairfax acquired insurance businesses, you'll see a very distinct trend of decreasing combined ratios and reserve redundancy. 

 

Do they write business as well as Berkshire?  An emphatic no!  But they do write as well as most of their peers and have made the transition to acquiring better insurance businesses.  The promotion of Andy Barnard to overseeing all Fairfax insurance businesses should tell you that Prem is very motivated in removing this reputation of poor underwriting that seems to have developed.  The reputation wasn't from their underwriting behavior or culture, but the losses developed by acquiring poor insurance companies.  That will go away, and if we are in a hard market, it will go away very quickly before this next cycle is over!  Cheers!

[Parsad]

Also, I answered some questions on the investment portfolio, so here is my response from those as well:

 

There is a real risk with the bond portfolio.  If rates start to rise, their longer duration bonds will get killed.  I don't see rates rising for a couple of years at best, but there is always the possibility that their bet is wrong.  Buffett says it's wrong, but then Buffett may be wrong himself!  :)  In the worst case scenario, they would just hold the bonds to maturity, and if shareholders own it just as long, no issues.  But in the meantime, the fluctuations in the bond portfolio will affect equity, and thus their ratings and statuatory capital.  If it is affected enough, they could be required to add capital and naturally that would have an effect on the stock price.  We will have to wait and see what happens.

 

But view that from Prem's point of view.  He's convinced that inflation is not going to be a problem, and deflation is the real culprit.  That rates will be low for maybe a decade.  He's preparing for the worst case scenario.  That means insurance companies are going to struggle to earn income for the next decade, because the bonds they are rolling over are paying less than 1.5% now and long term bonds are paying less than 4%.  Prem's roughly 7-year duration bond portfolio is paying about 6% in income!  So while Fairfax may get hurt if interest rates rise, they will kill their competition with the income from their bond portfolio.  That is why Prem says if rates rise, they will just hold onto the bonds till maturity, so they will suffer no loss, even though they will incur mark to market losses in the interim. 

 

Personally, I think the equity hedges were the mistake.  They only needed a maximum 50% hedge, because if markets go down, the bond portfolio would be up huge.  They give up any profits on the stocks presently, and I think they were wrong in their assumptions there, as soverign nations did everything they could to keep things afloat.  But Prem doesn't want to give up any dividend income by selling their positions.  By hedging, he kept the income and will have zero loss on the stock portfolio. 

 

What they've effectively done, is make sure they don't lose any money at all over that 7-10 year period.  Equities are 100% hedged, plenty of cash and a bond portfolio paying very good income that they can hold to maturity.  The stock will fluctuate with mark to market, and so will their equity and statuatory capital, but at the end of that 7 year period, they would not have lost a dime in equity.  In the meantime they would have earned 6% annually on the bond portfolio, fat dividends from their stock portfolio, plus any income from insurance. 

 

When you think in terms of people who try and completely look at margin of safety in investments, I can't think of any investors who do it better than Prem and Buffett.  It may just be that both are right.  Buffett in the short term (< 2years) and long term (>7 years), and Prem may be right in the mid-term (>2 years and <7years).  We will see...we will see!  Cheers! 

[original mungerville]

Parsad,

 

On the historical underwriting record, that is a key point almost nobody gets. If you buy businesses at 70% of book instead of 150% of book, however you have additional underwriting losses in the low double digits for 3 years while you turn around the underwriting, you have effectively acquired for around 100% of book. You are still better off than paying 150% of book for an acquisition, however those low double digit additions to the combined ratio really hurt your long-run combined ratio record. So you look like shit but you are actually very astute. You have to make some assumptions and back those turn-around year losses out and capitalise them into an adjusted purchase price. I mean this is a very fundamental point to get to the starting line of an apples-to-apples comparison.  This is critical to understand. The path is not a conventional one, the analysts, the rating agencies, investors, they all hate it - but it is not crazy when you back this stuff out and capitalise it and re-work the numbers.

[original mungerville]

Just to be clear: I am in complete agreement with Parsad. I am just trying to emphasise the point because its so important conceptually to understand this.

[Parsad]

Parsad,

 

On the historical underwriting record, that is a key point almost nobody gets. If you buy businesses at 70% of book instead of 150% of book, however you have additional underwriting losses in the low double digits for 3 years while you turn around the underwriting, you have effectively acquired for around 100% of book. You are still better off than paying 150% of book for an acquisition, however those low double digit additions to the combined ratio really hurt your long-run combined ratio record. So you look like shit but you are actually very astute. You have to make some assumptions and back those turn-around year losses out and capitalise them into an adjusted purchase price. I mean this is a very fundamental point to get to the starting line of an apples-to-apples comparison.  This is critical to understand. The path is not a conventional one, the analysts, the rating agencies, investors, they all hate it - but it is not crazy when you back this stuff out and capitalise it and re-work the numbers.

 

Yes, that's exactly right Mungerville.  That will change going forward.  In five years, investors should look at the combined ratios for companies like Zenith, and then get a better idea of how good or bad Fairfax's underwriting culture is.  Take a look at all the insurance businesses, big or small, they've bought in the last five years, and you get a better idea of what is changing at Fairfax. 

 

Odyssey's underwriting historically has been one of the best in the reinsurance industry, so with Andy overseeing everything now, that standard is going to be the one going forward.  100% or better long-term combined ratios and the acquisition of good insurance businesses at fair prices, rather than poor insurance businesses at cheap prices.  Cheers! 

[Labrador]

Great discussion!  I have owned FFH for a long time and Markel more recently.  My intention is not to sell either.  With both I get great honest management who are best in class at their jobs.  FFH's return to me as a shareholder has backed that up.  If it drops I will buy more.