FRFHF Intrinsic value

[shalab]

Would like to run it by the fairfax heads on this message board. Since the fixed investment income from insurance holdings is low, a higher premium is generally not warranted unless the growth prospects are immense.

 

Property/casualty insurance is going to be more competitive as a bunch of big insurers are becoming healthy again (after the crisis) and want to focus on P&C - e.g; AIG, HIG, Swiss-Re etc. Higher competition typically translates to lower profits.

 

In addition, I don't see avenues for 15% growth in FFH in the current situation, atleast for the next couple of years.

 

Sir Francis Galton, the founder of modern statistics observed the "wisdom of the crowds" in early 20th century:

 

In 1906, visiting a livestock fair, he stumbled upon an intriguing contest. An ox was on display, and the villagers were invited to guess the animal's weight after it was slaughtered and dressed. Nearly 800 participated, but not one person hit the exact mark: 1,198 pounds. Galton's insight was to examine the mean of these guesses from independent people in the crowd: Astonishingly the mean of those 800 guesses was 1,197 pounds, accurate to fraction of a percent.

 

 

[ERICOPOLY]

Sir Francis Galton, the founder of modern statistics observed the "wisdom of the crowds" in early 20th century:

 

In 1906, visiting a livestock fair, he stumbled upon an intriguing contest. An ox was on display, and the villagers were invited to guess the animal's weight after it was slaughtered and dressed. Nearly 800 participated, but not one person hit the exact mark: 1,198 pounds. Galton's insight was to examine the mean of these guesses from independent people in the crowd: Astonishingly the mean of those 800 guesses was 1,197 pounds, accurate to fraction of a percent.

 

No fear was involved to distort their perceptions.

[Packer16]

15 percent should be doable.  They need to make 8 percent on investments or lower cost of float with correspondingly lower investment returns.  They seem to realize bonds will not get them there but stocks and real estate could do the trick.  The 8 percent number is based upon the current level of float and debt to equity of 3x and cost of float/debt of about 3 percent.  If a hard market happens this gets easier.  The historic investment returns have been about 9 percent and BV growth of 19 percent.

 

Packer

[twacowfca]

15 percent should be doable.  They need to make 8 percent on investments or lower cost of float with correspondingly lower investment returns.  They seem to realize bonds will not get them there but stocks and real estate could do the trick.  The 8 percent number is based upon the current level of float and debt to equity of 3x and cost of float/debt of about 3 percent.  If a hard market happens this gets easier.  The historic investment returns have been about 9 percent and BV growth of 19 percent.

 

Packer

 

They should be able to do better than that.  Property rates are firming, up about 7% to 8% this year on average and more on cat exposed insurance.  This indicates a normalized negative cost of float.

 

AIG and the other mega insurers and reinsurers appear to have finally got religion, repenting of their sins of yield chasing.  It remains to be seen how long this will last, but the assumption that a company can afford to lose money on underwriting and make it up on investing going forward is no longer tenable in the current low interest rate environment.

[ubuy2wron]

This brings up an interesting conundrum. FFH and a select list of other companies mkt price is largely set by value investors. How can the price ever get over valued by a significant degree if it is simply traded back and forth between value investors. There is a relatively newish Canadian P&C company which has its roots in a ING spin off called Intact Financial and it is currently trading at 2X book. Is it not likely that overvaluation for FFH will not occur unless it can string a few lumpy return years in a row together and then have less value conscious investors apply an unrealistic multiple to that?

[racemize]

even so, I'm not sure I'd sell it at 2x book, assuming it still had a 15% expected growth going forward indefinitely.

[twacowfca]

This brings up an interesting conundrum. FFH and a select list of other companies mkt price is largely set by value investors. How can the price ever get over valued by a significant degree if it is simply traded back and forth between value investors. There is a relatively newish Canadian P&C company which has its roots in a ING spin off called Intact Financial and it is currently trading at 2X book. Is it not likely that overvaluation for FFH will not occur unless it can string a few lumpy return years in a row together and then have less value conscious investors apply an unrealistic multiple to that?

 

The entire P&C industry is selling at a cyclically low P/E multiple.  Quality will out over time.  The last time the whole market sold at bubble prices, FFH sold at something like three times book value.  FFH is positioned to deliver very good value to shareholders no matter which way the market goes.  :)