2013 results are out

[giofranchi]

Most would argue that global warming should be pressuring UW

 

I don’t think it works exactly that way... Let me explain: I see insurance as a “relative” game, meaning that, to make money from insurance operations, all you must be able to do is to assess risk better than your competitors. That’s it! However the rules of the game might change, as long as someone is a better judge of risk and probabilities, he or she might go on posting underwriting profits.

Needless to say, I like the renewed effort FFH is making to finally become an overall profitable underwriter.

 

Gio

 

[LowIQinvestor]

From Transcript:

 

"We expect the unrealized mark-to-market losses to reverse in the future. In fact, as of February 11th, two days

ago, we had an unrealized mark-to-market gain in 2014 of approximately $900 million. After-tax, this would have

laminated our loss in 2013."

 

"I caution you, we don’t pay too much attention to short-term fluctuations in market prices"

 

So if they don't pay attention to short term fluctuations, why are they talking about one month of performance in 2014???

 

 

[giofranchi]

From Transcript:

 

"We expect the unrealized mark-to-market losses to reverse in the future. In fact, as of February 11th, two days

ago, we had an unrealized mark-to-market gain in 2014 of approximately $900 million. After-tax, this would have

laminated our loss in 2013."

 

"I caution you, we don’t pay too much attention to short-term fluctuations in market prices"

 

So if they don't pay attention to short term fluctuations, why are they talking about one month of performance in 2014???

 

I guess it is just an example… One of the most difficult thing to do for investors, according to Mr. Ray Dalio, is to think that what has gone on for some time might change in the future and even revert. You get the same idea in the chapter about “mean reversion” in “Thinking Fast and Slow” by Mr. Daniel Kahneman… When Mr. Watsa keeps repeating that things might be reversed, he simply is not believed and summarily dismissed by… well, almost anybody! If instead he provides evidence that things might actually reverse, maybe people will think twice before judging.

 

Gio

 

[ERICOPOLY]

Mr. Watsa keeps repeating that things might be reversed, he simply is not believed and summarily dismissed by… well, almost anybody!

 

Sure.  For equities.

 

However, the bond market might reverse, meaning rates might go higher as deleveraging comes to a conclusion.  Then, he'll be sitting on big losses in his bond portfolio.  Many people have warned about rates going higher... but they are being ignored by almost everybody.

 

 

 

 

[Kraven]

What I find interesting is that people keep talking about how we will see if they are right in the future. It's been 5+ years. Doesn't there need to be some kind of time component to a determination of whether someone is "right" about a course of action?  Broken clocks and all that. It's like predicting that San Francisco is due for another major earthquake. If it occurs in 2024 are you right?

[LowIQinvestor]

What I find interesting is that people keep talking about how we will see if they are right in the future. It's been 5+ years. Doesn't there need to be some kind of time component to a determination of whether someone is "right" about a course of action?  Broken clocks and all that. It's like predicting that San Francisco is due for another major earthquake. If it occurs in 2024 are you right?

 

+1

 

From Transcript:

 

"We expect the unrealized mark-to-market losses to reverse in the future. In fact, as of February 11th, two days

ago, we had an unrealized mark-to-market gain in 2014 of approximately $900 million. After-tax, this would have

laminated our loss in 2013."

 

"I caution you, we don’t pay too much attention to short-term fluctuations in market prices"

 

So if they don't pay attention to short term fluctuations, why are they talking about one month of performance in 2014???

 

I guess it is just an example… One of the most difficult thing to do for investors, according to Mr. Ray Dalio, is to think that what has gone on for some time might change in the future and even revert. You get the same idea in the chapter about “mean reversion” in “Thinking Fast and Slow” by Mr. Daniel Kahneman… When Mr. Watsa keeps repeating that things might be reversed, he simply is not believed and summarily dismissed by… well, almost anybody! If instead he provides evidence that things might actually reverse, maybe people will think twice before judging.

 

Gio

 

 

I think my point may have been missed here... You can't say you don't pay attention to short term fluctuations and in the same breath site your mark to market performance after the first 40 days of 2014. I have a lot of respect for Fairfax but I think this was an error on their part. It makes it seem as though they do, in fact, care about short term fluctuations when they move in their favor.

[warrior]

What I find interesting is that people keep talking about how we will see if they are right in the future. It's been 5+ years. Doesn't there need to be some kind of time component to a determination of whether someone is "right" about a course of action?  Broken clocks and all that. It's like predicting that San Francisco is due for another major earthquake. If it occurs in 2024 are you right?

Kraven  you have  a good point.

Or  one was expecting to retire in 10yrs -15 , and due to investment poor result  all objectives need to be adjusted or retirement postponed ,well, it would be hard… naturally, individual should question the plan or an retirement adviser .

if one is wrong , wrong, wrong for 15 years … and than right ,may not work for some people.

So ,as of now it remains to be seen , if 100% hedging  in 2009  at the lowest market valuation was worth it.  as, of today , FFH shows no growth, 1.16x BV at the top end of its historical range which is not cheap for me . 

 

[tombgrt]

From Transcript:

 

"We expect the unrealized mark-to-market losses to reverse in the future. In fact, as of February 11th, two days

ago, we had an unrealized mark-to-market gain in 2014 of approximately $900 million. After-tax, this would have

laminated our loss in 2013."

 

"I caution you, we don’t pay too much attention to short-term fluctuations in market prices"

 

So if they don't pay attention to short term fluctuations, why are they talking about one month of performance in 2014???

 

 

 

That is something specific that has caught my attention already in the past as well. He may be right, but that way you can make almost anything look good.

 

What I find interesting is that people keep talking about how we will see if they are right in the future. It's been 5+ years. Doesn't there need to be some kind of time component to a determination of whether someone is "right" about a course of action?  Broken clocks and all that. It's like predicting that San Francisco is due for another major earthquake. If it occurs in 2024 are you right?

 

+1. If I'm not mistaken, people already said that stuff in early/mid 2012. Two full years later and hey, it might only happen in 2016!

 

And Prem now says he's hedging for a 30%+ decline. 30% wouldn't even get him to break even. After 5years of earnings growth etc, the market's fair value is quite a bit higher as well. If it was 900-1000 back then, it might easily be 1200 now. So is he hoping that the market goes well below fair value (and soon!) to be proven right? 

 

Mentioning how right you were in a one time event (2008) shouldn't give you endless credit either imo. That being said, he's likely right to stay hedged now!

 

 

[giofranchi]

What I find interesting is that people keep talking about how we will see if they are right in the future. It's been 5+ years. Doesn't there need to be some kind of time component to a determination of whether someone is "right" about a course of action?  Broken clocks and all that. It's like predicting that San Francisco is due for another major earthquake. If it occurs in 2024 are you right?

 

Hi Kraven,

yes, I agree! And I repeat my “7 lean years + 3 boom years” model for FFH: 7 years of no return, followed by 3 years of 35% cagr… therefore, 3 more years of no return to go! ;)

 

Cheers,

 

Gio

 

[Guest valueInv]

What I find interesting is that people keep talking about how we will see if they are right in the future. It's been 5+ years. Doesn't there need to be some kind of time component to a determination of whether someone is "right" about a course of action?  Broken clocks and all that. It's like predicting that San Francisco is due for another major earthquake. If it occurs in 2024 are you right?

 

Hi Kraven,

yes, I agree! And I repeat my “7 lean years + 3 boom years” model for FFH: 7 years of no return, followed by 3 years of 35% cagr… therefore, 3 more years of no return to go! ;)

 

Cheers,

 

Gio

 

I thought you said you don't know when the boom years are. So how do you know there are three more years of no returns ?

[giofranchi]

What I find interesting is that people keep talking about how we will see if they are right in the future. It's been 5+ years. Doesn't there need to be some kind of time component to a determination of whether someone is "right" about a course of action?  Broken clocks and all that. It's like predicting that San Francisco is due for another major earthquake. If it occurs in 2024 are you right?

 

Hi Kraven,

yes, I agree! And I repeat my “7 lean years + 3 boom years” model for FFH: 7 years of no return, followed by 3 years of 35% cagr… therefore, 3 more years of no return to go! ;)

 

Cheers,

 

Gio

 

I thought you said you don't know when the boom years are. So how do you know there are three more years of no returns ?

 

In fact! I don't know and I don't really care! ;)

 

Gio

[giofranchi]

What I do believe is this: if the markets keep rising like they did in 2012 and 2013 for 3 more years, FFH will make no money for 3 more years, then it will make 35% compounded annual for the following 3 years.

 

Gio

[Guest valueInv]

What I do believe is this: if the markets keep rising like they did in 2012 and 2013 for 3 more years, FFH will make no money for 3 more years, then it will make 35% compounded annual for the following 3 years.

 

Gio

 

How do you know that they will make 35% for 3 years?

 

[wknecht]

Mr. Watsa keeps repeating that things might be reversed, he simply is not believed and summarily dismissed by… well, almost anybody!

 

Sure.  For equities.

 

However, the bond market might reverse, meaning rates might go higher as deleveraging comes to a conclusion.  Then, he'll be sitting on big losses in his bond portfolio.  Many people have warned about rates going higher... but they are being ignored by almost everybody.

My thinking is that for a few reasons, rate movements have opposite effects on book value and economics. There are a lot of long duration insurance liabilities, so the bond portfolio is probably "overhedged". But for financial reporting, I don't think rates have any effect on the balance sheet value of the liabilities. Also, in banking terminology they seem asset sensitive, so as rates rise their reinvestment opportunities increase faster than insurance rates decrease, and relative cost of float economics improve. Not an insurance expert, so I don't know that prices respond so directly to rate movements like in banking.

 

But in any case, I think consistent with the insurance liabilities, looking at the bonds at cost is the more appropriate way to evaluate Fairfax's book value. Particularly for changes in book value.

[ERICOPOLY]

Mr. Watsa keeps repeating that things might be reversed, he simply is not believed and summarily dismissed by… well, almost anybody!

 

Sure.  For equities.

 

However, the bond market might reverse, meaning rates might go higher as deleveraging comes to a conclusion.  Then, he'll be sitting on big losses in his bond portfolio.  Many people have warned about rates going higher... but they are being ignored by almost everybody.

My thinking is that for a few reasons, rate movements have opposite effects on book value and economics. There are a lot of long duration insurance liabilities, so the bond portfolio is probably "overhedged". But for financial reporting, I don't think rates have any effect on the balance sheet value of the liabilities. Also, in banking terminology they seem asset sensitive, so as rates rise their reinvestment opportunities increase faster than insurance rates decrease, and relative cost of float economics improve. Not an insurance expert, so I don't know that prices respond so directly to rate movements like in banking.

 

But in any case, I think consistent with the insurance liabilities, looking at the bonds at cost is the more appropriate way to evaluate Fairfax's book value. Particularly for changes in book value.

 

I understand you in terms of liability management, but a hit to book value is a hit to book value.  Similarly, a drop in equities markets merely means that company earnings/dividends can be reinvested into the shares at a higher earnings yield.  They still hedge for this though -- but they don't when it comes to bonds.

[ourkid8]

Gio is assuming the market will continue to march toward for 3 more years and then we will get a huge correction.  What he is also not accounting for is that we also hold equities which will also fall which should net out the gains from the hedges.  I really wish they did not hedge, pay down debt and hold additional cash at the holding company.

 

Tks,

S

 

What I do believe is this: if the markets keep rising like they did in 2012 and 2013 for 3 more years, FFH will make no money for 3 more years, then it will make 35% compounded annual for the following 3 years.

 

Gio

 

How do you know that they will make 35% for 3 years?

[bkirkpatrick]

As Prem is worried (aware?) that we are in the middle of a 100 year financial event the cost of insurance to stay fully hedged is more justifiable than one would pay to protect against the potential for a 100 year event.  The storm analogies are misleading, I would assume if the worst hurricane in 100 years was approaching the shores of the US the cost to insurance with the storm on the horizon would be different than one would have paid to purchase the equivalent insurance the previous winter?

[gary17]

Prem is hedging for a 100 year event. So that'd be worse than the great depression and the sell of in the 80s... that's like a 50% and more market decline.

 

Think that could very well happen. On the other hand. We have a more interconnected world economy today. There's more study / understanding of economics .... so while the probability of the event occurring is probably as likely as in prior circumstances, the consequence may not be as great due to the advancement of our societies.... 

 

Optimism is a competitive advantage.

[writser]

What I find interesting is that people keep talking about how we will see if they are right in the future. It's been 5+ years. Doesn't there need to be some kind of time component to a determination of whether someone is "right" about a course of action?  Broken clocks and all that. It's like predicting that San Francisco is due for another major earthquake. If it occurs in 2024 are you right?

 

Hi Kraven,

yes, I agree! And I repeat my “7 lean years + 3 boom years” model for FFH: 7 years of no return, followed by 3 years of 35% cagr… therefore, 3 more years of no return to go! ;)

 

Cheers,

 

Gio

 

So you're happy to strive for ~9% annualized gross return?

[Kraven]

What I find interesting is that people keep talking about how we will see if they are right in the future. It's been 5+ years. Doesn't there need to be some kind of time component to a determination of whether someone is "right" about a course of action?  Broken clocks and all that. It's like predicting that San Francisco is due for another major earthquake. If it occurs in 2024 are you right?

 

Hi Kraven,

yes, I agree! And I repeat my “7 lean years + 3 boom years” model for FFH: 7 years of no return, followed by 3 years of 35% cagr… therefore, 3 more years of no return to go! ;)

 

Cheers,

 

Gio

 

Gio, I would maintain that your projection is speculation and not knowable. At the end of the day we all do what makes us comfortable. You are smarter than me though so what do I know.

[TwoCitiesCapital]

From Transcript:

 

"We expect the unrealized mark-to-market losses to reverse in the future. In fact, as of February 11th, two days

ago, we had an unrealized mark-to-market gain in 2014 of approximately $900 million. After-tax, this would have

laminated our loss in 2013."

 

"I caution you, we don’t pay too much attention to short-term fluctuations in market prices"

 

So if they don't pay attention to short term fluctuations, why are they talking about one month of performance in 2014???

 

I think to say this is hypocrtical as you did below this comment is disingenuous. It's not like Prem is pumping up their short term results. He's simply staing that the massive loss that was reported was reversed in a mere two months of positive equity performance. This is a very valid example that a short term lense of 1 quarter or 1 year doesn't give an accurate depiction of their results.

 

 

What I find interesting is that people keep talking about how we will see if they are right in the future. It's been 5+ years. Doesn't there need to be some kind of time component to a determination of whether someone is "right" about a course of action?  Broken clocks and all that. It's like predicting that San Francisco is due for another major earthquake. If it occurs in 2024 are you right?

 

There absolutely should be. When Prem said he was buying 10 year contracts, why are people assuming that he's wrong (and have been for the last two years) when only half the time has elapsed?

 

Prem is hedging for a 100 year event. So that'd be worse than the great depression and the sell of in the 80s... that's like a 50% and more market decline.

 

Think that could very well happen. On the other hand. We have a more interconnected world economy today. There's more study / understanding of economics .... so while the probability of the event occurring is probably as likely as in prior circumstances, the consequence may not be as great due to the advancement of our societies.... 

 

Optimism is a competitive advantage.

 

Funny how 1 in 100 year events happen far more often than that.

1929-1932 - peak to trough of 90% over the course of TWO massive market drops (this is what Prem is concerned about)

2007-2009 - peak to tough of 54%

1937-1938 - peak to trough of 52%

1973-1974 - peak to trough of 46%

1939-1942 - peak to trough of 39%

1968-1970- peak to trough of 36%

2000-2002 - peak to trough of 34%

 

Notice in the last 100 years, there were 7 instances of a 30+% corrections. You'll also notice that they all seem to cluster together with 3 occurring from 1929 through 1942, 2 in 1970s, and 2 in the 2000s. Now, I'm a betting man and I see a world that has more debt than any historical precedent, politicians who prefer to paper over the problems with bailouts and moral hazards, and a world that is more interconnected and susceptible to external shocks than it has been in the past....and because we haven't seen a major decline in stock indices in 5 years it means Prem is an idiot or has lost his touch?No. It means he has a better knowledge of history than you.

 

That's not to say he'll be right. It's simply to say to hedge against what he fears occurring means to hedge for the better part of a decade. It's common knowledge that he's hedged and the duration of the contracts should have told you something. If you don't like it, you're more than able to sell your shares. It's that simple.

 

 

I for one am glad he's hedged (provides catastrophe insurance for my own portfolio) and I'm increasingly glad to see improvements in the underwriting without having to worry about equity market performance on their capitalization ratings and regulator scrutiny. I fully expect them to increase premiums in a major way if the market keeps hardening and we will see massive insurance gains and increases in float which will support increased leveraged equity exposure when he deleveraging has occurred (traditionally takes 10-15 years). Heres to the long term success of Fairfax and their patient investors. Cheers!

 

[Phoenix01]

Zachmansell,

 

The whining over the hedges is really annoying.  Thank you for the thought you into your post.

 

Phoenix01

(Patient investor since 2000)

[ERICOPOLY]

10%-20% declines can happen in any given year.  So they should be hedged for that all the time, if they are hedged for it now.  Don't you see that?

 

They are worried about potential for a far greater decline.  They could instead simply express that worry by purchasing puts that are 10%-20% out-of-the-money.  That way, they accept the normal 10%-20% decline that any year can bring them, but they are protected in case anything far more severe arises.

 

Well anyway, that's the only irrational thing I see with their hedges.  They are hedging against every single penny of potential decline... when honestly, they know that in any give year, at any given time, you could be suffering 10%-20% decline.  That's just life in the markets.

 

So that's just what I find frustrating -- you can protect against 1-in-100 year declines without losing most/all of your gains when the market goes up instead. 

 

It seems pretty obvious really.

[wisdom]

I was watching an interview with Prem and the interviewer told Prem that his returns were better than Buffett's over the last 10 years. Prem's reply was that I only have a 25 yr record whereas Buffett has an excellent record over 40+ years. So he doesn't even come close.

 

I doubt many individuals here have a 25 yr record close to HW. We are all experts as a result of the run up over the last few years.

 

It reminds me of how people question every investment/decision Buffett makes only for him to be proven right in the long run most of the time.

 

It is interesting to watch. Some names whose investments have been considered wrong over the last few years - Buffett, Berkowitz, Watsa, Lampert. I know who I would rather invest/bet with.

[Guest valueInv]

 

1929-1932 - peak to trough of 90% over the course of TWO massive market drops (this is what Prem is concerned about)

2007-2009 - peak to tough of 54%

1937-1938 - peak to trough of 52%

1973-1974 - peak to trough of 46%

1939-1942 - peak to trough of 39%

1968-1970- peak to trough of 36%

2000-2002 - peak to trough of 34%

 

Notice in the last 100 years, there were 7 instances of a 30+% corrections. You'll also notice that they all seem to cluster together with 3 occurring from 1929 through 1942, 2 in 1970s, and 2 in the 2000s. Now, I'm a betting man and I see a world that has more debt than any historical precedent, politicians who prefer to paper over the problems with bailouts and moral hazards, and a world that is more interconnected and susceptible to external shocks than it has been in the past....and because we haven't seen a major decline in stock indices in 5 years it means Prem is an idiot or has lost his touch?No. It means he has a better knowledge of history than you.

 

 

The fact that those denies happened - was it correlation or causation?

 

Is there anything different about the 2008 decline when compared to the other ones?