Fairfax 2017

[chrispy]

Dazel, I was able to double down near the bottom and feel very comfortable having a large position in FFH...  Your posts and the subsequent discussions have been very useful to me. 

 

Very interested to see how they deploy all of this capital and hoping its not in RFP like investments.  Do you think they would ever give a small amount of money to someone like Brookfield for stable returns from real assets?

[investmd]

Dazel,

Thanks for sharing your insight and disclosing your big position in FFH. In re-reading this thread, the points I can glean from which you've built an argument for FFH include large cash flow, outstanding Bond Investing with Bradstreet, increased focus on insurance rather than capital gains, advantaged position in fast growing economy of India, focusing more on quality, & world wide acquisitions making it more like a BRK.

 

Since you started the thread at end of July 2017, further cash has been raised through First Capital and Lombard deals and FFH has announced share buy backs. The stock is up 15% since July 2017.

 

Can you share what you would consider to be "fair market value" today? When you bought into this "hated/misunderstood" stock in a big way, you must have had an estimate of how undervalued it was.

 

Curious to hear your thoughts. I'll venture a guess that you think the stock is a double in 2-3 years.

[Partner24]

Dazel,

 

I guess it has to do with how Prem handled the situation over the last few years. They were calling for a bad economy for years and hedged and everything, then after a long bull market, they are in. Billions of dollars lost. Only main explanation: Donald Trump election. Wow...

 

...big lack of candor. When you're ego is so big that you can't even realize your mistakes openly, chances are in that you'll keep doing them. Ego can be a very very expensive thing that you don't see on the financial results.

 

They also change the multivoting shares count, shareholders are upset and want to say no, and they come back until they win. 

 

I guess that some got pissed off by Prem's behavior. JMO.

 

Cheers!

[SharperDingaan]

 

I guess we can assume that the crickets on this thread are because one may feel they missed an easy tap in from an old trusted friend in Prem and Fairfax. Maybe now that this popped so much some may call it a momo stock and follow or comment?

 

OR maybe if they did a coin offering for a new cryptocurrency they may get some attention?!!! 

 

Here is the name of the new currency VIIND..."value investing is not dead"!

 

Yes I am kidding...in stupid stock market somethings make sense!

 

Have a good weekend

 

Dazel

 

Don't knock the block chain - the operational and financial benefits to the insurance industry are beyond ridiculous!!

Case in point: 'Who do I sue if the Oracle running these applications doesn't deliver (IBM, Etherium, Bitcoin, etc.)? '... Well isn't this business 'problem' really just a crypto version of cat/super-cat insurance ? - and with no significant competitors in the market  ;)

 

SD

[Cigarbutt]

SD,

Highly value your inputs and, going forward, still looking at insurance and reinsurance as potential opportunities and still looking at Fairfax as a potential field of dreams (if/when).

Tried to do my homeworks to maximize the value of inputs.

 

I understand the potential for faster services and decentralization of trust to decapture transaction costs but I don't see how long tail reserve management could be reasonably imparted.

 

Isn't blockchain potential only limited to a leaner intermediate for the basic transaction?

Aren't fragmented data sources and diffuse second-level liability management obstacles to long term commitments required by insurance contracts?

 

In other words, even if the process becomes smoother and more efficient from risk assessment, to quote, to claim assessment, how does that threaten the moat associated with underwriting discipline and long term reserve management?

 

[SharperDingaan]

Lots of immediate, new, & very different, markets open = significant diversification benefit. New markets also typically miss-price by quite a bit = an up-front reserve build similar to hard markets. P2P cost reductions reduce the load factors on existing reserves = ability to add significant new business without having to put up additional reserve.

 

And none of this touches the golden data, cost, and automation advantages - which is where the real money is  ;D

 

All good.

 

SD

 

 

 

[Dazel]

 

Chrispy congrats-Fairfax Real Estate investing record is fabulous

 

SD-while always a pleasure...I can’t eat Block Chain

 

Partner 24- I get it no one wants stagnant money in a bull market....until they do! I saw the 2000 and 2008 debacles first hand...people are once again going to get killed....no one is counting.

 

My reasons for returning to this forum are clear. Fairfax story had to be told I owed it to them and for the past wonderful people on this board. I did my part...and anyone’s that listened did well in a short period of time...what happens over the next 6 months or year I don’t know...Fairfax was really cheap and hated. I am not sure where it is in that metric now it’s tough for rational investors to buy after Fairfax’s rise that’s for everyone else to figure out. And really I don’t see many investors these days!!

I will leave you all with this as it is how I feel...Good Bye for now and Good luck!

 

“Essentially, I am out of step with current conditions. On one point however, I am clear. I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean foregoing large and apparently easy profits to embrace an approach which I don’t fully understand, I have not practiced successfully and which, possibly could lead to substantial permanent loss of capital.”

 

Warren Buffett 1969

 

 

 

[petec]

Dazel, I was able to double down near the bottom and feel very comfortable having a large position in FFH...  Your posts and the subsequent discussions have been very useful to me. 

 

Very interested to see how they deploy all of this capital and hoping its not in RFP like investments.  Do you think they would ever give a small amount of money to someone like Brookfield for stable returns from real assets?

 

They do give money to others - Kennedy Wilson - but I think that was more for value opportunities than for stable returns.

 

My sense is they back themselves (rightly) to invest for themselves, and that if they see an opportunity in an asset class they'd go for it by building a business around it with some very clever people in charge. NB one of their biggest equity investments now is their controlling stake in Grivalia, the Greek REIT. - I can see them doing something like that in another country if they see an opportunity.

[petec]

Dazel,

 

I guess it has to do with how Prem handled the situation over the last few years. They were calling for a bad economy for years and hedged and everything, then after a long bull market, they are in. Billions of dollars lost. Only main explanation: Donald Trump election. Wow...

 

 

Given what's happened since, thank God they did sell those hedges. And NB they didn't go "in", they sat in cash.

[Dazel]

 

 

I can’t in good conscience not comment on the $830m third quarter underwriting loss...as I posted on my perception of what their losses may amount to from the hurricanes. I realize most posters here could care less....However, I need to acknowledge the Brutal underwriting at Allied and Brit. 182 and 158 combined ratios!! These losses are above what I expected.

 

Fairfax legacy insurance operations combined ratios were extremely solid as I surmised in my posts are what I expected.

Odyssey Re-126

Crum&Forester-103

Zenith-84

Other-130

 

 

[Tommm50]

For Allied are we looking at (in effect) a year's worth of cat losses vs one quarter of premium?

[Cigarbutt]

As per pp 51-52 in interim report.

http://s1.q4cdn.com/579586326/files/doc_financials/2017/q3/2017-Q3-Interim-Report-Final.pdf

 

-accident year loss ratio from date of acquisition (July 6th to end of quarter).

-both numerator and denominator

 

It's a risk business.

From the report, acquired insurance and reinsurance portfolios "responded as expected".

Large numbers, but in line. So, should be a blip in the long term scheme of things.

[Tommm50]

Yup, that's my point. That period happened to catch the catastrophes so the accident "year" in this case is and accident 4 momths. If it's annualized you add in "normal" losses and 8 months of premium the combined should come down significantly.

[Sullivcd]

Any estimate of current bvps?

[karthikpm]

From the release

 

Book value per basic share at September 30, 2017 was $415.48 compared to $367.40 at December 31, 2016 (an increase of 15.4% adjusted for the $10 per common share dividend paid in the first quarter of 2017).

[Txvestor]

Agree with Dazel, the CR for AWH and Brit were brutal and certainly much higher than legacy units. Hopefully its not a cause for concern and certainly a quarter does not make an underwriting reputation, but it certainly the relaive differential caught ones attention.

[FFHWatcher]

Agree with Dazel, the CR for AWH and Brit were brutal and certainly much higher than legacy units. Hopefully its not a cause for concern and certainly a quarter does not make an underwriting reputation, but it certainly the relaive differential caught ones attention.

 

Upon reading this and seeing that Allied was responsible for about $400M of the $900+M cat losses, I decided to go back and look historically at Allied's underwriting.  It is impressive. They certainly don't look like some of the companies that FFH bought back in the day that were early disasters (but eventually turned out well). $2.2B in favourable reserve development in the past 15 years. Only one year in 15 years that was over 100% CR. They averaged 90.5. Very consistent.  Keep in mind their Portfolio is in the $9B range and they had $400M loss. As a percentage basis, they had more than their fair share within the FFH Group, that I agree with.

 

Take a look at page 18 - "Income Statement"

http://www.snl.com/Cache/1001217885.PDF?Y=&O=PDF&D=&fid=1001217885&T=&iid=4078260

[dartmonkey]

Page 18, he means, using the page numbers in the document - Allied World's balance sheet history.

[Cigarbutt]

Page 18, he means, using the page numbers in the document - Allied World's income statement history.

Sorry, couldn't resist.

[FFHWatcher]

Other interesting change is on pg. 8 here.  Cash at holding company. Common stock line item. $635M but with the notation below that shows the carrying value as $2,155.8. 

This is at the holdco?  What has that carrying value/what is it? (can't be First Capital, can it?)

 

http://s1.q4cdn.com/579586326/files/doc_financials/2017/q3/2017-Q3-Interim-Report-Final.pdf

[Cigarbutt]

To reconcile, the answer may be on page 65 (of the report) under the heading Holdco liquidity position and referring to the remainder of 2017.

 

"Net proceeds of approximately $1.6 billion expected to be received on the closing of the sale of the company's 97.7% ownership interest in First Capital would further augment holding company cash."

 

[FFHWatcher]

Caller on today's conference call to Prem, 'So how is your investment in Torstar going?' 

Prem's reaction >:(

Prem actually said they don't comment on specific portfolio investments

[Txvestor]

Agree with Dazel, the CR for AWH and Brit were brutal and certainly much higher than legacy units. Hopefully its not a cause for concern and certainly a quarter does not make an underwriting reputation, but it certainly the relaive differential caught ones attention.

 

Upon reading this and seeing that Allied was responsible for about $400M of the $900+M cat losses, I decided to go back and look historically at Allied's underwriting.  It is impressive. They certainly don't look like some of the companies that FFH bought back in the day that were early disasters (but eventually turned out well). $2.2B in favourable reserve development in the past 15 years. Only one year in 15 years that was over 100% CR. They averaged 90.5. Very consistent.  Keep in mind their Portfolio is in the $9B range and they had $400M loss. As a percentage basis, they had more than their fair share within the FFH Group, that I agree with.

 

Take a look at page 18 - "Income Statement"

http://www.snl.com/Cache/1001217885.PDF?Y=&O=PDF&D=&fid=1001217885&T=&iid=4078260

 

That was my impression as well, and Prem even touted their long term compounding of BV with a solid underwriting track record as the underpinning of their quality and reason for paying premium to BV.

Yet when you look at this Q numbers, they are significantly worse than legacy Fairfax insurance divisions. What's more, even EXCLUDING the Cat. losses this Q, AWH's CR was 106.2%. Again a Q does not make a reputation, but had AWH been trading on an exchange, I am pretty certain they would have been taken to the woodshed on these numbers. One hopes there is not more to this than just a Q of unfortunate developments.

[TwoCitiesCapital]

Agree with Dazel, the CR for AWH and Brit were brutal and certainly much higher than legacy units. Hopefully its not a cause for concern and certainly a quarter does not make an underwriting reputation, but it certainly the relaive differential caught ones attention.

 

Upon reading this and seeing that Allied was responsible for about $400M of the $900+M cat losses, I decided to go back and look historically at Allied's underwriting.  It is impressive. They certainly don't look like some of the companies that FFH bought back in the day that were early disasters (but eventually turned out well). $2.2B in favourable reserve development in the past 15 years. Only one year in 15 years that was over 100% CR. They averaged 90.5. Very consistent.  Keep in mind their Portfolio is in the $9B range and they had $400M loss. As a percentage basis, they had more than their fair share within the FFH Group, that I agree with.

 

Take a look at page 18 - "Income Statement"

http://www.snl.com/Cache/1001217885.PDF?Y=&O=PDF&D=&fid=1001217885&T=&iid=4078260

 

That was my impression as well, and Prem even touted their long term compounding of BV with a solid underwriting track record as the underpinning of their quality and reason for paying premium to BV.

Yet when you look at this Q numbers, they are significantly worse than legacy Fairfax insurance divisions. What's more, even EXCLUDING the Cat. losses this Q, AWH's CR was 106.2%. Again a Q does not make a reputation, but had AWH been trading on an exchange, I am pretty certain they would have been taken to the woodshed on these numbers. One hopes there is not more to this than just a Q of unfortunate developments.

 

I don't know about where Allied World's exposure is, but it seems reasonable that this would be a bad quarter/half for insurers given the two major hurricanes that made landfall in the U.S. which caused massive flooding in Texas/Florida while wiping out much of the island countries nearby, the wildfires in California, the major earthquake in Mexico, and anything else I may be missing. I think we can have confidence in their decades-long track record and not focus too much on the results of a single quarter that had multiple large cat occurrences. 

[Txvestor]

Twocitiescapital,

Perhaps so, but my point was those set of factors would be the same at odysseyre and the other legacy Insurance subsidiaries and the relative underperformance was what was unnerving. I just listened to the conference call recording from earlier this morning and Prem obviously projected confidence and seemed unperturbed. He said Andy Barnard and other senior execs. visited with AWH after the close and were happy with operations.

He did mention a $20m negative reserve development at AWH and without that and Cat losses they would’ve been a CR of 96%.

He mentioned their historically very conservative and redundant reserving. Mentioned Scott Carmelani’s Long track record etc.

To me that was a bit self-contradictory but .....

At any rate, not rushing to judgement here but certainly something to keep an eye on going forward. I mean how many times haven’t we seen an insurance purchase go wrong initially even if it eventually works out. Sometimes one wonders if that’s not an industry way to bring out the dirty laundry! It happened to Prem and Fairfax before and

it happened to no less than one WEB and Berkshire Hathaway right?

On a more positive note, he mentioned his view that he thought the discrepancy between BV and IV was at its largest in its 32yr history. That’s quite a statement considering Fairfax has traded at as much as 2.5-3x BV in the past and generally at a much higher ratio than its current multiple. Perhaps one could argue that it was overvalued then but it’s quite obvious that atleast Prem thinks shares are undervalued. And considering market valuations you would be hard pressed to disagree. My 2c is that if AWH and Brit turn out over time to be as good operations as their other Insurance subsidiaries have been of late, given current market valuations etc, 1.5BV is certainly not unreasonable for this. If we get a hard underwriting market and/or other investment holdings perform well, then Prem may well turn out to be right in his assessment. Some ifs in there for sure but the market certainly is more than pricing those risks in at current levels. It will be an interesting next 12mths for sure and a lot more should be clear to us by then.