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!
