Author Topic: Prem's 2020 Letter to shareholders is out  (Read 6523 times)

Spekulatius

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Re: Prem's 2020 Letter to shareholders is out
« Reply #10 on: March 14, 2020, 12:52:03 PM »
...
These combined ratios for insurers really need to come down to the low 90% in that framework.
Let's push this idea further. There has been a financial environment shift since the 2007-9 episode in the P+C world with most companies adapting to the 'cheap' capital environment, settling with lower ROE and gradually increasing P/B ratios. During the same period, FFH reported a very lumpy ROE, with an overall slight underperformance overall based on that metric and the market perception is resulting in a declining P/B ratio. FFH continues to differentiate itself from the pack (float investment side) and the question is how it will perform going forward. An interesting feature is that 'cheap' capital has resulted in resistance to harden the market (ie tolerate higher combined ratios) and has resulted in very low returns on the fixed income side of the portfolio (float).
https://www.macrotrends.net/stocks/stock-comparison?s=roe&axis=single&comp=WRB:TRV:CB

Is FFH better positioned at this point compared to peers?
Is the answer in the risk management section?

I don’t think that FFH is position better than its peers. It has improved its underwriting to the point where it probably is in the better 50% bucket of the industry, but it’s not in the top 10% either. It’s the investment side where they have been lacking. They make very contrarian investments as detailed by Stubblejumper. It seems that they want to jump 10 foot hurdles, where a one or two foot hurdle would suffice as an insurance company.  Stelco, BlackBerry, RFP etc are all deep underwater. Part of the reason is they their aspirational goal of a 15% ROE is just too high.

TRV is an example that have a bit above underwriting and just takes whatever they can get in terms of investment returns in bond markets without taking much risk (equity and real estate seems ~5% of their float) and they can get ~12-13% ROA. Excessive capital is burned off via stock repurchases and some dividends, It’s a model that works and boring in a good sense. FFH Model has too much risk (as evident by the wings in book valued) for the returns it is generating.
« Last Edit: May 13, 2020, 07:00:00 PM by Spekulatius »
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Viking

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Re: Prem's 2020 Letter to shareholders is out
« Reply #11 on: March 14, 2020, 01:12:37 PM »
In the current environment, where every company is getting killed, why would you not want to keep it simple and buy the number 1 or 2 player in each industry? To some extent you can almost start throwing valuation models out the window (too many moving parts to be useful). I am starting to look at market cap as a criteria. And the more predictable their business model the better (fewer nasty surprises moving forward).

mcliu

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Re: Prem's 2020 Letter to shareholders is out
« Reply #12 on: March 14, 2020, 01:16:59 PM »
I think FFH is pretty consistent, doing what they’ve always done. Problem is that they have too much capital to use the same approach properly. Cigar but investing is good if you manage small amounts of money, not tens of billions.

Cigarbutt

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Re: Prem's 2020 Letter to shareholders is out
« Reply #13 on: March 15, 2020, 06:09:23 AM »
...
These combined ratios for insurers really need to come down to the low 90% in that framework.
...
https://www.macrotrends.net/stocks/stock-comparison?s=roe&axis=single&comp=WRB:TRV:CB
Is FFH better positioned at this point compared to peers?
Is the answer in the risk management section?
I don’t think that FFH is position better than its peers. It has improved its underwriting to the point where it probably is 8n the better 50% bucket of the industry, but it’s not in the top 10% either. It’s the investment side where they have been lacking. They make very contrarian investments as detailed by Stubblejumper. It seems that they want to jump 10 foot hurdles, where a one or two foot hurdle would suffice as an insurance company.  Stelco, BlackBerry, RFP etc are all deep underwater. Part of the reason is they their aspirational goal of a 15% ROE is just too high.

TRV is an example that have a bit above underwriting and just takes whatever they can get in terms of investment returns in bond markets without taking much risk (equity and real estate seems ~5% of their float) and they can get ~12-13% ROA. Excessive capital is burned off via stock repurchases and some dividends, It’s a model that works and boring in a good sense. FFH Model has too much risk (as evident by the wings in book valued) for the returns it is generating.
An interesting feature in the past was that FFH used to outperform (in terms of ROE and market value) over time, despite lumpy results which tends to put a discount on market valuation. More recently, the results have remained lumpy but also inferior.

ROE simple calculation from presenting page of annual report: net earnings over avg total common SE (%, unaudited)
2005 (17.6)   2006 8.9   2007 32.6   2008 33.0   2009 14.0   2010 4.5   2011 0.6   2012 7.0   2013 (7.7)   2014 21.0   2015 6.6   2016 (5.9)   2017 16.6   2018 3.1   2019 16.2
estimated avg yearly ROE since end 2009: 6.5%
I don't mind lumpy results (and I guess one could take advantage of short term spikes?) but my guess is that they will continue to underperform as a function of relatively inferior investment results.

TRV is a model of stability. In this case slow and steady will win the race IMO if you have a choice between FFH and TRV. You likely know this already but TRV has done a good job at dissecting the drivers of ROE (they do deduct interest on holding company debt from fixed income which is interesting) and it makes it much easier to chart a potential future path of profitability. Here's a recent example (page 7 of the presentation):
http://investor.travelers.com/Cache/IRCache/e2ba8c90-722e-e143-27a2-3309585b8cb2.PDF?O=PDF&T=&Y=&D=&FID=e2ba8c90-722e-e143-27a2-3309585b8cb2&iid=4055530
« Last Edit: March 15, 2020, 06:17:57 AM by Cigarbutt »

petec

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Re: Prem's 2020 Letter to shareholders is out
« Reply #14 on: March 15, 2020, 07:06:33 AM »
my guess is that they will continue to underperform as a function of relatively inferior investment results.

This is the problem. We can all speculate, but we simply cannot know whether the causes of poor investment performance are ongoing or whether the company can improve.

Lumpiness I can deal with. In fact I like it - the market pays a premium for predictability that (all else equal) I’d rather not pay. All I care about is whether Fairfax can adapt.
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Viking

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Re: Prem's 2020 Letter to shareholders is out
« Reply #15 on: March 15, 2020, 08:00:53 AM »
my guess is that they will continue to underperform as a function of relatively inferior investment results.

This is the problem. We can all speculate, but we simply cannot know whether the causes of poor investment performance are ongoing or whether the company can improve.

Lumpiness I can deal with. In fact I like it - the market pays a premium for predictability that (all else equal) I’d rather not pay. All I care about is whether Fairfax can adapt.

“The best predictor of future performance is past performance.” 10 years is a good amount of time. Much better than using the first 10 years, which an investor probably should throw out (given the company has changed immeasurably since then).

petec

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Re: Prem's 2020 Letter to shareholders is out
« Reply #16 on: March 15, 2020, 03:14:14 PM »
my guess is that they will continue to underperform as a function of relatively inferior investment results.

This is the problem. We can all speculate, but we simply cannot know whether the causes of poor investment performance are ongoing or whether the company can improve.

Lumpiness I can deal with. In fact I like it - the market pays a premium for predictability that (all else equal) I’d rather not pay. All I care about is whether Fairfax can adapt.

“The best predictor of future performance is past performance.” 10 years is a good amount of time. Much better than using the first 10 years, which an investor probably should throw out (given the company has changed immeasurably since then).

Well if you think that then for God’s sake don’t invest. But until recently you seemed quite positive on the portfolio they own; may I ask what changed?
FFH MSFT BRK BAM ATCO LNG IHG TFG CGT DC/A

investmd

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Re: Prem's 2020 Letter to shareholders is out
« Reply #17 on: March 15, 2020, 03:26:12 PM »
Points I took away from FFH 2019 Annual Letter:

1.   The letter lacks integrity. Starts with 2019 was a great year for FFH and continues mostly with unbridled optimism throughout. Reality is shareholder return for 5 & 10 years have been terrible - he doesn't openly admit it and doesn't admit frustration with it and lay out a plan to change it. If one cares for their shareholders, he would be more contrite about the returns he has delivered.
2.   Ends letter with : "Over our 34-year history, we have always operated at Fairfax with a small team which, with great integrity, team spirit and no egos, protects our company from unexpected downside risks and which takes advantage of opportunities when they arise".  Well, after reading a decade plus of his annual letters, I've changed my mind - he's not showing integrity/honesty and his writing has consistently exhibited egotistical behaviour and FFH has not been able to take advantage of opportunities like others have.
3.   Insurance business is doing very well, has improved significantly and is successfully generating no cost float and is the jewel of FFH
4.   I’m glad that he has openly admitted that BB, Exco, and Resolute were mistakes – he is more open about this today than in the past
5.   Believes, “India is the best country to invest in long term”. OK, but no explanation as to why. Not genuine.
6.   Believes Modi re-election will turn around Indian economy. Again, no explanation as to why especially given that was the thought at time of Modi’s first election and it didn’t come to fruition. Again not genuine in his writing.
7.   Over 5 years intrinsic value has compounded by <5%/yr & share price <1%/yr. Over 10 yrs: IV - 3.2%/yr & share price at 5.2%/yr. Prem’s only comment on stock price is : “In last 4 years stock price has not gone up with intrinsic value, but it will happen again” - with no explanation. What about the fact that IV is only up 3.2%/year over 10 years?
8.   On investments: “shows that Fairfax’s investment results have been consistently very good since inception, with the exception of the 2011 – 2016 time period, when we treaded water” - how can he say “consistently very good” as investment returns over 33 years have been 8%/yr and over past 10 years have been <5%/yr ? Isn’t the point of his investing prowess to do better than the index? How can he say “very good”?
9.   “So when the correction happens (and it may be happening as we speak), we expect value stocks to provide better protection on the downside”.  A week after the report comes out, we are in a correction. From what I see, when there is a correction, everything goes down – BRK & FFH are down just as much as tech stocks.
10.   Committed to buying back shares over next 10 years


Being optimistic is one thing. Not being in touch with reality and getting people to invest in you/your business by shrilling dishonest optimism is getting to be on the Ponzi scheme side of things. As a long term shareholder, I am so disappointed in this man.

@Sanjeev: You have been a big supporter and believer in Prem Watsa’s honesty and integrity. This website's name is in homage to FFH. Watsa has shown his belief in you and invested in you. I’d appreciate your thoughts to above comments. Would also love it if there was a way to get FFH to reply.

Investmd....I understand your frustrations totally. I have studied Fairfax in-depth for well over 20 years and invested in the shares almost as long. I concluded a few years ago that something was very very wrong. Despite all of my considerable efforts I could not get to the bottom of the problem. in the end I concluded it was not one or two problems but a myriad of problems  that could not be corrected/overcome. As a result I started to sell off a portion of the shares I owned until I reduced the overall share position to a much smaller portion of my overall portfolio. I can assure you that I never looked back. My only regret....not selling all of the shares that I owned. I enjoyed going to the annual meeting and related activities which included meeting up with old friends that I had met along the way but let's get serious these reasons are not enough to keep me invested in the stock.

So for what its worth....start selling off your Fairfax holdings. It will hurt to do so but in the end you will not regret it.

Others will disagree  with this recommendation but a growing number will agree. Good luck!

Bearprowler, thank you very much for sharing your experience and words of support. I've been following and accumulating shares in FFH for 15 years and going to the meetings...and probably drinking the KoolAid. I hadn't thought of selling at these levels. However, your advice resonates. Thanks.

Uccmal

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Re: Prem's 2020 Letter to shareholders is out
« Reply #18 on: March 17, 2020, 06:12:47 AM »
Points I took away from FFH 2019 Annual Letter:

1.   The letter lacks integrity. Starts with 2019 was a great year for FFH and continues mostly with unbridled optimism throughout. Reality is shareholder return for 5 & 10 years have been terrible - he doesn't openly admit it and doesn't admit frustration with it and lay out a plan to change it. If one cares for their shareholders, he would be more contrite about the returns he has delivered.
2.   Ends letter with : "Over our 34-year history, we have always operated at Fairfax with a small team which, with great integrity, team spirit and no egos, protects our company from unexpected downside risks and which takes advantage of opportunities when they arise".  Well, after reading a decade plus of his annual letters, I've changed my mind - he's not showing integrity/honesty and his writing has consistently exhibited egotistical behaviour and FFH has not been able to take advantage of opportunities like others have.
3.   Insurance business is doing very well, has improved significantly and is successfully generating no cost float and is the jewel of FFH
4.   I’m glad that he has openly admitted that BB, Exco, and Resolute were mistakes – he is more open about this today than in the past
5.   Believes, “India is the best country to invest in long term”. OK, but no explanation as to why. Not genuine.
6.   Believes Modi re-election will turn around Indian economy. Again, no explanation as to why especially given that was the thought at time of Modi’s first election and it didn’t come to fruition. Again not genuine in his writing.
7.   Over 5 years intrinsic value has compounded by <5%/yr & share price <1%/yr. Over 10 yrs: IV - 3.2%/yr & share price at 5.2%/yr. Prem’s only comment on stock price is : “In last 4 years stock price has not gone up with intrinsic value, but it will happen again” - with no explanation. What about the fact that IV is only up 3.2%/year over 10 years?
8.   On investments: “shows that Fairfax’s investment results have been consistently very good since inception, with the exception of the 2011 – 2016 time period, when we treaded water” - how can he say “consistently very good” as investment returns over 33 years have been 8%/yr and over past 10 years have been <5%/yr ? Isn’t the point of his investing prowess to do better than the index? How can he say “very good”?
9.   “So when the correction happens (and it may be happening as we speak), we expect value stocks to provide better protection on the downside”.  A week after the report comes out, we are in a correction. From what I see, when there is a correction, everything goes down – BRK & FFH are down just as much as tech stocks.
10.   Committed to buying back shares over next 10 years


Being optimistic is one thing. Not being in touch with reality and getting people to invest in you/your business by shrilling dishonest optimism is getting to be on the Ponzi scheme side of things. As a long term shareholder, I am so disappointed in this man.

@Sanjeev: You have been a big supporter and believer in Prem Watsa’s honesty and integrity. This website's name is in homage to FFH. Watsa has shown his belief in you and invested in you. I’d appreciate your thoughts to above comments. Would also love it if there was a way to get FFH to reply.

Investmd....I understand your frustrations totally. I have studied Fairfax in-depth for well over 20 years and invested in the shares almost as long. I concluded a few years ago that something was very very wrong. Despite all of my considerable efforts I could not get to the bottom of the problem. in the end I concluded it was not one or two problems but a myriad of problems  that could not be corrected/overcome. As a result I started to sell off a portion of the shares I owned until I reduced the overall share position to a much smaller portion of my overall portfolio. I can assure you that I never looked back. My only regret....not selling all of the shares that I owned. I enjoyed going to the annual meeting and related activities which included meeting up with old friends that I had met along the way but let's get serious these reasons are not enough to keep me invested in the stock.

So for what its worth....start selling off your Fairfax holdings. It will hurt to do so but in the end you will not regret it.

Others will disagree  with this recommendation but a growing number will agree. Good luck!

Bearprowler, thank you very much for sharing your experience and words of support. I've been following and accumulating shares in FFH for 15 years and going to the meetings...and probably drinking the KoolAid. I hadn't thought of selling at these levels. However, your advice resonates. Thanks.

I concur with BearProwler.  I exited the stock completely by mid-2013 and never looked back, either. I no longer read the reports, or attend the AGM, even though it’s 30 minutes to get downtown. There is nothing to learn here.  I am not going to ever understand the insurance business after years of trying.  And there is nothing to learn from FFHs investments that applies these days, except what not to do, I suppose. 

FFH had 6 good years in the 90s.  The promised long term arrived years ago, and the results since put them in with the low end of going concern companies.

Watsa is an awesome salesman - I will give him that, and that’s it.

I learned years ago to cut my losses, or losses due to opportunity costs, and move on.   
There are hundreds, if not thousands of companies in the US and Canada that get better returns than FFH. 

For me it involves one primary question:  Can I get better, more consistent medium term returns at the prices that are listed on March 17 somewhere other than FFH?  An honest answer is..... extremely easily.

GARP tending toward value

Parsad

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Re: Prem's 2020 Letter to shareholders is out
« Reply #19 on: May 05, 2020, 12:01:21 PM »
Somebody pointed this post out to me, and I had not seen it.  My responses in "red" after each point.

Points I took away from FFH 2019 Annual Letter:

1.   The letter lacks integrity. Starts with 2019 was a great year for FFH and continues mostly with unbridled optimism throughout. Reality is shareholder return for 5 & 10 years have been terrible - he doesn't openly admit it and doesn't admit frustration with it and lay out a plan to change it. If one cares for their shareholders, he would be more contrite about the returns he has delivered.

I think Prem laid it out clearly as he always does.  They did well on insurance which was a good year, but their investment process...the value investment process...has been out of favour or touch for several years.  And they aren't the only ones...even Buffett (the master) has struggled.  But is should also be noted that Wade Burton's selections did well, and he will probably be the one leading Hamblin-Watsa for the next 10-20 years.

2.   Ends letter with : "Over our 34-year history, we have always operated at Fairfax with a small team which, with great integrity, team spirit and no egos, protects our company from unexpected downside risks and which takes advantage of opportunities when they arise".  Well, after reading a decade plus of his annual letters, I've changed my mind - he's not showing integrity/honesty and his writing has consistently exhibited egotistical behaviour and FFH has not been able to take advantage of opportunities like others have.

Does Prem have a healthy ego?  You bet...and like Buffett it is tied directly to his company.  Every great leader or CEO has an enormous stake tied to their business.  Is Prem egotistical?  I honestly cannot say that is even remotely true.  He's genuinely one of the nicest people you will ever meet and one of the most supportive, encouraging figures I've ever met.  Do you wonder why people like Francis Chou are extremely loyal to Prem?  Why someone like Brian Bradstreet never left his side?  Or why Ajit Jain has enormous respect for him.  He's hands down one of the great business leaders in Canadian history.

3.   Insurance business is doing very well, has improved significantly and is successfully generating no cost float and is the jewel of FFH

Yes, agree.  And we've seen that over the last several years since Andy Barnard began to oversee all insurance operations.

4.   I’m glad that he has openly admitted that BB, Exco, and Resolute were mistakes – he is more open about this today than in the past

You have to understand.  Fairfax will never be Berkshire in terms of buying only those high quality businesses.  Fairfax's core is deep value investing or distressed investing.  Even guys like Wade Burton and Laurence Chin cut their cloth at Cundill...they will never fully leave Ben Graham's ideas of distressed investing.  They will buy good businesses and investments, but they will also buy the cigar butts...that's their ideology and nature...you cannot simply discard it.

5.   Believes, “India is the best country to invest in long term”. OK, but no explanation as to why. Not genuine.

He's given significant reasoning around this belief.  There are a ton of books out there that you can read on why this MAY be true.  I've seen the companies we've invested in, and what is happening in India, and it is eerily similar to China 15-20 years ago.  I think executing will be a bit more difficult than China, simply because the Communist government said we are going to do this and did it over 20 years.  India will have similar success, but I suspect it will come with more challenges.

6.   Believes Modi re-election will turn around Indian economy. Again, no explanation as to why especially given that was the thought at time of Modi’s first election and it didn’t come to fruition. Again not genuine in his writing.

Again, plenty of comments by Prem in the past and present, and alot of books.  I agree with you, this is arguable though, as Modi's tenure is not guaranteed over the next 15 years...only for the next 5 years.

7.   Over 5 years intrinsic value has compounded by <5%/yr & share price <1%/yr. Over 10 yrs: IV - 3.2%/yr & share price at 5.2%/yr. Prem’s only comment on stock price is : “In last 4 years stock price has not gone up with intrinsic value, but it will happen again” - with no explanation. What about the fact that IV is only up 3.2%/year over 10 years?

Too much focus on macroeconomics and not enough focus on simply investing and deleveraging instead.  They spent the first half of the rebound on defense, and then got hit in the 2nd half once they went bullish.  Shareholders have a right to be upset on the investment process here, but many value investors were guilty of this after 2008.  I think things will be a bit different with more input from Wade.

8.   On investments: “shows that Fairfax’s investment results have been consistently very good since inception, with the exception of the 2011 – 2016 time period, when we treaded water” - how can he say “consistently very good” as investment returns over 33 years have been 8%/yr and over past 10 years have been <5%/yr ? Isn’t the point of his investing prowess to do better than the index? How can he say “very good”?

Yes, a fair gripe and I think overall they understand it.  Most of the underperformance came from the defensive position and a couple of large distressed positions like BB, etc.   I think everyone will agree that the bond side killed it during almost every 5 year period since inception...so you have to look at the portfolio in aggregate.  Again, I think shareholders have a gripe here, but I don't think things could be as bad every again with the defensive stance after 2008 and then going bullish after Trump looked like he was going to win.  I think we can all agree that they should just focus on investing and not focus on macroeconomics.

9.   “So when the correction happens (and it may be happening as we speak), we expect value stocks to provide better protection on the downside”.  A week after the report comes out, we are in a correction. From what I see, when there is a correction, everything goes down – BRK & FFH are down just as much as tech stocks.

He's talking about his actual positions...not Fairfax stock itself.  He has no control over that.  Fairfax's equity was down 8% in the first quarter...Berkshire's was down almost 12%.

10.   Committed to buying back shares over next 10 years

Companies should only buy back shares if they are at a significant discount to intrinsic value.  I don't think they should buy back their own shares except when they are below 0.85 of book.

Being optimistic is one thing. Not being in touch with reality and getting people to invest in you/your business by shrilling dishonest optimism is getting to be on the Ponzi scheme side of things. As a long term shareholder, I am so disappointed in this man.

Don't agree with this sentiment.  I think Prem's comments have always been forthright with shareholders.  Sometimes outcomes aren't in line with expectations or management gets it wrong.  But Fairfax has always operated with integrity and the best interests of shareholders.

@Sanjeev: You have been a big supporter and believer in Prem Watsa’s honesty and integrity. This website's name is in homage to FFH. Watsa has shown his belief in you and invested in you. I’d appreciate your thoughts to above comments. Would also love it if there was a way to get FFH to reply.

I generally don't own any one stock for the long-term.  I buy when it is trading below intrinsic value and sell when it is trading well above intrinsic value.  I never fall in love with a stock or company, even though I might love the management, culture and long-term objectives...including Berkshire and Fairfax. 

Yes, my family has held Fairfax in certain accounts for the long-term, and I have held a little Fairfax in my taxable accounts for the long-term.  But the majority of my stocks are held in non-taxable accounts where I will buy and sell them around their intrinsic value.

I think long-term shareholders will do better than the S&P500 holding Fairfax...simply because of the leverage and float.  But we are talking about a 20 year time line.  Thus the reason why I buy and sell investments in my non-taxable portfolios.  Presently, Fairfax is once again one of the largest positions in my non-taxable portfolios.  Cheers!

No man is a failure who has friends!