Thursday, March 17, 2011

Flagstone Re (FSR) ... The Importance Of Moving Like A Sloth

First and foremost, our thoughts and prayers are with the people of Japan. The loss of life and damage is almost incomprehensible. We should count ourselves very lucky that we live in a country with minimal seismic activity. There are many ways to help, here is one;

Two of my favorite Warren Buffett quotes are as follows;

  • Lethargy, bordering on sloth should remain the cornerstone of any investment style.  

  • An investor should act as though he had a lifetime decision card with just twenty punches on it.

  • In the above quotes, Buffett is telling investors to take their time and buy/sell carefully - move slowly. As a typical value investor I have sometimes been impatient and moved too fast and bought/sold too early. Value investors tend to get to the party early and leave early. There is a fine line between being "early" and being wrong.

    Within the last year I came across a small re-insurer based in Luxembourg. I was attracted by the discount to book, low P/E and strong balance sheet. Also, by the fact that the company went public in 2007 at $13.50. Any time I can buy a company significantly cheaper than the IPO price, I'll at least have a look. That's how I found International Coal Group (ICO). I did a quick "back of the envelope" series of calculations to see if there was any value there and if I should continue to dig deeper. I figured, at the time ( 6 months ago / $11) that FSR was worth around $15-$18 per share. I decided not to buy as I needed a bigger margin of safety. I also needed to dig deeper and learn more about FSR. Moving slowly on FSR combined with a little luck kept me out of the 30% fall FSR has recently experienced. The market is reappraising FSR (sliced off 190 million in market cap) due a slew of natural disasters that they will be required to pay out on. FSR will pay 60-80 million in claims for the Austrailian floods and 60-90 million in claims for the New Zealand earth quake losses. They also write significant coverage in Japan ( which I didn't know until recently ), to which, they don't know what the ultimate cost will be.
    FSR has ceded some of these liabilities to other re-insurers, but this will certainly damage the balance sheet. When the loss estimates come in from Japan I will rework my numbers and see how much the intrinsic value of FSR has been reduced. There could still be downside for FSR, but it is becoming more and more interesting at these levels. I'll continue to move like a sloth on this one...

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