Tommm50

It seems like a lot of people are missing the international piece. It's relatively small now but always been extremely profitable. They've positioned themselves well in markets with exponential growth potential. What happens in 5 to 7 years when international is bigger than U.S.? What's Markel got in that arena? That's how AIG was so profitable for so long. It wasn't their U.S. business it was their international business. My money is literally on Fairfax.

I agree with Petec, they are not using their own money but are immediately giving a big vote of confidence to the incoming administration. That can't hurt when they are dealing with regulators for the existing businesses in India.

Liked the pictures but the only person I knew was Prem. Is there any way to tag the people in the pictures to place a name with a face? Thanks.

There are a lot of sophisticated models out there on catastrophe risk. Their fatal flaw is they're based on past experience. Global climate change is a reality. Wouldn't it be just desserts if they stepped into the punch over the next few years?

The hedge fund money is going into one of the most lucrative parts of the reinsurance business, property cat protection (earthquakes, floods, hurricanes, etc.). They don't have the overhead traditional reinsurers have and they can write this business at a significantly lower rate. This puts tremendous pressure on any reinsurer who's major business is property cat. It puts some pressure on more diversified reinsurers (including Odyssey Re) as they have to make more money on the other parts of their portfolio, notably U.S. Casualty business and standard property business.

Looks like trouble ahead when world financial market have to kick the habit of the crack the Fed has been distributing. Market_Analysis.pdf

It doesn't seem like much of a victory. All the companies SAC trashed (Fairfax barely survived) and all the tens of billions Cohen pocketed. He's not in jail and still gets to enjoy his ill gotten gains.

I'm much more focussed on the underwriting results than I am on mark to market investments. There I am very pleased to see the nine month combined ratio down a full 7 points from last year, lead by Crum and Forster (where we most need the improvement). Over the middle and long term I'm confident their investment returns will be excellent. It's the UW side where they have to demonstrate consistent good results.

Just came in and looked at the day's result for Fairfax. Up 14 points in the last half hour of trading. Any idea what's going on there?

Couldn't happen to a more deserving guy.

What a nice fantasy, Fairfax gets $6 Billion out of SAC Capital and makes a special dividend of half of it to loyal shareholders. Unfortunately, they're still a long way from nailing his hide. Then they need to nail all the co-conspirators. And while we're talking rooked dealings does anyone else think it was too convenient that the analyst for Morgan Keegan that wrote the report saying Fairfax was billions underreserved wound up dead?

It seems the drumbeat gets louder over the various FBI and SEC investigations into SAC Capital. Insider trading settlements and talk of criminal charges keep mounting. It sure makes you wonder how the New Jersey judge could so easily dismiss Mr. Cohen from Fairfax's lawsuit. Particularly since his deposition has since been shown to display a very cavalier attitude toward insider trading or internal controls. Scent of corruption.

Thank you Lakeside. If that's the best loss ratio in the business you have to ask yourself why are we in it?

Tommm50, could you please elaborate a bit more on this one? I believe that insurance, reinsurance, and even investing require the same skill set. --Steven Markel, 2008 Thank you, giofranchi Insurance underwriters underwrite individual risks, their managers organize and quality control that process. Reinsurance underwriters underwrite the insurance companies they reinsure. That's a much different perspective. The best reinsurance underwriters are those that have insurance underwriting experience (optimally in the business they're reinsuring) but you'd be surprised at how uncommon that is. Most reinsurance underwriters I've known grew up on the reinsurance side. Their underwriting knowledge is based more on what they're told vs actually done themselves. I agree underwriting insurance or reinsurance or investing should all use a careful analytical approach. The process in general is similar. When you get down to the detail level though the questions you're asking to underwrite Long Haul Truckers, Legal Professional, Environmental Liability, or D&O are much different, requiring specific expertise and experience. I'm sure Andy is a very good manager and at his level that's the most important quality. My point was more attuned to the first paragraph.

1. I didn't see much analysis of the Zenith expense ratios in the annual report or their loss ratios for that matter. On page 11 of the annual report they note Zenith's combined ratios as 136.4 in 2010, 127.5 in 2010, and 115.6 in 2012. I managed uw operations writing WC for the Hartford for about 20 years. We always sought to hit 60% loss ratio or better. We didn't always manage it. The annual report describes Zenith as the best in the business but doesn't provide any backup for the contention. Let's say they think 70% is a good loss ratio. That means they're dragging 63.4%, 57.5%, and 45.6% as expense ratios over the past three years. That's outrageous on a book of $600 million GWP. If you look at the notes on page 134 they break out the expense components of Fairfax Asia. I didn't see anything comparable for Zenith (I'd be happy if someone pointed it out to me). Certainly if they write more premium that will help their expense ratio but I would have liked a lot more insight into why it's so high now. 2. To answer your question about my view of the market cycle I'm attaching a speech I gave to an insurance company attorneys' group on just that issue. Understand I'm just a guy who's been in this business a while and trying to give the attorneys a broader view of the environment in which they operate. It's not designed for this forum so you'll have to jump back and forth between the text and the slides. Bottom line: I don't see insurance companies being able to rely on "hard markets" to help them. They've got to manage themselves as it the past three years (and I mean Zenith) will go one forever. CLM_Keynote_Speech.doc CLM_Keynote.ppt

No, the 10 year accident year ratios are good indicators but what I find frustrating (And believe me I want to drink the Kool-Aid) is Crum and Forster's and Zenith's results over the last few years. Showing the 10 year numbers puts them in the best light but they only look good due to "hard market" results from earlier in that period. I do not buy the "high expense ratio" justification for Zenith and Crum and Forster's transition to more of a specialty insurer will have a great deal more credibility when it shows up in results. Specialty insurers lose money too if you don't know what you are doing. I hope Andy Barnard is the answer but he's a reinsurance guy managing insurance operations and it's not quite the same skill set.

That's a great account that elucidates what I have been only generally aware of. I have mulled over in my mind the idea of a concept like "policy year" being more accurate than accident year because of possible lags and disconnections between receipt and recognition of premiums matching the months of coverage on policies. Can you explain more about the concept and how it helps remove possible distortions in reporting results? Why isn't this more accurate way of accounting reported? Interestingly, National Indemnity recently had an issue with Swiss Re similar to Fairfax's buying the TIG and C&F pigs in a poke several years ago. NICO was concerned about reserving issues on a seasoned life insurance book they bought from Swiss Re. They did a thorough analysis and found glaring reserve inadequacies. They had to file suit against Swiss Re to finally get an adjustment. I found that to be astonishing because Swiss Re had asked BRK to bail them out during the financial crisis. How's that for repaying BRK! Policy Year data takes premium for all policies effective in a given year and matches it against all losses generated from those policies. It's the most accurate measure of UW results. The problem with it from an accounting/reporting viewpoint is it takes a long time to be complete or even close to complete. On the premium side it will take two calendar years to earn out a policy year's written premium (that policy effective in late December of the policy year has to run to it's expiration late the following calendar year). On the loss side claims are occurring over the same two calendar years. Then they have to be reported to the insurance company, initial reserves set, investigated, settled, litigated if necessary etc. All this takes time, 5 to 7 years or more depending on the line of business. Until the policy year is mature (all claims settled) you're looking at estimates of the ultimate losses (reserves). It's been a long time since I've looked at an annual statement (each U.S. insurer has to file one with the state in which they are domiciled), it's not anything like the annual report stockholders receive. I believe you can go through the schedules in the annual statements and construct policy year results but as I say it's been quite a while. For a group of companies, only some of which are U.S. , this presents some challenges.

To reply to your question about calendar year vs accident year. Annual statements required by state regulators look at January 1 to January 1. Remember unlike conventional businesses using GAAP which looks at a company as a "going concern", insurance company accounting starts with the question, "What happens if you go out of business tomorrow?". It's focus is to be sure policy holders get their losses paid in that event. Calendar year results match premium received and earned in the calendar year vs losses paid and reserved in the same calendar year, both of which can be coming from prior years policies. Makes sense for your average business but muddy as hell for an insurance company. Accident year is a bit better as it matches premiums earned in the calendar year to losses occurring in that year. If the company is not growing or shrinking Accident Year is a reasonable proxy for what's really going on. The only true measure of underwriting for an insurance company is Policy Year. It matches premiums earned for all policies effective in a given year to all losses arising out of those policies. Go luck trying to find those numbers. But to answer your question, Accident Year numbers are more representative of what's going on than Calendar Year numbers. As for Fairfax's purchase of Crum & Forster and TIG in the same year, they did use the strategy of buying at 70% of book rather than 130%. It worked well for them in Canada. What they didn't learn until it was too late was both companies "book value" was bogus. They were not equipped to do the deep uw and claims audits required to determine what a big U.S. P&C insurer's true book value was. They needed to buy them at 40 to 50% of "book value" to have a go at it. It's an enduring testament to their investment skill and their key financial supporters that they survived the experience. Full disclosure: I'm all in on Fairfax.

It's really discouraging to see a guy like Cohen who clearly is the poster boy for the criminal activity on Wall St that brought the world to the brink of financial ruin (and walked away with billions themselves) still seems bullet proof. How is it possible that his deposition in the Fairfax suit (which is Clintonesque in it's discussion of insider trading) caused the judge to dismiss SAC from the lawsuit?

I'm gratified to see the combined ratio came in under 100 (just). It's troubling however to see that it took a spectacular quarter and year for Odyssey Re. Zenith and Crum & Forster are still bleeding money at a prodigious rate. I don't know what Prem's expectations for Zenith were but it's taking a long time to bring it in line. Other WC writers are doing much better. Crum seems like it's been a poor performer forever. Anyway, big cash hoard, increase in book value despite the hedges and Sandy, good overall result. Let's hope this is the beginning of consistent improvement and those 15% annual returns we've been expecting.

When is Fairfax announcing 2012 annual results?

With a 30 point improvement in the combined ratio (128 to 98) quarter to quarter I'd be surprised if there wasn't a positive reaction in the market despite the flat performance to book value. After all, the knock on FFH has always been poor underwriting results.

It's got my vote.

I'm laboring under the burden of having a significant amount of Fairfax stock on the pink sheets since Fairfax delisted on the NYSE. I naturally check the stock price regularly. I was gobsmacked (love that expression) to see today the stock moved almost 4% on trading of 727 shares! Figuring maybe it's a currency exchange correction I looked at the price of FFH.TO and found it moved down almost 2%. The prices are now almost identical when the exchange rate is 1.028. Can wiser heads than mine postulate on what's happening?

No, it doesn't. I always said that if you are fully invested, then hedging would be a good idea. We are rarely ever fully-invested. Our hedge is cash, and we move in and out of cash as the market gives us opportunity. I don't hedge otherwise, and I won't do it ever, other than the occasional purchase of market puts when things seem completely out of whack. The other circumstance in which you may want to hedge, is if you are close to retirement or require a significant portion of your nestegg in the near future, where you would be in some distress if your investments fell dramatically. Otherwise, no point in hedging because of the frictional costs. What Prem makes completely clear in that article, as I've always said, is that they hedge because their capital levels would decrease if markets dropped, which would mean they couldn't write as much business. If markets fell enough, and they are leveraged 4-1 asset to equity, they could lose their qualified credit rating for property casualty insurance, in effect putting the whole business into run-off. So there is a very distinct reason why Prem hedges, and that is because of the insurance business. Cheers! Sanj, speaking of hedging, if you only own FFH is that in itself a hedge or will Fairfax's stock also tank in a stock market crash despite their own hedges?