Tommm50

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?

Sad to say, the feeling in the business is there is so much excess capacity right now even a major hurricane won't move the market to better pricing.

This must be a misprint. I realize pink sheets are volatile but FRFHF.PK is down over 10 points (over 2.5%) at the open on a trade of 7 (count 'em) shares? Is there some technical reason?

Any speculation as to the knock on effect to Fairfax's suit against the hedge funds? What was seen by the market (especially the Wall Street Journal) as a wild and unlikely allegation when the suit was filed years ago is suddenly extremely credible and riding the tide of the 47 criminal charges lodged against hedge funds (so far) for insider trading. And the feds are sniffing around SAC and Stephen Cohen.

Well the big lawsuit was for $6b. However, at this point, that's just a gleam in Prem's eye. First FFH has to win. Then they have to defend the thousand appeals that the hedgies will try to launch, and then FFH has to actually collect from the deadbeats. If they actually win and defend all the appeals, maybe, maybe, maybe they'll receive a cheque in 2020 or so.....assuming that these guys still have any visible assets in 2020 (as opposed to offshore money). And, whatever they collect will be discounted by time value of money (ie, what's the value of a billion that you won't receive until 2020?). So IMO, you're left with: $6b X probability of winning the case X probability of winning the appeals X % of award that is collectible / (1 + r)**10 Personally, I attach a value of zero to the lawsuit when I try to value FFH. SJ I wouldn't disagree about not waiting by the mailbox for a check but didn't the lawsuit include RICO allegations which if upheld would treble the damages to $18 billion? Just to add to your equation.

It depends on the type of Business Interruption coverage they bought. Some would, some wouldn't. It used to be business interruption coverage only kicked in if your business was interrupted by direct physical damage to your property caused by a covered peril. Nowadays there are much broader coverages out there. I'd guess in this soft market the broader coverage has become more common but I have no idea how prevalent it is.

I've taken everything else out of the market. I think FFH is not only a good investment in it's own right but a hedge against sudden market shock.

KF is right, the $9 billion is the estimated value of the entire fleet. Their risk is basically an individual plane crash. You can bet they buy reinsurance behind it because even an individual plane is worth a great deal more than the annual premium. The frequency of air crashes is low, hence the small premium relative to the value of a plane. It's analogous to buying fire insurance on your home. It may be worth $500,000 but you're paying $1,500 in premium.

The rough translation of the phrase is "Think Better"

As focus is turning to the annual meeting there's one topic I'd love to see discussed either at the meeting or at the post meeting festivities. That is: "What's up with A.M. Best and Fairfax?". As I'm sure most of you are aware A.M. Best is an extremely influential rating agency for insurance companies. When Fairfax announced their preferred share offering a few weeks ago A.M. Best gave the offering an ICR rating of bb+. That's a below investment grade rating. This is the web address of A.M. Best's description of their rating methodology. (http://www.ambest.com/ratings/methodology/bcrm.pdf) There are a number of considerations but given Fairfax's operating earnings record, their excellent liquidity, and their diversified insurance and reinsurance operations I'd really be interested in learning what conversations Fairfax is having with A.M. Best and has Best told them what exactly they need to do to be considered an investment grade?

I know this is obvious to most but for some reason I can't quite connect the dots. I'm a U.S. citizen holding a sizable number of FFH shares (since 2003). Since the delisting on the NY Exchange of course they are on the pink sheets. I hold them in an IRA account with E*Trade and they won't allow me to hold the shares on the Toronto Exchange. I therefore have shares of a Canadian company in U.S. dollars. My question is: If the U.S. dollar devalues won't the US dollar value of the FFH shares actually increase or do I have this backwards?

I may be the only one who finds this mystifying but in contrast, today, 15,000 shares trade with NO ???change in the stock price. Then, at the close a 100 share trade drops the stock price $1,50. ???

I've been looking for the thread to start for 2nd Qtr results and it just did with a vengeance. What I found amazing however was today's movement on the pink sheets. I understand it's very lightly traded but for a company of this market cap and shares outstanding to move 1.5% on 753 shares is very hard to believe.

Man, I look at that SFK thread and wonder if it deserves it's own mailbox. It's certainly dominating this board. On another topic. There seems a lot (relatively) of trading activity today on Fairfax on both the pink sheets and the Toronto Exchange. Happily it's upward. Any insight as to why? Tom

Up the Republic! (cry of defiance against the devious hordes of the hedges)