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mcveyvif.com

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  1. no one has aswered my query re whether the usa is more likely to face serious rates of deflation or inflation going forward, in light of their present fiscal predicament?
  2. New York, October 16, 2013 -- Moody's Investors Service has affirmed the Baa3 senior debt rating of Odyssey Re Holdings Corp. (Odyssey Re) and the A3 insurance financial strength rating of Odyssey Reinsurance Company. The outlook for the ratings has been changed to stable, from positive. Odyssey Re is a wholly-owned subsidiary of Fairfax Financial Holdings Limited (Fairfax - senior debt at Baa3, stable outlook). is this a positive rating change? I'm not an insurance expert, by any means, but would appreciate comments on the signifigance of this moody rating info RATINGS RATIONALE According to Moody's, Odyssey Re's ratings reflect the company's well established and diversified position in the US and international property/casualty broker (re)insurance markets, solid financial profile and strong underwriting results, and the growth of specialty primary insurance in the overall business mix. The company's underwriting leverage is appropriate for its business mix and risks. These strengths are tempered by the underwriting volatility and pricing uncertainty inherent in some of the company's chosen lines of business, which include catastrophe-exposed property and casualty-based exposures, the growing competition from the alternative market on some of the firm's largest property cat segments, the potential for adverse reserve development from long tail casualty exposures, increased level of high risk assets - primarily common equities and derivatives (while the derivatives are primarily intended to provide downside protection, they entail basis, liquidity and counterparty credit risks that the company manages actively but has not fully offset), and substantial debt leverage at the Fairfax group level, said Moody's. ORH is the largest subsidiary of Fairfax Financial Holdings Limited (TSX: FFH). Moody's stated that, with the exception of the above average catastrophe losses in 2011, the company has delivered strong underwriting results in recent years, with a combined ratio of approximately 85% for Q2, 2013, down from approximately 94% in 2009. The strong underwriting results have, to an extent, been offset by lower total returns on investment in recent years, mainly the result of the investment income being depressed in the low interest rate environment, and lower realized gains and in some cases, realized losses on the investment portfolio, including derivatives. This has had a dampening effect on net income and return on equity, which decreased to 5.8% for Q2 2013, from 12.1% in 2009. Moody's noted several factors that could lead to an upgrade of Odyssey Re's ratings: 1) continued development of the core franchise while maintaining a moderate catastrophe risk profile; 2) maintaining profitability at levels above peers to compensate for the higher risk investment strategy; 3) maintaining gross underwriting leverage at around 2.5 times; 4) adjusted financial leverage at Fairfax consistently below 25% and earnings coverage (excluding realized gains/losses) consistently above 5x; and 5) reduction in concentration (both direct investment and uncovered derivative positions) to single name equities and exposures to other high risk assets. Conversely, the following factors could lead to a downgrade of Odyssey Re's ratings: 1) a decline in shareholder's equity of more than 10% on a rolling 12 month basis; 2) adverse loss reserve development greater than 5% of carried reserves on a rolling twelve month basis; or 3) Fairfax's financial flexibility deteriorates such that holding company liquidity drops below $750 million (or less than 3x total fixed charges) or adjusted financial leverage/total leverage rises above 35% or 4) earnings coverage (excluding realized gains) consistently less than 2x. The following ratings have been affirmed with a stable outlook:
  3. As an investor it is hard to know how much effort you should put forth trying to take advantage of macro forecasts. Is macro forecasting really much more than a fool’s errand ? Consider Peter Lynch who wrote in One Up Wall Street that he spends 15 minutes at the start of each year on macro-economic issues. Warren Buffett isn’t much different than Lynch, preferring to spend his time looking at individual companies rather than thinking about where the economy is going. Lynch and Buffett have both done pretty well ignoring where interest rates are going or how fast the economy will grow. But then there is someone like Prem Watsa of Fairfax Financial. I’ve been reading Prem’s annual letters to shareholders for a long time. In 2008 as the financial world was falling apart because of derivatives linked to bad lending products Fairfax was reaping billions. Fairfax had years earlier purchased credit default swaps on financial institutions that were the most exposed to toxic mortgage securities. "While I agree with Buffett and Lynch about the dangers of becoming too obsessed with trying to understand the macro picture, I am not so naïve as to think that I can ignore the warnings of someone like Watsa who is clearly skilled at what he does.As an investor it is hard to know how much effort you should put forth trying to take advantage of macro forecasts. Is macro forecasting really much more than a fool’s errand ? Consider Peter Lynch who wrote in One Up Wall Street that he spends 15 minutes at the start of each year on macro-economic issues. Warren Buffett isn’t much different than Lynch, preferring to spend his time looking at individual companies rather than thinking about where the economy is going. Lynch and Buffett have both done pretty well ignoring where interest rates are going or how fast the economy will grow. But then there is someone like Prem Watsa of Fairfax Financial. I’ve been reading Prem’s annual letters to shareholders for a long time. In 2008 as the financial world was falling apart because of derivatives linked to bad lending products Fairfax was reaping billions. Fairfax had years earlier purchased credit default swaps on financial institutions that were the most exposed to toxic mortgage securities. While I agree with Buffett and Lynch about the dangers of becoming too obsessed with trying to understand the macro picture, I am not so naïve as to think that I can ignore the warnings of someone like Watsa who is clearly skilled at what he does." "If you follow Fairfax and Watsa you likely saw a recent article in the Toronto Globe and Mail (Globe) in which Watsa laid out his belief that deflation is all but inevitable. Watsa believes that with interest rates already basically at zero and stimulus spending capability now limited, the United States government is essentially out of ammunition. And like 5 years ago when Watsa saw the chaos in the financial sector looming, he has positioned Fairfax to not only survive but profit enormously should his pessimistic predictions pan out." a commenter on this article asks: "Zach MansellComments (213) I believe you have oversimplified the CPI linked derivatives. Not all $48 billion dollars (I think that's about the notional value of the contracts) are tied to cumulative deflation in the U.S. They are separated between the U.S., the E.U., and the U.K. In the 2nd quarter, Fairfax increased its holding of this CPI linked derivatives in the E.U. by a substantial amount. I know this is a nit-picky, but I just wanted readers to realize that the example you have presented is not entirely accurate as not all $48 billion are tied to deflation in the U.S. Also, do you have any clue who the counterparties are for such derivatives? I think this is a brilliant (and cheap) play by Prem Watsa, but as I'm relying more and more on these derivatives as my investment thesis for Fairfax, I become more and more concerned with the counterparties' ability to pay Fairfax billions in the event of such a melt-down in the economy." in a recent ottawa citizen newspaper article, dated sat sept 28,2013, james Bagnall writes:"“Canadian households remain highly leveraged,” wrote TD economist Leslie Preston, “and it will take quite some time for measures of leverage to return to historical norms.” The amount of debt on Canadians’ personal books isn’t necessarily a problem if interest rates increase gradually and the global economic recovery continues, especially in the U.S. A survey of economists by the Economist Magazine suggests U.S. GDP this year will grow 1.6 per cent, about the same as Canada, and accelerate to 2.7 per cent next year (versus 2.3 per cent for Canada). As for how quickly, or even if, interest rates rise, so much depends on the ability of central banks to unwind trillions of dollars in risky financial debt accumulated since the beginning of the recession. Some financial analysts, such as Harry Dent, author of The Great Crash Ahead, are convinced that the bursting of the debt bubble will produce an era of deflation and another stock market crash. Eric Sprott — the principal of Sprott Asset Management — has an equally dim view of central bankers’ strategies but believes the end result will be debilitating inflation, with only precious metals such as gold and silver holding their value. Assuming the central bankers do get it right — that is, they preside over a gradual reduction of debt and an increase in economic growth, the consensus is that we’ll get through this, albeit slowly. There is, in fact, no precedent for what we’re about to witness." I personaly do not know a lot of macro-economics, but I am puzzled about whether we should be worried about possible inflation from all the new money created by central banks and their so-called 'quantitative easing' policies OR the deflation that seems to worry Mr Watsa so greatly. If we end up facing high rates of inflation in the future is hedging against deflation of any use or perhaps a large waste of money? I would welcome other board members views on this confusing issue - is it really possible to hedge the economic future?
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