2013 results are out

[OracleofCarolina]

http://www.fairfax.ca/news/press-releases/press-release-details/2014/Fairfax-Financial-Holdings-Limited-Financial-Results-for-the-Year-Ended-December-31-2013/default.aspx

 

[Crip1]

For those like me who have been clamoring for the underwriting to improve, we've been given a nice dose of that.

 

For those who want to buy below $370, you may get your chance tomorrow.

 

-Crip

[OracleofCarolina]

yes, 92.7 combined ratio for 2013..can they consistently do this going forward??

[Grenville]

Great to see the improvement in the insurance subs and to see Zenith positive. The hedges were costly. Book value at $339.

[A_Hamilton]

For those like me who have been clamoring for the underwriting to improve, we've been given a nice dose of that.

 

For those who want to buy below $370, you may get your chance tomorrow.

 

-Crip

 

Perhaps, though with the gains in IRE, BBRY, RFP, KW, USG, LT bonds thus far this quarter and the only real offset being a loss on OSTK, BV today is substantially higher than reported BV...so not really sure it matters what they reported for year end.

[naboo]

Currently, good underwriting company worth 1.3 to 1.5 times book.  but Fairfax is not an underwriting company, don't forget we didn't have CAT last year. the investment result is still questionable, need to get more information from tomorrow's conference call.

[karthikpm]

Equity Hedges continue to be a drag . I can understand the hedges on a macro level, but when picking cheap undervalued securities hedging seems counterintuitive

[vinod1]

In hindsight, but Fairfax lost $4 billion cumulatively pre-tax over the last 4 years on equity hedges and CPI derivatives. All this to protect $4 billion in equity investments at cost.

 

Vinod

[gary17]

I hear a lot of discussion about how the hedges don't turn out so well..... 

 

i just have one question:  If you have a $4B portfolio and the info Prem had 4 years ago.... what would you have done to protect the capital base? 

 

I think it just comes down to: did Prem make good decisions based on the info available? 

 

I think in this increasingly interconnected world the difference between a global recession & "chugging along" is a very fine line...      G

 

 

[vinod1]

 

i just have one question:  If you have a $4B portfolio and the info Prem had 4 years ago.... what would you have done to protect the capital base? 

 

 

Fairfax could have done either of the following:

 

1. Buy puts. That would have been true insurance.

 

2. Had brought some protection in case stocks shoot up.

 

Four years ago it seemed likely that markets would go down again. Fairfax was positioned as if this is nearly certain. Fairfax bought the hedges as a protection against 1 in 100 year event. Has it been Fairfax's assessment that the market had much less than 1 in 100 chance of shooting upwards?

 

What kind of insurance is it that if it does not work out produces as much losses as it is supposed to protect?

 

Vinod

 

 

 

[vinod1]

I hope someone asks a question on the CPI derivatives. Despite all the hoopla about deflation in Japan, the CPI index there peak to bottom went down by less than 5%. Fairfax seems to be preparing really for a repeat of Great Depression. Otherwise CPI derivatives do not provide much bang for the amounts being invested.

 

Vinod

[JBird]

I hear a lot of discussion about how the hedges don't turn out so well..... 

 

i just have one question:  If you have a $4B portfolio and the info Prem had 4 years ago.... what would you have done to protect the capital base? 

 

I think it just comes down to: did Prem make good decisions based on the info available? 

 

I think in this increasingly interconnected world the difference between a global recession & "chugging along" is a very fine line...      G

 

Clearly he didn't need to protect the entire capital base. But for whatever level of wealth he truly needed to protect, he could have bought a commensurate amount of out-of-the-money puts on the indexes. I think that even today it's a better strategy than total hedging.

[ECCO]

There must be something I dont understand about those hedges.

 

So the stock market goes up, FFH make money on their stock but lose that money because hedges lost value. So we are even.

 

In 2 years, the stock market goes down as the stocks FFH own, but they make money on their hedges. We are even again.

 

How do they expect to make money with that strategy? What is the trick I dont understand?

[ourkid8]

That could be the intention.  A return of capital instead of a return on capital during this rough economic patch.  Sajeev previously mention, maybe they were expecting a hard market and if they wanted to significantly ramp up on premiums written they could have had a regulatory challenge if the market also fell at the same time.  A counter point to that which I would have preferred would be to pay down debt, improve your credit rating and hold additional cash at the holding company.

 

Tks,

S

 

There must be something I dont understand about those hedges.

 

So the stock market goes up, FFH make money on their stock but lose that money because hedges lost value. So we are even.

 

In 2 years, the stock market goes down as the stocks FFH own, but they make money on their hedges. We are even again.

 

How do they expect to make money with that strategy? What is the trick I dont understand?

[thepupil]

He makes money being fully hedged By owning things that go up more than the market or are not correlated to the market, like a post reorg paper products company or a dying handset manufacturer with supposedly valuable stuff.

 

Prem has basically taken on huge "basis risk" in hedge fund speak where his "hedges" are not overly related to his longs (Irish banks, Greece, resolute, blackberry etc.).

 

I don't see how being short russell hedges out any of the risk involved in those longs. I think being short russell is not necessarily a bad thing and actually am myself, but I see it as a bet against the valuation of small us companies, not a hedge.

 

I don't follow fairfax closely so I may be misinterpreting it. Does prem have a bunch of u.s small cap longs of which I am not aware?

 

 

[valuesource]

For those like me who have been clamoring for the underwriting to improve, we've been given a nice dose of that.

 

For those who want to buy below $370, you may get your chance tomorrow.

 

-Crip

 

Well, it should go without saying that I've been surprised by FFH earnings and market reactions to them before.  However, I don't think we're going to see a drawdown of that magnitude tomorrow.

[gary17]

For those like me who have been clamoring for the underwriting to improve, we've been given a nice dose of that.

 

For those who want to buy below $370, you may get your chance tomorrow.

 

-Crip

 

Well, it should go without saying that I've been surprised by FFH earnings and market reactions to them before.  However, I don't think we're going to see a drawdown of that magnitude tomorrow.

 

Just so we are all on the same page - $370 USD or CAD?

[ERICOPOLY]

Book value was $369.80 back at end of 2009.

 

So take out $40 in dividends paid ($10 per year for 4 years), and you've got $329.80.

 

Compare that to $339 at the end of 2013.

 

Do I have it right?  It looks like it's taken 4 years to generate a cumulative 2.8% return.

[beerbaron]

Book value was $369.80 back at end of 2009.

 

So take out $40 in dividends paid ($10 per year for 4 years), and you've got $329.80.

 

Compare that to $339 at the end of 2013.

 

Do I have it right?  It looks like it's taken 4 years to generate a cumulative 2.8% return.

 

FFH has been a drag on my portfolio for 4 years but to tell you the truth. Their prediction of deflation and huge stock market losses were not that far off it and could have gone both ways... it's been 5 years out of the recession and the developed economies grow in aggregate below 2%.

 

Some would argue that we are not of the woods yet. Especially if we get another recession before we get rid of the malaise from the previous one.

 

BeerBaron

[gary17]

I wonder how well the world governments are prepared compare to 2008 if we have another recession.

[giofranchi]

Book value was $369.80 back at end of 2009.

 

So take out $40 in dividends paid ($10 per year for 4 years), and you've got $329.80.

 

Compare that to $339 at the end of 2013.

 

Do I have it right?  It looks like it's taken 4 years to generate a cumulative 2.8% return.

 

Yeah… Right! My “7 lean years + 3 boom years” model for FFH is made of 7 years with no return whatsoever, followed by 3 years of 35% annual compounded. Like it or not, that’s what they are doing. In the end you would get a very satisfactory 10-year annual compounded return. And imo running a very low risk, so that you would be able to invest a significant amount of money in this single idea alone: very good return, especially if compared to the amount of work that is required. Of course, there is a caveat here: you must have almost “saintly” patience… As I have always said, not a strategy for everyone… As for me, I am well prepared for 3 more years of almost no returns! ;)

 

Gio

 

[Guest valueInv]

Book value was $369.80 back at end of 2009.

 

So take out $40 in dividends paid ($10 per year for 4 years), and you've got $329.80.

 

Compare that to $339 at the end of 2013.

 

Do I have it right?  It looks like it's taken 4 years to generate a cumulative 2.8% return.

 

Yeah… Right! My “7 lean years + 3 boom years” model for FFH is made of 7 years with no return whatsoever, followed by 3 years of 35% annual compounded. Like it or not, that’s what they are doing. In the end you would get a very satisfactory 10-year annual compounded return. And imo running a very low risk, so that you would be able to invest a significant amount of money in this single idea alone: very good return, especially if compared to the amount of work that is required. Of course, there is a caveat here: you must have almost “saintly” patience… As I have always said, not a strategy for everyone… As for me, I am well prepared for 3 more years of almost no returns! ;)

 

Gio

In that case, why not buy something like Fiat or Bac, hold for 3 years and thn sell to buy FFH after 3 years.

[giofranchi]

Book value was $369.80 back at end of 2009.

 

So take out $40 in dividends paid ($10 per year for 4 years), and you've got $329.80.

 

Compare that to $339 at the end of 2013.

 

Do I have it right?  It looks like it's taken 4 years to generate a cumulative 2.8% return.

 

Yeah… Right! My “7 lean years + 3 boom years” model for FFH is made of 7 years with no return whatsoever, followed by 3 years of 35% annual compounded. Like it or not, that’s what they are doing. In the end you would get a very satisfactory 10-year annual compounded return. And imo running a very low risk, so that you would be able to invest a significant amount of money in this single idea alone: very good return, especially if compared to the amount of work that is required. Of course, there is a caveat here: you must have almost “saintly” patience… As I have always said, not a strategy for everyone… As for me, I am well prepared for 3 more years of almost no returns! ;)

 

Gio

In that case, why not buy something like Fiat or Bac, hold for 3 years and thn sell to buy FFH after 3 years.

 

Well, I simply don’t know when those 3 boom years will materialize… The lean years for FFH are the boom years for FIAT+BAC, the boom years for FFH will most probably be the lean years for FIAT+BAC… Given my very refined timing skills… I am almost sure that, if I jump from FIAT+BAC to FFH and vice versa, I will end up to be both in FFH and in FIAT+BAC at exactly the wrong time… That’s how good I am!! ;)

 

Gio

 

[karthikpm]

I have always considered Fairfax the hedge in my portfolio against deflation and market collapse. They will do better than cash in a deflationary environment. I can see the case for the CPI linked hedges and the indices ( Russell, SP etc). I read somewhere in these forums that they are hedging their individual stocks too- that would essentially yield zero return on any idea.  Unclear why they would do that? I suppose you could remove those hedges if your speculative bets start paying off . But those bets have to pay off in a few years , else it will be sunk capital.

 

Any of you going to the AGM this year?  I find the  Q and A in the AGM focuses heavily on their insurance operations , and very few questions ( at least in the last few years) have been on details of their hedges and hedging strategy..

[giofranchi]

The insurance and reinsurance operations produced operating income (excluding net gains or losses

on investments) of $770.2 million, compared to $298.5 million in 2012, primarily as a result of the

improved underwriting.

 

I don’t know how you guys look at these numbers, but to me $770 million are a lot of money! :)

 

Gio