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2014 Q2 result


naboo
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Quick look at the release. Insurance combined ratios were good. Nice to zee Zenith post 90% CR.

 

I thought this bit about the equity hedges was interesting:

At June 30, 2014, equity hedges represented approximately 85% of the company's equity and equity-related holdings. The hedge ratio decreased from approximately 98% at December 31, 2013 because of the increase in market value of the company's equity and equity-related holdings.
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My god, only few posts about the FFH earnings release. Remember the 2003 era? ;-)

 

At first sight, a good quarter. Underwriting seems to be in very good control now, but will take a look at combined ratios with the adjustments over time.

 

Cheers!

 

 

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Great quarter. Two questions for you forensic accountants out there.

 

1) Fairfax realized 300M in equity investments. How do hedges drop to 85% if they realized 300M in gains without realizing any gains/losses in hedges? Did they just reinvest this 300M and continue to do crazy well through out the quarter? It clearly wasnt Russel shorts doing well because unrealized gains on hedges is too small.

 

2)  anyone surprised at continuous CPI losses despite most exposure being in Europe that has had sub 1% inflation for past several months? Would've thought people would think deflation is a possibility at this point.

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Great quarter. Two questions for you forensic accountants out there.

 

1) Fairfax realized 300M in equity investments. How do hedges drop to 85% if they realized 300M in gains without realizing any gains/losses in hedges? Did they just reinvest this 300M and continue to do crazy well through out the quarter? It clearly wasnt Russel shorts doing well because unrealized gains on hedges is too small.

 

2)  anyone surprised at continuous CPI losses despite most exposure being in Europe that has had sub 1% inflation for past several months? Would've thought people would think deflation is a possibility at this point.

 

Regarding 1) the way I understand it is this way:

Say your hedges/shorts are 3b and your Equity/Longs are 3b so you are 100% hedged.

Now your Equity/Longs increase to 3.3b, your hedges/shorts are still at 3b. You are now 3/3.3 or 91% hedged.

 

:)

 

 

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Great quarter. Two questions for you forensic accountants out there.

 

1) Fairfax realized 300M in equity investments. How do hedges drop to 85% if they realized 300M in gains without realizing any gains/losses in hedges? Did they just reinvest this 300M and continue to do crazy well through out the quarter? It clearly wasnt Russel shorts doing well because unrealized gains on hedges is too small.

 

2)  anyone surprised at continuous CPI losses despite most exposure being in Europe that has had sub 1% inflation for past several months? Would've thought people would think deflation is a possibility at this point.

 

Regarding 1) the way I understand it is this way:

Say your hedges/shorts are 3b and your Equity/Longs are 3b so you are 100% hedged.

Now your Equity/Longs increase to 3.3b, your hedges/shorts are still at 3b. You are now 3/3.3 or 91% hedged.

 

:)

 

If they realized gains of 300M it means that the 3.3B goes back down to 3B for a 100% hedge ratio (unless if they reinvested 300M). I would've thought we'd hear about a new 300M position given that's a sizeable piece of their equity portfolio so I'm not sure that this was reinvested.

 

Hedges should've been largely flat so it could be that Fairfax closed a large portion of hedges that only show a deceptively small gain of 2M but I would think they'd mention this new stance towards being under hedged but instead said it was due to equity outperformance so I'm still lost.

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Great quarter. Two questions for you forensic accountants out there.

 

1) Fairfax realized 300M in equity investments. How do hedges drop to 85% if they realized 300M in gains without realizing any gains/losses in hedges? Did they just reinvest this 300M and continue to do crazy well through out the quarter? It clearly wasnt Russel shorts doing well because unrealized gains on hedges is too small.

 

2)  anyone surprised at continuous CPI losses despite most exposure being in Europe that has had sub 1% inflation for past several months? Would've thought people would think deflation is a possibility at this point.

 

Regarding 1) the way I understand it is this way:

Say your hedges/shorts are 3b and your Equity/Longs are 3b so you are 100% hedged.

Now your Equity/Longs increase to 3.3b, your hedges/shorts are still at 3b. You are now 3/3.3 or 91% hedged.

 

:)

 

If they realized gains of 300M it means that the 3.3B goes back down to 3B for a 100% hedge ratio (unless if they reinvested 300M). I would've thought we'd hear about a new 300M position given that's a sizeable piece of their equity portfolio so I'm not sure that this was reinvested.

 

Hedges should've been largely flat so it could be that Fairfax closed a large portion of hedges that only show a deceptively small gain of 2M but I would think they'd mention this new stance towards being under hedged but instead said it was due to equity outperformance so I'm still lost.

 

Agreed, just realized the conundrum after posting. May someone else try...

???

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Great quarter. Two questions for you forensic accountants out there.

 

1) Fairfax realized 300M in equity investments. How do hedges drop to 85% if they realized 300M in gains without realizing any gains/losses in hedges? Did they just reinvest this 300M and continue to do crazy well through out the quarter? It clearly wasnt Russel shorts doing well because unrealized gains on hedges is too small.

 

2)  anyone surprised at continuous CPI losses despite most exposure being in Europe that has had sub 1% inflation for past several months? Would've thought people would think deflation is a possibility at this point.

 

So I ran the numbers and Fairfax would've had to have made 11% on the equity portfolio this quarter to end up with an 85% hedge ratio after realizing 320M assuming no cash infusion to the equity portfolio. Only problem is that their top 4 holdings wouldnt have produced this return given that Sandridge, Bank of Ireland, and RFP all did too poorly to anywhere close 11%.

 

What am I missing?

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Great quarter. Two questions for you forensic accountants out there.

 

2)  anyone surprised at continuous CPI losses despite most exposure being in Europe that has had sub 1% inflation for past several months? Would've thought people would think deflation is a possibility at this point.

 

If I remember properly the cpi derivatives are based on a set level. So even if there would be 0% the derivatives would slowly decay. Obviously the guy at the other side of the deal would be nervous for a few years...

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  • 4 weeks later...

Great quarter. Two questions for you forensic accountants out there.

 

1) Fairfax realized 300M in equity investments. How do hedges drop to 85% if they realized 300M in gains without realizing any gains/losses in hedges? Did they just reinvest this 300M and continue to do crazy well through out the quarter? It clearly wasnt Russel shorts doing well because unrealized gains on hedges is too small.

 

2)  anyone surprised at continuous CPI losses despite most exposure being in Europe that has had sub 1% inflation for past several months? Would've thought people would think deflation is a possibility at this point.

 

So I ran the numbers and Fairfax would've had to have made 11% on the equity portfolio this quarter to end up with an 85% hedge ratio after realizing 320M assuming no cash infusion to the equity portfolio. Only problem is that their top 4 holdings wouldnt have produced this return given that Sandridge, Bank of Ireland, and RFP all did too poorly to anywhere close 11%.

 

What am I missing?

 

No one wants to give this case a try? I think it's a big deal if it really does mean they're reducing equity hedges substantially

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Didn't they reinvest EUR 300mm in Eurobank in April? Also, I think Eurobank shares had been doing very well relative to the rights offering price.

 

Thanks for the reply. This could explain it - if the $320M that was realized was reinvested then they'd only need about 5% gains in the portfolio which is far more reasonable. I qasnt.thinking Eurobank as it wasn't on their 13F.

 

It does look like they're letting winners run and keep hedges static. We've come from 98% hedged on 6.4B in equities to 85% hedged on 7.7B in equities.

 

Net exposure wont mean much to us but it does look like we're beginning to see alpha generation above and beyond the short index hedges. Finally! Let's hope Eurobank and Blackberry continue to do well going forward.

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