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Guest Dazel
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Just the fax! We think the market has missed this one.

All the numbers are from June 30/09

Bonds(in billions U.S)

cdn gov $1.4

Us gov  $.655

for gov  $1.01

Our guess $200m in gains mostly forex

 

munis      $4.4

corporate $2.44

mbs            .3

our guess on gains $1 billion

 

equities

cdn          $.650

us            $3.01

for            $.917

our guess on gains $800m

 

We think they will do $2 billion pretax in book value (this would include orh consolidated at 100%)...we have no idea what they sold during the quarter...our guess is not much...likely added to the mbs positions. We are assuming that the lack of hurricane activity will result in an underwriting break even. It seems as though the numbers are huge but the seem very conseravtive when you look at what the market has done in equities corporates and Muni's.

Is no one looking at this?

***we are of course long Fairfax

 

Dazel.

 

 

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Thanks for disclosure.  We are all curious until the very end ;D

 

It seems unusual to say that the market has missed this as FFH has moved up from $250 to $350+ in <3month.  $100/share x 17M shares = $1.7B increase in market value.  Has the market missed it?

 

Was it fairly value in July before the $100 move?  Is FFH more or less valuable with 100% ORH ownership (ORH is trading at $64.99...do you think the deal is going to close ;))?

 

Having said all that, I agree with you and have been a buyer as of late (thank you ORH>>FFH).  I think the $100 move was to make up for the previous gains and that the increase in value over the past 3 months is not fully represented in the current share price.  Let's assume they earned half of what you are proposing.  How much extra value does that bring to FFH?  They now have the additional investment portfolio size and the crew at HWIC can now invest and earn a return based on an asset base that is $1B larger than just 3 months ago.  I did plug in the newer stock prices into the excel spreadsheet that someone generously provided on the board and the gains were .... large.  They were also pretty good post Sept. 30th.

 

 

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Just the fax! We think the market has missed this one.

All the numbers are from June 30/09

Bonds(in billions U.S)

cdn gov $1.4

Us gov   $.655

for gov   $1.01

Our guess $200m in gains mostly forex

 

 

The foreign bonds in large part are invested reserves.  Take the $1.4b cdn gov for example... are you pocketing this gain without counting the increase in forex liabilities?

 

 

 

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Fairfax dropped almost $100 from its previous high before the recent move...so actually it is flat since the realization of the massive homerun in cds', treasuries, and hedges...

 

We think the valuation problem lies in what you just said. Fairfax was up in the worst market ever so most assume it has had a huge rise in value...that simply is not true...because when the market started to rise Fairfax was down significantly. why?

 

We think that Prem and Fairfax has been associated with the credit crisis and the cds'. While that should be true the market perceives a onetime windfall from the cds' gains. They are correct. However, they left the party and have never looked back. Fairfax is not being valued on the big bets they made at exactly the right time. I have never seen anything like this before. They bought muni's at the bottom, they dropped hedges at the bottom, they backed up the truck in equities at the bottom, they bought out Northbridge at the bottom!

 

A prime example of the market perception is Jeff Fenwick at Cormark securities. He had a $400 target on FFH in the winter of last year. He dropped his target on Fairfax in the spring to $330 after their frist quarter earnings missed. They missed because no one was expecting Fairfax to go all in...in their bets.

"his remarks were that they no longer see the upside from the Fairfax hedge positions"...they do see it as long term investment now...he was right in the short term as Fairfax price declined significanlty in the first half of the year.

 

How wrong is that? Fairfax will have a record year in 2009...I will take any and all bets on this...I will expand here on why and how if there is an interest...but I will throw in a hint.

The portfolio will yield in excess of $700 million this year without gains...$250 million of that is from muni's and is tax free...

 

Dazel.

 

 

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"The foreign bonds in large part are invested reserves.  Take the $1.4b cdn gov for example... are you pocketing this gain without counting the increase in forex liabilities?"

 

 

 

In your cdn example we are referring to Northbridge...they have significant liabilites in the US...so that is the off set.  Fairfax also has some currency hedges as well so this the toughest of all to evaluate. The massive drop in the US dollar certainly is something we have thought about a lot.

 

Dazel.

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I see an oppertunity here

 

I figure if there bond portfolio avg. 5% than you have 500M in gains on 9.7B

 

stock porfolio is 4.2B, thus 10% gain is 400M, 20% is 800 mill

 

I am seeing underwriting as flat as we hurricanes were minimal.

 

BVPS from 45-66 based on equity RoR from Q2.  I did account for the increase in commons for the equity issue.  I used 19,688.000 as my common float. 

 

Thoughts?

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The Fax:

 

government bonds discussed earlier. =$200m

8.3 % currency move in cdn and foreign gov bonds. We did not use any

currency moves anywhere else to account for foriegn liabilities.

 

muni's index return 3rd quarter 7.04%= $310 million @4.4b

 

corporate us high yield return  13.16%= $321m @2.44b

 

mbs returns were incredible      100%=$300m @.3b

 

*we are going out on a limb and giving Fairfax the premium they deserve of 1% across the board=$1 billion

 

Equities

S&P 500 return 15.57% used across the equity spectrum =$713m @4.577b in equities

 

We know Canada the emerging markets did about 20% and we are not using any currency in our equation.

Once again, we believe that Fairfax outperformed and they deserve the extra $87m =$800m

 

$2 billion would be a hell of a quarter but it is very realistic we think.

 

Dazel.

 

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Note: I have corrected an error in J&J in the spreadhseet and re-posted.

I thought I would also take a stab at FFH earnings for Q3. I will post updates as I continue to cycle through stuff.

 

1.) Underwriting: should be solid (low level of catastrophes)

2.) Interest & Dividend Income: should be comparable to Q2

3.) Investment Gains: should be comparable to Q2 (upside potential)

- US stocks: increased $529,000 ($807,000 in Q2) See spreadsheet below for details.

- 10yr Municipal Bond Yields: look to have come down around 80 basis points (35 bp in Q2)

- 10yr Corporate Bond Yields: look to have come down around 130 basis points (?? bp in Q2)

 

I am not sure how to overlay ORH onto this so I am ingoring the ORH aquisition for now.

Looks to me that mark to market BV has a chance to grow by a similar amount to Q2, which would be huge.

 

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Fairfax has not had a clean quarter in about 2 years believe it or not. Last years record income incuded $1 billion in other than temperary impairments and $500 million in mark to market losses. They took a $450m hit from the massive hurricane that hit Texas. No one noticed. We also believe they padded their reserves as I discussed before..again no one noticed.

 

They will be writing up investments for this quarter and the trend will continue. We see the spread sheets that people are using and they are excellent for the US investments but we think they understate what Fairfax has quietlly done. There is more potential in the other investments abroad. Fairfax made $200 million on ICICI bank a few years back....It was not sexy like the Wells Fargo investment everyone talks about but it was huge. They are partners with ICICI...do you think they did it again? This is what we are talking about...they are the best bond managers on the planet yet no one is talking about their muni bond or their massive corporate bond position. The corporate bond investment is more than a third of the equity in the entire company! An example of the last time we were here(2002) they bought Nortel bonds at 30 cents and sold them at par! 3 times their money!

 

The problem of the past was that they had to plow that money back into insurance losses...that is over! The world will start notice Fairfax in a big way soon and they will get the multiple they deserve.

We do not know what it is but it is MUCH higher than now. They beat the down market and they are now beating the up market. Their performance really should be written about! Someone let Cramer know!

 

By the way whoever made us raise the bid today(!!!!!)..really hope it was someone on the board. I mean really 3 hours and we come within 7 cents on a friggin $370.07 stock! Something is weird about the trading of Fairfax these days.

 

Dazel.

 

 

 

 

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Guest longinvestor

http://lvlt.client.shareholder.com/secfiling.cfm?filingID=1209191-09-49193

 

While on the subject of investments which are not actively discussed, here is Prem investing more into Level(3)...convertible notes this time. Prem owns a big chunk of LVLT and relative to  just about every other large investor, Prem paid pittance for his stake (I believe <$1 per share). If LVLT ever lives up to its stated potential, this could be 100's of millions and counting for FFH. And then it may not work out and we can return to the discussion of JNJ, WFC etc.

 

Disclosure: Long LVLT...not as smart as Prem but not dumb either to have bought @ over $100 during 99-01

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come on FFH Watcher....You gotta think he would do the book for free to stay out of the lawsuit! Sadly, I have more people pretending to be investors talk of Cramer than you can imagine! On one hand it is painful to watch people headed for a train wreck...on the other well...someone had to sell me those Fairfax shares today!

 

Dazel.

 

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Sorry for the overload of info!

 

Since 2004

-reinsurance recoverables have fallen by half

-investments have gone from $13b to over $20b

-runoff is not only fixed... its investments have been excellent and as a company very profitable

-crum has become a powerhouse cash machine

-Northbridge and Odyssey Re are wholly owned cash machines.Odyssey re alone if it were a standalone would have made more than $500m for the fourth year in a row!

-book value will have doubled from $192

All of this was achieved while being tormented by the biggest short traders on the planet and a one and 100 year market slaughtering. It is obvious that I am sentimental but once Fairfax gets its premium all those battles will be forgotten.

 

Berkshire was down for 5 years in the 70's and Buffett and Munger were under investigation by SEC for almost two years...no one ever talks about it. The same will happen with Fairfax and Prem Watsa...

 

Dazel.

 

 

 

 

 

 

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Berkshire was down for 5 years in the 70's and Buffett and Munger were under investigation by SEC for almost two years...no one ever talks about it. The same will happen with Fairfax and Prem Watsa...

 

$100,000/share in no time.  ;D

 

Ah, for a return to 3x book.  Drool.  ;)

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We entered FFH first in 03 near its low.  Then we cut our position in half in 05 just before and during the short attack when the stock traded above $150.  At the AGM in 06, Prem was asked why he didn't sell parts of the business when the stock was trading around $100.  His reply was ,''You wouldn't  like the price we would get.''  I interpreted this to mean that the private market value of FFH then was no more than about $100 per share and that the short thesis was not entirely misguided.  We held our position and then tripled down with short term calls and then leaps in late Aug and Sept when it appeared that the hurricane season was going to be benign.  The rest is history!

 

In 06 FFH' BV was way above the low price, but they had issues with chronic under reserving etc.  IMHO FFH now,trading at a tad under BV, is much much more solid, a better buy than then, and without much potential for nasty surprises. :)

 

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In 06 FFH' BV was way above the low price, but they had issues with chronic under reserving etc.  IMHO FFH now,trading at a tad under BV, is much much more solid, a better buy than then, and without much potential for nasty surprises. :)

 

 

 

I agree.  Adding to that, looking back 3 yrs... the driver of the stock price has been results.

 

In June 2006 the stock was at about $90 at the bottom, US GAAP book was about $125, and today the US GAAP book is somewhere in the $380 ballpark.  So yeah, the stock was maybe 25% below book at the 2006 bottom, in hindsight, the biggest driver in the share price has been the profits.

 

This company IPO'd at 2x book.  One might have argued then that there was no point to invest as it was not a Graham value.

 

 

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Fairfax being, well Fairfax, there is bound to be something in the earnings to ruin everyones perfect day.  Since I cant think of any equities to be written down, then it will likely come from the insurance divisions, probably on the volume of premiums and conbined ratios.  I bet there all above 100, across the board.

 

I will toss my estimate in as 700 M after tax, which would have really turned our cranks 9 quarters ago.

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Guest misterstockwell

Fairfax being, well Fairfax, there is bound to be something in the earnings to ruin everyones perfect day.  Since I cant think of any equities to be written down, then it will likely come from the insurance divisions, probably on the volume of premiums and conbined ratios.  I bet there all above 100, across the board.

 

I will toss my estimate in as 700 M after tax, which would have really turned our cranks 9 quarters ago.

 

Haha! It's sad that we think that way. I have other companies that are similar--I wish for simply a clean quarter, with surprising results, and no ugly bits hidden inside. I sure hope you are wrong about the combined ratios!

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