WideMoat Posted October 30, 2009 Share Posted October 30, 2009 CR was also affected negatively by: 1) currency losses, and 2) a higher expense ratio from writing less business. In my lights, the first is out of your control, and the second should be tolerated. As Buffett has noted, if you cut your staff and expenses when pricing is soft, then you create the wrong incentives--encouraging your people to write bad business to save their jobs. Link to comment Share on other sites More sharing options...
oec2000 Posted October 30, 2009 Share Posted October 30, 2009 For underwriting, keep ORH where it is and continue improvements with NB and C&F and FFH be alright. If they had decided to bring in ORH first before NB, they may have gotten NB at a lower price. They didn't have enough capital to bring in ORH earlier. Meanwhile, ORH was able to buyback quite a bit of shares at much lower prices. The ORH takeout only made sense when FFH price was high enough for them to do a placement - even then, they had to sell the shares cheap. Link to comment Share on other sites More sharing options...
Partner24 Posted October 30, 2009 Share Posted October 30, 2009 After reviewing the quarterly results and looking what Fairfax has accomplished over the last few years, here's what a blue-collar worker had to say: "Yabba-Dabba-Doo!" Fred Flintstone Link to comment Share on other sites More sharing options...
shalab Posted October 30, 2009 Share Posted October 30, 2009 While the results are impressive, not sure if the stock met the whisper estimates from this board. One may say that the whisper estimates were unrealistic to begin with and never have been :-). Link to comment Share on other sites More sharing options...
ECCO Posted October 30, 2009 Share Posted October 30, 2009 Company Symbol EPSEstimate* Time Add to MyCalendar Fairfax Financial Holdings FFH 9.91 After Market Close Add How much press would anothe company get beating an estimate by 3 times. Those estimates are totally bull***t and nobody should care about that. As I show in another post, the information was there and was available for everybody. Anybody could expect an increase in book value of about 50$/share by taking time to read ORH sollicitation document, and that information was available 1 month ago. I like the numbers but its not a surprise. FFH story's getting boring. One quarter its 500M$, another year its 1B$, hey we get used to those M$ and B$... there is no surprise anymore. ;) ECCO Link to comment Share on other sites More sharing options...
shalab Posted October 30, 2009 Share Posted October 30, 2009 The total number of shares outstanding 20.297 million including the new issuance. Not sure if this means the BV will reduce in the next quarter as ORH comes in and was paid a premium to book. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted October 30, 2009 Share Posted October 30, 2009 The total number of shares outstanding 20.297 million including the new issuance. Not sure if this means the BV will reduce in the next quarter as ORH comes in and was paid a premium to book. The premium shows up as an asset -- goodwill. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted October 30, 2009 Share Posted October 30, 2009 CR was also affected negatively by: 1) currency losses, and 2) a higher expense ratio from writing less business. In my lights, the first is out of your control, and the second should be tolerated. As Buffett has noted, if you cut your staff and expenses when pricing is soft, then you create the wrong incentives--encouraging your people to write bad business to save their jobs. This is the way to go. As you say, fire people for writing less business and the remaining staff will be certain to not repeat their mistake. This is an investment holding company with cheap leverage, as far as I'm concerned. No underwriting profit? Boo hoo. Leucadia doesn't have underwriting profit... shit, as long as you make a lot of money investing that's what counts most. Link to comment Share on other sites More sharing options...
Guest Dazel Posted October 30, 2009 Share Posted October 30, 2009 I was too optimistic! MBS' did not have the move we thought, a write down at ICICI ($130m) is strange, currency gain was $100m (low in our mind), emerging market stocks did not move like we thought either. That being said...We are extremely happy with the results. They added to their positions and their interest and dividend income is rising! $184million! Northbridge and Crum both had favourable reserves in the quarter. A couple of years ago that would have been thought unheard of! Someone said boring...they are right. This is now a blue chip stock... Markel and Berkshire trade at 1.35 times book value...that is where Fairfax is headed.. $500 is 1.35 times book value. Dazel. Link to comment Share on other sites More sharing options...
oec2000 Posted October 30, 2009 Share Posted October 30, 2009 The total number of shares outstanding 20.297 million including the new issuance. Not sure if this means the BV will reduce in the next quarter as ORH comes in and was paid a premium to book. The premium shows up as an asset -- goodwill. Given that ORH's BV would have been close to $60 in Q3, the goodwill should be less than $100m - not material. The goodwill on the NB acquisition was more - as at 30 Sep, FFH had $330m goodwill on the books. For a true apples to apples comparison of how FFH's BV has changed since last year, one should adjust goodwill from BV. Against this, there is the $150m undervaluation of equity accounted investments. So, $360 is probably a fair BV number to go by; close enough to reported book anyway. Link to comment Share on other sites More sharing options...
valuecfa Posted October 30, 2009 Share Posted October 30, 2009 CR was also affected negatively by: 1) currency losses, and 2) a higher expense ratio from writing less business. In my lights, the first is out of your control, and the second should be tolerated. As Buffett has noted, if you cut your staff and expenses when pricing is soft, then you create the wrong incentives--encouraging your people to write bad business to save their jobs. This is the way to go. As you say, fire people for writing less business and the remaining staff will be certain to not repeat their mistake. This is an investment holding company with cheap leverage, as far as I'm concerned. No underwriting profit? Boo hoo. Leucadia doesn't have underwriting profit... shit, as long as you make a lot of money investing that's what counts most. Leucadia used to have a sidecar in Olympus Insurance and they bailed when it blew up on them with poor underwriting. That cheap underwriting can turn expensive real quick. (As you know) Link to comment Share on other sites More sharing options...
oec2000 Posted October 30, 2009 Share Posted October 30, 2009 CR was also affected negatively by: 1) currency losses, and 2) a higher expense ratio from writing less business. If you read Note 2: Summary of Significant Accounting Policies, you will see that they have changed their accounting to remove the distortions caused by fx fluctuations. The CR's could not have been affected by fx losses. On a separate matter, the fair value of ICICI Lombard seems to have dropped by more than $200m. Has anyone figured out why? Link to comment Share on other sites More sharing options...
WideMoat Posted October 30, 2009 Share Posted October 30, 2009 CR was also affected negatively by: 1) currency losses, and 2) a higher expense ratio from writing less business. If you read Note 2: Summary of Significant Accounting Policies, you will see that they have changed their accounting to remove the distortions caused by fx fluctuations. The CR's could not have been affected by fx losses. I'm curious about others interpretation of this. Most simply, FFH has claims liabilities in foreign currencies, and then it pairs them with investments in that same currency. However, if the claims are paid out sooner than the investments mature (or gains/losses realized), then currency moves may look to be more significant for quarterly earnings than they really are. Now, per Note 2, FFH wants to better distinguish realized and unrealized currency gains/losses on their consolidated earnings report. According to the table following Note 2, it looks to me like they take a pre-tax (realized) currency loss on certain underwriting line items. However, the unrealized currency gains/losses that hedge those expenses show up in the comprehensive income table. yea, or nay? Link to comment Share on other sites More sharing options...
barminov Posted October 30, 2009 Share Posted October 30, 2009 Anyone else notice these little gems in the discussion of holding company cash movements... -the investment of $24.5 in the start-up insurance operations of Fairfax Brazil -the company intends to redeem its remaining Series A and Series B preferred shares in the fourth quarter (as described in note 6) at an expected cost of approximately $139.8 Link to comment Share on other sites More sharing options...
Grenville Posted October 30, 2009 Share Posted October 30, 2009 -the company intends to redeem its remaining Series A and Series B preferred shares in the fourth quarter (as described in note 6) at an expected cost of approximately $139.8 Just so there's no confusion.. On October 14, 2009, the company issued a notice to the holders of all of its 6,000,000 outstanding Series A and Series B cumulative redeemable preferred shares that it intends to redeem all of those shares during the fourth quarter of 2009. This does NOT refer to the Odyssey Re Preferreds. I couldn't quickly find much info on the two FFH preferreds, it doesn't look like they are listed like the newly issued FFH-C Link to comment Share on other sites More sharing options...
SharperDingaan Posted October 30, 2009 Share Posted October 30, 2009 You might want to look at the nice low debt/equity ratio, as isn't this where the immediate benefit of the ORH buy-back really showed up? This is quite the arc. Then notice how little press there is today ? SD Link to comment Share on other sites More sharing options...
Guest misterstockwell Posted October 30, 2009 Share Posted October 30, 2009 This is an investment holding company with cheap leverage, as far as I'm concerned. No underwriting profit? Boo hoo. Leucadia doesn't have underwriting profit... shit, as long as you make a lot of money investing that's what counts most. If they can't make an underwriting profit, they should fold up the company and start a hedge fund. There is no reason to expose us to potentially large losses from catastrophes every so often if they don't make an underwriting profit most years. HW could easily raise billions for an investment fund(I'd have my money in there for sure) and eliminate the insurance risk. Link to comment Share on other sites More sharing options...
T-bone1 Posted October 30, 2009 Share Posted October 30, 2009 misterstockwell, respectfully . . . I could not disagree more. We are not automatically exposed to huge risks because they are in the insurance industry. We are exposed to whatever risks the company decides to take on. I am sure they will be as prudent or moreso in taking these risks as they are in taking investment risk. There is no free lunch, one way or another they are taking risk. A lot of the gains in book value come from large fixed income investments funded by float. With zero or low cost float they can buy safe investments like muni bonds and make a profit. I certainly wouldn't want them levered 3 or 4 to 1 as a hedge fund, where they would be forced to reach for yield to pay for the interest on debt-funded leverage. Finally, I would suspect (as many here have alluded to) that it is the expense ratio rather than the loss ratio that is keeping the combined ratio high. Having a big insurance business is an asset, not a liability. The fact that they can write a lot more business than they currently chose to suggests to me that as a shareholder, I will reap the gains from this in the future. I think it is very short-term of you to suggest that they should shut down a world class worldwide business because it isn't profitable enough this quarter. On that last note, I must add two things. One is that you need to match assets to the float . . when you match the income on bonds to the cost of float this IS a very profitable business, even with (I suspect) a high expense ratio. Secondly, not that it has anything to do with the above points, but I think FFH waits until the end of the fourth quarter to see if there are no hurricanes, rather than September 30th, so I expect a better CR in Q4 Link to comment Share on other sites More sharing options...
txlaw Posted October 30, 2009 Share Posted October 30, 2009 ....of course, if they could ever make more than pennies on their underwriting, we would really have something special I read the reports from almost every ins co. this q and almost of them had cr in the low 90 even if yOu exlude prior year resrve release. Boy, am I glad I don't work for you guys! ;) Management has virtually doubled BVPS in the two most turbulent years in US financial history since the Great Depression. Anybody could have done that, right? Yeah, we need to take away Prem's bonus. What? Prem doesn't pay himself a bonus....oops, sorry. :D Just kidding, OK? Haha. :) My thoughts, exactly. I got the results necessary for my book value "arbitrage" situation to work out, but they're doing such a phenomenal job, I'm not sure I can bear to take the gains off the table. The Fairfax Brazil development plus the S&P 500 hedge make me very happy! Link to comment Share on other sites More sharing options...
twacowfca Posted October 30, 2009 Share Posted October 30, 2009 Barminov, The A&B pref redemptions appear to offset other preferred they recently issued at a lower rate. If this interpretation is correct, there would be little net change in their capital structure. Link to comment Share on other sites More sharing options...
Guest misterstockwell Posted October 30, 2009 Share Posted October 30, 2009 misterstockwell, respectfully . . . I could not disagree more. We are not automatically exposed to huge risks because they are in the insurance industry. We are exposed to whatever risks the company decides to take on. I am sure they will be as prudent or moreso in taking these risks as they are in taking investment risk. There is no free lunch, one way or another they are taking risk. A lot of the gains in book value come from large fixed income investments funded by float. With zero or low cost float they can buy safe investments like muni bonds and make a profit. I certainly wouldn't want them levered 3 or 4 to 1 as a hedge fund, where they would be forced to reach for yield to pay for the interest on debt-funded leverage. Finally, I would suspect (as many here have alluded to) that it is the expense ratio rather than the loss ratio that is keeping the combined ratio high. Having a big insurance business is an asset, not a liability. The fact that they can write a lot more business than they currently chose to suggests to me that as a shareholder, I will reap the gains from this in the future. I think it is very short-term of you to suggest that they should shut down a world class worldwide business because it isn't profitable enough this quarter. On that last note, I must add two things. One is that you need to match assets to the float . . when you match the income on bonds to the cost of float this IS a very profitable business, even with (I suspect) a high expense ratio. Secondly, not that it has anything to do with the above points, but I think FFH waits until the end of the fourth quarter to see if there are no hurricanes, rather than September 30th, so I expect a better CR in Q4 We are absolutely exposed automatically to huge risks being in the insurance business. If mother nature hits hard, as has happened in the past so many times, Fairfax will pay their share. Every so often they will lose a lot of money, but that is what the business is all about. The company may "decide" to take on only a certain amount of risk, but mother nature has a way of deciding her own amount of carnage that may not fit FFH models. As to cost of float, Fairfax states "our long term goal is to increase the float at no cost." They have not reached that goal as their average cost of float is 2.8%. I don't see why being paid for your float is such a controversial point here. Underwriting profit should be a constant goal, with investment gains icing on the cake. Many here tout investment gains as the main purpose of FFH. What's wrong with having some underwriting discipline in addition to a world class investment team? Each percent below 100 CR reaps huge rewards for shareholders, both directly as earnings and indirectly as better-than-free float that can be invested. Having said all this, I am looking forward to a hard market to see what happens. Fairfax bought some not-so-great insurance companies in the past, and had to deal with all the garbage surrounding them for many years. We are finally at a point where all the companies under the umbrella are in decent shape financially, flush with cash, and ready to underwrite-to-impress. I am counting on that. We shall see if underwriting discipline is a reality or just a hollow promise. If they can do it, we all stand to benefit tremendously. Link to comment Share on other sites More sharing options...
ericd1 Posted October 30, 2009 Share Posted October 30, 2009 Opened at $362.99 up $10.40 and traded higher thru $367.00 Link to comment Share on other sites More sharing options...
Mikenhe Posted October 30, 2009 Share Posted October 30, 2009 They could improve the CR by cutting back the reserving. That way the CR could be at 95%. However if they did that wouldn’t it mean that they would be taxed on the profit now rather than invest the float with reserving in full? By fully reserving now don’t they get to keep the float longer and only get taxed when they realize the reserve redundancy? It seem a bit like the commute argument. They appear to lose money on the commutes when what they are doing is getting 100% certain discounted cash now and removing a fully reserved potential future collection from reinsurers. Plus they buy reinsurance to protect against a portion of any huge loss. Link to comment Share on other sites More sharing options...
WideMoat Posted October 30, 2009 Share Posted October 30, 2009 As to cost of float, Fairfax states "our long term goal is to increase the float at no cost." They have not reached that goal as their average cost of float is 2.8%. I don't see why being paid for your float is such a controversial point here. Underwriting profit should be a constant goal, with investment gains icing on the cake. Many here tout investment gains as the main purpose of FFH. What's wrong with having some underwriting discipline in addition to a world class investment team? Each percent below 100 CR reaps huge rewards for shareholders, both directly as earnings and indirectly as better-than-free float that can be invested. Having said all this, I am looking forward to a hard market to see what happens. Fairfax bought some not-so-great insurance companies in the past, and had to deal with all the garbage surrounding them for many years. We are finally at a point where all the companies under the umbrella are in decent shape financially, flush with cash, and ready to underwrite-to-impress. I am counting on that. We shall see if underwriting discipline is a reality or just a hollow promise. If they can do it, we all stand to benefit tremendously. I agree--underwriting profit is better than a low cost of float. However, when your competitors are writing business at a high cost of float, then perhaps a CR of 98-104 is top performance. Even with a cost of float of 2.8%, that means they can "borrow" money more cheaply than most governments. In this interest rate environment, that looks less valuable, but over the long term, its benefits will reveal. Link to comment Share on other sites More sharing options...
twacowfca Posted October 30, 2009 Share Posted October 30, 2009 This discussion about CR is a tempest in a teapot. FFH had many years when they under reserved. Now they appear to be over reserving because this was A very good quarter for their peers and FFH didn't have any disclosed major loss events. Link to comment Share on other sites More sharing options...
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