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FFH Q3 2009 Conference Call Transcript


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This was my favorite ;)


Rich Derov


Just curious, what really keeps you up at night in terms of Fairfax? Who do you think the biggest drivers out there going forward?


Prem Watsa


Well, one of the – we keep a very strong financial position and we’ve always done this, but yes, you will – you might ask why we’ve hedged the 25% on our equity positions. As Greg has mentioned to you, the stock markets have appreciated significantly since March.


But we do testings like a 50% drop in the stock market happening at the same time as a one in 250-year event, a catastrophe event at the same time. And that means like a big Category Five storm in Miami or a big earthquake in Los Angeles or San Francisco. So we test our financial position and our cash positions in the holding company for those types of scenarios and so – so that’s a constant testing. We’ve considered Fairfax to be as our head office is always looking at worst-case events, making sure we can survive them. But after that, I must tell you, I sleep soundly.

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Someone asked a question about the fair value of ICICI Lombard. (I thought he was interested in why the value had dropped sharply. He didn't even know that fair value is disclosed! ???)


Anyway, I thought it was odd that neither Prem nor Greg used the opportunity to explain the sharp decline in value. Am I reading too much into this?

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The Icici Lombard site has an article about changes in the tax laws: http://www.icicilombard.com/app/ilom-en/ICICI-Lombard-news.aspx?rssID=73292.


Sandeep Bakshi also left the firm in April to join ICICI Bank's rural banking division. That, along with the government's emphasis on rural investment and ICICI Lombard's increasing focus on public insurance, might raise fears that rural underwriting will be unprofitable.



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So we have got all of that – those options available to us and I just wanted to continue to add to you like we say at all our conference calls and meetings, is that number one priority, Jeff, is to keep our financial condition really strong. So we won’t do any of those things at the expense of our financial condition.


...and that's terrific.





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"And again, I’d ask you to think – to remember that we’ve just spent $1 billion of that to complete the OdysseyRe privatization. And so we will – in Q4, we still have obviously well in excess of $1 billion in holding company liquidity."


Remember when, a few years back, a half billion of hold co cash was an accomplishment?



Again, while this has been a bone of contention amongst board members, I still admit to disappointment about the underwriting results, particularly at NB. Before I elaborate, I want to make clear that I fully acknowledge and appreciate the past 2-3 years have not been impressive, they have been nothing short of mind-boggling, and Fairfax is by far my largest holding (due in large part to the per-share increase in price). I am a huge fan! That said, the numbers for NB especially are a concern. NB was once referred to as "the crown jewel" of FFH companies for consistently good or better underwriting results. Well, there is certainly some tarnish to that jewel. We are going to have a underwriting loss for 2009 as we did in 2008. 2009 is a year where Cat losses were quite low. That would have been unheard of in the 2004-2006 timeframe. Yes, I understand the softening market and the increased expense ratio by not cutting staff, but I said before and and will repeat that if FFH could underwrite with the Chubbs of the world, this company would be absolutely best-in-class, without question.


On the flip side, one other area not touched on by the board is the performance of Fairfax Asia. Though FF Asia net premiums earned was only 12% of the NPE of Northbridge, FF Asia's underwriting profit in Q3 more than offsets NB's underwriting loss. Considering that the FF Asia is increasing premiums written YOY while others are decreasing, FF Asia's contribution to the whole of FFH will become more and more significant. Certainly, we cannot expect combined ratios for FF Asia below 70 in perpetuity, but the trends there continue to look encouraging.


All in all, the perforamance of FFH over the past 2-3 years, considering the economic malaise in which we currently find ourselves is nothing short of mind-boggling. Thanks to all at Fairfax.



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