Fairfax 2008 Year-end Results (February 19, 2008)

[KFRCanuk]

Posted this as an event in the calendar also.

[KFRCanuk]

Should be anytime now :)

[Guest misterstockwell]

http://www.fairfax.ca/Assets/Downloads/2008Q4.pdf

[Guest ericopoly]

I am pleased that they ditched the Treasuries and bought tax-exempt at 5.79%.

 

That's more or less an 8% tax-equivalent yield on bond lower risk than Berkshire:

 

 

During the fourth quarter, Fairfax sold almost all of its U.S. Treasury bonds (sale proceeds of $5.8 billion) for net gains of $471.5 million and reinvested a significant portion of the sale proceeds in U.S. state, municipal and other tax-exempt bonds (purchases of $2.9 billion). At December 31, 2008, subsidiary portfolio investments included $4.0 billion of tax-exempt bonds with an average yield (at purchase) of approximately 5.79%, approximately 87% of which are insured by Berkshire Hathaway Assurance Corp.

[Guest ericopoly]

As of December 31, 2008, the company owned $8.87 billion notional amount of credit default swaps with an average term to maturity of 3.3 years, an original cost of $161.5 million and a fair value of $415.0 million.

 

 

That is terrific news.  They likely have nice gains in C, BAC right now.

[Uccmal]

Happy to say my guess was wrong although I expect the equity portfolio has taken a bath in the last 6 weeks.

 

After NB what is holding company cash:  about 1.2 B?

 

Quarterly returns should be way up. 

 

Underwriting should move to BE or plus in Q1; Q2

 

Remaining CDS must be doing well:  Swiss Re; C; BAC

 

Like to see the higher interest and tax free bond portfolio.  Almost 3% above what they were getting earlier on that 4 B. 

 

2 Billion in Equities with a P/B of <1 (excepting JNJ) and P/E ~ 6-8

 

Be reading it in detail on the plane tomorrow. 

 

 

 

 

 

[Guest misterstockwell]

Man, they still suck at underwriting. I hope that hard market and some underwriting discipline arrive quickly.

 

What about the ~$600 mil in OTTI of equity and bond positions? What do you think that includes? That's a $30-something per share hit.

 

 

[UhuruPeak]

I am not happy with the underwriting either.  There have been quite a few quarters now when we rejoice with great investment earnings yet the market looks at UW only.

 

 

Question to those who follow other insurers:  what did their ratios look like?

[Crip1]

Markel was at 99% for the year.

 

The underwriting is the absolute KEY for Fairfax, and will separate whether they will be a good company, or a great one. Some may say that they are great now, and I have made a lot of money with them...but the underwriting results are weighing them down something fierce.

 

-Crip

[Guest misterstockwell]

Chubb combined ratio in Q4 was 84.3%

Allstate 96.4%

WR Berkley 93.1%

White Mountains Re 88%

Esurance 104%

OneBeacon 86%

TRH  98.1%

 

I could go on, but you get the point

 

[valuecfa]

Agreed. I am thrilled that they continue to have superb timing/skill with their investment side of the business (and that they continue to surpass analyst expectations), but i would like for them to focus on some better underwriting. If they could do that, they would be the perfect stock.

 

Congratulations, shareholders, on a fantastic quarter.

[Guest ericopoly]

You could go on, but we get the point?

 

Hello, currency conversion -- how much foreign exposure did those firms have?

 

 

included 12.2 combined ratio points ($135.8) of net

adverse development of prior years’ reserves, comprised of the adverse impact on prior years’ reserves of U.S. dollar strengthening

relative to other currencies

 

 

[FlyingArrow]

You could go on, but we get the point?

 

Hello, currency conversion -- how much foreign exposure did those firms have?

 

 

included 12.2 combined ratio points ($135.8) of net

adverse development of prior years’ reserves, comprised of the adverse impact on prior years’ reserves of U.S. dollar strengthening

relative to other currencies

 

 

 

 

I'm still trying to wrap my head around this. We've seen the US/CAD dollar swing wildly over the past year and I don't ever recall seeing any discussion of combined ratio points swing associated with currency movements (either way) in previous quarterly or annual reports. I hope they make a point of discussing this on the call tomorrow.

 

Can anyone give me the "idiots guide to combined ratio impact due to prior years adverse reserve impact associated with US dollar strengthening" ???

[Guest ericopoly]

Dammit.  I quoted the wrong thing.  I understated the impact of US Dollar on their underwriting.

 

14.4 combined ratio points, $160.6),

 

So, they lost $207.4 in the fourth quarter, but $160.6 of it was due to a stronger US dollar.

 

 

So really, it's an underwriting loss of $46.8.

 

Combined ratio for the quarter is therefore 104.2 had the dollar been stable.

 

 

[watsa_is_a_randian_hero]

Yeah, when the CAD went beyond parity with the USD we never heard of any huge gain on the CR.  Whats up with that?

 

Either way, great quarter over all.  My favorite part is they fully sold the treasuries.  I was afraid they were going to be burned on that and the common stocks this quarter.  The muni's is a huge plus too.  The tax equivalent yield is 8.5%+.  On $4 billion, the 5% spread between that and the 3.5% treasuries is $200 million per year, or another $6-$7 per share approximately in earnings.

[valuecfa]

(1) Excluding the effect of foreign currency movements, the 2008 combined

    ratios of Northbridge, OdysseyRe, Reinsurance - Other (foreign currency

    movements principally affected Advent) and Fairfax consolidated were

    102.4%, 101.3%, 116.6% and 106.0% respectively.

 

This, of course, is the full year currency effect. (emphasis mine)

 

(2) Excluding the impact of Crum & Forster's lawsuit settlement in the first

    quarter and Crum & Forster's reinsurance commutation loss in the second

    quarter, the combined ratios in 2008 were 106.7% and 107.7% for Crum &

    Forster and Fairfax consolidated respectively.

(3) Prior to giving effect to the above-mentioned foreign currency

    movements, the two above-mentioned items affecting Crum & Forster and

    catastrophe losses related to Hurricanes Ike and Gustav, the Fairfax

    consolidated combined ratio in 2008 was 96.2%.

 

 

Cheers, and congrats on the quarter!

[Daphne]

Thanks for doing that math. It makes more sense.

 

Let's not forget that Prem warned us that he'd walk away from business rather than take underwriting risks.  There's a short term price to pay for this conservative decision -- we were forewarned so stop complaining-- that decison's more than offset by investment gains.  Those other companies you've listed are most likely increasing their risk to write the business.

 

[Guest ericopoly]

One big culprit is 4.8 combined ratio points from Advent for Gustav and Ike:

 

 

Fourth quarter 2008 catastrophe losses related primarily to increased loss estimates on Hurricanes Ike

and Gustav by Advent (impact of 4.8 combined ratio points, or $54.1 net of reinstatement premiums)

 

 

[valuecfa]

Underwriting results in 2008 also included the adverse impact on claims reserves of 4.2 combined ratio points ($189.2 million) arising from U.S. dollar strengthening relative to other currencies, compared to a benefit from foreign currency movements in 2007 of 0.9 combined ratio points ($41.3 million). The company generally mitigates the impact of foreign currency movements on its foreign currency-denominated claims liabilities by holding foreign currency-denominated investments. As a result, the impact of foreign currency translation gains and losses included in underwriting results is generally mitigated in whole or in part by foreign currency translation gains and losses on investment assets included in net earnings or other comprehensive income.

 

Of course if those Hurricanes never happened then we would be well under 100% combined ratio (consolidated)

 

 

[nodnub]

Agreed. I am thrilled that they continue to have superb timing/skill with their investment side of the business (and that they continue to surpass analyst expectations), but i would like for them to focus on some better underwriting. If they could do that, they would be the perfect stock.

 

Congratulations, shareholders, on a fantastic quarter.

 

Seriously?  Here come the momentum guys... Perfect stock! yes!

 

I don't care how my companies perform relative to analyst expectations.  Analysts can stick their expectations where the sun don't shine.

[valuecfa]

?

[Guest misterstockwell]

I'd rather they didn't have to exclude their way to profitable underwriting. It's an insurance company, after all.

 

Daphne--If Prem walked away from business rather than take underwriting risk, why does the combined ratio suck so bad? They even try to make this point in the release about their "disciplined response to the softening underwriting cycle." If you are disciplined, you knock out combined ratios like HCC(consistently 80's). If you are poor at underwriting, you do 25% less business like Northbridge and have a 119% combined ratio from previous crappy underwriting. If they improve their underwriting, the company rocks.

[Guest ericopoly]

I'd rather they didn't have to exclude their way to profitable underwriting. It's an insurance company, after all.

 

You wouldn't be passing that comment were it not for two things:

 

1)  USD

2)  Advent

 

How long have they held power over Advent?  It was only consolidated in September 2008.  Fix it?  I'm sure they plan to.

 

 

Now, if you are going to give them a lot of hell over the USD and call it "underwriting", yet their overall investment positioning blew the hell out of their competition (but it's not considered "underwriting"), then I'm sorry but you are being unduly negative.  The USD exposure was in many ways similar to investment management, yet it counts against underwriting but some other part of investment positioning like bond and CDS gains do not.

 

 

[Guest ericopoly]

Should think the USD will not keep rallying like it did in Q4!  Truly, it would be impossible for it to keep strengthening the way it did out to infinity.

 

[Guest misterstockwell]

They still did not underwrite profitably, even excluding the currency issue. I'd like 5-10% underwriting profits to add to the stellar investment results. I just want to make the comparison to those who underwrite well--Fairfax's insurance companies definitely do not underwrite as well as their quality peers. That's my point, and one that Fairfax's peers have noted to me in conversations. It will be something to watch during the development of this hard market--how much will they increase premiums written and how profitable will it be?