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

[valuecfa]

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.

 

 

 

The combined ratio doesn't reflect the foreign currency hedges they had in place. It is listed in net earnings and other comprehensive income.  So they weren't as adversely effected by the currency fluctuations as the reported combined ratios alone would suggest.

[Uccmal]

Think about this a moment.  The year was 2008.  A huge number of companies much bigger than FFH that recorded multi-billion dollar losses.  Not only did FFH make 1.4 Billion profit this year, and 1.1 billion last year but they are sitting on 1.2 B in cash.  How many financial companies can make this claim?  None?

 

They have a massive float that grows every year and they are investing it at feverish clip, in the cheapest investing climate in most of our investing lifetimes.  The insurance business serves one purpose to FFH, and that is to provide investable cash.  

 

To put this picture into perpective, at the very best they may earn 400 Million on insurance for a full year at their present size.  They made 4 x this on the investment gains. So, good underwriting is a nice to have and a worthwhile goal but it is far outwieghed by the investment performance.  It is as if the CRs were actually 65% not over 100%.  

 

It completely baffles me why this company is not trading at 600-1000 US rather than 290.  If this was 3 years ago this stock would have been at 1000 with results like this.  

 

 

[Uccmal]

Is it just me or are these Quarterly reports starting to take on the size of annual reports?

[gaf63]

Another aspect adding to the '08 CR for FFH consolidated is that Advent only reported results from Sept. when FFH took control, so

the losses from  Ike and Gustav were concentrated and not averaged over the whole yr. of Advents results.

[FlyingArrow]

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.

 

 

 

Eric, in general I'm very pleased with the quarter and won't be selling anytime soon. There are lot's of pluses I really like. However, I think your analysis is not accurate if you're suggesting that Advent and USD made up all of the problem.

 

Underwriting results in 2008 also included the effect of foreign currency movements (affecting both current year and prior years’ reserves) which added a total of 4.2 combined ratio points ($189.2) to the combined ratio of the company’s insurance and reinsurance operations (compared to a benefit of 0.9 combined ratio points ($41.3) in 2007). The company generally mitigates the impact of foreign currency movements on its foreign currencydenominated

claims liabilities by holding foreign currency-denominated investments. As a result, the impact of foreign currency

translation gains and losses included in incurred losses generally is partially or wholly mitigated by foreign currency translation gains and losses on investment assets that are included in financial results as investment income in net earnings or in other comprehensive income.

 

Take out the currency part of it and we have a combined ratio of 110.1-4.2 = 105.9%

 

Advent had an underwriting loss of $112.4 and a combined ratio of 242.5% for the portion of 2008 (since September 11, 2008) that its results were included in the consolidated Fairfax results.

 

I agree we shouldn't beat the team up for this. So take out advent for about 2.5% (a quarter of our $457M and 10% underwriting loss) and we're still at 103.4%

 

Like others I don't agree with removing catastrophes to show an artificial combined ratio. We have enough fingers in various pies that there will be some catastrophe every year.

 

Bottom line, I still wish underwriting was better.

[Guest ericopoly]

That's my point, and one that Fairfax's peers have noted to me in conversations

 

 

Consider investing in 4% bonds and a 1 yr float lifetime -- you need 104 combined ratio to break even.  But if that float lives on the books for 2 yrs... then you are making a profit on the float.

 

So if you are going to draw comparisons and assumptions on how much the insurance side is worth, this topic is at least worth mentioning.  I believe Fairfax has quite a lot of long-lived float -- like the Asbestos settlement charge they took.

 

Without Advent's Q4 Ike/Gustave and currency issues, combined ratio was 98.7 in Q4 -- doing fine.

 

 

 

[FlyingArrow]

Think about this a moment.  The year was 2008.  A huge number of companies much bigger than FFH that recorded multi-billion dollar losses.  Not only did FFH make 1.4 Billion profit this year, and 1.1 billion last year but they are sitting on 1.2 B in cash.  How many financial companies can make this claim?  None?

 

They have a massive float that grows every year and they are investing it at feverish clip, in the cheapest investing climate in most of our investing lifetimes.  The insurance business serves one purpose to FFH, and that is to provide investable cash.  

 

To put this picture into perpective, at the very best they may earn 400 Million on insurance for a full year at their present size.  They made 4 x this on the investment gains. So, good underwriting is a nice to have and a worthwhile goal but it is far outwieghed by the investment performance.  It is as if the CRs were actually 65% not over 100%.  

 

 

 

Al, I was going to write many of these positives but you beat me to it!

 

It completely baffles me why this company is not trading at 600-1000 US rather than 290.  If this was 3 years ago this stock would have been at 1000 with results like this.

 

That's so we can keep accumulating and accelerate "Freedom Fifty Hello" 

 

[Guest ericopoly]

However, I think your analysis is not accurate if you're suggesting that Advent and USD made up all of the problem.

 

It made up all of the problem in the Q4 results.  Back them out and we're below 99 C/R.

 

You are starting off with a combined ratio of 110, suggesting you are talking about all of 2008 -- so we're talking about different things.  I already knew the results for the first 3 quarters, was only discussing new info we learned today.

 

 

So let's talk about the full year then -- 103.4 is your number.  Okay then, it's 4.4 points higher than MKL.  Now, we had a commutation charge of $80m remember.  I think we're pretty damned close to MKL going forward if you include only yr 2008 results.  Had they chosen to not commute that 80m, I think you're getting very close to MKL.  And MKL trades at like 1.3x book!

 

[Guest ericopoly]

And that commutation was truly voluntary.  There is no reason they did it except that it made economic sense to get the cash sooner.

 

It typifies the kind of charge that you can back out without calling it a fudging of underwriting results.  I think it was there to hedge themselves against adverse development from float they acquired.  I cannot believe they will buy similar policies in the future to hedge against their own reserving, so that's why I'm willing to ignore it.

 

[FlyingArrow]

However, I think your analysis is not accurate if you're suggesting that Advent and USD made up all of the problem.

 

It made up all of the problem in the Q4 results.  Back them out and we're below 99 C/R.

 

You are starting off with a combined ration of 110, suggesting you are talking about all of 2008 -- so we're talking about different things.  I already knew the results for the first 3 quarters, was only discussing new info we learned today.

 

 

So let's talk about the full year then -- 103.4 is your number.  Okay then, it's 4.4 points higher than MKL.  Now, we had a commutation charge of $80m remember.  I think we're pretty damned close to MKL going forward if you include only yr 2008 results.  Had they chosen to not commute that 80m, I think you're getting very close to MKL.  And MKL trades at like 1.3x book!

 

 

Point taken on Q4 impact.

 

I agree that the $80M commutation should come out. Those are good things for us as we know what Prem and team can do with the money! That's another 2% off the CR so we're at 101.4%

 

They just need to improve by $100M over the year and we're at 99% in a year with some good cat losses. Very achievable going forward.

 

But seriously Eric, you've got to stop pumping this stock. I want to accumulate more before we get to 1.3x BV!!  ;D

[Guest ericopoly]

But seriously Eric, you've got to stop pumping this stock. I want to accumulate more before we get to 1.3x BV!!

 

I'm already bought in.  I just want to get very rich now.

 

IV grows faster when you have a high book value multiple (Soros is right!).

[FlyingArrow]

I'm already bought in.  I just want to get very rich now.

 

Me too. But I'm greedy...  When others are fearful ;)

[Uccmal]

Managed to buy a few 2011 leaps yesterday and today after FFH came down a bit.  Not a deal in themselves just a reasonable proxy for the stock.  Had to take a hit on some other stuff to do it. 

 

Me too. But I'm greedy...  When others are fearful

 

I'm greedy and fearful right now.  :P

[FlyingArrow]

Consolidated net gains on investments in 2008 of $2,720.5 included $2,079.6 of net gains related to short equity and equity index positions, $1,290.5 of net gains related to credit default swaps, net gains of $273.7 on bonds, $20.6 of net gains on common stocks and $60.2 of net gains related to foreign currency, partially offset by $996.4 of other than temporary impairments recorded on common

stock and bond investments.

 

Anyone have any thoughts on the $996.4 of OTTI's? What are the rules for OTTI and is this really like mark to market? If these impairments don't truly materialize because they are really value investments made by a top notch jockey does this really represent conservative accounting as we really don't expect to see these losses materialize? That's almost $57 per share! That plus the investments held at equity which hide another $20/share in book value really has me thinking about the future. And it looks very bright!

[FlyingArrow]

Managed to buy a few 2011 leaps yesterday and today after FFH came down a bit.  Not a deal in themselves just a reasonable proxy for the stock.  Had to take a hit on some other stuff to do it. 

 

Me too. But I'm greedy...   When others are fearful

 

I'm greedy and fearful right now.   :P

 

I was fishing to do the same but didn't get any. Which ones did you get and at what price?

 

Regardless of how we feel about this report and the longer term prospects I simply have no prediction on what Mr. Market will do tomorrow with this stock. Very interesting times. Other than worrying about the odd margin call which I can deal with by balancing various account I'm glad that I'm in for the very long term and couldn't care less what it does tomorrow.

[Partner24]

It was an overall stellar year. Hey, we made not only a profit this year, but a huge one!  :D Remember, that is 2008!!!!!

 

Regarding underwriting, to me, Fairfax is an ok underwriter. Not a bad one, not a good one. Over the long run, I'm not expecting to have zero cost of float like Markel, Berkshire or W.R. Berkley. I'm expecting 1, 2 or 3 percentage points of cost of float on average. I've dreamed about zero cost with Fairfax in the past, but my expectations were too high and sometimes, I've been disapointed with underwriting. Now I'm expecting these kind of things and that's ok, because we have great investors to invest that float. And hey, if the situation change over time, I'll be pleasantly surprised!  8)

 

[Uccmal]

Anyone have any thoughts on the $996.4 of OTTI's? What are the rules for OTTI and is this really like mark to market?

 

Hey Mark, Someone else can correct me if I am wrong but I think they use two quarters of impairment which would include LVLT, OSTK, SFK, CGS, etc.  We know they are going to hold these and make at least 20% on the 1 Billion, so with Aggressive accounting one could add what you have suggested.  That would mean an increase of 1.2 B above the present book value.  Of course they will only roll them over into other investments that will behave the same way so maybe you can only add the 200 M in assummed capital gains.

 

Anyways:

320s -

330s -

5 or 6 altogether.  I had to scrape and take other losses and they weren't exactly a deal.

 

I am saving up lots of tax loss room right now to shield future gains.  8) 

[Guest ericopoly]

IV went through the roof when they sold the Treasuries and bought the Muni's.  I mean, they more than doubled their tax equivalent yield.

 

 

They have:

80% of book value in common stocks

80% of book value yielding  5.79% after tax (munis insured by Berkshire)

 

Okay, let's stop right there and think about it.  Let's say they make 15% returns per annum on their stock portfolio for 5 years and let it compound tax-deferred.  Okay, now that's 12% per annum compounding because you only get 80% of the 15% return.

 

Now, let's add in 80% of 5.79%.  That adds another 4.6% to the return.  

 

12% + 4.6% = 16.6%

 

We haven't even started to discuss the other 10 billion of float, $4b or so of it is invested in corporate bonds yielding maybe 10% with some stock conversion features.  It ought to kick in another 7% or so, without thinking of the conversion (the 10% is taxable).  

 

So you're at 23.6% roughly.  Now, maybe back out 10% for ORH minority ownership, and that still gives you 21.6%.

 

 

We're not even talking about book value expansion yet.  Granted, there is room for credit losses etc to make this look optimistic, but then again I'm not including convertibles and I'm making a fairly conservative 15% common stock assumption.  It's probably extremely conservative given that they were able to do 24% in the recent decade -- I could pick 24% but let's not be too cocky?

 

I've also assumed they make nothing on the rest of their float.  I'm only adding up returns on $12billion, but they have $18.5 or so.

 

 

 

 

 

 

 

 

 

 

[Redskin212]

WSJ headline:

 

Fairfax 4Q Net Dn On "Challenging Industry Conditions"

http://online.wsj.com/article/BT-CO-20090219-720664.htmlhttp://]http://online.wsj.com/article/BT-CO-20090219-720664.html

 

While technically accurate, all the other headlines I have seen have been very positive.  You would think that a publication like the WSJ would report the fact that a financial company actually made $1.4 billion in 2008.  Makes me wonder??

 

Redskin

 

 

[basl1]

based on this, can someone suggest a net value for a FFH share?

???

[Guest misterstockwell]

Maybe Peter Eavis wrote it!

[valuecfa]

based on this, can someone suggest a net value for a FFH share?

???

 

Well if you go strictly by book value at Dec. 31 2008 (the only precise number we have), then...

 

 

book value per basic share increased to $278.28 at December 31, 2008. The current stock price is $300/share. This means that the company is selling for 1.08x book.

 

If you want to put a multiple of 1.3x book on that, then the company is worth $362 per share.

 

If you want to put a 1.5x book on that, then the company is worth $417 per share.

 

Given that

1.) the insurance market is due to harden

2.) some competition is disappearing

3.) future corporate debt and equity returns are looking as attractive as they do

(markets at shocking low historical levels, bodes well for the long-term future investment results)

4.) fairfax is one of few companies with ample spare cash for distressed/good companies (USG, etc.)

 

 

I would put the value at around $400 - $415 per share.

 

(But that's just me)

 

 

Cheers,

 

ValueCFA

 

 

P.S.~ You may want to factor in some of the events since Dec. 31, 2008.

[Mungerville]

I will speak to ORH.  My plan is to factor in the worst for this year from an investment point and figure out how much book value could erode.  Everyone is factoring in a gain for the year and following years from investments.  Figure out what happens in a worst case.  Figure out the implications and if you are OK with those, ORH at this price is good.

 

SO Ericopoly, for example, I would invert your post. 

 

The market is down 20% or so from its highs of early this year.  Start working with that instead of assuming 15% growth in stocks.  Assume a combined ratio of 100% and see how much the stock market needs to collapse, assume the bond market stays firm for ORH given CDS hedges, assume the munis will payout and BRK will not be toast.  So take the yield on all those bonds with no decline in value in the bonds (this may not be the most conservative from a mark-to-market as confidence in BRK would get hit - this would however be offset by the fact that the CDS hedges corp bonds and recoverables and the recoverables are not marked to market while the munis are - so call that mark-to-market issue a wash, i.e. forget this sidebar).  Just take the yield on the bonds - gross them up to pre-tax.  Assume they don't fall in value cause CDS would offset. 

 

Calculate different scenarios for stock market and after-tax hit to book value.  Stocks down 20% (currently the case), down 30%, down 40% down 50%.  At 50%, don't forget to take 70% to get back to after-tax.  If you don't like the result of the book value hit (keep in mind competitors will be destroyed at this point and a very hard-market will develop and underwriting expansion will commence for ORH), hedge yourself at whatever level you get anxious - might be reasonably cheap to do so.

 

I think it makes sense to do this analysis both on the upside and downside for the stock market in terms of my investment in ORH - that way, you just get pleasantly surprised, no anxiety, and all it might cost is a tad of insurance in the form of out-of-the money puts on ORH.

 

Analyse the upside and invert to figure out the downside to book value in a potentially very bad year. ::) ??? :P

[watsa_is_a_randian_hero]

There has been some discussion on the underwriting.  I failed to remember this myself when first analyzing their CR's this year.  Lets not forget that FFH keeps its policyholder liabilities undiscounted on its books unlike most.  I'm sure this affects the CR.  

 

Maybe someone with more industry expertise could comment/confirm.

[oec2000]

While technically accurate, all the other headlines I have seen have been very positive. 

 

Guess you haven't seen this one! :) Talk about ridiculous.

 

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