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Financial Results for the Year Ended December 31, 2009


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http://finance.yahoo.com/news/Fairfax-Financial-Holdings-iw-4006923657.html?x=0&.v=1

 

-book value increased to $369.80 per basic share at December 31, 2009

 

- The combined ratio of the company's insurance and reinsurance operations was 99.8% on a consolidated basis. Underwriting results of the company's insurance and reinsurance operations improved to an underwriting profit of $7.3 million from an underwriting loss of $280.9 million in 2008 primarily related to U.S. hurricane losses.

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I guess the non-obvious things I would add from the report:

 

Equity investments had a fair value of 171 million above carrying value.  Adjusted book approx. 377

100 million recovery of taxes for the quarter

425(?) million decline in net receivables for the year

Used up 312(?) million of tax asset

Repurchased 315,000 shares during 4Q09, at a cost of 112 million.

 

(?)- numbers off the top of my head, may be slightly off.

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I guess the non-obvious things I would add from the report:

 

Equity investments had a fair value of 171 million above carrying value.  Adjusted book approx. 377

100 million recovery of taxes for the quarter

425(?) million decline in net receivables for the year

Used up 312(?) million of tax asset

Repurchased 315,000 shares during 4Q09, at a cost of 112 million.

 

(?)- numbers off the top of my head, may be slightly off.

 

I don't understand these guys... why issue shares just to repurchase?  Issue shares for odyssey...repurchase 1 quarter later...then 1 quarter later issue shares for zenith?  Why not just raise a little debt if you are going to do that? 

 

Why go through the underwriting costs of issuing shares and diluting?

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I guess the non-obvious things I would add from the report:

 

Equity investments had a fair value of 171 million above carrying value.  Adjusted book approx. 377

100 million recovery of taxes for the quarter

425(?) million decline in net receivables for the year

Used up 312(?) million of tax asset

Repurchased 315,000 shares during 4Q09, at a cost of 112 million.

 

(?)- numbers off the top of my head, may be slightly off.

 

 

Q3, 2009 - Shares issued for $347, net of commissions.

Q4, 2009 - repurchased about 12% of the Q3 issuance for a HIGHER price, $356. 

Q1, 2010 - issue shares at ____?  Probably lower than the $356, given that is where it was trading today.

 

We are no longer in a position where we NEED capital.  Especially in a market environment like this, where it is unfavorable.

 

Why

 

I don't understand these guys... why issue shares just to repurchase?  Issue shares for odyssey...repurchase 1 quarter later...then 1 quarter later issue shares for zenith?  Why not just raise a little debt if you are going to do that? 

 

Why go through the underwriting costs of issuing shares and diluting?

 

This is not smart in my opinion.

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It seems people are quibbling over the $200 million in possible equity dilution. What about a 35% increase in book value year on year? What about steady uw results? What about the over $700 million in investment and interest income and they haven't gotten their hands on Zenith's portfolio? This reads to me like a spectacular year, am I alone in this?

 

 

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Guest ValueCarl

Just an FYI, Gentlemen.

 

Morningstar had a quick negative release criticizing the earnings QoQ tied to the fact that their "investment income" was light comparatively even pointing to the 30.3M investment loss in the Q.  It had been released on Google Finance, and I believe under the Toronto symbol FFH, but it is now gone, for some strange reason. I believe they also criticized the consolidated CR at 1.02 percent although my quick scan shows it at 99.8 percent. 

 

This could be why they retracted such a fast, sloppy swat at the numbers, I don't know.

 

In any event, I hope Mr. Watsa has something to say about the ongoing status of his war with Stevie Cohen, and that dubious hedge fund cabal on the call tomorrow.

 

If they're stupidly looking for investment income as opposed to more favorable operating income from this entity, maybe a large payment from Cohen to Watsa will suffice.

 

Good luck tomorrow, all! imo 

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It seems people are quibbling over the $200 million in possible equity dilution. What about a 35% increase in book value year on year? What about steady uw results? What about the over $700 million in investment and interest income and they haven't gotten their hands on Zenith's portfolio? This reads to me like a spectacular year, am I alone in this?

 

 

 

You are not alone. I would need a brakedown of the purchases and sales to know what the full story was. They may have bought lower then they issued or issued to purchase then bought after capital was dividended up.

 

Either way a great year and my leaps are hoping 2010 is even better. Does anyone have any more color on the tax issues? I didnt see those when i glanced at the release.

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Guest ValueCarl

Did I state "stupidly" seeking investment income from this entity? I forgot that it's an insurance conglomerate whose overall capital accumulation is predicated upon "investment income."

 

However, one bad quarter does not make a year, and this quarter's $30M loss had been footnoted as certain reclassifications of foreign exchange gains and losses for the quarter and year. 

 

Very tricky writing, however.

 

 

<The decline in 2009 fourth quarter net earnings to $79.4 million ($1.65 per diluted share) from $346.8 million in 2008 ($19.62 per diluted share) resulted from improved year-over-year underwriting results at the company's insurance and reinsurance operations, increased interest and dividend income and a corporate income tax recovery in the fourth quarter of 2009 that were more than offset by reduced fourth quarter net investment gains (net investment losses of $30.3 million, compared to $681.0 million of net gains on investments in the fourth quarter of 2008).>

 

I am still very interested in the Stevie Cohen PUT that is out there for FFH owners. My best wishes are that the size of the award or settlement does NOT resemble Dr. Byrne's paltry amount($5M) in the case of David Rocker when comparing it to the original CLAIM. I believe Byrne, etal, didn't extract a big enough pound of flesh, and failed at GAGGING those SLIME BAGS as part of ultimate settlement. imo   

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Issuing at 347 and then buying back later at 357 isn't necessarily a bad thing as it has been portrayed on this board.  I think it's much smarter to think of it in terms of a multiple to book value rather than a dollar figure.  If the $347 is used to earn $10 before the share is repurchased for $357, the company comes out even as far as I can tell.  Sure it seems like a lot of movement, but as long as the repurchase price is lower in relation to intrinsic value per share than the sales price, I don't think shareholders have lost anything. 

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- The combined ratio of the company's insurance and reinsurance operations was 99.8% on a consolidated basis.

 

Anyone has an insight into the nitty-gritty of how the Fairfax combined ratio is different from other insurers?

 

"The combined ratio – which may be calculated differently by different companies and is calculated by

the company as the sum of the loss ratio (claims losses and loss adjustment expenses expressed as a

percentage of net premiums earned) and the expense ratio (commissions, premium acquisition costs

and other underwriting expenses as a percentage of net premiums earned) – is the traditional measure

of underwriting results of property and casualty companies, but is regarded as a non-GAAP measure."

 

When I look into some other companies, it seems some state they use earned premium instead of net earned premium as the denominator?

Am I mistaken ???

 

Example:

The U.S. GAAP combined ratio measures the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and

insurance expenses to earned premiums.

and

The percentage of assumed earned premiums to net earned premiums for the years ended

December 31, 2008, 2007 and 2006 was approximately 10%, 9%and 8%, respectively.

 

Cheers

 

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The 12 month results for FFH have been very strong and the company has made a number of moves that positions it very well for the future.

 

Unfortuantely we investors in FFH have been spoiled the past 2 years. FFH has overdelivered (to put it mildly) on the investment side and we on the board have know about massive gains that others (apparently) did not (first CDS, then municipal bonds, and then stocks). There was always a catalyst. Life was rather grand.

 

We are now in a more normal period. FFH in the near term will now resemble an insurance company and not a hedge fund. It will make money in one of three ways:

1.) underwriting (I think it is safe to say 2010 CR will be over 100, given how elevated the expense ratio is and given how soft the market in aggregate remains)

2.) interest & dividend income (this should stay flat or grow modestly in 2010)

3.) investment gains (given how elevated markets are this may only grow modestly, to give FFH the benefit of the doubt)

 

Wrap it all together and FFH will chug along until the market hardens. Their earnings will likely disappoint in the near term as other insurers do a much better job at 1.) and a similar job at 2.) and 3.) looks to have no visibility in the near term. I do not expect shares to sell of dramatically because the hold co has enough cash to buy back a chunk. And I do not expect the shares to rocket higher as I do not see a catalyst. Great buy at current levels for long term holders. I have to remind myself that FFH is an insurer and not a hedge fund.

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ValueCarl,

 

This is the short article...no unusual criticism here, just highlighting the key factors in the YoY change.

http://torontostar.morningstar.ca/globalhome/industry/news.asp?articleid=326936

Lackluster underwriting profits were once again displayed in Canadian insurer Fairfax Financial Holding's FFH  FRFHF fourth-quarter earnings report. The combined ratio for all insurance and reinsurance operations was 102% in the fourth quarter and 100% for the full year. The company earned $1.65 per diluted share in the fourth quarter as investment gains were muted compared with last year. Fairfax made a great call several years ago and prepared itself for financial market turmoil, which resulted in outsized investment gains in 2008 driving fourth-quarter earnings to almost $20 per share. Not so this year, as the firm recorded a quarterly net loss on investments of $30 million versus a quarterly net gain of $681 million in 2008.

 

Earlier in the day Fairfax announced that it was buying the remaining outstanding stock that it did not already own in American insurance company Zenith National Insurance ZNT for a 31% premium to yesterday's closing price of $29 per share. Because we do not cover Zenith and have no fair value estimate on the stock, we have put Fairfax under review as we determine whether this is a good deal for shareholders.

 

Morningstar had a quick negative release criticizing the earnings QoQ tied to the fact that their "investment income" was light comparatively even pointing to the 30.3M investment loss in the Q.  It had been released on Google Finance, and I believe under the Toronto symbol FFH, but it is now gone, for some strange reason. I believe they also criticized the consolidated CR at 1.02 percent although my quick scan shows it at 99.8 percent. 

 

This could be why they retracted such a fast, sloppy swat at the numbers, I don't know.

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- The combined ratio of the company's insurance and reinsurance operations was 99.8% on a consolidated basis.

 

Anyone has an insight into the nitty-gritty of how the Fairfax combined ratio is different from other insurers?

 

"The combined ratio – which may be calculated differently by different companies and is calculated by

the company as the sum of the loss ratio (claims losses and loss adjustment expenses expressed as a

percentage of net premiums earned) and the expense ratio (commissions, premium acquisition costs

and other underwriting expenses as a percentage of net premiums earned) – is the traditional measure

of underwriting results of property and casualty companies, but is regarded as a non-GAAP measure."

 

When I look into some other companies, it seems some state they use earned premium instead of net earned premium as the denominator?

Am I mistaken ???

 

Example:

The U.S. GAAP combined ratio measures the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and

insurance expenses to earned premiums.

and

The percentage of assumed earned premiums to net earned premiums for the years ended

December 31, 2008, 2007 and 2006 was approximately 10%, 9%and 8%, respectively.

 

Cheers

 

 

 

In the case of Markel and Fairfax, I believe that their CR's are comparable. Earned premium, as stated by Markel, is net of premiums assumed and ceded. I haven't seen too much flexibility in the earned premium denominator, but some insurance companies calculate the expense ratio differently.

 

 

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Omagh, I can understand why some viewed the article as overly critical. Where is the wisdom in looking at quarter over quarter investment results to measure the progress of an insurance company?

 

It's perfectly fine for the WSJ or some other news publication--they have to report something--but Morningstar also serves an analytical function. They are training the reader to think unintelligently about a company.

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Guest ValueCarl

I think they're always going to be a bit of a HYBRID play with their core operations being insurance until they can convert by masterful hedging techniques into operating companies whose underlying businesses and cash flows extend beyond the boundaries of insurance. imo 

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35% increase in book value for the year.

Plenty of gains to come from the acquisition of 100 of ORH and the ventures in India and china plus they also have UK, south American, Middle east and Polish interests. And that’s just the insurance piece of the business.

 

I do not have any concerns over the 100% ratio as they are known to reserve fully rather than at a discounted amount. That means less income being exposed to potential tax and available to invest now. I’d rather they did this and have a higher CR and be able to discount later than discount reserves now and try to make up the difference with investments.

 

The takeover of Zenith will give them access to funds that are conservatively invested and give FFH the chance to do what they do best – invest.

 

I hope nobody gets too excited about the moves they have made in laying the groundwork for the future – because I’m still happy to buy at this price.

 

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A truly fantastic year! We are proud to own this company and having shared in the Fairfax team's incredible success. They have acquired everything they wanted in the last year and those acquistions will prove to be steals in the coming years.

We think the future of Fairfax looks as good as any company we see. Their earnings power on the float on a per share basis is unmatched anywhere.

 

2010

 

Fairfax shareholders have been on a wild ride up over the last 4 or 5 years...the results really should be documented as some of the best in corporate history. What the market and some on this board are missing is the fact that Fairfax has gone from speculative (the investment community) to "Blue chip". They have built an insurance powerhouse just as Buffett did. They are sitting in the drivers seat to make boat loads of money...which they will. In late 1990's when people were looking at Fairfax they did simple math. Float $22 billion and counting....at 5% =1.1 billion a year before tax etc....10% is $2.2 billion...before tax. This farmer math will be used again soon. We see that fthe Fairfax income stream will be significantly higher than tin the past and that capital gains will add gas to the fire. Math is on Prem's side.

 

Dazel.

 

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In the case of Markel and Fairfax, I believe that their CR's are comparable. Earned premium, as stated by Markel, is net of premiums assumed and ceded. I haven't seen too much flexibility in the earned premium denominator, but some insurance companies calculate the expense ratio differently.

 

OK - thanks !

 

Just wondered what the difference was as e.g. Markel state their combined ratio is U.S. GAAP, while fairfax' combined ratio is non-U.S.GAAP.

And also if the difference was significant.

 

Cheers

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That's another stellar year for Fairfax. I'm delighted by these results.

 

Some years ago, I told that we were making steps in the right direction. I must say now that we've made huge steps in the right direction!  ;D

 

Suffice to say that our balance sheet is far better now than in our lean years period.

 

Furthermore, I'm impressed by the Fairfax shift toward quality-at-a-good-prices investments. While the equity portfolio hedge removing and strong investments in equities was a historical event for Fairfax recently, maybe we'll see Zenith acquisiton as an another historical shift few years from now.

 

Cheers!

 

 

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            $CDN                  1ST

            Share    Shares      Qtr        USA

            Price      OS      Earns      Book

 

2005  $168.00    17.8M    $47.2M  $137.50

2006  $231.67    17.7M  $198.4M  $150.16

2007  $287.00    17.7M  $110.9M  $230.01

2008  $390.00    17.5M  $631.8M  $278.28

2009  $410.00    20.0M  -$60.4M  $369.80

2010            ?          ?          ?              ?

 

 

        ---------------------- In Millions --------------------------

                          Shrholders                Accum        Net      Recover

          Assets      Invstmnts    Equity    Paid Div      Earns    From Re

 

2005  $27,542.0  $14,869.4  $2,448.2    $64.6    -$446.6  $7,665.7

2006  $26,576.5  $16,819.7  $2,662.4    $89.5      $227.5    $5,506.5

2007  $27,941.8  $19,091.7  $4,063.5    $138.2  $1,095.8    $5,038.5

2008  $27,305.4  $18,415.0  $4,866.3    $226.7  $1,473.8    $4,234.2

2009  $28,402.8  $20,078.6  $7,391.8    $366.7      $856.8    $3,809.1

2010              ?              ?            ?        ?                ?              ?

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Dynamic, I liked the tables... paints a pretty clear picture about how the company has improved its financial position dramatically on just about every metric. What is not so clear are all the investments it has made in the past 15 months: NB & ORH, Advent, Polish Re, and the longer term stuff in China and Brazil. And now Zenith. When the next hard market arrives (WR Berkley feels we should be there come December) we should see the insurance business outperform and begin to deliver over time significant profits. We then could see solid underwriting, interest & div income and investment gains (see the company hitting on all three cylinders) some thing we have not yet seen.

 

From the conference call: Op Co Shareholders Equity (Billions)

        2009  2008

ORH  $3.55  $2.83

C&F  $1.52  $1.16

NB    $1.41  $1.38

Bottom line, even after Zenith purchase, Op Co's look to have decent dividend capacity (given that premiums are shrinking).

 

Effective tax rate = 33% - 6 to 7 % for tax adv municipals - a little more for tax loss carry forwards

 

C&F business looks to have stabilized.

 

Investment portfolio ended the year at $21.3 billion.

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As someone else already mentioned, Zenith also has significant dividend capacity.  I don't miss the days when recoverables where > 200% of equity and am looking forward to when Fairfax is firing on all cylinders with investments per share north of 1000, should see a nice boost as short term rates creep up from absolute bottom. 

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In the past 12 months the purchases of FFH indicate the following values of the susidiaries:

 

Northbridge - 1.2/1.3x book

Odyssey - 1.3x book

Zenith - 1.34x book

 

and FFH trades at approx book value.  Based on the fact that these 3 subs represent the majority of the company, one would think that FFH should trade at about 1.3x book.  No as we all know Mr. Market sees it differently, however I think Prem and co. have proved that they are one or two steps ahead of Mr. Market and I would imagine that we see a valuation of 1.2-1.3x book soo enough.

 

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