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Fairfax 2009 Annual Report is Out!


Parsad
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I always jump to the investment section of the letter first to see what Prem has to say...he believes the next decade could be treacherous...but he's very optimistic of the opportunities he may get presented with as well.  Cheers! 

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I'm not sure what else to draw from that comment.

 

He says it's unlike the rate will be maintained.  Does he mean it's unlikely they'll pay as much as $10 again, or unlikely it will keep growing at the rapid pace of the last 3 years?

 

 

Given our results for 2009, our significant holding company cash and marketable securities position, the availability

to us of the free cash flow of our insurance companies now that our three largest companies are 100% owned, and our

very strong and conservative balance sheet, we paid a dividend of $10 per share (an extra $8 per share in excess of our

nominal $2 per share). It is unlikely that this rate will be maintained.

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I'm not sure what else to draw from that comment.

 

He says it's unlike the rate will be maintained.  Does he mean it's unlikely they'll pay as much as $10 again, or unlikely it will keep growing at the rapid pace of the last 3 years?

 

 

 

I don't think he means that they won't pay a 10$ dividend again, they will probably continue to issue a high dividend during years when Fairfax earns a very satisfactory return on equity.   

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Interesting comments below:

 

Last year gave us an outstanding opportunity to add to our investment holdings of excellent companies with fine

long term track records. All things being equal, we expect to hold these common stocks for the very long term.

Shares owned

(millions)

Cost per

share

Amount

invested

Market

value

As of December 31, 2009

Wells Fargo 20.0 $19.36 388 540

Johnson & Johnson 7.6 61.00 463 488

US Bancorp 15.9 16.27 258 356

Kraft Foods 10.7 26.55 285 291

Wells Fargo, as you know, is a wonderful bank in the U.S. with an outstanding long term track record. In the financial

crisis of 2008/2009, it seized the opportunity to double its size (without much overlap) through the purchase of

Wachovia Corporation, while increasing its shares outstanding by only about a quarter. Today it has more than

70 million customers in the U.S. with a net interest margin of 4.3%, the highest among the major U.S. banks. With

80+ separate businesses, cross selling at least six products per customer and a funding base of $800 billion in deposits

at a cost of 40 basis points – all embedded in a risk averse culture under John Stumpf’s leadership –Wells Fargo is well

positioned for strong growth over the next decade and we expect to be a major beneficiary.

US Bancorp is, similar toWells Fargo, an outstanding bank with a great track record. LikeWells Fargo, it has benefited

from the financial crisis by making many tuck-in acquisitions (FDIC assisted). It also has a very profitable payments

processing division with worldwide expansion prospects. Under Richard Davis’ leadership and with its risk averse

culture, we expect to be a major beneficiary in the next decade. We continue to like Johnson & Johnson and we

believe that Kraft Foods will, over time, benefit greatly from its purchase of Cadbury’s (one example – Cadbury’s has a

distribution network of over 1 million stores in India!). All these are very high quality companies selling at modest

multiples compared to their past and relative to the S&P500!

We expect to hold these investments for a long period and if we are right, unrealized gains will become a significant

portion of our equity base (at year-end 2009 it was already significant at $747 million after tax). A side benefit will be a

smaller tax bill (until we sell), since gains generally compound tax free while we hold the investments

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Have to like the sound of that! Starting to sound a little like BRK in a way, long-term holding of blue-chip stocks with solid moats......

 

cheers

Zorro

 

Interesting comments below:

 

Last year gave us an outstanding opportunity to add to our investment holdings of excellent companies with fine

long term track records. All things being equal, we expect to hold these common stocks for the very long term.

Shares owned

(millions)

Cost per

share

Amount

invested

Market

value

As of December 31, 2009

Wells Fargo 20.0 $19.36 388 540

Johnson & Johnson 7.6 61.00 463 488

US Bancorp 15.9 16.27 258 356

Kraft Foods 10.7 26.55 285 291

Wells Fargo, as you know, is a wonderful bank in the U.S. with an outstanding long term track record. In the financial

crisis of 2008/2009, it seized the opportunity to double its size (without much overlap) through the purchase of

Wachovia Corporation, while increasing its shares outstanding by only about a quarter. Today it has more than

70 million customers in the U.S. with a net interest margin of 4.3%, the highest among the major U.S. banks. With

80+ separate businesses, cross selling at least six products per customer and a funding base of $800 billion in deposits

at a cost of 40 basis points – all embedded in a risk averse culture under John Stumpf’s leadership –Wells Fargo is well

positioned for strong growth over the next decade and we expect to be a major beneficiary.

US Bancorp is, similar toWells Fargo, an outstanding bank with a great track record. LikeWells Fargo, it has benefited

from the financial crisis by making many tuck-in acquisitions (FDIC assisted). It also has a very profitable payments

processing division with worldwide expansion prospects. Under Richard Davis’ leadership and with its risk averse

culture, we expect to be a major beneficiary in the next decade. We continue to like Johnson & Johnson and we

believe that Kraft Foods will, over time, benefit greatly from its purchase of Cadbury’s (one example – Cadbury’s has a

distribution network of over 1 million stores in India!). All these are very high quality companies selling at modest

multiples compared to their past and relative to the S&P500!

We expect to hold these investments for a long period and if we are right, unrealized gains will become a significant

portion of our equity base (at year-end 2009 it was already significant at $747 million after tax). A side benefit will be a

smaller tax bill (until we sell), since gains generally compound tax free while we hold the investments

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From pg. 9:

 

"At the end of 2009, we have approximately $579 per share in insurance and reinsurance float. Together with our book

value of $370 per share and $115 per share in net debt, you have approximately $1,064 in investments per share

working for your long term benefit."

 

That is a strong value proposition. Then there's the future underwriting profits to throw on top of all that.

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The part of the AR that I always love the most is to look at the "loss triangles" that describe how reserves evolve over time.  The reason for this is that the easiest way for an insurer to screw an investor is to lie about underestimate its reserves. When you look at the triangles that were constructed on an accident year basis, FFH's underwriting discipline is obvious and compelling.

 

I sleep well at night, with no worries about adverse development!

 

SJ

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