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Summary of Canadian Equity Holdings


Viking
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I spent a couple of hours to build a summary of FFH's Canadian Equity holdings (rough approximation of 13F available for US equity holdings). And yes, this may be quite inaccurate. I started with p12 of 2009 AR where Prem provides year end values for H&R, CWB, Mullen & GMP. I then went through past news releases which provided details for BRK.UN, IFP, JAZ, RCL, SFK & TS. I did not include Mega Blocks given that transaction happened in Q1. Here are the numbers:

 

              Dec 31      March 31      Change

Canada  $983,000  $1,081,000    $98,000  10%

US      $3,678,000  $4,074,000  $396,000  10%

 

So far in April the Canadian portfolio is up another $119 and the US is up  $250 million.

 

Weave it all together and we get very rough gains on equities of $494 (to March 31) and $863 to April 21. Add in gains in international equities and corporate bonds and we should be safely over $1 billion. Take out 30% hedge and taxes and perhaps the increase in BV = $30/share???

 

In reviewing the AR what jumped out at me was the size of the write offs that FFH has taken on their many, many holdings the past two years. As risk markets continue to stabilize we may start to see some write ups which would then likely make my estimate above much too low.

 

My purpose in pulling this together is not too try and peg the exact number but rather to try and get a general directional estimate of what is going on with the FFH investment portfolio and the possible impact on book value.

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I was reading RBC's most recent report on non-life insurers. Interesting because there was a lot of discussion around Q1 catastrophies, CR's and reserve releases and impact on Q1 results. Very little discussion on investment results and potential impact on BV. (Although I have found RBC has been presenting some pretty fair commentary on FFH lately).

 

As per usual we will find out what's what when they release Q1 results next week (with a little more colour perhaps at the AGM).  ;D

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Viking: Keep in mind that MTM valuation functions in much the same way as the actuarial reserve. Actuarial reserving is proactive & marks once/yr; MTM is reactive & marks quarterly. As the 'reserves' should also be largely uncorrelated (market values don't generally move simultaneously with underwriting markets/natural disasters) there's also a measure of diversification.

 

In practical terms as long as the MTM's were not 'permanent' capital losses, the 'reserve' is going to get released at some future point. ie: FFH financing the Torstar bid for Canwest, & the new entity thriving, produces MTM gains on their direct investment and a recovery of the existing Canwest MTM loss. A small upward market improvement effectively produces steroid results.

 

Given that Mr Market is still fuzzy around the +ve MTM effect, the 'no-name' financials are a lot cheaper than they should be. Hardly surprizing that this board would have them as favourites  ;D

 

SD

 

 

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The annual report stated that The Level 3 investment was written off for the amount of about

$225 million because of accounting regulations and the time it has been down. Just bringing this back on the balance sheet would be a gain of a quarter of billion! Would someone please verify that as it not part of any thesis I have with regards to Fairfax. Although the the fact that I think they stacked the deck in the last couple of years should prove brilliant in the coming year (level# is an example). I think we are also over reserved because of the benefits this would have to income tax payable. Anyone doing their taxes right now can relate! Buffett is the king of this practice.

 

Dazel.

 

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The annual report stated that The Level 3 investment was written off for the amount of about

$225 million because of accounting regulations and the time it has been down. Just bringing this back on the balance sheet would be a gain of a quarter of billion! Would someone please verify that as it not part of any thesis I have with regards to Fairfax. Although the the fact that I think they stacked the deck in the last couple of years should prove brilliant in the coming year (level# is an example). I think we are also over reserved because of the benefits this would have to income tax payable. Anyone doing their taxes right now can relate! Buffett is the king of this practice.

 

Dazel.

 

 

Prem answered a question in regards to this at the AGM today.

 

Summary of Prem's answer with some additional details from me:

OTTI (other than temporary impairment) write downs flow through the income statement leading to a reduction in the cost basis for the various investments. LVLT original basis was $2 and now its $0.7 due to an OTTI write down. The important thing to remember is that as the value of LVLT rebounds any MTM (mark to market) gains are registered in shareholder equity (book value) through OCI (other comprehensive income). The MTM gains on LVLT will not be realized in the income statement until the investment is sold. The gains are not "hidden", they show up in book value.

 

My additional color:

Book value reflects the MTM of the common equity positions. The only ones it doesn't reflect are the equity accounted investments like ICICI that are held at carrying value.

 

P.S. Please let me know if I missed something, but that's how I understand it.

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Its correct.

 

For any given quarter look at the holdings that are generating the bulk of the OCI charges, & assess whether those holdings are reasonably likely to be worth more 3,4,5 years out. Guess how much more they'll be worth, & the probability of occurrence. The difference is essentially the MTM 'unrealized reserve release' that would occurr over the period.

 

More important to an insurer than it looks; the MTM 'unrealized reserve release' effectively reduces the amount of super-cat reinsurance the insurer needs to carry, & the 'saved' premium is an annual realized return on this 'unrealized reserve release'. Additional MOS.

 

SD   

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