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FFH Q1 Investment Results


Viking
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I thought it would be useful to start a post reviewing key movers. What is amazing to me is all of the moving parts. They certainly have been opportunistic. I am surprised they have not yet increased the hedge (although selling a chunk of the equity portfolio has a similar effect). Should markets continue higher their Q2 gains could once again be quite large!

 

1.) equity hedge did cost FFH $105.8 million in Q1

- my guess is they are now effectively hedged March 31 level of the S&P 

- did not increase 30%; Prem said on conference call they review this regularly

- offsetting this loss were equity total return swaps, call options and warrants gains = $116 million

2.) sold a significant amount of stocks (likely at C&F); we will find out when they release their 13F

- common stock holdings on consolidated balance sheet FELL from $4.9 billion at Dec 31 to $4.6 billion at March 31 even though they appreciated significantly

- looking at cash flows they had $320 million in purchases and $1.4 billion in sales!

- nice to see them realizing some gains

3.) established an inflation hedge (top p13): "As an economic hedge against the potential adverse impact on the company of changes in price levels in the economy, the company has purchased inflation-linked derivative contracts referenced to inflation indices in the geographic regions in which the company operates. As at March 31, 2010, the derivative contracts had a carrying value in the consolidated balance sheets of $80.3 (December 31, 2009 – $8.2) and a cost of $92.4 (December 31, 2009 – $8.8)."

4.) interest & dividend income = $182 million or $209 million on a tax equivalent basis (from conference call)

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Although a minor part of the fair value, I'm amazed at the number and par value size of e.g. MBS - many of which are valued at a rate of 0.0000.

For Odyssey alone, at year end 2009 a par value of $617M carried at $61M and having an actual cost of $76M.

 

Suppose some of this trash turns out to be less junk than what the market thinks now - there are maybe 30 years to go..

 

Btw, maybe this is common, but for me it's a fist to see an effective rate of more than 100,000,000% on a long duration security in an otherwise low interest rate environment. Wonder if the formulas are even valid to calculate such things...

 

Cheers

 

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Although a minor part of the fair value, I'm amazed at the number and par value size of e.g. MBS - many of which are valued at a rate of 0.0000.

For Odyssey alone, at year end 2009 a par value of $617M carried at $61M and having an actual cost of $76M.

 

Suppose some of this trash turns out to be less junk than what the market thinks now - there are maybe 30 years to go..

 

Btw, maybe this is common, but for me it's a fist to see an effective rate of more than 100,000,000% on a long duration security in an otherwise low interest rate environment. Wonder if the formulas are even valid to calculate such things...

 

Cheers

 

 

The MBS that are listed in ORH NAIC filings are essentially cigar butts.  Most will likely go to 0...however clipping the last few coupons can be very profitable.

 

Here is why: on a tranched security like that, very small differences in default rates/prepayments rates can make the difference between your tranche receiving 5 additional coupons before defaulting or 10 additional coupons.  Because of the huge volatility in potential results, a huge IRR is demanded from those that would like to sell.  So, the buyer pays pennies on the dollar for the last few puffs on the cigar butt, and the implied yield to stated maturity is a huge % (as you stated above), but that is because everybody knows the mbs is not going to mature, but rather default.

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