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Fairfax Quarterly Results!


Parsad
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I am hoping for a pullback and wish I still owned OdysseyRe. It looks like FFH is positioning themselves for the turn, and has covered their major investment risks.

 

One can buy and hide out a storm here quite comfortably. Hopefully they are still over reserving.

 

Reinsurance - OdysseyRe 92.2

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$19 - approx. 5% - increase in book value per share from July to September  8)

 

and the stock still trades at roughly book value despite the strong track record and strategic positioning.

 

Amazing how wall street firms and many so called professional investors seems unable to put two and two together.

The current stock price must be the result of some major calculation error ;)

 

Cheers!

 

 

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Amazing how wall street firms and many so called professional investors seems unable to put two and two together.

 

Well, funny you should mention it, majority on this board wouldn't buy Fairfax either: http://cornerofberkshireandfairfax.ca/forum/index.php?topic=2956.0;viewResults

 

Yes, my guess is people have been spoiled by earlier short attacks, repeatedly sending the share price to extremely low levels.

Personally, I already had all the Fairfax shares that I needed and therefore didn't vote yes in your poll...

 

Cheers!

 

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Amazing how wall street firms and many so called professional investors seems unable to put two and two together.

The current stock price must be the result of some major calculation error ;)

 

Cheers!

 

 

 

Wrong!

 

You are Wrong -niels12think!

 

The market is efficient!  Fairfax must be priced at the book, as rational market participants have determined based upon FFH systematic risk level, an appropriate risk-adjusted required rate of return.

 

Barclays figured it out - thats why FFH is included in their index fund - MSCI Canada Index Fund!

 

When will you guys learn?  

 

 

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Amazing how wall street firms and many so called professional investors seems unable to put two and two together.

The current stock price must be the result of some major calculation error ;)

 

Wrong!

 

You are Wrong -niels12think!

 

The market is efficient!  

 

Yes, the market is very efficient in providing opportunities  ;D

 

Cheers!

 

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What is this? Is it a gain on the Run-Off they bought las quarter?

 

A gain of $83.5 million on the excess of the fair value of net assets acquired over the purchase price of General Fidelity Insurance Company

 

BeerBaron

 

looks like run off is not just steady but instead producing positive returns.

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From the report:

 

The excess of the fair value of net assets acquired over the purchase price in the amount of $83.5 recorded on the acquisition of GFIC is primarily attributable to the TIG Note being non-interest bearing except in periods, if any, when there is significant inflation in the United States."

 

from page 15:

On August 17, 2010, TIG Insurance Company (“TIG”), an indirect wholly-owned subsidiary of Fairfax, completed the acquisition of all of the

issued and outstanding shares of General Fidelity Insurance Company (“GFIC”), for total consideration of $240.2 comprised of a cash payment

due upon closing of $100.0 and a contingent promissory note issued by TIG (the “TIG Note”) with an acquisition date fair value of $140.2 (the

“GFIC Transaction”). The TIG Note is non-interest bearing (except interest of 2% per annum will be payable during periods, if any, when there is

an increase in the United States consumer price index of six percentage points or more) and is due following the sixth anniversary of the closing of

the GFIC Transaction. The principal amount of the TIG Note will be reduced based on the cumulative adverse development, if any, of GFIC’s loss

reserves at the sixth anniversary of the closing of the GFIC Transaction. The principal amountwill be reduced by 75% of any adverse development

up to $100, and by 90% of any adverse development in excess of $100 until the principal amount is nil. The fair value of the TIG Note was

determined as the present value of the expected payment at maturity using a discount rate of 6.17% per annum due to the long term nature of

this financial instrument. Fairfax has guaranteed TIG’s obligations under the TIG Note. Following this transaction, the assets and liabilities and

results of operations of GFIC have been included in the company’s consolidated financial reporting in the Runoff reporting segment. The

purchase price of $240.2 is comprised of net assets acquired of $323.7 less the excess of the fair value of net assets acquired over the purchase price of $83.5 recorded in the consolidated statement of earnings. GFIC’s assets and liabilities as summarized in the table below is preliminary and may be revised when estimates and assumptions and the valuations of assets and liabilities are finalized within twelve months of the purchase date.

GFIC is a property and casualty insurance company based in the United States whose insurance business will be run off under the management of

Fairfax’s RiverStone subsidiary.

 

Sounds like a complicated accounting fiction to me, and not the runoff having better than expected development.

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From the report:

 

The excess of the fair value of net assets acquired over the purchase price in the amount of $83.5 recorded on the acquisition of GFIC is primarily attributable to the TIG Note being non-interest bearing except in periods, if any, when there is significant inflation in the United States."

 

from page 15:

On August 17, 2010, TIG Insurance Company (“TIG”), an indirect wholly-owned subsidiary of Fairfax, completed the acquisition of all of the

issued and outstanding shares of General Fidelity Insurance Company (“GFIC”), for total consideration of $240.2 comprised of a cash payment

due upon closing of $100.0 and a contingent promissory note issued by TIG (the “TIG Note”) with an acquisition date fair value of $140.2 (the

“GFIC Transaction”). The TIG Note is non-interest bearing (except interest of 2% per annum will be payable during periods, if any, when there is

an increase in the United States consumer price index of six percentage points or more) and is due following the sixth anniversary of the closing of

the GFIC Transaction. The principal amount of the TIG Note will be reduced based on the cumulative adverse development, if any, of GFIC’s loss

reserves at the sixth anniversary of the closing of the GFIC Transaction. The principal amountwill be reduced by 75% of any adverse development

up to $100, and by 90% of any adverse development in excess of $100 until the principal amount is nil. The fair value of the TIG Note was

determined as the present value of the expected payment at maturity using a discount rate of 6.17% per annum due to the long term nature of

this financial instrument. Fairfax has guaranteed TIG’s obligations under the TIG Note. Following this transaction, the assets and liabilities and

results of operations of GFIC have been included in the company’s consolidated financial reporting in the Runoff reporting segment. The

purchase price of $240.2 is comprised of net assets acquired of $323.7 less the excess of the fair value of net assets acquired over the purchase price of $83.5 recorded in the consolidated statement of earnings. GFIC’s assets and liabilities as summarized in the table below is preliminary and may be revised when estimates and assumptions and the valuations of assets and liabilities are finalized within twelve months of the purchase date.

GFIC is a property and casualty insurance company based in the United States whose insurance business will be run off under the management of

Fairfax’s RiverStone subsidiary.

 

Sounds like a complicated accounting fiction to me, and not the runoff having better than expected development.

 

My head hurts! Hopefully Watsa will explain in English what this is tomorrow.

 

BeerBaron

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Sounds like a complicated accounting fiction to me, and not the runoff having better than expected development.

 

Runoff had pretax income of $115.2M in the third quarter, so even if we back out the GFIC gain of $85.9M, runoff still generated income of $29.3M from July to September. (page 26 in the Q3 report)

 

Btw, when Fairfax aquires GFIC below book, it seems only natural that the book of Fairfax should increase similarly.  Here they naturally choose to put that $85.9M gain in runoff. Seems fair to me.

 

Another thing is the way the deal is financed, I agree it looks complicated  ::)

 

Cheers!

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The way the deal is financed is actually pretty cool (if I have actually understood it correctly!  :o ).

 

So, they're effectively putting a down payment on the acquisition of the assets, with the remainder financed at ~6% using a zero-coupon note.  PLUS, they have effectively purchased $100m of finite re-insurance against adverse development (remember, for the TIG and C&F acquisitions, they bought the $1B cover separately from SwissRE).  Of course, this time it's not called re-insurance, but it works out to provide the same type of downside protection without getting everybody's panties in a twist.....

 

Very creative.

 

SJ

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Sounds like a complicated accounting fiction to me, and not the runoff having better than expected development.

 

Runoff had pretax income of $115.2M in the third quarter, so even if we back out the GFIC gain of $85.9M, runoff still generated income of $29.3M from July to September. (page 26 in the Q3 report)

 

Btw, when Fairfax aquires GFIC below book, it seems only natural that the book of Fairfax should increase similarly.  Here they naturally choose to put that $85.9M gain in runoff. Seems fair to me.

 

Another thing is the way the deal is financed, I agree it looks complicated  ::)

 

Cheers!

 

Does everybody remember when runoff was costing $25M/quarter, if my memory serves me correctly?

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Sounds like a complicated accounting fiction to me, and not the runoff having better than expected development.

 

Runoff had pretax income of $115.2M in the third quarter, so even if we back out the GFIC gain of $85.9M, runoff still generated income of $29.3M from July to September. (page 26 in the Q3 report)

 

Btw, when Fairfax aquires GFIC below book, it seems only natural that the book of Fairfax should increase similarly.  Here they naturally choose to put that $85.9M gain in runoff. Seems fair to me.

 

Another thing is the way the deal is financed, I agree it looks complicated  ::)

 

Cheers!

 

Does everybody remember when runoff was costing $25M/quarter, if my memory serves me correctly?

 

YEP! It would be neat to see at what point runoff is now. I suspect they are still down but hopefully the longtail nature run off will break even.

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The zero coupon is a lot more elegant than you think.

 

At inception, the unearned zero interest is non-cash equity limiting risk & reducing the D/E ratio. Going forward, if nothing happens the zero's BV increases 6%, but is offset with positive earnings - increasing the D/E ratio going forward & return/$ invested. If something goes wrong both their earnings & the zero's BV decline by the same amount, decreasing the D/E ratio.

 

Subtle, & elegant

 

SD

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Haven't had the chance to listen to the call yet, but is their equity portfolio still nearly fully hedged? I understand their logic for the hedging, but seems like they're largely missing out on the rally over the last few months. I know they obviously take a long-term view with this, but a lot of the equities they've been holding for a while (that had been relatively flat for a while) are finally registering some strong gains and I'm just wondering how much of those gains are beating lost due to the hedges. 

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I finally had a chance to gert through the quarterly report (needed a couple of drinks so if I make no sense I appologize). Here are my key takeaways:

1.) at 57 pages, not a light read (I noticed BRK's quarterly reports are also getting longer)

2.) ex ORH looks to me that FFH is writing at a CR of 110 (which is what WRB says 'industry' in US is currently writing at - but not reporting... perhaps they are on to something!)

3.) ORH had a phenominal Q3

4.) Goodwill and intangible assets = $943 million = $46/share

5.) net gains on investments = $68 million but the swings were wicked: bonds were up $422 million (looks to me that Zenith had lots of US treasuries); common stocks were down $388 million and equity derivatives lost $23 million. Not sure where the hedge fits in???

 

When I weave it all together and look out into the future I see a company:

Underwriting (incl runoff) = -$200

Interest & Div = $600

Op Inc = $400

Int Exp = -$200

Corp = -$60

Total before investment gains = $160 million (= small potatoes)

 

Until pricing improves (so CR improves) the company remains (perhaps similar to a few short years ago) a play of how you think they will do with their investments. If they continue to make shrewd investments then BV will grow.

 

 

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I do find it fascinating to see how various companies are managing their business and capital during the current soft market.

 

The re-insurers impress me the most as they remain disciplined on pricing (posting solid CR's) so when you fold in low interest and div income and decent investment gains you get decent overall results. and what are they doing with earnings? Buying back huge amounts of stock (given that most are trading at or below BV).

 

FFH has been aggressive consolidators. Last year it was NB and ORH. This year it was Zenith. And they have made a bunch of smaller moves that I am having trouble following (shotgun approach versus rifle???); I am not sure how they can be sure they are getting best of class companies when they are making so many moves; perhaps they don't care given the small size (so I would ask who do it? Roll it all together and FFH has a bit of a conglomorate look to it...

 

WR Berkley is growing organically (a while ago pulled in some teams from AIG I believe) and is using quaretly earnings to aggressively buy back shares (closer to re-insurers than FFH).

 

It is easier to understand what the re-insurers and WRB are doing than FFH. But you have to love FFH track record the past 3 years. 

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With the hedges, it sounds like Prem is still planning for deflation, which is sort of fighting Bernake and QE. Tough to tell if that's a good idea. It's hurting them quite a bit so far.

 

It is hard to bet against him.

 

It is probably wise not to fight the fed. I liked Teppers interview on CNBC- he is taking the government's word that they will do what they say they are going to go -I assume inflate the market, etc with QE2

 

Nevertheless I am comfortable holding FFH + having an unpopular strategy for a portion of my portfolio. Time will tell. It is more fun having a stake in this game and watching how things play out.

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With the hedges, it sounds like Prem is still planning for deflation, which is sort of fighting Bernake and QE. Tough to tell if that's a good idea. It's hurting them quite a bit so far.

 

Au contraire.  The big bond gains were part of the Van Hoisington/Hamblin Watsa thesis about deflation.  FFH has made out like a bandit on the plummeting interest rates.

 

The equity hedge has perhaps been a bust over the past quarter, but am I alone in thinking that the S&P500 is fully valued at 900-1000?  It makes me feel good to see the index up at 1200, but I mentally give my portfolio a haircut when I look at my brokerage statement.

 

 

SJ

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The equity hedge has perhaps been a bust over the past quarter, but am I alone in thinking that the S&P500 is fully valued at 900-1000?  It makes me feel good to see the index up at 1200, but I mentally give my portfolio a haircut when I look at my brokerage statement.

 

I don't try to put current or near-term values on indexes, but when I look at the 13 or so companies I own shares of, I feel like almost all of them are still a bit undervalued based on current earnings, and think their earnings will be higher a few years from now than they are now.

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