Q4 2010 results out

[treasurehunt]

Looks pretty ugly at first glance.

 

Net loss of $364.6 million  -- $18.43 per diluted share -- in Q4.

Book value per share down to $379.46.

Combined ratio of 105.8% for Q4 and 105.2% for the full year.

 

The Q4 net loss was due to the equity hedges and mark-to-market losses on bonds.

 

[Parsad]

I think the mark to market losses aren't really ugly, but just the reality of what happened in the last year.  The munis are insured by Berkshire so they are fine.  The cost of hedging your portfolio if you're wrong...be it short-term or long-term...is the potential loss in gains. 

 

Underwriting was hit hard in North America during the 4th Q.  I'm guessing the cold snap had quite an impact, and that should probably carry into Q1.  The new businesses should have more of an impact going forward.

 

More interested in the annual report and letter, and exactly what Prem sees going forward.  Cheers!

[biaggio]

press release-

 

http://online.wsj.com/article/PR-CO-20110217-911416.html?mod=crnews

 

Combine ratio for U.S operations =130% ?

 

 

[bluedevil]

It's been three full years now that Fairfax's combined ratio for North American insurance has been significantly above 100, despite low interest rates and what appears to be Fairfax's disciplined approach to the soft market.  The hard market can't be *too* far away.

[Guest Dazel]

 

Fairfax who you all know i love have been dead wrong (market perception)...their bonds, hedges, and lack of equity buying...wrong...for now...we are very concerned about things because we know how wrong Fairfax has been lately...we are thinking in the long run they will be right once again...and what does that mean?

 

 

Dazel.

[biaggio]

 

Fairfax who you all know i love have been dead wrong (market perception)...their bonds, hedges, and lack of equity buying...wrong...for now...we are very concerned about things because we know how wrong Fairfax has been lately...we are thinking in the long run they will be right once again...and what does that mean?

 

 

Dazel.

 

I am hoping they are just early.

 

[biaggio]

I am not an expert by any means, and I am learning from you all...

 

Do you think they are overly conservative with their reserving? I noticed that their provisions for claims has increased 10.1% but their total business has increased only about 2%. Is this what is driving their combined ratio higher?

 

If that is the case then a lot of their loss is on paper only ie not real cash (yet)

[Viking]

Results look to be just about in line with what we discussed in January http://cornerofberkshireandfairfax.ca/forum/index.php?topic=3612.0 And I do want to thank benhacker for taking the time back then to post some thoughts on the hedges; it helped me better understand what FFH was doing and the loss potential given the rise in interest rates and the rise in the equity markets.

 

Looking at 2011 we can estimate:

1.) Underwriting income = -$300 mill

2.) Int / Div Income = +$800

Operating Income = +$500

3.) Net Gains on Invest = ????

4.) Interest Exp = -$200

5.) Corporate Overhead = -$100

6.) Runoff = -$50

Pre Tax Income (before Investments) = +$150

 

As usual for FFH, the key is investments. With bond yields rising AND equity markets rising, in the very near term things do not look good. To be fair to FFH they do not buy investments with a one or two quater time horizon so we can't say they are wrong. We can only say that reported book value will decline further in Q1 should current market trends continue.

[Viking]

biaggio, I am hopeful that you are correct regarding reserving at FFH (overly conservative). However, if this was the case (overly conservative) I would expect this to also have been a past practice and I do not see large reserve releases (like other conservative insurers/reinsurers such as WRB, PRE, RNR etc). Or perhaps FFH is more conservative today than they were in past years?

 

When I see the range in CR's being reported by different companies it does make me wonder who is swimming naked; I have a hard time believing it is FFH given their reported numbers.

 

Interesting times!

[Partner24]

Well, at first glance, that's disapointing, but we've been throught that ride before and we have to take the long term view. Over the long term, their results have been very good so far and I don't see why they suddenly would have lost their talents. 

 

No problem with the munis. These are fundamentaly sound and when they bought them, they got a great deal and they'll know when to dispose of them if they have to.

 

But like I said approximately a month ago, I think they should take time to explain their hedges better and to let us know what would happen if we would like a 1 to 50 years to 1 to 100 years event that would be the contrary of what they want to protect at first glance (i.e. huge bubble in the stock markets in wich they took a "downside protection").

 

Regarding that "overconservativeness" on the reserves, I've heard that since 2003. In the end that "overconservativeness" have to show up on the numbers. But Fairfax is not W.R. Berkley on the underwriting side of the business and I think that people have to realize that. But W.R. Berkley is not Fairfax neither! Both have their own talents.

 

Cheers!

 

Cheers!

 

 

 

 

[omagh]

3.5% loss on a $22.7B portfolio in a quarter where bonds rose is expected.  The portfolio is positioned for both inflation and deflation while meeting obligations, so it doesn't much matter in the long run.

 

-O

I think the mark to market losses aren't really ugly, but just the reality of what happened in the last year. 

[alertmeipp]

disappointing result - hedge is a difficult thing - my hedge last year and this year cost me dearly.

their core business still aren't great (read-bad) - without good investment gain; their result won't be good for a while.

[bluedevil]

 

Regarding that "overconservativeness" on the reserves, I've heard that since 2003. In the end that "overconservativeness" have to show up on the numbers. But Fairfax is not W.R. Berkley on the underwriting side of the business and I think that people have to realize that. But W.R. Berkley is not Fairfax neither! Both have their own talents.

 

 

That's true, but the story is different when you look at the track record of the companies that have been under Fairfax management for the longest period of time.  Between 1995 and 2008, Fairfax's Canadian subs (i.e., Northbridge) had favourable reserve development of 4.7% on a weighted average basis.  And parsing the annual reports, only in the last couple years, since the CDS haul, has Prem characterized Fairfax's reserves as "conservatively" stated on a companywide basis.

[oec2000]

3.5% loss on a $22.7B portfolio in a quarter where bonds rose is expected.  The portfolio is positioned for both inflation and deflation while meeting obligations, so it doesn't much matter in the long run.

 

 

Would you mind clarifying how you see the portfolio positioned for inflation if the equity positions are substantially hedged?

[niels12think]

... parsing the annual reports, only in the last couple years, since the CDS haul, has Prem characterized Fairfax's reserves as "conservatively" stated on a companywide basis.

 

I'd wish Prem at the CC or in the letter to shareholders would somehow try to quantify the "conservatively" stated reserves as compared to similar non-conservatively stated reserves. As a small shareholder - and thereby small business partner - I would much appreciate such information.

 

Thanks

 

 

[Guest longinvestor]

There is one conclusion to be made from this Quarterly earnings report........... Nothing has changed in the business. We should hope to hear this from the CC.

 

Prem has always said results will be lumpy & bumpy versus the smooth linear earnings most companies report. This Q belonged in the lumpy bucket. I will be priming the pump for the stock to pull back to 0.9x book (under $340) before the bumpy ride up. With all the international aquisitions and investment gains not priced into the stock, I will be ready for Mr Market's follies.

[omagh]

oec...your question is good, but it reflects a certain framing.  FFH is an insurance company with a substantial bond portfolio and a much smaller equity portfolio. If you look back over inflationary periods, insurance companies with short durations in their bond portfolios have the ability to roll their bonds over into higher yielding securities.  It's a type of asset conversion that Marty Whitman has written about.  In the event of inflation, insurance companies typically revalue towards a "going concern" model.

 

If you get the chance to go to the Fairfax shareholders dinner, talk to the quiet guy named Brian who runs the bond portfolio -- guaranteed to be worth your time.  FFH has made far more money off bonds than equities in its lifetime, but people mostly like to talk about equities here.

 

-O

Would you mind clarifying how you see the portfolio positioned for inflation if the equity positions are substantially hedged?

[Myth465]

Results are as expected and Q1 is not looking much better unless we sell off from mid Feb to March. Though investment gains should be there due to SD and other holdings.

 

I think FFH is a great buy, but still dont quite understand those who think its worth 1.5 to 2x book value with these underwriting results.

 

----

 

I think you guys are fishing with the "conservative" underwriting mantra. These things at some point tend to flow through the numbers. FFH hasnt been a great underwriter and has been an investment story as long as I have known it (which isnt long). I take the numbers as is and view future reserve releases as nice unexpected bonuses.

[ok22]

Having gone through the entire filing, having trouble telling what the maximum amount FFH could lose on the hedge/swaps/derivatives is.  Any insight from board members would be welcome.  Basically a related concern to Partner24's question:  What is the amount they could lose in a 1/50 type opposite events from their hedged event scenario

 

1.  See the notional amounts but that cannot be the max loss because that would have been a very poor (hopefully non-starter) investment decision

2.  See the cost of each derivate/hedge investment line item and see the change in value to reconcile to current market value but that does not give you the total amount they could lose

3.  Nothing in the MD&A that outlines scenarios or any verbage scenarios that says if the Russell goes to x we would lose y on a mark to market basis. 

4.  Nothing in the MD&A or filing numbers that outlines whether they can cap the loss by closing out the hedges/swaps/derivatives at certain points in time or for a certain price or at a certain level of each index.

5.  Nothing in the MD&A to give comfort on how much upside there is in the offsetting income from the hedge/swap/derivates that might mitigate the total loss

 

 

Own a largish amount of FFH and have bought in chunks all the way from $85 (during the they are going under days) to $300 with an average cost of $220ish.  Never really considered selling and honestly hope never to sell but the following things are making me wonder/annoyed:

 

1.  The NYSE delisting which I viewed as a bit arrogant and peevish and unnecessarily limiting.  The savings

2.  Very disappointed with their MD&A and numerical presentation here in this filing.  After all FFH and Prem has been through, thought they would be over detailed when you have a really bad quarter even if it is only bad "looking/short-term" mark to market/ short term etc.

3.  The way too early time of the conference call imho has been making for too few questions especially quality ones

4.  The decision to hedge 80%+ of your portfolio.  Why not then just be 20% long invested and in cash?  Long term oriented shareholders should be ok with having dry powder and waiting for FFH to pull the trigger.  Feel like they are being overly cute and complex with the hedge/swap/derivate maneuver and mathematically don't think it makes sense at such a large percentage?  Again, if I am wrong would love to hear a detailed explanation on how you can invest $100 and then hedge $80 and then still make money if the s

5.  Unnecessary high bar jump investments like Abiti, canadian retailer turnaround, messy regional airline situation, Level 3, Overstock, usg, dell etc.  They were liquid when lots of higher quality companies/business models were cheap, why stretch for these higher bars to jump over.  Is there something in the DNA that says we like to buy messy insurance companies and fix them so they are attracted to messy equity investments.  fyi, i see and hear their JNJ in the portfolio response but dont consider the price they bought it at to be that great.  JNJ is going to have issues if the stent business has issues as that was masking the growth and margin problems in the rest of the business and with their recent consumer product issues and medical device issues that I see could occur, I don't think that JNJ is at a sufficient margin of safety.  Almost impossible now for JNJ to find a small Neutrogena for a great price and grow it into a large business to make up for medical device revenue/margin issues.

6.  CDS gains caused inflated head syndrome at FFH with respect to investment process?

6.  Agree with Myth465 on underwriting so not expecting some miracle there.

 

Again, don't really want to sell so would love for the board members to refute/assuage my concerns with their knowledge and opinions.  Hate to pay lots of taxes and its hard to find "replacement" good companies at good prices.

 

Parsad:  Hope you take no offense at my rather pointed concerns and vexation.  Really like the board and have been a long time FFH fan but am definitely frustrated with some of the recent decisions and this filing's disclosure quality has me a bit more frustrated.  Realize this may not pass the worth your time test:  but if Prem does care to hear from shareholders that think they have legitimate issue(s) to raise, feel free to pass it along if it is appropriate or worth your time.

 

[Uccmal]

If you get the chance to go to the Fairfax shareholders dinner, talk to the quiet guy named Brian who runs the bond portfolio -- guaranteed to be worth your time.  FFH has made far more money off bonds than equities in its lifetime, but people mostly like to talk about equities here.

 

Well said Omagh, There is more in the bond portfolio stucture than meets the eye in terms of dual durations etc.  FFH are among the best bond investors on the planet.  As long as Brian doesn't retire or is unable to pass along that store of knowledge....

 

I think part of the key is to try and ignore the mark to market noise and focus on D&I income of 767 M, up 7% y/y.  This number is growing Q by Q.  As far as the hedging goes they will look pretty bright on a market pull back.  We have been on the longest roll I can recall since the late 90s.  I for one have been selling across the board nearly every day for a month now.  You can bet that FFH is adding to that downside "insurance" as the markets reach new highs.

 

As for underwriting I think we might as well forget about it.  That is not really what FFH is about.    

[Myth465]

Having gone through the entire filing....

 

 

ok22, that was one of the most sobering and honest critics of FFH I have seen on the board. Welcome and I look forward to your future posts. Hopefully we shares some holdings. I would like to read more of your critics. I hold 1 share of FFH and hope to buy in sooner or later.

[Uccmal]

ok22, Fair criticism for sure.  Nothing wrong with that.

 

Some thoughts:

1) NYSE delisting should have no effect on stock price except reducing volatility.

2) No argument

3) Ask some questions yourself.

4) RE: hedging - time will tell.  I think we have to work back through the timing of events.  They hedged much of this at a time when things were looking much more tenuous.  I for one am not sure that it is about hedging anyway.  They used the same excuse for the "investment" in CDs which at one point had put them close to $300 M in the red with counter party money posted.  It is easier to say 'hedge' then "we are speculating with a small sum of our portfolio on a medium probability event that will make a great deal if it comes true".

5) All of the investments you mentioned were made prior to the meltdown.  Some are now bearing fruit in a big way such as ABH, and Dell.  LVLT, ABH etc. all add to the Quarterly dividends.  To my recollection they have made some awesome high bar investments as well such as CWB, H&R Reit, ICG, SD, RIM, etc.  JNJ is a depressing stock to say the least.  It may languish for years.  A stalled large cap is an unpleasant experience to say the least.  Just ask shareholders of FFH itself.

6) Not a chance.  Go the the annual meeting and take the time to talk to these people.  After the near death experience in the mid 2000s there is not a swelled head in the bunch.

7) Underwriting for FFH is a source of cash to be used in investing.  If FFH can get by not losing too much on underwriting things will be fine.  

 

I would not buy FFH at these prices but then I still hold a sizable position.  At the moment I am nearly tapped out for ideas anyway.  If it gets cheaper then I will likely start to reconsider.  I just had to sell over a thousand shares after converting my options.  

 

[ok22]

Thanks Uccmal and Myth465.

 

Uccmal:

 

What is the size of the turnout at the annual meeting?  Is it possible to meet and spend some quality time talking to the FFH "these people?"  Have not been but would go if it was a venue where one could meet and talk to FFH management members appropriately.  Would love your insight since it is a rather long haul for me.  Not really interested in going if it is like the brk circus.

 

3) the conference call:  they instituted it at/after the near death experience and imho if one listens to all the conference calls since then, the tone and attitude is not really that enthusiastic on FFH's part.  Basically the one or two sell side analysts asking a bunch of detailed short term questions about the quarter.  Anything else gets brushed off - it is very polite, professional and smooth.  Ok if we disagree here, just responding more thoroughly to your point which is well taken by me.  I'll let you decide/figure out if I might have already tried that - starting with the NY analyst day during the darkest days :)

[alertmeipp]

I used to consider FFH as a cheap mutual run by the best manager in the world with free option on insurance business when the market returns. I think the CDS thing is once a life-time scenario - don't expect it to repeat. (i.e. the recent hedge is just hedge). Can't blame their hedge - they have rating agency to deal with.

[Uccmal]

Ok22, No argument on the conference calls.  I wait for the transcript.  oec2000 has asked some really pointed questions at the AGM, as have a few other board members.  

 

Prem himself was essentially non-communicative in the dark days.  I am guessing the stress related to the items in the lawsuit was getting to him.  He was paranoic at the time - no wonder.

 

From experience they will offer market theses but not specific company theses.  If you ask Prem to explain why they bought SFK for example you will get told a stock line such as " we like the management" or we invest according the the principles of BG.  They will give alot of detail about the insurance companies.  The manager of Polish Re was circulating a couple of years ago looking for people to talk to.  Sam, Brian, and a few others also circulate as best they can.  Sam is pretty chatty and will lay out specific theses for equities such as LVLT or SD.

 

As for availibility at the meeting it seems to vary.  During the dark days you could easily talk to anyone for as long as you wanted.  The last couple of years have been hectic.  I am guessing this year will be more muted.  

 

Is it worth the trip... probably not.  I have never been to BRK and wont go now.  Not my style.  I live 30 minutes from Downtown TO so FFH is no big deal.