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ORH Q1


Viking
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Q1 report was pretty much in line with expectations.

1.) Solid operating income = $0.95/share

2.) Investment Losses = $99 million = $1.65/share

- not great, but expected and should now be behind us (i.e. Abitibi bonds writedown etc)

3.) Comprehensive loss = $93 million = $1.55/share

- not great, but the stocks ORH own simply went on sale in Feb/March

4.) BV = $43.80 (down from $45.37 or $1.57)

 

It appears to me that ORH is evolving. Its operating earnings are becoming more predictable (5% portfolio yield and good CR) and to me this is the big positive out of this earnings release.

 

The unexpected bonus is the communication in the FFH release of $900 million increase in market value from March 31 to April 24. ORH represents 40% of FFH total portfolio which suggests they could represent $360 million = $6/share pretax!

 

It is interesting... last year you held FFH or ORH because of their CDS and US Treasury holdings (bearish stance). Now you hold FFH or ORH because of their municipal bond and equity holdings (bullish stance).... Bizarre!

 

Other notes:

1.) interest and dividends = $78 million x 4 = $312 = 4.2% yield (before tax considerations)

- guidance of after tax yield = 5% appears bang on

- total investments and cash = 7.5 billion

- with additional purchases of bonds and stocks in Q1 we can expect portfolio yield to be a little higher!

- this now represents an important relatively stable source of earnings going forward

- when they were holding US treasuries the past few years the portfolio yield was coming down steadily, which in turn impacted operating earnings

- the analysts should love this as they largely only forecast operating earnings. Perhaps this will get ORH a little more respect and this may help the stock price trade at a multiple closer to that of its peer group

2.) CR = 96.5%, looks to be OK

- we will find out more tomorrow but from the conference calls I have listened to it appears the hard market for re-insurance is beginning to develop a little quicker than expected and slow improvements in pricing expected each quarter and continuing until early next year. Bottom line is this is positive news going forward... how positive we have to wait and see.

3.) Investments: looks to me that they spent just over $400 million of cash on bonds and stocks in Q1 which should help portfilio returns going forward.

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The ORH muni portfolio is certain and in a deflationary environment its huge - especially when guaranteed by Berkshire.  I hold ORH because its a guaranteed return from the big muni position PLUS some underwriting profit here and there, and eventually they will do something else that is smart with the rest of the portfolio with all the dislocations.  Its a huge head-start vs investing myself.  Its the power of an insurance/investment business model in this environment PLUS the specific very rare muni bond portfolio.  Its just so simple, you start off with an 8% guaranteed return taking no risk.

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I'm long ORH myself, but don't be fooled into thinking there is any "no risk" investment in this market.  We're going to start seeing some Munis default as tax receipts are coming in very low.    Yes the Berkshire insurance is a huge plus, but I'm still not putting all my eggs in one basket.    I trust FDIC more than BRK at this time....not saying that can't change.

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So you think there is a risk Berkshire won't be able to pay on whatever munis themselves can't pay?  IF there is a risk, its minute and, as an investor, I am fully prepared to take it.  If you can't take that risk, you might as well do nothing and doing nothing will erode your saving with inflation so that is probably more risky.

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Yes, I do think that risk exists.  As I said though, I'm long ORH myself, and consider that risk small enough to stomach with some of my investments.  However I still have a substantial portion of my capital in Treasuries and FDIC insured accounts as I have since July '07. 

 

Inflation is not a risk I'm worried about. 

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Transcript up:

 

http://seekingalpha.com/article/134679-odyssey-re-holdings-q1-2009-earnings-call-transcript

 

Good notes on rates and what's happening.  More positive than usual.  There is also some added clarity for those who were concerned / curious as to how the investment yield calculation works.

 

Nice quarter overall... slow and steady and we'll make the a 1.4-1.6x book value company in the market's eyes.

 

Ben

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