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Create 1bln dollars of shareholder value


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Goal: Create 1bln dollars of shareholder value for Fairfax Financial Holdings


Vehicle: PNC Financial Group - James E. Rohr, CEO of PNC Financial, looks to be built in the mold espoused by Roberto C. Goizueta  in an essay from Coca-Cola Company's 1997 Annual Report.


Valuation:  50% discount from intrinsic value



1. PNC's focus on all stakeholders and a one page valuation case

2. UBPR data derived comparison between Wells Fargo & PNC Financial (eff. calculation corrected)



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Summary: PNC Financial shows too much risk. Not the right vehicle.


Status: Based on further analysis of PNC Financial’s financial statements, it appears that the company is taking on sizable risk outside of its traditional business model. The company has begun to write sizable amounts of reinsurance tied to third party insurance policies offered to its customers. In the past, PNC’s two wholly owned insurance business’s would write policies and limit risk with external reinsurance.


The amount of reinsurance exposure is large and looks to be growing quite rapidly.

Maximum reinsurance exposure

2009- 1.736 billion

2010- 4.543 billion

2011 Q1- 4.894 billion

2011 Q2 – 5.713 billion


Despite the quantitative discount that the share price offers, the increasing risk exposure along this avenue needs to be further studied and warrants avoiding the shares. One would prefer the bank to stick to banking and serve as an insurance broker instead of developing businesses outside of its circle of expertise.


Disclosure in the financials:

The disclosure in the financial has improved in the latest 10Q but still raises many questions.


From 2011 Q2 10Q p. 127:


We have two wholly owned captive insurance subsidiaries which provide reinsurance to third-party insurers related to insurance sold to our customers. These subsidiaries enter into various types of reinsurance agreements with third-party insurers where the subsidiary assumes the risk of loss through either an excess of loss or quota share agreement up to 100% reinsurance. In excess of loss agreements, these subsidiaries assume the risk of loss for an excess layer of coverage up to specified limits, once a defined first loss percentage is met. In quota share agreements, the subsidiaries and third-party insurers share the responsibility for payment of all claims. These subsidiaries provide reinsurance for accidental death & dismemberment, credit life, accident & health, lender placed hazard, and borrower and lender paid mortgage insurance with an aggregate maximum exposure up to the specified limits for all reinsurance contracts as follows:



In millions

June 30, 2011 & December 31,2010

Accidental Death & Dismemberment $ 2,372 & $ 2,367

Credit Life, Accident & Health 973 & 1,003

Lender Placed Hazard (a) 1,987 & 709

Borrower and Lender Paid Mortgage Insurance 381 & 463

Maximum Exposure $ 5,713 & $ 4,542


Percentage of reinsurance agreements:

Excess of Loss – Mortgage

Insurance 6% & 8%

Quota Share 94% & 92%

Maximum Exposure to Quota Share Agreements with 100% Reinsurance $ 973 & $ 1,001

(a) Lender Placed Hazard contract including stop loss provision expired in the third

quarter of 2010. Stop loss provision not available on replacement contract.


A roll forward of the reinsurance reserves for probable losses for the first six months of 2011 and 2010 follows:



In millions 2011 & 2010

January 1 $150 & $220

Paid Losses (73) &  (43)

Net Provision 16 & 21

Changes to Agreements nil & (3)

June 30 $ 93 & $195


Changes to agreements only represent entering into a new relationship or exiting an existing agreement entirely. The impact of changing the terms of existing agreements is reflected in the net provision. There is a reasonable possibility that losses could be more than or less than the amount reserved due to ongoing uncertainty in various economic, social and other factors that could impact the frequency and severity of claims covered by these reinsurance agreements. At June 30, 2011, the reasonably possible loss above our accrual is not material.


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