Q3 Report out

[Crip1]

http://www.fairfax.ca/Theme/Fairfax/files/Q3%202011%20-%20FINAL_v001_c385a7.pdf

 

-Crip

[Grenville]

Bonds up big and it looks like premiums are growing from a first glance. Reinsurance combined was 146.7 bringing the consolidated to 107.5.

 

Book is at 403.

[Parsad]

Bonds up big and it looks like premiums are growing from a first glance. Reinsurance combined was 146.7 bringing the consolidated to 107.5.

 

Book is at 403.

 

I think the board got it pretty close with the estimates.  Bonds were the main contributor, and the hedges countered the losses in equities.  Insurance premium pricing is firming a bit, as they are writing more business.  Doesn't look like they took any real profits off the bonds...at least before September 30th.  I was hoping they would have capitalized on a bit and bought some cheap stocks. 

 

Basically, they are hedged neutral the way the portfolio is set up.  In the meantime, they can grow their insurance businesses and continue to add bolt-on acquisitions.  All in all, a good report in a volatile quarter!  Cheers!

[beerbaron]

Look at how they changed the duration of their bond portfolio. It seems they are moving with to a shorter maturity. Also, corporate and preferred are down.

 

Parsad it seems your friends in Toronto are still very cautious, even more then 3 months ago.

 

 

[Uccmal]

If they didn't take any bond profits then the book value is back down around 380 today.  IFRS complicates things more than ever.  By marking to market unrealized gains book value just jumps around.

 

I was not convinced they would take the bond gains.  They still need liquid regulatory capital and moving from the higher interest payments of 10-30 year to 3 Month would reduce the portfolio' interest income.  We know they have been putting lots of money to work, just not from bond sales. 

 

Mediocre quarter, about what I epected. 

[Parsad]

Mediocre quarter, about what I epected.

 

Al, you're getting spoiled!  ;D  Mediocre quarter?!  Cheers!

[Valuebo]

Prem made a macro bet and is sticking to it, I can appreciate that. This quarter shows what a position in FFH could be worth when things would truly turn to shit.

 

While we wait and collect a dividend they are allocating capital in unique situations and growing the insurance business.

 

Net premiums written by the company's insurance and reinsuranc operations in the third quarter of 2011 increased 21.4% (15.6% excluding acquisitions) to $1,430.3 million from $1,178.1 million in the third quarter of 2010.

[Santayana]

Anyone know any details about this?

 

The company has entered into long equity total return swaps on individual equity securities for investment purposes with an original notional

amount of $1,118.1.

[Grenville]

Anyone know any details about this?

 

The company has entered into long equity total return swaps on individual equity securities for investment purposes with an original notional

amount of $1,118.1.

 

This information is a bit dated but the securities are probably the same:

From the 9/30/10 NAIC filing for ORH (assume other subs have similar positions)

KFT TRS NOT: 151mln

USB TRS NOT: 152mln

WFC TRS NOT: 242.7mln

 

The total return swaps are equivalent to their original common stock positions. The Swaps are with Citibank Canada and probably help net out their exposure to Citibank because their TRS short positions on the Russell & S&P are with Citibank

[Partner24]

Al, mediocre quarter?!

 

Don't you remember the lean years?

 

Come on, Al.  ;)

 

Well, Alzheimer's can't be all bad. You get to meet new people every day.  8)

[Guest misterstockwell]

Let me help them with all that new premium they are writing:

 

CR>100= :'(

CR<100= ;D

 

.......and CR's include catastrophe losses.....because you sell insurance.....for catastrophes.....

 

Just a thought.

[Santayana]

The happy/sad breakeven point for the CR can change from 100 + or -, it all depends how well they are using the float. 

[Parsad]

Let me help them with all that new premium they are writing:

 

CR>100= :'(

CR<100= ;D

 

.......and CR's include catastrophe losses.....because you sell insurance.....for catastrophes.....

 

Just a thought.

 

That's only correct over longer periods of time.  For example, when you are in the midst of a normal insurance cycle, when premium pricing turns soft, you cannot reduce your operating costs as quickly as you reduce premiums written.  Thus, you are going to see high combined ratios, even though you are doing the prudent thing by cutting back on premiums where the risk/reward isn't in your favor. 

 

When the market starts to harden, you generally do not see the premiums earned right away, but your operating costs have remained high.  Eventually, you do start to see the effect of the premiums being written, and your combined ratios start to fall. 

 

As long as Fairfax's insurance subs show their historical trend of maintaining lower long-term combined ratios after acquisition, then investors should not be concerned with high combined ratios in the short-term.  Cheers!

[Uccmal]

I stick to my asessment gents.  If you back out the bond gains which are gone now we are back to a book value closer to where it atarted.  It is not a criticism. 

 

Re: combined ratios.  I saw a brief article a couple of  weeks ago that compared ffhs expense ratio to others in the industry.  It was among the very highest.  But as followers know the ffh team has made a deliberate policy of keeping staff on and trained for a tighter market.  I am okay with this.  When others in the industry start to implode ffh will hit the ground running with fully trained, experienced underwriters, who will write extremely profitable long term business, worldwide.

[ShahKhezri]

Is ORI too big of an acquisition for Fairfax?

[sdev]

Mediocre quarter? Since when did we become short term investors? They continue to expand globally, are making whole acquisitions, buying dirt cheap franchises that are once in a lifetime (ireland)... I'm happy.

[txlaw]

Is ORI too big of an acquisition for Fairfax?

 

ShahKhezri, I have thought the exact same thing and have said as much in private.

 

Almost considered applying to the VIC with ORI, but I couldn't bear to actually write the damn thing up.  Not sure I'm too interested in applying for the VIC anyway.

[ShahKhezri]

Is ORI too big of an acquisition for Fairfax?

 

ShahKhezri, I have thought the exact same thing and have said as much in private.

 

Almost considered applying to the VIC with ORI, but I couldn't bear to actually write the damn thing up.  Not sure I'm too interested in applying for the VIC anyway.

 

Just seems like a great fit under the FFH umbrella, cut the dividend (+7%), reinvest the portfolio (very sizable), long-term operators going through a tough period (like Zenith).  Might be too big, but Zenith was +1B, this would be 2.5-3x.

 

 

[Packer16]

The only part that would not fit is the mortgage insurance piece.  FFH took the opposite side of this bet in the mid-2000s.  It looks like picking up those pennies is pretty expensive now.

 

Packer

[Uccmal]

Mediocre quarter? Since when did we become short term investors? They continue to expand globally, are making whole acquisitions, buying dirt cheap franchises that are once in a lifetime (ireland)... I'm happy.

 

Sdev, there are probably only two or three board members here who have continuously held ffh as long as me: 14 years.

[beerbaron]

Mediocre quarter? Since when did we become short term investors? They continue to expand globally, are making whole acquisitions, buying dirt cheap franchises that are once in a lifetime (ireland)... I'm happy.

 

Sdev, there are probably only two or three board members here who have continuously held ffh as long as me: 14 years.

 

Lol, are you break-even now on your original price?

 

BeerBaron

[Uccmal]

Lol,  a little up actually.  I wasn't exactly good at this when I started out.  The original shares are certainly long gone to tax loss heaven.  I have kind of averaged down buying in the low 80s way back when. 

[watsa_is_a_randian_hero]

Mediocre quarter, about what I epected.

 

Al, you're getting spoiled!  ;D  Mediocre quarter?!  Cheers!

 

if they are not trading to take advantage of these swings, I agree, mediocre quarter.

 

reason it is mediocre is because while bond portfolio is MTM based on interest rates, the insurance liabilities are not.

 

As the risk free rate either moves up or down, to the extant FFH keeps their bond portfolio unchanged and matched duration to their liabilities, there is no gain in intrinsic value.

[Valuebo]

Earnings call transcript:

 

http://seekingalpha.com/article/303291-fairfax-financial-holdings-limited-s-ceo-discusses-q3-2011-results-earnings-call-transcript?part=qanda

 

Mark A. Dwelle - RBC Capital Markets, LLC, Research Division

 

Okay. My second question. Obviously, a lot of the result in the quarter was related to unrealized gains. Is there a -- I know in the past sometimes you've provided some update in terms of how the portfolio has moved subsequent to the quarter. I guess -- my guesstimate would be is that some of that gain has eroded in the course of October.

 

V. Prem Watsa

 

Yes. So Mark, that's right. And we had opportunity -- these are very liquid treasury bonds, longer-term treasury bonds. We can sell it, at a moment's notice, we decided not to. And it's reflecting the fact that we're still very concerned about the economic outlook. As I said to you, we're concerned about the situation in the United States, in terms of -- broadly speaking, we're looking at this as a balance sheet recession. So there's a lot of deleveraging taking place among individuals, as well as businesses. And on top of that, you've got now the government on austerity programs in the United States and then -- and in Western Europe. And so we think that no fiscal options to speak of in the current environment and no monetary options, because interest rates are up basically at 0% today in both parts of -- both those major areas, Western Europe and the United States. And in that environment, we think our study of the past -- and we think you have to look at Japan and the Saudis. Those are the 2 relevant periods, we think. Because there were also balance sheet recessions, and there were times when there was a lot of debt in the system, both countries. And so in those time periods, government bonds were the ones that benefited an investor. And so as far as your question is concerned, in the third quarter, long rates might have dropped by approximately 1.5 percentage points. And since the end of the quarter, maybe 1/3 of it has been reversed. It's gone up say, 50 basis points from the end of the quarter. And so these are fluctuations. They continue to go up and down. The markets go up and down. We're looking through all of that -- looking at the long term, and there'll be a point when we'll realize these gains, but we don't think it's today.

[txlaw]

Earnings call transcript:

 

http://seekingalpha.com/article/303291-fairfax-financial-holdings-limited-s-ceo-discusses-q3-2011-results-earnings-call-transcript?part=qanda

 

Mark A. Dwelle - RBC Capital Markets, LLC, Research Division

 

Okay. My second question. Obviously, a lot of the result in the quarter was related to unrealized gains. Is there a -- I know in the past sometimes you've provided some update in terms of how the portfolio has moved subsequent to the quarter. I guess -- my guesstimate would be is that some of that gain has eroded in the course of October.

 

V. Prem Watsa

 

Yes. So Mark, that's right. And we had opportunity -- these are very liquid treasury bonds, longer-term treasury bonds. We can sell it, at a moment's notice, we decided not to. And it's reflecting the fact that we're still very concerned about the economic outlook. As I said to you, we're concerned about the situation in the United States, in terms of -- broadly speaking, we're looking at this as a balance sheet recession. So there's a lot of deleveraging taking place among individuals, as well as businesses. And on top of that, you've got now the government on austerity programs in the United States and then -- and in Western Europe. And so we think that no fiscal options to speak of in the current environment and no monetary options, because interest rates are up basically at 0% today in both parts of -- both those major areas, Western Europe and the United States. And in that environment, we think our study of the past -- and we think you have to look at Japan and the Saudis. Those are the 2 relevant periods, we think. Because there were also balance sheet recessions, and there were times when there was a lot of debt in the system, both countries. And so in those time periods, government bonds were the ones that benefited an investor. And so as far as your question is concerned, in the third quarter, long rates might have dropped by approximately 1.5 percentage points. And since the end of the quarter, maybe 1/3 of it has been reversed. It's gone up say, 50 basis points from the end of the quarter. And so these are fluctuations. They continue to go up and down. The markets go up and down. We're looking through all of that -- looking at the long term, and there'll be a point when we'll realize these gains, but we don't think it's today.

 

That's unfortunate.  I thought they might realize some bond gains and buy some cheap equities, particularly ones with relatively high dividend yields.