Q3 Report out

[Valuebo]

 

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

 

In a way it is. But on the other hand this is exactly why I have part of my portfolio in FFH. Who knows where we are in a year. Better than holding everything in cash imo, besides normal stock exposure I mean. And in a hardening market I assume they will gain with or without the bond gains. Just look at how prudent they are at the moment:

 

Paul Holden - CIBC World Markets Inc., Research Division

 

Okay. And then just second question, if I may, on Zenith. You're underwriting at higher premiums, combined ratio continues to be fairly high. So when does that new business start to hit the combined ratio and bring it back down to sort of the long-term average?

 

V. Prem Watsa

 

Yes. So when you look at Zenith, you'll see that the expense ratio exceeds the loss ratio. So they have a loss ratio of 60%, 62%, between 60% and 65%. But their expense ratio is higher than that. And that just reflects the fact that, that premium volumes have gone from $1.1 billion in 2005 to about $450 million today. And so as they increase their volumes, the expense ratio comes down. The loss ratios remains the same. That's just how they underwrite. And their long term average, as you pointed out, is 95%. And we expect that overtime, that's where they'll will be. In fact, they'll be less than that to make up for these years so far, 125% combined ratios.

 

---

 

Tom MacKinnon - BMO Capital Markets Canada

 

Okay. And one other follow-up question, with respect to the CPI-linked derivatives. It looks like you made some money on them in the quarter. If I look at the CPI indices in the U.S. and in Europe and in U.K., they all kind of hit to all-time highs in the -- at the end of the third quarter. How are we to sort of look at? How do you put any kind of value in these CPI derivatives?

 

V. Prem Watsa

 

When you say all-time high, you mean the CPIs, right?

 

Tom MacKinnon - BMO Capital Markets Canada

 

That's right, yes.

 

V. Prem Watsa

 

Yes. So the CPIs, if you construct them, particular to the U.K. and perhaps in Europe, they increase in value-added tax. And then we have many onetime items that raise the CPI in those countries. And need their 10-year contract -- their long-term contracts, and so we look at them as protection. It's in our books at the end of September. It's a little more than $200 million. We've written them down by a little more than $200 million in the first 9 months. We think of it as a 10-year deal. And anytime -- it's a long ways, we point out that in Japan, there was a 15% cumulative deflation. In the 30s, there was comparable deflation. So it's not a month-by-month or a quarter-by-quarter investment strategy, Tom. We are protecting our -- there's going to be unintended consequences. I mean, just imagine, if you were a Greek bank, and you were buying the safest bonds in the country, the debt -- the government debt, you just took a 50% haircut and you probably lost a bank. So there's all sorts of unintended consequences here that you have to be very careful about. And also, that's how we take these CPI inflation or deflation derivatives. We take it in the sense that, there's going to be things that we're not going to see, that we might well get hurt in the deflation. We're worried about deflation, not inflation. We think there's a lot of concerns about inflation, but it's really deflation that we're worried about. That's the unexpected possibility -- not a certainty, but an unexpected possibility, and that's what we worry about.

 

It was actually funny to read how that analyst was pondering about the short term valuation of the CPI contracts. He seemed confused.  ;D

 

[Parsad]

Actually Tom has followed Fairfax for a long time and is a pretty good analyst.  I think he was just confused about exactly how the mark to market on the CPI-linked derivatives worked, since inflation was up in the last quarter, and they booked gains instead of a loss on them.  Cheers!

[Packer16]

I think the missing piece is these derivatives are like call options on deflation and Fairfax purchased these options with very little "time premium".  Since these are MTM (either by an option model or a trade) an increase in deflation volatility can also increase the value of the call when the underlying CPI is steady or slightly increasing. 

 

Packer

[rijk]

hwic, who has grown book value and share price by 20+% for 25 years, is accepting a 2.85% yield and does not cash in on significant unrealized gains on treasury bonds while interest rates are at all time lows........  what should this tell us????

 

regards

rijk

 

 

We continue to be very concerned about the prospects of the financial markets and the economies of North America and Western Europe, with the possibility -- with the possibilities of developing problems in China.

 

Our annualized portfolio yield decreased in the third quarter of 2011. The yield, on an annualized basis, was 2.85%. That compares to the third quarter of 2010 yield, which was 3.45%. The decrease in the yield reflected the increased investment expenses associated with the total return swaps. The average investment portfolio size has increased to $24.9 billion from $23.2 billion last year.

 

And we had the opportunity -- these are very liquid treasury bonds, longer-term treasury bonds we can sell 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

 

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.

 

 

 

[Uccmal]

Tombgrt, you bring up good points.  Ffh makes up a big part of my portfolio.  In this environment it makes an excellent economic hedge.  That and the upside potential are the reasons I keep it.  They hedge so I dont have to

[biaggio]

re hedges, -the hedges are on the general market, correct? He can still make money (in the short term) if FFH common stocks go up faster than the general market goes up. Is this right?

 

If so he gets to protect his capital for when he can right more profitable insurance but still get some return on his portfolio (would this return be what you guys call alpha?)

[Valuebo]

Actually Tom has followed Fairfax for a long time and is a pretty good analyst.  I think he was just confused about exactly how the mark to market on the CPI-linked derivatives worked, since inflation was up in the last quarter, and they booked gains instead of a loss on them.  Cheers!

 

Yes, seems so. :) What Packer16 explained is what I was getting at. That's why they will fluctuate greatly over time. Prem won't consider selling unless the situation improves greatly or he can lock in a serious gain and imo it is almost useless to look at what those CPI contracts are doing in the meantime.

 

But good to see FFH has at least one decent analyst to ask relevant questions in the future. :)

 

I think the missing piece is these derivatives are like call options on deflation and Fairfax purchased these options with very little "time premium".  Since these are MTM (either by an option model or a trade) an increase in deflation volatility can also increase the value of the call when the underlying CPI is steady or slightly increasing. 

 

Packer

 

---

 

Tombgrt, you bring up good points.  Ffh makes up a big part of my portfolio.  In this environment it makes an excellent economic hedge.  That and the upside potential are the reasons I keep it.  They hedge so I dont have to

 

Yes. I sold some recently (I don't hold cash.) for some BRK ($67) and BAC ($5.62) because I'm really looking at FFH as my hedge. I still hold a 8% position* but will be the first to double again if markets keep gaining.  8)

[Packer16]

I look at FFH and SSW as my fixed-income proxies in my porfolio.

 

Packer

[Zorrofan]

hwic, who has grown book value and share price by 20+% for 25 years, is accepting a 2.85% yield and does not cash in on significant unrealized gains on treasury bonds while interest rates are at all time lows........  what should this tell us????regards

rijk

 

 

We continue to be very concerned about the prospects of the financial markets and the economies of North America and Western Europe, with the possibility -- with the possibilities of developing problems in China.

 

Our annualized portfolio yield decreased in the third quarter of 2011. The yield, on an annualized basis, was 2.85%. That compares to the third quarter of 2010 yield, which was 3.45%. The decrease in the yield reflected the increased investment expenses associated with the total return swaps. The average investment portfolio size has increased to $24.9 billion from $23.2 billion last year.

 

And we had the opportunity -- these are very liquid treasury bonds, longer-term treasury bonds we can sell 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

 

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.

 

I think that is a very good point indeed.....

 

cheers

Zorro

[DynamicPerception]

FFH will probably hold the course until they see the light at the end of the tunnel.

"unintended consequences"

Here's an inside perspective of a "balance sheet recession".

 

[Valuebo]

Mr. Market gaining new insights regarding the bonds and hedge?

[Myth465]

FFH will probably hold the course until they see the light at the end of the tunnel.

"unintended consequences"

Here's an inside perspective of a "balance sheet recession".

 

 

Thanks for the link. Always enjoy Koo.

[nhall110]

Apologies for the question, but was hoping some of you experts on here could shed some light on the current BV of FFH.  With no real applicable background, would appreciate some valuation help.  Thanks in advance.