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Fairfax 4th Q Results


Parsad

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I see a few shareholders panicked.  0.2% of the float so far.

 

The media articles about FFHs hedging operation always ask the wrong question, and come to the wrong conclusions about FFH.  They have hedged the present and future equity holdings.  If FFh writes double or triple the business in the next couple of years and invests double the amount they have into cheap equities the hedges will only be 50%.  It is protection for a large and growing equities position.  i.e we know they have bought more Bkir since year end.

 

Rijk, the bond position has remained mostly unchanged.  I haven't looked in detail but I would expect the plan is to hold them to maturity.  They would book unrealized losses along the way, if yields rise.  These bonds are paying FFH far more than if they had bought them today.  Buffett is referring to investing in bonds today.  If they sold these bonds and rolled them into short term treasuries interest income would tank.  This money has to be kept liquid as it is regulatory capital, so the choice is long bonds paying 4.5 or money market paying zero.

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Rijk, the bond position has remained mostly unchanged.  I haven't looked in detail but I would expect the plan is to hold them to maturity.  They would book unrealized losses along the way, if yields rise.  These bonds are paying FFH far more than if they had bought them today.  Buffett is referring to investing in bonds today.  If they sold these bonds and rolled them into short term treasuries interest income would tank.  This money has to be kept liquid as it is regulatory capital, so the choice is long bonds paying 4.5 or money market paying zero.

 

I believe he said they sold half their treasuries (though I'm not sure what percentage of the bond port that was).

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According to the 4Q report they did sell 51% of treasury bonds at the sub level for an increase of $1.67 bil

 

Major movements in portfolio investments in 2011

included the following: subsidiary cash and short term investments including cash and short term investments pledged for short sale

and derivative obligations increased by $2,809.4, primarily reflecting the sale of approximately 51.4% of the company’s holdings of

U.S. treasury bonds (measured using amortized cost) with the $1,673.7 of proceeds from the sales retained in cash or reinvested into

short term investments, net cash received in connection with the reset provisions of the company’s long and short equity and equity

index total return swap derivative contracts and the consolidation of the cash and short term investments of First Mercury and Pacific

Insurance.

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In reviewing the "Financial Track Record" at the company website, it appears that the stock traded below book value only once since 1985 (2002, using their year end data).  While the recent underwriting looks horrendous, if pricing is firming and if the current stock price is below book value, perhaps most of the bad news is out there.  I'll add, however, that the "Financial Track Record" is a hodgepodge of USD and CAD, and some of the terms are inconsistent (e.g., "book value" appears to be equal to "common shareholders' equity."  Why not use the same term?).

 

*long and considering adding.

 

 

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In reviewing the "Financial Track Record" at the company website, it appears that the stock traded below book value only once since 1985 (2002, using their year end data).  While the recent underwriting looks horrendous, if pricing is firming and if the current stock price is below book value, perhaps most of the bad news is out there.  I'll add, however, that the "Financial Track Record" is a hodgepodge of USD and CAD, and some of the terms are inconsistent (e.g., "book value" appears to be equal to "common shareholders' equity."  Why not use the same term?).

 

*long and considering adding.

 

Current price is above book value though.

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Looks like roughly a $300M gain on the Treasuries sold in the 4th.  Glad to see that some was booked, but was not enough to escape the market rebound and the resultant mark-to-market losses.

 

Uccmal - I like your point if FFh writes double the business in the next couple of years and invests double the amount they have into cheap equities the hedges will be much less than the current 104%.  --  I would agree and would like for that to happen but given H&W's view, I am sure they will hedge along with their investments.  I would prefer to restrain a little on the hedging, but understand their position.  I think FFH us shareholders are protected enough with a 50-75% hedge.

 

 

Cheers

JEast

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My only concern is with writing all that additional business with a CR over 120.  The higher rates should help that, but I'm beginning to wonder if we will ever see good underwriting results.

 

Added some shares today at $395.

 

He indicated that at least some of the CR is due to low premium writing (i.e., the fixed costs were causing higher ratios).  Accordingly, new business should help on two fronts: 1) higher prices due to the cats and 2) lower fixed costs relative to overall premiums.  He also indicated that the entire P&C industry needs to be writing at 90-95% to get mid to high single digit ROE due to the low interest rates.

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Looks like roughly a $300M gain on the Treasuries sold in the 4th.  Glad to see that some was booked, but was not enough to escape the market rebound and the resultant mark-to-market losses.

 

Uccmal - I like your point if FFh writes double the business in the next couple of years and invests double the amount they have into cheap equities the hedges will be much less than the current 104%.  --  I would agree and would like for that to happen but given H&W's view, I am sure they will hedge along with their investments.  I would prefer to restrain a little on the hedging, but understand their position.  I think FFH us shareholders are protected enough with a 50-75% hedge.

 

 

Cheers

JEast

 

I've learned not to second guess Prem - he seems to be able to "get" the big picture better than most. What worries me is not that he is so fully hedged, but what he sees coming that causes him to be so fully hedged......

 

cheers

Zorro

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I appreciate the comment, but I am not second guessing H&W as I have the same view.  I am first guessing the approach as the balance sheet is now big enough that we shareholders do not need to be as hedged as much as we once needed to be.  Just shades of grey on the approach.

 

Cheers

JEast

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A bad year on the underwriting side (far from being the first one), a bad year on the hedge side, a good year (fortunately) on the bond side.

 

Some of their stuff I like a lot (like good, big and cheap big companies), some of their stuff I wonder what they are doing there (like RIM), and the macro stuff that I can't predict.

 

If the insurance business prices are getting interesting, it's a good thing to write more business, as long as you not fooling yourself with "catastrophes are not normal part of the business" kind of mindset.

 

It's been some time since I've reviewed a lot of things in details with FFH, but overall, correct me if I'm wrong, but Fairfax will do very well if their deflation scenario happens, and will do bad if interest rates increase significantly.

 

Regarding the stock price drop today, we're at about the same level as last october. Nothing to be excited or worried that much. Remember 2003? ...

 

 

 

 

 

 

 

 

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