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FFH results out


Daphne
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Book dropped $10 to $354/share.  It'll be interesting to see how the shares respond tomorrow.

 

With a 30 point improvement in the combined ratio (128 to 98) quarter to quarter I'd be surprised if there wasn't a positive reaction in the market despite the flat performance to book value. After all, the knock on FFH has always been poor underwriting results.

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"We had a much improved underwriting result on increased premiums, but our defensive investment position through our hedging strategy resulted in a small unrealized investment loss as the markets moved higher in the first quarter," said Prem Watsa, chairman and chief executive officer of Fairfax, "and we again finished the quarter with cash and marketable securities at the holding company of $1-billion. We continue to maintain our equity hedges, as we remain very concerned about the economic outlook over the next few years."

 

How can these be called hedges? If the market moves higher, they lose? This sounds more like a net short position or we hope for the market to go down.

 

Cardboard

 

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Agreed on the "hedges", as I sense that the short position is more of an arbitrage of the RUT and S&P versus WFC, JNJ, and USB.  Sometimes the arbitrage goes against one as it appeared to in the 1st quarter.

 

What concerns me more is the continued struggles at C&F.  The first quarter numbers are usually the most benign of the year.  Even so, C&F still could not write at 100%.  I support Doug Libby as he did a bang up job at Senaca.  But with rates improving and T&C tightening, if C&F can not write at 98% or lower then big changes are required!!

 

Cheers

JEast

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What concerns me more is the continued struggles at C&F.  The first quarter numbers are usually the most benign of the year.  Even so, C&F still could not write at 100%.  I support Doug Libby as he did a bang up job at Senaca.  But with rates improving and T&C tightening, if C&F can not write at 98% or lower then big changes are required!!

 

 

Was the ridiculous tornado activity during Q1 or was it Q2?  The mid-west really got hammered, and presumably C&F will have a piece of that?

 

 

SJ

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What concerns me more is the continued struggles at C&F.  The first quarter numbers are usually the most benign of the year.  Even so, C&F still could not write at 100%.  I support Doug Libby as he did a bang up job at Senaca.  But with rates improving and T&C tightening, if C&F can not write at 98% or lower then big changes are required!!

 

 

Was the ridiculous tornado activity during Q1 or was it Q2?  The mid-west really got hammered, and presumably C&F will have a piece of that?

 

SJ

 

End of Feb - first quarter. 

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The impact of the tornados in the south and central U.S. this year was only 0.4% to CR.  This was less than cat losses in 1st quarter of 2011.  If one takes into account that the asbestos and environmental liabilities are 100% reinsured now, the numbers look even worse.  My memory does not go back very fair, but I believe C&F has not written below roughly 105% for the last 10 years!!

 

On a positive note, they are trying to carve out the turds and add in profitable lines of business like First Mercury.  The biggest drag to Fairfax underwriting is C&F period.  Doug  --  either pull the pen away from some folks or tighten the T&Cs and let the business go, even in an upcoming harder market.  Get ready for some very tough questions at next year's meeting.

 

Remember, I am a 'Super' strong supporter of Fairfax.

 

Cheers

JEast

 

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The impact of the tornados in the south and central U.S. this year was only 0.4% to CR.  This was less than cat losses in 1st quarter of 2011.  If one takes into account that the asbestos and environmental liabilities are 100% reinsured now, the numbers look even worse.  My memory does not go back very fair, but I believe C&F has not written below roughly 105% for the last 10 years!!

 

On a positive note, they are trying to carve out the turds and add in profitable lines of business like First Mercury.  The biggest drag to Fairfax underwriting is C&F period.  Doug  --  either pull the pen away from some folks or tighten the T&Cs and let the business go, even in an upcoming harder market.  Get ready for some very tough questions at next year's meeting.

 

Remember, I am a 'Super' strong supporter of Fairfax.

 

Cheers

JEast

 

Hi JEast--I went and looked at the accident year reserve triangles for C&F (looks like it is on page 164 for 2011 and page 139 for 2009) and it seems as though their reserving was pretty decent in the 2000-2011 time range (looks to run a surplus on most years)--I guess the higher combined ratio is coming from expenses in that case.

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Devil is in the details.  Recognize that many items have been pulled out of C&F over the years as either discontinued operations or put in runoff.

 

What do they say about EBITDA  --  'the stuff before all the bad stuff.'  The triangles you see now/then are after much of the bad stuff was taken out.  Your point is dead on though about expenses though.  I argued with a previous CEO about the number of employees he had  --  he didn't really know :(

 

Many of us are still getting over the handover of a great two days of activities, but in the end I have to ask the tough questions to myself -- and not get too excited about underwriting at Fairfax.

 

 

Cheers

JEast

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How can these be called hedges? If the market moves higher, they lose? This sounds more like a net short position or we hope for the market to go down.

 

the market moved higher than their holdings.

 

They appear to be overhedged.  In answer to a question, Prem said that they still had the same total return swap on now that they put on some time ago.  But, the value of their stockholdings has gone down substantially.  Therefore, it may no longer be a hedge worthy of hedge accounting, but a directional bet.

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FFH looks to be dead money for some time to come. 

 

If stocks in general go up their hedges become worth less and less.  If interest rates stay low, even up to the 2% overnight rate they will only be back where they were 9 months ago on interest and dividends.  The large investments are stalled works in progress: Bkir, Rim, Dell, JNJ, etc.  I am not a fan of the deflation hypothesis, never have been.  The price of oil is preventing deflation to this point, and a recovering US economy will make the opposite more likely. 

 

On the other hand it makes an awesome hedge for my derivative rich portfolio.  If the market goes for a nasty tumble FFH will do well. 

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FFH looks to be dead money for some time to come. 

 

If stocks in general go up their hedges become worth less and less.  If interest rates stay low, even up to the 2% overnight rate they will only be back where they were 9 months ago on interest and dividends.  The large investments are stalled works in progress: Bkir, Rim, Dell, JNJ, etc.  I am not a fan of the deflation hypothesis, never have been.  The price of oil is preventing deflation to this point, and a recovering US economy will make the opposite more likely. 

 

On the other hand it makes an awesome hedge for my derivative rich portfolio.  If the market goes for a nasty tumble FFH will do well.

 

I think the market is going to go for a nasty tumble, and Prem's deflation bet will eventually pan out.  The world is out of bullets and Europe is devastatingly fragile.  There is going to be a nasty liquidity issue in Europe and it isn't far away! 

 

I used to think that Prem was like a chess player 2-3 moves ahead of the rest of us, and Buffett was a chess player 4-6 moves ahead of everyone else.  It's the other way around!  Cheers!

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I think the market is going to go for a nasty tumble, and Prem's deflation bet will eventually pan out.  The world is out of bullets and Europe is devastatingly fragile.  There is going to be a nasty liquidity issue in Europe and it isn't far away! 

 

Is that a relatively new line of thinking (information from the Fairfax weekend)?

 

I don't believe BAC is hitting tangible book this year if that unfolds -- so it makes me think you've recently grown more suspicious of the market.

 

 

 

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I think the market is going to go for a nasty tumble, and Prem's deflation bet will eventually pan out.  The world is out of bullets and Europe is devastatingly fragile.  There is going to be a nasty liquidity issue in Europe and it isn't far away! 

 

Is that a relatively new line of thinking (information from the Fairfax weekend)?

 

I don't believe BAC is hitting tangible book this year if that unfolds -- so it makes me think you've recently grown more suspicious of the market.

 

 

 

 

No, I always said that BAC will hit tangible book by Christmas, barring any significant economic meltdown...see post April 10th below:

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/you-know-what-to-do-but-you-have-to-wait-and-wait/msg74177/#msg74177

 

No, nothing to do with Fairfax or Prem.  We sent out emails to our clients before the meeting saying that we were delaying our quarterly letter, because we want to incorporate all information from our dinner, the Fairfax AGM and our AGM.  We also said that we were seriously concerned with what was happening in Europe. 

 

I thought Europe had the balls to face their own problems head on and throw everything but the kitchen sink at it.  I was wrong, and I think they are taking too long.  The longer they go, the greater the problems will be.  We stated to the attendees at our dinner that Spain was facing conditions similar to the 1930's Great Depression in the United States.  This is a particularly worrisome problem. 

 

We are only watching the beginning of the contraction in GDP in Spain...and then we don't know what happens after that.  I don't think Europe has the firepower to handle this if they allow it to fester.  You have 25% unemployment across the board in Spain, and 50% among young adults.  One in 3 restaurants have closed!  It's a death spiral until they get bailed out...or worse...leave the Union if they can't get the bailout!     

 

I've stated on here numerous times that we are increasing cash over the last three months.  That we are close to 50% cash.  Yet, I have not sold a single share of BAC or WFC.  I think the United States is a safe-haven.  Those stocks may get hit if the shit hits the fan, but they are well-capitalized and U.S. corporations are in good shape.  But things will get volatile again, and it will be messy.  Cheers!   

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....I used to think that Prem was like a chess player 2-3 moves ahead of the rest of us, and Buffett was a chess player 4-6 moves ahead of everyone else.  It's the other way around!

 

It's the other way around?

 

What do you mean? Prem is way ahead of Buffett? RIMM will be a home run? FFH will soon buy BRK????

 

My comments were in reference to macroeconomic issues...re: Uccmal and Twcowfca's comments on deflation and hedges.  Prem is better at that than Buffett.  I didn't say he was better than Buffett at anything else.  Cheers!

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