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SEC Completes Fairfax Investigation!!


oldye
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What is left of the thesis anyway?

 

- Excessive leverage - Nope

- Lack of Liquidity - Nope

- Underreserved - Nope

- Unethical Management - Nope

- Offshore Accounts Hiding Problems - Nope

- Investment Returns Can't Be Maintained - Nope

- Debt At Subs Is High - Nope

- Insurance Businesses Are Crap - Nope

- Runoff Will Require Capital Over Time - Nope

- SEC Investigation Into Reinsurance Activities - Nope

 

What's left?

 

- So-called "Warren Buffett of the North" - Well, he one-upped the master in 2008

- Jim Chanos Says "This Thing Is Going To Zero" - Priceless!

 

Cheers!

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sometime, soon, investors will be saying this is self evident. For now, I'm buying, as much as I can

 

 

What is left of the thesis anyway?

 

- Excessive leverage - Nope

- Lack of Liquidity - Nope

- Underreserved - Nope

- Unethical Management - Nope

- Offshore Accounts Hiding Problems - Nope

- Investment Returns Can't Be Maintained - Nope

- Debt At Subs Is High - Nope

- Insurance Businesses Are Crap - Nope

- Runoff Will Require Capital Over Time - Nope

- SEC Investigation Into Reinsurance Activities - Nope

 

What's left?

 

- So-called "Warren Buffett of the North" - Well, he one-upped the master in 2008

- Jim Chanos Says "This Thing Is Going To Zero" - Priceless!

 

Cheers!

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I will be happy to see the paragraph that communicates this issue disappear from Q and annual reports. You never know what may happen with these sorts of things so I am happy to see it simply go away. Good riddance.

 

I wonder if this issue impacted any institutional investors from buying FFH or ORH? Bottom line is the story continues to get better and better...  

 

 

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I wonder if this issue impacted any institutional investors from buying FFH or ORH?

 

Almost certainly to a degree.  I'm sure the ones who also bailed once most of the CDS gains had been reaped, paid particular attention to that paragraph.  Cheers!

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The stock was down for the day and did pop about $3.50 U.S. on the news. Still quite disappointing to see Fairfax trading where it is at.

 

Personally, I was not really optimistic following the November announcement that all hedges had been removed. Disclosure: I had no position. I thought that they were doing exactly the right thing, but that the market would react negatively since the company was seen as a strong defensive name in what was a killing zone. So I was really surprised to see the strength in the stock in January and early February, but then everything unravelled in late February.

 

Since mid-March they have made a killing in the market, so this lack of hedges fear should have abated, but it did not work that way. I have a really hard time explaining why Fairfax share price is still not reflecting any of their gains. I truly hope that Prem is buying back a lot of shares at this price since they still have plenty of cash at holdco. Do we really need to carry more than $500 million in liquid assets at holdco with no debt due until 2012? Half a billion is quite a cushion especially when you consider that pretty much all of our insurance subsidiaries are over-capitalized.

 

The only explanation I can come up with it is that Fairfax is now seen as boring. Traders and fund managers are trying to squeeze returns so they are buying the volatile names: commodity plays, emerging markets, big U.S. financials. The pattern since mid-March in other P&C insurers is also quite similar.

 

The above could be a decent explanation for FFH recent trading pattern. However, I think that Fairfax and Prem should really question why we are still trading well below book. This made sense before in the dark days, but now that the issues are fixed, I see no reason why we should be trading at any less than peers.

 

Cardboard

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I quite agree Card. I can't help but wonder what's going on behind the curtain of the stock trading. Paranoids and conspiracy theorists (I'm trying hard not to be one) can't help but note Fairfax has engaged in a lawsuit against some of the biggest players in the rigged game Wall St has become since Long Term Capital (aka Cassandra) sounded a warning no one listened to. These guys move trillions of dollars without much in controls. It looks very unlikely, whatever the merits of the suit, there will be anything more than lip service to regulating these modern day robber barons. If I had that much money and someone was suing me and threatening everything I have (plus jail time) I might work to hold the stock down (and let Fairfax know it to an unprovable degree) as a bargaining chip to get Prem to call off (or settle for pennies) the lawsuit.

 

There, I've said it, now I feel better.

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RE: FFH and all the cash they have unallocated....

 

Has anyone made a table of the CDS bonanza (about 500M I think) and the investments made after that period, such as BRIC, Canwest, (maybe more in SFK) ?Torstar and backstopping H&R...

 

I seems to me that that 500M is well spoken for...  The yield is known and the risk varies..  hence the lack of spark in the stock.  It almost always starts to wane in the hurricane season, which will  not really in the headlines till September, starts right now as I recall officially.

 

While the exoginous things outside of the business model have now waned, the overall business model worries will now appear..  combined ratio and all of that.

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My read is Fairfax has a business model that has not been understood or appreciated since the late '90's. In all the reading that I have done recently (quite a lot) OPERATING EARNINGS is pretty much all that analysts pay attention to when they look at insurance/reinsurance stocks. The problem that FFH and ORH have is their combined ratio has not been great; I believe the problem is due to the legacy issues and the repeated addition to reserves from accident years pre 2002.

 

Looking forward I believe underwriting at FFH/ORH will surprise to the upside (as the legacy issues are no longer a concern). Their portfolio yield is much improved given their shift into tax free US muncipals and tax advantaged dividend paying stocks. Bottom line, I expect their OPERATING INCOME to be much improved going forward. Ans of course, I also expect their investment gains to also be MUCH better than their peer group. Add it all up and I expect VERY LUMPY but large gais from FFH/ORH going forward. In another couple of years perhaps they will trade at a premium to their peer group.

 

Of note, book value of FFH today is US$255. Shares todat closed at $248 = P/BV = 0.97. This is much higher than many insurers. Now if you add in expected increase in Q2 BV ($35??) and then the math becomes $248/290 = 0.86. And then add in hidden value of ICICI ($10???) and the math becomes $248/300 = 0.83. How cheap FFH is today depends on what you think happens to equity markets. Bottom line is most analysts cannot handle how FFH operates as they will sacrifice short term profits for long term gains. I do believe FFH will deliver 15% ROE over a couple of years, although the ride will be VERY wicked. ORH has been my favourite the past few months. Although this week I just re-established a small position in FFH.

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Viking,

 

I have book value pegged at around $300 US per share.  This is derived by taking the April 21st numbers.  Collectively, unless I am missing something major this should be relatively intact since then.

 

I think Watsais... also has it pegged at a low of about 290US.  These numbers are without accounting for ICICI and take into account all the CDN equities in the dumpster. 

 

Am I missing something or is your post a little confusing?

 

 

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I agree Al,

 

No one is still valuing Fairfax using March 31 book value. Everyone can go on the SEC website and pull the 13F to see what is going on with their major U.S. holdings. They also disclosed that book value on April 24 was north of $285 and things have gotten better for sure since then. If people are waiting for mid-August to understand what book value will be on June 30 they have blinds on.

 

Cardboard

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Al & Cardboard, my post was meant to more illustrate the increased volatility that we will see with FFH book value going forward given they now hold more risk assets (with hedges removed).

 

Yes, today I estimate BV = $290 to $300 range, making P/BV = 0.84 ish 

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Captured regulators and SEC investigations. Does anyone doubt that a segement of the hedge fund industry were playing a very profitable little game. Take on a largish short position and then turn over a file of concocted evidence to the SEC re their targets. Jim Chanos appears to have an almost god like reputation amongst some because of his call on Enron which he then fed to Bethany Maclean which made her reputation. The smart guys figured out however that you did not have to be right on your thesis, in the post Enron era you just had to call out the hounds and you  made a bunch of dough. I think this is really what should be investigated. In the end fear is a much more powerfull emotion than greed and it is more likely to generate a knee jerk reaction in the mkt place which a manipulative trader can profit from.

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Personally, I was not really optimistic following the November announcement that all hedges had been removed. Disclosure: I had no position. I thought that they were doing exactly the right thing, but that the market would react negatively since the company was seen as a strong defensive name in what was a killing zone. So I was really surprised to see the strength in the stock in January and early February, but then everything unravelled in late February.

 

During Q4 the 30 yr treasury yield was at roughly 2.5% for a while.

 

Nobody knew how much was going from Treasuries to Munis during October... some thought there would be huge bond gains in Q4, but as it turns out the selling of treasuries happened between 3.5% and 3%.  Gains yes, but not as much as some hoped.

 

Some were expecting book value to be better than it was -- once earnings came out, the stock started dropping.

 

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Ericopoly,

 

You are absolutely correct. I had forgotten about this expectation of a large treasury gain. That is what kept the stock going in Jan and early Feb.

 

Once the hope for large treasury gains vanished with q4 announcement combined with a more agressive stance toward equities in what was a very difficult market then the stock took a hit.

 

Oldye,

 

Book value is not everything, but it sure is important for financial companies as it has been demonstrated so many times during this financial crisis. If this value is good, it is also a floor or what investors could expect upon liquidation.

 

Personally, I prefer to value a firm based on earnings or free cash flow. I don't know how long you have been following them, but I would say that Fairfax has earned terrible returns over the past 10 years. They were supposed to earn on average $30/share a year in the early part of this decade and we know now how this turned out.

 

I estimate current earning power in the $35-40 range based on their current structure which by the way is still short of what is necessary to reach their goal of 15% a year growth in book value. This estimate is based on some assumed returns over time on their portfolio which yours is as good as mine. Considering the uncertainty surrounding these estimates, it becomes quite understandable why the Street is keeping a close eye on their book value.

 

Cardboard

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To be fair if you are valuing the company using BV, you are doing it wrong. 

 

I'm not valuing the company with book value.  Gains do flow to book value though, and when people were expecting a higher book value, it's another way of saying they expected more gains.

 

If you are ignoring gains in valuing the company, you are doing it wrong.

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