Fairfax 3rd Q Results!

[Uccmal]

Thanks Gio, I should have looked at Rim filings before commenting. 

 

I was kidding about the long term nature of my investment.  Although it doesn't that long term, since I have held FFh in varying forms and amounts since 1997-98, continuously. 

[giofranchi]

anybody listen to the conference call?

 

was that you gio who called as the guy had been invested in 2010 and feels like we may be headed for another 7 lean years?

 

 

Frank,

No! It was not me! ;) I try to have no feelings about businesses… ;D No, really: I don’t care how FFH will perform next year or in 2014. All I care about is what they are doing. And I don’t like exposure to market risk, when general stock prices are high and debts are still dangerously unmanaged all over the developed world. Much better to be patient and to concentrate on underwriting profitably. It is just as simple as that. That's why I like what they are doing.

Of course, I also don’t jump in and out of stocks. I am sure you are much better than me at doing that, and so you will time the re-entry point in FFH quite satisfactorily! Good for you! :)

 

giofranchi

 

 

Anyway Frank,

I think it might be worth repeating Mr. Watsa’s answer to Mr. Shezad, because it is a great answer, and because it should give some food for thought to all who think they will have a chance in the future to jump on board at a price well below book vale, just because FFH has traded at a discount to book value in the past...

 

Mr. Watsa:

“Yes, that was -- Shezad, that's a good question. And so the first thing, just to say you is we've always focused on the long-term and when we went through our 7 lean years, Shezad, we were turning around our company. We were turning around Crum & Forster and the -- take reinsurance and all of that, and that took sometime to turn it around. Today, our companies are in excellent position, they're underwriting-focused, they are well reserved, they've cut back in the soft markets and they are well- positioned to expand significantly at the right time. And then as we are expanding today, you're seeing that in Zenith, and you're seeing it in Crum & Forster, you're seeing it on Odyssey. And the Canadian market's always lag -- have lagged in the past and you'll see it in time in Canada. So underwriting operations are very well-positioned, and our investment philosophy and position -- they're always long term. So when we had credit default swaps in the past, it took a few years for it to work out and as you know, we made a lot of money. And so right now, it's very important not to reach for yield because if you do reach for yield, if you put money into the stock market at these prices, you could suffer permanent losses. We'll take temporary losses but we don't like taking permanent losses. So I don't think we'll be at a position where our results will be poor for a long period of time but you're right for the last year and a half, it hasn't been good. But our results for year ending 2011, for the 5 years, is among the best in the business and of course, for the 26 years ending 2011, it's better than anyone else in our industry. So we're focused on the long-term and we continue, we've always been focused on the long-term, and continue to be focused on doing well for our shareholders always.”

 

giofranchi

[obtuse_investor]

As a side note, for folks building or managing a portfolio, FFH is an excellent hedge at these current prices.  Heads you win, tails you won't lose too much.

 

My sentiments exactly.

 

Mr Watsa and his team are in the deflationary camp, and I am leaning that way too. I am no macroeconomist, but I have read enough financial history to identify when it is about to repeat itself.

 

If and when the effects of deflation hit, stocks would perform very poorly. There is real risk of permanent loss of capital for folks buying into stock market today. There are definitely deep value names out there, but the number keeps on getting smaller and smaller. FFH's CPI linked instruments should do very well in that environment.

 

If FFH falls 10% [or more] below book, it would be worthy investment for the long haul with a healthy margin of safety.

 

Disclosure: I have a small position in FFH; waiting for opportunity to increase it significantly

[SharperDingaan]

Just a reminder that you make money in FFH by trading the P/BV ratio, NOT by taking a buy and hold approach.

 

Most would look for next weeks East Coast weather to generate some very big claims, & a forcing of FFH's P/BV done further because of the re-insurance exposure. Add in market uncertainty over the ability of the US election winner to quickly punt the fiscal cliff ... & it's not pretty. Six month's out it's getting into AGM time, a nice market hardening to pay for next weeks probable losses, & some likely significant gains from the short hedges.

 

A sale & repurchase, or a delayed purchase & sale, could well be very rewarding - & even spin off some cashflow from FFH's annual dividend.

[shalab]

Gio - thank you for your analysis. I dont see investments/share moving anywhere in the past nine months - can you explain the discrepancy?

 

 

[giofranchi]

Gio - thank you for your analysis. I dont see investments/share moving anywhere in the past nine months - can you explain the discrepancy?

 

shalab,

I am not sure I understood your question correctly: with investments/share you mean the value of the Portfolio investments divided by the number of shares outstanding? If so, why should it have changed? As far as I know, investments/share could increase in four ways:

1) Increasing shareholders’ equity

2) Increasing insurance contract liabilities (increasing float)

3) Increasing debt (or issuing more preferred stocks)

4) Reducing the number of shares outstanding

None of them has changed much during the first nine months of 2012. Actually, a Cash Flow Statement could be derived by the changes that occurred in the Balance Sheet from December 31, 2011 until September 30, 2012. And see exactly how investments increased by $263 million.

But I guess that is not what you are asking… right?

 

giofranchi

 

[link01]

Gio - thank you for your analysis. I dont see investments/share moving anywhere in the past nine months - can you explain the discrepancy?

 

i think the investments per share question misses the point gio was trying to make. which is simply that, ex the short hedges & the associated short term unrealized losses & ex the rimm losses fairfaxes long only equity portfolio has appreciaTED ABOUT 20 ANNUALIZED FOR THE 9 MONTHS ENDED 9-30-12. not too shabby on the long side. timing on the short side has obviously hurt. ( and my kitten just stepped on my CAPS key, which i'm not inclined to edit... :-\

[LC]

Gio - thank you for your analysis. I dont see investments/share moving anywhere in the past nine months - can you explain the discrepancy?

 

i think the investments per share question misses the point gio was trying to make. which is simply that, ex the short hedges & the associated short term unrealized losses & ex the rimm losses fairfaxes long only equity portfolio has appreciaTED ABOUT 20 ANNUALIZED FOR THE 9 MONTHS ENDED 9-30-12. not too shabby on the long side. timing on the short side has obviously hurt. ( and my kitten just stepped on my CAPS key, which i'm not inclined to edit... :-\

Ugh...I can't stand this type of argument...it's like saying, "Well if I didn't have a large portion of my portfolio in Enron, I'd be up 40% for the year!"

[giofranchi]

Gio - thank you for your analysis. I dont see investments/share moving anywhere in the past nine months - can you explain the discrepancy?

 

i think the investments per share question misses the point gio was trying to make. which is simply that, ex the short hedges & the associated short term unrealized losses & ex the rimm losses fairfaxes long only equity portfolio has appreciaTED ABOUT 20 ANNUALIZED FOR THE 9 MONTHS ENDED 9-30-12. not too shabby on the long side. timing on the short side has obviously hurt. ( and my kitten just stepped on my CAPS key, which i'm not inclined to edit... :-\

Ugh...I can't stand this type of argument...it's like saying, "Well if I didn't have a large portion of my portfolio in Enron, I'd be up 40% for the year!"

 

My original point was actually a little bit different: I wanted to point out how the RIM investment had been over-publicized. I started saying that a 14% annual return was achieved by FFH on the long side, RIM included. So, anyone who was too worried about the losses incurred with the RIM investment, just missed the whole picture.

On the short side, maybe the timing wasn’t perfect. But I really couldn’t care less… I agree 100% with Mr. Watsa’s strategy and I am willing to be patient together with him. I am sure I am in very good company! :)

 

giofranchi

 

[twacowfca]

Gio - thank you for your analysis. I dont see investments/share moving anywhere in the past nine months - can you explain the discrepancy?

 

i think the investments per share question misses the point gio was trying to make. which is simply that, ex the short hedges & the associated short term unrealized losses & ex the rimm losses fairfaxes long only equity portfolio has appreciaTED ABOUT 20 ANNUALIZED FOR THE 9 MONTHS ENDED 9-30-12. not too shabby on the long side. timing on the short side has obviously hurt. ( and my kitten just stepped on my CAPS key, which i'm not inclined to edit... :-\

Ugh...I can't stand this type of argument...it's like saying, "Well if I didn't have a large portion of my portfolio in Enron, I'd be up 40% for the year!"

 

My original point was actually a little bit different: I wanted to point out how the RIM investment had been over-publicized. I started saying that a 14% annual return was achieved by FFH on the long side, RIM included. So, anyone who was too worried about the losses incurred with the RIM investment, just missed the whole picture.

On the short side, maybe the timing wasn’t perfect. But I really couldn’t care less… I agree 100% with Mr. Watsa’s strategy and I am willing to be patient together with him. I am sure I am in very good company! :)

 

giofranchi

 

 

Giofranchi, you have a good point.  This view on the investing side is similar to tallying up an insurance company's losses into two columns: attritional and catastrophe.  The cat losses will be lumpy, but a negative trend in attritional losses is much more cause for concern than an occasional, but manageable catastrophe loss.  :)

[giofranchi]

Gio - thank you for your analysis. I dont see investments/share moving anywhere in the past nine months - can you explain the discrepancy?

 

i think the investments per share question misses the point gio was trying to make. which is simply that, ex the short hedges & the associated short term unrealized losses & ex the rimm losses fairfaxes long only equity portfolio has appreciaTED ABOUT 20 ANNUALIZED FOR THE 9 MONTHS ENDED 9-30-12. not too shabby on the long side. timing on the short side has obviously hurt. ( and my kitten just stepped on my CAPS key, which i'm not inclined to edit... :-\

Ugh...I can't stand this type of argument...it's like saying, "Well if I didn't have a large portion of my portfolio in Enron, I'd be up 40% for the year!"

 

My original point was actually a little bit different: I wanted to point out how the RIM investment had been over-publicized. I started saying that a 14% annual return was achieved by FFH on the long side, RIM included. So, anyone who was too worried about the losses incurred with the RIM investment, just missed the whole picture.

On the short side, maybe the timing wasn’t perfect. But I really couldn’t care less… I agree 100% with Mr. Watsa’s strategy and I am willing to be patient together with him. I am sure I am in very good company! :)

 

giofranchi

 

 

Giofranchi, you have a good point.  This view on the investing side is similar to tallying up an insurance company's losses into two columns: attritional and catastrophe.  The cat losses will be lumpy, but a negative trend in attritional losses is much more cause for concern than an occasional, but manageable catastrophe loss.  :)

 

twacowfca,

I hadn’t thought about it that way, but as always yours is a very good comment and comparison!

By the way, what’s your take on the damages Sandy is going to cause?

Thank you very much,

 

giofranchi

[Palantir]

In the US there seem to be two tickers for Fairfax - FFH and FRFH, what is the difference? Sorry for the n00b Q.

[racemize]

In the US there seem to be two tickers for Fairfax - FFH and FRFH, what is the difference? Sorry for the n00b Q.

 

FFH is the TO listing and FRFHF is the pink sheets.  With fidelity, I trade FRFHF, which actually results in them going and buying the FFH on the toronto exchange for me.

[StubbleJumper]

In the US there seem to be two tickers for Fairfax - FFH and FRFH, what is the difference? Sorry for the n00b Q.

 

 

 

FFH trades in $Cdn, while FRFHF trades in $US.

[obtuse_investor]

By the way, what’s your take on the damages Sandy is going to cause?

Thank you very much,

 

giofranchi

 

Fairfax largely would have an exposure via their reinsurance operations.

[ShahKhezri]

From KW:

On March 13, 2012, we announced a €250 million (approximately $325 million) capital commitment from Fairfax Financial Holdings ("Fairfax") to acquire real estate and loans secured by real estate in the United Kingdom and Ireland. Investments under this program require Fairfax's agreement to participate on an investment-by-investment basis. As of September 30, 2012, we have purchased two investments within this platform, the historic 210-unit Alliance Building in Dublin, Ireland, located adjacent to Google's European headquarters, for $50.0 million and Brooklawn House, a Dublin office property, for $18.5 million. We invested $25.7 million of our equity in the investment vehicles that acquired these assets.

 

Since Fairfax became our partner in the Japanese apartment portfolio in September 2010, we have distributed a total of $51.5 million, of which our share was $24.0 million.

 

[Parsad]

From KW:

On March 13, 2012, we announced a €250 million (approximately $325 million) capital commitment from Fairfax Financial Holdings ("Fairfax") to acquire real estate and loans secured by real estate in the United Kingdom and Ireland. Investments under this program require Fairfax's agreement to participate on an investment-by-investment basis. As of September 30, 2012, we have purchased two investments within this platform, the historic 210-unit Alliance Building in Dublin, Ireland, located adjacent to Google's European headquarters, for $50.0 million and Brooklawn House, a Dublin office property, for $18.5 million. We invested $25.7 million of our equity in the investment vehicles that acquired these assets.

 

Since Fairfax became our partner in the Japanese apartment portfolio in September 2010, we have distributed a total of $51.5 million, of which our share was $24.0 million.

 

Fairfax is going into the real estate business with some flair!  I think they should just acquire all of KW and bring Bill McMorrow in house.  I hope Bill comes to our dinner this year, because I think our guests are going to have plenty of questions.  Cheers!

[Uccmal]

I have been following the KW transactions with some interest.  Mcmorrow's record is incredible.

 

I plan on looking closer at it.  CRE is really beyond my competence at the moment.

 

It trades at 1.6 BV.  Does anyone have a feel for this?