ORH Revisited

[Viking]

Here is my updated analysis regarding ORH. I have also enclosed a thread from April where Smazz copied over some well thought out comments from Mungerville which you also may want to review: http://cornerofberkshireandfairfax.ca/forum/index.php?topic=459.0

 

Bottom line, I expect Q2 BV to be in the $49 range. With the stock trading at $39.80 July 10th the P/BV = 0.81

- the key risk that I see is the volatility in the stock holdings as we could easily see a 20 or 30% fall in the general markets.

- the key opportunity is that we see reinsurance (and insurance) pricing continue to harden.

- the wild card is that FFH announces it is buying the 30% of ORH it does not own.

- another wild card is we get some costly catastrophies… yes, this would hurt short term. But as Mungerville has pointed out, this would hit FFH competitors much harder (as they are not as well capitalized) and a hard market would likely happen instantly and ORH would actually benefit over the medium term.  

 

Regarding Q2 BV:

- Op Income = +$1.60

- Investment Gains = +$6.00 (extrapolated Apr 24 number provided by FFH)

- Currency Adjustment = +$0.50

- Interest & Other Exp = -$0.25

- Total = $7.85

- Taxes = 33% = $2.60

- Earnings = $5.25

 

Q1 BV = $43.80

Q2 BV = $49.05

 

Please note, my numbers above are trying to estimate the change in BV at quarter end. I do not expect realized investment gains of $6.00, but rather expect that to be the approximate number of mark to market gains, some of which will flow through to net income and the majority to OCI.

 

Regarding average earnings for the next 5 years:

1.) Underwriting: CR = 98 = $50 million

2.) Interest & Dividends = 4.54% x $7.5 billion = $340 million

3.) Operating Income = $390 million

4.) Net Gains on Investments = 4% x 7.5 billion = $300 million

5.) Interest Expense = $33 million

6.) Other Expense = $20 million

7.) Pre-tax Income = $637 million

8.) Tax Rate = 33% = $210 million

9.) Net Income after Taxes = $427 million = $7.09/share = 16.2% growth in BV

10.) Shares Outstanding = 60,243,000

11.) Book Value per Share (Mar 31) = $43.80

12.) Share Price (July 10) = $39.80

 

Regarding estimates, I am looking for a 5 year average and I am trying to be reasonably conservative:

1.) Underwriting = 98%. The market for reinsurance is beginning to harden and the insurance market is flat. My guess is the reinsurance and insurance markets will harden as we enter 2010. This should give ORH a 5 year average CR of 98.

- Adverse Development: since 2001 ORH has had favourable = $868.4 million and unfavourable = $174.2 or net favourable development = $694.2 million. The issues regarding adverse development are really for accident years prior to 2001. Most importantly, since 2004 the cumulative development has been decreasing each year and was +$10.1 million in 2008. Bottom line, looks to me that the adverse development issues are largely behind us and one could reasonably expect for reserve redundancies on a cumulative go forward basis (perhaps $50 million this year if the trend of the past few years continues) which would reduce their CR to 96. See p. 22 of ORH annual for more details.

- if analysts become more comfortable with underwriting at ORH we can expect to see ORH trade at a multiple to book greater than 1.

2.) Interest & Dividends: From the Q1 conference call 'In the first quarter of 2009, the tax equivalent yield on our portfolio was 4.54%.”

- the major changes to the portfolio during Q1 were sales of remaining short term treasuries (yielding nothing) and the purchase of corporate bonds and stocks (primarily Wells Fargo and USB) which should result in small increase in Q2 portfolio yield.

3.) Net Gains on Investment: Since 1986, Hamblin Watsa Total Return on Avg Investments has been 9.8% (see p 142 of FFH Annual Report) and for the past 10 years I estimate it has been about 9%. Let’s assume the return going forward is 8.5%; the current portfolio yield is 4.5% so our assumption is for a Net Gain on Investments going forward of 4%.

 

Other notes:

FFH Asia: ORH also owns 26% of FFH position in ICICI Lombard. It is carried on the books at $67 million. I think their share is worth perhaps twice that meaning BV is understated by perhaps $0.50 to $1.00. See p. 123 of ORH AR.

Balance Sheet: ORH has low amount of debt ($489 million) and no maturities are due before 2013.

ORH Dividend Capacity: ORH has the ability to pull $544.8 million in dividends in 2009 from Odyssey America (sub) if they so chose. I believe they plan to leave the cash with the sub and to utilize to grow their business as the markets harden in the future. Bottom line, this value is not built into the above analysis (i.e. they could pull this money up and buy back another 10 million shares to grow shareholder value). See p. 83 of ORH AR.

FFH Buyout: FFH has to be looking at how it can buy the 30% of ORH it does not currently own (they need at least US$1 billion). ORH is dirt cheap and poised to grow significantly; I am not sure how FFH can justify spending its money on anything else at present. Further, I think ORH can use the $545 in dividend capacity to help fund this (I think NB did this to help cover their purchase by FFH). Perhaps this will be the next rabbit we will see FFH pull out of the hat.

 

[Smazz]

You would have to think they are buying back at some rate.

They have tea leaves we do not as yet so this should be interesting.

[ERICOPOLY]

I am not sure how FFH can justify spending its money on anything else at present.

 

 

I don't see why they should buy ORH at the 1.2x (minimum) multiple you likely expect when they can instead purchase FFH shares for way less than that.

 

[Viking]

Eric, I agree that FFH purchasing their own shares would also be a very good move. They had the same opportunity when they bought back NB... why pay 1.2xBV rather than purchase FFH back then?

[ERICOPOLY]

Eric, I agree that FFH purchasing their own shares would also be a very good move. They had the same opportunity when they bought back NB... why pay 1.2xBV rather than purchase FFH back then?

 

Somebody at the AGM (summarized here on this board) explained that taking the rest of NB was done to improve holdco cash flow.  Same could be said about ORH I suppose, but not clear to me if the new NB cashflow is enough to make them comfortable.

 

I simply want ORH to at the very least buy another 9.5% (roughly) of it's shares so that FFH owns 80% -- just in case we need the tax sharing again one day.  That could be nearly completed by now except for the fact that they haven't repurchased a single ORH share (that we know of) since Q3 2008 I believe.

 

 

[oldye]

Regulators told insurance companies that they need to maintain maximum capital levels, that is at least in part an explanation for not buying back shares below 38.  If they kept going at their old rate they'd be close if not past 80% by now, but for all we know they bought back shares since so lets keep fingers crossed. 

[StubbleJumper]

At this point, maintaining a liquid market for ORH is becoming an increasing concern.  If the share buybacks continue, there will not be enough of a float remaining to keep a decent market for us to sell our shares.\

 

At this point, I would suggest that I would like FFH to do a share exchange for the remainder of the ORH float that they do not currently own.  Both FFH and ORH are selling at a healthy discount to book, so there is not much of an advantage or disadvantage for current shareholders to replace their ORH shares with FFH shares....but it may have tax advantages to do a share exchange rather than a cash payout (like NB).

 

So FFH's shares outstanding would increase by what?  2.0m shares?  2.5m shares?  No biggie.

 

SJ

[woodstove]

All the back-and-forthing with Fairfax's ORH ownership percentages, as well as the Northbridge IPO/secondary/buyback, has been harmful to Fairfax's long term positioning.  Profitable near term (2-3-4-5 years maybe) but not building the base for a bedrock financial institution.

 

What I think might be best, would be for Fairfax to do something like XOM/IMO relationship, which is targetted at 69.6 pct ownership.

 

For example, Fairfax might target to own 73 pct of ORH (or whatever).  Establish a stable dividend policy for ORH to make it a safe haven for those in US markets looking for income and store of value.  Genuinely excess capital in ORH can be used for buybacks, in which Fairfax participates pro-rata to maintain its 73 pct ownership.

 

The result is long term ORH share price appreciation, which perception strengthens the perception of Fairfax.  With consequent benefits should there be a need to raise capital.

 

If ORH needs additional capital, provide it thru Fairfax via joint participation - similar to how XOM will take some part of an IMO-managed project as well as its 69.6 pct participation via IMO ownership.

 

The above takes time (decade or more) and discipline to resist impulses to do near-term financially advantageous shuffles.  But if/as Fairfax grows to become one of the pillars of Canadian financial structure, it must draw in participation from diverse groups of investors, including those individiuals and funds seeking income and store of value.

 

(And that is why I think Northbridge buyout was a strategic error.  Cut off participation from an important segment of investing public.)

[oec2000]

These are what I see as the pros and cons of taking ORH private.

 

Pros

 

a) Having all the key subsidaries wholly-owned allows for more efficient allocation of capital. You can transfer capital in or dividend surplus capital out as required without having to worry about fluctuations. Since ORH is very well capitalised (as was NB), its surplus capital could be more easily paid out to FFH if it were 100% owned. As in the NB takeout, a significant portion of the takeout could be funded by ORH.

b) Reduce costs and inconvenience of having an additional listed company. (FFH gets 100% benefit from cost reduction by buying out less than 30% of the company.)

c) ORH is a good and cheap investment that FFH knows very well. When markets recover eventually, it may no longer be possible to buy it out so attractively.

d) Tax planning flexibility that comes with wholly owned subsidiary.

 

Imo, these issues factored into the decision to privatise NB at 1.3x book rather than buying back FFH stock and should continue to be the driving factors to privatise ORH. If NB continues to generate 15-20% ROEs or similar growth rates in book value, I don't see how the takeout was a strategic error.

 

Cons

a) An all-cash privatisation will reduce the overall capital available to the group. This may constrain FFH from taking advantage of a hardening of the insurance market.

b) Having a listed subsidiary provides the group with some flexibility when there is a need to raise funds.

 

The decision will be driven by mgmt's assessment of capital requirements as well as the ratings agencies'/market perception of capital adequacy. At the AGM, I believe Prem alluded to how investment performance could significantly affect their capital position. After removal of the equity hedges in Q4 08 and with the volatility of the mkts in Q408 and Q109, mgmt may have thought it prudent to conserve capital and refrain from the ORH buybacks. With the recent recovery in the markets, they may feel more comfortable to resume the buybacks.

 

Personally, I do not agree with StubbleJumper's suggested route of buying ORH with cheap FFH shares especially as you will have to pay a premium for the ORH shares for the privatisation to succeed. It makes more sense to use their investment gains to fund any ORH purchases. The Q2 earnings report should provide interesting clues as to where they are heading.

[StubbleJumper]

 

The decision will be driven by mgmt's assessment of capital requirements as well as the ratings agencies'/market perception of capital adequacy. At the AGM, I believe Prem alluded to how investment performance could significantly affect their capital position. After removal of the equity hedges in Q4 08 and with the volatility of the mkts in Q408 and Q109, mgmt may have thought it prudent to conserve capital and refrain from the ORH buybacks. With the recent recovery in the markets, they may feel more comfortable to resume the buybacks.

 

Personally, I do not agree with StubbleJumper's suggested route of buying ORH with cheap FFH shares especially as you will have to pay a premium for the ORH shares for the privatisation to succeed. It makes more sense to use their investment gains to fund any ORH purchases. The Q2 earnings report should provide interesting clues as to where they are heading.

 

 

Well it's really a two-staged decision:

 

1) Would buying the 17m ORH shares be a "good deal?"

2) How would we pay for them?

 

For the first question, it seems that most of us concur that ORH is a splendid deal at current market prices.  Obviously, FFH would not be able to buy up the entire 17m shares for current market prices, as too many of us know that they are worth far more!  So what sort of premium would be required?  Could FFH get the shares for $45 cash?  Or would they have to pay $50 cash? Personally, I wouldn't vote yes for an offer of $45 cash as this would be lower than what I think they're worth....and then I'd have to pay a pile of capital gains tax for the privilege of having my shares "stolen".

 

On the question of how to pay for the ORH shares, there are a few options.  You could use $800m of holdco cash to buy the shares and then issue a big dividend from ORH to FFH to replace a good chunk of that $800m.  This would weaken the financial strength of both the holding company and the ORH sub.  Or, you could go to the market and borrow a large chunk of the $800m (let's say issue $500m in bonds), but it would probably take a 10% interest rate to attract that kind of money and you would still be burning some holdco cash (perhaps about $300m).  Or you could do a share exchange by giving FFH shares in exchange for ORH shares.

 

So here's my question to you:  As an ORH shareholder, if FFH were to give you a choice of $50 in cash or $45 in FFH shares, which one would you take?  As an ORH shareholder, I'd be roughly indifferent from a value perspective (actually, the FFH shares might be worth a bit more than $50...).  But from a tax perspective, I might be slightly better off with the share exchange because I would have to give Revenue Canada a small chunk of the $50 in cash...

 

From the perspective of existing FFH shareholders, which would be preferable?  A $50 offer financed by debt at 10% interest?  A $50 offer financed by existing cash holdings?  Or a $45 offer financed by (underpriced) FFH shares?  IMO, the "price" for all three options is high, but for the first two options the price is felt through increased financial risk to FFH (which we've experienced acutely in recent years).  For the third option, the cost is felt through dilution of existing FFH shareholders (which we have also experienced in recent years).  Personally, I'd be more comfortable with modest dilution rather than heightened financial risk during this period of market uncertainty.

 

In any case, this is a good "problem" to have.  It's nice to discuss the many ways that FFH could be opportunistic rather than discussing how they must be defensive!

 

SJ

[Partner24]

There is also a good alternative to buy ORH...it is to not buy it.

 

Balance sheet comes first. We already bought back NB recently and we have a decent margin of safety with our holdco cash to weather some storms if they were to occur. That is a huge asset to have.

 

 

And, as a FFH shareholder only, to issue FFH shares to buy back ORH is not the kind of deal that would be the best use of our capital IMO. We would issue shares of a very diversified insurance business, both geographicaly and by insurance products, at a huge discount. Yes, we could get the remaining of ORH in return, but the ORH discount does not seems to be wider than FFH, so I don't see the added value here.

 

 

[ERICOPOLY]

I wonder how this conversation about ORH buyout would be different if nobody here owned ORH, and instead only held FFH.  I hold some of both, but mostly FFH.  My heart is where my treasure lies, and it isn't screaming for paying above book (via ORH) for the same assets that can be bought below book (via FFH).

 

[oec2000]

The ideal strategy, imo, would be for ORH to continue to take advantage of Mr Market to buy back shares at a discount to book until FFH's holding is sufficiently high (say, 80+%) that the privatisation premium would not cost a lot in absolute terms. For e.g., a $10 per share premium on 10 m shares is only $100m. Apart from the fact that $100m is less than 4% of ORH's book value, this would be offset by the annual savings in compliance and inconvenience costs of being listed.

 

Others who were at the AGM might be able to correct me but Prem may have said that they had the capacity to double the insurance business if rates were attractive enough. So, it does not appear to me that capital is a constraint with the exception of short term fluctuations in the value of investments.

 

In any case, there is always the option of cutting back on the insurance business if it was felt that the capital cushion was reduced because of a privatisation. This has the added advantage of improving underwriting quality and results.

 

Disclosure: My exposure is largely in FFH but I do have a very small position in ORH.

[Uccmal]

I think the present structure can work very well:

 

It offers greater financial flexibility.  ORH can tap the capital markets on an as needed basis with greater transparency.  If FFH deems that the ORH has alot of excess cash it wont use, then periodic dividends can be used to pay all the shareholders, or stock buybacks can be executed as has been happening.  When the shares are expensive more can be issued either by selling from FFH, or by ORH from treasury. 

 

If FFH has need of capital they can sell some ORH shares, keeping them within a certain range. 

 

A good working example of the present structure is Power Financial or Power Corp. 

 

Other less tangible examples of the PWF structure are that more than one CEO, CFO, COO get experience running a public company.  This helps to create alot of bench depth which we have seen FFH capitalize on in the past.

 

Right now FFH and ORH have the best of both worlds, IMO. 

 

One reason I like substantial dividends is that it forestalls the big company growth issues that are now affecting Berskshire. 

[Viking]

Regarding buying back ORH, I think FFH should first build up their cash reserves. Q2 will hopefully show this happening as C&F sent $100 million after Q1 close (as reported previously by Ben H I believe)and my guess is runoff can afford at least $100 million special dividend given all the realized gains from last year. We also know in Q2 very large gains in the equity portfolio will be reported (if any were realized we will see). Investment gains may be very large over the next 12 to 18 months. ORH also has the ability to buy back more shares. As earnings continue and if the hard reinsurance market is delayed utilizing surplus to buy back stock (below book) makes sense to me. FFH could find itself in another 12 months with much more cash on hand and fewer shares of ORH outstanding to purchase.

 

The risk to FFH is BV for ORH will grow rapidly and perhaps more quickly than for FFH. If reinsurance pricing continues to firm more quickly than insurance pricing ORH's share price may also command more of a premium than FFH. Holding off may result in FFH paying materially more to bring ORH back in.

 

What I find interesting is NB did nor repurchase any shares (of significance) in period preceding the FFH aquisition (6 or was it even 12 months) even though they were also trading very cheaply and they had the cash to do so.

 

I do not expect FFH to buy back ORH. However, it would not surprise me if they did.

 

Currently I hold much more of ORH that FFH because:

1.) cheaper on P/BV (ORH=0.93; FFH=0.96)

2.) I expect current underwriting at ORH to be more profitable in near term (reinsurance doing better than insurance)

3.) ORH portfolio yield is higher

4.) I expect near term investment portfolio gains at ORH to outperform FFH

5.) I expect pricing trend for reinsurance is better than insurance

6.) I expect ORH to report reserve redundancies higher than FFH

Yes, ORH is much more exposed should a catastrophe occur. And the stock is quite illiquid and thinly traded which has resulted in the past in it staying undervalued for long periods of time.

I like FFH; I just like ORH a little more right now (even given the higher risk).

[Guest Dazel]

Hello everyone! Sorry for not posting for sometime...We have certainly been extremely busy. I have been checking in from time to time and appreciate all of the posts you have written...Anyways...

 

There is one thing that we have realized from our time watching Fairfax is that with regards to internal transactions there is no one better on the planet. Anyone that has been around on the other end of the lean seven years that ended a couple of years ago...know how incredibly smart and agile the Fairfax team is.

 

We believe that the synergies between Northbridge and Fairfax were obvious...Northbridge was extremely conservative with virtually no debt...it was a forgotten entity to most in the canadian market place and they really got a fair deal when they bought it...

 

We also believe one of the main drivers of the speed of the purchase was a currency opportunity...ie the US dollar spiked during the crisis when they announced the deal and they really bought it at exactly the right time...We believe on US dollar terms they stole Northbridge...incredibly smart by Fairfax.

 

Orh has different characteristics and a seperate shareholder base...US based...We believe that while Fairfax and ORH are going to be opportunistic going forward in both share buy backs and the possibility of Fairfax subs purchasing more shares of ORH (not sure on limits there)...It does not make sense to take it private right now...actually both ORH shareholders and FFH shareholders will benefit longterm by ORH shares trading this low for awhile...Why?

 

Fairfax finished 2004 at about $170US ($230cdn) and ORH finished at about $22US....

 

We are now at about $246US (283cdn) and $40.50 US...It is obvious which stock you would rather own during that period...Going forward we believe that Fairfax and ORH will likely trade in tandem...Which will benefit both FFH holders because any increase in ORH shares adds to Fairfax book value. ORH shareholders get a different company profile than FFH in a global reinsurance company. ORH gives FFH greater financial flexabilty at the current time as a public company because it has access to the public markets as a standalone company that has performed extremely well over the last number of years. In the eyes of the ratings agencies Fairfax has a liquid postion in ORH that in our opinion will grow significantly over the long term. ORH shareholders will benefit from this as will Fairfax.

 

 

 

We see both as the best opportunities in the market...Mr. Market has made an error here and it will be corrected.

 

Dazel.

 

 

 

 

[Vinayd]

Well, I'm still in the camp that FFH is eager to take ORH private versus other opportunities for a couple of reasons.

 

1. The first, and overwhelming, is that as much as we attempt to overcome (...and it is a lifelong process), we continue to think as equity analysts and not private business owners. Business owners are passionate about their business, and feel it a part of their family. They own it forever and pass it on to their children or charity for future generations.  What is Fairfax?  How would the owner define it's business entity. What are the components or 'string' that tie Fairfax owners/shareholders/employees to it?  This question goes beyond the quarterly short term price fluctuations of the individual pieces.  FFH, to it's owners, is defined by the success and challenges of it's 4 major on-going components: Northbridge, C&F, OdysseyRE & Hamblin Watsa.  This is how they lay it out in their quarterly and annual statements, and this is how in their minds they own and define FFH. This is what FFH business owners own for the long term.

 

The reason for taking NB private was clearly to get back what they had to 'rent-out' during difficult times. If FFH management felt that they needed improved capital flexibility at the sub-level, or greater transparancy of their value, and only thought of these entities as investment vehicles -- then the correct decision would have been to actually take a piece of C&F public during 2007 to complete this strategy.  By taking NB private and proactively reducing ORH public shares by 30%, the remaining small float of ORh does little in providing capital flexibility and transparancy on FFH's ultimate value.

 

FFH had to sell part of their main house in dire times, and they are taking the opportunity to buy it back.  They have shown this with NB and may likely continue with ORH. 

 

2. Regarding whether to buy more FFH shares at below book versus buying ORH at 1.2.  Again, although an investment firm mindset could buy $100M-$200M worth of ORH at 0.9X book, but likely could not buyout the remaining shares at 0.9X book. 1.2X book of the rest of ORH is a good deal long term.  It makes their house whole again, and better defines their business entity.  Obviously, there were many other better investment deals in Dec/Jan than buying NB at 1.3X book (and a $400M investment is significant even for FFH -- so there was more to it than an investment decision).

 

3. Now the timing of taking ORH private, in my opinion, may only occur post Dec 2009. Clearly, FFH will need dividend capacity from their subs to help out on this purchase.  FFH cannot get clearance for their subs' dividend until the regulators validate their 2009 reserve levels in December 2009.  This is likely why the timing of NB occurred in January, and could be repeated.

 

3. The real catch in blocking FFH from purchasing ORH may more likely be due to FFH's strategy on how to handle their upcoming debt maturities.  Although debt maturities at sub level and holding company don't occur until 2013, This is only 3 years away and it is significant. ORH has significant maturities in 2012-2013, C&F has debt maturities in 2013 and FFH holding has some in the 2013-2015 range.  IF FFH wants to significantly reduce their outstanding debt they will need to start building cash now, and therefore may not purchase ORH.  If they plan to extend a significant portion, they will likely take ORH private.  I think this is the key long term decision FFH is mulling. With the size of float, cash holding, number of employees, etc. FFH needs to be making decisions now that may be implemented in 2-3 years. So, the decision of less long term leverage versus making your house whole again is the major decision for business owners.

 

cheers,

Vinayd

[Crip1]

"I expect near term investment portfolio gains at ORH to outperform FFH"

 

Viking, can you explain the rationale for this? I am not agreeing, or disagreeing, just seeking to understand the reasoning.

 

-Crip

[Viking]

Crip, to state the obvious, I expect ORH investments to outperform FFH on a percent basis (not absolute). As well, I expect the outperformance to be a small amount. The reason I like ORH more right now is when I add all the 'small' amounts up (underwriting, income, investments gains, pricing power) I get a large enough number to like ORH a little more (given it is also trading at a lower P to BV ratio).

 

this is not an exact science. FFH stated in their Q1 earnings release that as of April 24, investments had appreciated by $900 million; equities by $700 and debt by $200. C&F also communicated that investments had appreciated by $230 million; equities = $152 and debt = $78 million (p 34 of their 10Q). ORH simply said investments had appreciated a 'material' amount more than the Q1 loss in BV.

 

Here is my logic:

1.) bonds: most of the gains in bonds were likely driven by US municipals (not Canadian gov't bonds which are held at NB). ORH holds a higher percent than FFH of what has appreciated in value; hence they should benefit much more on the bond side of the equation.

2.) equities: the largest gainer on the equity side has likely been Wells Fargo and we know that a disproportionate amount of the new position is held at ORH (7.6 of 16.5 million purchased in Q1 = 46%).

So to summarize, I expect equities at ORH to perform in line with FFH as a whole and bonds to outperform = slight outperformance at ORH on investments.

 

The US equities that FFH reports in its 13F were up 17% to April 24 and 30% to June 30. The reported gains at C&F to April 24 on equities was 15% ($152 million/$1.0 billion) which is very close to the 13F number. Using this logic, I think it is reasonable to assume that ORH will see a 30% lift in their equity portfolio in Q2 = 30% x $1.5 = $450 million. Add in $100 million for bonds (hard to know as yields have come up some since April 24) and we could see investment gains of $550 million. And yes, this is my optomistic scenario. Enclosed is my updated investment tracker of the stocks reported in the 13F (March 31, April 24 and June 30). FYI, as of today 13F portfolio is up just under 2% to June 30 close.

[Mungerville]

Viking,

 

That's a great spreadsheet.  Thanks.  But why is that your optimistic scenario as the stock gains look straight-forward after your work and I would guess the percentage bond gains are low for ORH - very very low.  Only 100M?  Really?  Wasn't the mispricing huge on the Berkshire guaranteed municipals on a significant portfolio of bonds?

[Viking]

Mungerville, here is a little more detail:

 

Regarding bonds, my 'read' is muni yields came down quite aggressively to mid April and then a little more in May (most of the gains were likely in Q4 and Q1). At the same time, Treasury yields were rising. Since May both Treasury and Muni yields have come back up and it looks to me that Muni yields are higher than they were April 24 (implying the bond gains at FFH are likely lower than $200 million). The wild card is I believe FFH communicated on their conference call that they had after March 31 purchased 1 billion in corporate bonds... if this is indeed the case then bond yields should be greater than $200 million in Q2 (I am unable to locate a transcript from the Q1 FFH conference call... can anyone help me out here???).

 

Here is what US Treasuries have done in Q2... pretty ugly. I wonder how this will impact the investment results of insurers who exited risky assets in Q4 and Q1 and moved to the 'safety' of US treasuries. One has to be impressed with the decisions coming out of Hamblin Watsa!

 

Date       1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr

03/31/09 0.17 0.21 0.43 0.57 0.81 1.15 1.67 2.28 2.71 3.61 3.56

04/24/09 0.07 0.10 0.31 0.50 0.99 1.38 1.96 2.56 3.03 3.99 3.89

06/30/09 0.17 0.19 0.35 0.56 1.11 1.64 2.54 3.19 3.53 4.30 4.32

 

Another really important point is all of this stuff I am communicating is really just an educated guess. I expect that FFH has continued to make changes to the investment portfolio's and these I am not able to see... Perhaps they realized some gains early in the month? So please take all that I am communicating with a few grains of salt (I do!). Bottom line is we should see large investment gains from FFH and ORH in Q2... how great we will have to wait and see.

[Mungerville]

Viking,

 

No, you are right - I just had a momentary lapse there.  I also agree with all your other comments re them potentially adding to corp bonds as well as other insurers maybe getting nailed a bit on treasuries.

 

I think that is a good baseline picture. 

[jegenolf]

I copied Viking's spreadsheet into a google doc that gets updated automatically with current stock quotes. It's no more useful than the original, but it's a bit more fun to watch... The portfolio is up 4.5% since June 30th, even with the WFC drop today.

 

Here's the link if anyone wants to see:

 

http://spreadsheets.google.com/ccc?key=tnYq9IBT1FmN49JwDorpnfQ

 

And apologies for the plagiarism, Viking. If you want it to disappear, I'll happily delete it.

 

Also, I'm still looking for a way to get historical quotes with results in a single cell rather than tabular form. If anyone knows how to do this in a Google spreadsheet, I'd love to know...

[Viking]

jegenolf, no problem... that is why I share this stuff... for others to use and for all of us to debate.

[jegenolf]

I didn't think you'd mind, just I'd be polite when I'm stealing something!

 

And I thought I shared the sheet with anyone with the link, but I'm getting requests for access. Can anyone confirm that they can see the spreadsheet using only the link provided?