-Mae West
Depends who you are, if you are a crack head, too much of a good thing (crack) can be wonderful in the short-term, and if you are a business partner of the three wise guys (FFH, ORH, NB.TO), too much of a good thing (increased position) can be wonderful in the long term.
The reference to crack-heads is actually to the whole financial institution spectrum that the Three Wise Guys profit from through their CDS portfolio. Why so harsh? Not a day goes by where so and so institution doesn’t get capital infusion from foreigners, and they don’t do it because they are sincere, they do it at the cost of massive dilution. So just as how crack-heads and druggies need one last high before they are “sobered up or quit” (so they say!) and willing to sell valuables (family jewels) to pawn shops (foreigners) at dirt cheap prices, which the pawn shop will gladly buy and resell at a higher price later on in the future, the Three Wise Guys profit.
So go to your local bar and order the drink Three Wise Guys to start the night, it is composed of:
Johnnie Walker® Scotch whisky (
Jim Beam® bourbon whiskey (Northbridge)
Jack Daniel's® Tennessee whiskey (Odyssey)
Just a rundown on FFH, NB.TO, and ORH, I have been meaning to do this for a while, thanks to a rolled ankle from playing basketball, I can afford to now…
Fairfax 2007 Results were the best in 22 year history, 1.1 billion after tax, Book value increased by 49% to 230 (Currently I think it’s at least in the 260-270 range. 2007 Combined Ratio was 94%, 2006 CR was 95.5%. No CDO’s, or ABS, 80% hedge of equity portfolio.
-Refinanced common debt to 2017 maturity, resulting in lower interest rate. Consolidated debt to capital ratio to 27%, net-debt to net capital to 17%.
-Counterparty include 3 large international banks. For year 2007, sold 1 billion notional value for 199 million, cost of 25 million, profit of 174 million. In accounting terms, realized 185 million!
-From January 1- February 15, sold an additional 2.7 billion notional value for 651 million, realized gain of 591 million, cost of 60 million.
-Purchased an additional 2.2 bilion notional value for 51 million. Now totals 18 billion notional value. Value had increased by 596 million since the end of 2007.
-If Q1 ended Feb. 15, total gain of 747 million (150 on contracts sold, 596 increase in market value.) As of February 15th, maket value of 18 billion notional was 1.3 billion. In summary, sold 3.7 billion for 850 million approximately 10 times original cost of 85 million and more than two times total cost of all CDS contracts ever bought.
-Not only has Mr. Watsa recouped total cost of the CDS portfolio, in effect he has a total 100% gain, even if all the remaining contracts expire. Further, they continue to be protected from a 1 in 50, and 1 in 100 storm in financial markets. I’m not a historian, but if now is a 1 in 50 storm, rest assured; Mr. Watsa has 10 people carrying bags to the right side of the balance sheet. Cumulative investment gain of over 5.5 billion since 1986.
-Fourth quarter earnings of 563 million were outstanding, but that’s more attributable to a relatively disaster-free year. 4Q07 underwriting profit was down 39% YOY, and that’s fine, if business is not profitable why be the village idiot, let AIG play their role.
-
Now for the Subs:
For Odyssey,
-“Underwriting pricing is dropping, costs are going up. Property Cat- pricing continues to subside, remains relatively attractive…Primary level is more severe, Surety continues to perform very well.”
-“Picked up several new accounts in
“In
-“Medical malpractice at Asian marketplace and Asian marketplace have been growing.”
-“May see net premium in 2008 decline up-to 10%. Competition on renewal will increase, margins will compress.”
-Net income, 4Q07 243 million (3.48 per share), 4Q06 84 million (1.16 per share)
-Operating Income, 4Q07 59 million (.85 per share), 4Q06 65 million (.91 per share)
-Combined Ratio (Quarterly), 4Q07 93.7%, 4Q06 94.8%
-Combined Ratio (Annual), FY07 95.5%, FY06 94.4%
-2007 underwriting profit of 94.7 million, versus 2006 underwriting profit of 77 million.
-Gross Written Premium was down 2%, In America down 10%,
-Premium Composition 52%
-Business Composition, Casualty 53%, Reinsurance 68% of total.
Regional
-Euro-
-
Losses?
-30 million- Flood in
-10 million for potential D&O subprime losses
-Asbestos survival ratio reserving 10.7 years
AM Best estimate for Combined Ratio for the reinsurance line was 95%, ORH notched a spectacular 95.5%
Why spectacular? Because rating bureaus always underestimate true market vibes.
Investments- Investment Result of 595 million in 2007, 507 million in 2006.
-CDS, rise in value when credit spreads widen
-As of Dec 31st, carrying value was 308 million, up from 130 million as of Sep. 30, 2007
-Notional Value of 5 billion, term to maturity 3.6 years.
-In 1Q08 up to Feb 15th, sold an additional 670 million notional for 161 million
-Remaining- total earnings thus far have benefited by 179,4 million, carrying value of CDS portfolio was 327 million.
Finances
-Debt to Capital 16%
-Purchased 770,000 shares or 1.1% of outstanding for 28 million, since Sep. 30th
-Full Year- 2.6 million (3.7% of outstanding) for 94 million
-Since Dec. 31, 2007 to February 21, 2008- Purchased an additional 329,000 shares
-Total 3 million at cost of 109 million (36.33 average)
-91 million dollars remaining,
Economic Interest
-26% economic interest in Fairfax Asia
-6.5% share of ICICI Lombard
Book value of 36.78, up 31% for the year, in the 4th quarter 12% or 3.87 per share
Since 2001, grown book value at 20%
For Crum & Forester,
Best’s estimate was 94% and C & F bested that with 93.5%. 2007 underwriting profit of 77 million, 86 million in 2006. Gross written premium was down 7%, and net premium written down 8%. Net Earnings of 293 million in 2007, 312 million in 2006.
For Northbridge,
-Underwriting profit of 78 million in 2007, 20.5 million in 2006. There was some “Frequency and some severity in its Commonwealth and its Markel books.”
-2007 combined ratio of 92.3.
-Net earnings grew to 295 million in 2007, 167 million in 2006
-1.7 billion of premiums written across the four company’s (
-Net investment income was 89.9 million
-Shareholder equity rose to 1.42 billion
Across 4 company’s:
-Lombards- CR 93.7% for 2007, 90.1% in 2006
-Growth in specialty
-YOY decline in underwriting profit because of increased frequency
-Favorable reserve development contributed to about 18 million underwriting profit
-Markel- CR 95.2 % in 2007, 91.2 in 2006
-Net premium written down 15% YOY
-Competition in mid to large accounts
-15.5 million benefit from favorable exchange movement on U.S. Claims
-Long haul trucking, “returing to the darker days of the last stock markets.”
-Federated- CR 94.1% in 2007
-Premiums written flat
-Common Wealth- CR of 77% in 2007, 153.7% in 2007
-Underwriting profit favorable development of 31.3 million
-Book value of 28.59 (22.89 in 2006), up 25% for the year.
-Investments
-Carrying value of investments of 3.3 billion, 2.9 billion in 2006
-Includes (+136 million in CDS gains, +100 million in Hub Gain, +12 million improvement on short sales of S&P, -23 million write down, -21 million in foreign exchange loss)
-Already 85 million in gains on CDS in 2008
-26% in cash and shore term, 54% in government
-Buybacks
-30 million for 840,000 (35.71 average)
-Allow repurchase of 2.5 million shares before Nov. 5 2008 (watch this date! Why? Well because Northbridge averages a little over 92k shares a day, if they wanted to take advantage of the full 2.5 million share buyback, that would take 27 full days of NB.TO being the only buyer of stock, obviously that’s not going to happen…here’s the perfect scenario, for the stock to go down, average 100k volume, and NB.TO to take advantage of the full 2.5 million share buyback).
-Future
-“We think there is going to be considerable consolidation in this industry over the coming decade as markets soften and who knows how much of the foreign owned parents will get into capital problems over the coming years.”
For
-Underwriting profit of 20 million, up 40%, Combined ratio of 70.4%. Gross written premium of 171 million, up 27%, net premium written 70 million, up 16%.
-Growth in
-For
-Group Re had an underwriting profit of 11.3 million, with combined ratio of 95.6
For Runoff,
-187 million pre-tax income due to investment of 291 million, 241 attributable to CDS. Year to date gains on CDS of 160 million pre-tax.
Cash is over 1 billion, paid down 100 million in debt, debt to capital ratio declined from 35.7% in 2006 to 27.1% in 2007.
They have a 19 billion dollar investment portfolio:
-Bonds represent 10.5 billion, duration of 7.5, last year was 8.5
-cash and Short term securities represent 4 billion
-Equities represent 3.3 billion, we now know that 10% of their equity portfolio is in JNJ.
-Derivatives represent 1.2 billion
They have no intention of selling any run-off business. New CDS positions have exposure to “Auto, Credit Card, Private Equity, Bank loans, all sorts of things.”
Why?
Because, “The idea of tranching loans, be it mortgage loans, credit card loans, the structure was applied all across the credit markets, and that has led to moral hazard.”
Who?
If you somehow come across a guy with the last name “Bradstreet” congratulate him, even if his first name isn’t Brian. The guy will forever be remembered as the brains behind the very profitable CDS portfolio. Rest assured, Mr. Watsa says “We like where we are.” And who wouldn’t?
Just to conclude: I hold positions the three wise guys (FFH, ORH, NB.TO) and I actually treat it as one position. Why? Well management philosophy is pretty much the same, investment portfolio is the same, and if I like those two qualities and want to be a part owner in Fairfax Asia, and the largest Canadian insurance company, would it make sense to just hold ORH? It does to some people and I don’t want to step on any toes, but I think too many people own one and not the other based purely on metrics. I own all three because I want specific exposure to certain business operations that I wouldn’t get with only ORH, or only NB.TO. I believe that treating all three as one investment position will allow you to hold an outstanding insurance business portfolio. For example, if you only hold ORH, you are not getting any of the Runoff business or Crum and Forester business, your best bet is to buy FFH, then add ORH and NB.TO.
Anyways, those who hold one, likely hold two, and if they hold two they probably do own all three. So I am probably preaching to the choir.
Enjoy your week, I will be heading off to
As always, until next time,
Take care,
S.K.
