Fairfax Financial Holdings Limited (USA) (NASDAQOTH:FRFHF)

CAPS Rating: 4 out of 5

A financial services holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance, investment management and insurance claims management.

Recs

3
Player Avatar Andyman (94.84) Submitted: 5/25/2008 1:43:51 PM : Underperform Start Price: $278.00 FRFHF Score: +6.74

Fairfax looks pretty awesome on paper. They scooped up credit default swaps for what appear to be a massive bargain, and they've been able to book big gains in unrealized income on those derivative securities.However, the value of the swaps are now notoriously volatile, and I have doubts that they're going to be able to unload those huge CDS positions and convert unrealized gains into cash. The market for these securities is pretty thin.If you back investment income out of 2007 pretax earnings, you get only $520MM, which is a heck of a long ways away from the $2.6BB it recorded.I'm not looking for their insurance business to help make up the difference, either. Premiums declined 6.1% YOY in 2007, and Fairfax reported an underwriting loss of $7.7MM in 1Q08, compared to a profit of nearly $50MM a year earlier.

Member Avatar socraticmunger (87.33) Submitted: 5/29/2008 6:00:40 AM
Recs: 8

The 17.5 billion dollar CDS portfolio FFH on it's books acts as insurance vs a major economical disaster. They pro actively purchased insurance when it was cheap and have sold enough to cover their costs several times over. The 17.5 billion in notional value insurance provides investors with desirable, and I might say enviable protection. Take some time to research the counter parties to the transactions, I'm sure you'll notice the very tangible collateral posting requirements and TOBF nature of their business. < If you back investment income out of 2007 pretax earnings, you get only $520MM, which is a heck of a long ways away from the $2.6BB it recorded.> Considering that investment income will always be a major source of income for this company, it is silly to back out investor earnings completely. Consider that Management has averaged 9.5% return on total assets. Investment per share is in the area of 1075 per share as of Q1. Also compare to the insurance portfolio of other insurers, 75% of cash and government bonds CDS provide the company with the distinct advantage...they can be opportunistic when other's are strapped for cash. " I'm not looking for their insurance business to help make up the difference, either. Premiums declined 6.1% YOY in 2007, and Fairfax reported an underwriting loss of $7.7MM in 1Q08, compared to a profit of nearly $50MM a year earlier. " Tis sad but true, after 2 years of above normal profits due to absence of major catastrophic insurable events, insurance prices have softened. When prices are low, it makes sense to cut Premiums. Trust me, if you write unprofitable business, you won't make it up on volume. Over time, Fairfax has earned superior returns on equity by Value Investing the Float. Like Warren said, It's never a bad time to buy into an incredible business. I guess I could add that it's never a bad time to buy a company that will achieve above average returns on equity at or near book value.

Featured Broker Partners


Advertisement