According to an article in the Globe and Mail, published November 23 2007, Prem Watsa famed investor and CEO of Canadian insurer Fairfax Financial Holdings (FFH) says losses from the credit cruch are only just beginning and it will take a long time for the US economy and housing sector to recover from a spate of poor lending decisions by mortgage brokers.
Here is the link
"http://www.globeinvestor.com/servlet/story/RTGAM.20071123.wrfairfaxmarket23/GIStory/"
Prem Watsa has strategically prepared Fairfax Financial's investment portfolio by concentrating his fixed income portfolio almost exclusively in government bonds "for the first time ever" according to Prem and and using credit default swaps to bet on a widening of credit spreads in a growing aversion to risk of corporate defaults. According to the International Herald Tribune , the Markit CDX North American index of credit-default swaps on over 100 investment grade companies tripled since February, to 90 basis points from 33.
Since the end of September the index has doubled. Many of the companies Fairfax Financial holds in its CDS book are mortgage or banking stocks such as Countrywide Financial, Freddie Mac, Radian have seen their spreads more than double since September 30. As a result Fairfax Financial's investment portfolio of CDSs would now be valued between 1 to $1.5 billion up from around $500 million at the end of September 2007.
Nick Nejad has a great write up on the changes in the value of Fairfax Financial's CDS's at rationalangle.blogspot.com
http://rationalangle.blogspot.com/2007/10/fairfax-cds-gains-demystified.html
No doubt as corporate debt spreads widen (and corporate bonds become cheaper) more opportunities will present themselves to insurance companies and other investors over the next few years. However, with the housing recession intensifying in the US, the potential for corporate failure amongst weaker public companies in the mortgage and banking industry is high.
Sources: International Herald Tribune, The Globe (globeinvestor.com), rationalangle.blogspot.com, Fairfax Financial annual/quarterly reports
Disclosure: I own shares in FFH
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