Canadian insurer Fairfax Financial (FFH) has just reported its year ending December 2007 results and they are extraordinary. Normally I don't get carried away with a quarter's numbers but what is significant here is that an investment strategy brilliantly conceived by Prem Watsa and his team over the past few years has paid off handsomely. The simple premise was this, risk had been undervalued by the credit markets for too long with little to no distinction made between a safe AAA treasury bond and a AAA rated CDO that included unsafe subprime loans. Fairfax made its bet that risk would be repriced at a higher level, by using credit default swaps. In the last year, Fairfax was proven right as credit was dramatically repriced.
Driven by huge gains on this credit default swap bet, Fairfax ended the year with $4.1 billion in shareholders or $230 in book value, a 49% increase year over year. This closing book value was more than my more conservative estimate of $220 (see my article from earlier in January).
Further, there is clear evidence that Fairfax is finally getting its reserves under control with a solid 93% combined ratio for the quarter & 94% for the year.
Fairfax's credit default swap gains continued during the first quarter of 2008. A total of $151 million in realised gains & $596 million in unrealised gains up to February 15 2008. That puts Fairfax's book value north of $270 so far this quarter. A truely great result.
Prem Watsa and Fairfax Financial have suffered under a torrent of press criticism and outspoken Fairfax shorts over the last few years. Surely justice has been dealt today and Fairfax shareholders have been vindicated.
Disclosure: I own shares in FFH
Thursday, February 21, 2008
Monday, February 18, 2008
Bond insurer split up could attract lawsuits
Interesting article from Bloomberg. Essentially they are saying that Investment Banks who own insured subprime investments would be able to sue where they suffer losses & make a claim but there are not enough funds available due to the insurer moving its assets to another entity (holding their municipal liabilities).
Here is a quote...
"Despite the regulatory interest in separating the exposures, the essential fact remains that all policy holders, whether municipal or structured finance, entered into contracts backed by the entire entity,'' analysts led by Jeffrey Rosenberg in New York wrote in a note to investors dated Feb. 15. A breakup is ``likely to lead to significant legal challenges holding up the resolution of the monoline issues for years."
Here is the link
http://www.bloomberg.com/apps/news?pid=20601087&sid=aOeT8cK2ZxVk&refer=home
I wonder if the investment banks will give their consent to the proposed split up. They probably won't? The alternative might be as Warren Buffett proposed to re-insure these municipal bonds, effectively protecting policyholders even if the mono-lines can't pay at the end of the day (due to CDO loss payouts). But the mono-lines have already said no to the deal?
This is a very tricky situation. Of course, all of this resulted from the Insurance regulators letting the mono-line insurers write CDO insurance in the first place!
Here is a quote...
"Despite the regulatory interest in separating the exposures, the essential fact remains that all policy holders, whether municipal or structured finance, entered into contracts backed by the entire entity,'' analysts led by Jeffrey Rosenberg in New York wrote in a note to investors dated Feb. 15. A breakup is ``likely to lead to significant legal challenges holding up the resolution of the monoline issues for years."
Here is the link
http://www.bloomberg.com/apps/news?pid=20601087&sid=aOeT8cK2ZxVk&refer=home
I wonder if the investment banks will give their consent to the proposed split up. They probably won't? The alternative might be as Warren Buffett proposed to re-insure these municipal bonds, effectively protecting policyholders even if the mono-lines can't pay at the end of the day (due to CDO loss payouts). But the mono-lines have already said no to the deal?
This is a very tricky situation. Of course, all of this resulted from the Insurance regulators letting the mono-line insurers write CDO insurance in the first place!
Saturday, February 16, 2008
Looking at interesting insurance stock buys and sells during 4Q 2007
By region
US & Canada
Lets start of with Markel Corporation (MKL)(led by Chief Investment Officer Tom Gayner) . Markel found investment opportunities in the US title insurance sector which has been suffering from the housing recession. Markel initiated a new position of 930,500 shares in LandAmerica Financial Group (LFG). Markel also raised their stake in Fidelity National Financial (FNF)by 125% to 1.68 mil shares.
Mohnish Pabrai sold his stake 17,500 BRKB shares in Warren Buffett’s investment holding company Berkshire Hathaway, retaining just one BRKA share. Berkshire’s shares have seen a decent run up over the last few months as investors have sought refuge from the credit crunch in Berkshire’s rock solid balance sheet which is a genuine AAA (unlike others!). Mohnish kept his stake in Canadian property and casualty insurer Fairfax Financial Holdings (FFH) largely unchanged selling around 1,900 shares to end the year with 314,165 shares. Fairfax Financial’s large credit default swap bet , on a decline in the housing sector and the repricing of credit risk, has worked a treat over the last 6 months.
New York based Alleghany Corporation(Y) led by CEO Weston Hicks made a foray into the distressed mortgage insurance sector picking up 1.65 mil shares in Chicago based Old Republic (ORI). Old Republic have a more diversified book of business than their other mortgage insurance competitors.
Bruce Berkowitz and the Fairholme Fund (FAIRX) team who practice the investment philosophy of ignoring the crowd certainly did when they embraced controversy and bought a new stake of 7.65 mil shares in Wellcare Health Plans (WCG). This Florida company has been under investigation by federal and state authorities. Fairholme also initiated a small 4.16 mil share position in auto insurer Progressive Corporation (PGR). This is an interesting buy given the poor performance of most auto insurers and Progressive in particular which has been facing tough competition from Geico, a subsidiary of Berkshire Hathaway (BRKA,B). Do Fairholme feel that the market may harden and premium rates could start to improve for the auto insurance sector?
Europe
Mackenzie Cundill Value Fund with famed value manager Peter Cundill took advantage of market volatility in 2007 to add to their position in the world's second largest reinsurer, German based Munich Re AG (MUVGN.DE - XETRA). According to their fund's annual report, it is now the fund's largest position.
Post year end , Warren Buffett and Berkshire Hathaway snapped up 3% of Swiss reinsurance giant Swiss re (SWCEY-Depository receipt; RUKN.DE - XETRA) , which has been caught by the subprime crisis, and will take one-fifth of all Swiss re's property & casualty premiums over the next 5 years in return for providing one-fifth of the risk. This deal looks to be more than just an insurance stock buy and more a stategic reinsurance partnership.
Bermuda
The successful Third Avenue International Value Fund (managed by Amit Wadhawany)initiated a new position, buying 771,224 shares in Bermuda based reinsurer Montpelier re (MRH - NYSE). Here is a quote from the annual report for 2007 ...."Shares of Montpelier Re were purchased at prices which we believe understate its value as a going concern, as it imputes little to no value to the company’s operational infrastructure,underwriting expertise, or the membership at Lloyd’s."
Asia & Middle East
Longleaf Partners International Fund made no changes but retained a significant weighting to Japanese insurers , NipponKoa Insurance Company (6.7% of fund) (8754 - Tokyo) and Millea Holdings (3.7% of fund) (MLEAY.PK - US pink sheets; 8766 - Tokyo) Japan's largest non-life insurer. Both insurers represent a little over 10% of this Longleaf Fund.
Disclosure: I own shares in MKL,BRKB,FFH,Y,FAIRX
Disclaimer: The opinions expressed by the author in this article are not intended as investment advice & should not be relied upon as investment advice.
US & Canada
Lets start of with Markel Corporation (MKL)(led by Chief Investment Officer Tom Gayner) . Markel found investment opportunities in the US title insurance sector which has been suffering from the housing recession. Markel initiated a new position of 930,500 shares in LandAmerica Financial Group (LFG). Markel also raised their stake in Fidelity National Financial (FNF)by 125% to 1.68 mil shares.
Mohnish Pabrai sold his stake 17,500 BRKB shares in Warren Buffett’s investment holding company Berkshire Hathaway, retaining just one BRKA share. Berkshire’s shares have seen a decent run up over the last few months as investors have sought refuge from the credit crunch in Berkshire’s rock solid balance sheet which is a genuine AAA (unlike others!). Mohnish kept his stake in Canadian property and casualty insurer Fairfax Financial Holdings (FFH) largely unchanged selling around 1,900 shares to end the year with 314,165 shares. Fairfax Financial’s large credit default swap bet , on a decline in the housing sector and the repricing of credit risk, has worked a treat over the last 6 months.
New York based Alleghany Corporation(Y) led by CEO Weston Hicks made a foray into the distressed mortgage insurance sector picking up 1.65 mil shares in Chicago based Old Republic (ORI). Old Republic have a more diversified book of business than their other mortgage insurance competitors.
Bruce Berkowitz and the Fairholme Fund (FAIRX) team who practice the investment philosophy of ignoring the crowd certainly did when they embraced controversy and bought a new stake of 7.65 mil shares in Wellcare Health Plans (WCG). This Florida company has been under investigation by federal and state authorities. Fairholme also initiated a small 4.16 mil share position in auto insurer Progressive Corporation (PGR). This is an interesting buy given the poor performance of most auto insurers and Progressive in particular which has been facing tough competition from Geico, a subsidiary of Berkshire Hathaway (BRKA,B). Do Fairholme feel that the market may harden and premium rates could start to improve for the auto insurance sector?
Europe
Mackenzie Cundill Value Fund with famed value manager Peter Cundill took advantage of market volatility in 2007 to add to their position in the world's second largest reinsurer, German based Munich Re AG (MUVGN.DE - XETRA). According to their fund's annual report, it is now the fund's largest position.
Post year end , Warren Buffett and Berkshire Hathaway snapped up 3% of Swiss reinsurance giant Swiss re (SWCEY-Depository receipt; RUKN.DE - XETRA) , which has been caught by the subprime crisis, and will take one-fifth of all Swiss re's property & casualty premiums over the next 5 years in return for providing one-fifth of the risk. This deal looks to be more than just an insurance stock buy and more a stategic reinsurance partnership.
Bermuda
The successful Third Avenue International Value Fund (managed by Amit Wadhawany)initiated a new position, buying 771,224 shares in Bermuda based reinsurer Montpelier re (MRH - NYSE). Here is a quote from the annual report for 2007 ...."Shares of Montpelier Re were purchased at prices which we believe understate its value as a going concern, as it imputes little to no value to the company’s operational infrastructure,underwriting expertise, or the membership at Lloyd’s."
Asia & Middle East
Longleaf Partners International Fund made no changes but retained a significant weighting to Japanese insurers , NipponKoa Insurance Company (6.7% of fund) (8754 - Tokyo) and Millea Holdings (3.7% of fund) (MLEAY.PK - US pink sheets; 8766 - Tokyo) Japan's largest non-life insurer. Both insurers represent a little over 10% of this Longleaf Fund.
Disclosure: I own shares in MKL,BRKB,FFH,Y,FAIRX
Disclaimer: The opinions expressed by the author in this article are not intended as investment advice & should not be relied upon as investment advice.
Thursday, February 14, 2008
Auction-rate securities fail to attract bidders
This was an interesting story this week. Here are some excerpts from Bloomberg.
"Auctions of bonds sold by cities, hospitals and student loan agencies are failing as confidence in the creditworthiness of insurers backing the securities wanes, and as loss-plagued banks seek to avoid tying up their capital. More than 129 auctions failed yesterday, said Anne Kritzmire, a managing director for closed-end funds at Nuveen Investments in Chicago"
and further on
"Bank of America Corp. estimated in a report that 80 percent of all auctions were unsuccessful yesterday. That may mean as much as $20 billion of bonds failed to find buyers, based on the $15 billion to $25 billion of auction bonds that are scheduled for bidding daily, said Alex Roever, a JPMorgan Chase & Co. fixed income analyst. "
The flip side to this story is that where there is less demand & more supply , buyers of auction rate securities get paid handsomely.
With the turmoil in the municipal bond markets, munis generally could now represent a very attractive fixed income investment opportunity for insurance companies and pension funds.
Municipal bonds are pretty safe. Interestingly the article mentions ... "auctions have failed for frequent and well-known borrowers, such as Port Authority of New York and New Jersey and New York state's Metropolitan Transportation Authority. "
It is not just the fact that financial guarantors are under stress that is causing distress here, as investment banks such as UBS suffer with their own capital writedowns and liquidity issues, they are unable to participate in these auctions & purchase those auction-rate securities that don't sell. Who knows, could be another opportunity for Warren Buffett....capital seems to be highly prized these days.
Warren Buffett recently alluded to the fact that Berkshire Hathaway (BRKA/B) were buying up insured municipal bonds suffering from the "financial guarantor" stigma. Here's what Warren said on the CNBC interview yesterday...
"We've actually bought, or, we see bonds trading that are insured that are selling at lower prices than their uninsured counterparts, just because there's been an unusual supply and demand situation. "
Here's the full article from Bloomberg...
http://www.bloomberg.com/apps/news?pid=20601087&sid=aWXuwp96Q0k4&refer=home
Disclosure: I own shares in Berkshire Hathaway (BRKB)
"Auctions of bonds sold by cities, hospitals and student loan agencies are failing as confidence in the creditworthiness of insurers backing the securities wanes, and as loss-plagued banks seek to avoid tying up their capital. More than 129 auctions failed yesterday, said Anne Kritzmire, a managing director for closed-end funds at Nuveen Investments in Chicago"
and further on
"Bank of America Corp. estimated in a report that 80 percent of all auctions were unsuccessful yesterday. That may mean as much as $20 billion of bonds failed to find buyers, based on the $15 billion to $25 billion of auction bonds that are scheduled for bidding daily, said Alex Roever, a JPMorgan Chase & Co. fixed income analyst. "
The flip side to this story is that where there is less demand & more supply , buyers of auction rate securities get paid handsomely.
With the turmoil in the municipal bond markets, munis generally could now represent a very attractive fixed income investment opportunity for insurance companies and pension funds.
Municipal bonds are pretty safe. Interestingly the article mentions ... "auctions have failed for frequent and well-known borrowers, such as Port Authority of New York and New Jersey and New York state's Metropolitan Transportation Authority. "
It is not just the fact that financial guarantors are under stress that is causing distress here, as investment banks such as UBS suffer with their own capital writedowns and liquidity issues, they are unable to participate in these auctions & purchase those auction-rate securities that don't sell. Who knows, could be another opportunity for Warren Buffett....capital seems to be highly prized these days.
Warren Buffett recently alluded to the fact that Berkshire Hathaway (BRKA/B) were buying up insured municipal bonds suffering from the "financial guarantor" stigma. Here's what Warren said on the CNBC interview yesterday...
"We've actually bought, or, we see bonds trading that are insured that are selling at lower prices than their uninsured counterparts, just because there's been an unusual supply and demand situation. "
Here's the full article from Bloomberg...
http://www.bloomberg.com/apps/news?pid=20601087&sid=aWXuwp96Q0k4&refer=home
Disclosure: I own shares in Berkshire Hathaway (BRKB)
Tuesday, February 12, 2008
Buffett names his price
Warren Buffett's latest offer to re-insure up to $800 billion of municipal bonds held by the mono-lines should come as no surprise.
Buffett's price is one & a half times the unearned premium on these municipal bonds, nearly double the price originally charged by these monoline insurers (MBIA,Ambac & FGIC). Its a steep price & as of this time, two of the monoline insurers (one is Ambac) have spurned Buffett's proposal.
Buffett's big pricetag does highlight the bargaining power Berkshire Hathaway has at this time and his own view that the mono-line insurers are facing a desperate financial situation.
If all the mono-line insurers reject Buffett's proposal , they are likely to face an even more hard-line from Insurance regulators who may seek to preserve capital for the policyholders by preventing dividends being paid from the insurance subsidiaries to the bond insurer holding companies. As I have said previously, the insurance regulators are intent on stabilising the municipal bond market and while doing this in a commercial way would be ideal, they may be left with no option but to engage in more direct intervention to protect capital and municipal bond markets.
Finally, Buffett & Berkshire are expected to dramatically raise their profile in the municipal bond underwriting area over the coming year. If Buffett doesn't succeed in reinsuring the municipal bonds held by the bond insurers, he will succeed in stealing away new business.
Here's the CNBC interview transcript with Warren Buffett
http://www.cnbc.com/id/23126179
Ajit Jain's letter (which walks us through Berkshire's reasons for the deal and proposed price) - thanks Berkshire Shareholders at MSN board for this one!
http://www.marketwatch.com/news/story/warren-buffetts-letter-bond-insurers/story.aspx?guid=%7BE5BBF062%2D4C41%2D4DE4%2D99C2%2DF7B2EA6CE889%7D&siteid=yhoof
Disclosure: I own shares in Berkshire Hathaway (BRK)
Buffett's price is one & a half times the unearned premium on these municipal bonds, nearly double the price originally charged by these monoline insurers (MBIA,Ambac & FGIC). Its a steep price & as of this time, two of the monoline insurers (one is Ambac) have spurned Buffett's proposal.
Buffett's big pricetag does highlight the bargaining power Berkshire Hathaway has at this time and his own view that the mono-line insurers are facing a desperate financial situation.
If all the mono-line insurers reject Buffett's proposal , they are likely to face an even more hard-line from Insurance regulators who may seek to preserve capital for the policyholders by preventing dividends being paid from the insurance subsidiaries to the bond insurer holding companies. As I have said previously, the insurance regulators are intent on stabilising the municipal bond market and while doing this in a commercial way would be ideal, they may be left with no option but to engage in more direct intervention to protect capital and municipal bond markets.
Finally, Buffett & Berkshire are expected to dramatically raise their profile in the municipal bond underwriting area over the coming year. If Buffett doesn't succeed in reinsuring the municipal bonds held by the bond insurers, he will succeed in stealing away new business.
Here's the CNBC interview transcript with Warren Buffett
http://www.cnbc.com/id/23126179
Ajit Jain's letter (which walks us through Berkshire's reasons for the deal and proposed price) - thanks Berkshire Shareholders at MSN board for this one!
http://www.marketwatch.com/news/story/warren-buffetts-letter-bond-insurers/story.aspx?guid=%7BE5BBF062%2D4C41%2D4DE4%2D99C2%2DF7B2EA6CE889%7D&siteid=yhoof
Disclosure: I own shares in Berkshire Hathaway (BRK)
Monday, February 11, 2008
Is it possible Fairfax Financial might have raised their CDS bet?
With AIG's recent report of larger than expected CDS "mark to mark" losses and default spreads on AIG hitting over 200 bps as of today, Odyssey re & Fairfax Financial would have received another boost to the value of their enormous CDS portfolio (AIG is one of their CDS positions held most likely for hedging rather than investment purposes).
I believe it is more probable than not that Fairfax would have taken profits on positions in CDS positions in Countrywide, MBIA & Ambac amongst others over the last few months. That is my expectation given the excellent pricing Fairfax would have received, MBIA & Ambac were recently priced for a 70% chance of bankruptcy. However, this is pure speculation and journalistic opinion on my part. We won't know until they report their results for this quarter.
Economic conditions have degenerated rapidly throughout the world particularly in North America but also Europe, Japan and other regions. Risk continues to be re-priced into corporate bonds and expectations are that default rates will increase considerably from current levels.
Further, in two interviews given since November ,Prem Watsa, CEO of Fairfax, has maintained that we that we are only at the beginning stages of a credit crunch and the US could be facing a Japan like economic situation of deflation.
Finally, the largest equity positions recently added by Fairfax are in healthcare/pharmaceutical stocks which definitely have defensive characteristics in a recession like environment.
The question therefore I want to pose is this , if Prem Watsa feels we are only in the beginning stages of a credit crunch and Fairfax continues to set up its equity and bond portfolio for recession, is it possible that during the 4th Quarter 2007 Fairfax Financial may have raised its CDS bet on some names perhaps already held or others not held at the end of the 3rd Quarter 2007?
Disclosure: I own shares of FFH & AIG
Disclaimer: The opinions expressed by the author in this article are not intended as investment advice and should not be relied upon as investment advice.
I believe it is more probable than not that Fairfax would have taken profits on positions in CDS positions in Countrywide, MBIA & Ambac amongst others over the last few months. That is my expectation given the excellent pricing Fairfax would have received, MBIA & Ambac were recently priced for a 70% chance of bankruptcy. However, this is pure speculation and journalistic opinion on my part. We won't know until they report their results for this quarter.
Economic conditions have degenerated rapidly throughout the world particularly in North America but also Europe, Japan and other regions. Risk continues to be re-priced into corporate bonds and expectations are that default rates will increase considerably from current levels.
Further, in two interviews given since November ,Prem Watsa, CEO of Fairfax, has maintained that we that we are only at the beginning stages of a credit crunch and the US could be facing a Japan like economic situation of deflation.
Finally, the largest equity positions recently added by Fairfax are in healthcare/pharmaceutical stocks which definitely have defensive characteristics in a recession like environment.
The question therefore I want to pose is this , if Prem Watsa feels we are only in the beginning stages of a credit crunch and Fairfax continues to set up its equity and bond portfolio for recession, is it possible that during the 4th Quarter 2007 Fairfax Financial may have raised its CDS bet on some names perhaps already held or others not held at the end of the 3rd Quarter 2007?
Disclosure: I own shares of FFH & AIG
Disclaimer: The opinions expressed by the author in this article are not intended as investment advice and should not be relied upon as investment advice.
Sunday, February 10, 2008
Asia insurance industry awards 2007
ICICI Lombard General Insurance Company (part of a joint venture between India's ICICI Bank & Fairfax Financial Holdings (FFH)) received General Insurance Company of the Year award.
From the article
"However, it was ICICI Lombard’s innovation that really caught the eyes of the judging panel. To reduce the cost of claims processing in rural areas, it launched a first-of-its-kind pilot project issuing biometric smart cards to rural customers availing of health insurance. The card contains a smart chip which authorises transactions based on the customer’s fingerprints. The balance sum insured can be easily ascertained when the card is presented at a hospital.
ICICI Lombard, together with the involvement of the World Bank, has also pioneered weather insurance to cover weather-related risks faced by crops. In fiscal 2007, more than 200,000 farmers and 250,000 acres of land were insured for a range of crops."
Here's the link to the full story
http://www.asiainsurancereview.com/pages/awards/awardswinners2007.asp
From the article
"However, it was ICICI Lombard’s innovation that really caught the eyes of the judging panel. To reduce the cost of claims processing in rural areas, it launched a first-of-its-kind pilot project issuing biometric smart cards to rural customers availing of health insurance. The card contains a smart chip which authorises transactions based on the customer’s fingerprints. The balance sum insured can be easily ascertained when the card is presented at a hospital.
ICICI Lombard, together with the involvement of the World Bank, has also pioneered weather insurance to cover weather-related risks faced by crops. In fiscal 2007, more than 200,000 farmers and 250,000 acres of land were insured for a range of crops."
Here's the link to the full story
http://www.asiainsurancereview.com/pages/awards/awardswinners2007.asp
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