Saturday, March 10, 2007

Some Recent Portfolio Earning's Reports:

Several portfolio companies have reported earnings in the past week. Below are some notes taken for each. I'm still waiting for SFK's earnings release.

Fairfax Financial (Current Price: $200.04)
Market Cap: 3.55 Billion

-Book value is up to 2.7 Billion, or $150.16 per share.
-2.6% benefit of float
-Runoff seems to be very well contained and costs should be down next year due to office closures.
-ICICI Lombard (equity accounted) is the largest private insurer in India with a 12.5% market share, and grew premiums over 80% this year to $700 million
-Expecting a soft market ahead for insurance, Fairfax's goal is to write costless float.
-8.1% return on portfolio for 2006, long term average of 9.3%. This is amazing and what makes Fairfax stand out from its competitors.
-continued to be hedged for 1 in 50 year market meltdown with S&P puts and CDS.
-Subsequent to year end, Hub Group was bought out for consolidated pre-tax gains of 220 million, and the CDS portfolio has regained much lost ground after the recent market scare. Note that the CDS portfolio is against several US mortgage companies, which is where we are seeing a lot of devastation. It is also mark-to-marketed each quarter, affecting Fairfax's income statement.

I recommend that everyone reads their shareholder letter to get a clearer understanding of the company and to understand the rationale for their market hedge.
Prem Watsa 2007 Shareholder Letter

Bancinsurance (Current Price: $6.05)
Market cap: 30 million

-Shareholder's equity up to $36.4 million, or $7.30 per share
-Net income of $5.5 million ($1.08/share) for 2006, affected by:
1. 1.8 million loss in discontinued bond program
2. 2.5 million realized gain on sale of publishing subsidiary
-Only the highland arbitration remains, and:
During the third quarter of 2006, the Company received information indicating that Highlands and the U.S. Department of Homeland Security (“DHS”) reached a global settlement concerning Highlands’ immigration bond obligations, which settlement is subject to the approval of the court in which the receivership is pending. Based on this information, the Company recorded reserve redundancies of approximately $0.1 million during 2006.
-So, I expect to see little to no more losses from the bond program.
-15.5 million in debt
-91 million investment portfolio
-Loss ratio of 53%, Expense ratio of 45%, premiums of 50 million.
-For 2007, company has already been informed of 4 million in premiums that has been moved or transferred.
- For 2007, the company expects a significant reduction in arbitration legal costs.

I believe legal costs have been costing the company about 4 million/year, so look for huge improvements in the combined ratio and earnings now that the legal disputes have been largely resolved.

Delta Financial (Current Price: 9.72)
Market Cap: $227 million

-Shareholder's equity of $150 million, or $6.23 per share.
-Net income for 2006 of 29 million, or $1.28 per share.
-92% Fixed Rate Origination, 8% ARM
-52% Retail , 48% Wholesale
-Cost to Originate down to 1.6% for 4Q, expect about 1.8% for 1Q due to seasonality. Still, very great progress on the expense side.

With all the bad press surrounding the subprime industry, many of you are probably wondering why DFC is any difference. Well, besides their disciplined underwriting and focus on fixed rate loans, DFC also uses very conservative accounting, that chooses to realize residual interests as they occur rather than try to estimate the gain and record it on the sale. Also, DFC has a much safer balance sheet than its competitors.

Loans held by co: 340 million
Loans securitized: 6 billion
equity: 150 million

Loans held by co: 9 Billion
Loans securitized: 13.8 Billion
equity: 2 Billion
Residual Certificates: 223 million

Loans/Securities held by co: 2.35 Billion
Loans securitized: 2.05 Billion
equity: 500 million

As you can see, Delta holds a far lower proportion of loans in their own name, lowering their own risk. That said, the 90+ day delinquency for the quarter was about 5% for DFC. Going back to '94 for the company, this percentage has always been closer to the 1-2% range. The sudden rise does bring some cause for concern, and this is why Delta still remains a small percentage of our portfolio. But, i still believe Delta will survive any disaster and will become a bigger player in the future of the industry as more competitors go under.

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