Saturday, September 15, 2007

A Few Tangents on Fairfax

Last night I went looking into a few things that I thought might affect Fairfax's value. The results are below.

1. Effect of a strengthening Canadian dollar
From the standpoint of a US investor, the overall strengthening of the Canadian dollar is a positive for US investors, in that it increases the value of Northbridge, their Canadian subsidiary. This is partially offset by an increase in corporate costs from the Toronto headquarters. Overall, the effect is pretty insignificant. Judging based on the market value of Northbridge, a 5% rise would add 88 million in value. If looking at earnings, a 5% rise would add approximately 9 million in operating income. (before tax) These are based off the table on pg. 53 which breaks down the overall business in terms of region.

2. Very Long-Tail Float from Run-off?
Under "Contractual Obligations", insurers include their loss reserves as well as a time-span for when they expect those to be paid out. I was hoping that perhaps Fairfax possessed a lot of super long-tail business from run-off which are reserved for today, but will not have to be paid until much, much later.

At the end of 2006, Fairfax had:
3-5 years 1.686 billion
5++ years 2.162 billion
Total reserves 10.658 billion

3 year++ reserves/ total reserves : 36.1%
5 years ++ reserves/ total reserves: 20%

Now in comparison, Allstate's property and casualty business had:
3 year++ reserves/ total reserves: 25.78%
5 years++ reserves/ total reserves: 14.23%

Which seems encouraging, but then I looked at Berkshire Hathaway, which only provides 3 years ++ numbers, and they were at 36.3%. So overall, I'd have to say that perhaps they have a slight edge in this respect, but not by much.

Also, some people have asked whether Fairfax's long term bond portfolio perhaps was a way to match assets with expected liabilities. Fairfax had over 6.7 billion in treasuries with a maturity greater than 5 years, far more in excess of the 2.1 billion they have reserved for. So the answer to that appears to be "No".

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