Wednesday, September 12, 2007

Prem Watsa Presentation at Scotia Capital- Notes

Fairfax Today
- At end of march 2007, 700 million US gross premiums for ICICI Lombard, 5,000 people.
- Consolidated, about 4.8 billion premiums written, 60% orh and 60% northbridge
- Mostly, commercial line company
- 5 Yr Growth in book value adjusted for dividends
Northbridge (?)
Odyssey 18.7%
Crum forster 17.9%

- Fairfax level had Run-off problems, “we think now that is history”
- 25% net debt to capital, soonest payment is 245 million due in 2012.
- We think property and casualty industry is on a downswing.
- Prices have come down in first half, we think it will continue to come down.
- Investment Side of business; 22% cash reserves, 55% in bonds, small corporate bond position. Went from 50% to 80% of equity portfolio hedged, plus 18 billion notional CDS portfolio.
- Conservatively structured for potential risks we see, not what we’ve seen over the last 6 months but worse, so we’re keeping our portfolio structure.

Why we’re concerned about the US: Can Japanese experience be repeated in the US?

- The 13 or 14 years from Nikkei peak in 1890, it went down. 40,000 to 7,500.
- even though interest rates fell from 8.00% to .50%, the stock market still fell down significantly.
- we like treasuries, 10 yr and above- if you look at it from a very long perspective, it is still a very high rate, 4.60%.
- High yield spread has been much higher, went down, going up again now.
- CDS for countrywide was about 150 basis when we bought, went to 50 basis points , now significantly higher.

Q & A

- Q: whether you would sell CDS'? (Question doesn’t come up on call, my guess based on the answer given below)
Our view is it’s our judgment, and if we get sufficient spread we will take it. Some we think have a higher chance of having credit problems, but fair to say given an appropriate price we would sell it.

- Q: Counter-party risk of CDS Portfolio?
Counter-parties are Citibank, Duetsche bank, and Barclays, so major institutions, along with pledged collateral. People think Fed Reserve will drop rates and we will be back in business, we think that might not be the case, so we’re keeping treasuries and CDS portfolio.

-Q Plans on ICICI Lombard?
Long, long term holding. Right now 6 billion premiums of India, we have 700 million. They’re projecting it will be 12 billion in 5 years, that’s still very small for 1 billion people. Fairfax is more in the investment management of the funds of the business. No intention of monetizing it.

-Q: Comment on Earnings?
We focus on increasing book value by 15%, earnings may be volatile depending on when they realize capital gains, and we don’t give guidance. $1.50 book value in 1985 to $165 today.

-Q: Some time ago you gave general guidance on runoff of break even, anything new?
No, still the case, we’re looking at approximately break even.

-Q: Long-tail claims of Runoff still stable?
There could be bumps, but we’re happy with reserves we have set.

We have 16 billion of investments, 3 billion in equity, and 4.5 billion of premiums written. 500 million interest from portfolio, but majority from capital gains. We made a ton of money in India- market went from 3000 in 2003 to 15000 today; we have little in India today.

I'll post Archive Link and Slides here as soon as available.

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