Fairfax’s Watsa Sees More Turmoil; Maintains Hedges

By | October 28, 2011

Fairfax Financial Holdings is maintaining its market hedges due to concerns about the global economic outlook and in spite of the recent turnaround in stock and bond prices, the insurer’s founder and chief executive said Friday.

Prem Watsa, who made billions from his prescient call on the 2008 financial crisis, told investors and analysts he continues to be very concerned about the market prospects for North America and Western Europe, and sees a “pocket of developing problems” in China.

“We’re looking at this as balance-sheet recession, so there’s a lot of deleveraging taking place among individuals as well as businesses,” he said on a conference call to discuss the insurer’s third-quarter results.

With governments in the United States and Europe already on austerity programs and central bank interest rates near zero, governments have few options available to reverse the situation, he said.

He compared the current environment to the 1930s depression or Japan’s recession in the 1990. “In those time periods, government bonds were the ones that benefited an investor,” Watsa said.

Fairfax’s bond holdings and fully hedged equity portfolio allowed it to notch a $1.6 billion gain on investments during the quarter, a period in which Canada’s main stock index fell 12.6 percent.

All told, the company earned $973.9 million, or $46.73 a share, in the second quarter, ahead of estimates of $23.45 a share, according to Thomson Reuters I/B/E/S/.

Its shares, which have outperformed its peers since the middle of the year, were up 1 percent at C$415.93 [US$411.77], making it the strongest Toronto-listed financial stock in early Friday trading.

The results overshadowed a small operating loss in the company’s core property and casualty insurance business, due to higher-than-expected claims losses related to catastrophes such as Hurricane Irene and the Japanese earthquake and tsunami.

“As has so often been the case (with Fairfax), huge investment gains far overshadowed operating results that were good, but not great,” RBC Capital Markets analyst Mark Dwelle said in a note.

Since the end of the quarter, stocks have rallied – the S&P/TSX composite index is up 7.6 percent – while bond prices have fallen, meaning Fairfax has likely already lost some of the unrealized gains on its portfolio.

“We’re looking through all of that. We’re looking at the long term, and there will be a point where we’ll realize these gains, but we don’t think it’s today,” Watsa said.

(Reporting by Cameron French; editing by Rob Wilson)

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