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Short positions hurt Fairfax Financial in Q1, but CEO still worried about deflation

Apersistent deflationary environment will force insurers to push their combinedratios well below 100% to eke out even modest returns, according to 'stop executive.

Chairmanand CEO V. Prem Watsa said during an April 29 conference call that despitethe efforts of central banks across the globe, inflation figures remain low andconsumers are not spending the way those institutions would hope. In fact, inplaces like Sweden, the savings rate is climbing as consumers sock even more oftheir income away to try to stay ahead of falling interest rates.

"There'sa lot of unintended consequences" to central banks' actions, Watsa said.

FairfaxFinancial reported a first-quarter net loss of $51.0 million, or $2.76 pershare, compared with earnings of $225.2 million, or $9.71 per share, in theyear-ago period. The insurer blamed net losses on investments of $159.6 millionfor the result. All of the company's major insurance units posted combinedratios of less than 100%; Fairfax Financial recorded a consolidated combinedratio of 93.1% for the period.

Asof quarter-end, equity hedges represented 107.2% of Fairfax Financial's equityand equity-related holdings, up from 88.1% at Dec. 31, 2015, reflectingadditional short positions in equity and equity total return swaps andunrealized depreciation of equity and equity-related holdings. Watsa concededthat the company's timing in adding to its short positions "wasn't thebest," as domestic stock markets rallied in the latter half of the firstquarter.

Butdespite that positive equity market movement, Watsa remains concerned about theglobal macroeconomic environment and expects Fairfax Financial to make asignificant profit off its deflation swaps.
"We're in a deflationary environment, and we have weak economic growth,"he said, adding that central banks are "out of ammunition" toalleviate the worst effects of any recession that could take hold.