petec

Oh, it's very easy to reverse! It's just that the political will doesn't usually exist to deposit $1m of newly printed money in the bank account of every citizen (or subject. I am British after all :) ) Just about to listen to the podcast.

All that, and the fact that if you look at the last 10 years FFH can't invest for sh1t, so one of the key value drivers is broken. That impacts the p/bv the market will pay. On the positive side: 1) We are likely in a hard market, which drives better CR's and investment leverage. 2) Several of FFH's big holdings (especially ATCO and EUROB in my view) look very cheap. 3) FFH are working to improve investment decisions, although it's a leap of faith to assume this will work.

Yes. When people discuss the sit on your a$$ strategy described by Mr. Munger, people get that the idea revolves around selective decisions and focus on the never sell decision aspect. However, Mr. Munger also described that one has to be ready to act decisively with a prepared mind. Outside of index investing, it's a tough act to follow (to various degrees of differentiation) and individual positioning is what makes a market. :) You can call this the fifty shades of grey of investing. I would say you're entirely correct 95 to 99% of the times which makes the timing issue challenging. I'd like to remind you (f i understand correctly) that investing in FFH after 2010 involved a thesis in large part resting on the possibility of a 100-year event. This time is always different in a way and we (most of us anyways) entirely and always feel that the present is unusual and special to some degree but, on the topic of investing, if one decides that this is part of the unknowables, the present financial system environment is characterized an extreme level of unusual forces. One could say that we're going through the greatest monetary experiment of all times. If the goal is to sleep well, it may be best to make abstraction of that. It’s precisely the Fairfax history that leads me to my view. I bought into it at the time, read widely around the topic, and was wrong. The lesson I learned is that lots of risks exist most of the time, but nobody I know has the skills to predict macro outcomes with any consistency, and I certainly don’t, so I think the best I can do is be reasonably aware of the macro risks and not stand too directly in front of them. Hence, more or less all reading on this is useless to me. But interesting!

I think the short answer is that FFH floated 10-year debt, which they need for the longer term financing of the holdco, while the corporates at 4.25% will likely be sold in roughly a year for a realised gain. What is more, the corporates were largely funded from the revolver, which is a good tool to use opportunistically to exploit the temporary displacement of credit markets, but it's not a great tool for the longer term financing of the holdco. The money was made when FFH bought the corporates a few weeks ago, but it won't be realised until 2021. SJ The corporates were bought in the insurance subs investment portfolios. They’re funded by premiums, not holdco debt. I think you’re confusing the part of the revolver that was drawn down in Q1, which was reinvested “at a positive spread” (which may imply corporates, but they didn’t say that) but basically sits at the holdco as cash or near-cash in case of emergencies, with the part that was drawn down earlier and used for general holdco purposes, like recapping the subs, and has now been termed out. You are correct that FFH did not explicitly state that the revolver drawdown was invested in corporates, but simply that it was invested at a favourable spread. I took the mental short cut to assume that the only way to get a favourable spread would be to invest it in risky bonds (risk-free only yields about 0.50%). But, it is always possible that they found some sort of state/provincial/municipal debt or some sort of agency debt that yields enough to constitute a favourable spread. Whatever sort of risky bonds they bought at the holdco level are likely to be sold in 2021 if the risk-free returns to a sane level and the spreads narrow back to near pre-covid levels. Out of curiosity, where did you see that the revolver draw for re-capping the subs has been termed out? The risk of using a revolver for that purpose has always been that it needs to be regularly renegotiated and who knows what kind of covenants the lender will end up demanding. But, if it's termed out for, say 5 years, that would be great. SJ Well in effect they’ve termed it out. They’ve just issued a 10y bond and the stated use of proceeds is to repay the revolver. Maybe they’ll keep the revolver wholly drawn, but cash/near cash at the holdco then rises. Same effect. Agree re risk free rate at 0.5% but I guess my broader point is I did not take the $2.9bn of corporates to include holdco reinvestment of the revolver draw. I assumed that was all in the investment portfolio.

I think the short answer is that FFH floated 10-year debt, which they need for the longer term financing of the holdco, while the corporates at 4.25% will likely be sold in roughly a year for a realised gain. What is more, the corporates were largely funded from the revolver, which is a good tool to use opportunistically to exploit the temporary displacement of credit markets, but it's not a great tool for the longer term financing of the holdco. The money was made when FFH bought the corporates a few weeks ago, but it won't be realised until 2021. SJ The corporates were bought in the insurance subs investment portfolios. They’re funded by premiums, not holdco debt. I think you’re confusing the part of the revolver that was drawn down in Q1, which was reinvested “at a positive spread” (which may imply corporates, but they didn’t say that) but basically sits at the holdco as cash or near-cash in case of emergencies, with the part that was drawn down earlier and used for general holdco purposes, like recapping the subs, and has now been termed out.

The $2.9bn is part of the float. It’s not just in a different place, it has a fundamentally different purpose and it’s not really owned by FFH because it is “owed” to policyholders. For example, it cannot be used to recapitalize the insurance subs to help them grow in a hard market, and it can’t be used to buy back FFH shares for cancellation. The cash at the holdco does belong to FFH. The question is how it’s funded. It can be equity or debt and if it’s debt it can be revolver or term. All that’s happening here is that they’re terming out most of the portion of the revolver debt that they’ve already spent (but not the portion they drew down last quarter as a precaution). If one took your line of thinking, it would never make sense to buy treasuries, which by definition yield less than the cost of debt or equity funding. But it does make sense to buy treasuries, because they’re funded by float at (hopefully) a sub-100 CR.

The biggest thing this does is release the risk of breaching the covenant on the revolver. Good news. I had a feeling this was coming - Prem made a pointed comment at the AGM about having bond market access.

Pure speculation, but if FAH consolidates ATMA at any point, and ATMA consolidates UBN, the P/BV and P/E metrics here get transformed overnight.

I have not scoured the AR yet. Does anyone know if the "ratchet" in the OMERS deal includes a deadline for an IPO? because a) if not then the ratchet is somewhat irrelevant. b) if so, and it is any time soon, then FIH are going to give away a lot of BIAL shares. Coronavirus and full IPO valuations are not compatible.

I have been meaning to have a look at CIB for a while. I am a big fan of well-run EM banks, which often have high returns and spectacular growth potential. Here are my notes FWIW. Genuinely impressive. Very focussed on governance. More awards than you can count. Simplest balance sheet ever. 53% of assets are in government bonds. 29% are in loans, split 78% corporate, 22% consumer/SME. Substantially all of the rest is cash and due from banks. Govt bonds attract a low capital weighting so RWA/A is 50%, but RWA/loans is 170%. CAR is 27%. Nearly all capital is equity. All equity is tangible. 94% of liabilities are deposits. The loan to deposit ratio is 43%. Assets/equity is 8x. NIM 6.3% and efficiency ratio 23%. NPLs are 5.3% and coverage is 190%. 10y ROE range 21%-33%; excluding a one off dip during the uprising, the range is 26%-33%. The Egyptian economy grows. Reforms started in 2006/7 and slowest growth since was 2% for three years after the uprising. Liberalisation continues. Inflation seems to average about 10% but spiked to 30% in 2017 before falling to 3% in late 2019. Potential for growth is huge. GDP per capita is $3,000 and 80% of GDP is private consumption. Bank lending/GDP is 34% and household debt/GDP is 7%. 80% of the adult population is unbanked. In a population of 100m there are only 16m debit cards and 3m credit cards. Mortgages barely exist. Two oddities: they seem to be the largest bank with 7% market share, and I can't understand how such a fragmented system is so profitable; and I can't see which currency the government bonds are in (they may have a portion in US treasuries backed by dollar deposits, or it may be all Egyptian pounds). I think a good shorthand measure for long term dollar returns in EM bank stocks is ROE minus inflation, which suggests something in the high teens. EDIT: I forgot to say that the CEO here, Hisham Ezz al-Arab, is on the Fairfax Africa board.

Specifically?

That will show whether the contracts are in the money, but not what they could currently be sold for.

No, he mentioned the market not wanting this hypothetical player as a counterparty. Never mind!

This may be a really dumb question but if someone out there has a liquidity problem, how can they pay someone else to take the contract off them? I can understand how a liquidity crunch would drive a firesale at a low positive price. I can't understand how it would drive a negative price. Surely if you're f***ed for cash and the price goes negative you just go bust and stop worrying about the fact that you can't accept delivery? This is a real market for physical delivery, so if you own the contract you MUST take delivery or you are bankrupt, and your broker will have to handle it for you. Oil is not like steel or copper or something else you can just take delivery of and drop off at a yard somewhere. You can't dump it out on land or the ocean, you need to pay someone for storage, and that's what drives the negative prices, as those storage costs are non-trivial, and during a shortage like the present, there is simply nowhere to put the oil that must be delivered. I know. But that doesn’t explain how (in SD’s scenario) a player that has no cash (liquidity crisis) can *pay* someone to take the contract. That’s what I’m asking.

This may be a really dumb question but if someone out there has a liquidity problem, how can they pay someone else to take the contract off them? I can understand how a liquidity crunch would drive a firesale at a low positive price. I can't understand how it would drive a negative price. Surely if you're f***ed for cash and the price goes negative you just go bust and stop worrying about the fact that you can't accept delivery?

IIRC these contracts are not quoted.

Can't be anything to do with the fact that his own businesses probably have business interruption insurance ;)

If I had to take a stab at interpreting that, it likely means they will NOT be increasing equity allocation and will be doing relative value trades with the existing portfolio. There' still going to be meat on the bone for them in fixed income which is GREAT! But definitely not the outcome we would've envisioned from the "financial ark" that Fairfax was setting itself up to be when it was hedged. Agreed. On a separate note with oil at -$37 those deflation swaps might actually be worth something. ;) ::)

I think with so many names out there trading at the discount, there has be to be substantial change in the story (other that we're sorry, we are trying to improve), for the investment flow to come in and lift FFH. I have no doubt that FFH is being bought on the cheap by hard core value investors. I think the exercise to do is simply to see if at $400 CAD a pop, there is more value in that basket today than there was in 2013, when last it was at the same price. But that lift that will bring it 1.1 book that will take time. At the AGM it was mentioned that there is about $1 billion left in monetization. Let's hope that takes care of few bad apples. My speculative scenario is that perhaps Alphabet would be interested in the Blackberry and its IP portfolio, now that its (Google) advertising dollars will have some headwinds and now that Blackberry can be said is cheap. ($4 billion market cap and $1 billion revenue) so 4 times sales. FFH bought shares of Alphabet. Completely unrelated but you never know ... I think the monetisation comments referred to the private portfolio, not the public one.

I enjoyed Prem's clarity on the topic of how much they could invest in equities at the AGM: Q: How high could you take that percentage of the portfolio for equity exposure? A: We have selected about that, you know, what we have today and you can always trade something that we may not - we like a lot, but we like something even better higher quality. So we've done that and selectively but situation at the, will that be like but yes so that's where we are right now on our equity portfolio. :o

You heard right. But I think someone had identified that up-thread.

If either XOM or GOOG are the size of BB I'll be amazed.

My AGM notes FWIW. 1Q. BV down 12% in 1Q20 but bear in mind they don't mark consolidated or associate-accounted investments, which includes big ones like FIH, Recipe, Eurobank, so this doesn't capture the full drawdown. Capital. Implies ratings agencies are unconcerned - no discussions on being downgraded. No covenants on bonds, and they are well within the 35% debt:equity covenant on the bank line. No holdco maturities for 4 years. Buybacks yes, but not at the expense of growing insurance subs or making good investments. Investing. Last few years "we have not made good selections - first to admit that." But only one of their 5-y time periods did not show investment gains (2011-16) and they are confident they have a good team looking at opportunities globally and across asset classes (bonds, equities, PE, real estate). Have some very good people - Wendy Teramoto was Wilbur Ross' right hand woman for 20 years. Most of the portfolio is still managed by Prem/Roger/Brian (with input from the others which has improved analysis) but the portion delegated to team members is growing. PMs get oversight from Wade (day to day) and Prem/Roger/Brian on a less frequent basis. This is working well and will naturally lead to a less concentrated and more liquid portfolio. Have bought $2.9bn of 4y investment grade corporate bonds at 4.25% yields - mentioned DIS spread as having gone from 50bps to 250bps. May not do much more as spreads have closed somewhat. Also looking at put bonds and pref+warrant deals. And bought some high quality stocks like XOM, "the most financially sound oil company, with a 100 year record, at a 10% yield", and GOOG. Monetisation of private investments continues - "at least $1bn" to come, but over time, no rush. Insurance. Premium growth will now be flat for "several quarters" but underlying hard market developing. "Continued strong rate improvement" e.g. DD at Allied, DD and accelerating at Northbridge and HSD at Odyssey, Crum. Allied is at the leading edge of the hard market and has plenty of capital. Crum growing premiums over 20%. Riverstone UK has huge opportunity because Lloyds is restructuring and has put many portfolios into runoff (hence the OMERS deal, although nobody asked why OMERS buying a stake from Fairfax, rather than via an equity injection, helps RSUK to grow). Xenith is the only major platform not seeing rates moving the right way but is reporting strong CRs and they know exactly how to handle this market. Business interruption not an issue as nearly all of Fairfax's exposure is standard contracts which require physical damage to property - courts would have to overturn contracts for these contracts to provide broad based coverage. Highly unlikely they will have to pay anything significant but it might end up going to the supreme court. Scott Carmilani's new role is to encourage cooperation and transfer of best practice - e.g. knowledge about insuring long haul trucking in one geography may be transferrable to others.

Lord but this replay is clunky. I keep getting cut off, and there's no easy way to navigate back to where you were. If anyone from Fairfax is reading this, please put out a transcript or at least load the audio onto a webcast system that allows navigation.

I would focus very hard on how mission-critical the software is, how expensive it is, and what switching costs are. I would think some will be safer than others. For example, I cannot imagine switching off my Microsoft 365 subscription right now. Maybe I am biased as a MSFT shareholder, but it's cheap and realistically converting all my excel files to something else just is not going to happen.