petec

Thanks! Commonhold isn’t common here.

It’s not a term I’ve ever heard in the UK but I’m happy to be educated.

They also said premiums wouldn’t grow for a few quarters. I found that a bit contradictory. But overall it was positive. I think he meant that in the short-term we are seeing a contraction, but will see premiums increase as the expansion restarts later on. I think alot of insurers are taking a significant hit presently...can't see how we do not see a hard market when premium pricing renews around November. We were already starting to see dramatic increases in some lines before Covid-19. I know that strata fees on the West Coast had jumped 300-700% and insurers were no longer offering coverage for many or deductibles had jumped 200-300%. I'm also seeing huge increases in D&O Insurance and some other non-casualty lines. Cheers! Thanks. What’s a strata fee?

They also said premiums wouldn’t grow for a few quarters. I found that a bit contradictory. But overall it was positive.

There is a link under news -> events and webcasts. I haven’t tried it for Fairfax, but the equivalent link on the Fairfax Africa site gave me a playback this morning.

Cash - yes - but it is still a lot. Travel - yes - but plenty of potential investments are listed and don't require cash. They said they were hoping to have news on CIG and ATMA soon. I wondered if they are thinking of taking them private.

Notable that just cash and treasuries here, less all liabilities (there are virtually none), is about $2.30 per share. At $2.90 you're paying 60c for some genuinely attractive assets in UBN, Nova Pioneer, ABC Botswana, maybe bits of CIG and AFGRI. And if they can deploy some cash in this selloff...

@SJ - of course, using YE19 dividend capacity is misleading when we know that capital has since been destroyed at the subs. But assuming the stocks come back, and I think most of them will, Allied can probably largely fund the buyout of its own minority over the next 4 years. It just can't do that and grow. @bearprowler - I sincerely hope Fairfax do not to communicate more frequently. They were right to this time, because it's a weird quarter and they know they will get questions at the AGM. But normally, 90 days is the blink of an eye in business terms. @Sanjeev - I'll be quite happy if you're right but that's not my understanding. Thinking back, they may not have drawn the link between book value and equities quite as clearly as I did upthread - apologies for the confusion. But they have said publicly that equities will generally be 25-30% of the portfolio (which very roughly = common equity), and that there is a practical limit to how high they can go. For example, Rivett said on the 4q18 call that they will generally have 25-30% of the portfolio in equities and that "we're roughly at the upper end of our limit...given the rules and regulations...in the reinsurance and insurance companies". He didn't mention ratings agencies but I believe they represent a restriction, too. BTW for the purposes of this discussion I believe equities refers to all equity exposure, whether private or public and no matter how accounted. Either way I agree they won't pile in at these levels, at least not to markets generally, although they might find a few of the levered smallcaps in troubled industries that they seem to specialise in! All that said, they might be able to get good equity upside from converts or pref/warrant deals, without actually investing more in equities.

Well, the quick way to eye-ball it is to look at page 95 of the AR which depicts dividend capacity, because that gives you a sense of "excess capital." Then you can go to page 195 and look at the premiums:surplus ratio. We know that last year, FFH drew a divvy from C&F and then for whatever reason, reinjected some capital. When you look at C&F's dividend capacity on page 95, it was $140m, and then when you look at C&F's premiums:surplus ratio on page 195 it's 1.7:1. Usually you don't see that ratio go above 2:1. So, with a surplus of $1.4B, perhaps C&F could bump up its net written premiums by $500m to $2.8B (see page 16). The problem is that C&F increased its net written by 18% during 2019, and 33% in Q4 2019 compared to Q4 2018 (page 5). So you have a sub that looks to be a little lean on capital, received an injection in 2019 and is probably growing its premium at a pace of 20%+. It cannot sustain that kind of premium growth throughout 2020 without a capital injection. Northbridge is in a similar situation so they probably would benefit from a bit of capital too, but it's a less pronounced "problem." Allied has lots of capital, while Zenith and Brit did not grow their book during 2019. Odyssey has lots of capital, but it has also shot out the lights in the past when pricing got stupid, so it would not at all surprise me if their book could outgrow their capital. SJ SJ I don’t have the stats to hand. How much excess capital does Allied appear to have? Allied's dividend capacity was $800m as at Dec 31. Premiums to surplus was 0.6:1. So, they could increase their premiums by maybe 150% and it would still only be 1.5:1? SJ Yes. Which would be a nice surprise. Arguably more likely, Allied could buy a decent chunk of the OMERS minority stake (which I recall being $1.5bn) themselves and still grow premiums. Brit could also afford to its the OMERS minority. That somewhat improves the picture on holdco liquidity.

Well, the quick way to eye-ball it is to look at page 95 of the AR which depicts dividend capacity, because that gives you a sense of "excess capital." Then you can go to page 195 and look at the premiums:surplus ratio. We know that last year, FFH drew a divvy from C&F and then for whatever reason, reinjected some capital. When you look at C&F's dividend capacity on page 95, it was $140m, and then when you look at C&F's premiums:surplus ratio on page 195 it's 1.7:1. Usually you don't see that ratio go above 2:1. So, with a surplus of $1.4B, perhaps C&F could bump up its net written premiums by $500m to $2.8B (see page 16). The problem is that C&F increased its net written by 18% during 2019, and 33% in Q4 2019 compared to Q4 2018 (page 5). So you have a sub that looks to be a little lean on capital, received an injection in 2019 and is probably growing its premium at a pace of 20%+. It cannot sustain that kind of premium growth throughout 2020 without a capital injection. Northbridge is in a similar situation so they probably would benefit from a bit of capital too, but it's a less pronounced "problem." Allied has lots of capital, while Zenith and Brit did not grow their book during 2019. Odyssey has lots of capital, but it has also shot out the lights in the past when pricing got stupid, so it would not at all surprise me if their book could outgrow their capital. SJ SJ I don’t have the stats to hand. How much excess capital does Allied appear to have?

I would also presume this - but if not, then we may be double counting the need to inject equity and buy in minorities. It is possible they can achieve both objectives with one outlay.

The annual letter gives statutory surplus/premiums and you can see that Odyssey and Allied are the two that have significant excess capital. The quarterly and annual reports detail capital injections into the subs.

In very rough and simplistic terms the $40bn splits $10bn equity (which FFH own) and $30bn float (which policyholders own, but FFH can keep the investment returns. Those returns actually show up at the insurance subsidiaries, because that's where the float is. Insurance company profits (which includes investment returns) can be retained to fund growth or dividended up to the holdco. The holdco's main source of cash flow is insurance subsidiary dividends. It uses these cash flows to service holdco prefs and debt, to pay head office costs, and to pay the dividend. That's all fine. The issue at the moment is that the holdco actually needs to put money into the insurance subs to support growth (rather than receive dividends from them) and also needs to fund the purchase the Brit and eventually Allied minorities (Eurolife will fund the purchase of the Eurolife minority itself). That's why holdco cash looks quite tight over the next few years. But the key point I think you're getting at is that they can't use the $40bn portfolio to service holdco cash needs because it is held at the insurance subsidiaries against future claims. Edit: sorry, I didn't see that SJ had already answered this!

Hi Petec, How did you conclude this? They've said numerous times, Sam Mitchell, Prem, Brian, Francis...there is no limitation to how much they can allocate to equities, be it float or equity, but they have to make sure the portfolio is in a position where they aren't risking a huge reduction in statutory surplus or liquidity. I asked and they told me. As I understand it regulation does not explicitly forbid it but as you say, they can't risk the surplus or their liquidity, so to all practical intents and purposes they are limited, and it shows in their behaviour, because IIRC they have never invested substantially more than book value in equities. I must check.

They can’t buy any more equities. Simplistically, they can invest their equity in equities but their float must be invested in fixed income. So the opportunities are in switching from treasuries to corporates at expanded spreads and buying back stock. They’re doing a little of both but neither will change their prospects much. They entered this sell off fully invested in cyclical value stocks. As a result, there’s not much they can do. Thanks for your input. Pretty bad then. They missed the bull market few years ago because of the massive short positions and now they can't capitalize on the great bargains offered. Is it me or it is very disappointing from Prem? I am puzzled by his thinking, which appears to be against what he always been valuing. That is more or less the gist of this thread for most of the past decade, sadly. The positive spin is that if you go through the holdings you can find serious value today, especially in Eurobank.

They can’t buy any more equities. Simplistically, they can invest their equity in equities but their float must be invested in fixed income. So the opportunities are in switching from treasuries to corporates at expanded spreads and buying back stock. They’re doing a little of both but neither will change their prospects much. They entered this sell off fully invested in cyclical value stocks. As a result, there’s not much they can do.

Welcome Bryggen! You'll find some discussion on this news on the Fairfax 2020 thread.

How do you mean?

I don’t think this sold off because anyone’s scared the parent drew the revolver. It sold off because it’s an small illiquid closed end fund invested in illiquid/private foreign companies in the biggest recession ever. I bought my holding back for half the price - superb value.

I’m pleasantly surprised at the size of the loss, but as others suggest I suspect some of the equity markdown is masked by equity accounting. For example, FIH and FAH will be on the books for more than market value and I need to remind myself how Recipe is accounted. In fairness, it’s quite smart of Fairfax to structure their equity exposure this way and protect BV from short term marks. Also like the fact they’re swimming in cash. So much for a liquidity crunch.

Stock v strong on at least 3 separate days recently, including +30% today. I feel like someone knows something...

I’d love to know why they think it will take 5-7 years to get back to the 2019 output gap. Key prediction and no reasoning given. Entirely useless for investing, but fascinating.

I almost think we are more likely to have deflation now than 2008 - the disruption to cash flow and normal demand behaviour is greater. But it will be temporary. I will be stunned if the Fairfax deflation swaps are worth anything material.

What is horrible for Prem, if he claims to be a value investor, is that he failed to pick up high quality value in 2010 and instead hedged a cheap market; and then turned on a dime when Trump was elected and decided that the economy was going to take off, but felt quality was too expensive and chose to express that view by investing in cyclical value which crapped out the minute a cloud appeared. It is a staggeringly poor series of decisions. :-) now he has a chance to buy Berkshire at 1.05 BV or so Ha! Sadly he doesn't even have that. He can't add to equities and there's very little he can realistically sell to redeploy cash, because his stock picks are either 1) very undervalued, 2) illiquid, 3) sponsored by Fairfax, or all three. They will have to be very smart to make hay in this crisis, and I think their opportunity is in the bond market, not the equity market.

Yeah I wondered that.