petec

Quite honestly, what's happened to their equities YTD is what gives me the confidence that they can do 3-4% on their investments. A simple 50% reversion back to what they were likely provides that. Given the blow out in spreads, the drop in equities, and the drop in FFH, it's the first time it's been attractive to me with a clear path to 15% annualized since my lapse in judgement in 2018 thinking interest rates might actually be sustainably rising. The drop in equities and the rebound won’t help with their 7% investment return goal. The rebound would just undo what the drop did. Unless I am misunderstanding your point Agreed, and I won’t be selling here. But 3-4% positive might be quite an ask given what their equities have done ytd. My apologies if it wasn't clear. I sold out of FFH when I realized that my 3-6 month flop on rising yields being sustainable was wrong and went back into the "there's no way in hell FFH gets 15% ROE @ these yields and stock prices" camp So for me, buying back 25% of my original position today @ $290 USD means I actually have a decent chance at 15%/yr returns just from the reversion in current investments back to something closer to where they were. Agreed. My point was about book value for 2020 given where the equities were on 1/1, not where they are now.

1) I don't think you get #1 because FFH only has $26b of bonds and bills, and $6b of common and preferreds, at Dec 31 prices. As a P&C operator, they need to keep the lion's share of the $26b in governments, preferably short term, which currently yield less than 0.5%. The dollar yield on the equity portfolio won't change, but in percentage terms it will go up (ie, if no stocks are sold, they get the same divvies as last year). So, the math is like one of those tricky algebra problems from when we were 12 years old, but I don't think you quite get to $1B. That $26B of bonds and bills already includes $18b of governments and $8b of corporates, so how much further can that be pushed? Whatever governments you roll-over will almost certainly be rolled into considerably lower interest rates. Whatever corporates get rolled will get rolled into considerably higher interest rates. And then how many billions can you shift from governments to corporate to exploit the spread? Maybe a couple billion, max? Probably less than a couple billion. That was one of the comments I made about the AR, because it looked as if they might have already begun reaching for yield when they were not really paid for the risk. By my estimate, they have about $18B of bonds and notes in the one year or less category. Irrespective of how you work through the algebra, I'm not sure that you get $1B in dividends and interest. But it's a good stretch-goal! 2) Let's hope there is a V-shaped recovery in the equities, but that's mostly outside of FFH's control. I'd be happy to take a bit of luck, but the equity recovery or lack of recovery probably won't be indicative of good management or poor management on FFH's part. 3) Above and beyond buying Brit, Eurolife, or Allied minority stakes, I'd like to see FFH try to negotiate a better deal. They are not obliged to make those purchases, and perhaps the vendor will want to see some cash because equity markets have been horrific. This might be an opportunity to say, "Look, equities have flopped by 30%, can we talk about the buyout price? If I pile more of FFH's money into Brit/Eurolife and I don't get a discount, my shareholders will be apoplectic that I didn't use the cash to buy discounted AMEX or Visa shares instead...." No guarantee of success, but mgt should view this as an opportunity. 4) Curious about how you view Covid's impact on the CRs. Could be bad for Zenith, and perhaps there will be some business interruption insurance issues? But do you see this as a "cat" for FFH's subs? Frankly, I haven't been preoccupied by the possibility of claims, but maybe I haven't been thinking about this enough. 5) Yes, let's hope that the book can be grown significantly and profitably. Why do you think the growth in the book of business must wait until 2021? Are you of the view that there will be people who will non-renew their insurance during 2020 due to cash constraints? SJ 1) I haven’t thought it through your way, because I don’t know the regulatory rules, but they’re at $800m ish now and said that $1bn was a reachable target before spreads gapped out, so I can only assume it’s more reachable now. 2) agree luck not control. 3) I find it staggeringly improbable that they will try to renegotiate with OMERS, especially since it would likely put the RiverStone UK deal at risk, but you might be right. I think they will just delay. 4) honestly I’m not sure. 5) recessions generally mean less insurance sold. Cash crises generally mean less insurance sold. My (very high level) assumption is that COVID-19 puts the brakes on premium growth for a few months (not necessarily a bad thing for FFH given capital constraint) but makes for an even harder market in 2021 due to lower bond yields, equity losses, higher claims etc. The best I can see for FFH right now is they somehow have the capital to grow at low risk in 2021.

Agreed, and I won’t be selling here. But 3-4% positive might be quite an ask given what their equities have done ytd.

Only no2 is realistic. Hands are tied on all the others. Especially buying the minorities - these are at fixed prices, or with price floors. My view is best you get this year is 1) div & int income sustainably over $1bn due to redeployment of fixed income at fatter spreads 2) equity portfolio has a v-shaped recovery due to corona-control and the fact that it’s v cheap 3) Brit and Eurolife minorities bought, Allied postponed (a virtual certainty) 4) CR doesn’t crap out too hard given corona 5) moderate ability to grow in 2021 in an even harder insurance market.

Yep. Did anyone ever expect to see FFH with a 4% dividend yield? SJ At $290 USD this is late 2007 prices! Did the last 12-13 years really happen? Sadly I can confirm they did.

LNG, I hope, and the CEO bought stock a couple of weeks back significantly above today’s price.

You can’t have a depression in a fiat money system unless politicians and central bankers choose to have one. We are far more likely to have an inflation.

This assumes the bailout is company specific. I suspect what saves the bacon of most companies is fiscal spending, whether via govt investment or direct money transfers to consumers.

I wouldn’t get your hopes up. He was in big and/or illiquid cyclicals and won’t have been able to reduce much. The best that happens now is they do a great job picking up corporate bonds and don’t have to raise equity in the meantime. With this market disruption, let's just hope that they don't find themselves in violation of some covenant in that goddamned revolver. SJ Isn't "now" a bit early in the game for corporate bonds? https://fred.stlouisfed.org/series/BAA10Y Related to SJ's concern, last February (before the R2000 went down by 37.5%), Moody's made some comments and listed the following risks: high common stock investments, general investment strategy, earnings volatility and added: "A material expansion of the group's investments in stressed or turnaround assets as a proportion of shareholder's equity could also lead to downward pressure on the rating". https://www.moodys.com/research/Moodys-assigns-provisional-ratings-to-Fairfax-Financial-shelf--PR_1000002128 I just want to politely mention that, even if nobody knows the future, the posture comparison, at this point in time, between BRK and FFH, is simply mind boggling.. Too early to go all in? Absolutely. Too early to begin accumulating selectively? Probably a good time to get started. Spreads are at roughly prior peaks outside of 2008/2009. You don't wanna blow the whole load in the event things get worse, but picking IG selectively @ 3-3.5% pick up or HY @ and an 8% pickup isn't a terrible place to start. Certainly a better outcome 3-4 years from now than waiting in 2-year Treasuries for the Fed to hike rates. I agree with you on the concept but... For FFH, fixed income portfolio management has a been a large driver of returns over the years. Given that a significant amount of float has to be invested in fixed income, only small relative outperformance can result in a huge difference because of the embedded leverage. It's interesting to think of their fixed income float management from the perspective of an individual investor whose objective is to remain always fully invested. Dynamic (fellow Board member) explains this very well for equities and the following quote from Keynes is complementary: "In the main, therefore, slumps are experiences to be lived through and survived with as much equanimity and patience as possible. Advantage can be taken of them more because individual securities fall out of their reasonable parity with other securities on such occasions, than by attempts at wholesale shifts into and out of equities as a whole. One must not allow one’s attitude to securities which have a daily market quotation to be disturbed by this fact." Quoting others doesn't result in good returns but, from a humble perspective, this juncture appears to be one of the trickiest, by far, and I would tread very carefully along the fixed income parity curves. The wild card remains what public agents will do (or come up with). Agreed. But I think there is probably an opportunity to increase yields over those available in ST treasuries without taking real credit risk. If Fairfax’s interest income doesn’t rise over the next few weeks I’ll be disappointed. If spreads then compress and you get a levered impact on equity, great.

I wouldn’t get your hopes up. He was in big and/or illiquid cyclicals and won’t have been able to reduce much. The best that happens now is they do a great job picking up corporate bonds and don’t have to raise equity in the meantime.

SPG. Ouch.

Aercap. Several of the things owned by FFH: Eurobank, Atlas, Stelco.

I know of no good sites, but consider the pound cheap, and am concerned that most of my investments are in a basket of international currencies, which will cost me if the pound appreciates.

There will be no inflation. Massive deflation. Won’t happen in a fiat world - there simply isn’t the political will to accept it, even if it takes UBI with printed money to stop it.

This is the problem. We can all speculate, but we simply cannot know whether the causes of poor investment performance are ongoing or whether the company can improve. Lumpiness I can deal with. In fact I like it - the market pays a premium for predictability that (all else equal) I’d rather not pay. All I care about is whether Fairfax can adapt. “The best predictor of future performance is past performance.” 10 years is a good amount of time. Much better than using the first 10 years, which an investor probably should throw out (given the company has changed immeasurably since then). Well if you think that then for God’s sake don’t invest. But until recently you seemed quite positive on the portfolio they own; may I ask what changed?

This is the problem. We can all speculate, but we simply cannot know whether the causes of poor investment performance are ongoing or whether the company can improve. Lumpiness I can deal with. In fact I like it - the market pays a premium for predictability that (all else equal) I’d rather not pay. All I care about is whether Fairfax can adapt.

We have data from places like China—question is if you can trust it. Based on this data, Locking down Hubei had a major impact on spread throughout the other provinces. Turns out there are actions you can take to nip this in the bud instead of infecting 60% to achieve “herd immunity”. Don’t misunderstand British policy. Britain will lock down. But it’s at an earlier stage than many other countries and locking down too early is potentially catastrophic. Plus, as your flu/Christmas example demonstrates, the problem comes when you *lift* the lockdown. That’s why herd immunity matters. For interest:

Closing schools has already been shown to drastically reduce the spread of viruses like influenza. Any parent with young kids know that school/daycar is where infections spread from one child to another and then that illness is introduced to a new household. People who don’t use daycare don’t have that problem until school starts. This stuff has been proven over and over again in medical literature. Nothing rational about refusing to close schools. Relying on behavioral economics over much harder science is sure to prove unwise. Let’s see. This thing seems rare to me in how it doesn’t harm kids as much as the elderly. I think the risk is not how many get it - it is going to spread no matter what we do - but limiting intra-family interactions to protect the elderly. But that’s it from me. If you disagree I’m not going to argue, because I don’t hold my views as strongly as you clearly do. Only time will tell.

Unbelievable. Dalal, I hate to break it to you, but this is the USA's plan too. Britain is being honest. Trump is giving us bread and circus. I suggest you listen to their plan if you want to know what the true plan is here. It's the best we can do given that the federal gov't squandered what time we have. All they can do is try to manage the rate at which people become infected through social distancing. You are thinking about testing from the perspective of the individual. At this point, it's about the herd, not the individual. If I had to choose who would do better? All else equal, the country that communicates honestly, openly, clearly and with one voice would get my vote. On the federal level, My money is on Britain for having better outcomes. It’s a good thing then that we will still be able to travel to/from Britain. It’s like handcuffing the two slowest kids at school to each other for the big race. British response seems rational to me. If you shut schools kids (carriers) go to grandparents (vulnerable) which is dumb. And if you lockdown too early people get bored and you create a worse issue later. We are in uncharted waters, and a lot depends on behavioural “science” which is far less precise than medical science, so who knows what’s right, but at this point I don’t have an issue with Britain’s approach. What does annoy me is certain elements of the press stoking panic because it’s good for their Twitter reputations. But then we have long said that countryside is the act of killing Piers Morgan.

Yes, but that’s more something they issue than something that might represent a good opportunity because of a sell off.

There is little space to add to equities, but you might be right that there is space to do a few options. I would guess they are more likely tp go long than short though, at this point.

The latter. The time to reach for yield is when you are paid for the risk. There's starting to be a bit more reward for risk in the market. Exactly - with the possibility that if spreads compress again when coronavirus turns out not to have killed everyone and when central banks really turn on the taps, they get a nice boost to BV. So it could be both, but one after the other.

TCC which spreads are you seeing being higher than 2016? I’m not seeing that for most of the obvious candidates.

That would meaningfully improve the outlook for FFH.

They cannot redeploy a meaningful amount into equities. They can’t recap the subs in any meaningful way and if the equities remain depressed may not be able to grow into a hard market. They certainly don’t have the capacity to grow and buy back stock. The only opportunity is in the bond portfolio - but that could be huge.