StubbleJumper

Just for reference, the last financial report put BB's cash and short-term investments at about ~$900m and the debentures are ~$600m, so that could leave things a bit tight for BB. I am guessing that they would want to refinance the debentures in some fashion, but I'm not convinced that there would be many takers other than FFH. SJ

Was refuted by Fairfax this AM. Who knows what is going on here.... If I had to guess, this is likely being driven by BB's convertible debs that FFH holds. Working from memory, ~$600m of those debs come due in November-ish, so having a conversation about them 5 or 6 months in advance would be a natural thing to do. Given the current situation with BB, if FFH were to roll the debs, it is likely that FFH would demand some sort of improvement in the coupon rate, the conversion privilege, or both. If their demands about the conversion privilege were too outrageous, it wouldn't surprise me at all if BB didn't suggest that FFH take look at a complete acquisition. Or maybe the converts have nothing to do with this, and BB will simply write a large cheque to FFH later this fall... SJ

No, the exodus of longtime shareholders occurred when Prem decided to reweight his multiple voting shares so that the Watsa family could retain full control of FFH despite having only a 7% economic interest. That sad story took an interesting twist when Prem decided at the last minute to extend the voting period, presumably because he needed some more time to convince a few shareholders to vote in his favour. Since that time, the FFH board of directors has been stacked with two Watsa children who have mediocre qualifications, and Prem seems to have created a job for one of the kids by hiving off a chunk of our investment portfolio for him to manage. Long-time shareholders are not impressed by the governance abuses, and the investing results haven't been good enough for them to keep their shares while holding their noses. There is a reason why a considerable portion of minority shareholders withhold their director vote for select FFH directors. SJ

;D Dear lord can you imagine the reaction on this board if Fairfax took Torstar private?! Prem can't admit mistakes! Declining industries! Good money after bad! Liquidity! Leverage! AAAAAAAAAARRRRRRGGGGGHHHHH. Couple of (serious!) points: 1) What makes you believe Torstar did not test the market before agreeing this deal? 2) If there was a better deal to be had, why would Fairfax not have taken it? 3) Anyone can still make a bid. The break-fee seems to be only $2+1.5m on a deal that is currently valued at $52m. If somebody figures that this is a bargain and comes in and offers, say, $75m later this week Torstar BoD wouldn't have much choice but to recommend that the offer be accepted and simply pay the break-fee. Any offer above $55.5m ($52+3.5) would be a no-brainer for shareholders, right? Probably not going to happen...

Optics is not good on this one. I don't like it. In Feb 2020 Prem commented, “Paul told me recently that for family reasons, he wanted to retire as President of Fairfax. It was with great sadness that I accepted his decision". I've been a big proponent of Prem and hold a lot of shares. Going forward, I'll have to approach any such comments with greater skepticism. Yes optics are terrible.....moving on is not a bad thing...but getting robbed by a former executive of the company who was apparently in retirement is quite something else. Why the hell would Fairfax agree to a buyout of Torstar at $0.63....the cash balance (and no debt) alone is worth more. The rest of the what Torstar owns....newspapers, several media properties (Torstar paid $190 million for their investment in Vertical Scope only 4 years ago and own 15% of Blue Ant Media etc) are worth considerable more than zero. Fairfax shareholders (and Torstar shareholders but who cares about them) should be outraged....but all we have here is largely silence from Fairfax shareholders.... I agree with Sanjeev on this one.....good for Paul Rivett....but this should not be allowed to happen.... As for the tax loss carryforwards this sale will create for Fairfax....these are only of value if you have investment gains to offset them which is not something that has been in abundance at Fairfax recently. BP6 Bearprowler, If this is truly a sweetheart deal, should we not expect to see additional suitors appear on the market? I understand your concerns about the fact that Torstar is being bought at far below book -- and in fact as you said, below cash. But, if it's an obvious steal, we should expect other offers, right? I expect no other offer because Torstar appears fundamentally broken. Newspapers are a dying industry and Torstar is competing in a market that is shared with the Toronto Sun, the Globe and Mail and the National Post. The only worse newspaper market in Canada is Montreal! So are Torstar shareholders getting screwed? I guess there's a couple of ways to try to measure that: 1) Discount the cash from operations - when you look back 3 or 4 years, it seems pretty evident that Torstar has generated essentially no cash from operations, and that's ignoring the need for maintenance capex. From a basic discounted cash flow sniff-test, how much cash from operations would Torstar need to be worth $100m? Maybe they'd need about $15m cash from ops (maybe even $20m), understanding that maintenance capex is unavoidable? Is there any reasonable prospect of getting that kind of cash from ops? The trend has been really unfavourable, and were it not for a cash infusion from the federal government, would Torstar still even be in business? I am having trouble seeing any prospect that a future owner could extract annual cashflows from Torstar, but hey, maybe they have some excellent management plan that will turn things around? From a discounted cashflow perspective, it looks roughly like a zero. 2) Sum of the parts - your point about selling Torstar for less than its cash is spot on. But, is it feasible for a management team to sell the assets, settle the debts and walk away with more than $52m? Most of the assets appear to be worth nothing. If you were to shut down Torstar, under Ontario law you would be on the hook for severance costs of probably 6 months to a year of pay for each of Torstar's hundreds of employees. My guess is that alone would eat down that cash balance to below the $52m purchase price, and then the employees would go to court to try to have the rest of that cash seized to satisfy the pension plan deficit. If you liquidate, it's likely a zero, or close to it. Torstar is a stinker and has been for a long time. The other one on FFH's books that is also likely a stinker is Toys R Us, but we don't ever see enough disclosure to know for sure. FFH bought Toys with the notion that the real estate alone was enough to underpin the purchase price, but I am guessing that Toys is losing money from an accounting perspective and I question whether it too is cash flow positive. And once again, to extract any value out of Toys, FFH has to either find a greater fool, make it profitable enough to pay divvies to FFH, or liquidate it. And, just like Torstar, it's really tough to liquidate Toys and extract much value from the assets. The first best option would have been to have never bought crappy assets like these in the first place. The second best option is to recognize your mistake, try to salvage whatever value you can and move on. Perversely, I don't view this development as a bad thing. SJ

You hadn't already mentally written this off? If FFH were to hold this for another 5 or 10 years, what do you figure would be their cashflows from the investment? Approximately zero? At least with this arrangement, FFH gets $18m and a tax carry-forward and they can focus on something else. Maybe they'll also be able to recuperate a bit of capital from Resolute and Toys too? Past decisions have been regrettable, but moving on isn't necessarily a bad thing. SJ

Relevant follow-up about potential costs (workers comp in California) which is important for Zenith. The ongoing development (not in the sense of recognized reserve development but in the sense of the social inflation threat) is definitely positive. Absent future adverse legislation, costs appear more and more manageable. Even if there is unusual flexibility to submit claims, Zenith will have to opportunity to rebut the claims and influence case law. It appears that Zenith will be able to report reasonable estimates in the coming quarters. https://www.wcirb.com/sites/default/files/documents/rb-covid19-cost_impact_of_governor_executive_order_0.pdf Thank-you for sharing that document. The document was a nice walk through on how the costs can rapidly accumulate. So in California, they are estimating a mid-point of 7 loss points and a bound of 10 or 11 points, and that's before any government programming or reinsurance. If that applied across the US, that would be no problem at all for Zenith. Beyond that, on a personal level, I am surprised at how small the indemnity is for a health care worker fatality. Only $400k each and that includes medical costs as well as 5 or 10 years of economic support to surviving spouses and children? The bulk of the workers dying must be personal support workers who don't earn so much? I think I trotted out an assumption of about 5X as large, but admittedly, I just pulled that out of my ass because I know so little about WC. SJ

They do admit that the contract (and other identical contracts) contained some ambiguity. WEB did say he was aware of at least one insurer who also had that ambiguity on their contracts and would have to pay. He ruled it out for berkshire contarcts Apparently the wording used in British insurance contracts may have sometimes been ambiguous as well. Not a direct problem for BRK, but who knows what GenRe might have reinsured. SJ

Prem did mention Exxon by name at the Annual Meeting conference call. He made reference to a 10% dividend rate. If they bought it in March and already sold it a few weeks later, they might have made a quick 20% or 25%. SJ Could it be that they purchased after March 31st which is the current filing date? The call was few weeks after that, right? That could explain why it isn't showing. Yep, that would be a sensible explanation. Of course, that would also mean that they are probably only ahead by 0-10% if they bought in April. I guess it's better than a kick in the pants. SJ

Prem did mention Exxon by name at the Annual Meeting conference call. He made reference to a 10% dividend rate. If they bought it in March and already sold it a few weeks later, they might have made a quick 20% or 25%. SJ

In some respects, you are actually being a little generous on this. From an individual's perspective, we are hoping that covid is a "one and done" infection. Whether that is ultimately true remains to be seen, but that's the hope anyway. On the other hand, influenza is a recombinant virus, meaning that it gets a fresh new crack at you every couple of years. So which is worse, a one-time risk of covid or a dozen cases of different strains of influenza over your lifetime? SJ

Thanks Cigarbutt. I hadn't seen the article from Insurance Journal, so that is interesting in particular. A couple of the more elaborate industry level loss estimates gives a bound for Zenith. It looks like perhaps 16 loss points, before reinsurance and government funding, might be the reasonable estimate, with a bound of perhaps 50 loss points. So, for an outfit like Zenith that writes $750m of premium, that would be maybe ~$120m before reinsurance and government funding, but possibly as much as $375m . As you said, it's probably not an existential question, but it's curious that no provision was taken in the first quarter. SJ

In terms of COVID-19 by priority of potential impact, event cancellation comes first, then business interruption (dynamics developing) and then workers comp exposure (at Zenith). The evolving "presumption" definition makes sense. Typically, the presumption of a work related "disease" (infectious or not) does not apply and the worker has to "prove" that there is causality. However in certain instances (by using classes of work or criteria for exposure) the presumption threshold can be modified. Work-related exposure to COVID-19 will be specific to state or provincial jurisdiction but similar principles apply. Some areas will use a class of work method (ie healthcare workers, first responders, working in meat processing plants?) and states like California will use a criteria method. The end result (the story has evolved when compared to the Zenith link mentioned above; this was released relatively early in the game) was influenced by inputs given by players like Zenith. There may be significant pockets of costs but the typical accepted claim using the criteria will likely result in very manageable costs. Also, the typical person who will get COVID-19 will be asymptomatic or will have limited symptoms. Zenith has a long history of strong underwriting and this episode may even help them to strengthen their moat when rate increases will be authorized by regulators. https://www.thezenith.com/wp-content/uploads/Agent-GovernorExecutiveOrder.pdf Thanks for the thoughtful observations, Cigarbutt. I guess my disquietude about workers comp reflects my limited knowledge about the subject. It was an enormous cost, largely underwritten by Uncle Sam, for the 9/11 response. There is some talk of public funding for covid workers, but this is yet unclear. I agree that most will have extremely mild symptoms that they might not even notice, some will have a modest WC claim if they are off work for a month or two because that would likely exhaust their paid sick leave. The ones that get expensive will be the tail cases -- those that have long-term lung issue, extreme PTSD and those that actually perish from covid. In the US there have already been about 100 public transit workers who have died from covid (https://www.theguardian.com/world/2020/apr/20/us-bus-drivers-lack-life-saving-basic-protections-transit-worker-deaths-coronavirus). My guess is that there will be hundreds of workers from nursing homes that will meet the same fate. And then there will be the other less visible deaths from places like the slaughter plants that we have already mentioned, plus the retail workers who worked in essential businesses. What kind of indemnities will be triggered? A couple million bucks per death if the policy covers income replacement for 5, 10, or more years? It doesn't take a lot of imagination to envision 1,000 fatalities in the US, resulting an industry level indemnity of perhaps a couple billion divided by however many underwriters are in that space. If the government does get involved, that becomes more manageable (just like what it was for the 9/11 responders), but it seems perplexing to me that this has not already been a cause for at least a modest provision at Zenith. Anyway, maybe this will end up being nothing-burger for Zenith, but I still find that idea quite counterintuitive. SJ

No, I think that FFH is out of Reitmans. The larger concern is that FFH seems to like to buy POS companies that do not have a moat and that operate in highly competitive sectors. Doing things like buying Reitmans outright while it is reorganizing would be right up FFH's alley! Let's hope that Prem can resist! SJ

Throwing that one in again to get you guys' input. Could Fairfax insurance businesses face similar losses? As large as Lloyd's? I think you need to think about covid on a sub-by-sub basis. Prem assures us that the US subs (C&F) used the industry standard virus exclusions in their commercial contracts, which should protect them from business interruption claims. It seems like about half of the US states have enacted legislation to provide immunity to nursing homes for covid claims ( https://time.com/5835228/nursing-homes-legal-immunity-coronavirus/ ) so that too should help limit litigation. So far, I have not read about any litigation involving C&F, but there are definitely many cases already launched against other US primary insurers (KJP posted this in the P&C thread: https://www.law360.com/pennsylvania/articles/1273308 ). Given that Northbridge didn't take a covid provision, one presumes that they used some sort of exclusionary language for business interruption. What is more, nursing home litigation risk in Canada is less pronounced because getting a class certified is a bit more difficult, and you can usually only sue for actual economic damages in Canada -- punitive damages are very, very rare in Canada, and that would be the expensive part of the claim because the economic damage from the premature death of an 88 year-old is pretty minimal because most of them don't have a job or run a business (ie, when an senior citizen dies a year or two sooner than he should have, virtually no income is lost). Zenith is one of the subs that causes me consternation. Zenith has stated on its website that a covid related workers comp claim needs to demonstrate that the virus was caught in the workplace rather than in the community ( https://www.thezenith.com/wp-content/uploads/Zenith-Coronavirus-Update.pdf ). In most cases, that's a pretty hard thing to prove, but I do wonder whether there won't be some employers/employees who argue that the existence of a covid cluster in a workplace is adequate proof of virus provenance. In particular, nursing homes, public transit agencies and slaughter houses have all had a heavy incidence of covid, resulting in time off and sometimes death of employees. I question whether some of that might ultimately come back to Zenith if groups of employees convince a judge or jury that the existence of an employment related cluster is adequate proof that covid was actually a workplace injury. But, I don't recall seeing any covid provision for Zenith. Like every other reinsurer in the world, Odyssey is a bit of a concern because it's impossible for a shareholder to have any idea of what exactly is being reinsured. Odyssey took a $50m covid provision, so obviously there are at least a few policies that are a problem. But, is Odyssey reinsuring a primary company that was sloppy in the wording of its business interruption insurance? Hard to know, but it's a point of concern. The other sub that might be a problem is Brit. Brit does business in the UK and apparently some of the commercial policies written by UK insurers did not have a virus exclusion, so that might be the driver behind Lloyds' large estimate of indemnities. Brit did take a covid provision in Q1, but who knows the extent of their problem? Did they write many commercial policies with business interruption? What reinsurance have they taken out on their commercial book? At this point, we don't have many options other than to take Prem at his word and assume that the covid claims will not be very large. We don't have many options other than to accept that the $84m provision in Q1 is a fair estimate of the ultimate covid liability. But, I certainly don't blame you for being concerned about how this might evolve. SJ

One of the things that is happening in Canada is that the AirBnB market has collapsed, which is forcing a certain number of apartments and condos into long-term rentals. Some of the AirBnB operators had rented an apartment and were simply re-renting it through AirBnB to make a profit. Others had made the investment to put a down-payment on a condo (or multiple condos) and were using them for AirBnB short term rentals. Clearly, that market will be dead for the foreseeable future, and there are a few people desperately seeking long-term tenants, which seems to be pushing rental rates a bit lower. But, does it make a difference in the CPI? Those hedges could become interesting if prices keep dropping for another 6 months or so... SJ

It says average age of 4 years for the corporate bonds. In their pre AGM memo update. Yes, the $2.9B of corporate bonds are about 4 years, plus, apparently the holdco bought a pile of commercial paper with the money that it drew from the revolver (on the call, Prem stressed that these were not corporate bonds, but after the ABCP debacle of 12 years ago, what the hell difference is there?). The corporate bonds have probably gone up a shade, but with a 4 year duration, it's probably not outrageous. The bigger question is, if FFH sells the corporates, into what should the proceeds be invested? Governments haven't budged in the past month, so not much incentive to unload the corporates. SJ

I think you have hit the nail on the head. In a typical organisation, how do you get promoted? Do you get promoted by doing good work, or do you get promoted because the bosses like you? Certainly doing good work doesn't hurt and doing bad work is a real problem for you. But, my observation is that the promotions go to those who have superior ass-kissing people skills and who have also done decent work. The people skills don't do much for you when you are working remotely. The bosses will always work out of the office, and the "climbers" with social skills will always find a reason to work out of the office too. The guy who puts in a great 8 hours per day of work, but is not a social climber is the best candidate for remote work...but being unseen is really not a good thing for your career. Like it or not, we are social animals! SJ

If there is no transcript, does anyone mind summarizing what was said about the Equity Total Return swaps previously mentioned in the thread. It sounded like Fairfax went long total return swaps in March? If that is so, these are likely a source of additional liquidity since these things tend to be standardized and settled on a quarterly basis in cash payments. Depending on the size of the TRS purchase, Fairfax could have tens of millions of cash coming to it in June simply based on what the indices have done since March. Transcript is here: https://finance.yahoo.com/news/edited-transcript-ffh-earnings-conference-024448274.html SJ Thanks. Wasn't aware YAHOO also provided the service and Google didn't pull it up in a search. Have always relied on SeekingAlpha! Doesn't seem like a whole lot of information is given on the swaps, notional amounts, or underlying indices. The quarterly report does say the notional for the swaps is $952 million though. When I worked for a hedge fund, these were typically standardized on total return indices and would settle on the 3rd Thursday of the month ending the quarter or something like that. Things might've changed since then given the move to Central Clearing and whatnot, but I'm just trying to ballpark figures of incoming liquidity to Fairfax as a result of these derivative positions. Using the S&P 500 total return index and a last settlement date of 3/19 - Fairfax would be in the money by 18.7% on the current run and would be owed a cash payout of $178 million if values don't change between now and June. $178 million of incoming cash in a quarter is nothing to sneeze at for those who are concerned about liquidity issues. Yes, $178m is $6/share pre-tax, so that's great. I am, however, curious where those swaps are held. Are they held in holdco or in one or more of the subs? Money is money, but as you suggested, it would be a happy situation if a cash influx happened to be at the holdco. SJ

If there is no transcript, does anyone mind summarizing what was said about the Equity Total Return swaps previously mentioned in the thread. It sounded like Fairfax went long total return swaps in March? If that is so, these are likely a source of additional liquidity since these things tend to be standardized and settled on a quarterly basis in cash payments. Depending on the size of the TRS purchase, Fairfax could have tens of millions of cash coming to it in June simply based on what the indices have done since March. Transcript is here: https://finance.yahoo.com/news/edited-transcript-ffh-earnings-conference-024448274.html SJ

At least they've made money from their engagement with K-W.

The systemic risk is from space weather. That could cause a generalized mess to the electrical grid and communications.

I'm surprised Trump hasn't released the vaccine already. You know he's smart enough to get it done. ;) I thought that he made the bleach announcement a couple of weeks ago? SJ

Thank you for posting that. I knew the release was coming, but I probably would not have thought to look for it for a few more days. It's interesting that Residential rent bumped up a shade, as did imputed rent for an owned residence. Does that make any sense to people? Are people in your circle currently being served a rent increase by their landlord? Are people in your circle currently seeing their house increase in market value (which ought to be the driver of the imputed rent)? I would say that this is not happening in Canada right now, but maybe the US is different? As McLiu noted earlier in the thread, the options are OTM at the moment, but would require a ~10% CPI decrease from Feb to become ITM. If the counter-party is valuing this by model for the purposes of its financial reporting, this could begin to show up as a considerable liability on its Q3 financials if we see a few more months like this (the derivatives do not need to be ITM for modelled valuation to rapidly grow). Depending on what's happening in the counter-party's business, perhaps they will want to get the liability off its books? SJ

Good questions and good thought process. I'm not sure that an equity issue is necessary any time soon. But, the covenants on FFH's revolver do represent a bit of a risk. After the Q1 release, I spilled a bit of ink whining about how they were at a debt:equity of 0.34:1 on March 31, and their max ratio under the covenant is 0.35:1. My whining was that it wouldn't take an outrageous collection of insurance catastrophes to amount to amount to a $1B hit to their consolidated equity, which would trigger a bit of scrambling to manage the revolver covenant. Similarly, if equity markets take another leg down from where they were on March 31, it would only take about a hit of ~$500m to their equities compared to March 31 to leave FFH scrambling. Neither of those events are terribly likely, but IMO, they are entirely conceivable, which is why I don't love this situation of being reliant on that revolver. The good news is that the holdco is carrying so much cash equivalents that they could easily get "on side" with the covenant by trimming holdco cash equivalents and repaying a portion of the revolver...but the bad news is that the whole point of negotiating and paying stand-by fees for a large revolver is so you have flexibility and in the end you might not even be able to draw on it. Happily, the revolver is good until Christmas 2022, so as long as they respect the covenants, all is good. I do not view Recipe and Toys as being particularly vulnerable to a write-down any time soon. You would need to make the assessment that the assets are permanently impaired. While I don't love either of those businesses, at this point they are basically closed with the intention of fully reopening when social distancing measures are relaxed. It would probably take at least couple of years of shitty sales and income after the full reopening to conclude that the businesses are fundamentally damaged and permanently impaired. However, despite Prem's assurances that they will not need cash from the holdco, I do worry that if this closure is prolonged, they will end up burning through their revolvers and could ultimately require a cash injection to support their working capital needs when the restart occurs. Does FFH have a spare $75m for Toys or a spare $200m for Recipe if that should become necessary? It's trite to say it, but if everything goes well, everything will go well. What is the holdco's cash situation between now and March 31, 2021? I think it looks a bit like this: Sources: Cash at March 31, 2020: $2,483 Debt issue: $645 Subsidiary dividends: $? Management fees: $? (this is what holdco gets from Fairfax India/Africa or Hamblin Watsa) Interest/divvies on the $2.5B holdco cash: ~$50 Uses: Revolver repayment in April 2020: $500 Holdco interest payments for 12 months: ~$300 (based on $5.2B holdco debt) Holdco operating/admin: ? Purchase of Brit minority stake: $100 (but nothing says that this cannot be paid from an insurance subsidiary) Preferred and common divvy: $300 (assumes that FFH declares a $10 common divvy at Christmas 2020) If you assume that the holdco cash inflows from management fees and subsidiary dividends exactly offset its cash outflows for operating/admin costs, the holdco would have about $1.9B cash on March 31, 2021. So as I so tritely said, if everything goes well, everything will go well. But, if they need to take a large, unfavourable equity mark or they experience a very bad cat year, they could be in the situation of needing to repay part of that revolver to respect their covenants, and then cash at March 31, 2021 might not look so rosy. SJ *PS, my understanding is that Riverstone closed on March 31, meaning that the proceeds should be part of the $2.5B holdco cash.