StubbleJumper

The problem is as follows: if mall/whatever reopened, I would go there if I knew I'd be the only person in the mall. But then store(s) don't get enough business. OTOH, if everyone rushes in, then I wouldn't go there. So likely you can't get many people there. It's also possible that there will be a bad feedback loop: people don't go to malls, cases don't rise, people think that it's safe and go to malls, then cases rise again, rinse, repeat? Restaurants are more complicated than stores. Even if I'm the only customer there, there is a risk of getting infected from the staff. More risk than if I ordered for delivery. So screw going to restaurant. I wouldn't worry at all about going to malls. My observation is that I don't have much trouble staying 6+ feet away from the next guy at a shopping mall except during the Christmas rush and at lunchtime at the food court. But a mall during May in Canada? You could shoot a cannon down the mall and not hit anybody during May. It's a bit of a similar thing with most restaurants at lunch time during May and from Monday-Wednesday at supper time. One table out of two might be occupied. But, for restaurants it is more hit-and-miss. There are some that are jammed all of the time, so you'd have to be a bit selective. SJ

I am a bit disappointed in that cheque. I had expected to see an image of the president as a watermark in the background, but all I saw was a strange bit of print. Was that even worth his effort? SJ

But he also said that unlike the 25 years of going nowhere from 1929 to 1954, the Fed now has FDIC and other tools. I actually got the opposite impression that it will be much shorter than a 25 year depression because of what the government is doing. Exactly right. He also said he expected inflation, which would be rather a different outcome. I happen to think an inflationary depression is pretty much the same as a deflationary depression ) But at least the Dow or SP or whatever will go up, just not as fast as all your costs. Actually, my take is that an inflationary depression is probably a bit easier to manage. Labour prices (wages) tend to be sticky downwards, and minimum wages in particular are sticky downwards. At least with an inflationary depression, you the real price of labour gets inflated away, which enables firms to consider hiring more people. Similarly, in a deflationary environment, there is a disincentive to spend immediately while in an inflationary environment you are better off to convert your cash into goods immediately. We probably don't want to experience either of those, but if I were forced to choose.... SJ Given everything we are seeing today, is it not likely that we see mild deflation in the US moving forward? This has been the trend in Japan for the past decade and Europe in recent years? Oil at $20 will be deflationary (lower input costs). Massive unemployment. Massive number of business bankruptcies. Double digit negative GDP growth. Falling consumer spending and business investment. Worldwide recession. Strong US$. Long bond yields at historic lows. Debt to GDP levels back to historic highs. Higher taxes in 2021 (likely). What will cause inflation in the near term? War perhaps? Other? The theoretical cause of inflation would be the rapid expansion of high-powered money and the elimination of bank reserve requirements. Will it work, or does conservatism at banks and a lower velocity of money off-set the expansion of the monetary base? Time will tell. SJ

But he also said that unlike the 25 years of going nowhere from 1929 to 1954, the Fed now has FDIC and other tools. I actually got the opposite impression that it will be much shorter than a 25 year depression because of what the government is doing. Exactly right. He also said he expected inflation, which would be rather a different outcome. I happen to think an inflationary depression is pretty much the same as a deflationary depression ) But at least the Dow or SP or whatever will go up, just not as fast as all your costs. Actually, my take is that an inflationary depression is probably a bit easier to manage. Labour prices (wages) tend to be sticky downwards, and minimum wages in particular are sticky downwards. At least with an inflationary depression, you the real price of labour gets inflated away, which enables firms to consider hiring more people. Similarly, in a deflationary environment, there is a disincentive to spend immediately while in an inflationary environment you are better off to convert your cash into goods immediately. We probably don't want to experience either of those, but if I were forced to choose.... SJ

Yes, I must say that I did not at all miss the BS from previous years where adults write a question and get their 11 year-old to go to the microphone to ask it. SJ

Maybe RBC was the outfit that extended the $2B revolver to FFH? ::) SJ

The difference between FFH's cash and BRK's cash is the extent to which mgt is free to deploy it without constraints. So, BRK doesn't actually have ~$130B of cash that can be deployed into just anything. Some of that cash needs to be maintained in risk-free (or almost risk-free) investments so that it is available for use by the insurance subs if there is some sort of mega-cat. So maybe BRK has $60 or $70B of truly discretionary cash that it could deploy into an acquisition, equity purchases, share repurchases or divvies? Now turn to FFH. Some of the cash hoard at FFH needs to be retained for insurance operations because we know that NB and C&F were bumping up against their UW ceiling due to their limited capital. So, of that ~$11B, how much can truly be deployed without constraints? Maybe a couple of billion? That thought process was the driver behind the discussions on this board about how high FFH's equity allocation could truly get, and my question about just how much exposure to corporate bonds/paper that FFH can truly accept. On the other issues that you listed #1 to #4, I don't believe that any of these are a short-term problem. Holdco liquidity is fine if this situation is cleared up within a year or so -- there are no major maturities coming down the pipe, Prem claims that Recipe and Seaspan won't need any more cash from FFH, so the big decision at Christmas will be whether it's still a good idea to kick out $270m in common dividends. But, if this situation persists for more than 1 year, clearly FFH will need to have a few conversations with its lender about that revolving credit line and then in 2022 the bullet payments will return. The other risk is that if the market takes another leg down and FFH is forced to take a negative mark on its equities, those revolver covenants could become a real thing. #2 and #3 are probably what is discouraging investors the most. Over the past few years, FFH has been heating its offices by throwing bundles of cash into a woodstove.... SJ

Frankly, I'm good with that. As long as the next guy does not fritter away the $100B+ cash balance on value-destructive, ego-driven acquisitions I won't much fuss about whether he is the funniest guy in the room. I just pray that the next guy won't be another Edward Bronfman Jr. SJ

How are you getting 15% with portfolio investments returning 2.5%? I understand you are using $255 stock price as your capital base, but are you taking into account interest expenses, corporate expenses, preferred dividends? Even 3.5% pre-tax return does not get me to 15%. Vinod For a shorthand analysis like this, it would not be entirely unreasonable to net underwriting profits against head office costs (incl interest) and simply look at investment return/stock price. I think we are looking at nearly $650 million in these other expenses and underwriting could cover half of it. So it has a material impact. I get a 7-8% return on capital under those assumptions. Not 15%. Vinod No, everybody does the rough math a bit differently, but the math has gotten pretty attractive over the past month, irrespective of how exactly you do it. The quick math in my mind is that if you believe that FFH is good for $15B net written and a 95 CR, that's $750m UW profit which is roughly enough to offset the interest and holdco admin costs. So what's left is the investment income and the other operating income (but let's call the operating income a zero from Toys, William Ashley, etc). The investment portfolio as at Dec 31 was US$1,300/sh and yesterday's stock price was ~US$260/share, so call it about 5:1 leverage. So, from where I sit a 2.5% yield on the investment portfolio gives you 5 x 2.5%=12.5% pre-tax. To get 15% earnings yield post-tax you might need an investment portfolio yield of 3.5% to 4% (ie at 5x that would be 17.5% or 20% pre-tax to get your 15% post-tax). My quick math excludes any contribution from Fairfax India and Africa, which are clearly valuable, but a bit hard to predict. If you believe that the operating companies and Fairfax India and Africa will contribute something positive, then you could get your math down to 2.5%.... SJ

I took a quick scan of Q1 results, and it's more or less what FFH had telegraphed through its April press release and through Prem's comments at the annual meeting. But, nonetheless here are a few comments/observations from my scan: 1) What's the deal with the CR? - Okay, so net written increased considerably (page 35 of Q1), but aren't the CRs just a wee bit disappointing (page 37 of Q1)? We have been led to believe that much of the increase in net written was the result of price increases. Price increases ought to fall directly down to the bottom line, meaning that CRs should have decreased markedly. In actual fact, the consolidated CR dropped from 97% to 96.8%, which doesn't really show much of a price increase, and this is mostly due to the current accident year -- this is not a case of being hit by skeletons in the closet. In fairness to FFH, Odyssey booked 6.1 CR points for Covid and Brit 6.2 points (pages 41 and 44 of Q1) which inflated things a bit for those two subs, but the underwriting overall has been a bit of a disappointment. The "Other insurance" grouping is once again a bit of a disappointment with an Accident Year CR 100.6...once again, why bother taking the risk of doing business in shit-hole countries if your result is an underwriting loss? At least the kleptocracies of Eastern Europe seem to have done a shade better. 2) Shift into corporates - It's not really news, but the shift out of governments and into corporates is quite visible (page 12 of Q1). Corporates are now $12.3B compared to 9.9B on Dec 31. Total investments are still $33B or $34B, so the corporates have been bumped up from abut 30% to about 36% of total investments. FFH suggests that credit quality is generally pretty good but it has visibly declined as a result of this process of reaching for yield (page 24 of Q1). I wonder what their comfort level truly is? Would they go to 40%? How about 45%? 3) Debt levels and the revolver covenants - in February, I did a bit of ranting and raving about FFH's reliance on its revolver because revolver covananents tend to bite you on the ass at the worst moments. FFH did the right thing by drawing its revolver before its lender could concoct a reason to pull it. But, the displacement in markets has resulted in some of FFH's assets being marked down, and the covenants are becoming more of a thing. FFH is permitted a maximum debt to equity of 0.35:1 (see page 19 of Q1), and they are currently at 0.34. So, do a little bit of school-boy arithmetic, and it's evident that FFH is a bit tight on its convenant. What size of asset impairment would be required to take you from 0.34 to 0.35? A reduction of equity of about 3% would make FFH hit that threshold. As we know, total consolidated equity is $16.2B (page 2 of Q1), so an asset write-down of ~$500m would be enough to force FFH to either make some decisions or to have a chat with its lender. This is not an urgent, end-of-the-world type of situation. The first obvious thing that FFH could do would be to sell some of the holdco bonds that it purchased with the revolver draw, and then use the proceeds to repay the revolver, and that would be enough to put it back "on side" with its covenant. What is more, most of the equity positions have had favourable marks since March 31, so the situation is probably less tight than it was a month ago. But, a $1B hit to assets or to insurance liabiities could become a cause for scrambling at FFH ($1B is just a couple of bad hurricanes in the US, right?). FFH probably should be holding some proactive conversations with its lender... 4) Why aren't things worse at Zenith? - Am I alone in being surprised that Zenith's results were actually not that bad (page 43 of Q1)? The accident year CR of 104.7 strikes me as lower than I would have expected. I had imagined that there would be a heavy amount of claims due to doctors, nurses and personal service workers who allegedly caught Covid while working in nursing homes or hospitals. Similarly, slaughter plants, public transit facilities and other employers all have heightened rates of Covid. Is it the case that this is not material? Or is it the case that Zenith is refusing to pay and losses will only be recognized after employers/employees sue Zenith on the argument that employment related Covid clusters are sufficient evidence that workers comp indemnities should be paid? I was also a bit surprised that Zenith's net written hadn't really declined that much in Q1 (page 39 of Q1)...maybe it was too soon to expect that and we'll see a hit in Q2? 5) Subs' Revolver Usage - The subs are starting to draw pretty heavily on their revolvers. Brit drew $83m and Recipe $210m (page 19). For non-Canadian readers, almost all of Recipe's restaurant dining rooms are closed right now, but they are doing a bit of take-away and delivery business. The revolver draw likely reflects the continued fixed costs with very little contribution margin to cover them. When Recipe's dining rooms re-open, will it require an external cash source for working capital? Would any lender other than FFH provide that cash? Returning to point #3, FFH needs to manage its consolidated debt and its consolidated equity. The subs have generally had a free reign to manage their business, but going forward, greater coordination from the holdco might be required to ensure that the actions of one or more subs does not trigger one of the holdco's revolver covenants. 6) Piling more money into Seaspan? - During Q1, FFH piled another $100m into Atlas (page 16 of Q1). Seaspan has been one of FFH's few success stories in recent years, but returning to my traditional rants and raves about position-sizing, is this really wise? Seaspan seems to be in good shape with much of their capacity under medium term contracts, but what residual risks remain (ie, counterparty risk, events eligible for declaration of force majeur, etc)? FFH has now piled a total of $1.5B of its capital into Atlas. Is this a reasonable risk from a position-sizing perspective? Returning to point #3, a write-down of ~$500m would be inconvenient. SJ

What a dumb idea. If the social distancing strategies are held in place for much longer, the market is full of zombie companies. Nearly every travel company, restaurant company, and entertainment company is basically a dead-man walking. There aren't many good options available to the management of those outfits, but bankruptcy, re-caps and M&A are basically three of the big tools. And now the "tools" in Washington want to eliminate one of those options? SJ

Well, in the strictest sense, that is true. But, in the North American reality, our consumption of pork and poultry does not create a meaningful risk of novel viruses because the vast bulk of our meat is produced in intensive livestock operations (factory farms). Those facilities are on permanent lock-down status, with access restricted to only essential people, and access is granted only on a shower-in, shower-out basis. The animals never leave the barn, and few people ever get access to the barn. The biggest risk is actually the small operations such as the back-yard pig industry in China or back-yard poultry flocks anywhere. A large portion of rural Chinese effectively live along side a couple of hogs and a few dozen chickens, and those animals also root around or scratch around outdoors. With that operational structure, the poultry is susceptible to infection from migratory birds because a flock of birds flying overhead can shit into the backyard where the chickens are kept. And then the chickens live in close proximity to the humans and the hogs, so that's where problems can arise. The next time your neighbours lobby city council for a bylaw that permits people to keep backyard chickens, think about whether a few dozen eggs is really worth the risk posed by highly pathogenic H5N1. SJ

Ship them to Lithuania! Or ship them to US! There was at least couple times there were no potatoes in the grocery store when we went there. No, in North America, there is a surplus of russet potatoes that are used for processing (frozen fries primarily), but just like you, I have had trouble finding round reds, round whites and yellow-fleshed potatoes in my grocery stores. Those latter varieties are, in my opinion, better for home use because they tend to be less dry and chalky. I have been buying russets (as they say, any port in a storm), but the only ways that I am using them are for mashing or baking where you supplement the potatoes with copious butter, milk or sour cream. This shut down has affected supply chains in many unexpected places... SJ

Yeah, he seemed to struggle through it a bit last year. At times he seemed to be falling asleep and on one or two occasions, WEB had to smoothly bail him out. It's a big day for somebody his age... SJ

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

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

Yeah, that was already tried out at the 2nd Battle of Ypres. It didn't work out so well...

But, you are right that it will feel more secure when they issue a second press release in a week or so saying that the deal has been transacted (usually there are two press releases for these things?). SJ

That is excellent. With the disruption in financial markets, I had anticipated that they would not be able to float debt at a reasonable rate. However, this rate is perfectly fine and the amount is only $100m less than what I thought they might need. About a month ago, I listed a half dozen possible elements of a "successful" year for FFH in the context of the recent turmoil. This is one of them. A double-digit increase in Net earned with a mid-90s CR was another. Good to see! SJ SJ Don't celebrate yet, the notes will be offered but there might be no takers at the proposed rate. BeerBaron I thought that it was a private placement, meaning that it's a done deal. Is there something specific that makes you understand something else? SJ

That is excellent. With the disruption in financial markets, I had anticipated that they would not be able to float debt at a reasonable rate. However, this rate is perfectly fine and the amount is only $100m less than what I thought they might need. About a month ago, I listed a half dozen possible elements of a "successful" year for FFH in the context of the recent turmoil. This is one of them. A double-digit increase in Net earned with a mid-90s CR was another. Good to see! SJ SJ

Careful! If you publicize this too much, Trump might start telling people to start sucking on neonicotinoids to prevent covid (they would do this right after drinking bleach to cleanse their body!). I guess it's more palatable than the idea of shoving a flashlight up your ass.... SJ

Christ, I just about shot coffee out my nose when I read that! SJ

Thanks for digging that out and sharing. At first glance, those numbers a bit disappointing. On the other hand, that's $1B in three weeks, which would be an annualized rate of ~$17B, if they elected to keep it going for an entire year. If they do elect to keep it going for an entire year, at least BRK's total cash balance wouldn't continue to increase appreciably.... SJ

This is quite a clever way of moving the goalposts. Nobody was disputing that the virus was spreading in the USA in March--or even in February. The thing everyone disagreed with was that there hundreds of thousands or millions of cases in March. So I guess this is admission you were wrong while trying to rewrite what you said and what the actual disagreement was about? (Like, good grief--why is it so hard for you to say that your speculation was wrong? It was a speculation, and speculations are often wrong. Why the heck would you allow a random speculation to bias you in such a huge way for everything that came afterward, rather than say, "Hey that speculation was wrong, but this is my view on what's happening now"? So brutal!) Richard, there are 800k+ confirmed covid cases in the US. Some of the population studies that have recently come to light over the past week suggest that 10x or 20x the confirmed number might be carrying antibodies. If that's actually true (big if), the number of people in the US with antibodies today could be 8 to 16 million. Now, suppose the number of cases has been doubling every week for the past 3 weeks while we have all been social distancing. Working the exponential growth backwards, how many people had antibodies on April 2 if there actually are 8m to 16m that have antibodies today? My rough math is 1 or 2 million in the US? How is that inconsistent with hundreds of thousands or millions during March? SJ

Thanks for the link. I read the Quillette article and the journal article from which the diagram was pulled. I understand the theory about how the AC could have pushed droplets from Table A to Table B. But I don't understand how Table C was infected by Table A, given that Table C was upstream from Table A with respect to the airflow from the AC unit. The other diagram in the journal article shows an exhaust fan adjacent to Table B and a dashed line running in the opposite direction of the airflow from the air conditioner. Are they saying that the exhaust fan recirculated contaminated droplets back into the AC system, rather than ventilating them to the outside? I don't particularly buy the notion that most of the spread to the other tables was from breathing. Usually when you go to a meeting, party, banquet or whatever in a hotel conference room consisting of 6 or 8 round tables of 8 people each, you introduce yourself and shake hands with the people at your table before having supper. And then, if you know another 5 or 6 people from different tables at the same event, you'll probably end up shaking hands with them and exchanging a few words. It's possible that it was the breathing that affected the people immediately beside A1, but it's also quite likely that the shaking of hands transmitted virus to some of the people in that room. The author also made reference to the super-spreader event that occurred at the medical practioners' curling bonspiel in Alberta, and suggested that it could be curlers breathing heavily while sweeping rocks that caused the virus to spread. I don't much buy that because when you sweep, you normally only have a couple of different sweeping partners. However, everybody who has curled knows that you always shake hands before the game to wish each of your four opponents a good game, and then when it's over you once again shake hands with each of your four opponents and thank them for having played a good game. And then all eight of you go to the bar, sit at one of those round tables for eight people, and the four winning players walk to the bar to buy a pint for the four losing players, and if there's enough time, the four losing players return the favour by buying a pint for the four winning players. So, did the curlers mostly catch Covid from breathing on each other, or did they mostly catch it from shaking hands and transferring pint glasses? The quillette article was interesting, but I still remain unconvinced about how the virus was transmitted at some of those events. SJ