StubbleJumper

Are you thinking that Mason Hawkins might be throwing some capital into FFH? He had been lightening up on FFH over the past year, but he certainly has taken high conviction positions in the past. SJ

+1 on the transcript request. I rarely bother listening to the conference calls because I quickly tire of the "rah-rah, the past was great and the future will be great" part of the calls. I can normally read a quarterly conference call transcript from Seeking Alpha in about 10 minutes, which is a lot better than listening for 60. But, I saw no transcript of the annual meeting, so I had to listen to a two hour call. Suffice it to say that the call gave me a year's worth of BS about how great the past was, how valuable the culture is and how the best is yet to come. If somebody can point the way to a transcript of that meeting, it will guarantee that I will not have to endure a replay! SJ

Article about Prem's comments concerning business interruption insurance and Covid: https://www.canadianunderwriter.ca/commercial-lines/how-fairfax-predicts-courts-will-react-to-legislated-retroactive-business-interruption-policy-changes-1004177010/

I'm sure that the state governors will give it all of the consideration that it merits.... SJ

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 buy the OMERS minority. That somewhat changes the picture on holdco liquidity. Yes, the Allied buy-up is $1.5B, but FFH doesn't have to make that decision for another 3 or 4 years. FFH could definitely buy the Allied stake and then take a $500m divvy from Allied to offset the cost. But mostly, I am not preoccupied with the Allied buy-up because there is still plenty of time for capital markets to normalise before FFH needs to do anything. SJ

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

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

Thanks … I ll have a look at A/R page 95. putting this in reverse, they said this yesterday in their COVID update "During the first quarter of 2020, Fairfax utilized approximately $400 million and $300 million of its cash and marketable securities to provide capital support to its insurance and reinsurance operations and to pay common and preferred share dividends, respectively." When FFH injects money into the subs for capital support, as oppose to receive dividends from them, is that akin to equity injection? If so when FFH does it for an entity like Allied World, which is co-owned with OMERS, does it mean that capital injection by FFH is pro-rated and matched by OMERS ? if FFH taking the full burden of that capital injection and OMERS not participating, that would mean that it is actually doing on its own behalf as well as OMERS, so in fact increasing its stake in Allied World as the expense of OMERS Yes, it is exactly an equity injection. Some of us have been bitching and moaning over the past couple of months about the fact that some of the subs did not seem to have adequate capital to crank up their underwriting to exploit this hardening market. If FFH is confident that it can write a CR or 95 or lower, it makes perfect sense to inject some money into the subs and rapidly grow the book of business. For every dollar of capital injected into a sub, they can comfortably write $1.50 or $2 of incremental premium and invest those premium dollars in fixed income. Page 195 of the AR depicts the existing premiums:capital ratios. If an injection is made into a sub with a minority interest, presumably the minority will also pony up some cash. Prem made some noise about Riverstone expanding its book in the future.... SJ

Most of the investment portfolio is held in the subs -- like 95% of it or so. If the subs succeed in their underwriting, and if Hamlin Watsa does a good job of investing the subs' float for them, the subs can be highly profitable and can issue dividends to FFH holdco. But, the subs can only issue a dividend to the holdco if the insurance regulators in the various jurisdictions approve. On page 95 of the AR, FFH describes the approved dividend capacity of the major subs. However, if the subs max out their dividends to the holdco, it results in a reduction of the subs' capital and underwriting capacity, so the challenge is to find that happy medium. One of the challenges for FFH is to ensure that there is adequate holdco liquidity. FFH holdco needs cash for interest payments on holdco debt, operating expenses for the holdco, and holdco common and preferred dividends. In addition to those cash needs, there are also opportunities that the holdco can exploit using cash, such as acquisitions and share buybacks. If the holdco does not have adequate divvies from the subs, management fees arising from Hamblin Watsa, Fairfax India and Africa, and interest/divvies on holdco investments, it becomes dependent on debt (including the revolver) to finance its activities. That's all fine and good until capital markets freeze up. SJ

And now this: "Whoa, 147 (36%) out of 408 people tested positive for the #coronavirus at a large homeless shelter in Boston https://medrxiv.org/content/10.1101/2020.04.12.20059618v1. More interestingly, only ~1/6 showed symptoms among those tested positive, i.e. 1:5 for symptomatic vs asymptomatic. #COVID19" No way, I don't believe it. So we have germany, pregnant woman, homeless people. Critics will note, not a totally representative study but very interesting. Need to see what the Stanford study says. Mortality rate will likely trend down still. Will be interesting to watch. The interesting aspect of this is that the homeless population is not a very healthy group. Most of them have some sort of existing condition, are smokers, drinkers, or have poor nutrition. I am very surprised that Covid was not harsher with such a group. SJ

The industry level data can be viewed here: https://www.iii.org/table-archive/21113 But, the logic of a premium increase is that the real, inflation-adjusted value of insured assets might go up by a couple percent per year (more houses built, more cars on the road, etc every year) and then the cost of those assets might go up by inflation which might be a couple extra percent. So maybe 4% growth is average? The nice thing about a 10% increase, like what we saw in 2018 is that a large chunk of that falls directly onto insurers' bottom line. That's why so many of us on this board were a little tepid about FFH's reported CR for 2018. We were hoping that it would be 95-ish. SJ

Okay, that's actually a reasonably good collection of news. We already knew that the equity portfolio would be a shit-show, but hopefully that is temporary. But the good news is reassuring; 1) Riverstone closed as planned, which was key for holdco liquidity. 2) FFH drew down the revolver almost fully before the lender could find a reason to screw them by pulling it. Now it's the lender's problem! Say what you want about Prem, but he's nobody's fool. There's some banker out there who probably wishes that he hadn't written that $2B revolver a couple years ago! 3) They have been hitting the corporate debt market hard. This is Bradstreet's expertise, so that is a very good sign. Look for some realized gains in 2021 and 2022 from the corporates being bought over the past month. The money is being made now, but it won't be realized until later. 4) Gross Written is up 12% and CRs are under 100, so that is exactly what most of us were hoping for on the underwriting front. Okay, this is good. We already knew about the equity shit-show, so this is helpful. It would be useful to have FFH make a general statement about the language used in its business continuity insurance contracts and the likelihood that those contracts will trigger indemnities. SJ

You made no mention of labour. Is the $120k a "true profit" meaning that all labour has been costed, or is that the result of an unpaid family member sitting at the front desk for 84 hours per week? If the business uses only hired labour, then $250k for $120k NOI sounds pretty good. But, if there is a large mass of uncosted labour in that, you would basically be buying yourself a job. SJ

And we think that herd immunity might kick in once we get to 40%-60% carrying antibodies? That is very interesting news, indeed, and much faster than I would have expected. SJ The 15% number is in a district that was heavily hit but Sars-COV-2 in Germany. Places that haven't been that hard hit are probably much much lower. What matters is the average over larger populations. Sure, the larger population immunity is what matters more. But, this result is a bit interesting in that it is supportive of the notion of locking down the elderly and vulnerable, and then reducing restrictions for the younger, healthy population in one geographic area at a time. You might not want to do it all at once nationwide, but it does suggest that you could make major strides to smaller population immunity pretty quickly, without a terrible mortality rate.

And we think that herd immunity might kick in once we get to 40%-60% carrying antibodies? That is very interesting news, indeed, and much faster than I would have expected. SJ

This article discusses the question in general, but who knows what BRK might have chosen to insure: https://www.insurancejournal.com/blogs/big-i-insights/2020/03/24/562253.htm SJ

Impossible to say how it works out economically. Governments have been brave enough to impose 25% or 30% unemployment on their citizens, and that seems to have been accepted by the people for at least a couple of months. Will governments continue to find the budget to impose those sorts of measures and will citizens continue to accept 25% or 30% unemployment for several months? And that's saying nothing about whether citizens will continue to accept considerable restrictions on their non-productive activities (no soccer for the kids, no movies, no workouts at the gym, no nothing). SJ

I have never worked on CPI, so I cannot say how the nuts and bolts of the calculation work. But, I am very curious how governments will treat rent abatement for tenants who tell their landlord that they cannot or will not pay their full rent any time soon. If they skip out on paying rent altogether, that's probably not considered to be a transaction for CPI purposes. But, if my landlord agrees to drop my monthly rent from $1,000 to $750 until the end of 2020, is that captured as a price decrease? Or is there some logic through which the government would still view the price as $1,000 for CPI purposes, and the $250 is just some sort of rebate that doesn't get captured? The drastic decline in the price of petroleum would certainly be helpful for a lower CPI, but I'm not sure the weight is really that important. But shelter is like one-third of the index... I am not holding out much hope that the deflation derivatives will finish in the money. Maybe the best hope is that the counter-party will want them off its books for some reason and would agree to a favourable cash settlement? SJ

The interesting wild card is the shelter element of CPI. It's a heavyweight in the index, and is it possible (likely?) that Covid and its associated recession could push US housing prices down considerably? Otherwise, it's a bit tough to imagine a 10% haircut in the CPI. SJ

Stubby - get specific with your accusations please. What did I say about Canada? Where have I commented about Canada? What the fuck is your problem? You probably haven't. Drinking and posting on Saturday night is likely not a great combination. Peace and apologies. SJ

Now I KNOW you are a really smart guy Rb. You really want to give Xi and China a PASS on this one? Seriously. You KNOW Xi knew exactly what was happening. Did he stop sending THOUSANDS of people into Toronto, Vancouver, etc? Maybe next to WWII and WWI - this is one of the greatest disasters of the last 100 years - and you are going to defend these guys. I KNOW you are smart Rb - but are you for real?? Cubsfan, I have stayed out of this silliness all day. But if you are truly that paranoid, you should be goddamned worried about what the Administration has chosen to do. The US has kicked its nearest neighbour in the teeth, and anyone who has a paranoid streak should be a bit concerned that its neighbour will gravitate towards China as a result. Would you like to see your neighbor invite China to establish military bases in the south of Nova Scotia and on Vancouver Island? How would you like a hundred or so missiles with nuclear warheads located in Manitoba? It's definitely not going to happen, but if you are at all as paranoid as you seem, you should be very distressed that your government is antagonizing its northern neighbour. Keeping a close relationship with Canada and Mexico should be a no-brainer for the US. SJ What in the world is your problem Stubble? What have I said about Canada? What? I've been talking about China all day. Are you crazy or what? Am I crazy? This is my second post in this thread today and you have been expressing paranoia in any number of posts throughout the day. If you are truly paranoid, think a little about what the Administration has done to Canada and whether it is even remotely in the long term interests of the US. Think about what the Administration has done to Cuba and think about whether it is in the long term interests of the US. Hopefully, all of this blows over, right? SJ

Now I KNOW you are a really smart guy Rb. You really want to give Xi and China a PASS on this one? Seriously. You KNOW Xi knew exactly what was happening. Did he stop sending THOUSANDS of people into Toronto, Vancouver, etc? Maybe next to WWII and WWI - this is one of the greatest disasters of the last 100 years - and you are going to defend these guys. I KNOW you are smart Rb - but are you for real?? Cubsfan, I have stayed out of this silliness all day. But if you are truly that paranoid, you should be goddamned worried about what the Administration has chosen to do. The US has kicked its nearest neighbour in the teeth, and anyone who has a paranoid streak should be a bit concerned that its neighbour will gravitate towards China as a result. Would you like to see your neighbor invite China to establish military bases in the south of Nova Scotia and on Vancouver Island? How would you like a hundred or so missiles with nuclear warheads located in Manitoba? It's definitely not going to happen, but if you are at all as paranoid as you seem, you should be very distressed that your government is antagonizing its northern neighbour. Keeping a close relationship with Canada and Mexico should be a no-brainer for the US. SJ

Projected 3,000 to 15,000 deaths in Ontario.. More than Hubei province in China, up to 5x more. How is Trudeau/Ford govt managing this well? 3,000 to 15,000 deaths is an estimate over the course of the entire pandemic. Ontario model estimates that it may last up to 2 years (multiple waves). Do you have Hubei estimate for the entire pandemic? What is their estimate for the pandemic duration? I agree with you that Ontario is not managing all that well. However, you don't need to spin the numbers to make your case. Sorry, not trying to spin #s. I was just looking at slide 13 and it says over course of pandemic, doesn't list any assumptions. No idea about Hubei #s. Officially ~3000 deaths and pandemic basically over. Estimates over 10x those #s, who knows. Keep in mind there's 4x the population of Ontario and higher density. Also, Ontario currently has more deaths than Quebec but only half the # of cases? Caution with the Ontario death numbers. Of the 67 covid deaths in Ontario, 21 of them are related to a single, small outbreak at the nursing home in Bobcaygeon. Those 21 deaths do not necessarily reflect that the virus is widespread, but rather that the virus happened to hit in a very bad place. Doesn't mean that the federal and provincial governments are doing a good job or a bad job, it's just a sad event in Bobcaygeon. SJ

You are still allowed to go out for Happy Hour in NYC? I am gobsmacked.

That's a possibility. I tend to discount Ontario's deaths a bit because they are really skewed by a very small but very bad outbreak in a nursing home (for US members who don't much pay attention to Canadian news, we have one nursing home in Ontario with 65 beds and already 20 residents have died from Covid...the resident death rate in that facility is 30% and counting). Perhaps it's wrong-minded to do a little bit of mental accounting to discount the impact of that one facility, but if you do that, things are far better in Ontario than in Quebec. SJ