Cigarbutt

Rising rates is a tailwind for Fairfax (all things considered). They hold a disproportionate amount of their very large bond portfolio in short duration bonds or cash. As rates rise they will take a mark to market loss on existing holdings which will lower BV. However, if they are able to redeploy some of the cash/short term securities into higher yielding bonds then this will increase interest income. Presumably they would also be able to discount estimated future insurance claims at a higher rate which should help increase book value. The reserves are established and reported undiscounted. There was a time when they established and reported reserves for certain workers' comp lines of business (Zenith sub mostly) on a discounted basis but this was a small part of claims overall and, starting in 2012, they no longer described this discounted reserves sub-component.

^Morgan and cherzeca, thank you for the discussion about various government-sponsored enterprises and the sunset option. Entitlement spending is bound to remain a hot topic. ----- The opening poster suggested pockets of labor tightness, a very unusual topic given the very large pool of ‘non-participants’ in comparison to the much smaller ‘unemployed’ group. As the US is about to enter an era of net negative labor force growth (Japan is the leading the way), this may be an area worthy of some soul searching. When Keynes came up with his expectations of a leisure society, he assumed the Beggars in Spain story line would apply ie the ‘productives’ would more than compensate for the ‘non-productives’. He did not envision an entitled and unproductive rentier elite with a bunch of ‘disableds’, financed with debt. The monetary tools, for the employment mandate, are mostly geared to the headline unemployment number and, like the consensus view, the Fed expects inflation on that front in the short to mid-term (Waiting for Godot style). The monetary minds have looked at the declining labor participation and have concluded that it was, essentially, a secular trend (i agree), not a cyclical one, so out of their control or purview. So the Feds won’t interfere with secular trends here, at least not directly. Central bankers are very bright people but often come to interesting conclusions when out of public office. For example, in 2016, Mr. Alan “The Maestro” Greenspan suggested the following: • Entitlements now probably require a three to four percent growth rate in the United States. • Rate cuts, negative interest rates, buying corporate debt is no part of the solution. • Gross domestic savings as a percent of GDP has been declining over the years largely because entitlements have dug into them. • You just can’t print money and buy the infrastructure. Productivity will only increase if there is savings behind the investment. • We should be more concerned about inflation than we appear to be. • The issue is how long can we maintain long-term interest rates by continuously pushing money into the system, at rates which I would say, human psychology doesn’t “continence”. The fiscal tools used to deal with the growing disability problem has been to fund the payments with growing debt (Mr. Greenspan is more politically correct by saying that increasing entitlement spending has been funded by decreasing national savings) and, with present trends firmly entrenched (and incredibly bipartisan), it’s hard to see how this will change. But it will, somehow, when restructuring becomes possible. Japan is an interesting example in relation to this ‘labor shortage’ question. Since 1990, Japan has been a champion of reform delay and lately has been able to delay the eventual day of reckoning by adapting their labor profile. Older Japanese citizens, including the much older ones, have shown impressive resilience with a growing ability (as documented by rising teeth count and walking speed per individual, age-controlled) to participate in the labor force. Japan also has come up with an unusual degree of innovation to make care of the poorly functional elderlies more productive (helping slightly with the overall declining productivity trends (since the 80s, Japan total productivity has been a story of ‘productive’ sectors more than compensating the ‘non-productive’ ones, at least until recently and in spades)). i’m not sure what this means about the stock market today but interesting and real business opportunities (one related to continence or the absence thereof) are shaping up in my local area in this respect. ----- For those getting excited by rising rates, yesterday the US Treasury did something for the very first time. It sold ($60 billion of them) two-year notes at a yield of 0.119%. Because Treasury notes and bonds by regulation have a minimum coupon rate of 0.125%, the yield below that level means the notes were sold at a premium (!) above 100 cents on the dollar -- 100.011965, to be precise, a record. A weird world, we live. Somebody putting a million into the stuff would get about 3$ per day and they say inflation is coming. My bet is ‘we’ can’t have interest rates rise meaningfully and/or for any length of time. Famous last words.

Do we have demographic information on this group? A theory that is worth investigating in my opinion is an aging population that was working longer into their lifetime, who "finally decided to retire" in response to an extreme stimulus (COVID). A small addition as the topic has been an opportunity for me and it may have some relevance to this thread. As you likely know, while the labor participation rate (LPR) has come down significantly for the entire 'group', for the age 55+ group, LPR has gone up significantly, at least up to the 2020 pandemic. With Covid (i think it was the potential exposure to the virus more than exposure to the stimulus), the 55+ age group's LPR has gone down a little (very small decrease compared to the huge rise over many years and, from anecdotal stuff mostly, this group is likely to go back to previous trends once it feels 'safe' out there). The big question that remains (and which is relevant for the deflation/inflation question) is why such an enduring and significant decrease in LPR. Most of the decrease over the last few years has happened in the younger cohorts and the decrease has been inversely correlated to education (or skill) level. ----- In relation to the question that disappeared, when dealing with the LPR question, just like the inflation question, those in the know divide the potential causes into push and pull categories. The tightness of the safety net and high taxes on working wages will tend to pull people away from work. Also, over time, the residual pool of jobs has become relatively less attractive for the residual population left for those jobs, pushing them away from the work force. There are some mild differences between the US and Canada but the developing pattern of decreasing participation has been overall quite similar. The disincentives to work have historically been higher in Canada but the stimulus response by the US in 2020 and beyond left everybody else in the dust. ----- This topic has some importance for me. In the late 90s, i studied the LPR and expected significant declines over time and developed some private business ideas, with the main one around disability evaluation (asset-lite, high returns on intangibles etc). It seemed somewhat irrelevant for a while but what seems irrelevant is sometimes devoid of competition. Anyways, the way it worked is that people who left the work force were typically young and after long-term unemployment insurance often ended up on 'disability'. This does not seem to be a much talked about topic but the issue is very significant. What has become discovered is that people who become long-term unemployed (even more so if 'disabled) are unlikely to go back to work when/if economic conditions improve (hysteresis at work). ----- The bottom line here (apart from business ideas) is that a low (especially a declining trend) LPR will tend to be highly deflationary. Dependence to benefits, over time, may lead to overheating of the printing press. https://fred.stlouisfed.org/series/CIVPART

For several years now, in involved private businesses, there is an unusual trend in low or average skill workers: large turnover and unusual negotiating leverage for salary and conditions. It’s unusual (and puzzling) because the micro situation should reflect the macro situation (which has been evolving for a while) showing the very large pool who have somehow decided not to get involved in the working force. It’s hard to see how this wage pressure will be sustainable. A topic not often discussed is how come there is such a high number of people who have quit the labor force and maybe the underlying reasons help to understand the secular trends in interest rates and inflation. The shifting environment means higher costs related to wages but this seems more like short-term noise. The following is submitted for historical perspective: Headline: Ouch! The yield curve is steep (the 30-yr at a threatening 2.16%..) and inflation is here, there and everywhere. Headline: Since the advent of the unprecedented use of unconventional tools and various stimulants, inflation has remained dormant and now we wonder if two nuclear bombs work 'better' than one. Headline: The allusion to previous ‘dramatic’ events is interesting.

i agree with petec if interest rates rise slowly. Look below: As rates rise, reinvested coupons and reinvestments at maturity will (with some lag) make the bond yields to gradually rise. Inflation-indexed bonds could also be bought. They can also hold the longer duration bonds to maturity and the unrealized bond losses remain so. Looking at the whole industry, there is some kind of consensus that inflation is coming: There may be a problem though if winter is coming but that's another story and one which has come to maturity for Fairfax. They have changed their stance since 2016 and have expressed that they are expecting inflation along general economic growth and seem to espouse the reflation narrative. In the 2019 report, Mr. Watsa mentioned: "Our fixed income portfolio, which effectively comprises 70% of our investment portfolio, has a very short duration of approximately 1.5 years and on average is rated AA-. Very high quality and very short term to maturity – so rising interest rates would not impact our portfolio!" They also have derivative exposure to protect against rising rates for the residual longer term FI portfolio. In 2020, they switched some short term government paper for mid term corporates but duration remains low. If (IMO that's a big if) inflation comes, they are ready to benefit. Wild inflation would hurt but the hurt would be widespread. ----- A related aspect that needs to be considered for an insurer if inflation is for real is that the contracts for coverage are made with a specific inflation target. Especially for longer tail lines, if inflation is higher than anticipated, the eventual cost of claims is paid with more dollars. That was an issue in the 70s and early 80s and since insurers tend to react with a lag and since regulators may not accept significant rate increases, underwriting may suffer for a while. ----- FWIW, i've kept a diary of what would have happened if they had kept their long term fixed income exposure after 2016.

State Farm is a mutual but it has a dominant presence which is very relevant for competitors and an argument could be built that they are sacrificing profit at the expense of underwriting standards (policy holders (owners) don't seem to mind) and have an unusual bundling advantage due to scale and scope. State Farm is unusual and there may be something to learn. The video is dated but the underlying questions remain. When Benjamin Franklin set up an insurance operation in Philadelphia, it was a mutual-type of organization. https://fortune.com/company/state-farm-insurance-cos/fortune500/ ---) back to what are you buying?

^There are many ways to guestimate this. The point also is to make sure exposure was adequate, appropriately priced and to make sure that you can write policies in the future that will reflect the risk. The estimated net underwriting cost may lie between 300-350M. Here are the assumptions: -Uri will be comparable to Harvey (2017) (assume Uri will have total insurable costs slightly lower; significant residual uncertainty there) -In 2017, Harvey cost FFH 252.4M (122.9 at Allied World; the ‘catastrophe’ underwriting results in 2017 had raised questions about the acquisition) (assume there were no major reserves adjustments after, apart from generally favorable trend over the years) -In 2017, this loss = 2.6 combined ratio points (11.8 points for AW!) -Comparing 2020 to 2017 yr-end numbers, FFH’s SE has increased by 0.3% but NPW has increased by 48.9% (with AW and ORH really growing in 2020), so it may be reasonable to expect something like a 2.2 to 2.5% CR cost on the total premium base

What's the difference between when somebody is wrong and when one is 'clearly' wrong? Outside of some specific factual inconsistencies and a different perspective, what is so clearly wrong concerning the 'point-of-no-return' section? ----- Looking at his results from the letter (before fees i assume?), Mr. Bloomstran has returned (since 2000 not audited GIPS or otherwise, CAGR) about 10.9% versus 8.0% for BRK and 6.6% for the S&P 500. Is that alpha enough to go through (sometimes irrelevant?) what he says, on an annual basis? Anyways, the coin on page 29 was 'printed' to the effigy of Julia Domna, wife of Septimius Severus and mother of Caracalla, two emperors who were critical actors in the Roman Empire decline. The decline is still looking for an explanation but currency debasement was certainly a symptom, if not a cause. Julia Domna was unusually powerful for a woman and was known for her moderation. She must have been concerned when Caracalla issued new coins with the same face value but with 25% less metal but the emperor was known to be irrational, if not psychotic and that was the name of the game, then. The Roman Empire could tolerate a slow debasement but could not eventually tolerate the seeds of destructive debasement that the two emperors sowed. During that period, the outcome for emperors was death by killing, 86% of the times. http://money.visualcapitalist.com/deaths-roman-emperors-vs-silver-coin-content/ ----- One thing which is nice with the Semper Augustus letter is that the author provides the reasons for his conclusions which makes it an interesting exercise for independent thought.

Actually, a point can be made that, as a result of the the great bubonic plague, your wages, longevity and standards of living could be materially improved if you were strong (and lucky) enough to survive. Of course, it means many 'friends' lost along the way. https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0096513 The link with position sizing?: we each have to come up, individually, with position sizing (if any) related to anti-fragility versus the rest of the selective pickings.

So your average holding period is about 18 months? Is that right? So i guess your holding period seems 'forever' as it is more than double the average period now for the average crowd. i've started doing 'this' about 20 years ago and one of the most striking features has been the unrelentling rise in competition. Some days i wish i'd have started in 1957 or something but then again, now is probably one of the greatest times to be alive.

i'm not sure this has any significance but it sort of rhymes. Yesterday, there was a new filing with the SEC for a new blank-company venture called: "Just Another Acquisition Corp.". The purpose is not clear.. In another period of financial innovation (1720, South Sea company and related capital raises), a prospectus contained the following: “a company for carrying out an undertaking of great advantage, but nobody to know what it is.”

OK. Let's take this a step further. If what they say is true (they will spend more than they borrow): But for the reserves management theory to apply, not believing is not enough. If the excess reserves were already excessive before, the Fed still aims to keep the bond buying spree going (so contributing to more excess reserves in banks that may have already too much 'liquidity') which means that (for the theory to apply) the TSA account needs to rise (staying the same is not enough) in proportion to bond buying. The Treasury Balance has been coming down since last summer.. Is it possible that they've gone too far?

https://www.bnnbloomberg.ca/yellen-shift-on-vast-treasury-cash-pile-poses-problem-for-powell-1.1564058 There is a difference between what one says one will do and what one will do but this should be interesting to watch.. If one believes in this reserves management aspect, effectively, the Fed has tested the next move by allowing (over the last few months) its balance sheet (deposits of depository institutions) to get back to where it was last spring. What happens next is conditional on underlying fundamental developments but, whatever scenarios considered, the balance sheet weaning promises to be challenging (from very to extremely). Who cares?

https://www.britinsurance.com/financials-and-governance/financials

i just spend 5-10 minutes on both Brit and FFH reporting and cross-checked a few things. Summary (it's easier to take OMERS' perspective as FFH contributed capital and assigned its own dividends to Brit) (all numbers in USD) Summer 2015: OMERS pay 4.30 per share for 120M shares (29.92% interest), with a shareholders' agreement stipulating an annual dividend at 0.43 per share. Total 516.0M In 2016: OMERS gets 4.30 per share for 13.449M shares, 57.8M In 2018: OMERS gets 4.30 per share for 58.551M shares, 251.8M In 2020: OMERS gets 4.30 per share for the remaining 48.000M shares, 206.4M i think the cumulative dividend has been paid effectively at 0.43 per share per year during the minority ownership. FFH had permission to buy back, on an annual basis and possibly with certain restrictions, the minority interest. So, this type of partnership could be a win-win and has been a reliable source of funds for FFH so far but, so far, the win-win has been met 100% on OMERS' side and remains to be defined on FFH's side and is based on a 10% (+/-) hurdle rate.

^The 516.0 in matches exactly the 516.0 out. With this and other transactions with OMERS, one gets the impression that OMERS is a debt financing partner, ie they look to get their principal back and to get a reasonable return along the way. OMERS' returns (as reported end-yr 2019): 1-year 11.9% 3-year 8.5% 5-year 8.5% 10-year 8.2% Their stated goal is 7-11%.

Additional perspective. Point 1: the difference in valuation is, in fact, larger. Point 2: it doesn't matter that much because FFH is likely to pay back OMERS over time based on the recent valuation (+ a dividend +\- 9%) Point 3: it's interesting though that, using their own (FFH-OMERS) internal private appraisals, IV growth at Brit had CAGR of about 8% since acquisition. Point 4: so the market just needs to recognize this now over time although delayed gratification may be indicated if buybacks are part of the picture. The 220M in Q3 2020 included an accrued dividend of 13.6M and the capital returned to OMERS appears to have been based to a pre-defined formula established at acquisition (summer 2015). So, the principal component paid back to Omers was likely based on a summer 2015 about 1.7B valuation. Still, these capital allocation moves raise some uncomfortable questions.

I don’t understand the issue. It’s easy to create short positions in excess of actual share count, you don’t need “naked shorting” as an explanation. Borrow a share, sell it, borrow it from the newbuyer, sell it again, now you have two short positions for a single share. Short positions aren’t shares, they are obligations to purchase shares. i would submit the opinion that it's not so simple. When selling a share short, one (or the intermediate party to which this is delegated) has to take into possession the borrowed share or at least to have a credible process in place to secure this share by settlement day. Disclosure: i was heavily invested in Fairfax and related securities when they ran into difficulties compounded by questionable behavior at the margin by short sellers. That case and others have triggered some kind of reflection about the balance between investor protection and market efficiency. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3307186

Is there a link with 1999 or what made 1999 possible? More 'color': Opinion #1: we may be reaching the end of the beginning here. Opinion #2: i thought Canada overdid it; so the US must be an example of a stimulus on steroids. The phenomenon that TwoCitiesCapital refers to is called habituation in some circles. Mr. Klarman (the comments on reddit and elsewhere, about him and what he represents, are getting nastier every year), in his last letter, refers to the boiling frog syndrome, a typical example used to picture habituation.

^The Contingent Value Instrument is likely tied to the liabilities component. In runoff transactions, there is typically a way to protect the buyer from adverse development and this can take many forms (indemnity reserve, CVR-type or other). When FFH bought GFIC in 2010 (and building a first-class global runoff operation), the acquisition was financed by a contingent note to the seller (which was decreased at time of closing due to interim unfavorable reserve development). The acquirer and acquired have to agree on the fair value (and possibly composition) of the portfolio of assets being acquired with the reserves. One of the goals of the transaction was liquidity and it may make sense to postpone cash movement (in exchange for non-cash assets) and keep ownership risk on some securities until then. AFAIK, there is no way to tell what was (is) exactly in the Riverstone UK portfolio but the acquirer may possibly be more interested in a more plain-vanilla variant than what FFH typically has.

... That's an interesting trend in premium retention. What really struck me is that Allied was one of the few subs that had considerable dividend capacity and a reasonably low premiums-to-surplus, as at Dec 31, 2019 (no capital problems). It's a bit of a funny trend to see in a hard market for a well capitalized sub. Perhaps management foresees big things in 2021 or 2022. SJ Perhaps you're right (big things foreseen by management) but there may be an element of regulatory insecurity concerning the ever unconventional capital management style. It seemed that building a rock solid balance sheet would have been the natural evolution after reaching a certain size but this is not part of their DNA and perhaps never will. The mother of all hardening could come from an asset side shock and it's not clear how FFH could really benefit if that scenario materializes over the foreseeable future. The TRS synthetic buyback is really clever and looks very good at this point but (if one is into discounting downside scenarios) this is not a true swap; both cash flows of the swap could go in the same direction (away from FFH). Allied remains very well capitalized despite the recent growth but so is the overall insurance industry. It's kind of a bizarre hardening.

Hi Lance, Even if your reasons appear different, it looks like we're on the same target again. http://www.capitalspectator.com/wp-content/uploads/2021/02/t.5.nom_.real_.2021-02-09.png To make a long story short, the consensus view seems to be that the recent divergence between real and nominal rates will be resolved by reflation. Betting on TLT means (at least from a certain perspective) that one feels that inflation expectations will gravitate to an enduring trend in real rates. A challenge here is that this is no longer a free market so the casino table may be rigged.

2 years after inception, starting in 2004 and going to the time Allied was acquired by FFH, they focused on primary property layers and low excess casualty layers and consistently (and in correlation to their exposure profile, industry practice and reinsurance pricing) retained 78 + or - 1% of their gross premiums. After the acquisition, there has been very significant growth in the primary casualty lines which have more uncertainty in relation to real exposure, loss development and timing of payments, requiring to cede a higher level of premiums, especially if reinsurance pricing is reasonable for those business lines. Retention has gone down accordingly: 2017:72%, 2018:70%, 2019:65% and 2020:64%. Also fast premium growth (even if capitalization has been relatively high at Allied and even in a hard market) is an added consideration for future uncertainty of cash flows. At least that's the way i see it and people actually writing contracts likely know better.

Fact check: Buffett did not donate to Biden; oil that would have been transported through the Keystone XL Pipeline will use existing infrastructure, not Buffett-owned railroad https://www.reuters.com/article/uk-factcheck-buffett-keystone-pipeline-idUSKBN2A22LR The Reuters link is very helpful. Thank you. The short term effects (railroads) are likely to be felt mostly north of the border and there may be mid-term implications with enough impetus given for 'partnerships' to go ahead with some real investments, such as the DRU project. https://www.spglobal.com/platts/en/market-insights/latest-news/oil/012921-canadian-rails-see-crude-increasing-on-keystone-xl-cancellation-dapl-uncertainty https://s25.q4cdn.com/892584814/files/doc_presentations/USDP_Investor_Presentation_DRU_FINAL.pdf Going back to a specific name, in the last 15 years, CNR's share (CNR being one of the major railway operators in Canada, with CP) has compounded at about (number unaudited) 15%, of which 5.5% came from EPS growth, 8% from multiple expansion and 1.5% from dividends (some of the 5.5% growth came from buybacks). CNR has benefited, in a cyclical way, from volatile oil prices (and other volatile fossil aspects) but it's not really a long term driver of the business. ----- What is meant by 'affordable' housing? The question is because the affordability indices used in North America (ie NAR) are truly fascinating. For example, housing 'affordability' in the US reached almost record levels last March.

I would make the argument that you don't have to invest your money somewhere. I think that institutional investors "have to" invest their money somewhere, so they can generate fees and stay in business, but that does not mean it is the rational or correct thing to do. Case in point, Berkshire Hathaway is sitting on $140 billion of cash. it depends on whether you want to create wealth or preserve wealth, but neither is particularly easy. if LT rates go up, then FI will destroy wealth just as surely as an equity market correction. there are no right answers or solutions, just trade offs. cf Thomas Sowell. From a certain perspective, a question needs to be answered: is moving from a low-yielding asset to a higher-yielding asset a positive move from a risk-return perspective or is it reaching for yield? Mr. Sowell's work applied to this likely means that one believes in efficient markets ie the market will tell you if the price is right, if not interfered with, which does not always apply (isn't this why such a forum exist?). It may be useful to compare the individual opportunity set and adjust expectations accordingly instead of doing the opposite. It may make perfect sense (risk-return perspective and under selected circumstances) to hold onto zero-yielding or even negative-yielding assets, in the present, instead of moving into higher-yielding assets, in the present. i wonder if that's what Mr. Buffett meant a few months ago. So, along the irremediable cycles, if the Sowell framework is rendered semi-strong, over time, individual intentional rationality will result in more systemic rationality.