A_Hamilton

I just wouldn't get too excited about it. Every major rating agency and major insurer has spoken about casualty inflation / some with outright deficiency pointed out, others like FFH taking redundancy from other lines and strengthening in casualty. https://www.carriermanagement.com/news/2024/05/08/261925.htm https://www.insurancebusinessmag.com/us/news/breaking-news/casualty-comes-back-to-bite-476388.aspx

I'm not sure the hard market is leading to large redundancy. It seems inflation and social inflation are moving just as much as price. I think pricing is high in part because it is a hard market, but in part because inflation/litigation/to a lesser extent claims frequency are up.

That's not how it works. FFH would be taking excess of loss on homeowners (they've gotten out of quota share / 1st dollar of loss there). Thus, if an insurer wants to lay off any losses over say $25 million, up to $200 million, FFH might have reinsured exposure with a maximum loss of $175 million. It is more complicated than this as usually there are many program participants, but this is the approximate way to think about it. Also, storm hitting Tampa (or any metro area) directly implies greater losses for FFH than not as they have a lot of commercial business where they would also take loss (for instance, business interruption).

The TRS are at the Parent level. There have historically been a lot of net operating losses at the parent from interest expense in Canada that doesn't have an offsetting gain each year. You'd have to speak to the company, but my understanding a few years ago was that this was shielding a decent portion of the gain (though with the swap up so much now it is likely less).

LIke what is FFH's play here? You are trading at 8x book, do they just exit this thing? But then the runway is so long and it is so difficult to take material stakes in financial services in India. Just a wild situation. Also I realize they likely have a lockup given the recent IPO. What a great situation.

From what I've seen of Hub's financials (they have some privately traded debt and if you own it you can get access) FFH shareholders can only wish Prem had decided to be an insurance broker as opposed to a multiline insurer.

What is everyone's understanding of FFH's ownership in the Digit assets? Here's what I understand -FFH owns 49% of GoDigit Infoworks Services Private Limited ("GoDigit Insurance" - not GoDigit General Insurance LTD ("Digit") which is a sub of GoDigit Insurance. Digit is the entity that went public not GoDigit Insurance. -Upon a change in Indian Law to allow foreign ownership, FFH can own up to 68% of GoDigit Insurance. Questions: How is the increase from 49% to 68% priced? Just a pure conversion with no cost, or per some preestablished valuation mechanism? Also, If FFH owns 49% of this entity, could it sell down to say 45% and then top position back up to 49% and then have a contingency to only be able to own up to 64%? -On pg 73 of its annual, FFH notes a Fair Value for GoDigit Insurance of $477.2 million and a carrying value of $146.6. This is seemingly in direct contrast to page 18 of the annual (prem's letter) which states a cost of $154 million and a 12/31/2023 of $2.265 billion. I suppose the difference is the convertible preferred? -FFH also owns 24.2% of digit life. It isn't clear to me if this is a sub of either entity above? Anyway, this is a homerun for FFH but I wish the annual were a bit clearer on what is owned and how any convert of compulsory prefs might work.

I would argue that reputationally it is very poor form to fleece one's asset management clients by foisting material dilution on them because of a formula that was set ex-ante and with a stock that has traded very poorly. In the long term I think doing the right thing will lead them to much better opportunities here, heck maybe FIH trades at a premium to book one day and they can issue a bunch of stock and drive more fees to say nothing of all of the other relationships FFH has.

I'd close out, was a great trade at a silly price, less attractive now. The other thing is that TRS are priced at SOFR + a spread, so this isn't necessarily cheap capital.

The issue for Pacwest wasn't the loan quality or the yield they were earning. The problem for PACW was that they were seeing deposit outflows and were having to fund these with wholesale funding / using up their FHLB/discount window etc lines. The rationale for selling is that you get rid of the risk that you need to fully fund the incremental $1.7 billion (on top of the $2.3 billion already outstanding) of borrowings as these projects get completed. Too, in the current environment there is some extension risk if the deal sponsor can't find another bank to take a traditional 1st or, more troublesome, was developing on spec and can't service the loan. The mark here so close to par and the low LTV's on completion cost suggest that across the book as long as thereisn't fraud and disbursements to builders are properly done based on completion milestones, these should be money good. In any case, the overall reason for PACW to sell was to bring more liquidity on its balance sheet and get rid of a contingent but known call on liquidity.

TRV reported $459 million in pre-tax losses from Elliott versus $305 million in Uri quarter. ALL $779 million in Cat losses ($478 due to Elliott) versus $590 million for Uri. Hannover reported $190 million in losses versus $133 for Uri. I don't know how retentions have grown/ Hannover certainly has more NE exposure, but it seems this was a pretty big hit for the primary guys.

No. I'd bet dollars to donuts that its is somehow tied to the counterparties involved in the total return swaps. The price moves are small and the volumes are huge suggesting that two parties have either long or short exposure and need to swap them out and both are afraid of moving price too much.

Any thoughts on losses from the December deep freeze throughout the U.S. and then these California floods? Hard to know how much loss content there will be on the reinsurance side, but I imagine the primary side will feel it industry wide.

That isn't how it works. The multiple voting shares cannot ever be more than 41.8% of the vote per the proxy. The difference has to be made up with subordinate voting shares which have a minimum of 58.2% of the vote.

I think you'd need share count to go well below that. Based on my understanding, Prem gets 41.8% of the voting rights (max) via the multiple voting shares. That leaves the subordinate voting shares with 58.2% of the vote. Prem controls 794,000 of these giving him 43.9% of the vote. In order to get 6.1% of the incremental vote at current levels Prem would need to own another 2.3 million shares at current levels. At current that is ~$1.35 billion of stock. Even if share count comes down by a few million shares, the price per share will appreciate and the cost to take true 50%+ control will be exorbitant. This all says nothing of the board's fiduciary duties around allowing a true change in control which would be above and beyond this.

Answering my own question here. Would be very difficult for Prem to get control via share repurchases as he would need to control like 15% of the subordinate voting shares on top of the multiple voting shares, and he is nowhere close.

Thank you for this nugget, Sanjeev.

Definitely aware these won't be sold. There is reference in the proxy to Sixty Two having subsidiaries in which it only owns 75%, but that doesn't necessarily mean there is more than one owner of Sixty Two. Relatedly, I'm curious if as FFH buys in more shares, and Prem's voting control gets closer to 50% whether there will be a change in control / premium issue that comes up. It is a very odd structure given that it will fall away 5 years after Prem exits the company / passes away (hopefully a long time from now).

Does anyone know if Prem is the only owner of Sixty Two, the vehicle in which he owns all of his multiple voting shares in FFH? Thanks.

I've really thought Sokol got a disproportionately raw deal in the Lubrizol scandal. However, the link above does not help to restore his reputation. Why would you get involved in this in any way shape or form? Just poor judgement on his part...again.

I guess I disagree re: FFH's book loss. One has to include the deficiency in fair value from non-insurance associates. It is part of the investment book and real. FFH would be down ~12% with this included. Nonetheless, I don't think it matters all that much given the growth rates here and strong combined ratios...

I'd like to see them just keep it on hand to fund premium growth and or begin reducing equity investments to tangible capital. I don't know why they always insist on living on the edge as it relates to liquidity and investment portfolio. Thankfully Bradstreet has kept them so short in duration this time around.

The idea of matching the duration of your policy tail is that all else equal the yield on offer at a point in time should equal the risk premium inclusive of inflation expectations, so your risk isn't all that great. Problem is at very low rates and narrow spreads you better be using some form of modified duration because you are taking so much rates risk. It has been pretty incredible to watch Brian Bradstreet change his mind over time. 7 year duration post-GFC to Trump era and then down to basically nothing post Trump election. With 5 year treasury over 3.5%, I imagine you start seeing FFH move duration out another 6-12 months, perhaps buy some intermediate term high grade corporates. It is interesting, FFH mistakes on fixed side have been limited to the inflation floors being just too large of a bet and then the atrocious Greek Government Bond trade that they just never mention. On just pure rates trading, absolutely astoundingly good. If we could get just 1/2 as good on the equity side we'd be rolling.

Always good to have BB report on first day of a new quarter.

FYI. Good overview of where ORH is writing premium and where it is avoiding. Sounds like a rough Q3 for the industry (and ORH to a lesser extent) and that there is still more to be learned on COVID losses in EMEA and South Africa. https://www.theinsurer.com/reinsurance-month/