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Prem's Last Conference Call!


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Some of you might not have heard, but the 2nd Q conference call was the last one with Prem.  Paul Rivett, President of Fairfax, will be leading the calls going forward.  Paul will do a fantastic job, and fear not, Prem will still be speaking at the AGM and various other engagements.  Going on 33 years at the helm...what a great Canadian business leader!


Here is the transcript:




For those that want to listen to the real deal...you've got till 5pm Friday, August 17th:




Cheers and enjoy!

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Some noteworthy remarks from Prem with respect to interest rates:


"As of June 30, 2018, we have $10.7 billion in cash and short term investments in our portfolios, which is 29% of our portfolio investments. We have another approximately $7.3 million of one year treasury bills that are classified as bonds and are approximately $1.4 billion of high quality corporate bonds with an average maturity of 1.8 years. In total, we have approximately $19.4 billion in cash and short date of securities, which is 52% of our investment portfolio. Our investment portfolios will be largely unimpacted by rising interest rates as we have not reached for yield. In fact, we will benefit from rising investment income."


"...We moved to the two-year treasuries and moved up the curve in terms of getting more income. We've gone into predominantly singly and above one and-a-half, two years covered bonds, picking up to 3%, 3.25% as interest rates have gone up. But we haven't gone into five and 10 years because we think that there's a lot of risk..... Remember, there's pent up demand. We've talked about that in the past. Pent up demand for the last eight years where prior to this administration, where the economic growth was like less than 2%. Given that pent up demand and with these very attractive economic policies, the risk we think is interest rates rising and perhaps rising significantly. You'll see when you examine insurance companies, Mark, that the book values haven't grown because there's mark-to-market losses on that fixed income portfolio. And our experience, like we have 50% effectively in cash. While most companies have very little cash, it doesn't yield much -- and most companies, I'm talking insurance companies now, have reached for yield.  Spreads are very low, Mark. Record-low spreads, interest rates very low. When interest rates go up and for whatever reason, spreads you can't forecast this, but some time, this will happen, spreads will widen and they are unexpected and they can widen dramatically. That of course will hit capital and perhaps hard whereas we might have the opportunity of putting on money to work at very good rates. So that's the fixed income side, that's what Brian is looking at.......  We are very excited. We think we are well-positioned to benefit, the interest income has gone up by $100 million to $700 million, should continue to go up as we deploy the cash in one and-a-half to two year bonds. We think loan interest rates are bottomed and are on their way up. They're bottomed like 10-year rates are bottomed at maybe 1.5% to 2%. They're now close to 3%, but in a total perspective of history 3% is very low for long term U.S. treasuries, 10-year treasuries and above. We can see them going up much more and spreads widening. So in that environment, you have to be very careful with your fixed income portfolio.  That's how we're looking at it, Mark. We're looking at the fact that interest income will continue to rise over time as we deploy the cash."


When Prem says he is excited, I get excited.  And with the CAPE ratio sitting at a nosebleed level of 32.80 and past-year S&P500 PE at 24.5, we may see blood in the streets if/when/as interest rates do in fact rise and overall market valuations fall.....  Long term, I don't see too many companies prepared for this possibility the way that Fairfax is prepared. 

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Some noteworthy remarks from Prem with respect to interest rates:



I don't know where interest rates are going but it may make sense to get "protection" for certain outcomes or to position a fixed-income portfolio to take advantage of (future) opportunities. Historically, FFH has been very good at that. When you look at insurance companies, most follow a similar investment strategy and is is quite possible that FFH eventually ends up with a significantly different result.


If inflationary forces do, in fact, manifest, as WR Berkley recently explained (excellent long term underwriter), it is reasonable to expect a delayed response on the underwriting side too with mid to long term implications for the longer tail book of business as the new generation learned inflation from the history section of their training.


Even if agnostic however, I wonder if the death of long term bonds has not been declared too rapidly as FFH used to quote Hoisington not so long ago.


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