Fairfax 2023

[SafetyinNumbers]

3 hours ago, Viking said:

@TwoCitiesCapital , I agree with your comments. Fairfax India has been buying back shares for years at low prices. Are these not largely the shares that will be used to pay the performance fee to Fairfax? 

 

Fairfax India should keep buying shares when they are trading this much below BV. 
 

The good news for investors buying Fairfax India shares today is they are unambiguously cheap. They own quality companies. The prospects for Fairfax India - and India - are bright. 
 

Possible catalysts are out there. The big one is a possible Anchorage IPO. 
 

The biggest problem i see with Fairfax India is liquidity. I can’t buy shares without moving the price. There is no way an institutional shareholder can invest in Fairfax India. My guess is any remaining institutional holders would love to exit (and that is what we saw early last year).

 

As a result, absent some big catalyst, I think Fairfax India is destined to remain a frustrating stock to own. Not for those buying today. But for shareholders who bought when it traded above BV and still hold their shares. 
 

As it is configured today, I think the only ‘fix’ is for Fairfax to take it private. This makes more sense after Fairfax hits is ownership limit (about 50%)? Fairfax has been able to materially grow its stake in Fairfax India at exceptionally low prices.
 

Fairfax has always been a head scratcher for me (in terms of how the stock trades). Great company.

I don’t think they will take FIH private. With OMERS stake, they can never own more 90% but they could buy every other share back over time. There is no ownership limit, it just doesn’t allow FFH to elect shares for payment of the performance fee if it means FFH would own more than 49% of FIH. They should hit that by the next performance fee period end in 2026 assuming continued buybacks or big enough performance fee given they are at ~43% now.
 

I don’t think institutions want to own it because it’s not in their benchmark more so than the liquidity. It seems pretty easy to buy most days and I know a small cap manager that recently bought some for his fund. I do think it’s interesting how no one wants to buy the shares that actually closes the discount which makes sense as it’s mostly active value investors that are looking. That sort of buying comes from quants and passive these days. FIH won’t ever have that kind of buying. Kind of like ELF in that way. 

 

One positive aspect of FIH, that doesn’t get mentioned a lot is the cheap leverage. $500m note that doesn’t mature until 2028 at 5% is a pretty cheap cost of capital. As you have pointed out often recently, Viking. FFH is pretty good at managing debt. Issuing 7 year 5% paper when the 10-yr was ~1.5% in 2021, was another stroke of genius.
 

Buying FIH at these prices is ~2 to 1 leverage which is a lot better than an India ETF and that’s probably the switch trade investors should be making but no one on this board likely buys India ETFs as a long term investment. I think it’s impossible to know when the discount will ever close enough to realize the return but I’m invested anyway. I appreciate that people have better alternatives in what I believe is a very inefficient market.

[Haryana]

Samer Hakoura Alphyn Capital 

https://www.alphyncap.com/uploads/1/4/1/2/14123551/acml_2023-q3.pdf 

"

The long game

 

“The daily blips of the market are, in fact, noise -- noise that is very difficult for most investors to tune out.” – Seth Klarman

 

Investing in the stock market can often test one’s patience. There are stretches of time when returns seem stagnant or even negative.

 

Fairfax Financial serves as an apt illustration. Throughout our almost 5-year holding period, our investment in Fairfax has compounded at approximately 17% per annum, closely matching its impressive 25-year record of book value growth. However, it did not grow over a straight line. Fairfax’s share price largely stagnated for nearly five years of ownership, impacted by short-term issues, including macroeconomic uncertainties, underperforming investments, and challenges with operating companies arising from the pandemic. Yet, over the last year, the shares rallied as the market began to recognize its robust insurance business and the benefits of a favorable insurance market, and the company’s patient, long-term capital allocation began to bear fruit.

 

Had I lost patience and sold the shares at any point, we would have given up these returns and maybe shown a loss.

It is natural to wonder if I could time my position entry better and miss the long sideways or negative periods. Unfortunately, I’ve found no reliable method of doing this. Despite numerous discussions with fellow investors and researching various market timing techniques—like moving averages and oscillators, interpreting short-term news, or trying to outsmart the market on next earnings “beats or misses” I haven’t found a reliable, practical approach. Most attempts to time investments may offer smoother journeys, but often at the cost of overall performance. At best, it’s a trade-off; at worst, it hampers overall returns.

 

Of course, long-term holding is no guarantee of success, and our experience with Fairfax has not been replicated with all our holdings. Still, I believe that focusing on sound fundamental analysis, identifying undervalued companies, and maintaining a long-term perspective is more likely than not to lead to satisfactory outcomes.

"

 

[gary17]

3 minutes ago, Haryana said:

Samer Hakoura Alphyn Capital 

https://www.alphyncap.com/uploads/1/4/1/2/14123551/acml_2023-q3.pdf 

"

The long game

 

“The daily blips of the market are, in fact, noise -- noise that is very difficult for most investors to tune out.” – Seth Klarman

 

Investing in the stock market can often test one’s patience. There are stretches of time when returns seem stagnant or even negative.

 

Fairfax Financial serves as an apt illustration. Throughout our almost 5-year holding period, our investment in Fairfax has compounded at approximately 17% per annum, closely matching its impressive 25-year record of book value growth. However, it did not grow over a straight line. Fairfax’s share price largely stagnated for nearly five years of ownership, impacted by short-term issues, including macroeconomic uncertainties, underperforming investments, and challenges with operating companies arising from the pandemic. Yet, over the last year, the shares rallied as the market began to recognize its robust insurance business and the benefits of a favorable insurance market, and the company’s patient, long-term capital allocation began to bear fruit.

 

Had I lost patience and sold the shares at any point, we would have given up these returns and maybe shown a loss.

It is natural to wonder if I could time my position entry better and miss the long sideways or negative periods. Unfortunately, I’ve found no reliable method of doing this. Despite numerous discussions with fellow investors and researching various market timing techniques—like moving averages and oscillators, interpreting short-term news, or trying to outsmart the market on next earnings “beats or misses” I haven’t found a reliable, practical approach. Most attempts to time investments may offer smoother journeys, but often at the cost of overall performance. At best, it’s a trade-off; at worst, it hampers overall returns.

 

Of course, long-term holding is no guarantee of success, and our experience with Fairfax has not been replicated with all our holdings. Still, I believe that focusing on sound fundamental analysis, identifying undervalued companies, and maintaining a long-term perspective is more likely than not to lead to satisfactory outcomes.

"

 

 

It is hard to place significant value of this writing when he only done 3.2% since inception vs. 13.2% for the S&P500 !   

[Haryana]

 

More interesting commentary from Samer Hakoura of Alphyn Capital Management, LLC 

 

Letter to investors, Q4 2022

https://www.alphyncap.com/uploads/1/4/1/2/14123551/acml_2022-q4.pdf

 

"

Fairfax shares have remained flat over five years despite this quarter's solid share price performance. I had a conversation with someone in the company's investor relations department and asked what feedback they might be getting from investors regarding the medium-term share price performance. Were investors still upset with the company for the expensive and ill-timed macro hedges from years ago? His response was interesting: growth investors are attracted to different companies during boom times, and deep value investors look for badly beaten down companies that could rebound aggressively. Unfortunately, Fairfax doesn't easily fit into either of those categories and has largely been ignored for the last few years.

 

I read a report recently that described Fairfax as a "non-obvious growth stock," and I think the description is appropriate. From looking at the share price over the last five years, you would not know that Fairfax has been executing on several metrics. Consider that Fairfax's "gross premiums written" per share has compounded almost 18% from 2015-2021. It grew a further 19% in the first nine months of 2023). The insurance business is, of course, the engine of Fairfax's growth. With Fairfax's disciplined underwriting, insurance has averaged 2% profit for the last five years. Insurance also generates float, which the company reinvests. Float per share has grown 7% a year from 2017-2022, and Fairfax's investment portfolio has, in turn, increased from just under $28bn in 2015 to $51.5bn as of Q3 2021. As Fairfax generates a total return of approximately 5.7% on its investments, on a simplified calculation, we can see how this process has led to an additional $1.3bn in profits for the company. As a result, Fairfax's book value per share has grown by over 13% per year for the last six years. When one also considers the company's capital allocation, such as the sale of its pet insurance business which added $42/share gain on sale, buybacks, and the opportunity for increased profitability in the bond portfolio from higher interest rates, and growth from improving the operations of some of its privately held businesses, it has plenty of opportunity to continue compounding at faster rates. The share price should eventually catch up with the company's underlying economics. 

" 

 

[nwoodman]

11 hours ago, MMM20 said:

Does anyone here have a view on whether this should matter much to Fairfax investors?

 

https://lindynewsletter.beehiiv.com/p/borders-lindy

I guess more mouths to feed at Recipe restaurants is a good thing.  These mass immigration policies are typically hell bent on nominal GDP growth rather than the  thing that matters to the current population, GDP/capita growth.  If there is stagnant or even declining living standards then there inevitably will be push back.  These immigrants get old too, so is a bit of a Ponzi scheme in that respect.   This is not to say immigration per se is bad,  just that it needs to be measured and not a means of plastering over other poor economic choices.

[nwoodman]

3 hours ago, Hoodlum said:

Foran mining has raised $200 through a private placement at $4.10/share.  I wonder if Fairfax is participating to increase their equity. 
 

https://www.theglobeandmail.com/business/article-canadian-critical-minerals-miner-foran-raising-200-million-a-rare/

Me too, Fairfax look like they have kicked a real nugget here.  I note that Foran recently bought options on up to 100% of Denare West, an adjacent property from Purepoint.  The recent drilling program looks good too, with further evidence that Tesla and MB are linked.  

 

https://purepoint.ca/news/purepoint-uranium-enters-into-option-agreement-with-foran-mining-corporation-for-the-denare-west-project/

 

[This2ShallPass]

22 hours ago, TwoCitiesCapital said:

Book value.this is precisely how mutual funds and ETFs charge fees too (on NAV). There is no outcry about that being a conflict of interest - it'd payment for the service. 

There's no outcry because MF / ETF don't charge performance fees and rarely trade at a discount since most assets are mark to market. 

 

Here's my simple way of looking at it. Let's say I come to you with a plan of making you lot of money and in turn you give me 20% of profits. 3 years later, I come back and tell you I made you $1M (just take my word for it) and my fees are $200k. You pay me the $200k and turn around to sell your shares to get the $1M profit. But you find out no one is willing to buy at the price and the real profit you can get is $300k. But you have already paid me $200k and net is only $100k.

 

So, I used your money, 100% of risk is yours and made more money than you did! That's what is asinine to me. Let's not even get into the fact that I screw you even further by getting my $200k in heavily discounted shares.

 

To say there's no conflict of interest in using BV also makes no sense. Tomorrow if Fairfax increases BIAL valuation by 50%, with say fancy accounting, what's your recourse?

 

Let's go back to how Fairfax can show they treat minority investors fairly. Very simple, they can say they didn't envision this scenario of 40% discount and they agree it's completely unfair for them to calculate performance in BV and get paid in discounted shares (double whammy). The least they can do to rectify is get payment in cash or go above and beyond and say they'll defer payment until the discount is closed. That would be setting a high standard, not that hard to do and the fees from this is peanuts for them. They could easily afford to defer payments.

Edited November 28, 2023 by This2ShallPass

[Munger_Disciple]

15 minutes ago, This2ShallPass said:

Let's go back to how Fairfax can show they treat minority investors fairly. Very simple, they can say they didn't envision this scenario of 40% discount and they agree it's completely unfair for them to calculate performance in BV and get paid in discounted shares (double whammy). The least they can do to rectify is get payment in cash or go above and beyond and say they'll defer payment until the discount is closed. That would be setting a high standard, not that hard to do and the fees from this is peanuts for them. They could easily afford to defer payments.

 

They should base the fees on the lower of book value and market value of FIH shares, which also gives them an incentive to close the gap between the two if the shares are trading at a discount to book as they have been for awhile. 

[hardcorevalue]

agreed on treating shareholders right would cost ffh peanuts at this stage.

 

at this stage, it’s just more of an embarrassment for the team, especially in light of how fairfax africa was total disaster. 

[Munger_Disciple]

Personally, I don't think Fairfax should manage retail funds like Fairfax India or Africa. At a minimum, it is a conflict of interest between the mother ship & the fund. Fairfax could have just partnered with a pension fund or other institutional investor to make India investments directly without running a fund with high expenses.

 

People like to compare Fairfax to Berkshire but I can't imagine Berkshire ever doing something like this.

Edited November 28, 2023 by Munger_Disciple

[Parsad]

1 hour ago, Munger_Disciple said:

Personally, I don't think Fairfax should manage retail funds like Fairfax India or Africa. At a minimum, it is a conflict of interest between the mother ship & the fund. Fairfax could have just partnered with a pension fund or other institutional investor to make India investments directly without running a fund with high expenses.

 

People like to compare Fairfax to Berkshire but I can't imagine Berkshire ever doing something like this.

 

No conflict.  The obvious answer is to own FFH, which benefits from Fairfax India or Africa.  That's what I did...sold any India I owned and switched it all to FFH.  I then have the Indian exposure and still benefit from the fees.  The funds are really meant for retail clients or FFH shareholders who want additional exposure to those regions.  Cheers!

[Munger_Disciple]

10 minutes ago, Parsad said:

 

No conflict.  The obvious answer is to own FFH, which benefits from Fairfax India or Africa.  That's what I did...sold any India I owned and switched it all to FFH.  I then have the Indian exposure and still benefit from the fees.  The funds are really meant for retail clients or FFH shareholders who want additional exposure to those regions.  Cheers!

 

I too only own FFH, no position in FIH. However I think there is a conflict between FIH and its manager FFH which also makes India investments on its own. If there is a new sexy idea, where would FFH invest? For its own account or FIH? Plus if I were an FIH investor I would hate to pay the excessive management fees based on NAV which is way higher than market price. 

[SafetyinNumbers]

5 minutes ago, Munger_Disciple said:

 

I too only own FFH, no position in FIH. However I think there is a conflict between FIH and its manager FFH which also makes India investments on its own. If there is a new sexy idea, where would FFH invest? For its own account or FIH? Plus if I were an FIH investor I would hate to pay the excessive management fees based on NAV which is way higher than market price. 

FFH does any insurance investments and FIH does everything else so there is no conflict there.
 

FFH has bought shares in the open market and FIH has bought back shares at a big discount. Almost no shares have been issued below NAV and they have bought back significantly more below NAV. We’ll see what they do this year. They might surprise and take it in cash and ideally tender for shares. The parties that really let down minority shareholders were those who negotiated on their behalf i.e. OMERS etc… The agreement incentivized minority shareholders to buy the shares into the measurement period at the end of a performance period but they haven’t shown up. 

[Viking]

On 11/25/2023 at 10:31 PM, Viking said:

This is a long post. Fixed income is an under followed and under appreciated part of Fairfax. This post is broken into 3 parts: 

• Part 1: an introduction to the fixed income portfolio of Fairfax
• Part 2: fixed income - some basics 
• Part 3: what does all this mean for P/C insurers?

Part 1: An Introduction to the Fixed Income Portfolio of Fairfax

 

The team: how does Fairfax manage fixed income?

 

All investments at Fairfax are managed through Hamblin Watsa.

 

“Hamblin Watsa Investment Counsel, a wholly-owned subsidiary of Fairfax Financial Holdings Limited, provides global investment management services solely to the insurance and reinsurance subsidiaries of Fairfax.” Source: Hamblin Watsa website

 

Within Hamblin Watsa, the team that manages the fixed income portfolio is lead by Brian Bradstreet. Brian has been with Fairfax for 36 years - from the very beginning.

 

 

Is the team any good?

 

Under Brian’s leadership, the fixed income team at Fairfax has done an exceptional job over the decades of managing Fairfax’s fixed income portfolio. They have a very good long term track record. I think we can say the fixed income team is a competitive advantage for Fairfax compared to peers. This is important because fixed income is by far the largest piece of Fairfax’s total investment portfolio.

 

(As an aside, it was Brian Bradstreet who brought the CDS opportunity to Fairfax’s attention just as the housing bubble was getting going in the US. By 2009, that investment had made Fairfax $2 billion in profit. Not too shabby.)

 

How big is Fairfax’s fixed income portfolio?

 

Fairfax has an investment portfolio of about $57.5 billion. Of this total, about $16.5 billion or 29%, is invested in equities. The vast majority, about $41 billion or 71%, is invested in fixed income securities.

 

 

When investors talk about Fairfax and investments, they usually focus exclusively on the equity holdings. The fixed income part of Fairfax is rarely discussed - even though it is the much larger part of the total investment portfolio.

 

Well, this is changing. Why? Follow the money…

 

Has the fixed income portfolio been growing in size?

 

The fixed income portfolio at Fairfax has increased from $20.3 billion at Dec 31, 2016 to an estimated $42 billion at Dec 31, 2023. The increase is $21.7 billion, or 107%. The CAGR from 2016 to estimated 2023 is 11%. With the expected closing of the GIG acquisition in Q4 and the continuation of the hard market we should see similar growth in 2024.   

 

 

How much does Fairfax earn on its fixed income portfolio?

 

The returns that Fairfax earns in its fixed income portfolio come primarily in two ways:

• Interest income
• Investment gains (losses) - realized and unrealized

Fairfax actively manages its fixed income portfolio and has generated meaningful realized investment gains over time. However, to keep our analysis simple (and this post to a reasonable length), we are going to focus here on the largest bucket, interest income.

 

The historical returns for interest income

 

Interest income averaged $647 million per year from 2016-2021. From this average, it increased to an estimated $1.8 billion in 2023 or +182%. It is forecasted to increase further in 2024 to about $2.1 billion (my latest estimate).

 

The average yield on the fixed income portfolio from 2016-2021 at Fairfax was about 2.4%. The yield has almost doubled to an estimated 4.3% in 2023 and 4.6% in 2024.

 

 

Summary

 

Fixed income investments are managed by a very capable team at Fairfax, lead by Brian Bradstreet. The fixed income portfolio has more than doubled in size from 2016 to 2023. At the same time the yield Fairfax is earning on its fixed income portfolio has almost doubled (from the average from 2016-2021). As a result of these two doubles (size and rate of return), interest income has spiked higher to about $2 billion per year (the current run rate).

 

Interest income is now the largest income stream at Fairfax. This is important because this source of income is considered to be very high quality by investors and analysts. It is considered to be high quality because it is relatively predicable and durable.

 

What happened to spike interest income so much? In short, over the past 2 years the fixed income team at Fairfax delivered a clinic in value investing and active management. But before we explore this further, let’s first cover off some bond basics.

 

Part 2: Fixed Income - Some Basics

 

Fixed income investing is very different from equity investing. Let’s spend a few minutes and review a few things that are relevant to our analysis.

 

The greatest bull market in history.

 

From 1981-2020, bonds experienced the greatest bull market in history. It began in September 1981, when the interest rate on the 10-year US treasury peaked at around 16%. It ended 40 years later, in June 2020, when the interest rate on the 10-year US treasury bottomed at 0.65%. Ever falling interest rates was an incredible 40-year tailwind for fixed income investors (actually, all investors - equity, real estate etc).

 

 

The bull market lasted so long some of the risks of owning bonds, like interest rate risk, receded into the shadows…. largely forgotten by fixed income investors.

 

But everything changed in early 2022. The scourge of double digit inflation escaped from its cage and was wreaking havoc on the global economy. The Federal reserve and other central banks began a historic tightening cycle and in the process unleashed hell on bond markets.

 

The greatest bond bear market in history

 

From 2021-2023, bonds experienced the greatest bear market in their history. The interest rate on the 10-year US treasury - that had bottomed at 0.65% in 2020 - hit a 15 year high of 4.98% in October 2023. The relentless move higher in interest rates over the past 2 years has caused the value of fixed income portfolios to crater.

 

Where are the losses hiding? The massive losses are sitting on the balance sheets of central banks, pension funds and financial institutions all over the world. And yes, P/C insurance companies.

—————

The Worst Bond Bear Market in History

October 13, 2023 by Ben Carlson

• https://awealthofcommonsense.com/2023/10/the-worst-bond-bear-market-in-history/

“One of the strange parts about living through the worst bond bear market in history is there doesn’t seem to be a sense of panic. If the stock market was down 50% you better believe investors would be losing their minds. Yes, some people are concerned about higher interest rates but it feels pretty orderly all things considered.

 

“So why aren’t people freaking out about bond losses more?

 

“It could be there are more institutional investors in long bonds than individuals. There are lots of pension funds and insurance companies that own these bonds.

 

“It’s going to take a very long time for investors to get made whole but you can hold these bonds to maturity to get paid back at par.”

—————

Active management matters again

 

As the bear market in bonds clawed its way though fixed income portfolios, a few P/C insurance companies were much better prepared than others. To understand who the relative winners and losers were/are it is helpful to first review the risks of investing in bonds.

 

A review of some of the risks of investing in bonds

• Interest rate risk - rising interest rates cause bond prices to fall. Duration matters a lot with this risk. Spiking interest rates impact long duration bond portfolios much more than short duration portfolios.
• Credit risk - the risk the issuer may default on one or more payments. Market dislocations / recessions matter a lot with this risk - events that cause credit spreads to blow out. Commercial real estate (in particular office) has taken a beating over the past year.
• Inflation risk (purchasing power risk) - the risk that inflation is higher than the total return received on the bond. Unexpected inflation is what matters with this risk. Especially if the inflation is high and persists for years.
• Reinvestment risk - the risk that at maturity, the proceeds will be reinvested at a lower rate than the bond was earning previously.

Part 3: What does all this mean for P/C insurers?

 

To state the obvious, how fixed income portfolios were structured in 2020 / 2021 - when interest rates bottomed - has determined how the bear market in bonds has impacted individual P/C insurers. The two key metrics were:

• duration
• credit quality

So far, the clear winners have been the P/C insurers that had fixed income portfolios in 2021/2022 that were low duration. (If we get an economic slowdown / recession then credit quality will likely also become an important factor.)

 

Interest rate risk

 

“Only when the tide goes out do you discover who's been swimming naked.” Warren Buffett

 

Most P/C insurers match the duration of their insurance liabilities with the duration of their fixed income portfolio. So, in 2020/2021, many P/C insurers had an average duration in their fixed income portfolios of about 4 to 4.5 years.

 

As a result of spiking interest rates in 2022, most P/C insurers saw the value of their fixed income portfolio plummet. This in turn caused book value to crater. This happened despite earning a strong underwriting profit in 2022.

 

 

Let’s look at one P/C insurer to better understand what happened

 

Chubb is viewed by many investors/analysts as being one of the better run P/C insurers. At the end of 2020, Chubb’s fixed income portfolio of $107.6 billion was sitting on an unrealized gain of $6.5 billion. Interest rates started to rise in 2021 and at year-end the fixed income portfolio was sitting on a smaller gain of $3.2 billion. In 2022, interest rates spiked higher. At the end of 2022, Chubb was suddenly sitting on a loss of $8.4 billion. Holy shit batman! The two year change in the fair value of Chubb's fixed income portfolio was a staggering swing in value of $14.9 billion (from a gain of $6.5 to a loss of $8.4 billion). As a result, despite earning a strong underwriting profit, book value at Chubb got crushed in 2022.

 

To put this in context, from 2020 to 2022, Chubb earned an average of $3.5 billion per year in interest income from its fixed income portfolio. So a $14.9 billion swing in value over 2 years is a big deal.

 

 

How did Fairfax manage to increase book value in 2022?

 

In terms of book value growth in 2022, Fairfax was a clear outlier. Why? In late 2021 Fairfax reduced the average duration of their fixed income portfolio to 1.2 years (more on this in my next post). As a result it was not impacted by spiking interest rates nearly as much as other P/C insurers.

 

Did any other P/C insurers have extremely low duration?

 

Yes. Berkshire Hathaway had very low average duration (my guess is their loss in book value in 2022 was due in part to mark-to-market losses on their equity portfolio). WR Berkley also deserves a shout-out as their average duration at December 31, 2021, was 2.4 years, which was much lower than the average. As a result, in addition to Fairfax, WR Berkley was one of the few P/C insurers who were able to deliver an increase in book value in 2022.

 

How should we think about these losses?

 

Yes, big unrealized losses sounds scary. But P/C insurers have said they will simply hold the bonds until they mature. Unless there is an unexpected liquidity need (perhaps like a 1-in-100 year catastrophe) it is unlikely we are going to see forced sales. So if the losses will not be realized are they really a problem?

 

Given the sizeable impact to book value there may be regulatory implications - insurance regulators and credit rating agencies are likely paying close attention.

 

Perhaps the more important question is how long are some P/C insurers going to have to sit on those (shit) low yielding bonds they are holding? The key is duration. P/C insurers with fixed income portfolios with an average duration of 4 or 5 years are likely going to need another couple of years to get the (shit) low yielding bonds off their books. Low yielding bonds - means low interest income - means lower earnings.

 

P/C insurers with a low duration portfolio have a big earnings advantage for the next couple of years over P/C insurers with longer duration fixed income portfolios. We will discuss this more below.

 

Inflation risk

 

Expected inflation is generally not a problem. Unexpected inflation, if it is high and persistent, can be a big problem for P/C insurance companies. And guess what we have had for the past 2 years? Unexpected high (double digit) inflation.

 

Why is unexpected inflation an issue? Because most P/C insurance companies are sitting on tens of billions in insurance liabilities.

 

P/C insurers get paid a fixed amount up front when they write an insurance policy. When they price the policy, they have to guess at its cost. After doing all this, they hope to make a profit.

 

Unexpected inflation is a big problem for P/C insurers. It means costs are likely going up more than expected. This is especially problematic for long tail lines of business. Because those higher than expected losses keep happening for years into the future.

 

And if you also have a long duration fixed income portfolio - and, at the same time, you are stuck with (shit) low yielding bonds - well, your problems are even worse.

 

High unexpected inflation and a long duration / low yield fixed income portfolio is not a good combination for the profitability of a P/C insurer - it has the potential to squeeze earnings for years.

 

Perhaps this partly explains why the hard market that started in late 2019 kept going strong in 2023 and looks set to continue strong into 2024 - despite repeated predictions of its imminent demise.

 

Reinvestment opportunity (not risk)

 

The increase in interest rates the past 18 months has been historic in amount and speed. P/C insurers are seeing interest rates today - across the curve - at 15 year highs.

 

 

P/C insurers with shorter duration fixed income portfolios have been able to capture the spike higher in interest rates much more quickly than P/C insurers with longer duration portfolios. We can see this by looking at the trend in interest income for the last 2 years.

 

Fairfax is estimated to see interest income increase 133% in 2023 and 222% over the past 2 years. Chubb, on the other hand, is estimated to see interest income increase 33% in 2023 and 47% over the past two years.

 

The speed of the earn-through for Fairfax is more than 4 x that of Chubb.

 

 

It is also interesting to note that the yield on both Fairfax’s and Chubb’s fixed income portfolio now looks remarkably close. What is very different, however, is what they hold in their respective fixed income portfolios.

 

Credit Risk

 

The one risk I have not discussed is credit risk - the risk the issuer may default on one or more payments. Fairfax’s fixed income portfolio is stuffed mostly with government bonds. High quality. Chubb? Very different.

 

The yield on Fairfax’s and Chubb’s fixed income portfolio might be similar. However, the credit risk (made up of the holdings in each of the two portfolios) looks very different to me. Which portfolio is more risky? Which portfolio should perform better it we see an economic slow down? This post is long enough already… I’ll let you answer those two questions on your own.

 

Conclusion

 

The historic bear market in bonds has crushed the value of fixed income portfolios of many P/C insurance companies - in turn this has cratered book value. But a few odd ducks were prepared - Fairfax, Berkshire Hathaway and WR Berkely. On a relative basis, over the past 24 months, P/C insurers with low duration fixed income portfolios have been the clear winners over P/C insurers with long duration fixed income portfolios. Fairfax was exceptionally well prepared. 

 

Short duration portfolios protected book value. And the earn-through from higher interest rates (in the form of spiking interest income) has been much quicker - which is boosting profitability - compared to long duration peers. 

 

Having a short duration portfolio has also provided valuable optionality - it allows P/C insurance companies to be opportunistic should we see any dislocations in financial markets (like April of 2023, and the crisis that hit regional banks in the US).

 

In my next post (coming next week), I will take a closer look at what the team at Fairfax has done with their fixed income portfolio over the past 2 years. What can we learn about Fairfax and their fixed income team? Does value investing also apply to bonds? Does active management matter?

—————

Background Information:

 

How P/C insurance companies account for their bond holdings is important for investors to understand.

 

Most bonds at most P/C insurance companies are held in the ‘available-for-sale’ bucket. This means that unrealized losses do not show up in earnings (or ROE calculations). However, these unrealized losses are real - instead they show up in ‘other comprehensive income’ and book value.

 

How an Available-for-Sale Security Works

• https://www.investopedia.com/terms/a/available-for-sale-security.asp#:~:text=Available%2Dfor%2Dsale%20(AFS,a%20ready%20market%20price%20available.

“Available-for-sale (AFS) is an accounting term used to describe and classify financial assets. It is a debt or equity security not classified as a held-for-trading or held-to-maturity security—the two other kinds of financial assets. AFS securities are nonstrategic and can usually have a ready market price available.

 

“The gains and losses derived from an AFS security are not reflected in net income (unlike those from trading investments) but show up in the other comprehensive income (OCI) classification until they are sold. Net income is reported on the income statement. Therefore, unrealized gains and losses on AFS securities are not reflected on the income statement.

 

“Net income is accumulated over multiple accounting periods into retained earnings on the balance sheet. In contrast, OCI, which includes unrealized gains and losses from AFS securities, is rolled into "accumulated other comprehensive income" on the balance sheet at the end of the accounting period. Accumulated other comprehensive income is reported just below retained earnings in the equity section of the balance sheet.”

 

Below is the promised follow up to my initial post on fixed income. This post takes a deep dive into fixed income at Fairfax. 

-----------

The Genius of the Fixed Income Team at Fairfax

 

We are learning in real time the genius of the fixed income team at Fairfax. Genius is a big word, but I think it applies in this case. The team at Fairfax has been putting on a clinic for the past 3 years - demonstrating in real time the significant value that active management can add to a fixed income portfolio.

 

We are going to look at what Fairfax has done the past 3 years in three parts:

• Part 1: Late 2021 - Getting even more defensive
• Part 2: 2022 - Start extending duration
• Part 3: 2023 - Being opportunistic and going on the offensive

Part 1: Late 2021 - Getting even more defensive

 

The big picture

 

We are taught the way to get rich in investing is to buy low and sell high. But sometimes the opposite can also work: sell high and then buy low.

 

In 2020 and 2021, the 40-year historic bond bubble reached its blow-off-top. Bond yields reached all-time lows and conversely bond prices reached all-time highs. Mr. Market was feeling positively euphoric when it came to fixed income investments - especially those that were long dated. What was a value investor to do? Why sell your long dated bonds of course.

 

Below are details of 3 moves Fairfax made in late 2021:

 

1.) Significant sales of corporate bonds at very low yields, locking in large, realized gains:

 

“During 2021, we sold $5.2 billion in corporate bonds, mainly acquired in March/April of 2020, at a yield of approximately 1%, for a gain of $253 million.” Fairfax 2021AR

 

The question to ask here is who was on the other side of this trade? Who was buying corporate bonds at a 1% yield in late 2021?

 

2.) The duration of the portfolio was shortened, and the composition of portfolio was shifted to higher quality holdings, mostly treasuries:

 

“At the end of 2021, our fixed income portfolio, inclusive of cash and short-term treasuries, which effectively comprised 72% of our investment portfolio, had a very short duration of approximately 1.2 years and an average rating of AA-.” Fairfax 2021AR

 

Most P/C insurance companies match the duration of their insurance liabilities with the duration of their fixed income investments - which is around 4 years. So Fairfax going to an average duration of 1.2 years with its fixed income portfolio was a significant difference compared to peers. Fairfax's move to mostly government bonds was also significant and another big difference compared to peers.

 

3.) Part of the fixed income portfolio was hedged to protect against rising interest rates:

 

“To economically hedge its exposure to interest rate risk (primarily exposure to certain long dated U.S. corporate bonds and U.S. state and municipal bonds held in its fixed income portfolio), the company held forward contracts to sell long dated U.S. treasury bonds with a notional amount at December 31, 2021 of $1,691.3 (December 31, 2020 – $330.8)." Fairfax 2021AR

 

Fairfax did not sell all of its long dated bonds. It hedged some of its remaining exposure to provide added protection.

 

Summary

 

In late 2021, near the peak of the bond bubble, Fairfax ‘sold high’ and went extremely short duration with their massive fixed income portfolio of $37 billion. This positioning protected the company from the interest rate risk. It also protected them from inflation risk. Fairfax also shifted the vast majority of its fixed income portfolio to high quality government bonds, which protected the company from credit risk. In summary, by late 2021, Fairfax’s fixed income portfolio was very defensively positioned.

 

The team at Fairfax did all of this months before the Fed (and other global central banks) unleashed hell on fixed income markets. With hindsight, Fairfax's timing was close to perfect. (It should be noted that Fairfax had been cautious on fixed income - expressed as low duration - since late 2016.)

 

Does value investing also apply to fixed income?

 

What Fairfax did was a good example of value investing. Long duration bonds, with crazy low yields in 2020 and 2021, provided no margin of safety. Especially later in 2021 when it was clear that the economy was expanding and inflation was quickly becoming a big problem.

 

Passive management versus active management

 

Most P/C insurers have a policy of blindly matching the duration of their insurance liabilities with the duration of their fixed income portfolio. So in 2020 and 2021, other P/C insurers were busy buying 3 and 4 year bonds at historically low yields - they were buying at nose-bleed bubble high prices. Matching duration was the religion of the day. Yield did not matter.

 

This had been a winning strategy in a zero interest rate world - where interest rates and bond yields only ever went down. The problem with this strategy is it completely ignored interest rate risk and inflation risk. When the greatest bear market in history came lumbering along it crushed the value of fixed income portfolios of most P/C insurers. This in turn crushed the book value of most P/C insurers. Not Fairfax.
 

But we are getting a little ahead of ourselves. Back to late 2021. 

 

Fairfax ended 2021 with 77% of its fixed income portfolio in ‘cash’, ‘cash equivalents’ and ‘bonds of 1 year or less’. This was $28.4 billion of its $37.0 billion fixed income portfolio. This was a ‘high conviction’ move for Fairfax. (The increase in the 'Due after 10 years' bucket was due to the consolidation of Eurolife.)

 

 

Having a short duration portfolio at the end of 2021 had two key benefits:

• It protected the balance sheet from interest rate risk - a rapid increase in interest rates would cause the value of bonds to plummet. This would then cause book value to fall. Long duration bonds were especially vulnerable.
• It provided valuable optionality - this would allow Fairfax to quickly take advantage of rising interest rates and dislocations in credit markets.

Part 2: 2022 - Start extending duration

 

The big picture

 

The big economic news in 2022 was the spiking of inflation and the subsequent aggressive tightening by the Fed and global central banks. This in turn caused interest rates to spike, especially short term interest rates. The greatest bond bear market in history accelerated as the year progressed.

 

 

Fairfax’s fixed income portfolio had an average duration of 1.2 years at Dec 31, 2021. With such a low duration portfolio, as interest rates spiked higher Fairfax saw interest income quickly increase. Interest income bottomed out at $130 million in Q4, 2021. A year later, in Q4, 2022, interest income increased to $314 million, an increase of 141%. The earn-through from higher interest rates was happening very fast for Fairfax.

 

 

What did Fairfax do in 2022?

 

In 2022, Fairfax started extending the average duration of their fixed income portfolio - from 1.2 years at the end of 2021 to 1.6 years at the end of 2022. Bonds at the short end of the curve (1-year to 3-year) offered the highest yield and this is where Fairfax bought aggressively.

 

Fairfax ended 2022 with 47% of its fixed income portfolio in ‘cash’, ‘cash equivalents’ and ‘bonds of 1 year or less’.  This was down significantly from 77%, where it ended 2021.

 

 

Part3: 2023 - Being opportunistic and going on the offensive

 

The big picture in 2023

 

The big news in 2023 was that aggressive tightening by global central banks continued. This was unexpected. This in turn caused interest rates to spike even higher.

 

The unexpected and historically rapid increase in interest rates also started to cause some dislocations in financial markets. Silicon Valley Bank and Signature Bank both went under in April. This created opportunities in credit markets.

 

In October of 2023, we saw long bond yields spike to 15-year highs. This provided an opportunity for short duration fixed income portfolios to extend duration.

 

 

What did Fairfax do in 2023?

 

1.) Fairfax was very opportunistic with the dislocation that hit regional banks in the US in March/April.

 

In March of 2023, Silicon Valley Bank went bankrupt. This was the second largest bank failure in US history. There was a run on the bank (depositors wanted their money) and SVB did not have it - the money was locked up in low-yielding long-dated US treasuries. To meet customer withdrawal requests, SVB was forced to sell its long-dated treasury holdings - and it was forced to book billions in losses. This then resulted in more customer withdrawal requests. To stop the vicious feedback loop, SVB was forced to declare bankruptcy and regulators from the Fed stepped in and closed the bank. Signature Bank was also shut down at the same time by regulators. A full blown financial crisis had emerged with regional banks being at the epicentre.

 

The cat pounces

 

As we have discussed, having a very high quality, low average duration fixed income portfolio provides important optionality. Wonderful opportunities that come up unexpectedly can be seized.

 

Many regional banks were forced to strengthen their balance sheets. To raise liquidity, PacWest Bancorp sold $2.6 billion in real estate construction loans to Kennedy Wilson. They were sold at a $200 million discount. KW’s parter on the deal was Fairfax.

 

“During the first nine months of 2023 the company, in partnership with Kennedy Wilson, has completed net purchases of $2.0 billion of first mortgage loans acquired from Pacific Western Bank; the average annual return on the capital deployed with the loans is expected to exceed 10%.” Fairfax Q3 Interim Report

 

Fairfax was able to invest $2 billion of its fixed income portfolio at an expected annual return of 10%, or $200 million. Outstanding. 

 

This deal also highlights another strength of Fairfax: the many partnerships it has built out over the years with many different external capital allocators. This deal was only possible because of the close relationship that Fairfax has with Kennedy Wilson - cultivated over the past 13 years.

 

2.) In 2023, Fairfax continued to push out the average duration of its fixed income portfolio. They did this in two stages: first, in Q1 and again in October.

 

In Q1, 2023, the average duration of Fairfax’s fixed income portfolio was pushed out from 1.6 years to 2.4 years. This was a double from what it was 15 short months previously, at Dec 31, 2021.

 

It is instructive to look at the significant change in Fairfax’s fixed income holdings over the past two years. You can see the shift to longer duration holdings.

 

 

3.) In Sept/Oct 2023, bond yields unexpectedly spiked higher - but this time it was further out on the on the curve - 5-year, 10-year and 20-year bonds.

 

We just learned on the Q3, 2023 conference call that in October, Fairfax has extended the average duration of its fixed income portfolio from 2.4 years to 3.1 years.

 

“Recently, in October, during the spike in treasury yields, we have extended our duration to 3.1 years with an average maturity of approximately 4 years, and yield of 4.9%.” Prem Watsa - Fairfax Q3, 2023 Conference Call

 

We will have to wait until Q4 earnings are released to get more complete details of what bonds Fairfax has purchased. This is a significant development for Fairfax and its shareholders.

 

What does all this mean for interest income at Fairfax?

 

Interest income was a record of $874 million in 2022. In 2023 it is forecasted to total $1.8 billion, an increase of $950 million or 109%. The earn-through has been very fast for Fairfax - much quicker than most P/C insurers.

 

My guess is Fairfax is currently earning about $500 million per quarter in interest income. And with the extension of duration, Fairfax has locked much of this in for years. For perspective, Fairfax earned $568 million in interest income for the entire year in 2021.

 

 

What have we learned in this post?

 

Capital allocation is the most important responsibility of a management team. Fixed income is by far the largest part of Fairfax’s investment portfolio.

 

Over the past 3 years, the fixed income team has superbly navigated Fairfax (and Fairfax shareholders) through the greatest fixed income bubble top and subsequent bear market in history. This is yet another example of the outstanding performance we have seen from the management team at Fairfax in recent years.

 

They sold high - locked in nice gains and, most importantly, they avoided billions in losses. They protected the balance sheet. And then they bought duration on the cheap. They have also been very opportunistic, taking advantage of the high volatility in fixed income markets. And they did all this with a $40 billion portfolio.

 

Importantly, the fixed income portfolio at Fairfax looks to be very well positioned today. Fairfax has significantly pushed the average duration out - the table is now set for Fairfax to earn in the range of $2 billion in interest income in each of the next 3 years. The portfolio is also very high quality - heavily weighted to government bonds. Fairfax now likely owns the best ‘risk-adjusted return’ fixed income portfolio in the P/C insurance industry - it is both high yield and very high quality. And Fairfax is well positioned to continue to exploit continued volatility in fixed income markets.
 

In short, the fixed income team at Fairfax has just delivered a master-class in value investing and the benefits of active management. I think it is safe to say their performance has been best-in-class among P/C insurance companies.

 

This is just another meaningful example of ‘the story’ for Fairfax continuing to get better.

 

“What the fixed income team at Fairfax has just accomplished is nearly impossible. And that is why they did it.” This sounds to me like something Charlie Munger would say - RIP. 

 

—————

 

Can we quantify the benefit to Fairfax and its shareholders?

 

The benefits have come in two ways. The first has been the significant losses that have been avoided - let's call that balance sheet protection. The second is the significant and rapid increase in interest income.

 

1.) Balance sheet protection

 

One way to quantify the value here is to look at book value per share and compare Fairfax to other P/C insurance companies. How did Fairfax fare compared to peers? I did this in my previous post so let's try another approach here.  

 

Over the past three years, as the bear market in bonds was raging, many P/C insurers saw the value of their fixed income portfolios decline by double digit amounts. As an example, from Dec 31 2020 to Sept 2023, Chubb has seen a swing of $16 billion in the value of its $105 billion fixed income portfolio (from an unrealized gain of $6.5 billion at Dec 31, 2020, to an unrealized loss of $9.5 billion at Sept 30, 2023). This is a 15.2% swing in value for the fixed income portfolio.

 

 

What about Fairfax?

 

From Dec 31, 2020 to Sept 2023, Fairfax has seen a swing in value of $1.5 billion in the value of its $41 billion fixed income portfolio (from an unrealized gain of $900 million to an unrealized loss of $600 million). As we learned above, Fairfax was aggressive in selling corporate bonds in 2021 locking in a gain of $250 million. So its swing in value can be reduced to $1.25 billion. This is a 3% swing in value. 

 

 

What if Fairfax had experienced the same swing in value as Chubb = 15.2%

 

Chubb is a good comparable and likely similar to what has been experienced by many P/C insurers.

 

On a $35 billion portfolio, a 12% swing in value would have equated to $4.2 billion. (Let’s be conservative and use 12% and not Chubb’s 15%.)

 

Fairfax saw an actual swing in value of $1.25 billion so the difference is about $3 billion (before taxes and minority interests). To be even more conservative, let’s cut this number by 33%, which gives us $2 billion.

 

The bottom line is Fairfax's decision to go extremely low duration in 2021 has benefitted the company in a big way. It protected the balance sheet. I think the benefit can be conservatively measured to have been in the billions.  

 

2.) What was the increase in interest income

 

Interest income at Fairfax averaged about $650 million per year from 2016 to 2021. Fairfax is on track to earn more than $1.8 billion in 2023 and more than $2 billion in 2024. This is an increase of $1.3 billion or 200% over the trend from 2016 to 2021.

 

What is a new annual income stream of $1.3 billion worth? This is $58/share (yes, it is pre-tax and before minority interests).  

 

 

Summary

 

The benefits to Fairfax (and Fairfax shareholders) of how the company has managed its fixed income portfolio over the past 3 years can be measured in the $billions. It is impossible to come up with a precise number. What we do know is the value creation has been significant. 

 

What do you think?

 

—————

Narrative

 

My guess is most investment professionals have a strong opinion about Fairfax. Ask these same people to explain to you what Fairfax has done with their fixed income portfolio over the past 3 years and my guess is only 1 in 10 would be able to provide an accurate/satisfactory answer. That partly explains why narratives on a company can be completely wrong at times. Most investment professionals don't follow companies all that closely. Usually, they don't need to.  

 

But the fundamentals matter. Eventually the investment professionals (and small investors) do figure it out. And the narrative slowly gets updated (and brought closer to reality). And the stock price as well. 

 

—————-

Family control

 

At the Fairfax AGM this year (April 2023), a bunch of Fairfax shareholders met at the Keg one night for dinner and Ben Watsa came by for a visit and to say a few words. He commented about the positioning of the fixed income portfolio in 2021 (very low duration) and suggested this might be a good example for Fairfax shareholders of the benefit of family control.

 

With family control, it is easier for Fairfax to accept quarterly volatility and instead run the business with a long term focus. (Please note, these are my words and not Ben's.)

 

What do Fairfax, Berkshire Hathaway, Markel and WR Berkley all have in common? They are all P/C insurers (float is a beautiful thing). They all have exceptional long term track records of compounding shareholder value. And they are all family controlled. The last point might be the most important.

Edited November 29, 2023 by Viking

[villainx]

@Viking  thanks, i learned a lot.

[UK]

9 hours ago, Viking said:

What do you think?

 

I think you are right!

[Hoodlum]

DBRS Morningstar just upgraded Fairfax Financial from BBB(high) to A(low).  Unless i am mistaken, I believe this is the first rating agency to rate FFH at A(low).

https://www.dbrsmorningstar.com/research/424865

 

Quote

DBRS Limited (DBRS Morningstar) upgraded Fairfax Financial Holdings Limited’s (Fairfax or the Company) Issuer Rating to A (low) from BBB (high). DBRS Morningstar also upgraded the Issuer Rating and the Financial Strength Ratings (FSR) of Fairfax’s subsidiaries Northbridge General Insurance Corporation (Northbridge) and Federated Insurance Company of Canada to A (high). The trends on all ratings were changed to Stable from Positive.

 

KEY CREDIT RATING CONSIDERATIONS
The credit rating upgrades reflect Fairfax’s consistent and improving underwriting profitability particularly at Brit, the Company’s UK subsidiary where Fairfax has curtailed risk and improved results. Moreover, better overall results have also improved earnings metrics and modestly reduced leverage. Demonstrating improved execution through both acquisitions and organic growth, the reported gross premiums written for YE2022 have more than doubled over the past five years to $27.6 billion (from $12.2 billion in 2017).

 

The credit ratings and Stable trends reflect Fairfax’s resilient, diversified, and growing franchise, including an expanding market position as a major international Property and Casualty (P&C) insurance and reinsurance group. Higher interest rates have increased risk-adjusted investment income substantially. The Company maintains ample liquid assets at both the holding and operating companies, as well as access to committed lines of credit. Its subsidiaries maintain appropriate regulatory capital ratios with buffers above required solvency levels, allowing Fairfax to handle adverse events.

 

Edited December 1, 2023 by Hoodlum

[Parsad]

6 hours ago, Hoodlum said:

DBRS Morningstar just upgraded Fairfax Financial from BBB(high) to A(low).  Unless i am mistaken, I believe this is the first rating agency to rate FFH at A(low).

https://www.dbrsmorningstar.com/research/424865

 

 

 

Yes, that is promising!  Finally!  Cheers!

[glider3834]

https://www.fairfax.ca/press-releases/fairfax-announces-pricing-of-senior-notes-offering-2023-12-01/

 

[SafetyinNumbers]

31 minutes ago, glider3834 said:

https://www.fairfax.ca/press-releases/fairfax-announces-pricing-of-senior-notes-offering-2023-12-01/

 

Nice timing with the dip in rates. Also it looks like the spread came in about 65bps vs the 10-yr note it’s replacing.

[StubbleJumper]

38 minutes ago, glider3834 said:

https://www.fairfax.ca/press-releases/fairfax-announces-pricing-of-senior-notes-offering-2023-12-01/

 

Good.  I would have preferred to see $750m, but $400 makes a difference.  They have been blatantly short of actual cash and short term marketable securities at the Holdco level, so this is long overdue.

 

 

SJ

[nwoodman]

8 hours ago, StubbleJumper said:

Good.  I would have preferred to see $750m, but $400 makes a difference.  They have been blatantly short of actual cash and short term marketable securities at the Holdco level, so this is long overdue

Am I wrong in seeing this as simply debt recycling and not really news?  I don’t see it as necessarily improving medium term liquidity in itself at the HoldCo, but I question whether this is a real problem anyway.  

 

It is silly for me to even remotely make a comparison to my own situation but I see the cash balance in a sub as transferrable in minutes, so the aggregate cash is my primary concern. I realise that there are tighter regulatory controls for insurance Co’s.

 

I think all being equal, their ability to generate profits that I thought were 5 years off,  fixes this issue nicely. 

[glider3834]

45 minutes ago, nwoodman said:

Am I wrong in seeing this as simply debt recycling and not really news?

yes looks like it 

 

Fairfax intends to use substantially all of the net proceeds of this offering to repay outstanding indebtedness with upcoming maturities and use any remainder for repayment of other outstanding indebtedness of Fairfax or its subsidiaries and for general corporate purposes.

[Parsad]

47 minutes ago, nwoodman said:

Am I wrong in seeing this as simply debt recycling and not really news?  I don’t see it as necessarily improving medium term liquidity in itself at the HoldCo, but I question whether this is a real problem anyway.  

 

It is silly for me to even remotely make a comparison to my own situation but I see the cash balance in a sub as transferrable in minutes, so the aggregate cash is my primary concern. I realise that there are tighter regulatory controls for insurance Co’s.

 

I think all being equal, their ability to generate profits that I thought were 5 years off,  fixes this issue nicely. 

 

Yes, they are simply using most of the funds to replace existing debt.

 

In terms of cash balances in subs...yes, in normal times you are correct...aggregate cash is all that matters, because they could dividend up significant sums.  But when you have a hard market, you cannot do that as readily, because it decreases your statutory surplus and the amount of business you can write.  Thus why we have been carrying less cash at the holding company than the $1.5B Prem says he likes to have. 

 

Presently, they encourage shareholders to include the debt revolver as available cash, which isn't really the same thing.  At some point, I expect them to pull money from the subs and have nearly $2B cash at the holdco level, but that may be a year or two out. 

 

Cheers!

[nwoodman]

58 minutes ago, glider3834 said:

yes looks like it 

 

Fairfax intends to use substantially all of the net proceeds of this offering to repay outstanding indebtedness with upcoming maturities and use any remainder for repayment of other outstanding indebtedness of Fairfax or its subsidiaries and for general corporate purposes.