How the float is invested

[wondering]

I have got a two part question.  The first question I think I know.

 

1. How does Fairfax manage FX risk.  I asked Peter Frlan this question at an AGM, and he said that they also invest in the currency in which the premiums were earned.  So for example, Crum earns insurance premiums in US dollars. Fairfax then invests this money in US dollar bonds and equity investments.  Brit earns insurance premiums in pounds and euros (I assume) and therefore, all the float stemming from Brit would be invested in pounds and euros (equity and bonds).  And based on this, this mitigates the FX risk.  Do I understand this correctly.

 

2. If #1 is more or less true, then where does Fairfax invest the premiums earned in smaller markets such as Colombia, Argentina, Ukraine, etc.. These markets are really small.  Do they just invested in government bonds?  My thoughts are that they may invested in some public companies in these markets, but we don't about them because the investment is so small.   

[dartmonkey]

54 minutes ago, wondering said:

I have got a two part question.  The first question I think I know.

 

1. How does Fairfax manage FX risk.  I asked Peter Frlan this question at an AGM, and he said that they also invest in the currency in which the premiums were earned.  So for example, Crum earns insurance premiums in US dollars. Fairfax then invests this money in US dollar bonds and equity investments.  Brit earns insurance premiums in pounds and euros (I assume) and therefore, all the float stemming from Brit would be invested in pounds and euros (equity and bonds).  And based on this, this mitigates the FX risk.  Do I understand this correctly.

 

2. If #1 is more or less true, then where does Fairfax invest the premiums earned in smaller markets such as Colombia, Argentina, Ukraine, etc.. These markets are really small.  Do they just invested in government bonds?  My thoughts are that they may invested in some public companies in these markets, but we don't about them because the investment is so small.   

First part: there is no need to manage FX risk for most people and companies if you have a long-term perspective. What goes up usually ends up coming down, at least in most major economies. If Fairfax has $2b of Canadian float and invests it all in US treasuries, for instance, there is a risk that the USD might drop 20%, compared to the Canadian dollar, and they would take a $400m loss. There is also a roughly equal risk that the USD:CAD exchange rate goes the other way, and they end up with a gain. Over a large number of economies, these risks will usually balance out. But if they feel it's important to hedge that risk, investing in local treasuries, as you suggest, would be the way to go.

 

Second, most of their float is invested in treasuries and investment-grade corporate debt. Fairfax does have a lot of equity investments, but it has fixed income investments at roughly the amount of their float, and insurance regulators require most insurance premiums to be invested this way. So Fairfax doesn't have to find equity investments in countries where it has insurance operations.   

[Mystery Guest]

Yes being decentralized the insurance companies exist as distinct entities in their markets, HWIC allocates overall capital, provides insurance strategy and manages their investment portfolios in their currency and markets as if locally owned but with the worlds smartest value investors club checking in once and a while from Toronto. 

I think of it like an Octopus it grows by adding tentacles of insurance worldwide each arm applying Fairfax Strategy to its own local market HWIC is the Giant Brain at Head Office which is strictly a value investing operation.

I would argue they are taking the Float Investing model to a new place. By using a decentralized team approach they are not reliant on one genius. they are growing the model worldwide, they are able to find Ideas in world markets via their local presence.     

 

Peter Furlan was at an event an investor walked up and started asking him a bunch of insurance questions. 

Peter looked at him and said 

You know I actually know almost nothing about insurance 

 

apparently the investor, now ashen in appearance,

was only saved from his distress when 

Peter told him he had the wrong Peter 

You are looking for Peter Clarke