Comments and Observations about A/R

[petec]

Now we have this strange weasle-ish notion that FFH would walk away from a troubled non-insurance sub, so we don't need to bother counting that debt.  But, on that, I call bullshit.  If FFH ever walks away from any debt, insurance or non-insurance, who the hell would ever trust them to honour an insurance policy?  It's *all* FFH debt, irrespective of whether it is cross-collateralized, full-stop.

I keep meaning to come back to this thread and read/reply properly, but life and markets are getting in the way. But I have been thinking about this part and would make two observations:

1) The trust of insurance customers in FFH has survived far worse than having an AGT, or a Mosaic, or any of the myriad other organisations that end up consolidated on FFH's BS, default on its debt due to a localised issue. It is entirely reasonable to talk about non-recourse debt.

2) Whether it is important for investors or clients may not be the point. It's likely to be important for ratings agencies.

 

[StubbleJumper]

Now we have this strange weasle-ish notion that FFH would walk away from a troubled non-insurance sub, so we don't need to bother counting that debt.  But, on that, I call bullshit.  If FFH ever walks away from any debt, insurance or non-insurance, who the hell would ever trust them to honour an insurance policy?  It's *all* FFH debt, irrespective of whether it is cross-collateralized, full-stop.

I keep meaning to come back to this thread and read/reply properly, but life and markets are getting in the way. But I have been thinking about this part and would make two observations:

1) The trust of insurance customers in FFH has survived far worse than having an AGT, or a Mosaic, or any of the myriad other organisations that end up consolidated on FFH's BS, default on its debt due to a localised issue. It is entirely reasonable to talk about non-recourse debt.

2) Whether it is important for investors or clients may not be the point. It's likely to be important for ratings agencies.

We will have to agree to disagree.


SJ

[petec]

Now we have this strange weasle-ish notion that FFH would walk away from a troubled non-insurance sub, so we don't need to bother counting that debt.  But, on that, I call bullshit.  If FFH ever walks away from any debt, insurance or non-insurance, who the hell would ever trust them to honour an insurance policy?  It's *all* FFH debt, irrespective of whether it is cross-collateralized, full-stop.

I keep meaning to come back to this thread and read/reply properly, but life and markets are getting in the way. But I have been thinking about this part and would make two observations:

1) The trust of insurance customers in FFH has survived far worse than having an AGT, or a Mosaic, or any of the myriad other organisations that end up consolidated on FFH's BS, default on its debt due to a localised issue. It is entirely reasonable to talk about non-recourse debt.

2) Whether it is important for investors or clients may not be the point. It's likely to be important for ratings agencies.

We will have to agree to disagree.


SJ

What, twice in a day?

[jfan]

Just a simple question:

1) When determining the statutory surplus, is it almost equivalent to Common shareholder's equity + preferred shares + minority interest?

2) Just a simple observation:

Referring to their annual report's total return on investment portfolio footnote, it appears that they under-perform their 7% investment return hurdle rate 39% of the time over the past 33 years.

If that is true, that means under-performing 5 years in a row, would put it at less than a 1% probability.

For 1), statutory surplus is determined by state regulators who typically use a risk-based capital framework (similar to banks) to reduce the value of certain elements (and increase the margin of safety for the policyholder) of the balance sheet, as reported. The discounts vary and depend on the perceived level of risk. FWIW, I've been looking at a few insurers who carry a heavy load of BBB rated corporate bonds (not the case for FFH). An interesting feature is that, in the event of a recession, on top of the decrease in market value for the bonds, surplus capital gets a double whammy because the discount factor is higher for downgraded securities.
For 2), your statistical appreciation of forward returns is interesting and is in line with the idea of reversion to the mean, which has been a significant long-term feature at Fairfax (investment strategy, seven lean years analogy etc) but I wonder if such an approach is satisfactory on a forward basis as the investing environment has changed and the Fairfax investment recipe has been changing (some aspects dramatically so) so the future may not be correlated to the past. I think I read you're an MD and the following statistical "joke" came to mind when reading your post. There's this surgeon who comes to the patient waiting to be rolled in and explains that the death risk with the procedure is 1 in 2 but that the patient should not worry because the previous patient did not make it.

Thanks For the detailed response.

You are absolutely right if the underlying people, processes,  and investing environmental context change then the underlying distribution will change and the mean reversion effect may not happen.

I love the joke, as most physicians have no or little statistical training/understanding despite three decades of evidence based medicine.

I guess the meta question is “has hamblin watsa adapted to the environment and learned from its mistakes. Is their devil’S advocacy before investment commitment as a effective as they think it is?” That the distribution of investment outcomes is something other than 60-40 for 7%? With so many interacting variables involving a biological system, I guess this question may be impossible to estimate with any precision. We know their value principles but how about their learning and leadership principles. Certainly it appears there are a number of individuals that no longer think they have the adaptability moving forward to make decent investment returns.

But everything has its price in the market and there is an argument that the past is a sunk cost and all that matters is future behaviour.

Ps
You might enjoy this randomized control trial from the British journal of medicine

https://www.bmj.com/content/363/bmj.k5094

[TwoCitiesCapital]

Just a simple question:

1) When determining the statutory surplus, is it almost equivalent to Common shareholder's equity + preferred shares + minority interest?

2) Just a simple observation:

Referring to their annual report's total return on investment portfolio footnote, it appears that they under-perform their 7% investment return hurdle rate 39% of the time over the past 33 years.

If that is true, that means under-performing 5 years in a row, would put it at less than a 1% probability.

For 1), statutory surplus is determined by state regulators who typically use a risk-based capital framework (similar to banks) to reduce the value of certain elements (and increase the margin of safety for the policyholder) of the balance sheet, as reported. The discounts vary and depend on the perceived level of risk. FWIW, I've been looking at a few insurers who carry a heavy load of BBB rated corporate bonds (not the case for FFH). An interesting feature is that, in the event of a recession, on top of the decrease in market value for the bonds, surplus capital gets a double whammy because the discount factor is higher for downgraded securities.
For 2), your statistical appreciation of forward returns is interesting and is in line with the idea of reversion to the mean, which has been a significant long-term feature at Fairfax (investment strategy, seven lean years analogy etc) but I wonder if such an approach is satisfactory on a forward basis as the investing environment has changed and the Fairfax investment recipe has been changing (some aspects dramatically so) so the future may not be correlated to the past. I think I read you're an MD and the following statistical "joke" came to mind when reading your post. There's this surgeon who comes to the patient waiting to be rolled in and explains that the death risk with the procedure is 1 in 2 but that the patient should not worry because the previous patient did not make it.

Thanks For the detailed response.

You are absolutely right if the underlying people, processes,  and investing environmental context change then the underlying distribution will change and the mean reversion effect may not happen.

I love the joke, as most physicians have no or little statistical training/understanding despite three decades of evidence based medicine.

I guess the meta question is “has hamblin watsa adapted to the environment and learned from its mistakes. Is their devil’S advocacy before investment commitment as a effective as they think it is?” That the distribution of investment outcomes is something other than 60-40 for 7%? With so many interacting variables involving a biological system, I guess this question may be impossible to estimate with any precision. We know their value principles but how about their learning and leadership principles. Certainly it appears there are a number of individuals that no longer think they have the adaptability moving forward to make decent investment returns.

But everything has its price in the market and there is an argument that the past is a sunk cost and all that matters is future behaviour.

Ps
You might enjoy this randomized control trial from the British journal of medicine

https://www.bmj.com/content/363/bmj.k5094

I don't think they have and whether it's a good thing or a bar thing is up to you to decide. They have decades of making macro calls and decades where it served them well.

To expect that they'll stop just because 2011-2016 didn't work out for them seems naive. I also made the point in 2016 that them dumping all duration following Trump's presidency was just another macro call.

I believe macro calls will continue to be made in the future and shareholder results dependent largely on the success of those calls.

[Cigarbutt]

Just a simple question:
1) When determining the statutory surplus, is it almost equivalent to Common shareholder's equity + preferred shares + minority interest?
2) Just a simple observation:
Referring to their annual report's total return on investment portfolio footnote, it appears that they under-perform their 7% investment return hurdle rate 39% of the time over the past 33 years.
If that is true, that means under-performing 5 years in a row, would put it at less than a 1% probability.

For 1), statutory surplus is determined by state regulators who typically use a risk-based capital framework (similar to banks) to reduce the value of certain elements (and increase the margin of safety for the policyholder) of the balance sheet, as reported. The discounts vary and depend on the perceived level of risk. FWIW, I've been looking at a few insurers who carry a heavy load of BBB rated corporate bonds (not the case for FFH). An interesting feature is that, in the event of a recession, on top of the decrease in market value for the bonds, surplus capital gets a double whammy because the discount factor is higher for downgraded securities.
For 2), your statistical appreciation of forward returns is interesting and is in line with the idea of reversion to the mean, which has been a significant long-term feature at Fairfax (investment strategy, seven lean years analogy etc) but I wonder if such an approach is satisfactory on a forward basis as the investing environment has changed and the Fairfax investment recipe has been changing (some aspects dramatically so) so the future may not be correlated to the past. I think I read you're an MD and the following statistical "joke" came to mind when reading your post. There's this surgeon who comes to the patient waiting to be rolled in and explains that the death risk with the procedure is 1 in 2 but that the patient should not worry because the previous patient did not make it.

Thanks For the detailed response.
You are absolutely right if the underlying people, processes,  and investing environmental context change then the underlying distribution will change and the mean reversion effect may not happen.
I love the joke, as most physicians have no or little statistical training/understanding despite three decades of evidence based medicine.
I guess the meta question is “has hamblin watsa adapted to the environment and learned from its mistakes. Is their devil’S advocacy before investment commitment as a effective as they think it is?” That the distribution of investment outcomes is something other than 60-40 for 7%? With so many interacting variables involving a biological system, I guess this question may be impossible to estimate with any precision. We know their value principles but how about their learning and leadership principles. Certainly it appears there are a number of individuals that no longer think they have the adaptability moving forward to make decent investment returns.
But everything has its price in the market and there is an argument that the past is a sunk cost and all that matters is future behaviour.
Ps
You might enjoy this randomized control trial from the British journal of medicine
https://www.bmj.com/content/363/bmj.k5094

I don't think they have and whether it's a good thing or a bar thing is up to you to decide. They have decades of making macro calls and decades where it served them well.
To expect that they'll stop just because 2011-2016 didn't work out for them seems naive. I also made the point in 2016 that them dumping all duration following Trump's presidency was just another macro call.
I believe macro calls will continue to be made in the future and shareholder results dependent largely on the success of those calls.

My opinion (FWIW) is that, somehow, they have decided to try to move away from "macro calls" and it's ironic to note that, in the event that they could have built and maintained the ark, today's rain would look like pouring gold.
@jfan
I enjoyed immensely the research that you shared. However, I reject the validity of the conclusion because they did not control the two groups for fasting curcuma blood concentration levels. 

[Xerxes]

Even for the bet against the housing market 10 years back, I believe he was, in his word wrong, wrong, wrong and then right. But it was only a few years wait.

This time he had to wait 10 years. And it must have been very hard to maintain the steady course whilst everyone telling you to join the party.
 
In retrospect if you are a natural bear, perhaps you should have rolled your deflation hedges every five years starting fresh.

[StubbleJumper]

Even for the bet against the housing market 10 years back, I believe he was, in his word wrong, wrong, wrong and then right. But it was only a few years wait.

This time he had to wait 10 years. And it must have been very hard to maintain the steady course whilst everyone telling you to join the party.
 
In retrospect if you are a natural bear, perhaps you should have rolled your deflation hedges every five years starting fresh.

The problem was position sizing for both the equity hedges and the deflation hedges.  When you "hedge" more than 100% of your equity position, it's hard to continuously roll it when the market goes against you for a prolonged period.  When you buy deflation "hedges" that amount to more than 150% of the value of your assets, it's also pretty hard to continuously roll them over.  If Prem had dropped his equity hedge ratio to half of the size of the equity portfolio had the deflation hedge ratio to half of FFH's assets, it might have been sustainable.  There still would have been bitching from shareholders, but it probably would have been much more muted.


SJ

[Xerxes]

My only hope is that as a natural bear, he smelled it few weeks before it hit the fan. And somehow increased his bearish stand.

I vividly recall in the Q4 results from 2017, the number showed that he lost a certain amount because he shorted to early in Dec where the mini crash happened few months later in Feb 2018, when Trump went first against China on trade.

[petec]

My only hope is that as a natural bear, he smelled it few weeks before it hit the fan. And somehow increased his bearish stand.

I vividly recall in the Q4 results from 2017, the number showed that he lost a certain amount because he shorted to early in Dec where the mini crash happened few months later in Feb 2018, when Trump went first against China on trade.

I wouldn’t get your hopes up. He was in big and/or illiquid cyclicals and won’t have been able to reduce much. The best that happens now is they do a great job picking up corporate bonds and don’t have to raise equity in the meantime.