Fairfax 2020

[Cevian]

"higher yielding investment grade U.S. corporate bonds with an average maturity date of 4 years and average interest rates of 4.25%, that will benefit interest income in the future."

Honestly, isn't that one of the worst placed to be at the moment?

[TwoCitiesCapital]

"higher yielding investment grade U.S. corporate bonds with an average maturity date of 4 years and average interest rates of 4.25%, that will benefit interest income in the future."

Honestly, isn't that one of the worst placed to be at the moment?

Maybe, but they're buying it AFTER the initial panic dislocation and it's only 4-year paper. Too far out to be immediately of concern and short-enough that additional moves in rates and credit spreads won't have major impacts. This alone could increase interest income by 10-15% per annum in coming years with no credit giving to any potential for higher rates - and there is probably more of this to come if I'm correct in that this isn't over just yet.

Also, aren't these typically the types of bonds that are rolled in times like this? Companies voluntarily tender 2-4 year paper at a premium to push out maturities with a 7-10 year issuance to buy time and certainty of funding?

Also, the equity accounting of Eurobank is likely to help seeing as it won't be marked-to-market. This will be one to watch though as future appreciation also won't flow through and current book values will be overstated as a result.

[StubbleJumper]

Update from Fairfax - preliminary first quarter results:
https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Reports-Recent-Developments/default.aspx

Okay, that's actually a reasonably good collection of news.  We already knew that the equity portfolio would be a shit-show, but hopefully that is temporary.  But the good news is reassuring;

1) Riverstone closed as planned, which was key for holdco liquidity.

2) FFH drew down the revolver almost fully before the lender could find a reason to screw them by pulling it.  Now it's the lender's problem!  Say what you want about Prem, but he's nobody's fool.  There's some banker out there who probably wishes that he hadn't written that $2B revolver a couple years ago!

3) They have been hitting the corporate debt market hard.  This is Bradstreet's expertise, so that is a very good sign.  Look for some realized gains in 2021 and 2022 from the corporates being bought over the past month.  The money is being made now, but it won't be realized until later.

4) Gross Written is up 12% and CRs are under 100, so that is exactly what most of us were hoping for on the underwriting front.


Okay, this is good.  We already knew about the equity shit-show, so this is helpful.  It would be useful to have FFH make a general statement about the language used in its business continuity insurance contracts and the likelihood that those contracts will trigger indemnities.



SJ

[Parsad]

Update from Fairfax - preliminary first quarter results:
https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Reports-Recent-Developments/default.aspx

Okay, that's actually a reasonably good collection of news.  We already knew that the equity portfolio would be a shit-show, but hopefully that is temporary.  But the good news is reassuring;

1) Riverstone closed as planned, which was key for holdco liquidity.

2) FFH drew down the revolver almost fully before the lender could find a reason to screw them by pulling it.  Now it's the lender's problem!  Say what you want about Prem, but he's nobody's fool.  There's some banker out there who probably wishes that he hadn't written that $2B revolver a couple years ago!

3) They have been hitting the corporate debt market hard.  This is Bradstreet's expertise, so that is a very good sign.  Look for some realized gains in 2021 and 2022 from the corporates being bought over the past month.  The money is being made now, but it won't be realized until later.

4) Gross Written is up 12% and CRs are under 100, so that is exactly what most of us were hoping for on the underwriting front.


Okay, this is good.  We already knew about the equity shit-show, so this is helpful.  It would be useful to have FFH make a general statement about the language used in its business continuity insurance contracts and the likelihood that those contracts will trigger indemnities.



SJ

+1!  Premium pricing for insurance is only going to increase over the next 24 months.  There were already huge spikes in premium pricing in certain areas, and with portfolio losses across the board, those able to write business are going to do well over the next couple of years. 

I truly feel that businesses that gain efficiencies now and make it through this period in the top 10-20% of their industry, are going to be the long-term players in the future who will benefit from today's tightening.  Cheers!

[vinod1]

Net losses on investments of approximately $1.5 billion will reflect unrealized losses on the Company’s equity and equity-related holdings and bonds.

Is my understanding correct that the $1.5 billion loss in equities/FI is understated by about $0.5 billion loss on the Eurobank?

Yesterday, I was going through the portfolio to size up the losses and I approximated to about $1.5 billion decline, so the above would be a much bigger hit than I expected.

Who would have imagined in 2009, the come the next major crisis, a dot com stock (Amazon) would be a pillar of strength while Fairfax would be tapping the credit lines?

Vinod

[Xerxes]

For those of us who are less familiar about the insurance side, what is the normal gross premium growth rate, if 12% is considered exceptional.

A high gross premium growth rate, doesn't it just mean that you are just trying to grow market share, at a cost that it might cost you profitability ?

[StubbleJumper]

For those of us who are less familiar about the insurance side, what is the normal gross premium growth rate, if 12% is considered exceptional.

A high gross premium growth rate, doesn't it just mean that you are just trying to grow market share, at a cost that it might cost you profitability ?

The industry level data can be viewed here: https://www.iii.org/table-archive/21113

But, the logic of a premium increase is that the real, inflation-adjusted value of insured assets might go up by a couple percent per year (more houses built, more cars on the road, etc every year) and then the cost of those assets might go up by inflation which might be a couple extra percent.  So maybe 4% growth is average?

The nice thing about a 10% increase, like what we saw in 2018 is that a large chunk of that falls directly onto insurers' bottom line.  That's why so many of us on this board were a little tepid about FFH's reported CR for 2018.  We were hoping that it would be 95-ish.


SJ

[Xerxes]

Who would have imagined in 2009, the come the next major crisis, a dot com stock (Amazon) would be a pillar of strength while Fairfax would be tapping the credit lines?

yeah

Thinking back to that era (though slightly pre-Lehman), I recall the stalwarts were Exxon and Chevron in the financial media circles … the same way Amazon is holding up now and now those companies are in the gutter.

I hope 10 years from now, it won't be bitcoin … maybe gold will be the asset class that will have the last laugh when it reaches $6,000 / ounce due to a massive sovereign crisis and Marc Bristow will be the face stability in that massive market downturn ….. Marc, who ? :-)

[clutch]

Who would have imagined in 2009, the come the next major crisis, a dot com stock (Amazon) would be a pillar of strength while Fairfax would be tapping the credit lines?

Vinod

Quote of the day

[petec]

I’m pleasantly surprised at the size of the loss, but as others suggest I suspect some of the equity markdown is masked by equity accounting. For example, FIH and FAH will be on the books for more than market value and I need to remind myself how Recipe is accounted.

In fairness, it’s quite smart of Fairfax to structure their equity exposure this way and protect BV from short term marks.

Also like the fact they’re swimming in cash. So much for a liquidity crunch.