Only no2 is realistic. Hands are tied on all the others. Especially buying the minorities - these are at fixed prices, or with price floors.
My view is best you get this year is
1) div & int income sustainably over $1bn due to redeployment of fixed income at fatter spreads
2) equity portfolio has a v-shaped recovery due to corona-control and the fact that it’s v cheap
3) Brit and Eurolife minorities bought, Allied postponed (a virtual certainty)
4) CR doesn’t crap out too hard given corona
5) moderate ability to grow in 2021 in an even harder insurance market.
1) I don't think you get #1 because FFH only has $26b of bonds and bills, and $6b of common and preferreds, at Dec 31 prices. As a P&C operator, they need to keep the lion's share of the $26b in governments, preferably short term, which currently yield less than 0.5%. The dollar yield on the equity portfolio won't change, but in percentage terms it will go up (ie, if no stocks are sold, they get the same divvies as last year). So, the math is like one of those tricky algebra problems from when we were 12 years old, but I don't think you quite get to $1B. That $26B of bonds and bills already includes $18b of governments and $8b of corporates, so how much further can that be pushed? Whatever governments you roll-over will almost certainly be rolled into considerably lower interest rates. Whatever corporates get rolled will get rolled into considerably higher interest rates. And then how many billions can you shift from governments to corporate to exploit the spread? Maybe a couple billion, max? Probably less than a couple billion. That was one of the comments I made about the AR, because it looked as if they might have already begun reaching for yield when they were not really paid for the risk. By my estimate, they have about $18B of bonds and notes in the one year or less category. Irrespective of how you work through the algebra, I'm not sure that you get $1B in dividends and interest. But it's a good stretch-goal!
2) Let's hope there is a V-shaped recovery in the equities, but that's mostly outside of FFH's control. I'd be happy to take a bit of luck, but the equity recovery or lack of recovery probably won't be indicative of good management or poor management on FFH's part.
3) Above and beyond buying Brit, Eurolife, or Allied minority stakes, I'd like to see FFH try to negotiate a better deal. They are not obliged to make those purchases, and perhaps the vendor will want to see some cash because equity markets have been horrific. This might be an opportunity to say, "Look, equities have flopped by 30%, can we talk about the buyout price? If I pile more of FFH's money into Brit/Eurolife and I don't get a discount, my shareholders will be apoplectic that I didn't use the cash to buy discounted AMEX or Visa shares instead...." No guarantee of success, but mgt should view this as an opportunity.
4) Curious about how you view Covid's impact on the CRs. Could be bad for Zenith, and perhaps there will be some business interruption insurance issues? But do you see this as a "cat" for FFH's subs? Frankly, I haven't been preoccupied by the possibility of claims, but maybe I haven't been thinking about this enough.
5) Yes, let's hope that the book can be grown significantly and profitably. Why do you think the growth in the book of business must wait until 2021? Are you of the view that there will be people who will non-renew their insurance during 2020 due to cash constraints?
SJ
