Cigarbutt

^Yes the dividend capacity is a good starting point and it looks like FFH has already started to use this capacity in Q1 to buy back FFH shares. Opinion: it's a good starting point but, under present conditions, the capacity to switch the asset allocation (bonds to equities) may be less than 3.0B because the Northbridge capacity is contingent upon regulatory approval and dividend capacity as reported above includes the 'dividends' (fixed by contract, at 9-10% of funding) to Allied, Brit and Odyssey minority 'co-investors' (carrying value at around 2,5B).

^i would simply add the following: From the FT article: "What if I told you there could be an unprecedented stimulus injection into the US economy that will cost the government nothing and add not $1 to the national deficit? As early as this summer, a proposed move could begin to unleash almost $1tn into consumers’ wallets. By the autumn, it could be on its way to $2tn." In fact, one could carry this free lunch idea even further with a potential of $11tn of "tappable" equity: Homeowners are getting rich while renters get left behind (axios.com) It's hard to figure out what is going on in Mr. Druckenmiller's mind but it may have something to do with the wealth effect on consumption and with future consumption pulled today but who knows? A very interesting aspect of all this is that the author of the FT piece (The Oracle of Wall Street) recently suggested that home prices would soon enter a long period of decline (20 to 30% or more).

Interesting. FFH, when compared to peers, for float investments, is more of a return (risk) seeker. Rating agencies would probably be more flexible these days because of more recent positive and consistent underwriting performance but i wonder if the high level of financial flexibility that you suggest is there (assuming FFH would want now to switch funds from bonds to a compelling equity or equity-like opportunity). i remember the days when Northbridge and OdysseyRe were minority privatized in order to get some flexibility and can't help notice that several subs are still characterized by non-controlling interest sold to "financing" partners. Why would this be the case now if there was such excess capital available? In the 2023 AR, they mention that Northbridge has an MCT of 255% and most other subs (apart from TIG and run-off) have a 320% RBC. These numbers don't include the dividends sent to parent in Q1 2024. Anyways, if interested, there's this note from CIBC which contains some relevant material for this discussion, including a case study describing the cost to MCT when switching funds from low return (low risk) securities to higher (expected) return (higher risk) securities: Capital-efficient investing for property & casualty insurers (cibc.com)

Unusually busy day for me today so i didn't spend the time your post deserved but i'm wondering if there is a problem with the effect of funds reallocation on regulatory capital. Since you refer to GPT, here's a screenshot from Perplexity with info to ponder on, us (still) humans:

The contrarian in me says to look for mitigating factors. The following is from the UK but is representative of what's going on in the US, Belgium and other 'developed' nations: i will leave you with the following questions though (chicken/egg type of dilemma): -Are married/partnership people more likely to be happy? -Are happier people more likely to be married/partners?

-The 2.7B may be the right number and looking at this from several perspectives does help. -If interested look at FFH's 1990, 1991 and 1992 (much smaller insurance operation then) and see their equity exposure relative to capital... -The reference to BRK and the "ratio" is because it's a simple measure and easy to compute. At BRK, there is probably an embedded margin of safety which may be an adequate reference given FFH's past history during some transitions (many episodes requiring selling stock below intrinsic value, reaching for a line of credit etc). -The numbers about float need to take into account the definition of float as mentioned in FFH's annual reports: "Float is essentially the sum of insurance contract liabilities and insurance contract payables, less reinsurance contract assets held and insurance contract receivables, on an undiscounted basis excluding risk adjustment." So you need to subtract reinsurance contract assets (among other less important adjustments) to calculate float. -Questions and comments -i guess the idea is to (sell high and buy low) switch funds when equities become available at lower prices. If this idea applies, then the value of those regulatory measures become relevant ie they require a margin of safety. But then, you need a dynamic picture as bonds assets (including mortgage loans) can get downgraded or even default and other equity instruments (including the very significant total return swap on its own stock) can lose value. These changes impact regulatory capital to a very significant degree. -As a concept, moving funds from bonds (lower risk-weight) to equities (higher risk-weight) should impact negatively the MCT ratio. Why not in your example? You are right, this was not well phrased. The risky assets ratio is an indicator of potential future capital impairment. In a downturn, the risky asset ratio may go up if for example many bonds held get downgraded (have a higher risk weighting) or if unimpaired equities become impaired but the ratio may go down as a result of what you describe or if the company sells risk assets and fly to safety. However, when starting with a high risky assets ratio, the risk of capital impairment (including regulatory capital impairment) is higher, which is why FFH is close to the BBB category, a riskier posture for an insurer.

There was this person in the 50s (trying to understand WW2 money supply dynamics and the relative absence of runaway inflation that was felt to be secondary to price controls and others) who compared the combination of monetary and fiscal policy to the handling of a kite (with demand being the wind). There was this assumption that stabilizers (automatic and to be created) could always and effectively maintain some kind of wind, Interesting, indeed (opinion).

There are many ways to guess and each market transition comes with its own flavor. Using some kind of float coverage ratio concept, one could come up with a theoretical "number". Using cash and fixed income float portfolio over insurances float reserves, for example, for BRK, the ratio was 106% at end of 2023 and 112% at end of Q1 2024. During various opportunistic times in the past, this coverage ratio for BRK went slightly below 100%, even close to 90% for relatively short periods. For FFH, this ratio (slightly apples to oranges comparison with the mentioned ratio in this post, slightly overestimating the FFH coverage) was 131% at end of 2021, 127% at end 2022 and 130% at end 2023. In theory, FFH could sell about 25% of its bond portfolio in order to buy any assets (including equities). ----- Yogi Berra said (apparently) that, in theory, there is no difference between theory and practice but, in practice, there is. Mike Tyson also had a similar theory related to what could be done when punched in the face. ----- So, in practice, the limiting factors would be coming from regulators and from rating agencies. In a downturn, many present equity and equity-like holdings held by FFH would go down also and regulators would apply a risk-based capital haircut to risky assets (held and to be acquired). For the rating agency, using Fitch as an example who recently released an update, at end of 2023, the risky assets ratio is already at 85%. In a downturn, even absent any "tactical" asset allocation move by FFH, this ratio would tend to go up...towards BBB which makes it uncomfortable to write new insurance business.. Fitch Revises Fairfax's Outlook to Positive; Affirms Ratings (fitchratings.com) Fitch uses (and publishes) a relevant table: FFH has been known to be unusually creative during transitions (in the spectrum from survival to capacity to benefit from opportunities) but (opinion) the capacity to move float funds from fixed income to equity would be limited, much much less than 25% of their fixed income portfolio.

Whether it's conscious or not, planned or not or whatever, over the years, there has been some defensible movements of the fixed vs float quantity/duration balance. Using this methodology, at Q4 2023, the ratio was 106%, at Q1 2024, 112%. Even if there is some kind of rationality (relative lack of equity opportunities at reasonable prices), it's sometimes hard to differentiate tactical asset allocation from market timing. ----- i would say this aspect is also relevant for people wondering (on the FFH threads) how much money could be shifted from bonds to equities in certain circumstances.

This well explained in the interim report: FFH used to report their relative bond performance (last time from 2017 annual report; from memory this did not even include the CDS swap gains which imo were sort of bond investments): Since then, (guess to some degree) it appears that their relative total return bond performance has come down, with relative coupon income performance improving. FFH has had (at least up to 2016-7) an unusual capacity to harvest alpha-type capital gains in bonds, especially during "transitions". Those capital gains have been (at least up to 2016-7) lumpy but incredibly significant given the high (sort of leveraged float portfolio) exposure to bonds versus equity. Maybe this isn't so relevant anymore? What is the difference between tactical asset allocation and market timing?

For the Q1 underwriting side, short term volatility prevents meaningful conclusions about underlying trends. Numbers show a slight deterioration and this will be followed. For Q1 of 2022, 2023 and 2024, the underlying AY undiscounted CR ex-cat shows: 90.8, 90.9 and 92.4. These numbers exclude run-off (short term volatility even more significant here) and in Q1 2024, they report about a 1% favorable reserve development. There is an expectation that FFH will continue to perform better than comparable peers on the underwriting front.

On this Board, some work had been done in FFH's threads concerning the first round of Brit's sale and then re-acquisition of a minority interest. ----- Summary (From Feb 15th 2021): Taking OMERS' perspective as FFH contributed capital and assigned its own dividends to Brit (all numbers in USD) Summer 2015: OMERS (buys) pays 4.30 per share for 120M shares (29.92% interest), with a shareholders' agreement stipulating an annual dividend at 0.43 per share. Total 516.0M In 2016: OMERS (sells) gets 4.30 per share for 13.449M shares, 57.8M In 2018: OMERS (sells) gets 4.30 per share for 58.551M shares, 251.8M In 2020: OMERS (sells) gets 4.30 per share for the remaining 48.000M shares, 206.4M Total re-sold = 120M shares for 516.0M getting yearly 0.43 US cents per 4.30 USD share along the way. So effectively a post-tax financing rate of 10%. For some time, this didn't seem to make much economic sense but...eventually it did? Note: This line of thinking required some work in both FFH's and Brit's various filings. The numbers are clear about the price paid and the prices received by OMERS, showing how these co-investors' transactions are of the financing type. For the 10% yearly 'dividend' rate, some inferences need to be made but (opinion) the inference is likely right. Note: This type of work was not quite straightforward and the application of IFRS accounting has made it (at least for me) much more byzantine. ----- Based on the above, what about the 'cost' to re-acquire Brit's minority interest. Short story: there is a lot of IFRS-related accounting noise but, in substance, FFH will likely buy back the minority interest at the price for which it was sold (fixed price), with a fixed dividend rate along the way. ----- The following is based on hunch as much as knowledge so feel free to improve. With IFRS, selling a minority interest is considered an equity transaction and transaction gains of the revaluation type have to be recognized (as well as a non-controlling revalued interest). For FFH, this comes with a call option to buy back the non-controlled interest (at a fixed price) which appears to be treated like a derivative asset with a value taking into consideration the changing value of the non-controlled interest which, itself, is influenced by the NCI's share of earnings. So, my understanding is that the call option value will tend to increase over time based on the subsidiary's positive income and this will be recognized in net income (and retained earnings) at the parent level from the financial asset gain. But this is not really an economic gain and it looks like the way to deal with this from an accounting point of view is to deduct this financial gain (reduced income and reduced retained earnings) when the call option to buy back the minority stake is exercised. Short story (opinion): this accounting noise is just that.

Interesting. In Japan (see below), during a certain period, there was a growing trend (increasing corporate cross-holdings in a rising market): For the US, this time is different because the level of corporate cross-holdings is low. In your great country, the trend is for the rising market to be held by the top 1% and "foreigners".

-Attempt to answer this question, a reference to investment performance and another question The reference may be related to wind risk in the Northeast USA (it's tricky to refer to this risk as there may be climatic repercussions...i found the picture below which is climate-agnostic): i know that a "roughly" 1% exceedance probability is nothing to be excited about for the typical human but, when reading human recollections of such events in the New England area during the past century, people describe unexpected change with sunny skies changing to some kind of roar. People who tell these stories had either foresight or were simply lucky. Opinion: FFH is relatively well positioned for such event but who really knows? ----- Opinion: To explain FFH's stock value outperformance over the last 38 years by referring to "leverage in a bull market" is likely a (over) simplification. They used to compare (in older annual reports, in the CEO's section) their relative investment outperformance compared to bond indices and large stock indices and the results were impressive (Graham-Doddsville type), a good thing because their underwriting performance was really terrible, then). ----- Opinion: There is a short supply of discussion on the evolution of their investment stance (apart from sparse and intermittent mention of the cost part related to their previous posture). They used to position their portfolio in order to withstand a similar 1% exceedance probability event, a protection against the general markets not just wind but who cares these days?

This line of reasoning raises the possibility that one comes to an incorrect conclusion. The first issue is that float is based on net (not gross) insurance reserve liabilities (when premiums are ceded to another party of the reinsurance type so is the "float"). In 2017, FFH retained 81.8% of gross premiums and in 2023, 78.6% of gross premiums. So this partly explains why the growth in float was slower than the growth in gross premiums and is an issue unrelated to the "duration" of insurance liabilities. The second and more important issue is more conceptual (and even mathematical). To assess the validity or signal when comparing the growth of premiums and float, one would have to assume some kind of steady state (for example, constant growth over time). Think of an insurer which decides to significantly curtail new business or even move to run-off. Then the negative growth in gross premiums would happen faster than the decline in float because of the lag effect and the shape of the payment distribution over time, an issue not linked to a change in the "duration" of insurance liabilities. Recently, FFH has grown ++ the gross premiums component: The relative float growth will catch up over time especially if the growth in gross premiums written settles down (it's just a timing issue at this point) and this temporary decoupling is essentially unrelated to a hypothetical change in the "duration" of insurance liabilities. One way to support the above is to observe, over time, the composition and distribution of the insurance product lines. This appears to be quite constant. On a recent conference call, the CFO mentioned an insurance liability duration of 3.8 years and i would suggest that this duration hasn't changed much in the last few years. ----- Reading the above, i'm not sure it makes sense? Being simple minded (thinking along first principles is above my capacity), i always try analogies. So, for example, if you try to be more friendly to others around you, eventually, people around you will become more friendly to you (no guarantee of course) but there is a lag effect and your rate of growth of being nicer to others will precede the rate of growth of others being nice to you. The opposite obviously can occur but there may be a lag effect in the other direction as well due to the accumulation of social capital. Makes sense?