Fairfax Financial Holdings Limited

Good morning. And welcome to our call to discuss Fairfax's year-end 2018 results.

This call may include forward-looking statements. Actual results may differ, perhaps materially from those contained in such forward-looking statements as a result of a variety of uncertainties and risk factors, the most foreseeable of which are set out under Risk Factors in our base shelf prospectus, which has been filed with Canadian securities regulators and is available on SEDAR.

I'll now turn the call over to our President, Paul Rivett.

Thank you, Derek. Good morning Fairfax shareholders.

Welcome to your company's 2018 year-end conference call. I will discuss some of the year end highlights and then pass the call to Dave Bonham, our Chief Financial Officer for additional financial and accounting details.

Fairfax's net earnings were $376 million in 2018 versus $1.7 billion 2017, which equates to net earnings per diluted share of $11.65 versus $64.98 in 2017. Much of this year-over-year net earnings difference relates to unrealized investment losses and the sale of First Capital.

Fairfax's book value per share in 2018 decreased by 1.5%, adjusted for the $10 per share common dividend paid in the first quarter of 2018 to $432 per share. Despite having earnings for the year, our book value was negatively impacted by unrealized foreign currency translation losses of $11 per share.

We experienced another year of above average catastrophes. Yet our companies continue to have very good relative results with a strong combined ratio of 97.3% across the group, with strong reserves and producing an underwriting profit of $318 million for the year.

All of our major insurance companies with the exception of Brit, generated combined ratios of less than 100% with Zenith at 82.6%, Odyssey Group at 93.4%, Northbridge at 95.8% and Allied World 98.1%, Crum & Forster at 98.3% while Brit was 105.2%. For the year, operating income was strong at nearly $1 billion.

By contrast, our net gains on investments for the year were an unsatisfactory $253 million, consisting of realized gains in our investment portfolios of $1.2 billion principally Quess, USG, Arbor and Intrepid, offset by unrealized losses of just over $900 million, principally BlackBerry, Eurobank and Stelco, most of which occurred in the fourth quarter. As we have mentioned at our annual meetings and in our annual reports and quarterly calls with IFRS accounting where stocks and bonds are recorded at market and subject to mark to market gains or losses quarterly and annual income will fluctuate and investment results will only make sense over the longer term.

The turbulent markets in the final few months of 2018 wreak havoc on investment portfolios globally, our portfolios were similarly impacted, but we fared better than many. Much of this turbulence has reversed in the early weeks of this New Year and investment asset prices have generally risen.

At Fairfax, our top 20 list equity investments dropped approximately $500 million value in just the fourth quarter. But since the end of the year, our top 20 equity positions have recouped over 50% of the decline.

Please keep in mind when you see these short-term market to market gyrations. As we have said many times in the past, our results will be lumpy as we are focused on capital preservation in the short-term and capital gains over the long-term.

There are some key points to note for you. Strong organic growth is continuing at our companies.

Our insurance and reinsurance business' net written premium increased year-over-year by 8.7%, primarily due to growth at Northbridge, Odyssey, Crum & Forster and Brit after adjusting for acquisitions and the sale of First Capital. At the subsidiary level, the change in net premiums written for the year were as follows; Odyssey group was up 16.1%, Crum & Forster up 6.1%, Northbridge up 10.2%, Zenith was down 5.8%, Brit up 9% and Allied World up 5.8%.

In 2018, we continued to put more cash to work with approximately $13 billion invested in short-term U.S. treasuries and short-term investment grade corporate bonds.

Given the continued strength in U.S. economy and the perceived bias towards higher interest rates, we continue to be focused on the short end of the treasury curve for the time being.

Following this recent deployment into short-term U.S. treasuries, we now have an annual run rate of approximately $800 million in interest and dividend income.

Subsequent to the end of 2018, in January of this year, we invested an additional $250 million in debentures of Seaspan, as well as $250 million in the extra size of Seaspan warrants. Upon completion of the transactions, our cumulative cash investment in Seaspan totaled $1 billion.

In February, we completed an opportunistic offering of $85 million in senior notes due in 2024 with our partner Mitsui Sumitomo. We continue to build on the strong trusting relationship with MSI and see the potential for many more collaborative business ventures in the future.

Last week, the shareholders of AGT approved the management led take private transaction. AGT is a Regina based world leading supplier of plant-based proteins.

We welcome AGT to the Fairfax family and we look forward to collaborating with our new partners, Murad and Huseyin and their teams to continue to build our respective agricultural businesses around the world. Also last week, we announced the promotion of one of our key executives Peter Clarke, the Vice President and Chief Operating Officer.

Peter has been with Fairfax for over 20 years in various roles, such as Chief Actuary and more recently, our Chief Risk Officer. Peter will report directly to me and will continue work very closely with Andy Barnard and the CEOs of our insurance and reinsurance companies.

We remain conservatively positioned and very vigilant with holding company cash and marketable securities at over $1.5 billion. Always looking to be soundly financed first, we have begun to repurchase our partners' interest in our insurance companies, as well as repurchasing Fairfax shares.

Since the first quarter of 2017, we have purchased over 1.1 million Fairfax with approximately 340,000 shares purchased in the last six weeks alone. Our investment team at Hamblin Watsa continues to cautiously observe and monitor events, such as the upcoming U.S.

elections, Indian elections, South African elections, the Venezuelan crisis, Brexit negotiations and ongoing negotiations on global tariffs, in particular with China. Please remember we continue to hold CPI linked deflation for contracts with a notional amount of $114 billion and an average remaining term of maturity of 3.6 years.

We carry these contracts at only $25 million and they continue to provide us with downside protection in the event of a catastrophic turn at world events. With annual run rate of approximately $16 billion in gross premium, generating strong core operating earnings and a singular focus on underwriting discipline and superior reserving, our companies are in a very good position to continue growing and diversifying their books of business, while capitalizing potentially hardening market.

Meanwhile, the Hamblin Watsa team continues to believe there is tremendous opportunity for Fairfax shareholders over the long-term. We are keenly focused on improving our investment performance in 2019 and we are in the process of monetizing many of our equity investments.

We believe our 15% return on equity target is very much achievable. But please remember as we said before, our results will always be lumpy.

While we monetize our equities and re-optimize our portfolio, we have not reached for yield and remain made prudently invested with approximately $20 billion in cash, short dated U.S. treasuries and short dated investment grade bonds, which is approximately 53% of our portfolio investments.

Given the short tenure of our fixed income portfolio, our investment portfolios will be largely un-impacted by rising interest rates. Now, I'd like to pass the call over to Dave Bonham, our Chief Financial Officer.

Thank you, Paul. First of all, we wanted to let you know that in addition to the press release that we issued yesterday, all the details of our 2018 financial results will be made available in our annual report, which will be posted on our Web site on March 8, 2019.

So let's move on to Fairfax consolidated results for the full year of 2018, hit on some of the details of the operating company results and finish with our consolidated financial position. So for the full year of 2018, Fairfax has reported net earnings of $376 million or $12 per fully diluted share and that compared to net earnings of $1.7 billion or $65 per fully diluted share in the full year of 2017.

2018 net earnings principally reflected the strong operating income, but with lower net investment gains compared to 2017. And remember too that our net earnings in 2017 also included a one-time gain of $1 billion related to the sale of our Singapore based subsidiary, First Capital.

Our insurance and reinsurance operations produced an underwriting profit of $318 million and a combined ratio of 97% in 2018 compared to an underwriting loss of $642 million and a combined ratio of 107% in 2017. The increase in underwriting profit year-over-year of $960 million principally reflected the impact of lower current period catastrophes since 2017 was adversely affected by hurricanes Harvey, Irma and Maria and the 2017 California wildfires.

Net favorable prior year reserve development was also higher in 2018 on a year-over-year basis. Current period catastrophe losses in 2018 were principally comprised of the 2018 California wildfires, specifically the Woolsey and Camp wildfires and hurricane Michael, which affected Florida and Southeastern United State, Typhoon Jebi, which affected Japan and hurricane Florence.

In 2018, current period catastrophe losses totaled $752 million, representing 6.5 combined ratio points, significantly lower than current period catastrophe loss in 2017 of $1.3 billion that represented 14 combined ratio points. Net premiums written by our insurance and reinsurance operations increased by 20% in 2018 but that principally reflected the consolidation of the full year net premiums written by Allied World, so that I was an incremental year-over-year increase of approximately $1.4 billion.

In terms of our organic growth, net premiums written of the insurance and reinsurance operations increased by 8.7%. So that's after adjusting for the acquisitions of Allied world and the AIG branches in Latin America and Central and Eastern Europe, the sale of First Capital last year and some other one off intercompany reinsurance transactions, all of these occurred either in 2017 or 2018.

So moving to our operating company results, starting with Northbridge. Northbridge's underwriting profit increased to $47 million in 2018 with a combined ratio of 96% that compared to an underwriting profit of $9 million and a combined ratio of 99% in 2017.

Northbridge's 2018 underwriting results included the benefit of net favorable prior year reserve development of $107 million, representing 10 combined ratio points and that was somewhat higher than 2017 where Northbridge reported net favorable reserve development of $94 million or nine combined ratio points. The underwriting results at Northbridge in 2018 included $19 million of current period catastrophe losses principally related to storms in Ontario and Québec.

And in Canadian dollar terms, Northbridge's net premiums written increased by 10% in 2018, reflecting strong retention of renewal business and price increases across the group. Moving to Odyssey.

In 2018, Odyssey Group's underwriting profit increased to $181 million at 93% combined ratio from an underwriting profit of $60 million at a 97% combined ratio in 2017. Higher underwriting profit in 2018 principally reflected lower current period catastrophe losses and higher net favorable reserve development.

Current period catastrophe losses of $252 million represented nine combined ratio points in 2018, principally the events that I mentioned at the outset and other attritional current period catastrophe losses. And this was lower than the current period catastrophe losses of $392 million, which represented 17 combined ratio points for Odyssey in 2017, principally related to hurricanes Harvey, Irma and Maria.

Odyssey's combined ratio in 2018 also benefited from higher net favorable prior reserve development of $346 million or 13 combined ratio points. That development principally related to casualty and assumed property catastrophe loss reserves.

Odyssey Group wrote $2.9 billion of net premiums in 2018, which represented an increase of 16% from the prior year. This growth was spread across all of its divisions.

Crum & Forster's underwriting profit in 2018 increased to $33 million at a 98% combined ratio from an underwriting profit of $3 million and a combined ratio just slightly below 100% in 2017. The increase in the underwriting profit was principally due to higher business volumes in more profitable lines of business and lower current catastrophe losses, partially offset by a modest decrease in net favorable prior reserve development.

Crum & Forster's net premiums written increased by 6% in 2018, primarily reflecting growth in accident and health, umbrella, commercial multi payroll combined with the impact of rate increases. Zenith National's underwriting profit in 2018 increased $140 million at 83% combined ratio compared to underwriting profit of $117 million at an 86% combined ratio in 2017.

The increase in the underwriting profit in 2018 principally reflected higher net favorable prior year reserve development and an improvement in the estimated accident year loss ratio. Net premiums written by Zenith in 2018 of $789 million decreased by 6% year-over-year principally reflecting price.

In 2018, Brit reported an underwriting loss of $77 million and a combined ratio 105% compared to an underwriting loss of $202 million and a combined ratio of 113% in 2017. Current period catastrophe losses of $210 million representing 13 combined ratio points in 2018, principally related to the main catastrophe events mentioned at the outset.

That was lower than current period catastrophe losses of $259 million or 17 combined ratio points in 2017 that related principally to HIM. Net favorable prior year reserve development was higher in 2018 at $99 million compared to $10 million in 2017, and Brit's net premium written increased by 9% in 2018, excluding the onetime intercompany reinsurance transaction with Runoff that is eliminated upon consolidation.

The increase reflected the contribution from initiatives that Brit had launched in recent years, price increases and that's partially offset by reductions in non-core lines of business through active portfolio management. Allied World reported an underwriting profit of $43 million and a combined ratio of 98% in 2018 compared to an underwriting loss of $587 million and a combined ratio of 157% during the period Fairfax owned Allied in 2017.

The improvement in underwriting profitability principally reflected lower current period catastrophe losses in 2018, which were $223 million or 10 combined ratio points. And Allied World's underwriting profit in 2018 also benefited from $97 million or four combined ratio points of net favorable prior year reserve development, which included better-than-expected emergence on the 2017 catastrophe losses, a reduction in unallocated loss expense reserve, partially offset by net adverse development in its casualty and professional liability lines of business.

Allied World contributed $2.4 billion to net premiums written in 2018 compared to 2017, where Allied contributed $992 million for the period that Fairfax owned Allied since its acquisition in July. Fairfax Asia's underwriting profit decreased to $400,000 at a combined ratio of just below 100% in 2018, compared to an underwriting profit of $38 million at a combined ratio 80% in 2017 with the lower underwriting profit, reflecting the absence in 2018 of the underwriting profit that was contributed by First Capital, which was sold in the fourth quarter of 2017.

The insurance and reinsurance other segment reported an underwriting loss of $49 million and a combined ratio of 105% in 2018, compared to an underwriting loss of $81 million and a combined ratio 110% last year. The decrease in underwriting loss in 2018 principally reflected lower current period catastrophe losses, which impacted the combined ratio by 2 points in 2018 compared to 10 points in 2017.

Moving to Runoff, Runoff reported an operating loss of $198 million in 2018 compared to an operating loss of $185 million in 2017. The increase in the operating loss in 2018 principally reflected higher net adverse development, primarily related to asbestos and other loss reserves and increases in reserves for unallocated loss adjustment expenses.

Partially offsetting this was an underwriting gain of $85 million on the part seven transfer and reinsurance transaction with a UK insurer that was disclosed in our third quarter 2018 interim report in the runoff section. Turning to some of the consolidated results, consolidated interest and dividend income increased year-over-year from $559 million in 2017 to $784 million in 2018, primarily reflecting higher interest earned on increased holdings of short dated U.S.

treasury bonds and high-quality corporate bonds. So it was partially offset by lower interest earned on U.S.

state and municipal bonds as a result of sales during 2017 and 2018. Fairfax recorded a provision for income taxes of $44 million at 5% effective tax rate in 2018.

The lower effective tax rate in 2018 primarily reflected the gain on the deconsolidation of Quess, which was not taxable. Our total debt to total capital ratio increased to 27.2% at December 31, 2018 from 25.8% at December 31, 2017 and that was primarily a result of the decrease in our total capital.

We ended 2018 with an investment portfolio, which included holding company cash and investments of $38.8 billion, which was slightly lower and $39.3 billion that we held at December 31, 2017. With that, I'll pass it back to you, Paul.

Thank you, Dave. We now look forward to answering your questions.

Please give us your name, your company name and try to limit your questions to only one so that it is fair to all in the call. Okay, Angelica, we’re ready for questions.

Two questions for you, the first question is the capitalization of investments. Are we looking at the private investments or the public investments?

The second question would be are we going to do aggressive buyback this year or are you going to follow the same fashion that was followed last year?

We’re looking to capitalize both private and public. So we're evaluating the entire equity portfolio and re-rating it to make sure it's our hurdle and we’re in the process as we speak of monetizing some of the private investments and we will look at the public investments as well.

So we're always looking to optimize and this year we're acutely focused on getting to that 15% return on equity target. And so we will be monetizing equities.

On the buyback, we're very focused on, as Prem said and I’m sure he will talk about at the annual meeting, over the next 10 years buying back substantially our stock. We started doing that as we mentioned, 340,000 shares in last six weeks alone and we will continue to do that.

But Junior always being prudent and keeping that holding company cash and marketable securities for a rainy day for safety. With that in mind keeping being safe, we will use excess cash to buyback our shares, particularly at these levels.

So a question related to that 15% ROE target, you've done a lot to improve the operating income. I would argue that one of the levers you probably have left is on the underwriting average, not writing a lot of premiums relative to equity.

So maybe you can speak around thoughts and capacity there.

So we certainly have capacity to grow. And in the right market, we will grow substantially.

In the past, Odyssey doubled its premiums. We're not seeing anything like that yet, Paul, but we were ready.

And we think that particularly in the second half of the year, we could see increasing hardening. So to the extent that happens, we would love for insurance companies to continue to grow, but that's that they have.

We went through the stats and for the most part other than Zenith where they're seeing some softening and that's what they do, they are really good at dialing it back when they see some softening in their market, they produced premium but everybody else is growing, and they will grow much more we're sure of that if there is a hardening.

And so maybe you can just give us the organic premium growth for the quarter if you have that number?

Let me just grab that. It's actually about the same as the year 48.5%.

And then one more question if I could. You haven't allocated more capital corporate bonds in a while, sounds like you did that in Q4.

Just want to get a better understanding of that. Is that because corporate spread simply blew out in the quarter and you thought it was a good opportunity to take advantage of that?

Or has your thought around corporate credit changed on a go forward basis?

No, our thoughts on corporate credit haven't changed, you’re absolutely right, Paul. Spreads did widen out, particularly on the short end we've stayed at the very short end.

So it's roughly equivalent to cash but getting us that yield now with that run rate of $800 million of interest and dividend income. So we took advantage of opportunistically in the end of the last order of the year and that’s what we are best at.

We will take advantage when it comes. But for now we are very focused on staying at the short end of the curve.

Paul, just to follow-up on the equity position monetization efforts you've got going on there. How should we think about that in terms of your view just relative weighting of equities within the portfolio there?

I mean, are you talking about taking that weighting lower? Or is this just a bit of a repositioning we're talking about?

I think it's just more of a call it repositioning optimizing is what we’re focused on Jeff. So there is some things just that make sense given the price we think we can get for them to move them out and others that just came in, like Toys“R”Us just came in and there's some work that they need to do to optimize their operations.

But for us, we're looking at selling things that will go at a good price. And right now private equity is a focus in the marketplace and number people want those assets, and so we'll look to sell into that.

And then I guess one follow on the other one obviously very large position now with Seaspan. Can you just clarify for us is there anything in that agreement about holding that position or being able to sell it down at any period of time in the near future?

Or how should we think about how you are going to manage that going forward?

As you know, we really like David Sokol and he is one of the best managers we think we've ever seen, and he's got Bing Chen as CEO, but David is intimately involved. And we think that's a good long-term hold.

Obviously, everybody is focused on short-term and trade with China. But long-term having that business with David Sokol at the top, we think is something that can do very.

He's already been out there buying assets on the cheap and building up that business. And so for us to answer your question, there is no for us to hold, it's available for sale.

But this is when we think we could hold for a very long time. It's got a lot of runway with David.

And we could see great things from it. So we think it's one that's going to make us a lot of money over the long term.

In the news last week or a couple of weeks ago, Fairfax rumored for to be looking at protective insurance, not necessarily for you to comment on that rumor. But just in terms of M&A transactions in the insurance and reinsurance space.

Is there still an appetite to go down that path? Is there anything in particular that you would like to add or beef up?

Maybe some commentary around M&A in that space.

So for us, that’s a great question and we do get it quite a lot. After we completed the acquisition of Allied World, we really do feel like we've done the big acquisitions we need to do.

And to the prior question, we really think to be focused on now is buying back our own stock. But that said, we do see specialty businesses more tuck-in things that we're looking at from time to time and we will continue to do those.

They are brought to us sometimes from our own companies. We've got as you know a fairly good reputation of treating entrepreneurs, owners very well and they want to bring their businesses to us.

And if they make sense, we will look at them but they are more tuck in type acquisitions. On protective typically we don't talk about acquisitions until we've actually completed them, but that's one that I would say that we did receive the call.

And we just to say, because there is rumors about us being there that we are in fact not there, and we will not be there we're not interested. And we typically don't comment, but that's one just because our name is out there as being associated with it.

Just to make it clear, we are not looking at protective in any way.

And then one maybe little bit more granular question around the other corporate and overhead. Is there anything that happened in the quarter there that drove a little bit higher corporate overhead expenses that would be maybe one time or something that you can point to?

There will be some more details on that in our interim report. There was a reclassification in one of our operating companies of about $11 million of underwriting expenses that really weren’t underwriting expenses.

They were more related to a startup operation. So I think you might be seeing that in the fourth quarter corporate overhead.

Going back to the investment portfolio, it sounds like you're not changing your concentration or proportion of assets that you have in equity. Just perhaps some more buying and selling in the portfolio, a reshuffling of holdings, do I have this characterization of your monetization correct here?

That’s right, Tom. We think the team Wade and Lawrence and Prem and Roger, the team is salivating a little bit of the stock pick of market.

There's things that we can invest in around the world, but you're absolutely right. We’re looking primarily to optimize, it's not going to be a change in the mix.

And/or no change in the percentage of your portfolio that’s in equities?

No.

And then with respect to the cash deployment, down considerably year-over-year and quarter-over-quarter. Is there a magical percentage of your portfolio that you'd like to be in cash?

And if you're just deploying it in the short term that seems just to be very temporary. Where would you like to put it?

Where would you like to deploy this money in the long run to try to hit your hurdles, because this being so much in cash isn’t helping? Because it doesn’t sound like given the concentration, given what you said about equity that you don't want to increase the equity position substantially.

So where do you want to put this money?

I mean longer-term, Tom, we would like to go into longer-term fixed income, but we won't do it at expensive quality or tenure. So, we’re thinking that over the near to midterm here that rates will rise.

And we just don't want to take any risks. So we’re staying short end of the curve but we're finding yield there.

And where I said we're about $800 million interest in dividend income run rate. We think maybe $1 billion dollar is achievable maybe in that range on a run rate basis, but we will not reach for yield.

And so we’re just sticking conservatively at the short end of the curve.

I was wondering regarding the share buybacks from fourth quarter. So that you purchased 150,000 shares at cost of $20.4 million and that seems to be around $135 per share, which sounds very cheap.

Is that correct?

No, I don’t think so. But yes, share buyback in the fourth quarter was 52,000 shares at cost of $22 million, and that's about $434 per share.

And then we also did some buybacks for treasury about 98,000 shares at a cost of $44 million that’s about $451 per share. So our buybacks are coming in between $430 and $450 per share in the fourth quarter.

I also have another question if I may. You were also writing that there some amortization of $109.3 million regarding the subsidiary holdings in tangible assets.

Would you possibly provide some light regarding those write offs or amortization?

So that amortization relates to intangible asset amortization. So when we make an acquisition, part of the excess that we pay over the fair value of what or the carrying value of what we acquire is either goodwill or intangible assets.

And a lot of what you're seeing there is amortization of customer relationships, broker relationship things like that that were made in prior acquisitions relating to Zenith and Allied, especially Allied more recently that’s the big change period-over-period.

But they are all according to plans, I would say?

Yes, there is no impairments or anything in there. It's just normal course amortization.

And I would just highlight on the corporate overhead the other factor that has made it increase in the quarter is just lower share of profit of associates. So we had some profit of associate related to your life last year and it wasn’t as high this year, so that’s the other factor.

A couple of questions first related to the Runoff unit. I mean I see the loss in the quarter was around $96 million.

I know you had the gain related to the transaction that you did. So was there a substantial reserve addition or something else in the quarter that accounts, squares those differences?

We had some adverse development that I mentioned in my comments there to $200 million or so, and that was on asbestos, other reserves and allocated loss adjustment expenses. And there was a little bit offset in there for some favorable development on workers' compensation business.

And that was all in the quarter, not for the full year?

That was mostly in the quarter, that's right.

Second question I had within Brit, there was a fairly substantial decline in the net written premiums. You also mentioned there that there was an intercompany transaction.

Could just square how large that was so that I can get what the underlying run rate on the business was in the quarter?

So the intercompany transaction that I referred to there was a reinsurance into Advent and the amount of the interceded premium or the amount that was affected, the net written premium was about $174 million. So that’s the adjustment you make to Brit to get to the 9% growth rate that we set that Paul and I had mentioned in our comments.

And then the last question that I had related, I guess it primarily relates to the California fires. We've been seeing the stuff about the PG&E bankruptcy and the considerable insurance liabilities that they've incurred.

Does Fairfax have any particular exposure to that?

We have just a little bit, approximately $25 million, Mark.

Maybe I didn’t hear clearly. Could you please explain why Brit decayed so much after you bought it from Apollo?

Howard, I don’t think it actually decayed that much. They've been hit more than our other companies with the catastrophe losses I think is the primary thing that’s happened to them.

But Dave, I don’t know if you want to add to that?

No, I think that been off. And if you’re looking at the net premium written as we talked about in 2018, it needs to adjusted a little bit for that reinsurance transaction.

But even if you take it with the CAT losses, the return on total capital would still be single digits, which is not what you believed at least according to the prospectus of the deal when you bought Brit. So what's the difference?

I think Howard it is primarily catastrophes. I mean the lowest market has gotten tougher.

And so there's a rebalancing happening in Lloyd's. We think over the long-term, Brit is one of the company's that’s going to benefit from that.

But the other thing quite frankly as we have underperformed on investments, Howard. So we need to do better and on that.

But Brit with the team led by Matthew is doing very well and they will take advantage of what’s happening in the Lloyd's market. But we need to do better on investments for that.

Well, I’m curious because what else would you say but doing very well. When I looked at the transaction, I came up with different numbers than you came up with.

And maybe their management is not as sharp as you originally estimated?

No, they are quite good but we’re happy to talk about it with you more Howard at anytime.

Actually my question was asked and answered. Thanks.

I just wanted to quickly follow-up on the favorable reserve development in this quarter. Was there anything in particular that was driving that, whether it's from the catastrophe losses from 2017?

Is it something that we can potentially read into maybe a little bit more around catastrophe losses and this is something that can repeat in future years? And then a quick comment around the 2018 reserve development just being higher than your longer-run average run rate?

So I can hit the first one. We saw about $200 million of reserve redundancies from the CATs from 2017, so that's one.

Generally speaking, we have been very good over the last 10 years at conservatively reserving and have had reserve redundancies for the last 10 years. But with respect to the catastrophe in 17, that's led to about $200 million of release.

Just one question from me. On the assets under the balance sheet when you talked after the question earlier on about the amount that’s in equities and the amount that was in bonds and cash.

While it's not described, is that breakdown something that you're choosing to do in the very long-term just to match the liability side of the balance sheet? And the reason I asked is obviously maybe a little bit more value was offered in terms of short-term corporate bonds in the fourth quarter to make quite a lot of value with one offer in longer term assets high quality equities and you obviously didn’t deploy into that.

So just help me understand whether it's the balance sheet structure we've got on the asset side is something that’s slightly prescribed from the liabilities or is this just choice that you’re making?

That was a choice we’re making with respect to the equities that we held. I mean roughly speaking, we're going to be somewhere in the neighborhood of 25% to 30% in equities generally.

And we added to the equities that we have. As I mentioned, we were adding now to Seaspan.

You might have seen we did a transaction with Grivalia and Eurobank that we think will do very well. But we're roughly in the zone where we want to be with respect to equities.

But if you wanted to have bigger percentage you could, but it's the choice you've made in terms of the asset blend you want to have in the business?

We’re roughly at the upper end of our limit with respect to exposure given the rules and regulations that each of the regulators have in the insurance and reinsurance companies that we operate. So we're roughly at the top end of that range, Andrew.

If I make with my question, I would like to challenge a little your equity portfolio positioning and the fact that you're aiming reposition the equity side and the equity position the asset side. From what I see, you have roughly $10 billion in equities on the asset side against $11.8 billion of shareholders' equity, so those two are related.

It seems like as you just said in the upper range of what is allowable from regulatory perspective. But my question is and I know we've been shareholders of Fairfax for a long time and I know what you've been through with hedging the equity portfolio in previous years.

But my worry is that perhaps you are going long equities. And I’m not questioning your system peak or that other peak, but in terms of asset allocation.

Aren’t you too exposed to equities, precisely now when there seems to be an alternative for your float in the U.S short-term fixed-income market. And precisely now when it seems that equities over the long run and if you look at the indices or the asset categories the U.S.

equities can only go down. My worry here is that if U.S.

equities go to fair value that would be easily 50% down from where they are trading today and that would wipe out 50% of your equity capital. Wouldn't it be prudent precisely now to go back where you were in 2013, 2014 hedge at least a portion of your equity portfolio?

I mean that's a good question. And I think from our perspective, if you look at our results longer term, we've done.

Well, these short-term things that tend to be focused on -- you saw what happened in the fourth quarter and you saw the rebound, it is we think a stock pickers market. But we've got value stocks that we don't think will go down as much as the broader market.

And we don't really want to do the type of hedging we've done in the past, but yet we’re conservatively positioned with so much in cash and short-term fixed income. So that’s the worry out there what you’re saying and we're contrarian a little bit.

So we do like the stocks we have. And we do think it is a stock pickers market.

And we do think relative to our peers that our assets are conservative positioned, because we have so much in cash and short-term fixed income. And the equities are value equities that we believe in and that we believe will withstand this volatility in this period.

And meanwhile, while we’re sitting conservatively positioned, we do think there's the potential for a trade deal that will extend the runway in the U.S., and could potentially lead to markets moving up for some period of time.

Paul, Just to clarify. When you say your conservative position because of the cash and your short-term bonds that you have, I mean that needs to be that way because of the liabilities that you have in your insurance operation.

So what I'm saying is, I’m not doing a mistake by dividing the balance sheet between. On the asset side, I would have cash and short-term.

On the liabilities side, I would have the liabilities of your insurance operations. And then another separation, another classification of balance sheet would be I take your equities against your shareholders' equity on the liability side.

So I don't gain much comfort from the fact that you have plenty of cash and short-term treasury or corporate bonds, because that is the default choice since you're in insurance operation, so the equity exposure. And by the way, I like your stock picks as well, because I like you guys as value investors.

But my worry is that if the market goes down 50% and it stays there where it ought to be trading for a long time that your solvency would be at risk and the whole thing would be at risk, that’s like a big question I have. And I don't get from your answer a relief of that, because as I see you have 10.3 billion in equities and I'm sure that Seaspan will do great.

And I'm sure that Eurobank will raise eventually, and so on. But if the market goes down 50%, I don't see a way for those stock positions to really bifurcate or divert from the market to that extent, and that would keep your…

I understand what you’re saying, Mikel. And I think this is something probably better dealt with at the annual general meeting and Prem will address it, you will have the chance to speak with all of our professionals, Wade and Lawrence, and they will talk about it there.

But I think we don’t match assets and liabilities. And for us we saw it in the fourth quarter was a nice -- our stocks didn’t go down as much as many did.

We do think that we're positioned conservatively with those stocks. And if there is something catastrophic like a 50% down, there aren’t too many companies like us that have $114 billion and things like credit deflation for us.

So we are positioned with things that we have on our balance sheet that we think will give us some lift if there is something catastrophic like that. But then the other side of it is that in this market where it's a stock pickers' market.

We’re looking at things and we're trying to do debt and warrants and debt and warrant deals that will give us protection that others aren't getting. And we’re having management that wants us to do those deals like Seaspan where we can get the protection, get the yield and still have equity upside.

So we think we’re being prudent. But I think your question is a good one and I'm sure we will come up at the AGM, and that’s probably the best place to deal with it.

So my question is related to one of the investments that you guys made last year into Toys "R" Us Canada and where that’s shaking out, and are you guys going to put more money in?

It turned out to be better than we expected in some ways and tough in others. So we bought it and basically we're able to buy it for real estate value.

And then it turn out that as we look the real estate, in fact the real estate was worth more than even our purchase price. So we got a business that was making over 10 years a $100 million of EBITDA year after year after year, basically for free and 5,000 employees and 80 locations across the country and the number one toy seller.

And as you've seen, retail particularly through the Christmas season wasn't the greatest, but the company continues to generate EBITDA. And with the team that we've got in retail, we're going to do very well.

But it's a classic value investment and that we were able to purchase with all downside protection after real estate basically on the cheap and then got the business for free. And that’s the type of deal we'll do every time we see it, so that’s been a good one for us.

So you’re going to continue with stores there?

Yes, absolutely continue with the stores.

Well, if there is no further questions thank you for joining us on this call. We look forward to seeing you all at our Annual General Meeting in Toronto on April 11th.

Thank you very much everyone. Thanks a lot Angelica.