Cigarbutt

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?

The prospective measure you're looking for may be an elusive goal. The diagonal measure you describe could reveal some info but IMO not more than the current accident year combined ratio and the ratio you compute could be influenced by recent growth in premiums written which, in itself, would increase the ratio as the payment curve is not bell-shaped with more payments early on and then a long tail to the right. Example: The idea is to try, for each years and trend-wise, to identify a deviation from the expected trajectory. This is not easy and insurers may be slow to recognize developing issues. For example, look at the following which is a significant pattern that started to develop in the late 90s for medical malpractice claims: Over time, it became clear that developing trends would become very costly. BTW, this cumulative payment curve is sort of representative for the average long-tail type of lines that FFH carries (duration and shape). Up to 2013, FFH reported accident year reserve development and that was helpful but it's not a requirement and is no longer reported by them. It's possible to figure it out but it takes some effort.

Yes, i think this is correct. It's becoming clear that the 2017-9 years were written with a semi-conscious expectation that premiums were insufficient to meet profit objectives and the shortfall could be compensated by investment income. In the industry, they call this cash flow underwriting and this is based on the same foundation as the need to remain fully invested at all times at the individual level. For the industry, it appears that the eventually realized underwriting losses for those years were compensated by float investment income. See the following graph showing the yield on invested assets. For the industry, add a median 0.5% per year for realized gains: For FFH: It's interesting to note (it's becoming clear now) that, for those years, FFH did better (relatively) than the industry both for the reserves management and the float management. ----- Nuff said about triangles i guess. The relevant uncertain questions about the future are bound to be related to the asset side, i would venture to say, but what do i know?

Interesting. Let's build on that using net reserves (ie where reserve development stays with the company instead of being ceded to another party): So using the same line of reasoning, FFH has reserves reported (as of end of 2023) at higher levels than initially reported for the 2018, 2019, 2020 and 2021 years. And up to the 2019 year included, the end-2023 number is 410.5 M higher than the initial estimate. Also, the adverse movement from 2017 to 2018 was 1165.1 M ((254.6)-910.5). Not exactly catastrophic and not remotely as horrific as the late 1990s and early 2000s years (Ranger (ouch!), generic Crum, nauseating TIG etc) but still quite significant. No wonder (now), the late 2010s years were ripe for hardening. So, the same conclusion applies but (opinion) the net reserves trend smooth out significant older and softer adverse development as a result of more recent and harder favorable development. i'd simply add that this appreciation may help to guess the kind of underwriting contribution to the ROE of future years. @jfan, the best thing now would be that someone comes along and tries to establish an opposing view.

@jfan Your line of questioning is quite reasonable and, since there's not much action here, i will give it a shot (btw thank you for the crypto links that you had provided after i asked a question or two in that thread). ----- Disclosure: i have no formal training in reserve triangles but it is a fascinating topic and a relevant one for FFH and when an adolescent, i was told that i had what it took to become an actuary, an avenue not considered for various reasons including the deep desire to reach financial independence as soon as possible. ----- -If FFH wants to reach the 15% ROE goal, a key input is the underwriting return over the complete cycle. -Historically, despite many rational attempts to deal with this, there is the underwriting cycle and the associated (and correlated) reserve cycle that happens with a lag. -When looking at triangles such as the ones included above, one has to remember that what happens (recognition of inaccurate reserves) in an older year will work like a domino and change all the reported numbers for the subsequent years. So looking at trends is important. ----- Tentative conclusions -Like the overall P+C (re)insurance market, FFH's numbers (and present trends revealing how wrong previously reported numbers were) reveal that the 2018 and 2019 (+ or - 2020 or even 2021) were written in quite a soft market and eventually recognized reserves have become more than the initially recognized objective for profit. -While it is impossible to be precise, FFH continues to report overall positive net favorable development which means that the adverse development from softer and older years are more than being compensated by favorable from harder and more recent years. -While it is impossible to be precise, FFH appears to have done better than the market in general as a result (combination of skill and luck; likely more skill than luck) of 1-focus on more specialized lines, 2-opportunistic growth ++ during hardening and maybe/likely of 3-better underwriting discipline. -To specifically answer your question (needs to be watched carefully?), FFH has shown for some years the nonspecific strategy to be simply conservative in their reserving overall (choose the conservative side in the range given). Also, the poor years are now quite some time away and more than their typical reserve duration of around 3.8 years. In addition, if history is any guide, the more recent and significant growth in reserves during a hard market should continue to compensate and more for the net favorable development. -Now, it's always possible that the underwriting culture has deteriorated and this may take years to figure out but i would offer a fairly substantiated opinion that this is quite unlikely. If interested for more granular info at subsidiaries, look at the supplemental info: FFH - Annual Financial Supplement (2023 Q4) (fairfax.ca) OdysseyRe continues to be a star performer.

Can you elaborate, especially concerning trends including what is referenced to by @jfan, from 2022 to 2023 calendar years?

Thank you for the additional thoughts. ----- On a personal level (private ventures), it's been possible to identify and benefit from (relatively) small pockets of potential margin exploitation (in my case based on complex regulations, areas of bureaucratic inefficiencies etc) but opportunities could not be considered permanent and there's always been the constant threat of real competition. ----- The investment case for EQR (Equity Residential?) (after a 5-10 minutes review..) can be made (various tailwinds, demographic, wealth effect etc combined with an experienced and talented team) but it's not in my zone of comfort (good for you if it works out) and it's hard to discount a comparative advantage based on "tech" in this area if competition is still a thing. Opinion: A lot of the corporate pricing power these days is from lack of competition (and access to cheap and easy money).

Thank you for the feedback. However, the companies mentioned are not within my circle of competence. If others can benefit (seeing the present benefit as well as the discounted value of future benefits), that's great.

Obituary Daniel Kahneman obituary | Psychology | The Guardian He followed a tortuous life path and ended up trying to tone down the noise in order to optimize "adversarial collaboration". Why not?

To help with 'clarification', the following was posted earlier in the Fairfax 2024 thread. Fairfax 2024 - Page 28 - Fairfax Financial - Corner of Berkshire and Fairfax - The Value Investor's Haven (thecobf.com) Hope this helps.

Relating to the recent rise in profit margins (since 1999 when Mr. Buffett voiced his 6% 'normal profits' assumption), the material reduction in corporate taxes plays a role but there are other specific material variables, including maybe a common denominator? ----- Relevance for our day-to-day search for alpha? Since 1999, where i've 'looked', most (by far) of the improvement in net margins at relevant investment opportunities have come from lower debt service costs and lower corporate taxes, not from higher margins related to what @Dinar describes ie companies that (apparently) have the intrinsic ability to obtain and maintain superior products versus simply the possibility that monopoly power has gone up because of etc etc Maybe i'm not wired to 'look' where the real money is?

The conclusion that market cap growth has decoupled from GDP (and may continue to do so) may be correct but the two underlying assumptions that are mentioned appear to be incorrect. 1-When using GNP instead of GDP in the ratio, the international part which is described above does not materially change the picture. 2-When using NIPA profits (which is an imperfect measure bla bla bla ok but still...) which also includes private companies, the same trend appears. ----- Now, as to why margins have decoupled is anybody's guess but i'd bet public deficits play a role. The following is the same corporate profit line with, superimposed, the budget deficit. Look at what happened since 1999 when Mr. Buffett assumed that margins hovering around 6% would be the norm (absent fiscal largesse? which is sustainable?).

From the anecdotal to the global and back to China Our oldest offspring is a teacher at the primary level. He (like his peers in in North America) experiences greater trends across the education system in North America. Of course, there are major relative comparative advantages to other jobs especially after achieving a more 'permanent' status including the not so benign side effects of over-regulation, over-management and various 'entitlements'. However, there are also major disadvantages. A rising proportion of recent graduates are leaving after a short time spent on the 'job', despite recent adjustments to various salaries and other other monetary incentives (money does not appear to be enough). Based on what happened this week in his class room (and what has been happening for some time in North America), a major issue is the growing lack of respect linked to the gradual drift to incivility (also 'seen' in various forms of communication..). Here's an 'intelligent' answer from a perplex 'friend': ----- There has been a gradual normalization of this drift and... ----- Back to China The US continues to be a leading pole of light as seen in the large numbers of international students coming to the USA. For China, this has been an important factor in catching up but how to compete now? For the US, it's hard indeed to spoil the secret sauce but its market share of international students has started to decline lately. Why?