Fairfax 2017

[wondering]

Good article about Richie Boucher. I am glad to learn that he will continue on this FFH, although it appears not all the details of his role have been worked out.

 

https://www.irishtimes.com/business/financial-services/richie-boucher-i-m-just-a-boy-from-africa-who-managed-to-run-a-bank-1.3213029

[nwoodman]

Good article about Richie Boucher. I am glad to learn that he will continue on this FFH, although it appears not all the details of his role have been worked out.

 

https://www.irishtimes.com/business/financial-services/richie-boucher-i-m-just-a-boy-from-africa-who-managed-to-run-a-bank-1.3213029

 

That is fantastic news. I knew he had been offered a position but very happy to hear he has accepted.

 

Cheers

nwoodman

[Dazel]

 

 

I would speculate that Fairfax entire long term bond portfolio was sold into the rally of the last couple of weeks. This is not a big position but I would bet that Bradstreet would have liquidated allied's (they took over them in July)long dated bonds into the rally which will create realized capital gains this quarter and take book value higher. However, interest income will drop some more over the short term. Fairfax has bet on higher rates going forward and we may have seen a bottom in yields last week. We will see.

 

It would be extremely beneficial to Fairfax if insurance rates rise on these storms. They have excess capital and are full of cash.

[Dazel]

http://www.moneycontrol.com/news/business/ipo-business/icici-lombard-ipo-fully-subscribed-on-final-day-2391561.html

 

It was oversubscribed by 3 times!

This says a lot about Fairfax other assets in India as they are becoming the growthengine for the world economy. There is tremendous demand for India and Fairfax is 15 years ahead....we expect Fairfax to be a go to investment for those looking for exposure to India.

[Dazel]

 

 

I would speculate from Fairfax recent activity of taking advantage of rich valuations that Blackberry would or should be sold now. Tech valuations are at nose bleed levels where Blackberry treads water. The brand (for security), their patents, their footprint and installed base in the automotive industry and cash are valuable to an acquirer now. The reason for this is the acquirer will be able to use their high multiple shares to buy Blackberry and in doing so they raise cash (Blackberry has a lot of cash per share doing nothing) and they pick up assets that are not creating any cash flow to Blackberry but will valuable to the Googles of the world. Blackberry will not pay up for acquisitions as they are too expensive. It's time to be bought be someone with large pockets.

 

Disclosure: I have a small position in Blackberry.

[Phaceliacapital]

Thanks for the color and I agree!

[Dazel]

 

LOL.

 

No one is paying attention...and my numbers were are very light on the ICICI-Lombard sales. Fairfax has received $1.4b worth of shares sales and still hold 9.9% with the companies value now at $4.5b!!!

That values the sales and holding at almost $2b!!!!! We will have a record year of earnings...Prem and co. Have lost their touch still? More importantly of course is that the company is set up for great operating earnings over the next decade.

 

Yawn.

http://www.fairfax.ca/news/press-releases/press-release-details/2017/Fairfax-Sells-Shares-of-ICICI-Lombard/default.aspx

[Dazel]

Does anyone know what the addition of the $450m in marketable shares was involved in the sale?

 

That and the IPO value and subsequent 9.9% holdings jump has taken the proceeds well above what I thought they would be. I would also suspect they will sell off the remaining $450m worth of shares at these prices.

 

 

 

[A_Hamilton]

 

LOL.

 

No one is paying attention...and my numbers were are very light on the ICICI-Lombard sales. Fairfax has received $1.4b worth of shares sales and still hold 9.9% with the companies value now at $4.5b!!!

That values the sales and holding at almost $2b!!!!! We will have a record year of earnings...Prem and co. Have lost their touch still? More importantly of course is that the company is set up for great operating earnings over the next decade.

 

Yawn.

http://www.fairfax.ca/news/press-releases/press-release-details/2017/Fairfax-Sells-Shares-of-ICICI-Lombard/default.aspx

 

You do know that FFH via Brit/Allied World/Odyssey Re writes catastrophe reinsurance and we just had Harvey/Irma/Maria/multiple mexican earthquakes all in less than a quarter, right? The gains are great, but need to look at the right side of the balance sheet too.

[Dazel]

 

Of course....they could have a billion dollar pre tax loss (I guess it to be a third of that) from these events and still be close to record earnings...they have added $2b in after tax capital gains in the last 6 months....

 

To be honest. I hope the insurance industry losses are massive....and we lose a lot.

I am more interested in a hard insurance market because of their large diversified insurance footprint with $15b in premiums then their large  capital gains this year. It's a different company then the one most on this board remember... That is my point...

 

Long leaf said the same thing...

 

 

[Dazel]

 

A.Hamilton...your point is well taken of course. Let's see how well they were underwriting...at the reinsurance level.

 

And please bring on a hard market!

[Dazel]

 

One more quick point...the $2b in after tax cap gains from their insurance companies sales are a happening now.  They got three times book value in the worst hurricane season ever? That's what I mean by diversity. Fairfax is a different company than most remember.

They will be blue chip like Berkshire...

[Txvestor]

 

LOL.

 

No one is paying attention...and my numbers were are very light on the ICICI-Lombard sales. Fairfax has received $1.4b worth of shares sales and still hold 9.9% with the companies value now at $4.5b!!!

That values the sales and holding at almost $2b!!!!! We will have a record year of earnings...Prem and co. Have lost their touch still? More importantly of course is that the company is set up for great operating earnings over the next decade.

 

Yawn.

http://www.fairfax.ca/news/press-releases/press-release-details/2017/Fairfax-Sells-Shares-of-ICICI-Lombard/default.aspx

 

 

Dazel,

Whilst I share your enthusiasm for fairfax and their excellent insurance underwriting operations in a potentially hardening insurance market, the release states that the $1.4B is inclusive of the 9.9% shareholding they will have remaining. So I think you've double counted the remaining holding to get to the $2B. That is why I posted some time ago that when Prem sold the initial 12.2% stake to Warburg pincus for $USD383M back in May, they appeared to leave almost $200M USD on the table. Not sure what the issues were, but just 3mths later the stake is valued 60% more???

[Dazel]

 

Txvester...

You are correct....long day today...thx.

[Dazel]

 

Here is why Brian Bradstreet is the best bond manager in the world...the numbers are unbelievable and

these returns do not include the credit default swap gains of approx. $2b which were his creation. I am not sure if the Muni bond windfall from Nov 2008

are included as they were non taxable. Brian will handle the majority of the $40b investment portfolio. The returns for Fairfax on this $40b is the "rocket fuel" as Buffett calls it...the market is doubting Prem's ability as the investment performance over the last number of years has been horrible as any here have mentioned....they are missing what Brian has done! Prem and co. will come back in a big way in the investment portfolio they continue to prove that they are excellent company builders.

 

                                                                            5 years  10 years    15 years

Fairfax Taxable bonds                                            6.0%      9.6%        10.3%

Merrill Lynch U.S. corporate (1-10 year) bond index 3.8%      4.9%        5.1%

 

[Dazel]

https://www.canadianunderwriter.ca/insurance/benefits-merging-fairfax-allied-world-far-outweigh-overlap-reinsurance-fairfax-insurance-coo-1004105613/

 

Fairfax insurance is not very understood by the market as the company has been looked at as hedge fund over the years...Odyseey Re is 26th and Allied world is 41st biggest writers of reinsurance in the world in 2016 and Brit writes 25% of its business in reinsurance and the other 75% is primary insurance.

Odyssey Re (see Fairfax 2017 posts) bought reinsurance on their reinsurance in north America according to their annual report and would have little impact from small cat's and they also ended a large reinsurance contract for Florida in June of 2015 ...

 

These are not small Cat's of course and the losses could be very large at Fairfax but not in the context of Fairfax size. Fairfax owns 67% of Allied World as well I believe with options to buy it all over the next 5 years.

 

As for the industry if this creates a hard market...Fairfax will have a large amount of capital with insurance sales they just made so not only will they not have to raise capital they will be in position to take advantage of the hard market if happens. If that's the case its a back the truck up borrow money from whoever will give to you type investment! fingers crossed!

 

[FFHWatcher]

Anecdotal story regarding insurance coverage in a hurricane.  Unless you have pretty significant losses, you're pretty much on your own.  I was in SW Florida during Irma, I had damage at my house, with my boat, and many friends and customers sustained damage.  Your deductible is either $500, 2.5%, 5% or 10% of the insured value of your house.  I haven't talked to anyone that has a $500 deductible.  I have had friends with $50k+ in damage and their deductibles are $75k (5%) or more, so they are on their own.  As Irma wasn't as bad as initially expected, except in the Keys, Caribbean Islands and those parts of Florida that had flooding, so it will be interesting to see the insured damage numbers for Florida. 

It seems like the losses will be a big number but the insurance payout on them will be a fraction with the policyholders paying the majority out of pocket.  Just like the typical scenario goes, Insurance Companies will do anything and everything to get out of paying a claim. As a consumer that sucks, as a shareholder, it is easier to take. Being a Canadian now living in the US, I find the auto and property insurance not nearly as easy to understand as in Canada.  It seems like there is a lot more standardization in Canada (likely through regulation). 

The damage over in Houston seems to be much more significant than Florida.

 

[Jurgis]

Anecdotal story regarding insurance coverage in a hurricane.  Unless you have pretty significant losses, you're pretty much on your own.  I was in SW Florida during Irma, I had damage at my house, with my boat, and many friends and customers sustained damage.  Your deductible is either $500, 2.5%, 5% or 10% of the insured value of your house.  I haven't talked to anyone that has a $500 deductible.  I have had friends with $50k+ in damage and their deductibles are $75k (5%) or more, so they are on their own.  As Irma wasn't as bad as initially expected, except in the Keys, Caribbean Islands and those parts of Florida that had flooding, so it will be interesting to see the insured damage numbers for Florida. 

It seems like the losses will be a big number but the insurance payout on them will be a fraction with the policyholders paying the majority out of pocket.  Just like the typical scenario goes, Insurance Companies will do anything and everything to get out of paying a claim. As a consumer that sucks, as a shareholder, it is easier to take. Being a Canadian now living in the US, I find the auto and property insurance not nearly as easy to understand as in Canada.  It seems like there is a lot more standardization in Canada (likely through regulation). 

The damage over in Houston seems to be much more significant than Florida.

 

Houston is mostly flooding which is mostly not covered (and what's covered mostly comes from Fed program).

 

OTOH, business insurance apparently covers flooding, so that's that.

 

Don't know what deductibles business insurances have.

 

Percentage deductibles sounds crappy for homeowners. My deductible is probably something like $1K or $2K. But then I'm in MA and it's possible that insurance policies with such deductible in FL are just not affordable.

[TwoCitiesCapital]

The % deductibles were widely adopted after Katrina nearly bankrupted the entire industry selling insurance on the coast. Basically, up to that point, the insurance industry was MASSIVELY underreserved for hurricanes because they hadn't updated their models to account for 1) more people moving to coastal regions and 2) property prices being far elevated relative to inland property.

 

Basically, when you know that there is gonna be a direct hit from a cat 5 hurricane every ~30 years that will wipe out a good chunk of a potentially large city with premium real estate, you need to do something about it to make sure you have it covered.

 

Two ways to do that are to raise premiums or let homeowners be responsible for a good chunk of first loss exposure. The insurance industry chose both.

 

Sure it sucks from a consumer perspective to pay higher prices and still be on the hook for losses - but it was also the consumer's choice spend a small fortune on house in a region predisposed for massively destructive natural disasters and they knew that when they bought the coverage.

[Jurgis]

The % deductibles were widely adopted after Katrina nearly bankrupted the entire industry selling insurance on the coast. Basically, up to that point, the insurance industry was MASSIVELY underreserved for hurricanes because they hadn't updated their models to account for 1) more people moving to coastal regions and 2) property prices being far elevated relative to inland property.

 

Basically, when you know that there is gonna be a direct hit from a cat 5 hurricane every ~30 years that will wipe out a good chunk of a potentially large city with premium real estate, you need to do something about it to make sure you have it covered.

 

Two ways to do that are to raise premiums or let homeowners be responsible for a good chunk of first loss exposure. The insurance industry chose both.

 

Sure it sucks from a consumer perspective to pay higher prices and still be on the hook for losses - but it was also the consumer's choice spend a small fortune on house in a region predisposed for massively destructive natural disasters and they knew that when they bought the coverage.

 

Yeah, I understand all that.

[UK]

Some early "winners" emerging, even before Maria: http://www.insurancejournal.com/news/national/2017/09/28/465902.htm

 

"Lloyd’s of London expects net losses of $4.5 billion from hurricanes Harvey and Irma, which analysts said would eat into the insurer’s capital and hit its profitability."

 

"Meanwhile, Beale said it was too early to assess losses from Hurricane Maria, which devastated Puerto Rico last week and which some analysts have predicted will lead to greater insurance losses than Harvey and Irma."

 

 

[Dazel]

Hard market?

Certainly Berkshire would make a killing....but Fairfax with 41% investment portfolio in cash and the holding company stuffed with cash and capital..on per share basis Fairfax wins.

 

We will see who was swimming naked looks like the insurance claim tide may have gone out. From what I have read it looks like Fairfax went conservative across the board as insurance rates low for Cat's....the majority of their insurance is in other areas....Berkshire exited most of the business Buffett has explained...

 

[Dazel]

As an aside...Blackberry had good results yesterday....$1.9b cash.

Just saying...sell Qnx, build up radar and sell it...left the security business which is the diamond in the rough and provide security for both of the businesses they sell. Like the First Capital deal at Fairfax.

 

Disclosure: I own Blackberry small position...big Fairfax position.

[Tommm50]

I hate to point this out but the notion of a "hard market" in insurance and reinsurance is a vestige of history. The statistics indicate the industry has made an underwriting profit maybe 5 times in the last 35 years. The hard market/soft market cycle was true up until Bermuda arrived and the movement of capital became easy. It used to be hard to get capital into the insurance business, individually state licensed, etc. Once Bermuda captives showed up (and then grew to the point of buying their U.S. adversaries) the dynamic changed. Billions of dollars of capital come in to the business overnight. The idea of rates moving for more than a few months is an institutional memory. What makes Fairfax a potential juggernaut (I believe they've significantly reduced their property cat exposure) is their focus on casualty business in the U.S. and their significant growth potential in India and Southeast Asia.

[Dazel]

 

I guess we can assume that the crickets on this thread are because one may feel they missed an easy tap in from an old trusted friend in Prem and Fairfax. Maybe now that this popped so much some may call it a momo stock and follow or comment?

 

OR maybe if they did a coin offering for a new cryptocurrency they may get some attention?!!! 

 

Here is the name of the new currency VIIND..."value investing is not dead"!

 

Yes I am kidding...in stupid stock market somethings make sense!

 

Have a good weekend

 

Dazel