Fairfax 2020

[Bryggen]

Not sure if I should laugh rather than being excited reading this ;)

Thought this news was now well in the past and the topic concluded.

Not sure about you, but it ain't going to happen, right?

 

https://ca.yahoo.com/finance/news/buy-alert-blackberry-tsx-bb-200059026.html

 

 

[StubbleJumper]

Not sure if I should laugh rather than being excited reading this ;)

Thought this news was now well in the past and the topic concluded.

Not sure about you, but it ain't going to happen, right?

 

https://ca.yahoo.com/finance/news/buy-alert-blackberry-tsx-bb-200059026.html

 

 

It wouldn't surprise me if Prem were interested in buying BB outright, but the market cap is $3B+ and then you'd probably need to offer some sort of premium, which might value the company at $3.5-4B.  To execute a takeover, FFH would probably need to find about $2.5B to add to its existing equity and debenture position.  It would probably be a significant challenge to float that much debt, and it would require that FFH also renegotiate its revolver.  Even if FFH partnered with an outfit like OMERS, it would still need to find a large pile of capital.

 

I can't see it happening, but never say never.

 

 

SJ

[TwoCitiesCapital]

Can someone explain what is driving the hard market?

 

I've been skeptical of it so far just because we were told the reason for the soft market was the massive inflows of capital through new insurance-linked products and etc paired with limited catstrophes to remove said capital.

 

So what's changed? Why is it that suddenly low yields mean insurers hold the line and raise pricing. Low ROEs were acceptable for most of the last decade, why is 2020 suddenly different?

 

Guess I'm just trying to understand where I'm wrong in being skeptical. We've had a few months of sustained pricing increases across the industry and now places like Lancashire are raising capital to out to work in underwriting. The experts seem to believe this is for real so I'm just trying to understand what changed the dynamic?

[petec]

Can someone explain what is driving the hard market?

 

I've been skeptical of it so far just because we were told the reason for the soft market was the massive inflows of capital through new insurance-linked products and etc paired with limited catstrophes to remove said capital.

 

So what's changed? Why is it that suddenly low yields mean insurers hold the line and raise pricing. Low ROEs were acceptable for most of the last decade, why is 2020 suddenly different?

 

Guess I'm just trying to understand where I'm wrong in being skeptical. We've had a few months of sustained pricing increases across the industry and now places like Lancashire are raising capital to out to work in underwriting. The experts seem to believe this is for real so I'm just trying to understand what changed the dynamic?

 

Ive been wondering the same.

[ERICOPOLY]

we were told the reason for the soft market was the massive inflows of capital

 

Have the inflows of capital changed?

[TwoCitiesCapital]

we were told the reason for the soft market was the massive inflows of capital

 

Have the inflows of capital changed?

 

Not that I'm aware of. I don't have industry data that measures that on a regular basis, but I can't think of anything that would have caused that to change.

 

We haven't had any major catastrophes to scare money out, insurance linked products are becoming a bigger part of the industry, and the hardening of the market started long before all of this COVID stuff could have made capital scarce (and doesn't seem to be making it scarce for other risk products).

[bearprowler6]

we were told the reason for the soft market was the massive inflows of capital

 

Have the inflows of capital changed?

 

Not that I'm aware of. I don't have industry data that measures that on a regular basis, but I can't think of anything that would have caused that to change.

 

We haven't had any major catastrophes to scare money out, insurance linked products are becoming a bigger part of the industry, and the hardening of the market started long before all of this COVID stuff could have made capital scarce (and doesn't seem to be making it scarce for other risk products).

 

My next door neighbour is a Managing Director at one of the major reinsurance brokerage companies. I just spoke to him about the current state of renewal rates, the existence of the hard market and why now for the hard market if one exists.

 

To summarize what he said:

 

-rates are hardening everywhere

-the outbreak of the pandemic has not slowed down renewal rates at all.

-the hard market which started last fall is continuing with no end in sight

-best rate increases being experienced since 2005

-capital has not left however it is finally demanding an adequate return on investment. Too many lines of business were no longer profitable

-as for why now---the industry simply couldnt hold out any longer. The low interest rates look like they are here for awhile and longer than anyone expected so increased renewal rates is the only chance the industry has to stay viable

 

 

Hopefully this helps!

[Xerxes]

Bearprowler,

 

so that I don't understand the logic,

 

Low interest rate, takes away the incentive to write insurance, because the float has less alternative 'safe' investment options.

Less underwriting capacity means fewer underwriting not fore market share sake but for return's sake.

 

Did the low rate regime that first started in 2008-09, also caused similar behavior

[Cigarbutt]

Can someone explain what is driving the hard market?

 

I've been skeptical of it so far just because we were told the reason for the soft market was the massive inflows of capital through new insurance-linked products and etc paired with limited catstrophes to remove said capital.

 

So what's changed? Why is it that suddenly low yields mean insurers hold the line and raise pricing. Low ROEs were acceptable for most of the last decade, why is 2020 suddenly different?

 

Guess I'm just trying to understand where I'm wrong in being skeptical. We've had a few months of sustained pricing increases across the industry and now places like Lancashire are raising capital to out to work in underwriting. The experts seem to believe this is for real so I'm just trying to understand what changed the dynamic?

Who knows and there are multiple inputs but the alternative capital market is an area to look at. 2019 calendar year was characterized by very significant loss creep (adverse development) from catastrophe activity occurring in prior years (starting with Irma, 2017 event, which 'developed' well into 2019). The alternative capital is at the margin but it forms about 15 to 20% of reinsurance capital and is very significant in the retrocession category. The volume of securities outstanding in 2019 grew because of multi-year contracts but the new issuance level was actually down, something that hasn't occurred in ages. A blip or more? Because of previous negative surprises and the associated "trapped" capital in collateralized transactions, 'investors' have been asking much higher spreads.

 

On a business level and as a coincident indicator, underwriters, at some point, 'realize' that the last policies written were unprofitable. At the industry level, this means that some leave business lines altogether and disciplined underwriters have their prices met and more.

[TwoCitiesCapital]

Can someone explain what is driving the hard market?

 

I've been skeptical of it so far just because we were told the reason for the soft market was the massive inflows of capital through new insurance-linked products and etc paired with limited catstrophes to remove said capital.

 

So what's changed? Why is it that suddenly low yields mean insurers hold the line and raise pricing. Low ROEs were acceptable for most of the last decade, why is 2020 suddenly different?

 

Guess I'm just trying to understand where I'm wrong in being skeptical. We've had a few months of sustained pricing increases across the industry and now places like Lancashire are raising capital to out to work in underwriting. The experts seem to believe this is for real so I'm just trying to understand what changed the dynamic?

Who knows and there are multiple inputs but the alternative capital market is an area to look at. 2019 calendar year was characterized by very significant loss creep (adverse development) from catastrophe activity occurring in prior years (starting with Irma, 2017 event, which 'developed' well into 2019). The alternative capital is at the margin but it forms about 15 to 20% of reinsurance capital and is very significant in the retrocession category. The volume of securities outstanding in 2019 grew because of multi-year contracts but the new issuance level was actually down, something that hasn't occurred in ages. A blip or more? Because of previous negative surprises and the associated "trapped" capital in collateralized transactions, 'investors' have been asking much higher spreads.

 

On a business level and as a coincident indicator, underwriters, at some point, 'realize' that the last policies written were unprofitable. At the industry level, this means that some leave business lines altogether and disciplined underwriters have their prices met and more.

 

Helpful.

 

Thanks!

[TwoCitiesCapital]

we were told the reason for the soft market was the massive inflows of capital

 

Have the inflows of capital changed?

 

Not that I'm aware of. I don't have industry data that measures that on a regular basis, but I can't think of anything that would have caused that to change.

 

We haven't had any major catastrophes to scare money out, insurance linked products are becoming a bigger part of the industry, and the hardening of the market started long before all of this COVID stuff could have made capital scarce (and doesn't seem to be making it scarce for other risk products).

 

My next door neighbour is a Managing Director at one of the major reinsurance brokerage companies. I just spoke to him about the current state of renewal rates, the existence of the hard market and why now for the hard market if one exists.

 

To summarize what he said:

 

-rates are hardening everywhere

-the outbreak of the pandemic has not slowed down renewal rates at all.

-the hard market which started last fall is continuing with no end in sight

-best rate increases being experienced since 2005

-capital has not left however it is finally demanding an adequate return on investment. Too many lines of business were no longer profitable

-as for why now---the industry simply couldnt hold out any longer. The low interest rates look like they are here for awhile and longer than anyone expected so increased renewal rates is the only chance the industry has to stay viable

 

 

Hopefully this helps!

 

Thanks - I guess it makes sense that the industry is FINALLY accepting that they need to be economic on the policies and not just rely on float return.

 

I guess I just don't feel very comfortable assuming that's what happened when it didn't happen in any year where low interest rates were also a thing before.

 

Who knows how long this will last ,but have even more confidence in Fairfax at these prices if that's the case.

[omagh]

Bearprowler,

 

so that I don't understand the logic,

 

Low interest rate, takes away the incentive to write insurance, because the float has less alternative 'safe' investment options.

Less underwriting capacity means fewer underwriting not fore market share sake but for return's sake.

 

Did the low rate regime that first started in 2008-09, also caused similar behavior

 

If an insurance company writes consistently at 100% CR and makes 5% on the float after tax, it should report roughly 5% AT profit assuming no leverage.  So, with treasury rates down to 0.5% or lower, the way to report a similar profit as the previous simple example is to raise prices to ensure that the insurance business writes consistently at 95% CR; again with no leverage or change in portfolio mix.  Prices just went up in a hard market to help the company and its industry peers maintain profitability.  In the old days, one could write insurance at a loss (CR>100%) and make it back to profitability through investments and leverage.  Bill Berkley and Warren Buffett have talked extensively about these mechanics if you look around.

 

In the post-2008-9 period there was a short hard market 2010-11 if I recall correctly.  I had shares in Odyssey Re which Fairfax bought out in this timeframe as cat insurance was becoming very profitable to write at that point.  We're probably in the middle of a similar hardening as the industry's going forward financial picture has diminished greatly due to bond pricing getting whacked.

[Xerxes]

So really ultra low yield knocked out the investment engine of the twin-engine insurance business.

Now it all comes down to the one remaining underwriting engine performing and lifting the whole business. Game is much harder without the investment lift, so capacity leaves the market.

 

Kind of counter intuitive, I would have thought that aspect would have exasperated the market share game. 

[lessthaniv]

ORIGINAL: Prem Watsa Acquires Additional Shares of Fairfax

 

2020-06-15 17:05 ET - News Release

 

 

TORONTO, June 15, 2020 (GLOBE NEWSWIRE) -- Fairfax Financial Holdings Limited (TSX: FFH and FFH.U) announces that Prem Watsa, its Chair and CEO, has advised that over the last few days he has purchased in the market 482,600 subordinate voting shares of Fairfax for an aggregate purchase cost of approximately US$148.95 million.

 

Mr. Watsa commented as follows in connection with this purchase: “At our AGM and on our first quarter earnings release call, I said that our shares are ‘ridiculously cheap’. That statement reflected my recognition that in the 35 years since Fairfax began, I have never seen Fairfax shares sell at a bigger discount to their intrinsic value than they have recently. I have now backed up my strong words by purchasing close to US$150 million of Fairfax shares in the market over the last few days, as I believe that this will be an excellent long term investment.”

 

Fairfax is a holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and the associated investment management.

 

For further information contact:         John Varnell, Vice President, Corporate Development

at (416) 367-4941

 

 

[StubbleJumper]

ORIGINAL: Prem Watsa Acquires Additional Shares of Fairfax

 

2020-06-15 17:05 ET - News Release

 

 

TORONTO, June 15, 2020 (GLOBE NEWSWIRE) -- Fairfax Financial Holdings Limited (TSX: FFH and FFH.U) announces that Prem Watsa, its Chair and CEO, has advised that over the last few days he has purchased in the market 482,600 subordinate voting shares of Fairfax for an aggregate purchase cost of approximately US$148.95 million.

 

Mr. Watsa commented as follows in connection with this purchase: “At our AGM and on our first quarter earnings release call, I said that our shares are ‘ridiculously cheap’. That statement reflected my recognition that in the 35 years since Fairfax began, I have never seen Fairfax shares sell at a bigger discount to their intrinsic value than they have recently. I have now backed up my strong words by purchasing close to US$150 million of Fairfax shares in the market over the last few days, as I believe that this will be an excellent long term investment.”

 

Fairfax is a holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and the associated investment management.

 

For further information contact:         John Varnell, Vice President, Corporate Development

at (416) 367-4941

 

 

Good sign!  So now he has ~9% of the economic interest?  I wonder if he borrowed against the multiple voting shares to make this happen?  I would not have thought that he would have ~$150m just laying around....

 

 

SJ

 

 

***edit, it's worth noting that Prem didn't exactly hit bottom in that he paid ~US$300/sh, and bottom was a good 12 or 15 percent lower than that.

[Xerxes]

Just to give this context.

Common share dividends is about $275 million.

8% of that is $22 million in dividend cash payment.

 

So the $150 million that he put in is 6-7 times the size of his annual dividends.

Assuming my math is correct this must be a good.

 

 

[StubbleJumper]

Just to give this context.

Common share dividends is about $275 million.

8% of that is $22 million in dividend cash payment.

 

So the $150 million that he put in is 6-7 times the size of his annual dividends.

Assuming my math is correct this must be a good.

 

 

So, you are suggesting that if Prem might have had ~US$150m laying around if he had racked up ~10-12 years of divvies, paid the dividend taxes and then didn't go crazy on spending in his personal life?  That's definitely plausible.

 

 

SJ

[Xerxes]

Not at all.

I was just giving scale to his $150 million. Which at first I struggled to categorize as significantly big or just ok.

 

That was my way of saying if he is getting this much every January from his captive investment so a number that is multi fold greater must be viewed as a significant purchase.

[Parsad]

Not at all.

I was just giving scale to his $150 million. Which at first I struggled to categorize as significantly big or just ok.

 

That was my way of saying if he is getting this much every January from his captive investment so a number that is multi fold greater must be viewed as a significant purchase.

 

I would assume that Prem has about $200-250M outside of his Fairfax stock at a minimum before the stock purchase.  He's stated numerous times that 90% of his net worth is in Fairfax...which would be about $1.5B or so before the stock market correction.  So in relation to his net worth, it is probably the most substantial purchase of Fairfax stock that I have seen him make...and I'm going back 20 years!  It was at 0.6 times book for God's sake.  We had not seen that since 2003-2007.  Cheers!

[John Hjorth]

These purchases have taken place in Mr. Watsa's personal account, right? Does anyone here on CoBF know, if the controlling shareholding in FFH is still in that legal entity called Sixty Two Company [or something like that] ?

 

 

Edit: Fixed typo.

[petec]

These purchases have taken place in in Mr. Watsa's personal account, right? Does anyone here on CoBF know, if the controlling shareholding in FFH is still in that legal entity called Sixty Two Company [or something like that] ?

 

I believe it is.

[John Hjorth]

Thank you, Pete.

[Cigarbutt]

From this year's proxy:

"The Sixty Two Investment Company Limited (‘‘Sixty Two’’) owns 50,620 subordinate voting shares and 1,548,000 multiple voting shares, representing 41.9% of the total votes attached to all classes of our shares (100% of the total votes attached to the multiple voting shares and 0.2% of the total votes attached to the subordinate voting shares). V. Prem Watsa, our Chairman and Chief Executive Officer, controls Sixty Two and himself beneficially owns an additional 258,790 subordinate voting shares and exercises control or direction over an additional 2,100 subordinate voting shares. These shares, together with the shares owned directly by Sixty Two, represent 42.5% of the total votes attached to all classes of our shares (100% of the total votes attached to the multiple voting shares and 1.2% of the total votes attached to the subordinate voting shares)."

 

For context:

https://s1.q4cdn.com/579586326/files/doc_downloads/shareholder_letters/1992-Letter.pdf

[villainx]

This is with Fairfax not doing share buybacks, right?

[petec]

This is with Fairfax not doing share buybacks, right?

 

They are buying back. Or at least they were in April, which is the last data I saw.