Jump to content

Fairfax 2021


Recommended Posts

  • Replies 603
  • Created
  • Last Reply

Top Posters In This Topic

Further evidence that the insurance industry is in the midst of a hard market. Looks like reinsurance is starting to participate.

 

January Renewals Saw Some of Sharpest Price Hikes in Recent Years: Howden

- https://www.insurancejournal.com/news/international/2021/01/06/596323.htm

 

Lower investment yields, adverse catastrophe loss development, higher loss cost trends, concerns over climate change, and, of course, the pandemic coalesced to bring some of the sharpest price increases in recent memory during the Jan. 1 reinsurance renewals, according to Howden, the London-based insurance broker.

 

“The result is not only significantly higher pricing, but also more restrictive terms and conditions,” said Howden in a report titled “Hard Times. How a pandemic, record low yields, and climate-driven cat losses have changed the (re)insurance market.”

 

The report’s key findings on reinsurance renewals include:

- Howden’s Global Risk-Adjusted Property-Catastrophe Rate-on-Line Index rose by 6% at Jan. 1, 2021. This was higher than the flat outcome of 2020, and the biggest year-over-year increase in over a decade. COVID-19 loss experience, along with yet another hyperactive natural catastrophe year, were key inflating drivers.

- Programs in North America led the charge at Jan. 1, 2021, with an average rate-on-line increase of 8.5%. Pricing pressure was more subdued outside the United States.

- A significant turning point was reached in Europe where with rate rises in the low-to-mid-single digit range were seen.

- Another year of constrained capacity in the retrocession market saw Howden’s Risk-Adjusted Non-marine Retrocession Catastrophe Rate-on-Line Index rise by 13%. Four consecutive years of price increases have seen the cost of retrocession protection return to levels last recorded in 2012/13.

- Casualty reinsurance rates-on-line, including adjustments for exposure changes and ceding commissions, rose by 6% on average at Jan. 1, 2021.

- Rising rates on underlying business, especially in the U.S., mitigated pressure on ceding commissions somewhat, although outcomes varied depending on book performance. Reinsurers were resolute in pursuing higher pricing for excess-of-loss programmes, although there was again some degree of differentiation to account for portfolio characteristics and profitability.

 

Link to comment
Share on other sites

Further evidence that the insurance industry is in the midst of a hard market. Looks like reinsurance is starting to participate.

 

January Renewals Saw Some of Sharpest Price Hikes in Recent Years: Howden

- https://www.insurancejournal.com/news/international/2021/01/06/596323.htm

 

Lower investment yields, adverse catastrophe loss development, higher loss cost trends, concerns over climate change, and, of course, the pandemic coalesced to bring some of the sharpest price increases in recent memory during the Jan. 1 reinsurance renewals, according to Howden, the London-based insurance broker.

 

“The result is not only significantly higher pricing, but also more restrictive terms and conditions,” said Howden in a report titled “Hard Times. How a pandemic, record low yields, and climate-driven cat losses have changed the (re)insurance market.”

 

The report’s key findings on reinsurance renewals include:

- Howden’s Global Risk-Adjusted Property-Catastrophe Rate-on-Line Index rose by 6% at Jan. 1, 2021. This was higher than the flat outcome of 2020, and the biggest year-over-year increase in over a decade. COVID-19 loss experience, along with yet another hyperactive natural catastrophe year, were key inflating drivers.

- Programs in North America led the charge at Jan. 1, 2021, with an average rate-on-line increase of 8.5%. Pricing pressure was more subdued outside the United States.

- A significant turning point was reached in Europe where with rate rises in the low-to-mid-single digit range were seen.

- Another year of constrained capacity in the retrocession market saw Howden’s Risk-Adjusted Non-marine Retrocession Catastrophe Rate-on-Line Index rise by 13%. Four consecutive years of price increases have seen the cost of retrocession protection return to levels last recorded in 2012/13.

- Casualty reinsurance rates-on-line, including adjustments for exposure changes and ceding commissions, rose by 6% on average at Jan. 1, 2021.

- Rising rates on underlying business, especially in the U.S., mitigated pressure on ceding commissions somewhat, although outcomes varied depending on book performance. Reinsurers were resolute in pursuing higher pricing for excess-of-loss programmes, although there was again some degree of differentiation to account for portfolio characteristics and profitability.

 

It should also be noted that this hard market is a global phenomenon.  Not simply regional like during after a Gulf Coast hurricane or Italian earthquake.  You combine catastrophe losses, with underpriced premiums in many regions where global warming is taking hold, and a global pandemic...zero interest rates, overinflated stocks, fully priced bonds...you get arguably the greatest hard market in recent memory!

 

 

is a hard market better for EPS or not?

 

You bet it will.  For a good 2-3 years or so until you start to get private equity, hedge fund, institutional capital coming in down the road.  Cheers!

Link to comment
Share on other sites

is a hard market better for EPS or not?

 

Gary, nwoodman posted a link to a 100 page report that provides the best overview of the insurance industry that i have read. Perfect for the non-insurance type like me. It answers your question. The link to his post is below.

 

- https://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/fairfax-2020/msg444399/#msg444399

Link to comment
Share on other sites

is a hard market better for EPS or not?

Gary, nwoodman posted a link to a 100 page report that provides the best overview of the insurance industry that i have read. Perfect for the non-insurance type like me. It answers your question. The link to his post is below.

- https://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/fairfax-2020/msg444399/#msg444399

The simple question is not so simple.

The hard market that followed 2001 allowed FFH to increase premiums significantly especially at OdysseyRe (see page 18 slides) and, by 2005, overall float had increased by 50%. FFH was still swallowing reserve deficiencies of the past but the best was yet to come with the buildup leading to a capital scarcity episode for which they were ready for.

https://s1.q4cdn.com/579586326/files/2011%20AGM.pdf

Link to comment
Share on other sites

Chart 33 is interesting on the link above.

 

Heading to GFC, they had a 17% equity exposure, coming out of it they had 23% exposure (in 2010).

So an increase but not that much.

 

The big change was on their fixed-income portfolio. More the 50% in government bonds in 2007 down to 23% in 2010, whereas municipal bonds and corporate bonds allocation went from 1% and 4%, in 2007, to 23% and 9%, respectively, in 2010.

 

I guess that what that shows is the deployment of its dry powder. Moving from safe haven government bonds to municipal and corporate bonds to capture those as their spreads were blowing up. Weighted average yield went from 4.6% to 6.5%.

 

Did a quick math,

In 2007, the 5% of the portfolio allocated to municipal and corporate bonds was a $950 million holding on a $19 billion portfolio.

 

In 2010, the 32% of the portfolio allocated to municipal and corporate bonds was a $7.4 billion holding on a $23.3 billion portfolio.

 

In contrast, in the 2020 short lived bear market, FFH announced that:

 

" Since mid-March 2020, Fairfax has been reinvesting its cash and short term investments into

higher yielding investment grade U.S. corporate bonds with an average maturity date of 4 years

and average interest rates of 4.25%, that will benefit interest income in the future. To date, taking

advantage of the increase in corporate spreads, Fairfax has purchased about $2.9 billion of such

bonds. "

 

That is a 7% exposure on a $40 billion portfolio. So both in terms of dollar value and percentage, FFH wasn't able to re-shuffle the bond portfolio in 2020 as well as it did in 2008-09, thanks (but no thanks) to Central Bank distorting of the market and closing the spreads. But if the Central Bank didn't do what it did, FFH itself might have been in a dire situation, so it is not easy to square the logic in my head.

Link to comment
Share on other sites

is a hard market better for EPS or not?

Gary, nwoodman posted a link to a 100 page report that provides the best overview of the insurance industry that i have read. Perfect for the non-insurance type like me. It answers your question. The link to his post is below.

- https://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/fairfax-2020/msg444399/#msg444399

The simple question is not so simple.

The hard market that followed 2001 allowed FFH to increase premiums significantly especially at OdysseyRe (see page 18 slides) and, by 2005, overall float had increased by 50%. FFH was still swallowing reserve deficiencies of the past but the best was yet to come with the buildup leading to a capital scarcity episode for which they were ready for.

https://s1.q4cdn.com/579586326/files/2011%20AGM.pdf

 

Is the simple answer: as long as rate increases > loss cost trends then, given time, we should see better EPS? (All else being equal.) It takes time as written premiums become earned premiums.

 

From nwoodmans link, the report estimates 75% of EPS for P&C is investments returns; 20% is renewal and 5% is new business. Only 25% of earnings for most insurance companies is underwriting?

 

Plummeting bond yields has got to be killing 75% of earnings of most P&C companies. For the 25% bucket to make up this decline we are going to need to see big price increases or large price increases for insurance over many years. Perhaps this is the biggest reason we are hearing the hard market may run for years.

 

For Fairfax, they have underperformed on the investing side for so many years the bar is now very low. Improving CR and better investment results happening at the same time would definitely juice the stock price. The set up for 2021 is encouraging.

Link to comment
Share on other sites

is a hard market better for EPS or not?

Gary, nwoodman posted a link to a 100 page report that provides the best overview of the insurance industry that i have read. Perfect for the non-insurance type like me. It answers your question. The link to his post is below.

- https://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/fairfax-2020/msg444399/#msg444399

1- Is the simple answer: as long as rate increases > loss cost trends then, given time, we should see better EPS? (All else being equal.) It takes time as written premiums become earned premiums.

From nwoodmans link, the report estimates 75% of EPS for P&C is investments returns; 20% is renewal and 5% is new business. Only 25% of earnings for most insurance companies is underwriting?

2-Plummeting bond yields has got to be killing 75% of earnings of most P&C companies. For the 25% bucket to make up this decline we are going to need to see big price increases or large price increases for insurance over many years. Perhaps this is the biggest reason we are hearing the hard market may run for years.

3-For Fairfax, they have underperformed on the investing side for so many years the bar is now very low. Improving CR and better investment results happening at the same time would definitely juice the stock price. The set up for 2021 is encouraging.

Hi Viking,

For 2-, there are many factors (very unusual soft phase) already baked into the hardening phase and it's hard to 'forecast' the extent but capital (from retained surplus and alternative sources) is ample and this is bound to limit the upside.

For 1-, it's likely that most lines are written for a profit at this point and this may continue for a while. What we will find out over time (a topic we had discussed about a year ago) is the reserve release profile of the last few years. Of course all companies appear to be equally comfortable with their reserves but some are more equal than others. To get a better 'feel' for this, one has to go to AM Best and others for tedious and boring reading but the link that nwoodmans provided mentions this aspect on page 27. A way to ride this aspect would imply to invest in consistently profitable firms (underwriting side eg TRV, RNR) but this does not fit opportunistic investing, if that's your thing.

For 3-, an interesting aspect compared to before is that FFH is likely to provide some positive return on capital from the underwriting side. It's the investment side that is still difficult to figure out (my perspective).

Chart 33 is interesting on the link above.

...

That is a 7% exposure on a $40 billion portfolio. So both in terms of dollar value and percentage, FFH wasn't able to re-shuffle the bond portfolio in 2020 as well as it did in 2008-09, thanks (but no thanks) to Central Bank distorting of the market and closing the spreads. But if the Central Bank didn't do what it did, FFH itself might have been in a dire situation, so it is not easy to square the logic in my head.

Hi Xerxes,

(your inputs elsewhere about the Middle East were interesting; still, i'm not sure this is the right forum to discuss such 'hot' topics because of the potential for polarization. You may want to look for an old mini-series released in 1986 "On Wings of Eagles" about the hostage crisis. The series was poorly made on many levels but gives an interesting insight into some aspects.)

To link your post with Viking's, the bar is indeed very low for the return aspect but the bar for the downside aspect (status quo part; capital scarcity episodes are dead) remains IMO ill defined.

Link to comment
Share on other sites

Agreed, and i am not planning to do anymore post there or any other thread (Sorry Vikings).

 

It seems to me that discussion about politics/foreign policy tend to divide people and bring out the worse in them, while discussion about investment tend to bring the best out of people (specially when they disagree). Why propagate/absorb negative energy when you can propagate/absorb positive energy and cover your cost of capital while you are it.

Link to comment
Share on other sites

Fairfax has been moving up pretty steadily each day since Jan 1 (9% total). Chug, chug, chug...

 

Many of their largest equity holdings are also up nicely since the start of the year: Atlas, Blackberry (what’s up with the 17% move today?), Stelco, many of the India holdings etc.

Link to comment
Share on other sites

Apparently BB is making the rounds on various YOLO places, e.g., WSB, TikTok.  (This is what I hear anyway)

 

Ok, wow...  I did some searching and found this.  Absolutely bizarre.  Don't click the link if you're epileptic.  ;D  There's more, this is just the first one I clicked...

 

Link to comment
Share on other sites

Apparently BB is making the rounds on various YOLO places, e.g., WSB, TikTok.  (This is what I hear anyway)

 

Ok, wow...  I did some searching and found this.  Absolutely bizarre.  Don't click the link if you're epileptic.  ;D  There's more, this is just the first one I clicked...

 

 

 

Holy Christ.  I am absolutely gobsmacked to see a thread like that.  Will FFH's BB investment be rescued by the sudden appearance of a collection of "greater fools?"  I guess if you have a choice between being good or being lucky, you'd be well advised to choose the latter...

 

 

SJ

Link to comment
Share on other sites

Apparently BB is making the rounds on various YOLO places, e.g., WSB, TikTok.  (This is what I hear anyway)

 

Ok, wow...  I did some searching and found this.  Absolutely bizarre.  Don't click the link if you're epileptic.  ;D  There's more, this is just the first one I clicked...

 

 

 

Holy Christ.  I am absolutely gobsmacked to see a thread like that.  Will FFH's BB investment be rescued by the sudden appearance of a collection of "greater fools?"  I guess if you have a choice between being good or being lucky, you'd be well advised to choose the latter...

 

 

SJ

 

I have no words.  I feel like I need a shower after reading this thread.  It's like a cesspool of Red Bull, Adderall, and Dorito's dust mixed together, topped off with teenage sweat and hormones.  Mind blown. 

 

 

Link to comment
Share on other sites

Apparently BB is making the rounds on various YOLO places, e.g., WSB, TikTok.  (This is what I hear anyway)

 

Ok, wow...  I did some searching and found this.  Absolutely bizarre.  Don't click the link if you're epileptic.  ;D  There's more, this is just the first one I clicked...

 

 

 

Holy Christ.  I am absolutely gobsmacked to see a thread like that.  Will FFH's BB investment be rescued by the sudden appearance of a collection of "greater fools?"  I guess if you have a choice between being good or being lucky, you'd be well advised to choose the latter...

 

 

SJ

 

So which one of you planted this thread in Reddit  8)

Link to comment
Share on other sites

Apparently BB is making the rounds on various YOLO places, e.g., WSB, TikTok.  (This is what I hear anyway)

 

Ok, wow...  I did some searching and found this.  Absolutely bizarre.  Don't click the link if you're epileptic.  ;D  There's more, this is just the first one I clicked...

 

 

 

Holy Christ.  I am absolutely gobsmacked to see a thread like that.  Will FFH's BB investment be rescued by the sudden appearance of a collection of "greater fools?"  I guess if you have a choice between being good or being lucky, you'd be well advised to choose the latter...

 

 

SJ

 

I have no words.  I feel like I need a shower after reading this thread.  It's like a cesspool of Red Bull, Adderall, and Dorito's dust mixed together, topped off with teenage sweat and hormones.  Mind blown.

 

It's beautiful, isn't it?  ;D

Link to comment
Share on other sites

Apparently BB is making the rounds on various YOLO places, e.g., WSB, TikTok.  (This is what I hear anyway)

 

Ok, wow...  I did some searching and found this.  Absolutely bizarre.  Don't click the link if you're epileptic.  ;D  There's more, this is just the first one I clicked...

 

 

 

Holy Christ.  I am absolutely gobsmacked to see a thread like that.  Will FFH's BB investment be rescued by the sudden appearance of a collection of "greater fools?"  I guess if you have a choice between being good or being lucky, you'd be well advised to choose the latter...

 

 

SJ

 

So which one of you planted this thread in Reddit  8)

 

 

It wasn't me.  But, now that you mention it, I am considering the possibility of starting a new thread on this new outfit that I heard of which is likely to skyrocket.  It's called the Resolute Forest Products Information Technology Systems corp (you would rightly refer to it as RF-Pits).  They have an innovative product called e-paper which will be used by all electric car companies and is already in heavy use at Apple and Amazon...

 

 

SJ

Link to comment
Share on other sites

That would only solve RFP. Need a step further.

We need Cathie Wood launching a ETF and calling it the Fair & Friendly ETF, tracking FFH's common stock portfolio.

 

Bad joke I know.

My only one for 2021 hopefully.

Link to comment
Share on other sites

haha; it would.

 

Only 5 years ago Ms. Wood were seen to be on the fringe and weird (outside mainstream), now she came out of the pandemic as a hero. Her AUM is shooting up and now launching ETFX Space as new product offering. Cycles come and go.

 

10 years ago, FFH came out of financial crisis as a hero, Prem's AUM was shooting up (not exactly AUM but interest in his stock), he also launched new products (FIH and FAH). Cycles come and go.

 

With the 10-year yield perking up, FFH may yet have its day in the sun.

FFH will not outperform as a multi-bagger on an absolute sense even if there is a huge pivot to value, but may outperform on relative sense if all fancy stuff start to deflate a bit.

Link to comment
Share on other sites

 

FFH will not outperform as a multi-bagger on an absolute sense even if there is a huge pivot to value, but may outperform on relative sense if all fancy stuff start to deflate a bit.

 

Xerxes this comment intrigued me.  I actually think many of Fairfax's investments could do 2-3x or more from these levels.  Very rudimentary analysis on my behalf but Iam estimating FFH could be trading at $USD1000/share in 2025.  The caveat as always is that they have to do sensible not "clever" things.  Guess it also depends what we call a multi-bagger,  in this day and age the expectation is set by Tesla so 20% compounding is pretty mediocre  ;)

 

“What gets us into trouble is not what we don't know. It's what we know for sure that just ain't so.” Mark Twain

 

cheers

nwoodman

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share




×
×
  • Create New...