Fairfax 2021

[KFS]

18 hours ago, mjm said:

anyone receive an offer from their brokerage for the FFH dutch auction?  nothing from Fidelity.

 

Yes, Vanguard (FRFHF) on 12/3.  

[Parsad]

2 hours ago, StubbleJumper said:

 

 

You hold FFH in accounts at four different brokers?  How the hell much money do you have?!!?

 

 

SJ

 

RBC and TD - personal accounts.  Scotia is CMC's corporate account broker.  UBS is our U.S. GP and U.S. fund's broker.

 

So not as much money as you might think!    Cheers!

[Thrifty3000]

 

For those who think FFH should be judged on their last decade of performance check out the growth in net premiums written from 2000 to 2009 vs. 2010 to today.

 

What if the lessons they learned from 10 years constructing their insurance capital allocation machine were applied over the last 10 years to non-insurance capital allocation?

 

Step 1) Attract and retain great capital allocators over the course of several years.

Step 2) Shovel free cash in the direction of the best performers.

[StubbleJumper]

On 11/30/2021 at 7:02 PM, StubbleJumper said:

 

Well, it's an interesting question, isn't it?  Have you seen any estimate of insurable damage?  I occasionally visit Canadian Underwriter and the Insurance Journal and I've seen nothing.  So, what does it all add up to? 

 

As a general rule, most Canadian buildings are not insured for overland flooding because governments in Canada have done such a piss-poor job of flood plain mapping that it's nearly impossible for an underwriter to come up with an appropriate premium for a specific piece of property.  As a result, they can only quote insanely high flood coverage premiums under the assumption that there will be adverse selection.  So, most houses just go uninsured for flooding, and the assumption is that the provincial government will pony up some cash to victims, or if it's a big event, the feds will step in through the Disaster Financial Assistance Arrangements.  It'll be big bucks, but that won't be Fairfax's problem, right?

 

When you insure your car, you usually get both collision and all perils coverage (many cars went for a "swim" during the floods). But, in British Columbia, which company insures cars?  ICBC, right?  Effectively, all of the cars are insured by a Crown Corporation.  Does ICBC take out reinsurance?  No idea.  It wouldn't surprise me that they would want some sort of reinsurance, even if it had some relatively high attachment point, but I can't say for certain what ICBC has done.  Unless ICBC's reinsurer happens to be Odyssey or Allied, the fact that thousands of cars went for a swim, which is covered under all perils, is not of much significance.

 

So, what are we left with?  Business insurance?  So, business continuity insurance could be a real problem in BC as there are large areas where the flood has prevented people from accessing and running their business.  Northbridge probably wrote some of that, but what does it amount to?  Is it material?  I wouldn't think so, but I've been surprised before.

 

But, we are lucky to have somebody there on the ground, and it's somebody who knows about insurance.  @Parsad is right there, and maybe he has some insight about potential indemnities?

 

 

SJ

 

 

 

 

I have finally seen an estimate of the insurance indemnities from the flooding event in British Columbia.  Surprisingly, it's only CAD$450m.  Fairfax's share of that would amount to chump-change.

 

https://www.cbc.ca/news/canada/british-columbia/bc-flood-damage-1.6280393?cmp=rss

 

 

SJ

[glider3834]

1 hour ago, StubbleJumper said:

 

 

I have finally seen an estimate of the insurance indemnities from the flooding event in British Columbia.  Surprisingly, it's only CAD$450m.  Fairfax's share of that would amount to chump-change.

 

https://www.cbc.ca/news/canada/british-columbia/bc-flood-damage-1.6280393?cmp=rss

 

 

SJ

thanks SJ for posting - here is another article too

https://www.theglobeandmail.com/canada/british-columbia/article-preliminary-insurance-cost-estimates-for-bc-floods-point-to-a-massive/

 

Widespread flooding across southern British Columbia in November is now estimated to have caused $450-million in insured damages, making it the most costly severe weather event in the province’s history, new figures from the Insurance Bureau of Canada show.

But that figure reflects only a small portion of the total price tag, in part because many residents affected were in high-risk flood areas and floodplains where insurance coverage is not available.

[petec]

4 hours ago, Thrifty3000 said:

 

For those who think FFH should be judged on their last decade of performance check out the growth in net premiums written from 2000 to 2009 vs. 2010 to today.

 

What if the lessons they learned from 10 years constructing their insurance capital allocation machine were applied over the last 10 years to non-insurance capital allocation?

 

Step 1) Attract and retain great capital allocators over the course of several years.

Step 2) Shovel free cash in the direction of the best performers.

I don’t disagree, but I’d look at premiums per share.

[Thrifty3000]

12 minutes ago, petec said:

I don’t disagree, but I’d look at premiums per share.

Yeah, I started to go down that road, but I was actually trying to see if I could get a better sense of what to expect with the insurance ops and earnings after the hard market ends. So I’ll probably be looking at several other things pretty soon.

[petec]

7 hours ago, Thrifty3000 said:

Yeah, I started to go down that road, but I was actually trying to see if I could get a better sense of what to expect with the insurance ops and earnings after the hard market ends. So I’ll probably be looking at several other things pretty soon.

 

Makes sense!

[StubbleJumper]

7 hours ago, Thrifty3000 said:

Yeah, I started to go down that road, but I was actually trying to see if I could get a better sense of what to expect with the insurance ops and earnings after the hard market ends. So I’ll probably be looking at several other things pretty soon.

 

The per share approach might clean up a bit of messiness in the data, which is that over 20 years a considerable chunk of the growth in Net Written was from acquisitions, some was from inflation, and then the thing that we are really interested in is that some was a true organic growth in the volume/value of premiums from existing subs.  We can say that management is doing a great job if that organic growth after inflation is considerable, but we shouldn't give them a gold star for simply matching inflation.  And, whether to give them a gold star for acquisitions is ambiguous because it kinda depends on the amount paid for the sub, and the quality of its underwriting and investing.

 

Since many of the acquisitions were funded through expanding the share-count, a per-share approach cleans up that problem a bit.

 

 

SJ

[Thrifty3000]

23 minutes ago, StubbleJumper said:

 

The per share approach might clean up a bit of messiness in the data, which is that over 20 years a considerable chunk of the growth in Net Written was from acquisitions, some was from inflation, and then the thing that we are really interested in is that some was a true organic growth in the volume/value of premiums from existing subs.  We can say that management is doing a great job if that organic growth after inflation is considerable, but we shouldn't give them a gold star for simply matching inflation.  And, whether to give them a gold star for acquisitions is ambiguous because it kinda depends on the amount paid for the sub, and the quality of its underwriting and investing.

 

Since many of the acquisitions were funded through expanding the share-count, a per-share approach cleans up that problem a bit.

 

 

SJ

I completely agree. I’ll definitely break it down per share if I can wrap my mind around it. 
 

I know Prem has offered clues for what to expect. For example, I believe he said in a normal market they’ll write premiums of around 1x book value (I think it’s book value). And, in hard markets they’ll ramp volume up to 1.5x book value.

 

So, out of curiosity, I was trying to see what their premium volumes looked like after prior hard markets. Was there an obvious decline in premium volume from 1.5x book back to 1x book? Or did they hold premium volume steady and let book value grow to 1x?

 

I know it’s getting in the weeds. I was just surprised to see a decade of completely flat premium volume, followed by a decade of a 10% CAGR (and 15% annually in the last 5 years).

 

In the big picture we really just need a conservative growth rate estimate on premiums and a mid-cycle CR estimate in order to project normalized per share earnings potential.

 

Edited December 10, 2021 by Thrifty3000

[StubbleJumper]

16 minutes ago, Thrifty3000 said:

I completely agree. I’ll definitely break it down per share if I can wrap my mind around it. 
 

I know Prem has offered clues for what to expect. For example, I believe he said in a normal market they’ll write premiums of around 1x book value (I think it’s book value). And, in hard markets they’ll ramp volume up to 1.5x book value.

 

So, out of curiosity, I was trying to see what their premium volumes looked like after prior hard markets. Was there an obvious decline in premium volume from 1.5x book back to 1x book? Or did they hold premium volume steady and let book value grow to 1x?

 

I know it’s getting in the weeds. I was just surprised to see a decade of completely flat premium volume, followed by a decade of a 10% CAGR (and 15% annually in the last 5 years).

 

In the big picture we really just need a conservative growth rate estimate on premiums and a mid-cycle CR estimate in order to project normalized per share earnings potential.

 

 

The premium:statutory capital ratio has definitely gone up and down over time as the insurance cycle has waxed and waned.  The best way to see that is to look at the individual subs because what happens with Odyssey in the reinsurance industry is not always perfectly aligned with what happens with Crum as a primary underwriter, or with Zenith in workers comp.  To my knowledge, the data are not readily downloadable, but would need to be manually cobbled together by reviewing annual reports.  But, suffice it to say that the premiums:surplus ratio does move significantly over time, and, when you examine the annual CRs, the expense ratio balloons during a soft market and the subs refuse to underwrite unprofitable business.  All of this is evident from casual observation of the financial statements over time, but unfortunately I don't know of anyone who has rigourously constructed and maintained an underwriting database for the individual subs.  When I was quarantined for 14 days for international travel last spring, maybe I should have done it!

 

 

SJ

[Parsad]

23 hours ago, StubbleJumper said:

 

 

I have finally seen an estimate of the insurance indemnities from the flooding event in British Columbia.  Surprisingly, it's only CAD$450m.  Fairfax's share of that would amount to chump-change.

 

https://www.cbc.ca/news/canada/british-columbia/bc-flood-damage-1.6280393?cmp=rss

 

 

SJ

 

Insured losses are around $450M, but the gross losses will be far, far higher.  Apparently, much of the flood plain region was not insurable privately, so much of the losses from my original eyeball estimate will have to be covered by the provincial government.  Good for private insurers like Fairfax, but a huge burden on the public government and taxpayers.  Cheers!

[value_hunter]

Anybody has idea how much hit Fairfax will get for the worst in the history of Kentucky tornado?

https://www.chicagotribune.com/business/ct-biz-cb-tornado-home-renters-insurance-20210621-xtsl2g4w2jbwfo66b54nkkzgeq-story.html

[MMM20]

 

FWIW, sell-side seems to be getting more, I don't know, realistic? Earnings exploding, valuation on any metric still near all time lows, and now Scotiabank says half of intrinsic value. Can the momentum traders pile in now please?

Edited December 12, 2021 by MMM20

[Viking]

The next couple of weeks should be interesting for Fairfax’s share price:
1.) how is Dutch auction impacting current share price?

2.) where does share price trade post Dutch auction?

3.) does the Fed spook financial markets when they meet this week?

Regarding the Dutch auction my plan right now is to hold my FFH shares held in taxable accounts. And tender some shares in tax free accounts (not sure how many or what price). I want to see how things play out with the Fed this week. I am hopeful financial markets continue with the whole Christmas rally theme. 

The Fed is the big watch out for me this week. Powell has done a hard pivot from dovish to more hawkish. If the Fed moves even more hawkish this week my guess is financial markets will sell off and it could get ugly. 
 

Having said all that, financial markets have been super resilient (back at all time highs). Perhaps the Fed shift to more hawkish has been fully priced in to stocks. We will see in a few days.

—————

The bond market continues to be the big head-scratcher for me. With inflation running so high bond yields (across the curve) looks nuts… The real interest rate is super negative. If inflation continues to run hot into Q2 and 2H of 2022 you would think bond yields will have to move higher at some point.

Edited December 12, 2021 by Viking

[MMM20]

39 minutes ago, Viking said:

The next couple of weeks should be interesting for Fairfax’s share price:
1.) how is Dutch auction impacting current share price?

2.) where does share price trade post Dutch auction?

3.) does the Fed spook financial markets when they meet this week?

Regarding the Dutch auction my plan right now is to hold my FFH shares held in taxable accounts. And tender some shares in tax free accounts (not sure how many or what price). I want to see how things play out with the Fed this week. I am hopeful financial markets continue with the whole Christmas rally theme. 

The Fed is the big watch out for me this week. Powell has done a hard pivot from dovish to more hawkish. If the Fed moves even more hawkish this week my guess is financial markets will sell off and it could get ugly. 
 

Having said all that, financial markets have been super resilient (back at all time highs). Perhaps the Fed shift to more hawkish has been fully priced in to stocks. We will see in a few days.

—————

The bond market continues to be the big head-scratcher for me. With inflation running so high bond yields (across the curve) looks nuts… The real interest rate is super negative. If inflation continues to run hot into Q2 and 2H of 2022 you would think bond yields will have to move higher at some point.

Maybe it’s naive but I’d be much more concerned about the Fed if FFH was already trading at 1.5x book.

[TwoCitiesCapital]

18 hours ago, Viking said:

 

The bond market continues to be the big head-scratcher for me. With inflation running so high bond yields (across the curve) looks nuts… The real interest rate is super negative. If inflation continues to run hot into Q2 and 2H of 2022 you would think bond yields will have to move higher at some point.

 

I think the bond market knows that supply chain issues are temporary and that current debt loads prevent the Fed from hiking rates too aggressively. We couldn't get beyond 3.25% in 2018 despite record low unemployment, recent tax cuts, and a booming economy. How high do you think we can reasonably get today before interest rates choke off growth? 

 

Also, what's the alternative for relatively safe money in this environment?  Stocks that have never historically maintained 25-30x multiples in an environment of persistent 6% inflation? Real estate already at record highs and limited affordability? Commodities that are already through the roof and subject to major volatility?  

 

Seems perfectly rational to me that someone might want the least bad alternative in this environment and for some that may be bonds. 

Edited December 13, 2021 by TwoCitiesCapital

[TwoCitiesCapital]

20 hours ago, MMM20 said:

 

FWIW, sell-side seems to be getting more, I don't know, realistic? Earnings exploding, valuation on any metric still near all time lows, and now Scotiabank says half of intrinsic value. Can the momentum traders pile in now please?

 

Really hoping the momentum traders wait so I can tender some in the auction, make a cool 10% on my shares, and repurchase at a lower price before they jump in. 

 

Trying the same playbook that worked out alright for FIH when they did theirs. 

 

Then, momentum traders are welcome to pile in. 

[glider3834]

On 12/13/2021 at 3:44 AM, value_hunter said:

Anybody has idea how much hit Fairfax will get for the worst in the history of Kentucky tornado?

https://www.chicagotribune.com/business/ct-biz-cb-tornado-home-renters-insurance-20210621-xtsl2g4w2jbwfo66b54nkkzgeq-story.html

still too early to say but initial estimates are a single digit billion dollar event

https://www.artemis.bm/news/weekend-tornado-storm-losses-to-run-into-billions-of-dollars/

https://www.insuranceinsider.com/article/29g01n5bkms47pokxasjk/fatal-tornadoes-a-manageable-loss-but-outsized-disruption-for-reinsurers

 

looks like Fairfax had approx 1.1% of loss from Ida (340 mil loss on 30 bil or so event) 

 

So if we are looking at single digit billion dollar event, then I would guess loss for Fairfax is likely less than $100 mil 

 

 

 

 

 

[gary17]

i'm finally able to have some time to think about the SIB; i was wondering if anyone knows of a basic model or explanation somewhere online that can help me understand how Dutch auction work?

 

Wouldn't everyone just tender at the highest price - $500USD ? 

 

Gary

[Mick92]

11 minutes ago, gary17 said:

i'm finally able to have some time to think about the SIB; i was wondering if anyone knows of a basic model or explanation somewhere online that can help me understand how Dutch auction work?

 

Wouldn't everyone just tender at the highest price - $500USD ? 

 

Gary

I guess if it's fully subscribed, Fairfax can elect to take the lower priced tenders first so you run a higher risk of missing out if you only tender at the top range. If you're working under the assumption that it won't be fully subscribed, then tendering at the top end makes sense. Overall, probably all depends on how high you want the probability to be of getting the shares tendered vs the price received.

[gary17]

1 minute ago, Mick92 said:

I guess if it's fully subscribed, Fairfax can elect to take the lower priced tenders first so you run a higher risk of missing out if you only tender at the top range. If you're working under the assumption that it won't be fully subscribed, then tendering at the top end makes sense. Overall, probably all depends on how high you want the probability to be of getting the shares tendered vs the price received.

 

Thanks - maybe i misunderstood -  i thought even if i tender at the high price of $500USD ; i'm still guaranteed to be bought out at the purchase price as defined - which will fall in the range  - ?   

If that's true, then i guess i would naturally want to tender at the highest; and see where I end up...

Gary

[TwoCitiesCapital]

14 minutes ago, gary17 said:

 

Thanks - maybe i misunderstood -  i thought even if i tender at the high price of $500USD ; i'm still guaranteed to be bought out at the purchase price as defined - which will fall in the range  - ?   

If that's true, then i guess i would naturally want to tender at the highest; and see where I end up...

Gary

 

They're not committed to buying every share tendered - they're committed to spending a specific $ amount. And you're guaranteed to get the price you tendered for OR better if you get filled.

 

They accumulation of shares starts from lowest ask up to the highest ask until the $1 billion is exhausted. To avoid punishing shareholders for bidding on the low end, all shareholders will receive the highest incremental price that exhausts the $1 billion. 

 

Fairfax is tendering for $1 billion worth of shares. Below is a hypothetical

 

700,000 shares tendered at $460

700,000 shares tendered at $470

800,000 shares tendered at $475

1,000,000 shares tendered at $500

 

In this scenario, Fairfax buying power is exhausted in the $475 level. Everyone who tendered at $460 and $470 get filled for for $475 which was the last incremental price of the tender that exhausted the cash. The people who tendered for $475 will get pro-rata allocations where ~88% of the shares get tendered for $475.

 

The remaining 12% tendered  in the $475 bucket and the 1,000,000 shares in the $500 bucket go unfilled. The benefit of bidding lower is a guaranteed fill for your entire allotment knowing that you'll get filled at that price or a better one if the offer is oversubscribed. The risk of bidding high is that you don't get filled if enough people were willing to accept a lower price. 

 

 

 

 

[value_hunter]

46 minutes ago, TwoCitiesCapital said:

 

They're not committed to buying every share tendered - they're committed to spending a specific $ amount. And you're guaranteed to get the price you tendered for OR better if you get filled.

 

They accumulation of shares starts from lowest ask up to the highest ask until the $1 billion is exhausted. To avoid punishing shareholders for bidding on the low end, all shareholders will receive the highest incremental price that exhausts the $1 billion. 

 

Fairfax is tendering for $1 billion worth of shares. Below is a hypothetical

 

700,000 shares tendered at $460

700,000 shares tendered at $470

800,000 shares tendered at $475

1,000,000 shares tendered at $500

 

In this scenario, Fairfax buying power is exhausted in the $475 level. Everyone who tendered at $460 and $470 get filled for for $475 which was the last incremental price of the tender that exhausted the cash. The people who tendered for $475 will get pro-rata allocations where ~88% of the shares get tendered for $475.

 

The remaining 12% tendered  in the $475 bucket and the 1,000,000 shares in the $500 bucket go unfilled. The benefit of bidding lower is a guaranteed fill for your entire allotment knowing that you'll get filled at that price or a better one if the offer is oversubscribed. The risk of bidding high is that you don't get filled if enough people were willing to accept a lower price. 

 

 

 

 

My understanding is all bid $460-$475 will be pro-rata, not $460-$470 will get full filled and $475 get pro-rata.

[gary17]

5 minutes ago, value_hunter said:

My understanding is all bid $460-$475 will be pro-rata, not $460-$470 will get full filled and $475 get pro-rata.

 

Any reasonable investor would tender above the market , which is trading at $576 CAD = $448USD....