Fairfax 2022

[Candyman1]

26 minutes ago, Cigarbutt said:

Take the following as potentially reasonable answers to your questions.

Statutory accounting for bonds (at least NAIC based in US and similar elsewhere) requires bonds to be recorded at cost with an asset valuation reserve recorded immediately against surplus. For NAIC class 1 and 2 bonds (investment grade), this charge used to buffer future losses (mostly default-type losses) is between 0 and 2%. Then, unless an impairment needs to be recognized or somehow the insurer cannot demonstrate that the bonds can be held to maturity (also regulators look (and account for) idiosyncratic market exposure), there is no additional charge to surplus along the way to maturity. Note that, for the overall insurers' float portfolios in bonds, 94% of bonds are NAIC 1 or 2.

Here's a decent reference for the statutory accounting part:

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Just for fun (relevant for Fairfax now?), there was a time (annual report 1999) when potentially unsettling unrealized bond losses were not considered unsettling at head office (although the unusual concentration likely raised questions in some regulators' minds). Then, it seems that FFH wanted to protect against (and benefit from) the deflationary consequences of bu**ble bursting. That was then and now is now.

Thank you for clarifying.

[Viking]

When you look at the various asset classes, so far in 2022, bonds (@-20%) and stocks (@-30%) have gotten absolutely crushed. The clear winner - and its not even close - has been cash. With an average duration of 1.2 years at Dec 31 and still the same at June 30, Fairfax’s $35 billion bond portfolio is as close to cash as an insurance company can get. This positioning is shaping up to be a massive winner for future Fairfax shareholders.
 

There were costs to moving to this very low duration.
1.) Interest income was much lower than it otherwise would have been in past years. But this cost was largely borne by past shareholders.

2.) Fairfax in 2022 is reporting large mark to market losses as its bond portfolio is revalued as yields across the curve move to much higher levels. This cost is being borne by current Fairfax shareholders.
 

There are big benefits of the move to very low duration.

1.) Fairfax is immediately able to earn much higher interest income on its very large cash balances. And as bonds mature the bonds will be reinvested at much higher yields (with 1.2 year average duration lots of bonds can be reinvested each quarter).

2.) in the future, if bond yields fall, Fairfax will record large mark to market gains on its bond portfolio.
These benefits will be reaped by Fairfax shareholders in future quarters and years.
 

How big will the benefits be? Well, that will depend on a number of factors:

1.) how high do interest rates go?

2.) do spreads widen?

3.) does Fairfax extend duration?

4.) does Fairfax shift into higher yielding munis/corporates etc. 

The math of the impact of higher interest rates on interest income on a $35 billion bond portfolio is pretty compelling. (For reference, interest income was less than $500 million in 2021.)

1.) 3% = $1.05 billion = $44/share (pre-tax)

2.) 3.5% = $1.23 billion = $52/share

3.) 4% = $1.4 billion = $59/share

4.) 4.5% = $1.58 million = $66/share

 

My guess is Fairfax’s run rate yield on their bond portfolio will be over 3% at the end of Q3 and perhaps approaching 3.5% by year end 2022 (setting them up Jan 1 to be on track to earn $1.2 billion in interest income in 2023).

—————

The Fed is telegraphing the terminal Fed funds rate to go to 4.5% and stay there until late 2023. If this happens, both bonds and stocks will likely continue to sell off and cash will continue to outperform.

Edited October 8, 2022 by Viking

[maxthetrade]

TORONTO, Oct. 13, 2022 (GLOBE NEWSWIRE) -- Fairfax Financial Holdings Limited (“Fairfax”) (TSX: FFH and FFH.U) today announced that all regulatory approvals required to complete the previously announced transaction in which Independence Pet Group and certain of its affiliates, which are majority owned by JAB Holding Company, will acquire all of Fairfax’s interests in the Crum & Forster Pet Insurance Group™ and Pethealth Inc., including all of their worldwide operations, have been received. The transaction is now scheduled to close on October 31, 2022.

[TwoCitiesCapital]

2 hours ago, maxthetrade said:

TORONTO, Oct. 13, 2022 (GLOBE NEWSWIRE) -- Fairfax Financial Holdings Limited (“Fairfax”) (TSX: FFH and FFH.U) today announced that all regulatory approvals required to complete the previously announced transaction in which Independence Pet Group and certain of its affiliates, which are majority owned by JAB Holding Company, will acquire all of Fairfax’s interests in the Crum & Forster Pet Insurance Group™ and Pethealth Inc., including all of their worldwide operations, have been received. The transaction is now scheduled to close on October 31, 2022.

 

Maybe we'll see some nice buybacks executed after a hopeful dip following Q3 results

[Viking]

23 hours ago, TwoCitiesCapital said:

 

Maybe we'll see some nice buybacks executed after a hopeful dip following Q3 results

 

For me the pet insurance sale actually closing is a big deal. Just because it is so large. And cash is king right now (the timing of this sale could not be any better). US$1.4 billion in total, split as follows:

1.) $250 million in seller promissory notes - this will start compounding likely at a decent interest rate adding to interest income moving forward.

2.) $200 million in JCP V, a JAB consumer fund - a new investment in a company with a solid long term track record. Fairfax continues to increase the amount of their equity holdings that are managed by private equity types. Looks like a solid decision for those of us who want to see Fairfax move up the quality scale with its equity holdings. 

3.) $950 million in cash. 

 

So what do board members think Fairfax will do with the $950 million in cash?

- Shortly after the deal closes Oct 31, do they announce another large dutch auction buyback? Prem has telegraphed he wants to do this. Fairfax stock is dirt cheap. But will other uses trump this use? 

- Will losses from Hurricane Ike be large enough for Fairfax to need to keep some of this cash internally?

- Will the current geopolitical turmoil (creating lots of uncertainly in financial markets) cause Fairfax to keep a higher cash balance at HO the next couple of quarters?

- Is the hard market still going strong... does funding growth at the sub level, especially re-insurance, becomes the priority for use of excess cash?

 

What a great problem to have  The after tax gain from the pet insurance sale will be $975 million = $40/share. That should push BV back over $600 when they report Q4/YE numbers. Market cap for Fairfax is only $10.6 billion.  

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From FFH Q2 report:

On June 18, 2022 the company entered into a transaction with JAB Holding Company (“JAB”) in which certain affiliates of JAB agreed to acquire all of the company’s interests in the Crum & Forster Pet Insurance Group and Pethealth, including all of their worldwide operations. As part of the transaction, the company will receive approximately $1.4 billion in the form of approximately $1.15 billion in cash and $250.0 million in seller promissory notes, and the company will also invest $200.0 million in JCP V, a JAB consumer fund. The transaction is subject to customary closing conditions, including various regulatory approvals, and is expected to close in the second half of 2022. The company did not record any gains in the second quarter of 2022 on the sale of the Pet Insurance Operations and on closing of the transaction expects to record an after-tax gain of approximately $975 million.

Edited October 14, 2022 by Viking

[Viking]

On 9/23/2022 at 9:13 PM, Viking said:

 

@longlake95 I agree. The increase in US Treasury rates, across the curve, continues its upward march: 

 

2022	1 Mth	1 Yr	3 Yr	5 Yr	10 Yr
Jan 1	0.05%	0.40%	1.04%	1.37%	1.63%
Mar 31	0.17%	1.63%	2.45%	2.42%	2.32%
Jun 30	1.28%	2.80%	2.99%	3.01%	2.98%
Sep23	2.67%	4.15%	4.21%	3.96%	3.69%

 

This is a big, big win for Fairfax. How much of a win will depend on a couple of factors:

1.) how high do rates ultimately go?

2.) how long do rates stay high?

Treasury rates are already higher than I thought possible. But Powell just said rates will be going higher and staying higher well into 2023. Now I don't necessarily believe that is what will happen. Lets hope I continue to be wrong.

3.) does Fairfax increase duration? Not as of June 30 (still at 1.2 years). This will be perhaps the key piece of information I will be looking for when they report Q3 results. If they start to push the average duration out then that will give investors more certainty regarding the future path of interest income.

4.) do credit spreads blow wider? Not yet. But if the economy starts to roll over we likely will get a credit event. The Fed looks like it is going to keep raising rates until something breaks... I wonder if credit markets blowing out (and volatility soaring) will be the trigger for the Fed to stop and eventually reverse course.

----------

There is a short term negative to rising interest rates. And that is the significant market-to-market loss that gets booked at the end of the quarter as the fixed income portfolio gets re-valued:

- Quarter 2 = ($445 million)

- YTD 2022 = ($1.008 bilion)

- small offset: U.S. treasury bond forward contracts gain Q2 = +$32 million and YTD = +$100 million

Given the move in rates so far, it loos like the hit in Q3 will again be large: $500 million? Still, rising interest rates is a very good news story for Fairfax in 2 important ways:

1.) much higher interest income earned for years into the future 

2.) potential for significant mark-to-market gains should interest rates ever come down again. Especially if Fairfax increases duration at attractive interest rates.

 

Well, the one way interest rate train just keeps chugging higher up the mountain... the Little Train that Could! However, we are starting to see some cracks internationally (UK and Japan). It will be very interesting to see if Fairfax has made any changes to their bond portfolio when they report Q3 results in early Nov.

 

-----------

Hard to see how interest rates can stay this high for too long (more than a year or so). Western governments have so much short term national debt that will need to be rolled over the next 12 -24 months and now at much, much higher interest rates. If the interest burden on national debt starts to spike what do Western governments do? Spend more (which will be inflationary)? Or retrench and spend less (not popular)? 

 

Given what we have seen in the UK the past week, I wonder if markets will (finally) not force governments to be somewhat rational. (What a disaster monetary policy has been the past 10 years - specifically, the negative interest rate experiment.)

 

The most likely option the next couple of years is financial repression - actual inflation running @2 or 3 or 4% above government interest rates. So we slowly deflate the too much debt away over years (in real terms) like was achieved in the late 1940's and early 1950's.   

------------

The big difference today has from the 1970's is the amount of debt that is in the system. What is an investor to do? Perhaps commodities (oil and gas) can provide a partial solution. I wonder if this is not a big part of the thinking behind Buffett's aggressive move this year into energy (Chevron and Oxy). 

 

 

Edited October 15, 2022 by Viking

[UK]

Quite good writeup: https://seekingalpha.com/article/4546944-fairfax-financial-unfairly-punished-by-investors-significantly-undervalued?mailingid=29398128&messageid=2800&serial=293

[RedLion]

On 10/17/2022 at 10:03 AM, UK said:

Quite good writeup: https://seekingalpha.com/article/4546944-fairfax-financial-unfairly-punished-by-investors-significantly-undervalued?mailingid=29398128&messageid=2800&serial=293

I have not been a long time stockholder of Fairfax, but I recently started a position and am looking to increase this significantly. I believe this is one of the most compelling interest rate plays right now, and it seems to have a higher positive gearing to rising interest rates than BRK due to higher amount of cash to market cap and trading at a discount to book value. 

 

I think this write up is great, but what's interesting is that he uses a 3% yield on fixed income as sort of a base case and then as his bullish case he uses a 4% yield on fixed income. As of right now anything between 6 months and 5 years is at 4.5% or higher and the fed Is still hiking. 

 

So the setup definitely looks good, the valuation is still down, seems like there's a potential catalyst in place with stock buybacks below book value and a bond portfolio that starts gushing cash. Even at 4.5% a 35 billion bond portfolio is going to put out $1.5 billion in interest income on a $10 billion market cap, and who knows how much further the fed keeps hiking. 

[glider3834]

1 hour ago, RedLion said:

I have not been a long time stockholder of Fairfax, but I recently started a position and am looking to increase this significantly. I believe this is one of the most compelling interest rate plays right now, and it seems to have a higher positive gearing to rising interest rates than BRK due to higher amount of cash to market cap and trading at a discount to book value. 

 

I think this write up is great, but what's interesting is that he uses a 3% yield on fixed income as sort of a base case and then as his bullish case he uses a 4% yield on fixed income. As of right now anything between 6 months and 5 years is at 4.5% or higher and the fed Is still hiking. 

 

So the setup definitely looks good, the valuation is still down, seems like there's a potential catalyst in place with stock buybacks below book value and a bond portfolio that starts gushing cash. Even at 4.5% a 35 billion bond portfolio is going to put out $1.5 billion in interest income on a $10 billion market cap, and who knows how much further the fed keeps hiking. 

And then you have IG corporates at 6.4%, Mortgages over 7% and High yield debt 9.5% 

 

https://www.marketwatch.com/story/you-can-be-invested-in-fixed-income-again-bond-investors-say-even-before-the-fed-stops-hiking-rates-11666219818

 

Lets assume that rates are starting to peak & Fairfax wants to capture this higher rate upside but doesn't want to wait until all of its portfolio matures - do you think that Fairfax could use derivative strategy to capture these higher rates before they potentially start to roll the portfolio over into these higher yielding bonds - to effectively lock in some of these higher yields - can it be done - any thoughts?

 

 

 

 

Edited October 21, 2022 by glider3834

[Xerxes]

Prem speaking at Toronto Economic Forum. Something to do with Greece economic relations with Canada. 

 

 

Edited October 21, 2022 by Xerxes

[kab60]

So the bull case is pretty obvious. We make a ton of dough if Prem buys higher yielding bonds. What is the risk that he waits for even fatter yields, which never comes? Or they get crushed on insurance costs balloning due to inflation?

[Viking]

4 hours ago, kab60 said:

So the bull case is pretty obvious. We make a ton of dough if Prem buys higher yielding bonds. What is the risk that he waits for even fatter yields, which never comes? Or they get crushed on insurance costs balloning due to inflation?

@kab60 here is how i look at a few of the risks of investing in Fairfax. Sorry, the post is long and rambling (yes, i know, not my first :

1.) very near term, what is the hit from Hurricane Ian? RBC is estimating $500 million but this is simply a guess. Could it be higher? Yes. If it is materially higher that would not be good short term. This could also be a big nothing-burger (losses from Ian come in at expectations or even below).  We will know more in a couple of weeks.

- the interesting thing is Ian will likely accelerate and extend the hard market for re-insurance. Pain today. Gains tomorrow.

2.) big bets: my biggest watch-out is if Fairfax makes a big bold bet with its investment portfolio - that i don’t like. Like the ‘equity hedges’ from 2010-2016. I am not concerned today… but my eyes are wide open.

- the duration and composition of the bond portfolio is what i am monitoring most closely today… but i only see opportunity here right now. I can understand if they made no changes in Q3.

- what Fairfax does in India bears watching. Prem has mentioned repeatedly that he wants to invest billions in India in the next 5 or so years. Fairfax is rumoured to be one of the state owned banks. Not sure how i would feel if they took a big bet on India right now. 
3.) capital allocation. Do they get it right? Prem has repeatedly said priorities are:

- support insurance subs to grow in hard market

- conservative financial position (reasonable amount of debt)

- share buybacks

 

Fairfax announced in Aug they would be raising US$750 million to buy back a portion of minority interest in Allied World. Given we are in the middle of a bear market, with both equity and bond portfolio’s getting hit, it did surprise me that Fairfax decided this was a good time to lever up and add a significant amount of debt. They are paying 5.6%, which is looking very reasonable given the spike in bond yields since the deal was announced 2 months ago. Was this simply another example of Fairfax being opportunistic - thinking interest rates were going to stick higher for longer - so go get some debt while it is still available and at a reasonable rate?

 

I am really interested to see what they do with the proceeds from the pet insurance business. Do they take out a slug of Fairfax shares? Or do they use it in other ways -  like more deals like the take private for Recipe. I will be disappointed if they do not stay aggressive with Fairfax share buybacks. Buybacks are what Prem has flagged so my guess is this is what we see. Perhaps not a big dutch auction like last year. Perhaps they just get active with the previously announced NCIB.

 

4.) inflation: how does this affect CR? This is a watch-out, but not a concern right now. I am sure there will be lots of discussion on this topic with all insurance companies. I wonder if inflation concerns simply extend the current hard market into 2023 and possibly 2024. 
- if loss picks start to pick up in 2023 and 2024 (due to unexpectedly high inflation) then we should expect lower underwriting income (a higher CR).
- high inflation into 2024 likely means we also see higher interest rates into 2024. With such a low duration Fairfax will see a spike in interest income, which will mitigate the drop in underwriting income (caused by inflation). Perhaps this keeps Fairfax at low duration (as an offset to what happens on the underwriting side of the business).

5.) spiking interest rates: I  wonder how the spiking of interest rates and the subsequent hit to the bond portfolios of all insurers impacts the industry in the short term (over the next year). Regulators do not seem to care today (significant hit to BV from rising interest rates). Imagine this scenario:

1.) interest rates move higher from where they are today

2.) interest rates stay high - inflation continues to roar well  into 2023

3.) underwriting results start to weaken, due to inflation

4.) we get a record year of catastrophe losses in 2023
 

Insurers with long duration bond portfolios are going to be locked in to low returns on their fixed income portfolio for years… At the same time their underwriting results get worse (due to unexpectedly higher loss picks). And if we get a really bad catastrophe year (hello global warming) then some insurers could really start to sweat.
 

This just suggests to me the hard market in insurance will continue. And well capitalized insurers like Fairfax could continue to grow at 20% well into 2023 and possibly longer. So many interesting things going on right now with P&C insurers.

Edited October 22, 2022 by Viking

[kab60]

Appreciate the answer, Viking. I think you reasoning is very sound, but I do fear claims inflation, as inflation has run a lot hotter than most expected. While rates have moved up aggressively, they're still far below inflation levels. While that will be reflected in new policies, if inflation keeps running, insurance companies might be behind the ball continually, no? I understand why higher interest rates are great, I'm less sure it's great if inflation doesn't come under control. But this is just high levels thoughts, I know little about analyzing financials not least insurance companies.

[Viking]

1 hour ago, kab60 said:

Appreciate the answer, Viking. I think you reasoning is very sound, but I do fear claims inflation, as inflation has run a lot hotter than most expected. While rates have moved up aggressively, they're still far below inflation levels. While that will be reflected in new policies, if inflation keeps running, insurance companies might be behind the ball continually, no? I understand why higher interest rates are great, I'm less sure it's great if inflation doesn't come under control. But this is just high levels thoughts, I know little about analyzing financials not least insurance companies.

I am not an insurance expert so i really have no idea how inflation hits Fairfax and the industry in the coming years. My guess is every earnings call will have a focus on this issue so we should learn more over the next 2 weeks. We have been in a hard market since 2H 2019. So we are beginning year 4 of the current hard market. I would think with all the price increase we have seen there is some protection against inflation. And it there are deficiencies then we should see the current hard market extend another year or two. There are so many important moving pieces right now. 
—————

But no doubt about it we are seeing more cracks developing in the P&C market:

1.) record level of catastrophe losses year after year.

2.) acceleration of hard market for reinsurance.

3.) inflation stressing loss picks; creating future uncertainty.

4.) investment portfolios are declining in all asset classes and by a lot.

5.) spiking interest rates resulting in double digit declines in BV.

 

[StubbleJumper]

1 hour ago, kab60 said:

Appreciate the answer, Viking. I think you reasoning is very sound, but I do fear claims inflation, as inflation has run a lot hotter than most expected. While rates have moved up aggressively, they're still far below inflation levels. While that will be reflected in new policies, if inflation keeps running, insurance companies might be behind the ball continually, no? I understand why higher interest rates are great, I'm less sure it's great if inflation doesn't come under control. But this is just high levels thoughts, I know little about analyzing financials not least insurance companies.

 

I'd say you need to break it down a little.  First consider the CPI components and then consider the indemnity components.  So for CPI we know the headline number is like 8 percent and the leading elements are energy, food and motor vehicles, followed by a bunch of etcetera.  For indemnities, the inflation is composed of replacement cost for goods and social inflation for civil liability.  How do those square?  Food and fuel aren't likely to be short term drivers of indemnities.  Motor vehicles definitely are drivers of indemnities for the companies that insure them or reinsure them. 

 

So which elements of FFHs indemnities are you most worried?  Prem has expressed concern about social inflation for 4 or 5 years now, so much of that is likely priced in.  Otherwise, costs for rebuilding and other goods are probably not wildly out of control.  But, fuel and food is pretty irrelevant in the short term.

 

 

SJ

[glider3834]

3 hours ago, kab60 said:

While rates have moved up aggressively, they're still far below inflation levels.

is this an opinion or are you referencing data/stats?

 

 

[kab60]

11 hours ago, StubbleJumper said:

 

I'd say you need to break it down a little.  First consider the CPI components and then consider the indemnity components.  So for CPI we know the headline number is like 8 percent and the leading elements are energy, food and motor vehicles, followed by a bunch of etcetera.  For indemnities, the inflation is composed of replacement cost for goods and social inflation for civil liability.  How do those square?  Food and fuel aren't likely to be short term drivers of indemnities.  Motor vehicles definitely are drivers of indemnities for the companies that insure them or reinsure them. 

 

So which elements of FFHs indemnities are you most worried?  Prem has expressed concern about social inflation for 4 or 5 years now, so much of that is likely priced in.  Otherwise, costs for rebuilding and other goods are probably not wildly out of control.  But, fuel and food is pretty irrelevant in the short term.

 

 

SJ

I don't have a deep enough understanding of their exposures, but I don't see how rebuilding after something like Ian won't be much more expensive than expected not long ago. Building costs are up as well as property prices (though cooling off now). I might be wildly off, it just seems like a lot of folks are focused on their ST bond portfolio and a hard market and perhaps less so potential claims inflation. Which might be right, I'm a total noob and am not into the weeds (but am inclined to like the risk-reward).

 

https://www.fitchratings.com/research/insurance/global-insurance-sector-outlooks-at-risk-from-inflation-rising-rates-15-09-2022 (don't have the full report - perhaps Fairfax is unaffected)

Edited October 24, 2022 by kab60

[kab60]

8 hours ago, glider3834 said:

is this an opinion or are you referencing data/stats?

 

 

Sorry for being unclear, I was talking about interest rates (not insurance rates/premiums).

[glider3834]

3 hours ago, kab60 said:

Sorry for being unclear, I was talking about interest rates (not insurance rates/premiums).

[Viking]

RBC sends out an insurance update out each week (summary of what they are seeing). Here is what they said about insurance results reported last week:

 

“We would say earnings season is off to a largely ‘as expected’ start. Pricing remains good and there haven’t been any notable earnings surprises.

One thing we’d observe broadly with respect to P&C companies, and we think it showed a bit this quarter, is that while pricing has been decidedly good for going on 4 years running and margins have definitively improved over that time, there is still relatively little follow-though to reported earnings and ROE since cat losses, adverse bond marks, pandemic losses and inflationary headwinds have sucked up a lot of the benefit that would normally be flowing into profits and building balance sheets.

We think it’s fair to say that while managements are rightly ‘pleased’ with their results, they can’t be overly enamored with not realizing any book value growth or seeing a payback with a really strong earnings year. We view this as an underappreciated factor in why pricing could remain firm for a good bit longer.”

[glider3834]

On 8/28/2022 at 3:05 PM, nwoodman said:

@glider3834  Thanks for the heads up.  I hadn’t read through the prospectus in detail until now, from p.51. regarding the compulsorily convertible preference shares (CCPS)

 

The promoter of FAL Corp is Fairfax Financial Holdings Limited, which is listed on the Toronto Stock Exchange, the majority designated partner of Oben (holding 99.99%) is Kamesh Goyal, and the promoters of GDISPL are Kamesh Goyal, Oben and FAL Corp, which respectively hold 14.96%, 39,79% and 45.25% of the equity share capital of GDISPL. For details of the shareholding pattern of GDISPL, see “Our Promoters and Promoter Group” on page 261.
Additionally, FAL Corp holds 7,800,000 CCPS issued by GDISPL (aggregating to 100% of the preference share capital of GDISPL). The aforesaid CCPS has a fixed conversion ratio for conversion into equity shares of GDISPL being (i) 2.324 CCPS for each equity share, for 6,300,000 CCPS (”Ratio 1”) ; and (ii) 3.55 CCPS for each equity share for the remaining 1,500,000 CCPS (“Ratio 2”). Upon conversion of the CCPS, the parties have agreed that the shareholding of FAL Corp in GDISPL will represent maximum of up to 82.07% of the share capital of GDISPL. Further, consequent to conversion of the CCPS, the indirect shareholding of FAL Corp in our Company (on a fully diluted basis ) will be a maximum of up to 68.65%. While we believe that upon the CCPS conversion, none of our Promoters shall cease to act as promoters of our Company, we cannot assure you that the regulators will not take an adverse view, in which case such an event may have an adverse effect on our Company or its shareholders.
On June 7, 2022, our Company applied to the IRDAI, seeking its approval for conversion of the 7,800,000 CCPS into equity shares of GDISPL. However, the IRDAI, by way of its letter dated July 26, 2022, communicated that this application cannot be considered by it, since the proposed conversion of the CCPS would result in GDISPL becoming a subsidiary of FAL Corp which is not allowed under the IRDAI (Registration of Indian Insurance Companies) Regulations, 2000, which defines an ‘Indian promoter’ to mean a company, as defined in the Companies Act, which is not a subsidiary, as defined in Section 2(87) of the Companies Act. For further details in relation to the above, see “Our Promoters and Promoter Group” on page 261.
While upon the CCPS conversion, none of our Promoters shall cease to act as promoters of our Company, and our Company and our Promoters intend to continue to engage with the IRDAI in relation to such conversion of CCPS, as per the provisions of applicable law, we cannot assure you that the IRDAI will approve such conversion in the future. Consequently, we cannot assure you that the CCPS will be converted by FAL Corp in a timely manner, or at all. Further, each of FAL Corp and, subject to FAL Corp’s consent and right of first refusal, Kamesh Goyal and Oben has the ability, should they choose to do so, to sell their respective shareholding in GDISPL to a third party, which, if sufficient in size, could result in a change of control of our Company. 

 

The level of disclosure in the prospectus is refreshing.  The scrutiny by the IRDAI is frustrating but also creates quite the moat.

IRDAI has proposed new 2022 regulations (13/10) https://www.irdai.gov.in/admincms/cms/whatsNew_Layout.aspx?page=PageNo4834&flag=1 & they include changing the 'Indian Promoter' definition removing this requirement that a Company cannot be a subsidiary.

 

If these are implemented as proposed, then I think it would allow Fairfax to get over this issue described above & be able to convert its convertible preferred shares to take control of Digit & recognise any MTM gain where applicable.

 

2022 exposure draft 

 

 

 

original 2000 regs 

 

 

 

[nwoodman]

1 hour ago, glider3834 said:

IRDAI has proposed new 2022 regulations (13/10) https://www.irdai.gov.in/admincms/cms/whatsNew_Layout.aspx?page=PageNo4834&flag=1 & they include changing the 'Indian Promoter' definition removing this requirement that a Company cannot be a subsidiary.

 

If these are implemented as proposed, then I think it would allow Fairfax to get over this issue described above & be able to convert its convertible preferred shares to take control of Digit & recognise any MTM gain where applicable.

 

2022 exposure draft 

 

 

 

original 2000 regs 

 

 

 

If that proves the case, a very welcome amendment indeed.  Impressive digging as always

[glider3834]

3 hours ago, nwoodman said:

If that proves the case, a very welcome amendment indeed.  Impressive digging as always

[glider3834]

On 10/24/2022 at 4:13 PM, kab60 said:

I don't have a deep enough understanding of their exposures, but I don't see how rebuilding after something like Ian won't be much more expensive than expected not long ago. Building costs are up as well as property prices (though cooling off now). I might be wildly off, it just seems like a lot of folks are focused on their ST bond portfolio and a hard market and perhaps less so potential claims inflation. Which might be right, I'm a total noob and am not into the weeds (but am inclined to like the risk-reward).

 

https://www.fitchratings.com/research/insurance/global-insurance-sector-outlooks-at-risk-from-inflation-rising-rates-15-09-2022 (don't have the full report - perhaps Fairfax is unaffected)

I just listened to WRB Call - they did a avg rate increase (excl w/comp) of 7.3% in 3Q (vs 6.8% in 2Q) and they still see opportunity going forward - so sounds like the hard market is still in play albeit off the highs of last year

 

Also kab60 just on your question on rates - Rob Berkley estimated that their premium rate increases are running over 100 bps and up to 200 bps above loss cost trends - so they are looking to put in extra cushioning there but yes the ultimate cost won't be known until years out. Fairfax hasn't broken out their exact % rate increases but they have held a short duration portfolio & have been worried about inflation for the last few years & so have been pushing on rate.

 

 

 

 

 

 

 

 

 

 

 

Edited October 25, 2022 by glider3834

[kab60]

46 minutes ago, glider3834 said:

I just listened to WRB Call - they did a avg rate increase (excl w/comp) of 7.3% in 3Q (vs 6.8% in 2Q) and they still see opportunity going forward - so sounds like the hard market is still in play albeit off the highs of last year

 

Also kab60 just on your question on rates - Rob Berkley estimated that their premium rate increases are running over 100 bps and up to 200 bps above loss cost trends - so they are looking to put in extra cushioning there but yes the ultimate cost won't be known until years out. Fairfax hasn't broken out their exact % rate increases but they have held a short duration portfolio & have been worried about inflation for the last few years & so have been pushing on rate.

 

 

 

 

 

 

 

 

 

 

 

Thanks for flagging, I'll take a look at WRB's report and conference call.

 

And you're probably right that Fairfax are well-positioned. If anything these guys have been aware of the macro environment for a long time.