Fairfax and Float

[Viking]

Investors in insurance companies usually spill a great deal of ink discussing this wonderful thing called float. Yet, other than a casual mention, it is rarely discussed with respect to Fairfax. Why is this? Is float REALLY that important? Or is it simply not that important for Fairfax? More to the point, why was book value growth so poor at Fairfax for so many years? It had growing ‘float’ during these years.
 

Why should investors expect ‘float’ to matter for Fairfax in 2022 and in future years? What of substance has actually changed at Fairfax? i would love to hear other board members thoughts.

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To set the table, here is a little background information. Fairfax reports float in two ways:

1.) ‘Float’: insurance and reinsurance

2.) ‘Total Float’: insurance and reinsurance + run-off

 

From the Feb 10 (Q4) earnings release: 
 

YE.       Float                                Per share

2021.    $25.9 billion   +14.2%.     $1,080       +24.6%. (24 million shares)

2020.   $22.7.                                 $866           
 

Numbers above do not include Run-off = $1.6 billion on 2020.

 

         Total Float.         Per share.  (From p23 of 2020AR)

2020.   $24.3.                $927
2019.    $22.4.               $834

2015.    $17.2.                $775

2010.    $13.1.                 $641

 

From p23 2020AR: “Float is essentially the sum of loss reserves, including loss adjustment expense reserves, insurance contract payables, and unearned premium reserves, less insurance contract receivables, reinsurance recoverables and deferred premium acquisition costs. Our long term goal is to increase the float at no cost, by achieving combined ratios consistently at or below 100%. This, combined with our ability to invest the float well, is why we feel we can achieve our long term objective of compounding book value per share by 15% per annum. This no cost float is perhaps one of Fairfax’s biggest assets and could be the key reason for our success in the future. In 2020, our ‘‘cost of float’’ was a 1.4% benefit, as we made an underwriting profit. In the last ten years, our float has cost us nothing (in fact, it provided an average 1.2% benefit per year), while during that time it cost the Government of Canada an average 2.2% per year to borrow for ten years – an advantage for us over the Government of Canada of 3.4% per year.”

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Float: How Insurance Companies Can Leverage Buffett’s Secret to Wealth

- https://einvestingforbeginners.com/insurance-float-ahern/

 

[nwoodman]

Float growth has been quite spectacular.  I am expecting a few words to be spilled about in Prem's letter later this week.  I am eager to learn more about where the growth is coming from=> pricing power, market share, combination of both?.  If its market share is it becasue other insurers are stepping back.  I have no reason to believe that they are walking head long into a climate change mispricing catastrophe but it does temper my optimism which is probably not a bad thing.

Edited February 28, 2022 by nwoodman

[glider3834]

2 hours ago, Viking said:

Investors in insurance companies usually spill a great deal of ink discussing this wonderful thing called float. Yet, other than a casual mention, it is rarely discussed with respect to Fairfax. Why is this? Is float REALLY that important? Or is it simply not that important for Fairfax? More to the point, why was book value growth so poor at Fairfax for so many years? It had growing ‘float’ during these years.
 

Why should investors expect ‘float’ to matter for Fairfax in 2022 and in future years? What of substance has actually changed at Fairfax? i would love to hear other board members thoughts.

—————

To set the table, here is a little background information. Fairfax reports float in two ways:

1.) ‘Float’: insurance and reinsurance

2.) ‘Total Float’: insurance and reinsurance + run-off

 

From the Feb 10 (Q4) earnings release: 
 

YE.       Float                                Per share

2021.    $25.9 billion   +14.2%.     $1,080       +24.6%. (24 million shares)

2020.   $22.7.                                 $866           
 

Numbers above do not include Run-off = $1.6 billion on 2020.

 

         Total Float.         Per share.  (From p23 of 2020AR)

2020.   $24.3.                $927
2019.    $22.4.               $834

2015.    $17.2.                $775

2010.    $13.1.                 $641

 

From p23 2020AR: “Float is essentially the sum of loss reserves, including loss adjustment expense reserves, insurance contract payables, and unearned premium reserves, less insurance contract receivables, reinsurance recoverables and deferred premium acquisition costs. Our long term goal is to increase the float at no cost, by achieving combined ratios consistently at or below 100%. This, combined with our ability to invest the float well, is why we feel we can achieve our long term objective of compounding book value per share by 15% per annum. This no cost float is perhaps one of Fairfax’s biggest assets and could be the key reason for our success in the future. In 2020, our ‘‘cost of float’’ was a 1.4% benefit, as we made an underwriting profit. In the last ten years, our float has cost us nothing (in fact, it provided an average 1.2% benefit per year), while during that time it cost the Government of Canada an average 2.2% per year to borrow for ten years – an advantage for us over the Government of Canada of 3.4% per year.”

—————

Float: How Insurance Companies Can Leverage Buffett’s Secret to Wealth

- https://einvestingforbeginners.com/insurance-float-ahern/

 

viking I think its worth isolating the 'float per common share'  - to back out the float % that belongs to minority interests in the insurance subs (eg Brit, Allied)

 

Then we can compare float per share with other insurers that have 100% owned insurer subs. 

 

I think Fairfax reports total float & float per share for ease of reporting and because they are consolidating those subs where they have control and/or majority ownership.

[Viking]

19 hours ago, glider3834 said:

viking I think its worth isolating the 'float per common share'  - to back out the float % that belongs to minority interests in the insurance subs (eg Brit, Allied)

 

Then we can compare float per share with other insurers that have 100% owned insurer subs. 

 

I think Fairfax reports total float & float per share for ease of reporting and because they are consolidating those subs where they have control and/or majority ownership.

Glider, to adjust for minority we can made some rough adjustments using 2020 numbers where float is broken down by insurance sub. Not sure if we should adjust also for Odyssey; if so, after minority interest, Fairfax has total float in excess of US$1,000/share. For those with a better handle on accounting than me, please correct me where i am wrong.
 

My goal is to come up with a roughly accurate per share total float number for Fairfax that we can use to help us understand what float is and what it means for Fairfax shareholders.

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Float (insurance and reinsurance ) $25.9 - $3 = $22.9 / 24 million = $954/ share

Total float (including reinsurance of $1.6?/24 million) adds another $65/share = $1,020

Float               2020.  Minority % & $

1.) Allied.         $5.7.    30%.     $1.71

2.) Brit.            $3.2.    14%.    $0.45

3.) Odyssey.   $5.9.    10%.     $0.59

            Total.                            $2.75 billion - lets bump this to $3 to account for growth in 2021

[Viking]

22 hours ago, nwoodman said:

Float growth has been quite spectacular.  I am expecting a few words to be spilled about in Prem's letter later this week.  I am eager to learn more about where the growth is coming from=> pricing power, market share, combination of both?.  If its market share is it becasue other insurers are stepping back.  I have no reason to believe that they are walking head long into a climate change mispricing catastrophe but it does temper my optimism which is probably not a bad thing.

@nwoodman yes, increase in total float in 2021 to about $27.5 billion from $24.3 billion is dramatic. The increase in 2020 was also large +$1.9 billion. The increase the past 2 years = $5.1 billion = 23%. Per share the increase in total float has been +34% over the past 2 years. Hello insurance hard market?

 

The 3 years 2017-2019 saw float actually decrease by $0.5 billion. This was due primarily to the sale of Riverstone UK which reduced float in run-off by about $1.2 billion. Over these 3 years float at insurance and reinsurance subs was up only a very small amount. Page 23 of the 2020 AR has good detail.

Premiums collected - claims paid out = insurance float

 

What to expect in 2022? Given the hard market is expected to continue then it seems reasonable to assume solid growth in float at Fairfax in 2022. A tailwind.
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“Insurers don’t pay out all the money they collect right away. Rather, an insurance company will collect money in the form of premiums, invest that money, and then pay out claims as needed at some future date. The difference between premiums collected and claims paid out is called insurance float.”

- https://finmasters.com/warren-buffett-insurance-float/