Fairfax 2023

[SafetyinNumbers]

I used to work for a broker at a big bank (2002-2012) most of it on a street facing prop desk. They probably have to cross the shares under the TRS annually. We used to see those trades go up all of the time and we would call a desk (including our own) to see if there was liquidity only to find out it was "swap related". That meant it was two legal entities trading the shares between them. Usually two different subsidiaries of the bank.

 

The volume does catch attention though and there is a lot of money trading on momentum and technical analysis. It can't hurt the narrative to have high volume at all time highs trading at 6x EPS when the reported book value is likely to go up 25%+ in 13 months.

 

[Xerxes]

2 hours ago, Parsad said:

 

Highly unlikely it's Fairfax, unless they plan on using the funds to buy back part of their other insurance businesses that aren't wholly-owned or they are acquiring another insurance business.  

 

When Prem mentioned that $1000 price per share, he wasn't being facetious.  He thinks it's reasonable, and it certainly seems like from the insurance business and higher interest income alone, they would be on pace to hit that in the next year or two.  The swaps would be worth considerably more...so unless there is a better alternative, they aren't selling them yet. 

 

Cheers!

hi

i vaguely remember the $1000 figure by Prem. Do you remember if he meant US or CAD$ ? 
 

also is it normal for CEO to quantify an actual share price target. I know Brookfield does it with “plan value”, but based on framework. 

[hardcorevalue]

it was $US 

[TwoCitiesCapital]

11 hours ago, SafetyinNumbers said:

I used to work for a broker at a big bank (2002-2012) most of it on a street facing prop desk. They probably have to cross the shares under the TRS annually. We used to see those trades go up all of the time and we would call a desk (including our own) to see if there was liquidity only to find out it was "swap related". That meant it was two legal entities trading the shares between them. Usually two different subsidiaries of the bank.

 

Can you explain the purpose/intent behind this requirement to cross shares? 

[giulio]

10 hours ago, Xerxes said:

hi

i vaguely remember the $1000 figure by Prem. Do you remember if he meant US or CAD$ ? 
 

also is it normal for CEO to quantify an actual share price target. I know Brookfield does it with “plan value”, but based on framework. 

AR 2021:

"For our stock price to match our book value’s compound rate of 18.2%, our stock price in Canadian dollars should be $1,335. And our intrinsic value exceeds book value, a principal reason being that our insurance companies generate huge amounts of float at no cost. This is the reason we continue to hold total return swaps with respect to 1.96 million subordinate voting shares of Fairfax with a total market value of $968 million at year-end."

 

AR 2020:

"Investment returns are very sensitive to end date values, so with a stock price of only $341 per share at the end of December 2020, our five and ten year and longer returns have been affected. We expect this to change as Fairfax begins to reflect intrinsic values again. Nothing that a $1,000 share price won’t solve!"

 

Also on the TRS, Prem said this in 2020:

"since the latter part of 2020 Fairfax has purchased total return swaps with respect to 1.4 million subordinate voting shares of Fairfax with a total market value at the time of those agreements of $484.9 million ($344.45 per share). We think this will be a great investment for Fairfax, perhaps our best yet!"

 

I don't see anything wrong with giving shareholders clues about intrinsic value, especially when the stock is trading meaningfully below IV.

Buffett gave clues when starting the share buyback. Ackman provided a share price in its latest report.

 

What's wrong is talking your stock up, with no regard to IV, like someone expecting 50% CAGR on her portfolio!

[Viking]

Two key inputs used to value Fairfax is combined ratio and return on its investment portfolio. My current estimate is for Fairfax to earn about $105/share in 2023 (what i call ‘normalized’ earnings). Sept 30, 2022 BV is $570. $105/share in annual earnings would put Fairfax’s ROE in the high teens. 
 

$105/share in earnings assumes a 95 CR and a 6.2% return on Fairfax’s investment portfolio. Neither estimate is aggressive, in my mind. Why?
 

1.) The hard market in insurance is in its 4th year and is expanding to reinsurance. The top line is growing at 20% (yes, this will slow). The hard market should impact underwriting profitability (in a positive way) over time. From 2013-2016, Fairfax generated an average CR of 91 (it has happened in the recent past). I think it is likely that Fairfax’s CR improves from here. Every 1 point improvement on the CR = $220 million increase in underwriting profit. 
 

2.) A 6.2% return on its investment portfolio moving forward is not aggressive. In fact, it is probably conservative. Why? Interest rates have moved much higher over the past year. And we have just had a bear market in equities so of Fairfax’s equity holdings have been market down. Fairfax also was an aggressive buyer of equities in 2022 at very attractive prices… which bodes well for future returns.
 

What does a 6.2% return on the investment portfolio look like?

- interest income of $1.34 billion = 3.7% yield on $36 billion fixed income portfolio

- equity return of $1.845 billion = 11.5% on $15 billion equity portfolio

- equity return = dividends ($100) + share of profit of assoc ($920) + other ($125) + net gains ($700)

 

If Fairfax is able to achieve a 7% return on its investment portfolio (0.8% increase fro my estimates of 6.2%) = $400 million increase in pre-tax earnings. 
 

3.) Fairfax wild cards. We already know Ambridge is being sold for $400 million in 1H 2023, and likely for a significant gain. What else is coming? If we get a Digit IPO in 2023 then my guess is we could easily see Fairfax book a $1 billion gain. That is not part of my $105/share earnings estimate. Fairfax has lots of other levers it could pull in 2023 to surface more hidden value on its balance sheet.

 

4.) Share buybacks are another wild card. Fairfax will likely be generating record operating earnings in 2023. If they wanted, Fairfax could take out 1.2 million shares (5% of total) = $780 million (avg cost of $650/share).

Conclusion: i think my earnings estimate of $105/share for 2023 is not aggressive. But earnings of $105/share suggests Fairfax is capable of earnings high teens ROE moving forward (17 to 18% ish).
 

Shares are trading at $600. My guess is BV will be around $630-$640 at Dec 31. So investors today are able to buy for 0.95 x BV a well run insurance company that is poised to generate high teens ROE in the coming years. 
————-

Common shareholders equity at Sept 30, 2022 = $13.36 billion. 
Common shares effectively outstanding Sept 30, 2022 = 23.4 million

BV/share = $569.97

 

 

Edited January 22, 2023 by Viking

[StubbleJumper]

13 minutes ago, Viking said:

what i call ‘normalized’ earnings

 

I don't disagree with any of that, but in general, "normalized" earnings would be an average taken across a whole insurance cycle.  What we expect to see in 2023 is not a result that is normalized, but rather something that is extraordinarily favourable.

 

We expect to see in 2023 is to once again be in a situation that Prem described in his letter to shareholders in the 2003 AR as the "virtuous" part of the insurance cycle, where we expect to get solid underwriting profits, solid investment income AND solid realized gains.  That's not at all normal, and that's not at all the average (but I'll happily take it!).

 

Other than nomenclature, I agree entirely with what you wrote.

 

 

SJ

 

[glider3834]

9 hours ago, TwoCitiesCapital said:

 

Can you explain the purpose/intent behind this requirement to cross shares? 

yes @SafetyinNumbers if you could layout how these things are usually structured that would be great because details from Fairfax are limited - Peter Clarke said they have renewed for a few years, it sounds like there are renewal clauses built in - but what if the counterparty effectively short wants to exit - would the IB then just look for other investors who are interested in replacing them?

 

Another related question is if there are 1.96M shares sitting somewhere as part of this swap, can Fairfax in closing swap make some sort of repurchase agreement with counterparty perhaps for a partial buyback equal to their gains on the swap? or is the whole thing synthetic with no shares involved?

 

Apologies if my questions sound stupid.

 

Edited January 22, 2023 by glider3834

[Viking]

36 minutes ago, StubbleJumper said:

 

I don't disagree with any of that, but in general, "normalized" earnings would be an average taken across a whole insurance cycle.  What we expect to see in 2023 is not a result that is normalized, but rather something that is extraordinarily favourable.

 

We expect to see in 2023 is to once again be in a situation that Prem described in his letter to shareholders in the 2003 AR as the "virtuous" part of the insurance cycle, where we expect to get solid underwriting profits, solid investment income AND solid realized gains.  That's not at all normal, and that's not at all the average (but I'll happily take it!).

 

Other than nomenclature, I agree entirely with what you wrote.

 

SJ

@StubbleJumper thanks for the comments. So is it the 95CR or 6.2% return on the investment portfolio that you think is inflated (on a normalized basis). Or is it that the $22 billion in net written premiums or $51 billion investment portfolio that is inflated? Or some combination of the two?

 

I understand the hard market has to end at some point. For a number of reasons it looks like it will continue to power on in 2023 (we will know much more in another week or two as insurance companies start reporting).

 

The investment side of the ledger looks very favourable for Fairfax looking forward. The size of the investment portfolio is growing. Interest income is growing. And fall in interest rates will likely result in sizable gains in the bond portfolio. Much of Fairfax’s stock portfolio has been marked down so we should see nice gains in equities moving forward. 
 

Yes, i am ‘leaning out’ with my estimates. The hard market could quickly pivot to a soft market in 2023. And we could see another leg down in the current bear market for stocks. And interest rates across the curve could shoot higher. These events would likely drive Fairfax’s stock lower. So, we will see…

[StubbleJumper]

27 minutes ago, Viking said:

So is it the 95CR or 6.2% return on the investment portfolio that you think is inflated (on a normalized basis). Or is it that the $22 billion in net written premiums or $51 billion investment portfolio that is inflated? Or some combination of the two?

 

No, the premium will probably end up being sticky to a large extent.  It's possible that net written could decline if pricing is really bad, but in general volume trends up over time.  What is extraordinary is the favourable CR at the same time as a favourable investment return.  Usually you get either one or the other, but not both.  What it means is if I gave Prem $1 to use in an insurance sub, he could use it to write $2 of premiums.  Those $2 of premiums would give him 8 or 10 cents of underwriting profit, and probably another 10 cents of investment income.  Seriously, a 18% or 20% return on incremental capital in an insurance sub?  That's fabulous. 

 

Alternatively stated, it looks quite obvious that FFH will have little trouble making its target of 15% ROE during 2023....and maybe the real question is whether they are able to hit 20% or whether it's "just" 17% or 18% during 2023.  This is not normal.  This is Prem's "virtuous" part of the insurance cycle.

 

In the end, all of this must end up attracting new capital to the industry which results in pricing pressure.  This is the nature of the insurance cycle.  We can hope that FFH can squeeze out 2 or 3 more really good years, but at a certain point new money jumps in.  

 

 

SJ

 

[Viking]

2 hours ago, StubbleJumper said:

 

No, the premium will probably end up being sticky to a large extent.  It's possible that net written could decline if pricing is really bad, but in general volume trends up over time.  What is extraordinary is the favourable CR at the same time as a favourable investment return.  Usually you get either one or the other, but not both.  What it means is if I gave Prem $1 to use in an insurance sub, he could use it to write $2 of premiums.  Those $2 of premiums would give him 8 or 10 cents of underwriting profit, and probably another 10 cents of investment income.  Seriously, a 18% or 20% return on incremental capital in an insurance sub?  That's fabulous. 

 

Alternatively stated, it looks quite obvious that FFH will have little trouble making its target of 15% ROE during 2023....and maybe the real question is whether they are able to hit 20% or whether it's "just" 17% or 18% during 2023.  This is not normal.  This is Prem's "virtuous" part of the insurance cycle.

 

In the end, all of this must end up attracting new capital to the industry which results in pricing pressure.  This is the nature of the insurance cycle.  We can hope that FFH can squeeze out 2 or 3 more really good years, but at a certain point new money jumps in.  

 

SJ

@StubbleJumper thanks for the insight. Makes a lot of sense. Lets keep our fingers crossed that the hard market keeps rolling…

[SafetyinNumbers]

3 hours ago, glider3834 said:

yes @SafetyinNumbers if you could layout how these things are usually structured that would be great because details from Fairfax are limited - Peter Clarke said they have renewed for a few years, it sounds like there are renewal clauses built in - but what if the counterparty effectively short wants to exit - would the IB then just look for other investors who are interested in replacing them?

 

Another related question is if there are 1.96M shares sitting somewhere as part of this swap, can Fairfax in closing swap make some sort of repurchase agreement with counterparty perhaps for a partial buyback equal to their gains on the swap? or is the whole thing synthetic with no shares involved?

 

Apologies if my questions sound stupid.

 

I'm not entirely certain but I'm sure its for regulatory or tax reasons they have to trade the shares once a year. My understanding is that it's usually a bank subsidiary that holds the swap with the corporate and the broker. Presumably when Fairfax entered into the long swap with the bank, the bank then entered into long swap with the broker who had to go buy the shares underlying. The broker might have found other counterparties but most likely they just bought the shares. Interest rates were so low when they put it on, the cost was probably covered by the dividend. Now it's probably costing a few points a year to keep it on.

 

I think Fairfax could probably close out the swap and buy all of the shares when they are ready to by putting up the initial basis of the trade. I don't see any reason to do it while they are growing so fast and the stock is so cheap.

 

I haven't been in a broker for over 10 years and this wasn't my area so my understanding could be wrong or the process might have changed. The transactions make sense though through that lens.

[glider3834]

15 hours ago, SafetyinNumbers said:

I'm not entirely certain but I'm sure its for regulatory or tax reasons they have to trade the shares once a year. My understanding is that it's usually a bank subsidiary that holds the swap with the corporate and the broker. Presumably when Fairfax entered into the long swap with the bank, the bank then entered into long swap with the broker who had to go buy the shares underlying. The broker might have found other counterparties but most likely they just bought the shares. Interest rates were so low when they put it on, the cost was probably covered by the dividend. Now it's probably costing a few points a year to keep it on.

 

I think Fairfax could probably close out the swap and buy all of the shares when they are ready to by putting up the initial basis of the trade. I don't see any reason to do it while they are growing so fast and the stock is so cheap.

 

I haven't been in a broker for over 10 years and this wasn't my area so my understanding could be wrong or the process might have changed. The transactions make sense though through that lens.

thanks @SafetyinNumbers thats interesting - so potentially there is a broker &/or counterparties out there with 1.96M shares of FFH.

 

I looked at substantial shareholder filings - I couldn't see any disclosure for this quantity of shares - I wonder if they need to disclose if the beneficial interest in the TRS effectively lies with FFH not with the broker.

 

Another thought, a risk with a TRS would be that if there is an increase in interest rates, the receiver (Fairfax) of the swap has to pay much higher interest payments to the total return payer. But when you think about it, higher interest rates benefit insurers through higher interest income & even more so insurers (like Fairfax) that are short duration on their fixed income portfolio. And  higher interest income also increases probability of higher share price so TRS appreciates.

 

So Fairfax's strategy of short duration fixed income portfolio to benefit from higher rates plus the TRS swap are actually working hand in hand - Fairfax essentially was minimising interest rate risk on this TRS & in fact seeking to capitalise on higher rates. And if interest rates had stayed really low, Fairfax would have had to pay little to hold the TRS. 

 

 

 

 

Edited January 22, 2023 by glider3834

[Xerxes]

On 1/21/2023 at 11:21 AM, giulio said:

AR 2021:

"For our stock price to match our book value’s compound rate of 18.2%, our stock price in Canadian dollars should be $1,335. And our intrinsic value exceeds book value, a principal reason being that our insurance companies generate huge amounts of float at no cost. This is the reason we continue to hold total return swaps with respect to 1.96 million subordinate voting shares of Fairfax with a total market value of $968 million at year-end."

 

AR 2020:

"Investment returns are very sensitive to end date values, so with a stock price of only $341 per share at the end of December 2020, our five and ten year and longer returns have been affected. We expect this to change as Fairfax begins to reflect intrinsic values again. Nothing that a $1,000 share price won’t solve!"

 

Also on the TRS, Prem said this in 2020:

"since the latter part of 2020 Fairfax has purchased total return swaps with respect to 1.4 million subordinate voting shares of Fairfax with a total market value at the time of those agreements of $484.9 million ($344.45 per share). We think this will be a great investment for Fairfax, perhaps our best yet!"

 

I don't see anything wrong with giving shareholders clues about intrinsic value, especially when the stock is trading meaningfully below IV.

Buffett gave clues when starting the share buyback. Ackman provided a share price in its latest report.

 

What's wrong is talking your stock up, with no regard to IV, like someone expecting 50% CAGR on her portfolio!

 

@hardcorevalue @giulio

Thank you

 

[maplevalue]

Memory is a little hazy of the exact details of how these work, but I am starting to think the most likely explanation is these large volumes are related to taxation around the dividend.

 

From what I understand in Canada (and I believe more generally) there are certain entities that pay less tax on dividend payments (a public pension plan would be one such entity I believe). However, many other investors (retail included) are subject to taxes on dividends. I think this might have to do with where the entity resides (I think the tax rate on dividends from Canadian companies is different for Canadians versus international investors).

 

What I believe can happen is you have buy-sell-back agreements where a investor subject to tax sells shares today and simultaneously enters into an agreement to buy them back at a future date. Beneficial ownership passes to the nontaxable entity over the dividend date, pays less tax, and then the shares revert back to the taxable investor afterwards. Tax advantaged investor makes a fee, bank facilitating the trade makes a fee, taxable investor avoids some tax.

 

There was a case in the UK that was related to this type of trading around the dividend date (but in a far more fraudulent manner https://www.reuters.com/business/finance/uk-watchdog-narrows-dividend-stripping-investigation-2022-12-15/).

 

I don't know exactly how everything would be structured, but possibly in this buy-sell-back arrangement something has to be reported to the exchange, and hence the massive volume numbers.

[Viking]

On 1/21/2023 at 8:21 AM, giulio said:

AR 2021:

"For our stock price to match our book value’s compound rate of 18.2%, our stock price in Canadian dollars should be $1,335. And our intrinsic value exceeds book value, a principal reason being that our insurance companies generate huge amounts of float at no cost. This is the reason we continue to hold total return swaps with respect to 1.96 million subordinate voting shares of Fairfax with a total market value of $968 million at year-end."

 

AR 2020:

"Investment returns are very sensitive to end date values, so with a stock price of only $341 per share at the end of December 2020, our five and ten year and longer returns have been affected. We expect this to change as Fairfax begins to reflect intrinsic values again. Nothing that a $1,000 share price won’t solve!"

 

Also on the TRS, Prem said this in 2020:

"since the latter part of 2020 Fairfax has purchased total return swaps with respect to 1.4 million subordinate voting shares of Fairfax with a total market value at the time of those agreements of $484.9 million ($344.45 per share). We think this will be a great investment for Fairfax, perhaps our best yet!"

 

I don't see anything wrong with giving shareholders clues about intrinsic value, especially when the stock is trading meaningfully below IV.

Buffett gave clues when starting the share buyback. Ackman provided a share price in its latest report.

 

What's wrong is talking your stock up, with no regard to IV, like someone expecting 50% CAGR on her portfolio!

Fairfax is trading at about US$600 today. Fairfax getting to a share price of US$1,000 anytime sounds like a cruel joke. Right? Actually, i think there is a fairly credible path for Fairfax to get to $1,000 in about 24 months. Assumptions:

1.) CR = 95 or lower for 2023 & 2024

2.) return on investment portfolio of 6.2% for 2023 & 2024

3.) Mr. Market valuing shares at multiple of 1.2 x BV in Jan 2025

 

I don’t think these are heroic assumptions. A successful Digit IPO would likely accelerate the time line. A material share buyback would also accelerate the time line. 
 

Of my three assumptions above, i am least confident in 3.) and the multiple Mr Market attaches to Fairfax. Sentiment in Fairfax is improving. And if Fairfax is able to deliver back to back years of ROE of 16% that should push the P/BV multiple higher. (Alternatively, if Fairfax generates slightly higher earnings than my estimates over the next 2 years, they could get to $1,000 share price with a 1.1 x multiple.) 
 

Bottom line, it will be interesting to see what happens. I am focussed on Fairfax and their results (and execution). Strong earnings will translate into a higher stock price. Multiple expansion will be gravy.

—————

Well, lets do some basic math…

 

- Sept 30, 2022 BV = $570

- Dec 31, 2022 BV = $635 (my estimate)

 

- 2023 estimated earnings = $105/share

- Dec 31, 2023 BV = $740

- 1.1 x BV = $810

- 1.2 x BV = $890

 

- 2024 estimated earnings = $115/share

- Dec 31, 2024 BV = $855/share

- 1.1 x BV = $945

- 1.2 x BV = $1,026

 

 

Edited April 6, 2023 by Viking

[SafetyinNumbers]

2 hours ago, Viking said:

Fairfax is trading at about US$600 today. Fairfax getting to a share price of US$1,000 anytime sounds like a cruel joke. Right? Actually, i think there is a fairly credible path for Fairfax to get to $1,000 in about 24 months. Assumptions:

1.) CR = 95 or lower for 2023 & 2024

2.) return on investment portfolio of 6.2% for 2023 & 2024

3.) Mr. Market valuing shares at multiple of 1.2 x BV in Jan 2025

 

I don’t think these are heroic assumptions. A successful Digit IPO would likely accelerate the time line. A material share buyback would also accelerate the time line. 
 

Of my three assumptions above, i am least confident in 3.) and the multiple Mr Market attaches to Fairfax. Sentiment in Fairfax is improving. And if Fairfax is able to deliver back to back years of ROE of 16% that should push the P/BV multiple higher. (Alternatively, if Fairfax generates slightly higher earnings than my estimates over the next 2 years, they could get to $1,000 share price with a 1.1 x multiple.) 
 

Bottom line, it will be interesting to see what happens. I am focussed on Fairfax and their results (and execution). Strong earnings will translate into a higher stock price. Multiple expansion will be gravy.

—————

Well, lets do some basic math…

 

- Sept 30, 2022 BV = $570

- Dec 31, 2022 BV = $635 (my estimate)

 

- 2023 estimated earnings = $105/share

- Dec 31, 2023 BV = $740

- 1.1 x BV = $810

- 1.2 x BV = $890

 

- 2024 estimated earnings = $115/share

- Dec 31, 2023 BV = $855/share

- 1.1 x BV = $945

- 1.2 x BV = $1,026

 

 

Great way to frame the opportunity, Viking. 
 

From your numbers, reported book value is going up 30% in the next 13 months. It’s going to be hard for quants to ignore that kind of move. Plus, if the stock doesn’t keep up, it’s probably fair to assume buybacks will pick up which just makes it cheaper. 

[SafetyinNumbers]

7 hours ago, glider3834 said:

thanks @SafetyinNumbers thats interesting - so potentially there is a broker &/or counterparties out there with 1.96M shares of FFH.

 

I looked at substantial shareholder filings - I couldn't see any disclosure for this quantity of shares - I wonder if they need to disclose if the beneficial interest in the TRS effectively lies with FFH not with the broker.

 

Another thought, a risk with a TRS would be that if there is an increase in interest rates, the receiver (Fairfax) of the swap has to pay much higher interest payments to the total return payer. But when you think about it, higher interest rates benefit insurers through higher interest income & even more so insurers (like Fairfax) that are short duration on their fixed income portfolio. And  higher interest income also increases probability of higher share price so TRS appreciates.

 

So Fairfax's strategy of short duration fixed income portfolio to benefit from higher rates plus the TRS swap are actually working hand in hand - Fairfax essentially was minimising interest rate risk on this TRS & in fact seeking to capitalise on higher rates. And if interest rates had stayed really low, Fairfax would have had to pay little to hold the TRS. 

 

 

 

 

Under Canadian rules there is no need to file unless they are over 10% of shares outstanding and the TRS is smaller than that. 

[glider3834]

1 hour ago, SafetyinNumbers said:

Under Canadian rules there is no need to file unless they are over 10% of shares outstanding and the TRS is smaller than that. 

that makes sense cheers!

[StevieV]

9 hours ago, Viking said:

9 hours ago, Viking said:

 

Multiple expansion will be gravy.

 

That's always a nice setup.  If you get just the growth of the company, that's a nice double-digit return.  Buying at a multiple where the most likely scenarios should be at least a stable multiple and a good chance of multiple expansion.

 

"Dec 31, 2023 BV = $855/share" - Small typo here.  I believe you meant 2024.  I only mention it because it tripped me up for a second.

[Viking]

4 hours ago, StevieV said:

 

That's always a nice setup.  If you get just the growth of the company, that's a nice double-digit return.  Buying at a multiple where the most likely scenarios should be at least a stable multiple and a good chance of multiple expansion.

 

"Dec 31, 2023 BV = $855/share" - Small typo here.  I believe you meant 2024.  I only mention it because it tripped me up for a second.

@StevieV yes, that was a typo on my part. Meant 2024. I edited my post. Thanks for catching my error.

[Viking]

P&C insurance earnings started today with Travelers. Sounds like the hard market in insurance is continuing into 2023 with no signs of a slowdown. WR Berkley reports after close on Thursday; we should have a good handle on trends after they report. 

 

What does this mean for Fairfax? We should see strong top line growth again in Q4 (20%?). And with an exceptionally hard market in reinsurance, perhaps Fairfax can deliver another year of 20% top line growth in 2023. If they can do this, that would put net written premiums at around $26.5 billion in 2023, which would be double what they were in 2019 ($13.3 billion). That would be amazing. The Fairfax story just keeps getting better…
—————

Alan Schnitzer - Travelers Chairman and Chief Executive Officer on Q4 conference call:

“And let me spend just a second on the pricing environment because that seemed like it was part of your question, and I’ve seen a number of you write about it this morning. So I think it’s hard to characterize this pricing environment as anything other than very strong. At 10.1% that RPC is spot on an eight-quarter average. So incredibly stable and near record levels. Small movements between pure rate and exposure, but I would emphasize small movements between rate and exposure. The breadth of the pricing gains across our book is very strong and very consistent. I don’t think you can assess the pricing environment without looking at retention and given where that is literally record levels and given the profitability very strong. The pricing gains that we achieved were broad-based, led by property, auto, umbrella and CMP. And then you take all that against the margins that we printed and we just – we feel fantastic about the pricing and the overall execution this year. And again, we’re going to go out and do it again in ‘23.

Edited January 24, 2023 by Viking

[Parsad]

Viking, there is only one thing more amazing than Fairfax and their management.  You!  And the other great posters on FFH. 

 

But clearly...YOU are the one that continues to provide exceptional detail day after day.

 

Are you going to the AGM this year? 

 

Cheers!

[Viking]

38 minutes ago, Parsad said:

Viking, there is only one thing more amazing than Fairfax and their management.  You!  And the other great posters on FFH. 

 

But clearly...YOU are the one that continues to provide exceptional detail day after day.

 

Are you going to the AGM this year? 

 

Cheers!

Sanjeev, i am happy to throw my thoughts about Fairfax against the wall to see what sticks. Other posters add a great deal of value (most of which i steal for my next update). We are all slowly learning just how

1.) undervalued Fairfax got back in 2020.

2.) well positioned the company is for the current environment (extended hard market, rising interest rates and outperformance of value/cyclical equites).
3.) well the management team at Fairfax is executing.
 

We are in that Peter Lynch stage today where the story is continually getting materially better. So even though the stock has been going up a lot it remains cheap. 
—————

Regarding attending the Fairfax AGM, yes, i plan on attending this year (no overlap with family vacation this year). I look forward to meeting other board members who are able to make it.

Edited January 25, 2023 by Viking

[Viking]

The property cat market and reinsurance is something to watch moving forward. Fairfax has a significant reinsurance business so it will be interesting to learn what sort of rate increases they have been getting.
—————

Here is what Brown and Brown Insurance had to say on their Q4 call this morning:

 

“From an insurance standpoint, certain markets have been and remain in significant turmoil. Pricing for CAT property both commercial and residential was under pressure through the third quarter. Then Ian slammed into Florida. This caused 1/1 reinsurance treaties to be bound at higher attachment points and materially higher rates. As a result, we saw incremental price increases and lower limits being offered for placements in late Q4 of last year and early this year.

 

The placement of CAT property in Q4 last year and January of this year with some of the most difficult placements we've experienced in decades with rates increasing 20% to 40% or more. However, properties of lesser construction quality or that have experienced losses could be much higher and I mean much higher than this range.

As a result, we had customers unable to buy or afford full limits and therefore ended up increasing their deductibles or purchasing loss limit in order to manage our cost of insurance. In certain cases, this was not possible as lending institutions or condo associations would not allow lower limits or significantly higher deductibles. Admitted market rate increases were similar to prior quarters and were up 3% to 7% across most lines with the outlier being workers' compensation rates which remained down 1% to 3%.

 

The placement of professional liability and excess liability remain competitive with rates down 5% to up 5%, with public company D&O rates down 5% to down 20% or more. Regarding cyber, the story is similar to the last few quarters with rates and deductibles continuing to increase but we did see some slight moderation during the quarter.”

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Question: Greg Peters

…So, when I think about '23, …how will those variables -- like the June first renewals on property CAT…, how will that affect your organic results for this year -- this upcoming year?

 

Answer: Powell Brown

 

…As it relates to the CAT property pricing, the variable there, Greg, as you know is not as much our -- I mean, it is there are certain limitations on ability to present limits in some instances. But it's more of -- in my opinion, it's more of an affordability issue. And so, if you think about if you've been giving rate increases, let's just say to yourself on your own personal lines homeowners, if you've got an increase of let's say 10% a year for four or five years in a row and then all of a sudden we came on the fifth year and gave you a 25% increase, there is a -- the buyers are tiring of that.

 

And so, having said that, availability of capacity in this market is unlike anything I've ever seen, I've only been in the insurance industry for 33 years now. So, there's a lot more to go, but I've not ever seen anything like this and we will continue to provide solutions to our customers. But sometimes the example I think we used last time and I would use it again is, if you have an entity, and they're paying $800,000 for their property and the renewal is a $1.8 million, and they say, what can we buy for $1 million, which can't buy anymore insurance, we can't afford it.

 

So, we're seeing that more and more, Greg. So, the CAT pricing that is going to -- is it more of a wildcard. The other thing that we're seeing is in the CAT capacity and accessing it in some instances, there is commission pressure downward on some of those placements now. So, a lot of people just think, well, as the rate goes up X, then you're going to -- your commission goes up X if you're on commission as opposed to a fee and that is true sometimes, but in this case, they might cut your commission one or two points, and so we're seeing that as well. So that's a harder one to answer, Greg.