Fairfax 2023

[Viking]

@treasurehunt and @UK , it is important to note that Evan Greenberg (and Rob Berkley) do a good job of talking their own book on conference calls. So i do take what they say with a grain of salt…

 

I think the point that Evan is trying to make is, at least on the casualty side, the risk of future inflation is likely higher than what most insurers have modelled. So they need rate today to get prepared for what might happen in the coming years. 
 

It also sounds like some European reinsurers have said current levels of social inflation (legal costs) for casualty are higher than they expected/modelled. Both WRB and Chubb laughed at this (the being surprised part). 
 

The other aspect, as @vinod1 points out, is duration of fixed income portfolio matters. Chubb has an average duration of about 4.6 years so the benefit of higher interest rates will take a couple of years to play out. However, for short duration fixed income portfolios like Fairfax and WRB - who are at 2.4 years, they will see the benefit of higher interest income much more quickly. But i think Fairfax and WRB are outliers (in P/C insurance) with such short duration in their fixed income portfolios. And both are focussed on profitability - not market share. 
 

Bottom line, for most insurers, the risk of inflation/rising costs is offsetting a chunk of the slow increase they are seeing in interest income. So they need to be very careful until they know what is happening with inflation and its impact on loss costs.

—————

Personal lines/auto insurance looks like it has been a hot mess that past couple of years. This line is not out of the woods yet. My guess is insurers where auto is a big part of their business are needing to keep their margins high in non-auto lines to keep their overall profitability and return targets in line. 

—————

The renewed increase in interest rates in Q2 and Q3 is causing another round of large unrealized losses in fixed income portfolios for P/ insurers - leading to stagnant to declining book values. This likely is keeping P/C insurers rational on the growth/pricing front. With book values declining significantly at lots of P/C insurers over the past 18 months my guess is ratings agencies / regulators today will not be happy with insurers who get stupid with pricing in an attempt to aggressively grow market share. The last thing a management team at a P/C insurer wants right now is to be put on a ratings watch/downgrade.

—————

Please note, i am not an insurance expert. My comments above could be way off base. 

Edited October 26, 2023 by Viking

[treasurehunt]

@Viking, @UK and @Vinod1, thanks for your comments. They add some very useful context to how I was thinking about Evan Greenberg's comments. It makes sense that most insurers wouldn't benefit nearly as much from higher rates as Fairfax would.

[Dipesh Patel]

Today on BNN Top Picks- Brian Madden top pick On Jan 20 2023 was FFH,  and today his top pick was Intact Financial, however he reference FFH having the same the thesis.

 

 

https://www.bnnbloomberg.ca/brian-madden-s-top-picks-october-26-2023-1.1989956

 

https://www.bnnbloomberg.ca/brian-madden-s-top-picks-october-26-2023-1.1989956

 

 

[dartmonkey]

5 hours ago, UK said:

 

I am not sure I understand his comment either, but this logic you have described I think would work only for insurers with short duration bond portfolios. It would be interesting to know what is the average duration of bond portfolios of the whole insurance industry, but assuming some other companies own much more longer term bonds, increase in yields would not do much good for them for quite a while? 

 

Chubb and Fairfax have similar leverage (fixed income portfolio: net premiums earned), around 1.5-1.7 (I did the calculations, but I goofed up and lost my post and can't be bothered to redo it.) So I agree that a 1 point increase in interest rates should in principle give them leeway to increase combined ratios by MORE than one point, not less, even after tax. However, Chubb has an average duration of 4.5 years (so they say, in their 2022 AR), whereas Fairfax has duration more like 2y, so a given increase in LT interest rates available will translate into profits much more quickly for insurers like Fairfax with short duration. But eventually, everyone will get it, Fairfax just has a couple years more to enjoy the full benefit.

[UK]

Thanks everyone for comments!

[jbwent63]

According to the Globe & Mail (via Yahoo! Finance home page and Reuters), John Chen is leaving Blackberry at the end of this week.

 

(Reuters) -BlackBerry's CEO John Chen has resigned and will exit the company on Friday, the Globe and Mail reported on Monday citing a source familiar with the matter.

The Canadian technology company is expected to announce an interim or full-time replacement, expected later in the day, according to the report, which did not give details on why Chen was leaving.

U.S.-listed shares of the company gained 7% in late afternoon trading on the report.

 

Chen joined BlackBerry in November 2013 and led the company's turnaround efforts in pivoting it from consumer hardware business to one that focused on enterprise software.

Once known for its full-keyboard business phones, BlackBerry saw its business suffer after the launch of Apple's iPhone in 2007 and the rapid adoption of Android-powered smartphones around that time.

It had since moved to focus on cybersecurity, in-car software and Internet of Things (IoT) applications.

Earlier this month, the company said it would separate the IoT and cybersecurity units and target a subsidiary initial public offering for the IoT business next fiscal year.

Last year, it pulled the plug on its smartphones business and has since been trying to sell its legacy patents related to its mobile devices.

BlackBerry did not immediately respond to a Reuters request for comment.

[Parsad]

https://finance.yahoo.com/news/blackberry-ceo-john-chen-exit-202700310.html

 

Cheers!

[Spekulatius]

Looks like he gave it exactly 10 years and then calls it quits.

[Viking]

1 hour ago, Spekulatius said:

Looks like he gave it exactly 10 years and then calls it quits.

Or the board has decided that it/Blackberry needs to move on from John. I don’t follow Blackberry (to much personal baggage for me).

[Parsad]

What was his total compensation during those 10 years?  Cheers!

[Hoodlum]

The first early estimate of insured losses fromHurricane Otis is $3-6B.   This range will narrow over the next couple weeks as more data comes in.  Does anyone know approx what Fairfax's share of this would be. 

https://www.reinsurancene.ws/verisk-estimates-3bn-6bn-of-industry-insured-losses-from-hurricane-otis/

 

Quote

Global data analytics and technology provider Verisk, estimates industry insured losses to onshore property for Hurricane Otis, the strongest hurricane ever to hit Mexico, will likely fall from MXN 50 billion to MXN 110 billion (~USD 3 billion to 6 billion).

 

Edited November 1, 2023 by Hoodlum

[longlake95]

45 minutes ago, Hoodlum said:

The first early estimate of insured losses fromHurricane Otis is $3-6B.   This range will narrow over the next couple weeks as more data comes in.  Does anyone know approx what Fairfax's share of this would be. 

https://www.reinsurancene.ws/verisk-estimates-3bn-6bn-of-industry-insured-losses-from-hurricane-otis/

 

 

assuming FFH even has exposure to this:

 

likely <1%

 

BRK likely <4% ( 8 days of interest income on BRK 150B in cash...)

Edited November 1, 2023 by longlake95

[Thrifty3000]

On 8/24/2023 at 1:46 PM, Thrifty3000 said:

Now, if we fast forward to 2027, and project a scenario where the hard market has cooled and short term interest rates have moderated, we could easily be looking at something more like this (I simply increased each asset class by a total of 15% to account for 3 years of conservative growth, and I reduced the share count a bit)...

 

4 years from now, after the cliff of locked in near term interest rates has past us by, the portfolio will still be able to produce $140+ per share without needing to do anything spectacular from an investment standpoint!

 

You can add, say, $10 to $50 per share for insurance underwriting profits and we really are looking at the normalized 20% returns @Viking has been proclaiming. And, again, the all star investment team barely has to show up to work to produce the kinds of returns I'm forecasting. These estimates are probably too conservative.

 

^ here is a post from August where I provided a table with about as conservative of a forecast possible of the earning power of each category in the investment portfolio in 2027.

 

You can see it’s by no means a stretch for the investment portfolio alone to earn $140+ per share. You can then add to that whatever number you want for underwriting earnings (say $0 to $50 per share) and for any opportunistic surprises (like pet insurance subsidiary sales), etc.

 

The most important number is the earning power of the bonds. My table shows a 4% interest rate. I follow the same logic as Leon Cooperman on this front. In a world with at least 2% inflation and 1.5% GDP growth it’s hard to envision a long term scenario where bonds don’t yield at least 4%.

 

Long story short, people worrying about FFH earnings falling off a cliff in 4 years are likely overweighting the significance of underwriting earnings and underweighting the power of a huge investment portfolio that can produce solid earnings per share without any heroics from the FFH investment team. 

Edited November 12, 2023 by Thrifty3000

[vinod1]

8 hours ago, Thrifty3000 said:

^ here is a post from August where I provided a table with about as conservative of a forecast possible of the earning power of each category in the investment portfolio in 2027.

 

You can see it’s by no means a stretch for the investment portfolio alone to earn $140+ per share. You can then add to that whatever number you want for underwriting earnings (say $0 to $50 per share) and for any opportunistic surprises (like pet insurance subsidiary sales), etc.

 

The most important number is the earning power of the bonds. My table shows a 4% interest rate. I follow the same logic as Leon Cooperman on this front. In a world with at least 2% inflation and 1.5% GDP growth it’s hard to envision a long term scenario where bonds don’t yield at least 4%.

 

Long story short, people worrying about FFH earnings falling off a cliff in 4 years are likely overweighting the significance of underwriting earnings and underweighting the power of a huge investment portfolio that can produce solid earnings per share without any heroics from the FFH investment team. 

 

You need to account for about $1 billion in other expenses (interest costs, corporate expenses) and a tax rate of 20%. 

 

Rates could and would be influenced by the Fed, we had 12-13 years of that in US. Longer in Japan. So I would not base interest rate expectations on what we think should happen. If not for Covid, we might be sitting at pretty low rates even now. But who the hell knows. Not Fairfax or Cooperman. 

 

Vinod

Edited November 13, 2023 by vinod1

[UK]

https://www.ft.com/content/c587a47a-fa2e-4d86-b22d-16b0dcdfb4a9

 

"Reinsurance executives, also speaking at the event, warned that inflationary factors, and a push to improve profitability after years of losses, meant prices were unlikely to soften. “A market correction was needed,” said SiriusPoint’s chief executive Scott Egan. He forecast that there would be “no drop in rates” in January. “Reinsurers are prepared . . . to stand their ground.”

 

The other thing I would like to ask: does anybody can explain why TRV trades at a such a high multiple vs FFH or even MKL, despite being valued very similarly (all at ~1.3 BV?) 5 years ago? How does this makes any sense? Not the best chart, but to ilustrate the question:

 

Edited November 14, 2023 by UK

[SafetyinNumbers]

19 minutes ago, UK said:

https://www.ft.com/content/c587a47a-fa2e-4d86-b22d-16b0dcdfb4a9

 

"Reinsurance executives, also speaking at the event, warned that inflationary factors, and a push to improve profitability after years of losses, meant prices were unlikely to soften. “A market correction was needed,” said SiriusPoint’s chief executive Scott Egan. He forecast that there would be “no drop in rates” in January. “Reinsurers are prepared . . . to stand their ground.”

 

The other thing I would like to ask: does anybody can explain why TRV trades at a such a high multiple vs FFH or even MKL, despite being valued very similarly (all at ~1.3 BV?) 5 years ago? How does this makes any sense? Not the best chart, but to ilustrate the question:

 

On the face of it, it’s bigger, more liquid and has a larger dividend. 

[Luke]

13F from FFH. That SP 500 position got cut in half, no idea what that was....and significant add to Orla Mining.

 

 

 

Edited November 14, 2023 by Luca

[gfp]

That's interesting - I feel like some of Fairfax's trading / changes to holdings are not reflected in the 13-F that Dataroma uses.  As an example, inside Odyssey Re (q3 NAIC filing) we see some Orla Mining purchases but also this purchase of Kennedy Wilson, where the 13-F shows no change in KW holdings during the quarter.  (this chart is security, purchase date, source, number of shares, dollar cost paid)

Edited November 14, 2023 by gfp

[ander]

On 11/12/2023 at 12:26 PM, Thrifty3000 said:

^ here is a post from August where I provided a table with about as conservative of a forecast possible of the earning power of each category in the investment portfolio in 2027.

 

You can see it’s by no means a stretch for the investment portfolio alone to earn $140+ per share. You can then add to that whatever number you want for underwriting earnings (say $0 to $50 per share) and for any opportunistic surprises (like pet insurance subsidiary sales), etc.

 

The most important number is the earning power of the bonds. My table shows a 4% interest rate. I follow the same logic as Leon Cooperman on this front. In a world with at least 2% inflation and 1.5% GDP growth it’s hard to envision a long term scenario where bonds don’t yield at least 4%.

 

Long story short, people worrying about FFH earnings falling off a cliff in 4 years are likely overweighting the significance of underwriting earnings and underweighting the power of a huge investment portfolio that can produce solid earnings per share without any heroics from the FFH investment team. 

There is some debate re: earnings post 4 years from now and of course hard to say what the world looks like the further out we go. I have BRKb put away for the next 20+ years and will take a look then unless if anything substantial changes. I see the clear path to why FRFHF has substantial upside within the coming years, but curious if anyone has a framework for thinking about long term value accretion 10+ years down the road. I know Prem targets 15%. Is that realistic?

[StubbleJumper]

19 minutes ago, ander said:

There is some debate re: earnings post 4 years from now and of course hard to say what the world looks like the further out we go. I have BRKb put away for the next 20+ years and will take a look then unless if anything substantial changes. I see the clear path to why FRFHF has substantial upside within the coming years, but curious if anyone has a framework for thinking about long term value accretion 10+ years down the road. I know Prem targets 15%. Is that realistic?

 

 

I would refer you to page 20 of Prem's annual letter from last year.  On that page you will find the table that he publishes every year, which depicts the growth in BV every year since the company's inception.  You will see that in the past 20 years, achieving 15%+ growth in BV has been the exception rather than the rule.

 

 

SJ

[Thrifty3000]

18 minutes ago, ander said:

There is some debate re: earnings post 4 years from now and of course hard to say what the world looks like the further out we go. I have BRKb put away for the next 20+ years and will take a look then unless if anything substantial changes. I see the clear path to why FRFHF has substantial upside within the coming years, but curious if anyone has a framework for thinking about long term value accretion 10+ years down the road. I know Prem targets 15%. Is that realistic?

 

Yes, 15% is possible long term. The magic is in the $2,700 of portfolio investments per share vs $900 per share of book value. You only need to earn 5% to 7% on that investment portfolio to have the kind of ROE you're talking about.

 

Could Warren Buffett earn 5% to 7% on a $60 billion portfolio. 100% guaranteed he could. Can Hamblin Watsa earn 5% to 7% on a $60 billion portfolio? I have a hunch they can going forward.

[StubbleJumper]

13 minutes ago, Thrifty3000 said:

 

Yes, 15% is possible long term. The magic is in the $2,700 of portfolio investments per share vs $900 per share of book value. You only need to earn 5% to 7% on that investment portfolio to have the kind of ROE you're talking about.

 

Could Warren Buffett earn 5% to 7% on a $60 billion portfolio. 100% guaranteed he could. Can Hamblin Watsa earn 5% to 7% on a $60 billion portfolio? I have a hunch they can going forward.

 

 

Well, that's the mental short-cut.  But, you are also making a few unstated assumptions, right?  When you say that 5% with 3x leverage = 15% ROE, implicitly, you are assuming that:

 

Underwriting income -

Interest expense -

Corporate overhead -

Income tax =

0 or a positive number

 

Most years that assumption will not hold.

 

 

SJ

[MMM20]

4 hours ago, ander said:

I know Prem targets 15%. Is that realistic?

 

Play around with the numbers yourself and decide what you think is fair, but this is one way to get to ~15%. Someone please tell me if I'm missing something stupid. Didn't sleep much last night.

 

Investments

~$40B cash+fixed income @ ~5-6% yield

~$20B equities @ ~8-10% total return

= ~$4-4.5B return on assets

 

Financed in part by

~$30B float @ ~2-3% net margin (~97-98% combined) = negative $600-900mm

~$10B in debt+prefs @ 7-8% = ~$700-800mm

= ~zero net financing cost

 

minus opex and taxes

 

~$3-3.5B net income

vs ~$20B equity 

 

= ~15%+ ROE

 

Let's see if Prem follows through on his Teledyne inclinations and takes out enough stock over time to shrink book value to 0. If he does, I think some of our board members' heads might explode

 

BTW even if we're looking at more like a ~10-12% ROE, that's enough for a ~15%+ per share return if they're using cash flow to buy back big chunks of stock at big discounts to IV (eg Dec '21).

 

Edited November 14, 2023 by MMM20

[StubbleJumper]

17 minutes ago, MMM20 said:

Someone please tell me if I'm missing something stupid.

 

That looks like roughly the right recipe to get a 15% ROE.  You need either outstanding investment results and to break even on the underwriting, or you need a bit of underwriting profit and a good investment return.  The recipe with a 97-98 CR and a 7.3% investment return looks like it would roughly do the job.

On page 15 of his annual letter, Prem included an interesting table on CRs and investment returns.  It's been unusual to simultaneously get both solid investment results AND profitable underwriting.  Some years (like in 2023, probably!) you get both and it provides a fantastic ROE. 

 

 

SJ 

[Spekulatius]

4 hours ago, SafetyinNumbers said:

On the face of it, it’s bigger, more liquid and has a larger dividend. 

More consistent results and property insurers trade at a higher multiple than re-insurers generally speaking.

 

A blue chip property insurer like RLI trades at 4x+ book for example. A mediocre re-insurers like AXS for example trades around book and often below.

Edited November 14, 2023 by Spekulatius