Fairfax 2023

[Viking]

Many sceptics who follow P/C insurance companies are waiting with baited breath for the hard market to end. High interest rates HAVE TO cause the end of the hard market. Right? Well, maybe not. Why? Chubb provided some context on the casualty side of the insurance business. It looks to me like 2024 could see similar top line growth as 2023 of 8 to 10%. Similarly, company combined ratios could also come in similar to 2023. Excellent news for P/C insurance companies if that is what happens.

 

From the Chubb Q3 conference call:
 

Brian Meredith

…Evan, a little bigger picture here, just thinking about just generally, the casualty lines here. As you kind of pointed out, really attractive combined ratios that you're printing and in the industry in general. And now we're also looking at long-term interest rates that are, gosh, decade high, right? Are we seeing any weakness at all from a pricing perspective? Do you anticipate that's going to start happening here in the next 12 months, just given the return profile of the business and how attractive it is?

 

Evan Greenberg

I haven't seen it really, because higher interest rates are also a proxy for loss cost inflation. So, you've got an industry that I think is trying to stay on top of loss cost or has that impetus behind them to stay on top of loss cost in casualty. And other than in workers' comp, it hasn't been totally benign as you well know, and it's been around for a while. So, I think that higher yields are ameliorating.

 

And by the way, if you do the math and you translate the higher yields to what it means to earn the same return, what combined ratio affect you would get to achieve the same return, it's modest in combined ratio relatively, 1 point here, 1 point there. It’s not like, wow, I can raise my combined ratio by 5 points to achieve the same 15%, as an example, risk-adjusted return. No, you can't, and we run the math.

Edited October 26, 2023 by Viking

[valuesource]

Price target change from CIBC, $1,400 —> $1,500

[SafetyinNumbers]

2 minutes ago, valuesource said:

Price target change from CIBC, $1,400 —> $1,500

Unfortunately I can’t share the note but it’s really well done. 

[treasurehunt]

16 hours ago, Viking said:

And by the way, if you do the math and you translate the higher yields to what it means to earn the same return, what combined ratio affect you would get to achieve the same return, it's modest in combined ratio relatively, 1 point here, 1 point there. It’s not like, wow, I can raise my combined ratio by 5 points to achieve the same 15%, as an example, risk-adjusted return. No, you can't, and we run the math.

 

I don't understand this comment by Evan Greenberg. If investment yields have gone up a lot (say by 3 or 4 percentage points), then it should be possible to raise the combined ratio by a lot more than 1 point and achieve the same risk-adjusted return, no? I realize that this depends on the size of the investment portfolio relative to earned premiums, but the math for Fairfax indicates that the CR can go up a lot and they can still earn a good risk-adjusted return. Is it different for most other insurance companies?

[UK]

17 minutes ago, treasurehunt said:

 

I don't understand this comment by Evan Greenberg. If investment yields have gone up a lot (say by 3 or 4 percentage points), then it should be possible to raise the combined ratio by a lot more than 1 point and achieve the same risk-adjusted return, no? I realize that this depends on the size of the investment portfolio relative to earned premiums, but the math for Fairfax indicates that the CR can go up a lot and they can still earn a good risk-adjusted return. Is it different for most other insurance companies?

 

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? 

[Hoodlum]

Here is an initial estimate for Acapulco Hurricane damage.  Not sure what the insured costs would be.

 

https://www.insurancejournal.com/news/international/2023/10/26/745851.htm

 

Quote

Acapulco likely suffered an economic impact of $10 billion to $15 billion, according to Chuck Watson, a disaster modeler with Enki Research. There will be added losses because the region’s high season for tourism is December to March.

 

[valuesource]

Byron Wein, formerly of Morgan Stanley, passed away at age 90.  I remember him supporting the Short Thesis propagated by SAC Capital, Exis, Morgan Keegan, etc...  I don't blame him.  Those guys would have been good clients.  Some of us got some good opportunities below $100 CAD.  And the Jan 2008 $140 strike Calls went from $2.00 to over $160.  Stock was $92 USD back then with about 1.5 years to expiry.

[vinod1]

29 minutes 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? 

 

Not Fairfax, but most insurers do asset liability matching. So for current book of business changes to interest rates, does not matter all that much. 

 

But for writing any new business, the cash coming in on that would be invested at higher rates. So they can afford to write at a higher CR. 

[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.

[DM1]

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!

[Haryana]

About half the current market cap?

[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.