Fairfax 2023

[OCLMTL]

1 hour ago, MMM20 said:

I respect the full Kelly criterion sizing. I don’t have the risk tolerance for that. Anything about FFH at 75% keep you up at night? What do you think could go wrong? How do you know when to cut it down or exit?
 

I’m constantly a bit paranoid I’m missing something. “It ain’t what you don’t know that kills you…”

 

What makes me comfortable is the low risk of waking up overnight and the stock being down 20-30% in one day or with one earnings release, like a biotech or very high multiple stock. The margin of safety is so big due to tailwinds + low multiples. 
 

i feel like it’s also a great hedge vs my housing, I.e. my homes have certainly gone done in value in the last 18 months due to rates while FFH will benefit. At the end of the day, mathematically, it should add $130-160 per year for 2-3 years to BV, and I don’t see how current BV gets chopped by 20-30% and/or multiple going back to 0.8x. In fact, I think the most likely scenario is a $1200-1400 BV within 3 years and a 1.2x multiple which gets us to around $2K CAD. I’m a big believer in the capital markets angle that @SafetyinNumbers has been pushing. PMs, at the margin, likely won’t add to banks here, they are all OW IFC (great company and stock) and FFH will be as big as IFC in the index soon. That will lead to uncomfortable conversations between CIOs, PMs analysts, as it pertains to why they have zero weight in FFH while the stock doubled under their nose in the last 24 months. 
 

we shall see. I’ll humbly adapt positioning if I need to. 

[UK]

On 10/20/2023 at 5:51 PM, Xerxes said:

 

Luca

i think you might enjoy this episode. Peter Keefe talks about his top three positions (decade(s) old holdings) in about 45 min into the episode. 
 

The top three (Microsoft, Markel and American Tower) are very different holdings and different history of how he got into them. There are lots of lore on American Tower.

 

At is pertains this thread and “driving FFH to the wall comment” by @StubbleJumper, Peter’s view on Markel is interesting. Calls insurance not a very good business and that he is only there because of the management as capital allocator. 

 

This is a new name for me, but it is very interesting/good interview! Liked his angle on nature. The only thing missing: a question on his view re MKL vs FFH:)

 

This seems to be his 13F: https://13f.info/13f/000103347523000006-avenir-corp-q2-2023

 

Edited October 22, 2023 by UK

[gfp]

https://static.ew.wbm.infomaker.io/wp-content/uploads/sites/4/2023/10/Baden_Baden_Daily_One.pdf?utm_source=listrak&utm_medium=email&utm_term=Download+issue+one%3a+22+October&utm_campaign=Welcome+to+our+Baden-Baden+2023+Day+One+edition%3a+Sunday%2c+22+October
 

link to a free insurance industry publication with several interviews and recent color on industry expectations (from Baden Baden conference)

[MMM20]

On 1/4/2023 at 10:31 AM, MMM20 said:

 

 

Price/Book vs. BRK / MKL... don't mind me...

 

 

 

So what are the odds FFH trades at a premium to MKL by, let's say, year end 2024? 

 

I hear rates are still going up

 

 

Edited October 23, 2023 by MMM20

[Crip1]

5 hours ago, MMM20 said:

 

 

 

So what are the odds FFH trades at a premium to MKL by, let's say, year end 2024? 

 

I hear rates are still going up

 

 

Well, our crystal balls are not totally clear, but as someone who holds all 3 companies, I’d be willing to bet that Fairfax grows BV at a faster rate in the next year or so than the other two. Couple that with the fact that Fairfax has a better chance of P/BV multiple expansion and one can understand why I have more FFH than I do MKL and Berkshire combined.

Back to the question…I hate that this is going to sound snippy but I minimally care if FFH trades at a premium or a discount to MKL. Multiple expansion has been debated a fair amount on this board which, in and of itself, is harmless, but I don’t really care that much. What I DO care about is execution by the company.

Fairfax is executing, and has been for a number of years. The interesting thing (to me, at least) is that they’ve morphed from a company who has to do something(s) very smart (very difficult) to a company who has to not do something stupid (difficult as well, but easier). Avoiding something stupid should allow them to grow BV by 15%/Year (thanks Viking) which is in excess of a 50% increase. If that happens, the chances are extraordinarily good that Price/Book will expand. To what extent, God only knows, but adding 3 years on top of what we’ve already seen will, doubtlessly resonate with investors, and that happens by avoiding something stupid. 
1.2x Book, 1.3x, 1.4? Who knows? But growing book at a 15% clip will result in a nice return for shareholders.
 

-Crip

[backtothebeach]

Is there no thread for WR Berkley?

 

WRB up 8% today on Q3 earnings:

 

https://seekingalpha.com/news/4023074-wr-berkley-q3-earnings-climb-on-better-investment-results-premium-growth

 

A template for Fairfax?

[Malmqky]

8 minutes ago, backtothebeach said:

Is there no thread for WR Berkley?

 

WRB up 8% today on Q3 earnings:

 

https://seekingalpha.com/news/4023074-wr-berkley-q3-earnings-climb-on-better-investment-results-premium-growth

 

A template for Fairfax?

Short term treasuries go BRRRR

 

Fairfax earnings are going to be eye opening for a lot of folks I think. Inflection point has been reached, but it’s going to be REALLY obvious in the coming few months I reckon…

[Jaygo]

Acapulco Mexico got hit very hard overnight from a cat 5. It looks like major damage from wind and surge.

 

Not sure if it has any financial effect on these insurers but it does show the hurricane season is not over for North America.

[Hoodlum]

1 hour ago, Jaygo said:

Acapulco Mexico got hit very hard overnight from a cat 5. It looks like major damage from wind and surge.

 

Not sure if it has any financial effect on these insurers but it does show the hurricane season is not over for North America.

 

The closest comparable would be Hurricane Pauline hitting Acapulco as a Category 4 Hurricane in 1997.  That hurricane caused $9.7B in damage although I don't know how much of that is covered by insurance.  My highly pie in the sky guestimate is that this could be $20B+ for the Category 5 hurricane now.  But total insured amount will likely be much less than that.

 

I don't think this will be a big insurance event although it will help contribute to an ongoing hard market.

 

I believe this is the latest in the year that we have seen a category 5 hurricane hit North America.

Edited October 25, 2023 by Hoodlum

[Hoodlum]

I hope that the residents had enough time to find cover.

 

https://www.artemis.bm/news/high-probability-mexico-cat-bond-loss-will-be-50-62-5m-from-otis-plenum/

 

Quote

Moreover, what sets this hurricane apart is its rapid intensification in the last 24 hours. Indeed, hurricane Otis formed only 3 days ago, on October 22 2023, in the Eastern Pacific, close from Mexico. The storm then remained a low intensity storm (tropical storm) for the following 2 days. Only 12 hours before landfall the storm began to intensify at a very rapid rate. Within 12 hours, the storm intensified from a tropical storm into a category 5 storm, which represents the fastest intensification of a hurricane in Eastern Pacific history (according to Chicago State University).”

 

[Viking]

Below are some of my key take-aways from WR Berkley’s earnings. They have very low duration with their fixed income portfolio. As a result, interest income is spiking higher. At the same time, we are in a hard market in insurance - top line growth is very good and underwriting profit is very good. 
 

P/C insurance is in the sweet spot right now. Both investments and insurance are gushing cash. But P/C insurance is such a small segment of the overall market… few seem to be noticing. Well, WRB shares have popped higher the past 2 days so perhaps this is changing. 
 

Because of unrealized losses from bonds, despite strong EPS, book value per share has gone sideways the past 2 quarters at WRB. But WRB has very low duration on their fixed income portfolios. It will be interesting to see what reported BV/share for other insurers come in at when they report. 
 

WR Berkey Q3 results: a few key take-aways

1.) hard market continues to roll along. Top line growth actually ticked higher to 10.5%

2.) investment income is popping higher

• Book yield 4.5%
• Average duration is still short at 2.4 years.
• new money yield is 6% up from 5.4% in Q2

3.) book value per share was flat quarter over quarter

• Q3 = $26.80
• Q2 = $26.74
• Q1 = $26.45

4.) reported ROE was 19.8%

 

“Record quarterly net investment income of $271 million grew by 33.6% with the core investment portfolio increasing by 59.3%. There are two main drivers for the significant increase in the core portfolio, including the rising interest rate environment benefiting the reinvestment of fixed-maturity securities as they mature or are redeemed. And second, the increase in the size of the portfolio, due to continuous record levels of operating cash flows.”

 

“As of September 30, 2023, reflected in common stockholders equity are after-tax unrealized investment losses of $944 million an unrealized currency translation losses of $379 million. As of December 31, 2022, after tax unrealized investment losses were $893 million an unrealized currency translation losses were $372 million.”

Edited October 25, 2023 by Viking

[Viking]

Chubb reported results yesterday. Lots of the same themes as WRB… hard market is not ending. Investment income is increasing. Chubb is a well run P/C insurer; very good at the insurance side of the business. 

 

Investments

• Portfolio yield finished Q3 at 4.1%; was 3.4% a year ago.
• Average reinvestment rate is 6.2%.
• investment income was up 34% in the quarter.

—————
The question and answer below made me think of Fairfax and the international insurance platform they have patiently been building out over the past 20 years. Not just in SE Asia, but also in India.

—————

From the Chubb Q3 conference call: 

 

Alex Scott

Hi. I wanted to ask about the environment broadly in Asia, across the different countries… Where do you see the growth opportunities looking ahead?

 

Evan Greenberg

…Asia and North America are the two regions, I think that will have the greatest economic growth potential over the next decade or two.

 

And Asia, get out of China, Asia is very vibrant, very dynamic. North Asia, older population. Southeast Asia with over 700 million people, young populations, and those economies are growing more quickly and they're emerging. Look at Vietnam today. Look even where Indonesia is going today. Singapore, those markets are all -- and Thailand, those markets are so dynamic with a lot of opportunity, but it's hard work.

 

You have to really know those markets, and we've been there for decades. And we have spent the time to build and build and build capability on a local market basis. It's nothing to say you're in Asia. It's where are you in your capability in Thailand or Vietnam or any of these markets. They're distinct and you've got to have local capability, knowledge and a good command and control around underwriting. I'm very energized about what I see for this company over time in Asia. And I think it will continue to represent over time a greater share of our business.

 

Edited October 26, 2023 by Viking

[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.

[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!