Fairfax 2024

[Maverick47]

Sandy was a hurricane in 2012, but when it hit the Northeast it had weakened to Tropical Storm strength.  A  number of the northeastern states had coastal home insurance customers with hurricane deductibles of 1 to 5% of the replacement value of their homes.  Insurance commissioners determined that the wind speed at landfall was less than hurricane  strength, so did not allow the higher hurricane deductibles to apply.  That probably helped contributed to the losses of about $93 billion.

Since hurricane deductibles were not triggered, the industry tends to refer to the event as Superstorm Sandy.

 

A category 3 or greater hurricane hitting the right portion of the Northeastern US could cause insured losses many times that of Sandy.

 

[StubbleJumper]

4 hours ago, 73 Reds said:

Viking, do you or anyone here know what the most significant catastrophic insurance event was that affected Fairfax and what it cost & when it occurred?  Also, do we know the maximum dollar liability the company may be on the hook for now for any single event? 

 

I'm guessing 9/11 or KRW.

 

Edit: after looking up the impact of 9/11 it was 10.3 cat points on the CR and KRW was 13.9 cat points on the CR.  As a point of reference, all catastrophes during 2023 were a combined 4 cat points on the CR.

 

@Maverick47 Sandy was 4.5 cat points.  But interestingly, the same table in the AR shows the Japan earthquake (the one that affected the nuclear plant at Fukashima) in 2011 was 8.8 cat points, which surprises me even though I probably read that AR a dozen times a dozen years ago.

 

 

SJ

Edited August 21 by StubbleJumper

[TwoCitiesCapital]

2 hours ago, Maverick47 said:

Sandy was a hurricane in 2012, but when it hit the Northeast it had weakened to Tropical Storm strength.  A  number of the northeastern states had coastal home insurance customers with hurricane deductibles of 1 to 5% of the replacement value of their homes.  Insurance commissioners determined that the wind speed at landfall was less than hurricane  strength, so did not allow the higher hurricane deductibles to apply.  That probably helped contributed to the losses of about $93 billion.

Since hurricane deductibles were not triggered, the industry tends to refer to the event as Superstorm Sandy.

 

A category 3 or greater hurricane hitting the right portion of the Northeastern US could cause insured losses many times that of Sandy.

 

 

I was in NYC for Sandy. Everything South of 14th Street was a disaster for weeks. The financial district ran off emergency generators on 18-wheelers for months after the storm. 

 

The subways flooded and was months to 1-2 years before certain lines where back to normal schedules (like the NJ Path). 

 

A real hurricane would mess up the area bigly....

[Munger_Disciple]

19 minutes ago, TwoCitiesCapital said:

 

I was in NYC for Sandy. Everything South of 14th Street was a disaster for weeks. The financial district ran off emergency generators on 18-wheelers for months after the storm. 

 

The subways flooded and was months to 1-2 years before certain lines where back to normal schedules (like the NJ Path). 

 

A real hurricane would mess up the area bigly....

 

What do people think the hit to book of Fairfax under a serious catastrophic event causing a total damage of something of the order of $300 billion?

[73 Reds]

11 hours ago, StubbleJumper said:

 

I'm guessing 9/11 or KRW.

 

Edit: after looking up the impact of 9/11 it was 10.3 cat points on the CR and KRW was 13.9 cat points on the CR.  As a point of reference, all catastrophes during 2023 were a combined 4 cat points on the CR.

 

@Maverick47 Sandy was 4.5 cat points.  But interestingly, the same table in the AR shows the Japan earthquake (the one that affected the nuclear plant at Fukashima) in 2011 was 8.8 cat points, which surprises me even though I probably read that AR a dozen times a dozen years ago.

 

 

SJ

It would be interesting and probably scary at the same time to see a current schedule of all insured catastrophic events and the max liability for each.

[SafetyinNumbers]

10 hours ago, Munger_Disciple said:

 

What do people think the hit to book of Fairfax under a serious catastrophic event causing a total damage of something of the order of $300 billion?

3-3.75b based on 1-1.25%. Fairfax might breakeven in a year like that. 

[StubbleJumper]

23 minutes ago, 73 Reds said:

It would be interesting and probably scary at the same time to see a current schedule of all insured catastrophic events and the max liability for each.

 

 

I'm sure that there's an internal table or schedule with the max impact of specific existential events, but I doubt very much that shareholders would ever get to see that!

 

But, it is somewhat sobering to look at current Net Earned Premiums and then multiply that number by the 13.9% hit from the Katrina, Rita, Wilma hurricanes, or the 8.8% hit from that Japan earthquake.  I understand that the company says it's less exposed to hurricane risk on the east coast now than it was for KRW, but those events would still be a big number!

 

 

SJ

[Hoodlum]

This is where increasing Cash/short term securities from the current $2.5B to $3.5B would help.  With the current $2.5B and the above scenarios, Fairfax would need to pull additional dividends from their subs to cover these adverse events.

Edited August 21 by Hoodlum

[gfp]

7 minutes ago, Hoodlum said:

This is where increasing Cash/short term securities from the current $2.5B to $3.5B would help.  With the current $2.5B and the above scenarios, Fairfax would need to pull additional dividends from their subs to cover these adverse events.

 

Are you talking about holding company cash?  That isn't where claims are paid from.  There are plenty of invested assets, cash and otherwise, in the insurance subs and that is where claims are paid from.

[StubbleJumper]

4 minutes ago, gfp said:

 

Are you talking about holding company cash?  That isn't where claims are paid from.  There are plenty of invested assets, cash and otherwise, in the insurance subs and that is where claims are paid from.

 

Agreed.  The value of the holdco cash and the ability to tap into the revolver is that the holdco can quickly inject cash into a sub if that sub had mismanaged its exposures so badly that it had a capital shortfall.  But, we have to trust that the subs are carefully managing their exposure and will not have a capital shortfall to begin with.  The other value of that holdco cash balance is that large cats like 9/11 or KRW tend to trigger a hard market the next year, so it's nice if the holdco is able to add capital to a sub that might want to write a pile more business the year following the cat.

 

 

SJ

[Cigarbutt]

39 minutes ago, StubbleJumper said:

I'm sure that there's an internal table or schedule with the max impact of specific existential events, but I doubt very much that shareholders would ever get to see that!

...

SJ

The closest one can see from the outside that would look like that internal table is the following:

which can be found in the "ESG" report, with the next actualized version including 2023 likely coming to their website sometimes this fall.

Opinion: Catastrophe exposure is what it is but FFH has become less exposed to the risk/reward.

[Munger_Disciple]

Thanks @SafetyinNumbers, @StubbleJumper and @Cigarbutt for your perspectives on the loss estimates. 

[MMM20]

On 8/7/2024 at 7:09 PM, MMM20 said:

We are talking about a 10% ish drawdown. This happens like twice a year. If this is causing you pain and suffering, you’re probably too big in Fairfax.
 

I thought Charlie was talking about the ~50% portfolio drawdown that we’ll all go through at some point. 

 

 

Where are the posts about the extreme volatility of the past two weeks?

 

Edited August 21 by MMM20

[Santayana]

Those 10% pullbacks are such gifts.

[Munger_Disciple]

6 hours ago, StubbleJumper said:

 

 

I'm sure that there's an internal table or schedule with the max impact of specific existential events, but I doubt very much that shareholders would ever get to see that!

 

But, it is somewhat sobering to look at current Net Earned Premiums and then multiply that number by the 13.9% hit from the Katrina, Rita, Wilma hurricanes, or the 8.8% hit from that Japan earthquake.  I understand that the company says it's less exposed to hurricane risk on the east coast now than it was for KRW, but those events would still be a big number!

 

 

SJ

 

Annualizing the first six month net premiums for 2024, we get $26 Billion in net annual premiums. So that gives us roughly $3.6 Billion loss for a Katrina type CAT event which is roughly in line with the numbers suggested by @SafetyinNumbers. It equates to roughly 12%-13% after tax earnings hit to book. 

[SafetyinNumbers]

4 hours ago, Munger_Disciple said:

 

Annualizing the first six month net premiums for 2024, we get $26 Billion in net annual premiums. So that gives us roughly $3.6 Billion loss for a Katrina type CAT event which is roughly in line with the numbers suggested by @SafetyinNumbers. It equates to roughly 12%-13% after tax earnings hit to book. 

They probably still make money that year.

[StubbleJumper]

1 hour ago, SafetyinNumbers said:

They probably still make money that year.

 

Edit: Just ignore my comment, I'm mathematically challenged tonight!

 

 

SJ

Edited August 22 by StubbleJumper

[Viking]

On 8/19/2024 at 3:33 PM, nwoodman said:

I am in the combined ratios revert to 100 camp. However i wouldn’t be surprised if the mix of insurance Fairfax is writing today may favour better CRs than 10 years ago.  @glider3834 posted a league table a while back of Specialty underwriters that showed Fairfax had made considerable inroads primarily at the expense of Markel.  Then there was that insight that Markel baulked on Allied World.  Not saying it will be different this time but I do feel there is perhaps more flexibility across lines and geography than there used to be.  This may allow a bit more of a National Indemnity philosophy in terms of underwriting discipline.  Thank you again Andy Barnard. 

Buffett on NICO

“Some companies would feel that having [a significantly higher expense ratio] would be intolerable - but what we feel is intolerable is writing bad business… If you get a culture of writing bad business, it’s almost impossible to get rid of. We would rather suffer too much overhead than to teach our employees that, in order to retain their jobs, they needed to write any damn thing that came along, because that’s a very hard habit to get rid of once you’re hooked on it… I think we’re almost the only insurance company in the world - certainly public - that sends the absolutely unequivocal message to the people associated with us that they will never be laid off because of a lack of volume.”

@nwoodman  I thought this would be interesting to dig into a little: “I am in the combined ratios revert to 100 camp.”

 

Now i should say… i am not a P/C insurance guy. So i look forward to feedback from others who know much more than me on this topic. There is a lot of discussion on the board about Fairfax’s CR normalizing to 100 because ‘that is what always happens to P/C insurance.’
 

When i look at ‘P/C insurance’ I don’t see a homogenous business. Rather, i see a collection of very different businesses:

- Personal lines or commercial?

- Reinsurer or primary insurer?

- Standard or specialty?

- Is the business skewed to short tail (property or auto) or long tail (professional liability or workers comp)?

And then you have to overlay lots more important factors:

- geographies (US, UK, Europe, MENA, India…. Etc). This is a big one (getting bigger for Fairfax.)

- reserving history

The bottom line, I don’t think there is a ‘P/C insurance market.’ It looks to me like there are many (hundreds?) of P/C insurance markets. Especially for a global company like Fairfax. As a result, I think it highly unlikely that global insurance markets enter a synchronized soft market. instead, maybe we get rolling soft markets? 
 

A good example is workers comp in the US. I think it has been in a soft market for the past 5 years. This is significant business for Fairfax that looks poised to start to grow again in the coming years (just not sure when).

Intact Financial just warned about outsized catastrophe losses in Canada in Q3. They are the 800lb gorilla here - perhaps this extends the hard market another year here in Canada.

 

Bond yields have come way down in recent months. Central banks are easing - so yields could move even lower in the coming months/year. Many insurers were not able to roll a significant amount of their portfolio into longer dated bonds at peak rates (perhaps they missed the window). Lower bond yields moving forward will likely result in more discipline from most P/C insurers (they will need a solid CR to deliver the ROE expected by Wall Street).

 

WR Berkley keeps getting asked on conference calls if the ‘hard market’ is over. They keep saying the P/C insurance market (in the US) is splintering into ‘markets’, each with its own cycle (some soft, some hard and others in between).
 

Now we could get a really bad year for catastrophes and Fairfax’s CR might temporarily pop over 100 for that year. Perhaps we get two of these in a row - anything is possible. 
 

But do we get 4 or 5 years in a row? Never say never, but that seems highly unlikely.
 

Why? Because Fairfax looks too diversified (line of business, geography etc). The diversification is beneficial not just in terms of catastrophe exposure. It is also really beneficial in terms of the insurance market cycle (does India’s auto market run lock step with that of the US)?
 

The other really big factor is reserving. We could see reserve releases in the coming years surprise to the upside (especially if inflation comes down hard and stays low for years) - this might actually drive CR’s even lower for Fairfax (into the low 90’s, like we saw a decade ago). Not my base case. But not crazy talk either.

 

Bottom line, i think we have pretty good line-of-sight as to what a ‘normalized’ CR is for Fairfax in today’s environment. But 4 or 5 years from now? I don’t have a strong opinion. But that is the same for all P/C insurers (not just Fairfax).

 

Now it could be that i am completely out of my league - i have not owned Fairfax through a brutal hard market. So my view might simply be like a Disney movie. So i will continue to closely monitor the situation.
 

What i do care deeply about: Is Fairfax a disciplined underwriter? How disciplined/good are they?

 

I think the insurance cycle in the US will matter for Fairfax’s stock price (and all P/C insurers). If we get word that the hard market in the US has ended and P/C insurers are losing their discipline my guess is ALL P/C insurance companies will get taken out behind the woodshed. Which would probably give Fairfax the opportunity to buy back all the shares they want at very attractive prices. What i love about Fairfax right now is their flexibility/optionality - ability to flip the script - to actually benefit from what looks like a bad thing.

Edited August 22 by Viking

[UK]

Re insurance/CR: as of recent still ahead of BRK (good enough for me:)).

 

Edited August 22 by UK

[UK]

https://www.insurancejournal.com/news/international/2024/08/15/788486.htm

 

“Unlike previous boom and bust cycles, there are a number of factors—climate trends, an increasingly complex risk environment, and a prolonged period of higher interest rates—that make us believe these improved underwriting margins are likely to last for at least another couple of years if underwriting discipline is maintained,” said AM Best in its report titled “Strong Technical Profits Bolster Momentum for Global Reinsurers.”

 

https://www.swissre.com/media/press-release/pr-20240822-hy-2024-press-release.html

 

P&C Re renewed contracts with USD 4.5 billion in treaty premium volume on 1 July 2024. This represents a 7% volume increase compared with the business that was up for renewal. Overall, P&C Re achieved a price increase of 8% in this renewal round.

 

Edited August 22 by UK

[Maverick47]

2 hours ago, Viking said:

Now i should say… i am not a P/C insurance guy. So i look forward to feedback from others who know much more than me on this topic. There is a lot of discussion on the board about Fairfax’s CR normalizing to 100 because ‘that is what always happens to P/C insurance.’
 

When i look at ‘P/C insurance’ I don’t see a homogenous business. Rather, i see a collection of very different businesses:

- Personal lines or commercial?

- Reinsurer or primary insurer?

- Standard or specialty?

- Is the business skewed to short tail (property or auto) or long tail (professional liability or workers comp)?

And then you have to overlay lots more important factors:

- geographies (US, UK, Europe, MENA, India…. Etc). This is a big one (getting bigger for Fairfax.)

- reserving history

The bottom line, I don’t think there is a ‘P/C insurance market.’ It looks to me like there are many (hundreds?) of P/C insurance markets. Especially for a global company like Fairfax. As a result, I think it highly unlikely that global insurance markets enter a synchronized soft market. instead, maybe we get rolling soft markets? 

@Viking  I think you actually understand the forest of the P/C business as well as, if not better than, most folks who worked in a particular area of the business (such as myself) and who thus perhaps know more than you do only about a particular grove of trees in that forest!  That said, humility is one of the better characteristics of true value investors, so far be it from me to ever ask you not to employ it….

 

As you alluded to, some of those groves are longer or shorter tailed, or are primary rather than reinsurance, or commercial vs personal, to say nothing of the various geographies and regulatory regimes.  I do know enough about the surviving competitors in the business to feel optimistic about a soft cycle not necessarily hitting all lines at the same time, and that we’ve seen enough discipline from many participants in the business to not expect that this would necessarily mean a reversion to a 100 CR for Fairfax.

 

If you search Buffett’s letters from first decade or so after he bought all of Geico, he would often bemoan the lack of underwriting discipline of GEICO’s competitor, State Farm, which as a mutual insurance company, had accumulated a massive amount of surplus and was apparently more than willing to expend that surplus in support of CR’s well above 100 to maintain their industry leading market share.

 

This has changed over time, and as an example, State Farm is no longer willing to write business at a loss even in very  large states such as Florida and California simply to maintain market share.  I’ve seen similar examples of numerous US competitors also “getting religion” about the need to achieve CRs below 100.

2 hours ago, Viking said:

What i do care deeply about: Is Fairfax a disciplined underwriter? How disciplined/good are they?

That is exactly the right question to focus on.  They have exhibited this discipline in the recent past and Prem certainly highlights the CRs by subsidiary in his letters, which shows to us shareholders (and the leaders of the insurance subs) that he cares about this a great deal.  I suppose the only thing that I might like to know in addition is whether the incentive compensation plans for employees value this as well.  I do like it when everyone’s interests are aligned….

Edited August 22 by Maverick47

[nwoodman]

4 hours ago, Viking said:

If we get word that the hard market in the US has ended and P/C insurers are losing their discipline my guess is ALL P/C insurance companies will get taken out behind the woodshed. Which would probably give Fairfax the opportunity to buy back all the shares they want at very attractive prices. What i love about Fairfax right now is their flexibility/optionality - ability to flip the script - to actually benefit from what looks like a bad thing.

@viking, as we know it is a cyclical mean reverting commodity business so what really matters is underwriting discipline.  I am not seeing anything that suggests they are being anything other than disciplined.  
 

Timely that Morgan Stanley released a recent industry status report summarised as follows:
 

1. Market Conditions:

   - The report indicates diverging trends between life and P&C insurers.
   - P&C insurers are generally in a stronger position currently, but facing some headwinds.

2. Social Inflation:
   - This is a major concern for commercial carriers, putting pressure on margins and potentially leading to higher combined ratios.
   - The long-term impact of social inflation may be underappreciated by the market.

3. Personal Lines:
   - Personal lines carriers like Progressive and Allstate are seeing improving results, particularly in auto insurance as pricing stabilizes.

4. Reinsurance:
   - Reinsurers had mixed results - ahead on earnings but below expectations on premium growth.
   - Pricing remains firm, but growth is moderating, which could be an early sign of softening.

5. Commercial Lines:
   - Facing challenges due to social inflation and potential reserve inadequacies.
   - Pricing remained stable to positive overall in Q2 2024, but there are some marginal declines sequentially from the previous quarter.

6. Potential for Softening:
   - While not explicitly forecasting a broad market softening, the report provides some indicators that could point in that direction:
     a) Moderating growth in reinsurance
     b) Sequential declines in commercial pricing
     c) Stabilizing personal lines pricing
   - However, the report also notes that different segments of the market are in different stages of their cycles.

 

Perhaps I could have made it clearer in my original post, but I agree that their mix of lines and geography helps. Although a CR of a 100 is hardly the end of the world, especially if is a better CR than your peers.  Maybe I place too much emphasis on relative performance, but I see this as important over time.

 

Ultimately Fairfax will turn out to be an OK or great investment based on their capital allocation, same as Berkshire.  This means “don’t lose capital”.

 

 

INSURANCE_20240819_0411.pdf

Edited August 22 by nwoodman

[Viking]

11 hours ago, nwoodman said:

@viking, as we know it is a cyclical mean reverting commodity business so what really matters is underwriting discipline.  I am not seeing anything that suggests they are being anything other than disciplined.  
 

Timely that Morgan Stanley released a recent industry status report summarised as follows:
 

1. Market Conditions:

   - The report indicates diverging trends between life and P&C insurers.
   - P&C insurers are generally in a stronger position currently, but facing some headwinds.

2. Social Inflation:
   - This is a major concern for commercial carriers, putting pressure on margins and potentially leading to higher combined ratios.
   - The long-term impact of social inflation may be underappreciated by the market.

3. Personal Lines:
   - Personal lines carriers like Progressive and Allstate are seeing improving results, particularly in auto insurance as pricing stabilizes.

4. Reinsurance:
   - Reinsurers had mixed results - ahead on earnings but below expectations on premium growth.
   - Pricing remains firm, but growth is moderating, which could be an early sign of softening.

5. Commercial Lines:
   - Facing challenges due to social inflation and potential reserve inadequacies.
   - Pricing remained stable to positive overall in Q2 2024, but there are some marginal declines sequentially from the previous quarter.

6. Potential for Softening:
   - While not explicitly forecasting a broad market softening, the report provides some indicators that could point in that direction:
     a) Moderating growth in reinsurance
     b) Sequential declines in commercial pricing
     c) Stabilizing personal lines pricing
   - However, the report also notes that different segments of the market are in different stages of their cycles.

 

Perhaps I could have made it clearer in my original post, but I agree that their mix of lines and geography helps. Although a CR of a 100 is hardly the end of the world, especially if is a better CR than your peers.  Maybe I place too much emphasis on relative performance, but I see this as important over time.

 

Ultimately Fairfax will turn out to be an OK or great investment based on their capital allocation, same as Berkshire.  This means “don’t lose capital”.

INSURANCE_20240819_0411.pdf 9.12 MB · 7 downloads

@nwoodman, I completely agree. 

 

“Ultimately Fairfax will turn out to be an OK or great investment based on their capital allocation, same as Berkshire.  This means “don’t lose capital”.”

 

Fairfax is a good underwriter and at a 95CR, underwriting income still only represents about 20% of their various income streams. About 80% comes from investments. So yes, Fairfax is levered much, much more to investments. 
 

I think underwriting income is something like 45% of the income streams for most P/C insurers, with investments driving the other 55% (mostly interest income). So Fairfax is also much more levered to the investment side of the business than peers. 
 

This also means earnings at Fairfax are impacted much less by the insurance cycle than other P/C insurance peers. My guess is this is not well understood by Mr Market.

Edited August 22 by Viking

[Viking]

11 hours ago, Maverick47 said:

@Viking  I think you actually understand the forest of the P/C business as well as, if not better than, most folks who worked in a particular area of the business (such as myself) and who thus perhaps know more than you do only about a particular grove of trees in that forest!  That said, humility is one of the better characteristics of true value investors, so far be it from me to ever ask you not to employ it….

 

As you alluded to, some of those groves are longer or shorter tailed, or are primary rather than reinsurance, or commercial vs personal, to say nothing of the various geographies and regulatory regimes.  I do know enough about the surviving competitors in the business to feel optimistic about a soft cycle not necessarily hitting all lines at the same time, and that we’ve seen enough discipline from many participants in the business to not expect that this would necessarily mean a reversion to a 100 CR for Fairfax.

 

If you search Buffett’s letters from first decade or so after he bought all of Geico, he would often bemoan the lack of underwriting discipline of GEICO’s competitor, State Farm, which as a mutual insurance company, had accumulated a massive amount of surplus and was apparently more than willing to expend that surplus in support of CR’s well above 100 to maintain their industry leading market share.

 

This has changed over time, and as an example, State Farm is no longer willing to write business at a loss even in very  large states such as Florida and California simply to maintain market share.  I’ve seen similar examples of numerous US competitors also “getting religion” about the need to achieve CRs below 100.

That is exactly the right question to focus on.  They have exhibited this discipline in the recent past and Prem certainly highlights the CRs by subsidiary in his letters, which shows to us shareholders (and the leaders of the insurance subs) that he cares about this a great deal.  I suppose the only thing that I might like to know in addition is whether the incentive compensation plans for employees value this as well.  I do like it when everyone’s interests are aligned….

@Maverick47 when it comes to P/C insurance, I wonder if the overall market is a little more rational today than in the past. I look at all the shitty P/C insurance companies that Fairfax has purchased over the past 38 years - these have ALL been turned around. 
 

This does not mean there is not fierce competition. So we will see.

 

[73 Reds]

8 minutes ago, Viking said:

@nwoodman, I completely agree. 

 

“Ultimately Fairfax will turn out to be an OK or great investment based on their capital allocation, same as Berkshire.  This means “don’t lose capital”.”

 

Fairfax is a good underwriter and at a 95CR, underwriting income still only represents about 20% of their various income streams. About 80% comes from investments. So yes, Fairfax is levered much, much more to investments. 
 

I think underwriting income is something like 45% of the income streams for most P/C insurers, with investments driving the other 55% (mostly interest income). So Fairfax is also much more levered to the investment side of the business than peers. 
 

This also means earnings at Fairfax are impacted much less by the insurance cycle than other P/C insurance peers. My guess is this is not well understood by Mr Market.

Viking, I'm not sure I understand it either.  Does this simply mean that Fairfax writes less insurance?