Fairfax 2024

[gfp]

No clue.  The only news I could find today was the bond sale to finance part of the Sleep Country deal.

https://www.bnnbloomberg.ca/investing/2024/11/19/sleep-country-mulls-potential-bond-sale-in-rare-leveraged-buyout/

[MMM20]

18 minutes ago, longlake95 said:

Just sold all my FFH.PR.D. Wondering what's up? Why all the FFH prefs are soaring...

 

Let me be the first to wildly speculate that someone's leaking the news about index inclusion and funds are buying the prefs to get around insider trading laws.

[gfp]

1 minute ago, MMM20 said:

 

Let me be the first to wildly speculate that someone's leaking the news about index inclusion and funds are buying the prefs to get around insider trading laws.

 

How would that produce a profit on index inclusion?

[longlake95]

1 minute ago, MMM20 said:

 

Let me be the first to wildly speculate that someone's leaking the news about index inclusion and funds are buying the prefs to get around insider trading laws.

 

I agree

[Malmqky]

1 minute ago, MMM20 said:

 

Let me be the first to wildly speculate that someone's leaking the news about index inclusion and funds are buying the prefs to get around insider trading laws.

I wildly speculate this is the case too.

[SafetyinNumbers]

4 minutes ago, MMM20 said:

 

Let me be the first to wildly speculate that someone's leaking the news about index inclusion and funds are buying the prefs to get around insider trading laws.

I don’t think that makes any sense. I think FFH.PR.C and FFH.PR.D are close to their reset dates so likely prime candidates to get redeemed at par. 

[MMM20]

12 minutes ago, SafetyinNumbers said:

I don’t think that makes any sense. I think FFH.PR.C and FFH.PR.D are close to their reset dates so likely prime candidates to get redeemed at par. 

 

With respect to all the Canadians here (I love your country!), Occam's razor = something shady and borderline illegal involving the hedge fund community up there. Maybe I'm wrong about exactly what it is.

 

Edited November 19, 2024 by MMM20

[MMM20]

26 minutes ago, gfp said:

 

How would that produce a profit on index inclusion?

 

Cost of capital headed down across the board?

[SafetyinNumbers]

12 minutes ago, MMM20 said:

 

With respect to all the Canadians here (I love your country!), Occam's razor = something shady and borderline illegal involving the hedge fund community up there. Maybe I'm wrong about exactly what it is.

 

It’s a small country but I don’t think it takes a lot to predict redemption here. I assume mostly retail making the bet. The preferred aren’t very liquid so most hedge funds would pass.

[Hoodlum]

I blame it all on Muddy Waters.  

[mananainvesting]

Fairfax investing in Orla Notes: 

 

https://www.marketscreener.com/quote/stock/ORLA-MINING-LTD-19500426/news/Orla-Mining-Ltd-announced-that-it-expects-to-receive-CAD-200-million-in-funding-from-Fairfax-Financ-48397640/

 

[nwoodman]

13 minutes ago, mananainvesting said:

Fairfax investing in Orla Notes: 

 

https://www.marketscreener.com/quote/stock/ORLA-MINING-LTD-19500426/news/Orla-Mining-Ltd-announced-that-it-expects-to-receive-CAD-200-million-in-funding-from-Fairfax-Financ-48397640/

 

Love these paid to wait deals

[Parsad]

11 hours ago, SafetyinNumbers said:

I don’t think that makes any sense. I think FFH.PR.C and FFH.PR.D are close to their reset dates so likely prime candidates to get redeemed at par. 

 

You are correct, sir!  Cheers!

 

https://www.fairfax.ca/press-releases/fairfax-launches-c700-million-senior-notes-offering-11-19-2024/?utm_source=press-release&utm_medium=email&utm_term=Wed+Nov+20+2024&utm_campaign=Fairfax+Launches+C%24700+Million+Senior+Notes+Offering

[MMM20]

2 hours ago, Parsad said:

 

You are correct, sir!  Cheers!

 

https://www.fairfax.ca/press-releases/fairfax-launches-c700-million-senior-notes-offering-11-19-2024/?utm_source=press-release&utm_medium=email&utm_term=Wed+Nov+20+2024&utm_campaign=Fairfax+Launches+C%24700+Million+Senior+Notes+Offering

 

I was also correct that something shady was going on. Unless the timing of a spike - mid-day ahead of the announcement after the close - was pure coincidence

 

Edited November 20, 2024 by MMM20

[Hoodlum]

4 hours ago, Parsad said:

 

You are correct, sir!  Cheers!

 

https://www.fairfax.ca/press-releases/fairfax-launches-c700-million-senior-notes-offering-11-19-2024/?utm_source=press-release&utm_medium=email&utm_term=Wed+Nov+20+2024&utm_campaign=Fairfax+Launches+C%24700+Million+Senior+Notes+Offering

Those are great rates for Fairfax.  I wonder if we will see further bond issues for general purposes.  It could see them do that to eventually close out the TRS and purchase those shares. 

[glider3834]

5 minutes ago, Hoodlum said:

Those are great rates for Fairfax.  I wonder if we will see further bond issues for general purposes.  It could see them do that to eventually close out the TRS and purchase those shares. 

I believe Preferred divs are not deductible while interest on notes should be, so after tax cost likely cheaper with notes.

 

[Viking]

Can someone educate me a little: Fairfax appears to be reducing its preferred share exposure and shifting it to debt (where the capital is held on the balance sheet is shifting). Other than saving a little (or a lot?) on the cost side (after tax), are there also strategic reasons/benefits to what they are doing?

 

Preferred shares are considered equity capital. Fairfax's financial position and earnings trajectory has never been better.

[roundball100]

39 minutes ago, Viking said:

Can someone educate me a little: Fairfax appears to be reducing its preferred share exposure and shifting it to debt (where the capital is held on the balance sheet is shifting). Other than saving a little (or a lot?) on the cost side (after tax), are there also strategic reasons/benefits to what they are doing?

 

Preferred shares are considered equity capital. Fairfax's financial position and earnings trajectory has never been better.

Does the shift from preferred shares to debt result in greater per-share income numbers?

[dartmonkey]

4 minutes ago, roundball100 said:

46 minutes ago, Viking said:

Other than saving a little (or a lot?) on the cost side (after tax), are there also strategic reasons/benefits to what they are doing?

 

Preferred shares are considered equity capital. Fairfax's financial position and earnings trajectory has never been better.

Does the shift from preferred shares to debt result in greater per-share income numbers?

To the latter question, clearly the answer should be yes, since EPS is net after tax income less preferred share dividends, divided by common shares. If you buy out the preferred shares by takiing on debt, the interest on the debt will reduce your pre-tax income by the same amount as you reduce your preferred dividends, but then you get the tax benefit of those interest payments, which you don't get with the preferred dividends paid.

 

In response to viking's question, I would think that this would reduce the equity capital of the company, like a buyback, but I look forward to the responses of people more familiar with insurance regulation.

[nwoodman]

The shift in funding is definitely a sign of strength and signals confidence in future cash flows.  Apart from the bottom line impacts,   strategically there might be some upside in terms of credit ratings.  Lower WACC, improved cashflow, EBITDA margins etc.  

 

All very positive

 

Edit: It would impact their capital adequacy ratios as Prefs are Tier 1 and Debt obviously doesn’t count.  So they must be seeing the change as neutral in terms of their capital adequacy threshold.  
 

I also wonder if it provides some clues in terms of their view on the pricing of debt in general and the direction of rates.

Edited November 20, 2024 by nwoodman

[value_hunter]

I have FFH.PR.C. The reset rate will be 5 year canada bond+3.15%. Roughly 6.25% now. Definitely take 5.23% debt is much cheaper. Good move.

[mananainvesting]

Should help improve ROE (lower equity base), and more to the bottom line as others have mentioned. Should help with valuations in the longer run too imo.  

[nwoodman]

MS out with their review of if the Insurance industry for Q3/24. Is the hard market over? Summary as follows:

 

PERSONAL LINES: YES - TRANSITIONING OUT

- Auto rate increases decelerating in Q4 2024 and into 2025
- Major carriers like Progressive & Allstate pivoting from rate-taking to growth
- Competition ramping up as companies target growth in rate-adequate states
- Margins expected to remain healthy but pricing power diminishing

 

COMMERCIAL LINES: NO - BUT SOFTENING
- Pricing showing "slight deceleration" in Q3 2024
- Still need rate in many areas due to social inflation pressures
- Admitted market seeing increased competition
- Business flowing to E&S market where pricing power remains stronger
- Companies focusing on reserving discipline over aggressive growth

 

REINSURANCE: MIXED
Positive Signs:
- Property cat rates expected to decline low-to-mid single digits in 2025
- Excess capital putting pressure on pricing
- Return of capacity to market

Still Firm:
- Terms & conditions holding strong
- Some potential for casualty reinsurance rate increases
- Catastrophe losses still manageable at current pricing levels

 

KEY TAKEAWAY:
The report suggests we're not seeing a dramatic market turn, but rather a gradual transition varying by segment:
- Personal Lines: Clearly transitioning out
- Commercial Lines: Still firm but moderating
- Reinsurance: Mixed with property softening while casualty remains firm

 

The market appears to be entering a more nuanced phase where underwriting discipline and efficient capital deployment will be more important than pure pricing power.

 

How will this affect Fairfax:

 

While Fairfax Financial isn't directly covered in this Morgan Stanley report, we can analyze the likely impacts based on Fairfax's business mix and the report's industry insights:

 

POTENTIAL POSITIVES:

1. Investment Income
- Higher rate environment helpful for Fairfax's large investment portfolio
- Report suggests variable investment returns could improve with:
  * Better capital markets activity
  * Improved private market valuations
  * Higher prepayment income

2. Commercial Lines Positioning
- Fairfax has significant commercial specialty presence through companies like Allied World, Odyssey Group
- While commercial pricing is decelerating, social inflation providing support for continued rate adequacy
- E&S market (where Fairfax has strong presence) likely to remain stronger than admitted market
- Focus on underwriting discipline aligns with Fairfax's historical approach

3. Global Diversification
- Like peer Chubb (mentioned in report), Fairfax's international diversification provides growth opportunities
- Report notes international business remains a strong growth area

 

POTENTIAL CHALLENGES:

1. Pricing Pressure
- General softening in property catastrophe reinsurance (important for Odyssey Group)
- Increased competition in commercial lines
- Personal lines transitioning to growth focus over rate increases

2. Investment Risks 
- Report notes continued challenges in real estate investments within alternatives portfolios
- Fairfax has significant real estate exposure through various investments

3. Reserving Focus
- Report highlights industry-wide concern about commercial casualty reserves
- Increased attention to social inflation impact on long-tail business

 

KEY TAKEAWAYS:
Fairfax appears relatively well-positioned given:
1. Strong specialty/E&S presence where pricing remains more stable
2. Global diversification providing growth options
3. Investment portfolio benefiting from higher rates
4. Historical focus on underwriting discipline becoming more important as market softens

 

INSURANCE_20241121_0502.pdf

[Viking]

48 minutes ago, nwoodman said:

MS out with their review of if the Insurance industry for Q3/24. Is the hard market over? Summary as follows:

 

PERSONAL LINES: YES - TRANSITIONING OUT

- Auto rate increases decelerating in Q4 2024 and into 2025
- Major carriers like Progressive & Allstate pivoting from rate-taking to growth
- Competition ramping up as companies target growth in rate-adequate states
- Margins expected to remain healthy but pricing power diminishing

 

COMMERCIAL LINES: NO - BUT SOFTENING
- Pricing showing "slight deceleration" in Q3 2024
- Still need rate in many areas due to social inflation pressures
- Admitted market seeing increased competition
- Business flowing to E&S market where pricing power remains stronger
- Companies focusing on reserving discipline over aggressive growth

 

REINSURANCE: MIXED
Positive Signs:
- Property cat rates expected to decline low-to-mid single digits in 2025
- Excess capital putting pressure on pricing
- Return of capacity to market

Still Firm:
- Terms & conditions holding strong
- Some potential for casualty reinsurance rate increases
- Catastrophe losses still manageable at current pricing levels

 

KEY TAKEAWAY:
The report suggests we're not seeing a dramatic market turn, but rather a gradual transition varying by segment:
- Personal Lines: Clearly transitioning out
- Commercial Lines: Still firm but moderating
- Reinsurance: Mixed with property softening while casualty remains firm

 

The market appears to be entering a more nuanced phase where underwriting discipline and efficient capital deployment will be more important than pure pricing power.

 

How will this affect Fairfax:

 

While Fairfax Financial isn't directly covered in this Morgan Stanley report, we can analyze the likely impacts based on Fairfax's business mix and the report's industry insights:

 

POTENTIAL POSITIVES:

1. Investment Income
- Higher rate environment helpful for Fairfax's large investment portfolio
- Report suggests variable investment returns could improve with:
  * Better capital markets activity
  * Improved private market valuations
  * Higher prepayment income

2. Commercial Lines Positioning
- Fairfax has significant commercial specialty presence through companies like Allied World, Odyssey Group
- While commercial pricing is decelerating, social inflation providing support for continued rate adequacy
- E&S market (where Fairfax has strong presence) likely to remain stronger than admitted market
- Focus on underwriting discipline aligns with Fairfax's historical approach

3. Global Diversification
- Like peer Chubb (mentioned in report), Fairfax's international diversification provides growth opportunities
- Report notes international business remains a strong growth area

 

POTENTIAL CHALLENGES:

1. Pricing Pressure
- General softening in property catastrophe reinsurance (important for Odyssey Group)
- Increased competition in commercial lines
- Personal lines transitioning to growth focus over rate increases

2. Investment Risks 
- Report notes continued challenges in real estate investments within alternatives portfolios
- Fairfax has significant real estate exposure through various investments

3. Reserving Focus
- Report highlights industry-wide concern about commercial casualty reserves
- Increased attention to social inflation impact on long-tail business

 

KEY TAKEAWAYS:
Fairfax appears relatively well-positioned given:
1. Strong specialty/E&S presence where pricing remains more stable
2. Global diversification providing growth options
3. Investment portfolio benefiting from higher rates
4. Historical focus on underwriting discipline becoming more important as market softens

 

INSURANCE_20241121_0502.pdf 9.71 MB · 2 downloads

@nwoodman, great summary. Thanks for sharing. Bottom line, quality insurance companies should continue to do well in 2025. Except most don’t view Fairfax’s insurance business as high quality. And that is what creates the opportunity. 

[nwoodman]

16 minutes ago, Viking said:

@nwoodman, great summary. Thanks for sharing. Bottom line, quality insurance companies should continue to do well in 2025. Except most don’t view Fairfax’s insurance business as high quality. And that is what creates the opportunity. 

True, the fact that E&S is sounding stable was music to my ears though

 

"Given the challenges around receiving enough rate to cover losses in the admitted markets, a lot of focus is now on Specialty/E&S market opportunities."

 

"As increasingly unpredictable weather-related CATs, and social inflation risks force commercial carriers to tighten up underwriting guidelines in the admitted markets, we expect continued strong submissions & pricing growth in the E&S market for 4Q24 and 2025, as insurers have more flexibility around setting E&S pricing and terms & conditions."

 

It’s probably been done to death, but damn Allied World was a master stroke.

 

KEY THEMES FOR 2025:
1. More competitive environment overall
2. Technical underwriting becoming more important
3. E&S market remaining relatively strong
4. Social inflation as ongoing challenge
5. Reserve adequacy growing in importance
6. Investment income potentially improving
7. Growth opportunities varying significantly by segment

Edited November 22, 2024 by nwoodman