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Japan Just Got Hit By An 8.4 Earthquake...Near Sendai!


Parsad
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So if you've ever wondered why Fairfax is so careful with all their elaborate hedges...think about it now!  It's lucky this quake didn't hit Tokyo.  Fairfax is built to withstand a hit like that, plus a 50% drop in the stock market...which still could happen, although remote.  You just never know what can happen, so it's always better to be prepared.  Cheers!

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Bloomberg reports an 8.9 magnitude quake off the coast of northern Japan which has caused an explosion of an oil refinery and resulted in a 10 meter high tsunami going 1 km inland, causing widespread damage.  18 are reported dead.  Nuclear plants are reported to be closed for assessment as Asian markets are off sharply.  In Europe, Munich Re is down 4.6%, Swiss Re down 4.38%, etc. at the present time.

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Guest Bronco

Unfortunate for sure, but this is an investment board (with hockey and women thrown in).

 

What will everyone be picking at in this potential decline?

 

Google is catching my eye - hoping to steal this around $550.

 

The Europe reinsurers are getting hit - we shall see how that affects the stocks we follow here.

I am looking to buy more Loews around $40.  FFH may be attractive soon. 

 

JNJ - can this POS CEO please.  This may be another attractive opportunity. 

 

Bank of Hawaii - will this get hit?  Tsunami fears? 

 

ALEX?  Sell down today...

 

Let's make some money.  Also, prayers for those who we know/work with over in the East.

 

 

 

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"European insurance - comments from JPMorgan's M Huttner on impact from the Japan

quake - Japan earthquake is big, but costs appear manageable ($1bn-2bn for the European

reinsurers we estimate)"

 

It sounds like the damage is very manageable because the quake was offshore

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from Jeffries:

 

"at this stage insured losses from the Japanese earthquake appear limited. We are working on the assumption of a $10bn industry loss. The impact on (re)insurer balance sheets is likely to be around 5%. We expect some rate momentum in the upcoming Japanese/ CAT renewals, but not enough for the total industry cycle to turn. Tsunami and aftershocks remain real risks, and this will drag on sector performance"

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This is why I dont own much FFH or Insurance. Plenty of time to buy when the market hardens.

 

I haven't actually lived through (well, I was alive, but not paying attention) an insurance cycle going from soft to hard. What does it usually look like, and how long does it take before the insurers that are disciplined can take advantage of the hard cycle?

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This is why I dont own much FFH or Insurance. Plenty of time to buy when the market hardens.

 

I haven't actually lived through (well, I was alive, but not paying attention) an insurance cycle going from soft to hard. What does it usually look like, and how long does it take before the insurers that are disciplined can take advantage of the hard cycle?

 

I havent either auctually. I would assume whatever causes the markets to fall (either massive investment larges or large cats) will also take down share prices and book value.

 

One can get in at the lower book value, and profit from the market hardening. My assumption, may not match reality. I just dont see insurance stocks rallying on stock / bond losses or large cats.

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You may recall during the last hard market stories of people who had 20 years of driving accident free making a single claim and subsequently facing massive premium increases and threats of insurance cancellation.  The same thing was happening in the home insurance arena around 2003.  There had been a cumulative effect of the asbestos litigation in the US, then the  dual effect of the market crash in late 2000 followed by 9/11.  By the time the hurricanes arrived the hard market was full on. 

 

The problem for FFH at the time was their capital structure was so weak from the asbestos claims in the late 90s that they couldn't really take that much advantage of the cycle.  This time around they will be primed and ready when this time arrives.  Insurance is just like any cycle in that it appears to turn quickly but is years in transition.  So, if companies have been releasing reserves, and undercapitalizing for 5 years the crisis will appear to start in one or two quarters.  The cumulative effect of low bond yields, declining insurance revenues, inflated earnings, and a couple of mid cats should tip a few companies over the edge at some point.  Then the whole house of cards starts to come tumbling down.  FFH and no doubt Berky pay alot of attention to counterparties... others dont so much.  I would defer to what William Berkeley says in his quarterly reports as to what the final catalyst will be.

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Al...to value insurance companies at this point in the cycle, is P/B the right measure to look at for valuation?  That metric seems to percolate throughout most of the commentary here and it's a good one for looking at many points in the underwriting cycle.  A case could be made for price/underwriting capacity.  The estimate of intrinsic value could have an alternate scenario looking at the embedded optionality of the underwriting platform's capacity under firmer pricing conditions.

 

A working thesis that I have is that a subset of insurance companies are greatly undervalued -- 50 cent dollars.  The subset consists of experienced companies that are managing the cycle well -- excess capacity, experienced teams in waiting, few reserve releases, writing at decent pricing.  It takes a pricing catalyst, which I'm prepared to wait for, to unlock the embedded value.

 

-O

You may recall during the last hard market stories of people who had 20 years of driving accident free making a single claim and subsequently facing massive premium increases and threats of insurance cancellation.  The same thing was happening in the home insurance arena around 2003.  There had been a cumulative effect of the asbestos litigation in the US, then the  dual effect of the market crash in late 2000 followed by 9/11.  By the time the hurricanes arrived the hard market was full on. 

 

The problem for FFH at the time was their capital structure was so weak from the asbestos claims in the late 90s that they couldn't really take that much advantage of the cycle.  This time around they will be primed and ready when this time arrives.  Insurance is just like any cycle in that it appears to turn quickly but is years in transition.   So, if companies have been releasing reserves, and undercapitalizing for 5 years the crisis will appear to start in one or two quarters.  The cumulative effect of low bond yields, declining insurance revenues, inflated earnings, and a couple of mid cats should tip a few companies over the edge at some point.  Then the whole house of cards starts to come tumbling down.  FFH and no doubt Berky pay alot of attention to counterparties... others dont so much.  I would defer to what William Berkeley says in his quarterly reports as to what the final catalyst will be.

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You make an excellent point, omagh. A hard market won't benefit all insurers equally, and the ones to buy now are not only the cheapest but also those that will be able to profit most from a turning cycle. I've already picked those that I think will do well, but I'm curious to know what others here think are the best bets. Maybe this deserves its own thread.

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This won't be enough to create a hard market.  There was some $500B in industry capital and surplus in 2009, and you've had asset prices rise, so those levels should be higher.  It's going to take a couple of years of high catastrophe losses to create a hard market, or another significant drop in asset prices, in particular fixed income assets.  Cheers! 

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Guest Bronco

Parsad, maybe this is not enough for a hard market.

 

But have you seen the movie "2012"?

 

Moon too close to the earth - look out.

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has it ever been that clear that at some point in time you could definitively say that right now we are in a hard market? The reason I ask is because I have heard the term thrown around and some have claimed that we are in a hard market now.

 

The term Hard market and soft market are beginning to sound like the terms overvalued market and undervalued market where there are lots of opinions but it is never clear except in retrospect.

 

Will it be clear and apparent and not just an opinion when we are in a hard vs soft market and will it be able to be recognized at the time or only in retrospect?

 

Hard and soft are relative terms just like over and undervalued.

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(about soft and hard markets : )

 

I liked the presentation of Zeke Ashton on the value investing congress last year in october. He doesn't explain exactly what defines soft and hard markets but in general you could of course just say that in soft markets premiums are much less attractive and in hard markets capacity is removed making it possible for well-prepared insurers to take advantage of this. I would think that professionals in the business have some metrics to define wether we are in a soft or hard market. Anyone got an idea on this?

He also said : "The best players in the industry produce good ROE and book value growth during the soft parts of the cycle, and hyper-growth during hard markets. Industry valuations do not support new entrants as was true in '01 and '05." which is exactly why I like companies like FFH or LRE right now because I believe I can't exactly tell when the market will turn. With those companies in the end I will most likely get a fair return or home run anyway.

 

http://www.scribd.com/doc/39285829/Value-Investing-Congress-NY-2010-Ashton

 

 

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Omagh, In short I dont know.  Its a bit akin to waiting for any cycle to shift but others are easier to pin down.  Trying to value future writing capacity has got to be difficult.  The very process of entering the hard market may impede their ability to write business.  

 

I think this is the part where Buffett is talking about swimming naked.  He makes it sound deceptively simple.  In practice it requires doing all the things we see FFH doing to preserve their balance sheet for that day.  

 

Sanj, I have no idea on timing but once the snowball gets rolling from the bad underwriting it will run out of control.  Bad companies will write more and more unprofitable business trying to get back capital they have lost, and get hit with more and more claims.  I remember distinctly the August day when FFh announced the first of many brutal quarters due to the asbestos litigation claims.  The stock was cut by $100 in a couple of days - I had 30 shares then - a good portion of my net worth.  I recognized it with Kingsway Financial and got out with profits.  Others were not so lucky and rode KFs from 24 to <1.00.  

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Guys dont put too much faith into the estimates of this Tsunami/Earthquake.

 

I remember the Katrina days and EVERYONE was way underestimating in the numbers relative the actuals when they came out in the wash - Even FFH.

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NHK world english is now reporting trouble brewing at the nuclear power plants in the area.

Agency: Uranium fuel may be melting at reactor

 

The government's Nuclear and Industrial Safety Agency says 2 radioactive substances, cesium and radioactive iodine, have been detected near the Number One reactor at the Fukushima Number One nuclear power station.

 

The agency says this indicates that some of the metal containers of uranium fuel may have started melting.

The substances are produced by fuel fission.

 

University of Tokyo Professor Naoto Sekimura says only a small part of the fuel may have melted and leaked outside.

 

He called on residents near the power station to stay calm, saying that most of the fuel remains inside the reactor, which has stopped operation and is being cooled.

 

Saturday, March 12, 2011 15:26 +0900 (JST)

Venting air from reactor container suspended

 

The operation at Fukushima No.1 plant to lower pressure of the containment vessel has been suspended due to high radiation levels at the site.

 

Pressure of the reactor container is rising as its cooling system became dysfunctional due to a blackout and power generator breakdown. This has raised concern about possible damage to the container.

 

The power station's operator, Tokyo Electric Power Company, began to vent air from the reactor container at 9AM on Saturday.

 

Under the plan, 2 valves close to the container would be opened manually, but radiation level on the second valve was found higher than expected.

 

The operation has been suspended because of the possibility that workers could be exposed to radiation. The utility is reportedly studying how to open the valve by replacing workers at a short interval, or using electric remote control.

 

The Nuclear and Industrial Safety Agency says if radioactive substance is released in the air, safety of residents evacuated beyond a 10-kilometer radius from the No.1 reactor will be ensured.

 

Saturday, March 12, 2011 13:09 +0900 (JST)

 

 

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