Author Topic: Fairfax 2020  (Read 218571 times)

omagh

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Re: Fairfax 2020
« Reply #860 on: December 31, 2020, 10:29:33 AM »
There may be some useful observations for some in this piece by MS in their outlook for the P&C industry for 2021.

Quote
Covid, catastrophe losses, declining investment yields, rising litigation ... were just some of the big issues insurers dealt with in 2020. The silver lining is that the pricing momentum that began prior to Covid should be here to stay – at least over the near term. That leads to one of the biggest debates facing investors right now – the duration of this hard market. Some say well into the next 24 months; we think that’s a bit too optimistic, and expect a plateau sooner. Regardless, core underwriting margin gains should persist throughout the year. We’re not in the camp of blindly overweighting the commercial lines space, rather leaning toward more selectivity in our preferred names, as we still see balance sheet (namely, reserve) concerns for most of the industry. Our top picks are AIZ and HIG.


Quote
•Commercial lines: becoming more attractive, as pricing power continues – but caution needed. Commercial pricing power still has some legs. While core margin expansion still in the cards for most of the near term, prior year reserves still need to be monitored. We’re cautious on reinsurance given casualty loss trends.
• Personal auto: getting more competitive on pricing. Expectations on strong near-term margins from lower driving are fully baked into stocks, in our view. Next up is where industry pricing heads over the ensuing 6-12 months. We fully expect a more competitive environment through at least the first half of the year. We have a keen eye on the space and will look for valuations to pull back a bit before we become more incrementally positive.
• Other highlights for the coming year: Covid litigation concerns should continue to fade; disruption from new entrants to be actively monitored; valuations are near long-term averages, having recovered from Covid-led trough, but are still below pre-Covid levels.

Happy New Year all

Cheers
nwoodman
Slide 32 shows that P&C M&A transactions (2016-2020) have been done at P/B multiples from 1.2 to 2.0 (throwing out that 6.0).  So, Fairfax at 0.8 P/B is well below a private buyer's transaction level.


KFS

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Re: Fairfax 2020
« Reply #861 on: December 31, 2020, 11:34:53 PM »
There may be some useful observations for some in this piece by MS in their outlook for the P&C industry for 2021.

Quote
Covid, catastrophe losses, declining investment yields, rising litigation ... were just some of the big issues insurers dealt with in 2020. The silver lining is that the pricing momentum that began prior to Covid should be here to stay – at least over the near term. That leads to one of the biggest debates facing investors right now – the duration of this hard market. Some say well into the next 24 months; we think that’s a bit too optimistic, and expect a plateau sooner. Regardless, core underwriting margin gains should persist throughout the year. We’re not in the camp of blindly overweighting the commercial lines space, rather leaning toward more selectivity in our preferred names, as we still see balance sheet (namely, reserve) concerns for most of the industry. Our top picks are AIZ and HIG.


Quote
•Commercial lines: becoming more attractive, as pricing power continues – but caution needed. Commercial pricing power still has some legs. While core margin expansion still in the cards for most of the near term, prior year reserves still need to be monitored. We’re cautious on reinsurance given casualty loss trends.
• Personal auto: getting more competitive on pricing. Expectations on strong near-term margins from lower driving are fully baked into stocks, in our view. Next up is where industry pricing heads over the ensuing 6-12 months. We fully expect a more competitive environment through at least the first half of the year. We have a keen eye on the space and will look for valuations to pull back a bit before we become more incrementally positive.
• Other highlights for the coming year: Covid litigation concerns should continue to fade; disruption from new entrants to be actively monitored; valuations are near long-term averages, having recovered from Covid-led trough, but are still below pre-Covid levels.

Happy New Year all

Cheers
nwoodman


Thank you for sharing.  It's interesting to eyeball the chart showing the dramatic growth of alternate capital sources and relatively slow growth of traditional sources.  "Reinsurance disintermediation appears to be gaining traction as global capital pools seek higher returns and uncorrelated asset classes in a low return world."  (Slide 38.)  This is a narrative heard before (i.e. MKL/Nephila), but the chart really helps illuminate the drastic change over the past 10 years or so.....
« Last Edit: December 31, 2020, 11:55:14 PM by KFS »

TwoCitiesCapital

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Re: Fairfax 2020
« Reply #862 on: January 01, 2021, 09:17:54 AM »
There may be some useful observations for some in this piece by MS in their outlook for the P&C industry for 2021.

Quote
Covid, catastrophe losses, declining investment yields, rising litigation ... were just some of the big issues insurers dealt with in 2020. The silver lining is that the pricing momentum that began prior to Covid should be here to stay – at least over the near term. That leads to one of the biggest debates facing investors right now – the duration of this hard market. Some say well into the next 24 months; we think that’s a bit too optimistic, and expect a plateau sooner. Regardless, core underwriting margin gains should persist throughout the year. We’re not in the camp of blindly overweighting the commercial lines space, rather leaning toward more selectivity in our preferred names, as we still see balance sheet (namely, reserve) concerns for most of the industry. Our top picks are AIZ and HIG.


Quote
•Commercial lines: becoming more attractive, as pricing power continues – but caution needed. Commercial pricing power still has some legs. While core margin expansion still in the cards for most of the near term, prior year reserves still need to be monitored. We’re cautious on reinsurance given casualty loss trends.
• Personal auto: getting more competitive on pricing. Expectations on strong near-term margins from lower driving are fully baked into stocks, in our view. Next up is where industry pricing heads over the ensuing 6-12 months. We fully expect a more competitive environment through at least the first half of the year. We have a keen eye on the space and will look for valuations to pull back a bit before we become more incrementally positive.
• Other highlights for the coming year: Covid litigation concerns should continue to fade; disruption from new entrants to be actively monitored; valuations are near long-term averages, having recovered from Covid-led trough, but are still below pre-Covid levels.

Happy New Year all

Cheers
nwoodman


Thank you for sharing.  It's interesting to eyeball the chart showing the dramatic growth of alternate capital sources and relatively slow growth of traditional sources.  "Reinsurance disintermediation appears to be gaining traction as global capital pools seek higher returns and uncorrelated asset classes in a low return world."  (Slide 38.)  This is a narrative heard before (i.e. MKL/Nephila), but the chart really helps illuminate the drastic change over the past 10 years or so.....

Isn't this the primary argument for why insurance rates have been low? Crowding out and too much capital?

It's why I've been so skeptical that this hard market will last, because I don't see anything changing the trend of outside capital flooding the industry at lower rates of return.

Any thoughts anyone has on this and why it's not expect led to affect this hard market would be helpful.

Spekulatius

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Re: Fairfax 2020
« Reply #863 on: January 01, 2021, 09:24:06 AM »
There may be some useful observations for some in this piece by MS in their outlook for the P&C industry for 2021.

Quote
Covid, catastrophe losses, declining investment yields, rising litigation ... were just some of the big issues insurers dealt with in 2020. The silver lining is that the pricing momentum that began prior to Covid should be here to stay – at least over the near term. That leads to one of the biggest debates facing investors right now – the duration of this hard market. Some say well into the next 24 months; we think that’s a bit too optimistic, and expect a plateau sooner. Regardless, core underwriting margin gains should persist throughout the year. We’re not in the camp of blindly overweighting the commercial lines space, rather leaning toward more selectivity in our preferred names, as we still see balance sheet (namely, reserve) concerns for most of the industry. Our top picks are AIZ and HIG.


Quote
•Commercial lines: becoming more attractive, as pricing power continues – but caution needed. Commercial pricing power still has some legs. While core margin expansion still in the cards for most of the near term, prior year reserves still need to be monitored. We’re cautious on reinsurance given casualty loss trends.
• Personal auto: getting more competitive on pricing. Expectations on strong near-term margins from lower driving are fully baked into stocks, in our view. Next up is where industry pricing heads over the ensuing 6-12 months. We fully expect a more competitive environment through at least the first half of the year. We have a keen eye on the space and will look for valuations to pull back a bit before we become more incrementally positive.
• Other highlights for the coming year: Covid litigation concerns should continue to fade; disruption from new entrants to be actively monitored; valuations are near long-term averages, having recovered from Covid-led trough, but are still below pre-Covid levels.

Happy New Year all

Cheers
nwoodman


Thank you for sharing.  It's interesting to eyeball the chart showing the dramatic growth of alternate capital sources and relatively slow growth of traditional sources.  "Reinsurance disintermediation appears to be gaining traction as global capital pools seek higher returns and uncorrelated asset classes in a low return world."  (Slide 38.)  This is a narrative heard before (i.e. MKL/Nephila), but the chart really helps illuminate the drastic change over the past 10 years or so.....

Isn't this the primary argument for why insurance rates have been low? Crowding out and too much capital?

It's why I've been so skeptical that this hard market will last, because I don't see anything changing the trend of outside capital flooding the industry at lower rates of return.

Any thoughts anyone has on this and why it's not expect led to affect this hard market would be helpful.

Yes, I think it is correct to assume that hybrid capital which can be quickly ramped up has shortened the hard cycle duration. It is instructive to read the annual report and presentation from RNR (a very good underwriter which also manages several hybrid capital pools) on this matter.

I am a little more guarded in my view of insurers here than most because of low interest rates and any hard market arbitraged away by hybrid capital that can quickly swoop in.
Life is too short for cheap beer and wine.

Viking

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Re: Fairfax 2020
« Reply #864 on: January 01, 2021, 10:36:20 AM »
Arch had an investor day in Dec. They said much of the new capital coming in to the industry was from PE firms. They called this ‘informed/thoughtful’ capital. If an acceptable return is not possible the capital will not be deployed.
——————-

Regarding the hard market, they said there is currently a lot of ‘momentum’.
- industry ‘understands’ they need rate increases.

1.) investments are going to continue to be a headwind with bond rates so low
2.) social inflation cost trends continue to ge a headwind
3.) pandemic is a headwind (globally)

Rate increases are a tailwind; however it will take time for rate increases to be earned and for margins to improve. Investors will need to be patient.

Daphne

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Re: Fairfax 2020
« Reply #865 on: January 05, 2021, 03:39:41 PM »
Given that making money in the insurance business tends to be a longer term proposition coupled with the covid hit of 2020 ...hybrid capital, generally a shorter term proposition, is likely hiding in the bushes for the foreseeable future.

SharperDingaan

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Re: Fairfax 2020
« Reply #866 on: January 26, 2021, 09:53:54 AM »
We have parked the bulk of our cash in FFH for the New Year/Jan 2021.
Simply because over the next 4-5 weeks both the annual dividend pays out, and Q4 2020 reports.
At current pricing, it is pretty hard to see how one does NOT walk away with less than a 7-10% gain on the round trip ;)
 

We sold some of our FFH today, and moved the proceeds into CVE. 10%+ on the round trip.
Agreed that FFH should do very well in 2021, but a little hesitant around Q4 2020. The last quarter of an insurers fiscal year is typically when the year's true-up's occur; hence a wise man should hedge his bets a little. We still have a position, just not as much.

May we all continue to do very well   :)

SD

 


SharperDingaan

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Re: Fairfax 2020
« Reply #867 on: February 03, 2021, 01:28:38 PM »
We sold our CVE today, and are back in FFH.
A round trip was not the intent, but at current price levels it is worth the adverse earnings risk. We have a both a low re-entry point, and enough of a gain on this second round trip, to allow us to sleep very well :)

SD

Pedro

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Re: Fairfax 2020
« Reply #868 on: February 03, 2021, 02:08:27 PM »
Sounds kneejerky sharper. The rationale for selling then rebuying makes me wonder if your just finding a reason to justify your actions. I wouldnt be comfortable sitting infront of clients explaining 180 this but to each his own.

bizaro86

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Re: Fairfax 2020
« Reply #869 on: February 03, 2021, 03:00:10 PM »
Sounds kneejerky sharper. The rationale for selling then rebuying makes me wonder if your just finding a reason to justify your actions. I wouldnt be comfortable sitting infront of clients explaining 180 this but to each his own.

Not having to explain things to clients is the best thing about only managing your own money.