Author Topic: Fairfax 2020  (Read 206974 times)

petec

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Re: Fairfax 2020
« Reply #60 on: February 17, 2020, 12:09:25 AM »
We now have an idea of what Riverstone UK is worth. Does anyone have a handle on what the rest of Riverstone is worth? I don’t recall seeing disclosure that would allow one to estimate that.
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Viking

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Re: Fairfax 2020
« Reply #61 on: February 17, 2020, 11:58:29 PM »
Here is a summary from RBC of what they heard about insurance pricing on Q4 conference calls:

“What we heard was really bullish. We heard current rate increases were averaging anywhere from mid-single digits to low double digits depending on business mix. The more specialty, the more large account, the more excess casualty and D&O the more likely the average had two digits. The more workers comp, the more small account, the more standard lines, the more likely the average was around +/-5%. Heading in we expected the latter group would be around 5% and it was. We expected the former group however to be around 8% and we would say based on commentary it was probably a little higher than that.

As far as how long pricing conditions would last, again we were positively surprised. Our going in expectation was that companies would be cagey about addressing this topic and would give luke warm responses like ‘several more quarters’ or something like that. To our surprise there was pretty good unanimity that pricing power would persist throughout 2020. To our further surprise there were plenty suggesting the good times could roll well into 2021. While the latter corresponds with our own bullish viewpoint, we did not really expect to hear it said aloud. It was. Which gives us quite a bit of confidence in our conviction that we are only in the first or maybe second innings of a very favorable P&C market.”

Cigarbutt

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Re: Fairfax 2020
« Reply #62 on: February 26, 2020, 06:32:57 AM »
Viking, it looks like you made some money on this short ride. Based on a three to five year outlook, I didn't feel comfortable with the short term nature of the trade but well done for you.

FFH announced (on the call, not in the news release) that a 216M charge was recorded in the run-off section for asbestos and environmental reserve strengthening in 2019. This comes after an asbestos-related charge of 143.6M in 2018 and 182.5M in 2017 (ultimately and mostly due to 'legacy' units from C+F, Clearwater etc). Concerning the asbestos reserves, it's interesting to note that net reserves are still at the same level as 20 years ago. Since then, a lot of cash has been paid out, reserves have been raised along the way and there have been a few acquisitions with embedded asbestos reserves. I come to the conclusion that FFH's progress has been largely in line with the industry in that regard (FFH has a leading global market share in asbestos reserves; for example BRK has only 1.7x FFH exposure in that area despite being much larger overall as an insurer). Recently, the social inflation has played a role (even more than the usual trend and JNJ's talc issue may help to inflate the issue) but I think that the asbestos question is now under control and will likely show a material run-off (reserves heading towards zero) within the next 5 to 7 years. At large, it seems that the industry is reserved at 90% of the ultimate amount and if FFH continues to stick to the average evolution, it is reasonable to expect 350 to 400M further reserve strengthening during that period.

The potential relevant aspect here is the fact that the setup of the run-off sub came with many advantages (efficient way to run-off inside claims, potential profit center with acquisitions and especially the ability to separate poor results from 'continuing' operations). FFH has recently shown better than average underwriting results from continuing operations but it is helpful to remember that they were effectively able to segregate (channel is too strong a word) poor results into the run-off segments. Only for the asbestos charges, in the last 3 years, including these in the 'continuing' operations would have meant a combined ratio higher by about 2% each year. This is just to say that adjustments have to be made to the reported record.

Speaking of adjustments, here's an update on reserve releases (unaudited) as a % of CR improvement ('continuing' operations).
2016:  7.8%
2017:  8.5%
2018:  6.8%
2019:  3.8%
Overall, it seems that FFH has been able to develop a slightly better underwriting culture than the relevant part of the insurance industry (which is an amazing improvement compared to a certain period many years ago) but I would say that they are not much better than average and the true nature of reserves of recent acquisitions (Brit, Allied) is still, and will be, discovery in the making. Why this may be relevant, given a 5 year outlook?. IMO, the industry is shaping up for an unusual degree of hardening that could surprise to the upside if the capital "suppressants" that have been described eventually revert to the mean or more. I think the best way to make money here will be to invest in new capital ventures that will form opportunistically (ventures that will not have 'legacy' issues and that can set up a robust operating platform). But this comes down to timing the market versus time in the market and an alternative is to invest in companies that will be able to meaningfully grow (absolute and relative market share when the time comes). I happen to think that a lot of policies that have been written in the last few years and that have been associated with reserve releases will ultimately show a reversal of the trend with reserve deficiencies, to an extent that is not appreciated now.

The following is potentially interesting (especially figure 17, which can even be more instructive if put in a longer historical perspective). JLT Re has cried wolf for a while underlining that timing may make you look stupid but looking stupid does not necessarily mean that all your arguments are.
https://www.jltre.com/our-insights/publications/viewpoint-reinsurance-cycle/the-economic-cycle
We are truly living through unusual times and I'm glad to be alive.


petec

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Re: Fairfax 2020
« Reply #63 on: February 26, 2020, 03:05:24 PM »
Cigarbutt, would you put Fairfax in the category of companies that can meaningfully grow market share when the time comes?
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Cigarbutt

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Re: Fairfax 2020
« Reply #64 on: February 26, 2020, 04:51:28 PM »
^This was touched upon in reply #34.
To expand slightly, the participation will be conditional on (and proportional to):
1-investment performance (absolute and relative)
If the hard market is exacerbated by an impact on the asset side, FFH will not be spared and in fact may be, compared to peers, more significantly compromised (high equity exposure).
2-operating performance
They would require hardening to outpace the typical reversal recognized in prior years' reserves and significant catastrophe losses would impact their regulatory capital to a significant degree given their reinsurance exposure.

Reflecting on recent developments, they don't behave as if they have excess capital and we may be only at the beginning so...
In the past, they have issued equity at prices they didn't like in order to 'benefit' from opportunities and that's a possibility that should be considered.
I'm not a shareholder now (and I may be wrong about that) but remembering the last hardening phase, I was a shareholder and increased ownership significantly in the months that followed an end of year share issue in 2001, during a period when the risk-reward looked better (IMHO).

https://s1.q4cdn.com/579586326/files/doc_financials/011103ceo.pdf
see p.3, second to last paragraph, shares issued at 200 CDN
https://s1.q4cdn.com/579586326/files/doc_presentations/2013AGMWebsiteCopy_v001_u6w5x6.pdf
2013 slide presentation, see slide 15

Take the above with a grain of salt as I sort of prepared for the US 30-yr bond to reach 1.81% (that's where it is now) but I'm still confused about the significance. I'm mentioning that because, recently, FFH shifted attitude on the fixed income side and expected rates to go up significantly so it's not unreasonable to consider the possibility that they're confused too.
« Last Edit: February 26, 2020, 04:55:30 PM by Cigarbutt »

petec

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Re: Fairfax 2020
« Reply #65 on: February 27, 2020, 06:08:15 AM »
All very fair. Only thing I’d add is that they do have capacity, it’s just in the wrong place, at Odyssey, which is not seeing the same hardening (yet). That could change the outlook.

What gives you the feeling that reserve releases will be reversed, apart from asbestos?
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Cigarbutt

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Re: Fairfax 2020
« Reply #66 on: February 27, 2020, 08:34:22 AM »
^Based on the following  assumptions :

-The underwriting cycle is typically associated with such a reversal.
-FFH, even if more conservatively reserved than the median insurer, will tend to follow the industry trends of the typical delayed recognition of the trend reversal (business written that was felt to be profitable when, in fact, it was not).

So, this educated guess is based on historical assumptions and maybe this time is different (looking to be convinced otherwise for the industry and for FFH specifically). But if history is any guide, the magnitude of the reversal may be correlated to the unusual softness of the previous leg of the cycle.
How this plays out remains to be defined and one may want to play this actively, opportunistically or whatever.

Viking

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Re: Fairfax 2020
« Reply #67 on: February 27, 2020, 09:53:40 AM »
Cigar, thanks for taking the time to post. I am not an insurance expert and find your posts to be helpful :-)

I am back on the sideline with Fairfax. Their equity portfolio is getting hit pretty hard.

Cigarbutt

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Re: Fairfax 2020
« Reply #68 on: February 27, 2020, 03:16:15 PM »
^just in case you or others are interested, I came across today a recent report by the Argo Group which may be relevant. The idea is not to suggest that FFH is or will be a mirror image but a parallel can be drawn with the realization that previous business written may not be so profitable after all. Even if Argo's evolving situation walks and quacks like a duck (typical reversal of the reserve pattern), it is possible that the issue is isolated and already remediated but I doubt it. When you see a cockroach...and it potentially reflects (as a leading indicator) an industry-wide cyclical pattern.

Argo is domiciled in Bermuda and has grown net premiums written at a very high rate during the last few soft years. Here's what happened to reserve development (unaudited):
in combined ratio %    -unfavorable in (  )
2012  2.8%     2013  2.6%     2014  2.8%     2015  2.3%     2016  2.4%     2017  0.5%     2018  1.0%     2019  (8.0%)
details in 2019, per quarter:     Q1  0.6%     Q2  (5.2%)     Q3  (9.3%)     Q4  (17.9%)

Argo shows a pattern that moves slowly and then suddenly and rating agencies are getting agitated, which will likely make it hard for the company to grow profitable business to compensate for the reserve issue.
https://www.reinsurancene.ws/argo-reports-operating-loss-unfavourable-reserve-development/

To be clear: IMO, FFH is relatively much better positioned but the wave may be coming and some may be more naked than others.

Hoodlum

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Re: Fairfax 2020
« Reply #69 on: February 27, 2020, 05:08:16 PM »
Cigar, thanks for taking the time to post. I am not an insurance expert and find your posts to be helpful :-)

I am back on the sideline with Fairfax. Their equity portfolio is getting hit pretty hard.

But shouldn't their bond gains be offsetting this?