Author Topic: Fairfax 2020  (Read 199871 times)

TwoCitiesCapital

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Re: Fairfax 2020
« Reply #430 on: June 10, 2020, 12:19:18 PM »
we were told the reason for the soft market was the massive inflows of capital

Have the inflows of capital changed?

Not that I'm aware of. I don't have industry data that measures that on a regular basis, but I can't think of anything that would have caused that to change.

We haven't had any major catastrophes to scare money out, insurance linked products are becoming a bigger part of the industry, and the hardening of the market started long before all of this COVID stuff could have made capital scarce (and doesn't seem to be making it scarce for other risk products).


bearprowler6

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Re: Fairfax 2020
« Reply #431 on: June 10, 2020, 03:22:31 PM »
we were told the reason for the soft market was the massive inflows of capital

Have the inflows of capital changed?

Not that I'm aware of. I don't have industry data that measures that on a regular basis, but I can't think of anything that would have caused that to change.

We haven't had any major catastrophes to scare money out, insurance linked products are becoming a bigger part of the industry, and the hardening of the market started long before all of this COVID stuff could have made capital scarce (and doesn't seem to be making it scarce for other risk products).

My next door neighbour is a Managing Director at one of the major reinsurance brokerage companies. I just spoke to him about the current state of renewal rates, the existence of the hard market and why now for the hard market if one exists.

To summarize what he said:

-rates are hardening everywhere
-the outbreak of the pandemic has not slowed down renewal rates at all.
-the hard market which started last fall is continuing with no end in sight
-best rate increases being experienced since 2005
-capital has not left however it is finally demanding an adequate return on investment. Too many lines of business were no longer profitable
-as for why now---the industry simply couldnt hold out any longer. The low interest rates look like they are here for awhile and longer than anyone expected so increased renewal rates is the only chance the industry has to stay viable


Hopefully this helps!
« Last Edit: June 10, 2020, 03:46:12 PM by bearprowler6 »

Xerxes

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Re: Fairfax 2020
« Reply #432 on: June 10, 2020, 04:00:34 PM »
Bearprowler,

so that I don't understand the logic,

Low interest rate, takes away the incentive to write insurance, because the float has less alternative 'safe' investment options.
Less underwriting capacity means fewer underwriting not fore market share sake but for return's sake.

Did the low rate regime that first started in 2008-09, also caused similar behavior

Cigarbutt

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Re: Fairfax 2020
« Reply #433 on: June 10, 2020, 06:10:03 PM »
Can someone explain what is driving the hard market?

I've been skeptical of it so far just because we were told the reason for the soft market was the massive inflows of capital through new insurance-linked products and etc paired with limited catstrophes to remove said capital.

So what's changed? Why is it that suddenly low yields mean insurers hold the line and raise pricing. Low ROEs were acceptable for most of the last decade, why is 2020 suddenly different?

Guess I'm just trying to understand where I'm wrong in being skeptical. We've had a few months of sustained pricing increases across the industry and now places like Lancashire are raising capital to out to work in underwriting. The experts seem to believe this is for real so I'm just trying to understand what changed the dynamic?
Who knows and there are multiple inputs but the alternative capital market is an area to look at. 2019 calendar year was characterized by very significant loss creep (adverse development) from catastrophe activity occurring in prior years (starting with Irma, 2017 event, which 'developed' well into 2019). The alternative capital is at the margin but it forms about 15 to 20% of reinsurance capital and is very significant in the retrocession category. The volume of securities outstanding in 2019 grew because of multi-year contracts but the new issuance level was actually down, something that hasn't occurred in ages. A blip or more? Because of previous negative surprises and the associated "trapped" capital in collateralized transactions, 'investors' have been asking much higher spreads.

On a business level and as a coincident indicator, underwriters, at some point, 'realize' that the last policies written were unprofitable. At the industry level, this means that some leave business lines altogether and disciplined underwriters have their prices met and more.

TwoCitiesCapital

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Re: Fairfax 2020
« Reply #434 on: June 10, 2020, 06:30:40 PM »
Can someone explain what is driving the hard market?

I've been skeptical of it so far just because we were told the reason for the soft market was the massive inflows of capital through new insurance-linked products and etc paired with limited catstrophes to remove said capital.

So what's changed? Why is it that suddenly low yields mean insurers hold the line and raise pricing. Low ROEs were acceptable for most of the last decade, why is 2020 suddenly different?

Guess I'm just trying to understand where I'm wrong in being skeptical. We've had a few months of sustained pricing increases across the industry and now places like Lancashire are raising capital to out to work in underwriting. The experts seem to believe this is for real so I'm just trying to understand what changed the dynamic?
Who knows and there are multiple inputs but the alternative capital market is an area to look at. 2019 calendar year was characterized by very significant loss creep (adverse development) from catastrophe activity occurring in prior years (starting with Irma, 2017 event, which 'developed' well into 2019). The alternative capital is at the margin but it forms about 15 to 20% of reinsurance capital and is very significant in the retrocession category. The volume of securities outstanding in 2019 grew because of multi-year contracts but the new issuance level was actually down, something that hasn't occurred in ages. A blip or more? Because of previous negative surprises and the associated "trapped" capital in collateralized transactions, 'investors' have been asking much higher spreads.

On a business level and as a coincident indicator, underwriters, at some point, 'realize' that the last policies written were unprofitable. At the industry level, this means that some leave business lines altogether and disciplined underwriters have their prices met and more.

Helpful.

Thanks!

TwoCitiesCapital

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Re: Fairfax 2020
« Reply #435 on: June 10, 2020, 06:32:53 PM »
we were told the reason for the soft market was the massive inflows of capital

Have the inflows of capital changed?

Not that I'm aware of. I don't have industry data that measures that on a regular basis, but I can't think of anything that would have caused that to change.

We haven't had any major catastrophes to scare money out, insurance linked products are becoming a bigger part of the industry, and the hardening of the market started long before all of this COVID stuff could have made capital scarce (and doesn't seem to be making it scarce for other risk products).

My next door neighbour is a Managing Director at one of the major reinsurance brokerage companies. I just spoke to him about the current state of renewal rates, the existence of the hard market and why now for the hard market if one exists.

To summarize what he said:

-rates are hardening everywhere
-the outbreak of the pandemic has not slowed down renewal rates at all.
-the hard market which started last fall is continuing with no end in sight
-best rate increases being experienced since 2005
-capital has not left however it is finally demanding an adequate return on investment. Too many lines of business were no longer profitable
-as for why now---the industry simply couldnt hold out any longer. The low interest rates look like they are here for awhile and longer than anyone expected so increased renewal rates is the only chance the industry has to stay viable


Hopefully this helps!

Thanks - I guess it makes sense that the industry is FINALLY accepting that they need to be economic on the policies and not just rely on float return.

I guess I just don't feel very comfortable assuming that's what happened when it didn't happen in any year where low interest rates were also a thing before.

Who knows how long this will last ,but have even more confidence in Fairfax at these prices if that's the case.

omagh

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Re: Fairfax 2020
« Reply #436 on: June 15, 2020, 10:00:33 AM »
Bearprowler,

so that I don't understand the logic,

Low interest rate, takes away the incentive to write insurance, because the float has less alternative 'safe' investment options.
Less underwriting capacity means fewer underwriting not fore market share sake but for return's sake.

Did the low rate regime that first started in 2008-09, also caused similar behavior

If an insurance company writes consistently at 100% CR and makes 5% on the float after tax, it should report roughly 5% AT profit assuming no leverage.  So, with treasury rates down to 0.5% or lower, the way to report a similar profit as the previous simple example is to raise prices to ensure that the insurance business writes consistently at 95% CR; again with no leverage or change in portfolio mix.  Prices just went up in a hard market to help the company and its industry peers maintain profitability.  In the old days, one could write insurance at a loss (CR>100%) and make it back to profitability through investments and leverage.  Bill Berkley and Warren Buffett have talked extensively about these mechanics if you look around.

In the post-2008-9 period there was a short hard market 2010-11 if I recall correctly.  I had shares in Odyssey Re which Fairfax bought out in this timeframe as cat insurance was becoming very profitable to write at that point.  We're probably in the middle of a similar hardening as the industry's going forward financial picture has diminished greatly due to bond pricing getting whacked.

Xerxes

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Re: Fairfax 2020
« Reply #437 on: June 15, 2020, 10:44:51 AM »
So really ultra low yield knocked out the investment engine of the twin-engine insurance business.
Now it all comes down to the one remaining underwriting engine performing and lifting the whole business. Game is much harder without the investment lift, so capacity leaves the market.

Kind of counter intuitive, I would have thought that aspect would have exasperated the market share game. 

lessthaniv

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Re: Fairfax 2020
« Reply #438 on: June 15, 2020, 02:09:29 PM »
ORIGINAL: Prem Watsa Acquires Additional Shares of Fairfax

2020-06-15 17:05 ET - News Release


TORONTO, June 15, 2020 (GLOBE NEWSWIRE) -- Fairfax Financial Holdings Limited (TSX: FFH and FFH.U) announces that Prem Watsa, its Chair and CEO, has advised that over the last few days he has purchased in the market 482,600 subordinate voting shares of Fairfax for an aggregate purchase cost of approximately US$148.95 million.

Mr. Watsa commented as follows in connection with this purchase: “At our AGM and on our first quarter earnings release call, I said that our shares are ‘ridiculously cheap’. That statement reflected my recognition that in the 35 years since Fairfax began, I have never seen Fairfax shares sell at a bigger discount to their intrinsic value than they have recently. I have now backed up my strong words by purchasing close to US$150 million of Fairfax shares in the market over the last few days, as I believe that this will be an excellent long term investment.”

Fairfax is a holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and the associated investment management.

For further information contact:               John Varnell, Vice President, Corporate Development
at (416) 367-4941
        
<IV

StubbleJumper

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Re: Fairfax 2020
« Reply #439 on: June 15, 2020, 04:14:11 PM »
ORIGINAL: Prem Watsa Acquires Additional Shares of Fairfax

2020-06-15 17:05 ET - News Release


TORONTO, June 15, 2020 (GLOBE NEWSWIRE) -- Fairfax Financial Holdings Limited (TSX: FFH and FFH.U) announces that Prem Watsa, its Chair and CEO, has advised that over the last few days he has purchased in the market 482,600 subordinate voting shares of Fairfax for an aggregate purchase cost of approximately US$148.95 million.

Mr. Watsa commented as follows in connection with this purchase: “At our AGM and on our first quarter earnings release call, I said that our shares are ‘ridiculously cheap’. That statement reflected my recognition that in the 35 years since Fairfax began, I have never seen Fairfax shares sell at a bigger discount to their intrinsic value than they have recently. I have now backed up my strong words by purchasing close to US$150 million of Fairfax shares in the market over the last few days, as I believe that this will be an excellent long term investment.”

Fairfax is a holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and the associated investment management.

For further information contact:               John Varnell, Vice President, Corporate Development
at (416) 367-4941


Good sign!  So now he has ~9% of the economic interest?  I wonder if he borrowed against the multiple voting shares to make this happen?  I would not have thought that he would have ~$150m just laying around....


SJ


***edit, it's worth noting that Prem didn't exactly hit bottom in that he paid ~US$300/sh, and bottom was a good 12 or 15 percent lower than that.
« Last Edit: June 15, 2020, 04:16:52 PM by StubbleJumper »