Fairfax 2021

[bearprowler6]

Annual dividend has been declared:

https://www.fairfax.ca/news/press-releases/press-release-details/2021/Fairfax-Declares-Annual-Dividend/default.aspx

[Viking]

Further evidence that the insurance industry is in the midst of a hard market. Looks like reinsurance is starting to participate.

January Renewals Saw Some of Sharpest Price Hikes in Recent Years: Howden
- https://www.insurancejournal.com/news/international/2021/01/06/596323.htm

Lower investment yields, adverse catastrophe loss development, higher loss cost trends, concerns over climate change, and, of course, the pandemic coalesced to bring some of the sharpest price increases in recent memory during the Jan. 1 reinsurance renewals, according to Howden, the London-based insurance broker.

“The result is not only significantly higher pricing, but also more restrictive terms and conditions,” said Howden in a report titled “Hard Times. How a pandemic, record low yields, and climate-driven cat losses have changed the (re)insurance market.”

The report’s key findings on reinsurance renewals include:
- Howden’s Global Risk-Adjusted Property-Catastrophe Rate-on-Line Index rose by 6% at Jan. 1, 2021. This was higher than the flat outcome of 2020, and the biggest year-over-year increase in over a decade. COVID-19 loss experience, along with yet another hyperactive natural catastrophe year, were key inflating drivers.
- Programs in North America led the charge at Jan. 1, 2021, with an average rate-on-line increase of 8.5%. Pricing pressure was more subdued outside the United States.
- A significant turning point was reached in Europe where with rate rises in the low-to-mid-single digit range were seen.
- Another year of constrained capacity in the retrocession market saw Howden’s Risk-Adjusted Non-marine Retrocession Catastrophe Rate-on-Line Index rise by 13%. Four consecutive years of price increases have seen the cost of retrocession protection return to levels last recorded in 2012/13.
- Casualty reinsurance rates-on-line, including adjustments for exposure changes and ceding commissions, rose by 6% on average at Jan. 1, 2021.
- Rising rates on underlying business, especially in the U.S., mitigated pressure on ceding commissions somewhat, although outcomes varied depending on book performance. Reinsurers were resolute in pursuing higher pricing for excess-of-loss programmes, although there was again some degree of differentiation to account for portfolio characteristics and profitability.

[gary17]

is a hard market better for EPS or not?

[Parsad]

Further evidence that the insurance industry is in the midst of a hard market. Looks like reinsurance is starting to participate.

January Renewals Saw Some of Sharpest Price Hikes in Recent Years: Howden
- https://www.insurancejournal.com/news/international/2021/01/06/596323.htm

Lower investment yields, adverse catastrophe loss development, higher loss cost trends, concerns over climate change, and, of course, the pandemic coalesced to bring some of the sharpest price increases in recent memory during the Jan. 1 reinsurance renewals, according to Howden, the London-based insurance broker.

“The result is not only significantly higher pricing, but also more restrictive terms and conditions,” said Howden in a report titled “Hard Times. How a pandemic, record low yields, and climate-driven cat losses have changed the (re)insurance market.”

The report’s key findings on reinsurance renewals include:
- Howden’s Global Risk-Adjusted Property-Catastrophe Rate-on-Line Index rose by 6% at Jan. 1, 2021. This was higher than the flat outcome of 2020, and the biggest year-over-year increase in over a decade. COVID-19 loss experience, along with yet another hyperactive natural catastrophe year, were key inflating drivers.
- Programs in North America led the charge at Jan. 1, 2021, with an average rate-on-line increase of 8.5%. Pricing pressure was more subdued outside the United States.
- A significant turning point was reached in Europe where with rate rises in the low-to-mid-single digit range were seen.
- Another year of constrained capacity in the retrocession market saw Howden’s Risk-Adjusted Non-marine Retrocession Catastrophe Rate-on-Line Index rise by 13%. Four consecutive years of price increases have seen the cost of retrocession protection return to levels last recorded in 2012/13.
- Casualty reinsurance rates-on-line, including adjustments for exposure changes and ceding commissions, rose by 6% on average at Jan. 1, 2021.
- Rising rates on underlying business, especially in the U.S., mitigated pressure on ceding commissions somewhat, although outcomes varied depending on book performance. Reinsurers were resolute in pursuing higher pricing for excess-of-loss programmes, although there was again some degree of differentiation to account for portfolio characteristics and profitability.

It should also be noted that this hard market is a global phenomenon.  Not simply regional like during after a Gulf Coast hurricane or Italian earthquake.  You combine catastrophe losses, with underpriced premiums in many regions where global warming is taking hold, and a global pandemic...zero interest rates, overinflated stocks, fully priced bonds...you get arguably the greatest hard market in recent memory!

is a hard market better for EPS or not?

You bet it will.  For a good 2-3 years or so until you start to get private equity, hedge fund, institutional capital coming in down the road.  Cheers!

[Viking]

is a hard market better for EPS or not?

Gary, nwoodman posted a link to a 100 page report that provides the best overview of the insurance industry that i have read. Perfect for the non-insurance type like me. It answers your question. The link to his post is below.

- https://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/fairfax-2020/msg444399/#msg444399

[Cigarbutt]

is a hard market better for EPS or not?

Gary, nwoodman posted a link to a 100 page report that provides the best overview of the insurance industry that i have read. Perfect for the non-insurance type like me. It answers your question. The link to his post is below.
- https://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/fairfax-2020/msg444399/#msg444399

The simple question is not so simple.
The hard market that followed 2001 allowed FFH to increase premiums significantly especially at OdysseyRe (see page 18 slides) and, by 2005, overall float had increased by 50%. FFH was still swallowing reserve deficiencies of the past but the best was yet to come with the buildup leading to a capital scarcity episode for which they were ready for.
https://s1.q4cdn.com/579586326/files/2011%20AGM.pdf

[Xerxes]

Chart 33 is interesting on the link above.

Heading to GFC, they had a 17% equity exposure, coming out of it they had 23% exposure (in 2010).
So an increase but not that much.

The big change was on their fixed-income portfolio. More the 50% in government bonds in 2007 down to 23% in 2010, whereas municipal bonds and corporate bonds allocation went from 1% and 4%, in 2007, to 23% and 9%, respectively, in 2010.

I guess that what that shows is the deployment of its dry powder. Moving from safe haven government bonds to municipal and corporate bonds to capture those as their spreads were blowing up. Weighted average yield went from 4.6% to 6.5%.

Did a quick math,
In 2007, the 5% of the portfolio allocated to municipal and corporate bonds was a $950 million holding on a $19 billion portfolio.

In 2010, the 32% of the portfolio allocated to municipal and corporate bonds was a $7.4 billion holding on a $23.3 billion portfolio.

In contrast, in the 2020 short lived bear market, FFH announced that:

" Since mid-March 2020, Fairfax has been reinvesting its cash and short term investments into
higher yielding investment grade U.S. corporate bonds with an average maturity date of 4 years
and average interest rates of 4.25%, that will benefit interest income in the future. To date, taking
advantage of the increase in corporate spreads, Fairfax has purchased about $2.9 billion of such
bonds. "

That is a 7% exposure on a $40 billion portfolio. So both in terms of dollar value and percentage, FFH wasn't able to re-shuffle the bond portfolio in 2020 as well as it did in 2008-09, thanks (but no thanks) to Central Bank distorting of the market and closing the spreads. But if the Central Bank didn't do what it did, FFH itself might have been in a dire situation, so it is not easy to square the logic in my head.

[Viking]

is a hard market better for EPS or not?

Gary, nwoodman posted a link to a 100 page report that provides the best overview of the insurance industry that i have read. Perfect for the non-insurance type like me. It answers your question. The link to his post is below.
- https://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/fairfax-2020/msg444399/#msg444399

The simple question is not so simple.
The hard market that followed 2001 allowed FFH to increase premiums significantly especially at OdysseyRe (see page 18 slides) and, by 2005, overall float had increased by 50%. FFH was still swallowing reserve deficiencies of the past but the best was yet to come with the buildup leading to a capital scarcity episode for which they were ready for.
https://s1.q4cdn.com/579586326/files/2011%20AGM.pdf

Is the simple answer: as long as rate increases > loss cost trends then, given time, we should see better EPS? (All else being equal.) It takes time as written premiums become earned premiums.

From nwoodmans link, the report estimates 75% of EPS for P&C is investments returns; 20% is renewal and 5% is new business. Only 25% of earnings for most insurance companies is underwriting?

Plummeting bond yields has got to be killing 75% of earnings of most P&C companies. For the 25% bucket to make up this decline we are going to need to see big price increases or large price increases for insurance over many years. Perhaps this is the biggest reason we are hearing the hard market may run for years.

For Fairfax, they have underperformed on the investing side for so many years the bar is now very low. Improving CR and better investment results happening at the same time would definitely juice the stock price. The set up for 2021 is encouraging.

[Cigarbutt]

is a hard market better for EPS or not?

Gary, nwoodman posted a link to a 100 page report that provides the best overview of the insurance industry that i have read. Perfect for the non-insurance type like me. It answers your question. The link to his post is below.
- https://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/fairfax-2020/msg444399/#msg444399

1- Is the simple answer: as long as rate increases > loss cost trends then, given time, we should see better EPS? (All else being equal.) It takes time as written premiums become earned premiums.
From nwoodmans link, the report estimates 75% of EPS for P&C is investments returns; 20% is renewal and 5% is new business. Only 25% of earnings for most insurance companies is underwriting?
2-Plummeting bond yields has got to be killing 75% of earnings of most P&C companies. For the 25% bucket to make up this decline we are going to need to see big price increases or large price increases for insurance over many years. Perhaps this is the biggest reason we are hearing the hard market may run for years.
3-For Fairfax, they have underperformed on the investing side for so many years the bar is now very low. Improving CR and better investment results happening at the same time would definitely juice the stock price. The set up for 2021 is encouraging.

Hi Viking,
For 2-, there are many factors (very unusual soft phase) already baked into the hardening phase and it's hard to 'forecast' the extent but capital (from retained surplus and alternative sources) is ample and this is bound to limit the upside.
For 1-, it's likely that most lines are written for a profit at this point and this may continue for a while. What we will find out over time (a topic we had discussed about a year ago) is the reserve release profile of the last few years. Of course all companies appear to be equally comfortable with their reserves but some are more equal than others. To get a better 'feel' for this, one has to go to AM Best and others for tedious and boring reading but the link that nwoodmans provided mentions this aspect on page 27. A way to ride this aspect would imply to invest in consistently profitable firms (underwriting side eg TRV, RNR) but this does not fit opportunistic investing, if that's your thing.
For 3-, an interesting aspect compared to before is that FFH is likely to provide some positive return on capital from the underwriting side. It's the investment side that is still difficult to figure out (my perspective).

Chart 33 is interesting on the link above.
...
That is a 7% exposure on a $40 billion portfolio. So both in terms of dollar value and percentage, FFH wasn't able to re-shuffle the bond portfolio in 2020 as well as it did in 2008-09, thanks (but no thanks) to Central Bank distorting of the market and closing the spreads. But if the Central Bank didn't do what it did, FFH itself might have been in a dire situation, so it is not easy to square the logic in my head.

Hi Xerxes,
(your inputs elsewhere about the Middle East were interesting; still, i'm not sure this is the right forum to discuss such 'hot' topics because of the potential for polarization. You may want to look for an old mini-series released in 1986 "On Wings of Eagles" about the hostage crisis. The series was poorly made on many levels but gives an interesting insight into some aspects.)
To link your post with Viking's, the bar is indeed very low for the return aspect but the bar for the downside aspect (status quo part; capital scarcity episodes are dead) remains IMO ill defined.

[Xerxes]

Agreed, and i am not planning to do anymore post there or any other thread (Sorry Vikings).

It seems to me that discussion about politics/foreign policy tend to divide people and bring out the worse in them, while discussion about investment tend to bring the best out of people (specially when they disagree). Why propagate/absorb negative energy when you can propagate/absorb positive energy and cover your cost of capital while you are it.