Fairfax Financial 3Q16 Earnings Call Notes

Fairfax Financial Holdings’ (FRFHF) CEO Prem Watsa on Q3 2016 Results

35% of the portfolio is in cash

“Given the uncertainties of the U.S. election and the fact that we live in a mark-to-market world in the fourth quarter we have sold approximately 90% of our U.S. long term treasuries in our investment portfolio. And as a result we will have cash and short term investments in excess of $10 billion or 35% of the portfolio. Since we began buying treasuries in 2010 we have realized a cumulative gain. Now this is a cumulative gain of over $1 billion.”

Uncertainties in election were problem

“Yes, as we said, sold 90% plus of our treasury bonds and we made the point that the uncertainties in the U.S. election is the reason. We don’t know who’s going to win the elections, but you could have significant infrastructure spending, you could have that drop in corporate tax rates and while we think that might work in the short term in the long, we still have questions about that. But we do live in a mark-to-market world and we wanted to take that risk and so we’ve done that.”

There is too much debt in the US

“We recognize and we’ve said to you there is too much debt in the United States and in the rest of the world. All of the monetary policy QE 123 all haven’t worked in any significant way. So when you see all of that we like the fact that we have $10 million plus of cash in the investment portfolios with the idea that we can take advantage of opportunity as and when it comes our way.”

Markel 3Q16 Earnings Call Notes

Markel (MKL) Q3 2016 Results
Thomas S. Gayner

We’ve beaten the index for three decades and indexes aren’t that passive anyways

“As headline after headline proclaims these days, active management has a tough time outperforming passive approaches like indexing. Our three decades of outperformance stands in ongoing contrast to those headlines though. Additionally, our costs are so low that we really wouldn’t pick up any cost savings by switching the index. Also, indexes are not as passive as you think. Turnover within an index causes taxes to be incurred, while we also regularly realized gainings over the years on our equity holdings.”

It remains a sellers market out there in Markel ventures

“We continue to look for additional opportunities to grow our Markel Ventures operations, but it remains a sellers’ market out there and we remain disciplined in the prices we are willing to pay for acquisitions. Our reputation at Markel Ventures continues to grow along with our success, and we are seeing interesting opportunities that we would’ve never seen in prior years. We’re hard at work meeting people and reviewing opportunities, and I have every confidence that we will find appropriate opportunities to continue to build value as time goes by.

Been changes in the way that healthcare is delivered

” there has been tremendous change. I think, as everybody’s aware in just sort of how healthcare is being delivered, the smaller practices, the two, three, four doctors, they’ve been forming bigger practices, been joining hospital groups, so the landscape has changed.”

WR Berkley 3Q16 Earnings Call Notes

W.R. Berkley’s (WRB) CEO Rob Berkley on Q3 2016 Results

The marketplace is more of the same

“as far as the market goes, generally speaking a continuation of what we’ve seen over the past few quarters. The marketplace overall is becoming incrementally more competitive. Reinsurance remains somewhat consistent as it seems to bounce along the bottom in search of a catalyst for change. One of the interesting things about the reinsurance market is putting aside property tax and peel back a few layers of the situation there, the loss ratios by and large are not particularly problematic, what’s is really driving is the seeding submissions that are creating a challenge for their economic model, from our perspective.”

Cyber insurance is a growing category

“And as we see in the development of cyber insurance coming around and wait to see – here in that is the beginning to scratch the surface, the fact is that intellectual assets are going to become a growing class and we as an industry need to find ways to grapple with that and help society figure out how they will manage that exposure. And again, I think there is a great deal of room in that area for growth and a lot of opportunity.”

We did have some exposure to SpaceX

“We experienced what I would just define as some meaningful as I suggested short-tail losses that are not normal. An example of that would be a couple of good-sized by our scale property losses not overwhelming but good size, but perhaps even more noteworthy, we had some exposure to SpaceX which was the [indiscernible] that didn’t get very airborne.”

Commercial auto product is in a very deep hole

“I think the fact is that commercial auto found itself, as a product line, in a very deep hole. And the idea that a certain just one-off percent rate increase is going to fix that, I think is a pipe dream. And we can all read in places like the Wall Street Journal about trucking whinging over rate increases, but the fact is, most folks that are writing their insurance haven’t been making any money, in fact they haven’t been getting paid appropriately for the risk, whatsoever. So, do I think that the situation is improving? Yes. Do I think that it is still challenged? Without a doubt. But it is heading hopefully – well, it is heading in a better direction. And again that’s why we’re getting meaningful rate increases, but you see the line still shrinking as far as premium, because our account or exposure is going down dramatically, in spite of the rate increases we’re getting.”

Bill Berkley

I’m concerned about inflation because it’s the only solution to the repayment of deficits

“I think that clearly, we have a country divided by extremes and views that are in conflict. And I think there’s loss of stresses and pressures. But there’s also beginning to be a recognition that there’s no free lunch. That someone is going to pay for everything that comes about. I think the last time we had runaway juries, there was a general sense that this was free money and it all came from heaven. I think there’s now a reality, reinforced by the issues of increased premiums from the Affordable Care Act, that someone pays somehow or another for everything. So I’m not particularly worried about runaway juries.

I am concerned about inflation, because ultimately, the only solution to repayment of deficits for governments is inflation. And inflation in the short-run will put pressure on insurance pricing. Although with property casualty insurance companies have done better in times of inflation than in non-inflationary times. So overall I’m okay with where we’re going. And I – in the short run, there may be some pressures as we change over to probably a more inflationary time. But in the intermediate term, I think that’s probably good for the business.”

Travelers 3Q16 Earnings Call Notes

The Travelers Companies’ (TRV) CEO Alan Schnitzer on Q3 2016 Results

Renewal rate has improved in domestic business insurance

“In domestic business insurance, renewal rate change has improved a little bit for two sequential quarters led by our middle market business where rate has also increased sequentially month-to-month in the quarter. Underneath that middle market, we again achieved rate gains in excess of loss trend on our poorer-performing segments.”

Auto injury severity is increasing

“Looking at auto profitability, the underlying combined ratio for the quarter was 101.1, up about 5 points from the prior year. About 4.5 points of this increase was due to the year-to-date impact of an adjustment we made to the loss ratio related to bodily injury severity for 2016, which, for the most part, reflects higher severity in our smaller claims. About 3 points of that increase relates to the first two quarters of this year. With respect to this change, I want to emphasize a few points. First, as Alan said, we believe this is environmental in nature; that is we are seeing it across all our auto products both in personal and commercial lines. Second, what we are seeing is from the last four accident quarters and for a long tail line like auto liability, that is very recent activity…for reference I’d say look back to commentary we had going back as far as 2011, 2012 into 2013. We were talking about liability trends, what we were seeing in the auto product relative to distracted driving relative to increased litigation relative to increased utilization of medical diagnostic tools and the impacts on bodily injury. And to be totally honest, there were a couple of years there where we were getting a lot of questions from folks on this call about why are you seeing something that no one else is talking about? And over the years, I think everybody has been talking about it.”

Still early to say impact from the storm

“Kai, we anticipated that and we’re happy to give you an early range but I do want to indicate that we’re just three weeks post storm, so it’s still early for us. And it could be influenced from here through the end of the quarter by large BI claims that come up that we haven’t identified yet. So we would say our range at this point is $75 million to $150 million and that’s pre-tax. And again, the risk factor going forward is going to be claims that we haven’t seen or don’t know of yet but they could come in between now and the end of the quarter.”

Third Point Reinsurance 2Q16 Earnings Call Notes

Third Point Reinsurance’s (TPRE) Dan Loeb on Q2 2016 Results

Not sure you can draw a direct connection between Brexit and US election

“Yes, I think people are understably drawing comparisons between Brexit and the US Presidential election and obviously US Presidential election is consequential. But Brexit was a – was a referendum on participation in the EU. This is very different, we’re talking about the leaders of United States. So I think there is – people want to draw comparisons between the sort of populous backlash that promoted Brexit and which I think you could go through and analyze and discuss what the – and asses what the merits were or not for Brexit. I mean, this is very different. We have some very unusual personalities involved in this election. I think they are giving people some concern. I am not going to predict the outcome. But you know, we’re obviously watching the polling very closely. And I think that the election is important, but I think the polling would suggest that we will be in reasonable shape in this election. I just want to leave at that, I don’t want to get too much into the election discussion.”

Unfortunately the poor performance of a couple of hedge funds has hurt the industry

“No, I mean, unfortunately due to the poor performance of a couple hedge funds out there, it’s caused some institutions to rethink their hedge fund strategy and some of them are just completely gone out of the market. We had some exposure to those firms, but the ones that we did have exposure to we’ve have already – that’s already behind us”

Markel (MKL) Q2 2016 Earnings Call

Markel (MKL) Co-CEO Tom Gayner on the macroeconomic environment being perplexing as a result of low interest rates

“There are no practical long-term historical precedence to study and use as guides for what comes next. As such, our number one objective is to remain agile and flexible, so that we can adapt to different circumstances as they develop.”

Markel (MKL) Co-CEO Tom Gayner said they’re focused on building one of the world’s great companies

“We’ve got some good short-term news from the first half of 2016 to report to you this morning, and that’s always fun. More importantly though, this call was a check-in and an update on the long-term story of building the Markel Corporation. Building one of the world’s great companies is what motivates us and we’re excited to share with you the details of how that’s going.”

Markel (MKL) CFO Anne Waleski said they are remaining disciplined when writing new insurance

“Market conditions remained very competitive. Consistent with our historical practices, we will not write business, when we believe prevailing market rates will not support our underwriting profit targets.”

Markel (MKL) President Michael Crowley said they’re continuing to enhance their online capabilities

“We continue to make strides with our client facing technology, as evidenced by the successful rollout of our new express renewal program. And each quarter, we’re enhancing our Markel online portal with greater functionality and additional products.”

Insurance market pricing may be bottoming

“Just a few other items regarding competition. Market conditions remain particularly challenging in London and in the large accounts segments. Competition also remained strong in the reinsurance market. However, as I think I stated last quarter the rates have declined and slowed and even in a few cases we’ve seen some stabilization.”

Arch Capital (ACGL) Q2 Earnings Call

Arch Capital (ACGL) CEO Constatine Iordanou said they are focusing on execution and discipline in this low rate environment

“In today’s market, we are emphasizing to our troops underwriting discipline, execution, and risk management in order to preserve capital and maintain balance sheet integrity. We continue to believe that our strategies of diversifying revenue streams and actively managing the allocation of capital will allow us to better navigate in this environment, which is challenging for all of us.”

Arch Capital (ACGL) CEO Constatine Iordanou on how to be successful in the insurance industry

“The key to this business in my view and in all of our underwriters is to maintain discipline in accepting risk.”

Arch Capital (ACGL) CEO Constatine Iordanou on how to think about GDP growth affecting insurance company premium growth

“Global GDP will affect the revenue for the insurance sector. But having said that, because we are a highly regulated business, a lot of what we do is global, but it’s local from the regulation point of view. You operate and you need local licenses and you participate in the local market.  At the end of the day though, if GDP growth is very low, it will affect our ability to get revenue. It’s been always like that. You can track the growth on the P&C world of insurance and reinsurance with GDP and there’s a very, very good correlation there.”

Reinsurance terms pricing may have bottomed

“There are some signs that reinsurance terms, especially ceding commissions may have bottomed out. In our insurance segment, we saw a slight deterioration in rates across some sectors, particularly in the excess capacity layers and short tail areas. But grades were generally stable in most of the lines, while the mortgage insurance environment remains very healthy.”

Arch Capital (ACGL) COO Mark Grandisson said they are deploying capital into the mortgage insurance space where they are finding the opportunity to earn a adequate return on their capital

“We are continuing to redeploy aggressively in our mortgage or MI segments, where returns are very attractive and above our long term goals. We remain bullish on this sector and believe that returns will remain above our hurdle rates for the next several years. Within the U.S. mortgage MI sector, we estimate that our market share of the primary new insurance written or NIW in the U.S. was in a 9% to 10% range in the second quarter, up from 6.4% in Q1, as Arch MI continues to gain traction in the bank channel. The acceptance of RateStar, our risk-based pricing module, is a primary driver of this growth, and we believe it will allow us to earn better risk-adjusted returns.”

WR Berkley (WRB) Q2 2016 Earnings Call

WR Berkley (WRB) CEO Robert Berkley said low interest makes sometimes make him feel like crying

“Continued dislocation in the marketplace amongst some very large carriers as some of them were managing through a merger or acquisition and others were just going through a meaningful restructuring. And then finally, we have continued low interest rate environment around the world and it’s really gotten to the point that it could almost make your eyes tear.”

And the sector is becoming more competitive 

“The insurance market seems to march to a similar beat to what it did in the first quarter. The reinsurance market continues to flirt with the bottom. On the other hand, the insurance market is becoming incrementally more competitive though it can vary greatly by product line or clients.  A couple of general comments around some of the product lines in the insurance space. Properties, particularly cat exposed properties, remains surprisingly competitive to a certain extent. My speculation would be this is a result of the reinsurance market empowering the insurance market to be less than responsible in many situations.”

Looking more and more to the alternative investment space for returns in their investment portfolio as a result of low interest rates

“As you have heard our Chairman talk about for some number of years now, given the interest rate environment, we had to look for alternatives, hence the building out of our alternative investment portfolio and gains have become a more meaningful part of our strategy.”

WR Berkley (WRB) Chairman Bill Berkley on whether Brexit will affect their business

“First of all, we in fact had set up a company in Liechtenstein well in advance being cautious and wanting to take no chances. So we are equipped to do business in the EU in domicile other than the UK. So from a legal point of view, it won’t have an impact on us if we did that some time ago. Clearly, that impact that’s based in the London market continues to be there. We don’t see it disappearing, so we think London will continue to be the center of the insurance business in that part of the world. And from a regulatory point of view, we think we can protect ourselves, so we don’t really see a major change or a significant impact.”

All returns are not created equally

“We focus on risk-adjusted returns. All returns are not created equally and we try and evaluate the risk that we are taking on and what is an appropriate return is associated with that. Ultimately, we are focused on obviously we are going hand-in-hand with risk-adjusted return, ROE.”

WR Berkley (WRB) Chairman Bill Berkley on whether we will get tax reform

“Tax reform, I don’t know who is going to be elected President. Probably, either of the above will be a good outcome. I have no idea whether we are going to get tax reform or not. I think that the reality is that the tax system is not working, not just for the insurance industry, but for lots of parts of corporate America and how people behave or what people do. Will we get tax reform? We sure should. We need it. I spent last time in Washington as I become less enthusiastic about something happening. Last week, I spent time with our lobbyists and talked about it. It was more optimistic, because as they don’t have much choice. So, I am slightly more positive than I was 2 years ago, but you surely can’t bet on it.”

White Mountains (WTM) 2015 Annual Report

White Mountains (WTM) Managing Director Reid Campbell called the current investment opportunity set lackluster

“We continue to face a lousy opportunity set in financial markets. Equity valuations are still rich, and interest rates are still near historic lows. Now, more than ever, some sig- nificant volatility in both equity and fixed income markets would play to our advantage. We took advantage of the equity market pullback in January and February of this year to begin averaging back into equities and sit well positioned with significant dry powder to take advantage of additional market disruptions.”

Insurance is still currently in a soft underwriting market but that may be changing 

“We begin 2016 with challenging conditions in underwriting and investments. We anticipate premiums will be pressured as competitors look for market share. At year- end 2015, the cracks were apparent in many companies’ underwriting results, which may slow some rate reduc- tions and push for corrective actions in troubled lines.”