SafetyinNumbers

If the current discount rate is too high. Then the present value is significantly higher. Maybe they don’t want to write up a discount purchase too quickly. They increased the discount rate by ~7% since the end of last year and are still up ~40%. Why do you think it’s a distraction for management?

Is there anyway to assess midyear or is there only an annual update?

100% agree. The slowing of premium growth in Q3 and very high investment income going forward increases the possibility of much higher surplus capital at the insurance companies. I’m not an insurance expert so I’m wondering what’s the best way to assess what Fairfax’s surplus capital position is now, what it might get to and where it will be used? The analysts are currently assuming a declining ROE as capital builds presumably because they assume low return opportunities for that capital. They already have very low assumptions for associates income and capital gains on the equity portfolio so there are multiple opportunities for upside surprises.

He covers ~25 companies and has no clients. I don’t think it matters much to him. His analysis is basically, “a lumpy 15 isn’t worth owning”

it would be nice if everyone who trimmed FFH bought FIH. The discount would close in no time.

I think it’s too soon to start trimming. Maybe once it gets into the S&P/TSX 60. I appreciate that some people have insanely large positions though so each his own! I still expect the index chase to continue and eventually when the stock is 1.5-2x book value, the analysts may start to model earnings growth which will finally get the quants and their active counterparts involved.

Thanks for the insight and the link! Last Q3 and the switch to IFRS17 really made me think about “reserve management” more holistically. It makes sense that Fairfax would reserve more aggressively than peers because of their incentive structures and tax deferral advantages. Last Q3, outside of CAT, the combined ratio was 85% which seemed like a flex. They have recently highlighted on conference calls that even with a significant CAT event, underwriting profit should be able to offset it which I don’t think most analysts have appreciated.

Is it fair to assume claims in the quarter has a significant impact on their assessment of reserve adequacy? Based on IFRS17, the reserves seemed to be designated to a time period and then discounted back. Based on the triangles, ~25% of reserves are paid out in the next year so there is a lot of turnover expected (this is probably higher under IFRS17).

I accepted what Prem said and it was consistent with the triangles but I'm not an insurance expert. I assume reserves also follow a similar chart pattern as above so would it be reasonable to expect that Fairfax always has a lot of reserves they can and do release in Q3 of every year given the normally high CAT activity? Last year Fairfax had 15% of cat losses in the quarter but the combined ratio was only 100.3%. It's part of why I'm optimistic about the underwriting profit given how well most peers have performed. It's impossible to know what business they actually wrote or what came back to haunt them. Markel reported a 99% combined ratio after the close today and looks like they had both problems.

This is from the Q123 call. So all we know is at least 4 years. We should also note that the claims liabilities are in various currencies (but likely disproportionately USD) while the portfolio is in USD.

How long would you extend duration?

I guess if you like them realistic but that's not why I look at analyst estimates. I just want to see where expectations are. Quants really like estimates that are going up and earnings growth. Maybe analysts will get there in the next few years. I think it's part of how multiple expansion can get out of hand.

I pay for Koyfin.

I have seen a bad tick there before. I doubt its a real trade.

I think they can beat consensus on the back of IFRS17 which I think most analysts are ignoring. More important though will be the earnings power demonstrated in investment income, associates/dividend income and the combined ratio. Analysts will likely increase their 2024 estimates and introduce 2025 estimates which will make Morningstar’s pessimistic prognostication less relevant. It would nice to have growing earnings forecast like every other P&C insurer but FFH is too cheap and unloved for that.

I expect we’ll get some more previews this week before they report but here’s the lay of the land with respect to analyst expectations

Unfortunately I can’t share the note but it’s really well done.

This is very interesting. Does Fairfax own the same class of shares as Blackstone directly or a different class with different terms?

Thanks for sharing! Probably why the stock was up almost 5% last week while the Greek market was flat.

I try to think about it context. Shareholders were cheering the shorting at the time and rewarded Fairfax with a 1.3x BV multiple while they issued equity for the treasury and Allied World in 2016 which was the end of the shorting. They didn’t like the shorting in retrospect because it didn’t work out and book value growth stagnated for 7 years. The share count also went up ~35% over that period while revenues were up ~2.5x. It’s not surprising a lot of those newly issued shares were dumped in the following hears with Fairfax buying back more than half of them. I think a lot of people share your view and those who have been burned may not come back. I’m sure others are selling now because “it’s had a nice run” and they don’t want to own it for Prem’s next mistake. None of that matters as long as book value growth is double digits. With the float as big as it is and interest rates where they are, it’s hard to imagine that not happening over the next three years. Nothing is a guarantee as these are all probabilistic bets after all. If Fairfax executes, institutional investors will find it again and the multiple should increase. I think a lot of investors will miss out by selling too early trying to avoid a drawdown when the path for high growth in book value seems so promising.

I don’t think I fully appreciated how much Fairfax would have earned last year if IFRS 17 had been implemented a year earlier. I know they got the full benefit in the book value at the beginning of year and it’s helped by half a billion or so this year (so far) but to actually report the earnings would have had a bigger impact on valuation I think. It also really highlights the spectacular macro call of keeping short duration on the bond portfolio. IFRS 17 only increased book at Jan 2022 by ~$150m. The majority of benefit actually came in 2022 as rates increased substantially. The restated H12022 results go from a big loss to a profit.

It’s funny, I read the same post and it made me think I was right. I think to take out the IFRS17 plug, you have to assume no premium growth which isn’t consistent with the rest of the forecast.

We didn’t see an SIB but the buyback picked up just over 1m shares in September

I want to make it clear I’m not an insurance expert, my MAcc degree is 23 years old and I let my CA/CPA expire a few years ago to save on the fees! My premise is that as long as interest rates are positive and rates are unchanged, the discounted combined ratio will be lower than the undiscounted combined ratio assuming a growing business. I assume when a policy is sold, premiums are collected and reserves are set aside. If those reserves are discounted, the underwriting profit is by definition higher all else being equal and that should happen every quarter. The quarterly offset, however, is the reserve balance must also accrete at the same discount rate. Before IFRS17, in order to model underwriting income, an analyst will most likely estimate a combined ratio based on the trend in the reported undiscounted combined ratio. After, IFRS17 that’s still all Fairfax is giving us explicitly so that’s still how underwriting income is being modelled. But there is a plug needed. I don’t know if $480m is a fair estimate. If the discounted combined ratio is 300bps lower than the reported combined ratio and Fairfax writes $25b in policies, does that mean $750m in additional profits? In theory that includes any accretion from the reserve balance. I’m not sure at all but it makes sense to me.

I know you asked Viking but I think about this a lot so I hope you don’t mind my thoughts. My understanding with IFRS 17 is as long as interest rates aren’t zero there will be some sort of adjustment. The reported combined ratio does not include any impact for discounting reserves. But every quarter, the existing reserve balance accretes and any reserves for new policies have to be discounted. If rates are flat or going up, that should be a sizeable benefit every quarter. If rates are going down, the reserve balance will be revalued higher but the discounting of the new policies will still be positive. I think most analysts are ignoring this and that’s part of why their earnings estimates are too low. Intact breaks out the discounted combined ratio (see below) and for them in the first half it was a 440bps difference. I’m not sure what the right number is for Fairfax but it’s not zero. That being said at some point in the future if rates fall fast enough, the discounted combined ratio might be higher than the reported combined ratio.