glider3834

thanks Viking - using your estimate I have estimated adjusted forward book value per share Adjusted Forward BVPS - current estimate BVPS (30 Sep) 562 (reported) Digit revaluation 37 (expected Q4'21 or possibly Q1'22) Pre-tax excess 15 (19 pre-tax) (reported) Adjusted BVPS 614 Add Unrealised gain (post-30 Sep) 17 (21 pre-tax) (using estimate per Viking update) Adjusted Forward BVPS 631 USD ( 788 CAD) Stock Price (5 Nov) 432 USD (538 CAD) Price to Adjusted Forward BVPS 0.68 (edit note : removing word forward as its confusing - adjusted bvps incorporates Digit revaluation expected Q4 or Q1'21)

Eurobank - Fairfax slightly increased its share holding over Q3'21 from 30.5% to 32.2% Atlas Corp - it doesn't appear Fairfax exercised any warrants in Q3 as shareholding about the same as Q2

Here are few quick thoughts but I need time to digest - honestly I thought this would be a flattish result after a strong 1H21 Compared to 2017 insured losses where Fairfax had 1% share - it looks to be very close to that here on Ida & Euro storms - I actually thought their combined ratio would be higher - if Q4 is decent they could very well end up closer to 95-96 area for Fy21. Yes Brit needs to do a lot better on the other hand look at the 94.4 CR for Allied World which is excellent compared to their results in 2017 - I think a lot of great work has been done here - also with Brit small point but we need to factor in that expenses from Ki which is a start up are increasing the CR but also driving increase in NWP in Q3 44% increase with Ki (& 17% increase without Ki). Q3 result looks fine to me - $561 in book value with a further $37 from Digit to come in Q4 (looks like they took $9 MTM earlier than I thought) - unrealised gains on both their on non-insurance subs & common stocks - I suspect they are they up since Q3 end? But I need to do the calcs. I think a positive surprise in Q3 is the operating profit contribution from associates ($172 mil) & non-insurance subs ($25 mil) - this will be one to continue to watch Their quarterly run-off exp has almost gone to zero - is that a one-off or new normal??

@modiva it looks like Fairfax has reduced its annualised interest expense by around 5.5% this year from $475 mil in 2020 to $449 mil current. AR2020 https://www.sec.gov/Archives/edgar/data/0000915191/000110465921120474/tm2127687-4_f10a.htm

Yes plus the Digit revaluation (1.2bil approx- $46 per share- Q4 expected closing I guess) will further lower the Debt to Capital ratio

@modiva it is worth looking at the debt in three buckets 1. holdco debt 2. insurance/reinsurance subs debt 3. non-insurance subs debt So on 3. non-insurance subs debt. When we have a controlling interest in a company (for example, Recipe or Thomas Cook India), we are required to consolidate that company’s financial statements into our own financial statements even though we do not guarantee the debt – and quite often it is an investment in a public company. (AR 2020) So this debt is not guaranteed by Fairfax - if Fairfax instead of owning these non-insurance subs replaced them with small shareholdings (<20%,non-controlling) then this debt would disappear. The debt is required to be consolidated under accounting rules because Fairfax is a controlling shareholder. So when you are looking at Debt to Capital ratios & comparing to other insurers just keep 3. in mind, as Fairfax generally has more concentrated equity positions than other insurers which might own ETFs, or more diversified equity portfolios.

Kennedy Wilson https://finance.yahoo.com/news/kennedy-wilson-reports-third-quarter-201500851.html "Our strong 3Q and year-to-date results reflect the tremendous progress we have made in growing our business over the last 18 months," said William McMorrow, Chairman and CEO of Kennedy Wilson. "We saw exceptional rent growth across our portfolio in 3Q resulting in continued growth in the value of our real estate portfolio. I am also pleased to report that the Board of Directors increased the quarterly dividend by 9% to $0.24 per share."

@Viking yep I think so too - I think because its a private company they are keeping a lot of the financial stuff confidential

yes agree - considering that 30% of operating weeks were still affected by Covid looks like a stronger result than Q3'19 - revenue & EBITDA per restaurant is higher & adjusted net quarterly earnings 27.6 mil vs 19.5 mil - Q4 will continue to be affected by vaccine passport requirement & higher labour/food costs but moving along nicely - will be interesting to see what they can do when covid restrictions are closer to 0% level & I wonder if they can continue to still do reasonable level of ecommerce sales (how much will still remain when restrictions fully eased)

article on Eurobank re JP Morgan - at new 52 week high (last time I commented on Atlas reaching 52week high $16 it promptly fell to $14 so look out More specifically, it points out that it maintains an overweight stance for Eurobank and Alpha due to growth (with Eurobank remaining its top choice) as well as for the National Bank due to its defense balance sheets, while maintaining a neutral stance for Piraeus, underlining the significant transformation which also notes the very good history of the administration, but noting that it shows lower capital cushions and has a longer way to normalize ROTE. Thus, it gives a target price of 1.5 euros for Alpha with a margin of 35%, 1.20 euros for Eurobank with a margin of 29%, 3.30 euros for Ethniki with a margin of 20% and 1 , 90 euros for Piraeus with an increase margin of 29%. https://www.capital.gr/oikonomia/3592324/to-taxidi-tis-jp-morgan-stin-athina-kai-ta-minumata-gia-tis-ellinikes-trapezes-ti-tha-enisxusei-to-elkustiko-story-tou-kladou

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With Blue Ant - I am unclear what Fairfax's ownership % is? 'In the U.S., huge investors have snapped up production companies for staggering sums; Blue Ant itself is privately owned, with Fairfax Financial holding a big stake.' https://www.theglobeandmail.com/business/rob-magazine/article-new-platforms-needs-lots-of-fresh-content-and-michael-macmillan-has/ We also partnered with Michael MacMillan and his team at Blue Ant Media through a Cdn$42 million investment in debt and warrants. Blue Ant is a media content and distribution company with brands such as Love Nature, one of the world’s largest libraries of 4K wildlife and nature content. Michael is very well known for winning an Oscar at the age of 27 and then going on to merge his film production business in 1998 to create Alliance Atlantis, the producer of the hit series CSI: Crime Scene Investigation, which was sold to CanWest and Goldman Sachs in 2007 for Cdn$2.3 billion. We trust that Michael and his team will have similar success with Blue Ant! (FFH AR 2016) Torstar acquired 25% stake in Blue Ant in 2011 for around $22.7 mil (put approx Blue Ant value at $90 mil) In 2016 Blue Ant raised capital & diluted Torstar stake down to 16% (did Fairfax boost its own ownership % during this dilution) but at a 40% higher value (according to Torstar Annual report) based on their average weighted cost (lets estimate Blue Ant value $126 mil) Then in 2021 Blue Ant had $100 mil windfall on their Enthusiast stake - but what is current value of Blue Ant business? I would guess adding this Enthusiast stake windfall to 2016 valuation - possibly have a value north of $200 mil - but what is Fairfax's ownership ??

great summary Viking I guess question with these $1 bil set of private investments - how much more potential value extraction could there be from monetisation? How does the fair value sit with carrying value? They have taken advantage of the attractive IPO market this year & sold/partnered up where they just don't have the expertise to move the business forward eg Toys r us We should be able to see some of the associates share of profit in AR 2021 to see how they are tracking - I think Exco is definitely one to watch provided they have not hedged too much of their production, they should be doing really well IMO with surge in natural gas prices.

Going back to looking at the above in terms of Fairfax's book value per share (BVPS) BVPS (adjusted for Eurolife consol etc) was $545 at 30 Jun-21 Add estimated $46 net gain on Digit (approval expected Q4) BVPS = $591 (incl Digit net gain on revaluation) Estimated CV at 30 Jun-21 of Insur/Reinsur subs (excl Digit revaluation) = $16.5 bil (my estimate of 10% increase in shareholder equity from 31 Dec-20 - see above post) Apply x 1.3 multiple = 21.45 bil Subtract Estimated CV at 30 Jun-21 of $16.5 bil Excess FV over CV estimate = $4.95 bil (or $190 per share pre-tax) Subtract tax at 18% estimate or $0.9 bil Excess FV over CV estimate (excl Digit revaluation) = $4.05 bil (or $156 per share after tax) So if the insurance/reinsurance subs were all sold - estimated BVPS would increase to US$591 + $156 = US$747 (or US$771 adjusted BVPS for excess of FV over CV of non-insurance subs of around US$24 after tax at 30 Jun-21) I am not suggesting we should value Fairfax on the basis that all their insurance subsidiaries are going to be sold, but it further underlines I think the replacement value of the insurance subs using a market based multiple. Another way to think about it, if Fairfax wanted to start from scratch & acquire the whole business again paying market values - I am estimating they would need to spend US$771 per share (using adjusted BVPS) & that compares pretty favourably to share price of US$404.

I thought this topic deserves to have its own thread. In 2020 AR shareholder letter, Prem wrote Prem believes insurance subs are worth much more than their carrying value of $15bil or $572 per share at 31 Dec-20. Here is the breakdown at 31 Dec-20 I have in previous posts put up a chart showing P/BV multiples for 15 of Fairfax's insurance peers. The median multiple was 1.3x shareholders' equity & I think thats reasonable to use on the basis Fairfax's CR (excl Covid) over last 3 years is close to peer median & Fairfax's NPW growth rate is at higher end of its peers. Fairfax doesn't break out by reporting segment its insurance subs carrying value at 30 Jun-21 - there are moving parts here such as divs to the holdco. Lets just assume 10% growth in shareholders equity to 30 Jun-21. I am then adding the $1.8 bil revaluation of Digit (Jul-21) that is subject to approvals expected Q4-21 which is Fairfax's share of Digit. 1. Estimate Carrying value at 30 Jun-21 = $15 bil x 1.1 = $16.5 billion 2. Apply 1.3x multiple to estimate market value of insur & reinsu subs = $16.5 bil x 1.3 = $21.45 billion 3. Add Fairfax's share of Digit revaluation = $1.8 bil Estimate Market value (attributable to Fairfax equity holders) at 30 Jun-21 = 21.45 bil + $1.8 bil = $23.25 bil Estimate Carrying value (attributable to Fairfax equity holders) at 30 Jun-21 = $16.5 billion Estimate excess fair value over carry value (excluding Digit revaluation) = $6.75 billion ( or $260 per share pre-tax based on 26 mil shares outstanding) So Prem believes the insurance subs are worth a lot more than their carrying value (or book value). I am estimating based on peer median multiples a number of around $6.75 billion. What does everyone else think? (Edit note I am assuming the 16.5 bil carrying value does not include the Digit revaluation. If we include the Digit revaluation as if it happened at 30 Jun-21, then you could add $1.8 bil to carrying value to get $18.3 bil , then subtracting this from market value estimate = $4.95 bil excess of fair value over carrying value which will make more sense if you read my post below where I try & tie these numbers back to book value per share)

I am expecting this will grow for 2022. If we use growth in book value as a rough proxy then we could expect subs statutory surplus to be higher - but we need to wait on Q3 results (Ida impact) & Q4 & also will depend on what they div out of the subs during the 2021 year. I agree that to get an immediate $5 bil buyback, we would need to sell a big sub. I actually believe Fairfax's insurance subs are being carried below their intrinsic worth & Fairfax have sold subs in the past like ICICI Lombard & First Capital & realised large capital gains. M&A for P&C insurers was around 1.2x BV in 2020 - I am guessing this would be higher now & then what would Fairfax's subs like Odyssey be worth - they have an excellent track record? I know Prem has said its their crown jewel & they would never sell but everything has a price & I believe they said they would never sell First Capital? We also need to go back to that buyback question? Is this the best decision? as @petecpointed out to me - we are in a hard market which provides an opportunity to really grow their net written premium substantially & premiums in insurance tend to be sticky so that will flow through later on in much higher net earned premium, underwriting profit & float. The best thing about growing organically is that they are underwriting that premium themselves, often with existing clients who they are already offering line/s of insurance to so its a safer & cheaper way to build than through acquistions. I think they will try & strike a balance between growth & buying back their shares but buybacks are not the only way to build intrinsic value & pushing capital into their insurance business at the moment to grow premium seems smart & makes sense. If you cast your eye across their peers, Fairfax are sitting at the higher end in terms of double digit premium growth while others who often have a more rigid geographic focus as well are growing at single digits.

https://www.livemint.com/companies/news/warren-buffett-goldman-sachs-win-from-fintech-gold-rush-in-india-11635823280259.html

@Daphneno nothing concrete just a guesstimate - in 2017 Fairfax took around 1% share (or 1.3 bil) of the $130 bil in insured losses, the estimated insured losses from Q3 (both Ida & European Storms) are probably in the US$40-50 bil area https://www.insuranceinsider.com/article/2923c79ber4dpafctaq68/aigs-mark-lyons-sees-q3-insured-catastrophe-losses-at-40bn so if we take 1% we are at say US$450 mil area but this is just a guess. Esimtating the CR is tricky because we don't know how much favourable reserve development or what other catastrophe exposure/lsosses they might have. But assuming no major reserve release in Q3 and an UWP of $185 mil (but for Ida etc), so if we subtract that from 450mil it probably puts them over 100CR for Q3 but I think they could still sit under or close to 100CR for 9mths if my estimates are close & also we still have Q4 to come - baring any major catastrophes you would expect a decent UWP there.

https://www.theinsurer.com/viewpoint/rock-solid-allied-world-in-bermuda/19054.article

I should just qualify my comment with that expected return, that I am expecting negative impact from catastrophe losses in Q3 but still expecting its manageable & so that we still get to a high 90s CR for full year.

+1 agree - including Digit gain expected I guess now for Q4 - we are probably on track for an approx 7% or maybe closer to 8% total investment return for this year (assuming there is no major drawdown in markets by year end) which I think would be the biggest since 2014 Here is a visual on those hedges I put together a while back - I have edited in red show impact of hedge removal

I can't think of one successful investor that hasn't had a serious f*** up and Prem is no different - I guess that makes him human. I loved Buffett's reply in response to comment around his unsuccessful airlines investment & he replied our company still has more net worth than any other company on the planet....so true And not just in world of investing but even in sport, I still can't get over (for football fans) Zidane's headbutting incident in the world cup final against Italy - one of the greatest footballers on the planet making an absolutely worst possible decision at the worst possible moment - during a world cup final! But hey he is still one of the greatest footballers of all time. Prem & Fairfax's record will be judged by the investment community in the fullness of time - we're all lucky we don't have our records (and dirty laundry) on public display

I just realised if we back out the $1 bil probably in shorts over 2017-2020, they probably would have done a double digit growth in BVPS over 2017-2020 period versus 9% p.a reported.

I am not sure exactly what hedges/shorts they had in place - but assuming they had hedges on S&P500 - it has doubled since end of 2016 when it was around 2,300 when I gather Fairfax removed its hedges, so that probably also validates their shift to a more bullish stance. Even the corrections in 2018 & 2020 didn't push past that 2300 level from what I can see. Maybe they had individual shorts that could have been more optimally removed but I think what Fairfax did was say we are making a strategic decision & we will be consistent through the whole portfolio. I think they still will hedge to lock in gains on an individual equity positions but not speculative shorts where the potential losses are unlimited. Yes agree - I think their high % of cash & short term investments (versus other insurers) also provides a 'hedge' in some ways for their equity position - it provides liquidity given equity concentration & gives them opportunity to raise their bond allocation at higher yields.