Fairfax 2018

[TwoCitiesCapital]

appears to be solid print across many fronts. my big concern was allied reserve developments and it looks like small redundancy and 94% CR for Q.  At $560/share implies 1.2x Q1 BVPS so needs strong results to support valuation but not very demanding compared to peers imo

 

Closer to 1.1x when accounting for the $800 million in gains from fare value adjustments to investments in associates. Maybe even a little less when considering unrealized gains in investment portfolio since end of March - probably in the ballpark of $150-200M overall.

[ABM]

appears to be solid print across many fronts. my big concern was allied reserve developments and it looks like small redundancy and 94% CR for Q.  At $560/share implies 1.2x Q1 BVPS so needs strong results to support valuation but not very demanding compared to peers imo

 

Closer to 1.1x when accounting for the $800 million in gains from fare value adjustments to investments in associates. Maybe even a little less when considering unrealized gains in investment portfolio since end of March - probably in the ballpark of $150-200M overall.

 

Yeah I can definitely appreciate that adjustment but I can see an argument to also adjust for the goodwill & intangibles which represent ~45% of common equity. I found FFH has a relative high level of these intangible assets. On a P/TBV FFH aint that cheap compared to peers. 

 

@ fairfacts you are correct about the Allied CR

[FairFacts]

ABM, I may have jumped the gun, I was pointing out consolidated CR at 96% (not Allied).

 

 

 

[Dazel]

 

Fairfax is looking like some of us thought....strong. Congrats Fairfax team!

 

Buybacks at almost $300m since quarter 4..not that disappointed they were buying just not cancelling.

India investments showing their real value

Bradstreet buying Treasuries yield rising

$125m unrealized bond losses is exceptional for the rate rise first quarter.

Allied looked OK

96% not bad for jnsurance...

[mcliu]

If you back-out the one-time Quess gain, equity returns are still quite weak..

[Tommm50]

Doesn't it count?

[StubbleJumper]

I was a little surprised to see that FFH moved ~$5b from cash equivalents into treasuries.  Looks like they are mainly 1-5 year treasuries, so that would likely be a YTM of what 2%, 2.25%?  So, that's probably $100m annually of incremental income.  It was the right thing to do, but I'm surprised that it was done with such conviction (ie, magnitude and speed).  There's a good chance that these expire in 2 or 3 years and will be re-rated favourably as interest rates climb.

 

I'm not sure that I like the underwriting results.  During the last conference call, Prem spoke of rate increases for renewals, but given the accident year CRs, you'd be hard pressed to see the benefit of any rate improvements.  Renewals are stronger in Q2, so maybe things will get better from here?

 

 

SJ

 

[ourkid8]

At the Fairfax shareholder dinner, Mr. Bradstreet said they are all in 1 year treasuries.

 

I was a little surprised to see that FFH moved ~$5b from cash equivalents into treasuries.  Looks like they are mainly 1-5 year treasuries, so that would likely be a YTM of what 2%, 2.25%?  So, that's probably $100m annually of incremental income.  It was the right thing to do, but I'm surprised that it was done with such conviction (ie, magnitude and speed).  There's a good chance that these expire in 2 or 3 years and will be re-rated favourably as interest rates climb.

[maxthetrade]

The 2018 AM slides are now uploaded:

https://s1.q4cdn.com/579586326/files/doc_downloads/2018/2018-Fairfax-AGM.pdf

 

[StubbleJumper]

At the Fairfax shareholder dinner, Mr. Bradstreet said they are all in 1 year treasuries.

 

I was a little surprised to see that FFH moved ~$5b from cash equivalents into treasuries.  Looks like they are mainly 1-5 year treasuries, so that would likely be a YTM of what 2%, 2.25%?  So, that's probably $100m annually of incremental income.  It was the right thing to do, but I'm surprised that it was done with such conviction (ie, magnitude and speed).  There's a good chance that these expire in 2 or 3 years and will be re-rated favourably as interest rates climb.

 

 

 

Thanks, that's helpful.  so they've probably locked in a YTM a shade better than 2%.  And it'll likely be higher when the capital is re-invested next winter.

 

 

SJ

[Cigarbutt]

I was a little surprised to see that FFH moved ~$5b from cash equivalents into treasuries. 

 

I'm not sure that I like the underwriting results.  During the last conference call, Prem spoke of rate increases for renewals, but given the accident year CRs, you'd be hard pressed to see the benefit of any rate improvements.  Renewals are stronger in Q2, so maybe things will get better from here?

 

SJ

 

Three aspects:

 

1-on the underwriting side, Q1 to Q1 comparisons have limited value but I would say that 2018 Q1 results were satisfactory because a) accident yr CR went from 99,6% to 99,1% and AWH reported below 100% with minimal positive reserve development. So, no major surprise and no major break in a relatively favorable trend.

 

2-on the operational leverage side, surprised too that disclosures don't show much in terms of increased cat exposure. Various industry reports tend to show a persistence of soft conditions in most other areas. Most of the growth in NPW came from Odyssey Group (insurance lines). For AWH, Q1 typically shows higher premiums versus the rest of the year and, compared to Q1 last year, NPW increased about 9% to 735 million which should result in around 2,3 billion NPW for the year.

 

3-on the investment side, the significant capital shift on the fixed income is not indicative of reach for yield. For this aspect, FFH's position continues to be unique in the industry.

 

[FairFacts]

Prem Watsa announced that he will no longer host the conference calls, handing over the baton to Paul Rivett.

 

He sounded a little down beat in the announcement section but perked up during the Q&A. He focused (as he always does) on the Culture, Long-term, conservative approach. "We have a tremendous amount of flexibility".

 

[dutchman]

is fairax still perceived as a market hedge?

Maybe it's my imagination, but it's usually down when the markets up and vice versa.

[chrispy]

They have short duration bonds and a lot of cash. While they might be considered a hedge, it is far from how things were a couple of years ago

[Scunny Bunny]

This company is at the outer edge of complexity for me because of the fact much of the associated company equity (TCI apart) is held by the insurance subs and the statutory disclosure of some of the listed subsidiaries is different to FFH interpretation and carrying values at the consolidated level.  I try to focus in on what I am paying for the insurance book relative to peers since in the past few years (ex-2017) it's been an excellent business.  I did a valuation in May last year suggesting at the time the insurance business was valued at about 1.3x Tangible book. At that time the shares were just over C$600, everyone on this board was very downbeat. So we've had an 18%ish return & that's been fine.

 

A few obvious things. The level of realised accounting profits in the past nine months is up there, especially since it mainly emanates from India - TCI deconsolidation of Quess, sale of First Capital etc. I suppose you can say it independently more than verifies the carrying values, but I would like to see a higher level of recurrent earnings, which of course is held back by investment performance.

 

All care and no responsibility here. To get to an adjusted tangible book, we've obviously got to make a heap of adjustments. I reckon tangible book within insurance and run off is about US$9.5billion, excluding the associates held within the insurance funds. Revaluing the parent capital etc for changes in value of associates (I am not going through the work -it's pretty complicated), deducting these values from the share price to get a price for the insurance business, I reckon we are paying about US$488/share for something with TBV of $340/share (remember the consolidated TBV is only US$250/share at end March 2018).  That's about 1.44x TBV, up from 1.3x about a year ago. I'm a holder, not a buyer.

 

In comparative terms, RNR trades at 1.2x TBV and is down 7% over a year; RE trades at 1.12x TBV and is also down 7% - both being buried by the natural disasters of 2018. (no pointing out MKL thank you). So Fairfax has got relatively more expensive versus a couple of straight reinsurers. I also wonder about the Allied World deal. Please bear in mind I live in Australia where we have our own special global insurance take on lousy investing, crazed acquisition, under reserving and perennial earnings disappointment called QBE which trades at 1.8x TBV.

 

 

   

 

[Cigarbutt]

1- I suppose you can say it independently more than verifies the carrying values, but I would like to see a higher level of recurrent earnings, which of course is held back by investment performance.

 

2- I also wonder about the Allied World deal. Please bear in mind I live in Australia where we have our own special global insurance take on lousy investing, crazed acquisition, under reserving and perennial earnings disappointment called QBE which trades at 1.8x TBV.   

 

For item 1,

-One can argue that the long term thinking associated with lumpiness of earnings is a positive. Do you agree?

-Another differentiator has been the "investment performance". IMO, to invest in FFH now, you need to factor in a macro component or you need to rely on their investment team to make the calls. That may be one of the reasons explaining the relative confusion about their current status as a market hedge. I am slowly coming to the conclusion that they just modified their hedge to a less costly one. Are you saying that FFH would carry a higher valuation if it would become more traditional in terms of investment style?

 

For item 2,

The last insurance acquisitions have been significant and quite satisfactory IMO. I have come to the conclusion, at this point, that 2017 Q3 and Q4 results are not significant enough to think that AWH was a bad acquisition. What makes you wonder about the Allied deal?

[Cigarbutt]

Taking a long term view with a market share perspective listing relevant competitors (N.A. 2017).

There is still ample room to grow float.

 

http://www.naic.org/documents/web_market_share_170301_2016_property_lob.pdf

https://www.insurancejournal.com/research/app/uploads/2018/05/2017-NAIC-Market-Share-Data-Workers-Compensation.pdf

[gfp]

Was there a catalyst I am missing for today's rise in FFH share price?  Another insurer's results? Fairfax announcement / filing?

[Valuehalla]

Fairfax Financial increased its holding of CenturyLink CTL in Q1 by 29 %.

It is now the 7th largest position in the portfolio of FFH with 2,3% of the portfolio.

 

I would like call your attention on the CTL section of the forum, where i publish a lot about CTL:

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/ctl-centurylink/200/

 

Although the price went up already from its low of 13,16 to 19 $ now, i think its still cheap and a great valueinvestment, flanked by a 11,7 % dividend yield.

 

Free Cash Flow of CTL is expected around 3,15 to 3,35 B in 2018 and the marketcap is just 20,5 B today

 

 

[wondering]

Apparently, Prem is on BNN Bloomberg interviewed by Amanda Lang at 1pm Toronto time.  I am not sure if I will have time to watch it, hopefully I can watch it online at a later time.

[alpha]

 

I feel like although he is right he may be shooting himself in the foot long term by commenting on China's political system.

 

https://www.bloomberg.com//news/articles/2018-05-25/watsa-shuns-china-as-fairfax-looks-for-investment-in-india-u-s

[chrispy]

Prem stated that the recent toys r us Canadian locations were more successful than the US locations. Does anyone on the board have recent experience with the toys r us stores in Canada?

[wisowis]

https://www.youtube.com/watch?v=BW08lI8518A&feature=youtu.be

[Cigarbutt]

Thoughts on the fixed income side of the portfolios.

 

Short version:

 

Fixed income spreads are very low along the spectrum in the context of a high supply of debt but a stronger appetite for spread, in still a low risk-free rate environment.

 

IMO, insurance companies are reaching for yield and FFH is well positioned to benefit.

 

Longer version:

 

http://www.naic.org/capital_markets_archive/171221.htm

http://www.naic.org/capital_markets_archive/180313.htm

 

The first link is about the junk exposure. Insurance firms have increased exposure to high yield debt and the comparison year used in the references should be 2008 and not 2009. In 2008, high yield debt issue dried up and the reasons why high yield exposures increased in 2009 were: 1-many issues were downgraded with investment grade issues becoming junk on the books and 2-despite the widely publicized issues with AIG, financial guarantee insurance firms and mortgage-backed securities, the high yield debt market recovered remarkably well despite the relative severity of the recession and liquidity issues in certain areas. P+C firms’ exposure in high yield debt is skewed to lower quality along the spectrum and has a significant component in leveraged loans which IMO now reflects higher risk as most of these loans are covenant-lite and comparatively probably riskier than the typical high yield security. Exposure is diversified and 2017 was a “good” year but, cyclically, widening spreads tend to be periodically strongly correlated (unlike the spike limited to oil and gas in 2015-6). Interesting to note that, in the high yield space, Fairfax has become involved with Toys“R”Us only after chapter 11.

 

The second link describes a significant exposure to the lower end of investment grade. Most of it is corporate. The authors don’t seem to be concerned but the exposure has increased considerably as we go through quite an unusually benign (and levered) period.

 

In terms of sentiment, which is kind of hard to assess, I just finished reading the 2017 annual report of Unico. Unico (UNAM) is a very small P+C insurer. I am a minority shareholder holding 1 share :) but some here may be interested to know that Bigliari (through The Lion Fund) owns 9,9% of shares outstanding. The reason I bring this up is that the company used to run investment portfolios in-house, based on a very very conservative profile. Starting this year, investment guidelines allow to reach for yield.

 

I think that the increased exposure to high yield debt (and high yield debt to be) is significant in the P+C insurance industry. This may go on for a while but reaching for yield is pro-cyclical. I very much like how Fairfax positioned the cash and fixed income side of their portfolios. I also happen to think that long exposure to credit default swaps especially to high yield debt at this point would make sense given that premiums now are very low and given potential time-weighted scenarios where spreads could widen considerably and in a correlated manner.

 

 

[chrispy]

https://www.bloomberg.com/news/articles/2018-05-31/fairfax-is-said-to-prep-new-500-million-investment-in-seaspan