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2017 q4 result out!


zippy1
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From the press release: “At December 31, 2017, common shareholders' equity was $12,475.6 million, or $449.55 per basic share, compared to $8,484.6 million, or $367.40 per basic share, at December 31, 2016. Common shareholders’ equity at December 31, 2017 does not include the unrecorded pre-tax $1,233.1 million excess of fair value over the carrying value of investments in associates and certain consolidated non-insurance subsidiaries.”

 

Allied World Q4 combined ratio = 132; looks like they bore the brunt of $185 million in catastrophe losses due to California wildfires. I hope this business is getting some nice price increases and turns things around in 2018.

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Well, the numbers are nice, but it does bring to mind all of the cautions about lumpiness of results.  A few random observations:

 

1) Net written spiked nicely in Q4 and was up overall in 2017.  Given FFH's capital levels and underwriting capacity, this is a good sign of things to come.  If you are brave enough to pencil in a combined ratio of 95 and $500m in interest and divvies, it provides the basis of a decent and predictable operating income.

 

2) Nice to see reserve releases, especially for ORH.  WTF is going with Allied's adverse development, and can FFH fix it?

 

3) The bond and equities ports are running pretty lean, which is an excellent position in the context of rising rates.  Shitloads of cash, t-bills and short term bonds is a nice place to be.  Can we be brave enough to pencil in 2% for the cash equivalents for 2018, or is that dreaming in technicolour?

 

4) Holdco cash is high, which is no surpise after some of the asset sales.  But what's the deal with expanding the revolver to $2b?  So the holdco now has ~$4.0B-4.5B of immediate available cash, when taking into account the expanded LOC.  Why?  Presumably there's a standby fee for the revolver, so doubling it is a bit strange when FFH is already swimming in cash.  I understand that you want to acquire your credit when you don't actually need it, but this one seems strange.

 

5) Unrealised gains on equities were considerable.  How much of this has been given back in the past week or 10 days?  Some of the large legacy equity positions have finally moved the right direction, but has the market turned before FFH had the opportunity to exit?

 

 

Overall, I like the current position with very little of the port in equities and 5+ year bonds.  If the cash actually starts to yield something in 2018 and 2019 (as I questioned above, dare we dream 2%) and net written expands with the continued prospect of writing a CR of 95, there's a solid prospect of sizeable operating income.

 

And today it traded pretty much bang-on with the adjusted book.  Hard to believe.

 

 

SJ

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Thanks for that review Stubble. Sounds like ull be buying more.

 

 

It's doubtful that I will buy more.  I'm at 22% FFH, which is already far too high.  The shares look cheap, but Prem has done so many wacky things over the past 5 years that it's a tough thing to take the plunge to go to 30% or 35% (I've been there in the past, but the recent wackiness is a real hurdle for me).

 

 

SJ

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The key moving forward, as it usually is with FFH, is how they invest. What is the plan with the $17 billion in cash and short term investments? Given the results posted over the past 5 years I think many people are in wait and see mode.

 

As bond yields move higher the decision in Q4 2016 and Q1 2017 to sell long dated bonds and move to cash has certainly been a good one. But it may take 12-24 months before FFH starts making meaningful purchases of long dated bonds again. Patience will be important.

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And, the stock price is essentially flat at this morning's bell.  Interesting.

 

 

SJ

 

 

We've seen multiple instances of earnings coming out for FFH where price movement is relatively stable for 1-3 days only to see a significant move up (3-5%). Since I've got a pretty hefty position in Fairfax and am not one to trade on short-term movements, I'm not buying in to this, but history does show this to have occurred multiple times in the past.

 

 

-Crip

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"We've seen multiple instances of earnings coming out for FFH where price movement is relatively stable for 1-3 days only to see a significant move up (3-5%)"

 

That is absolutely right. I have noticed the same thing several times over the years. Any guesses as to why? The only thing I can think of is that FFH is just so far under the radar its like "Oh gee look at that, Fairfax posted some good results perhaps I should pick some up."

 

At times for me, it has been like having inside information about the results before they are posted. I'd be picking up more but I am already over concentrated in Fairfax.

 

FIH.U is up 4% though.

 

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2017 pretax loss before significant booking of capital gains and truly a one-time gain of just over $1 billion on the sale of a subsidiary was: -$462.9 million.

 

And out of the eye popping 20%+ growth in BVPS, a large portion is due to issuing 20% more shares than last year above book to acquire insurance companies combined with the one-time gain.

 

As I have mentioned countless times, there is no ROE generated if you exclude capital gains. So to trade well above book and generate the respect that you guys seek they have 2 choices:

 

1- Grow really fast like in the late 80's and 90's by acquiring company after company with an overvalued currency.

2- Generate a portion of the return via sound, repeatable earnings. That means low cost, less interest paid, profitable underwriting and more deployed into sound investments with the blessings of regulators.

 

Cardboard

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Our results in 2017 were the best in our thirty-two year history, in spite of some of the largest catastrophe losses in

history as a result of Hurricanes Harvey, Irma and Maria and the California wildfires,” said Prem Watsa, Chairman

and Chief Executive Officer. “We achieved record earnings of over $1.7 billion, resulting in a 22.4% increase in

our book value per share to $449.55."

 

I cannot imagine Buffett or Mark Leonard would ever say such a thing with the results achieved.

 

Vinod

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2017 pretax loss before significant booking of capital gains and truly a one-time gain of just over $1 billion on the sale of a subsidiary was: -$462.9 million.

 

And out of the eye popping 20%+ growth in BVPS, a large portion is due to issuing 20% more shares than last year above book to acquire insurance companies combined with the one-time gain.

 

As I have mentioned countless times, there is no ROE generated if you exclude capital gains. So to trade well above book and generate the respect that you guys seek they have 2 choices:

 

1- Grow really fast like in the late 80's and 90's by acquiring company after company with an overvalued currency.

2- Generate a portion of the return via sound, repeatable earnings. That means low cost, less interest paid, profitable underwriting and more deployed into sound investments with the blessings of regulators.

 

Cardboard

 

I heartily disagree.

 

1) Underwriting - if you run-rate Q4 you get $11B net written.  Tack on price growth from a firming market, you are at $12B net written.  Given past performance, I'd say they can write the $12B at a 95 CR, which gives $600m UW profit.

 

2) Interest and divvies - FFH has $20B of cash/T-bills/etc.  Interest rates have risen.  If they can average 2% during 2018, that's $400m.  They have $9B in bonds, which might average 2.5%, so that's another $225m.  And then $5B in common stocks might average 1%, so that's another $50m.  Call it ~$600m for the sake of conservatism (knowing that it's likely more like $700m)?

 

So, let's rack it up:

 

 

UW profit: $600

Interest and divvies: $600

Run-off: -$250

Non-insurance profit: $200

Corporate O/H & interest expense: -$300

Net gains: 0

 

Pre-tax income: $850m

 

So, in my book, there's $20+/share of after-tax earnings from operations.  The realised gains are gravy.

 

 

SJ

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Check your math at the end of next year and I can almost guarantee you that you will be wrong.

 

Cardboard

 

 

The numbers are 100% wrong, there's no doubt.  The question is if you eliminate the realised gains, will there be a material EPS?  And I will go out on a limb and say yes, in the absence of some unusual series of cats, there will be a material EPS from underwriting, interest/divvies and non insurance.

 

But, as a long time shareholder, I understand your cynicism. 

 

 

SJ

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Check your math at the end of next year and I can almost guarantee you that you will be wrong.

 

Cardboard

 

 

The numbers are 100% wrong, there's no doubt.  The question is if you eliminate the realised gains, will there be a material EPS?  And I will go out on a limb and say yes, in the absence of some unusual series of cats, there will be a material EPS from underwriting, interest/divvies and non insurance.

 

But, as a long time shareholder, I understand your cynicism. 

 

 

SJ

 

To your estimate you need to add a new  stream of revenu from FIH : in january they will pay FFH  114M in performance fee. We can hope for something from Fairfax Africa too in the  futur

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Check your math at the end of next year and I can almost guarantee you that you will be wrong.

 

Cardboard

 

 

The numbers are 100% wrong, there's no doubt.  The question is if you eliminate the realised gains, will there be a material EPS?  And I will go out on a limb and say yes, in the absence of some unusual series of cats, there will be a material EPS from underwriting, interest/divvies and non insurance.

 

But, as a long time shareholder, I understand your cynicism. 

 

 

SJ

 

To your estimate you need to add a new  stream of revenu from FIH : in january they will pay FFH  114M in performance fee. We can hope for something from Fairfax Africa too in the  futur

 

 

Yes, I believe that in the non-GAAP statements, FFH normally lumps investment fees in with the corporate overhead.  This time, it looks like corporate overhead, interest and investment fees all lumped together.  So interest goes up with the new debt taken on during 2018, but that's partially offset by better investment fees.  But, I'd say that particular line of my crappy pro-forma statement is one of the least accurate!

 

 

SJ

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Check your math at the end of next year and I can almost guarantee you that you will be wrong.

 

Cardboard

 

Are you suggesting that underwriting (ex. CAT) will be a lot weaker next year? or they'll make more investment losses?

 

 

I'm guessing that it's general cynicism and ennui with FFH. 

 

U/W profit from 2014 to 2017 was $705m, $552m, $576m and -$642m.  I don't feel badly at all about pencilling in 2018 Net Written Premiums of $12B at a CR of 95, yielding $600m of U/W profit when they've bounced around that level with lower premiums and lower CR.  If anything, I could be chastised for not pencilling in a CR of 90 or 92 to reflect that insurance prices have trended up in response to last year's ridiculous industry level cat losses.

 

With most of the port in cash, t-bills and bonds, there shouldn't be major investment income surprises.  I guess if interest rates rise meaningfully, the $9B of bonds could get written down to $8.7 or $8.5B, but that's not such a problem.

 

 

SJ

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