2017 q4 result out!

[Jurgis]

Can they compound book value at 10% for five years? if they can that’s good enough for me lol

 

Their past 5 year compounding was very low. But 2017 bumped it up to ~9% (ex divs, so perhaps 10% with divs) by a sub sale and the rest of 2017 results.

So I guess it's your call to decide whether to treat that as a legit contribution to 5 year book value compounding or not.

And to decide if they can repeat that going forward 5 years.  8)

[Viking]

Just finished listening to the conference call. Here are some thoughts:

 

Prem’s summary at the end of the conference call:

- currently have a run rate of $15 billion in net written premiums

- have underwriting discipline

- portfolio of $40 billion; will build investment income

- HWIC playing offense

- all grounded on fair and friendly culture built over 32 years

- we expect we will generate 15% return for our shareholders for 2018. This means around $2 billion in net income or $70/share

 

The RBC analysts during the Q&A session asked if Prem was issuing guidance with his statements above. Prem said of course not; FFH does not provide guidance. The RBC guy said that someone listing to the call who was not familiar with Prem might take his comments for guidance.

 

I am surprised that Prem would be so bold to make such a specific comment if he did not have a concrete plan to hit it. Otherwise it just looks like he is trying to talk the stock price up.

 

[Cardboard]

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

 

Actually it is not. Already we are seeing cracks in under-reserving from their recent acquisitions. They also have a history of their own under-reserving following large cats. I am suspecting that we will see some more in 2018.

 

There is also the expectation that 2017 was an odd year for catastrophes. I can't disagree entirely with that however, I believe that having almost no hurricane landing in populated area since 2005 is also very odd. And when was the last large earthquake in NA?

 

Then we can review the last 5 years with some containing near zero catastrophe and we will find out that what I mentioned or pre-tax loss or running essentially breakeven without the help of capital gains was the case.

 

So maybe that everything will go right and that they will make $850 million as SJ pointed out but, I have serious doubts. And once they start reinvesting some of the cash, there will likely be an near immediate drop in investment value as we all seem to experience whenever we deploy capital and you will feel less confident about their investing abilities.

 

My recommendation continues to be: drop leverage, find better, more stable investments/businesses, stop the market timing game. Basically copy Buffett. The old guy has a much, much bigger capital base and has outperformed Fairfax over the last 10 years. That should tell you something.

 

Cardboard

[Viking]

Here are my remaining notes from the conference call. Please correct any errors as you see fit :-)

 

US tax reform:

- took a $326 million charge in Q4 (reduced value of DTA)

- it sounds like US tax reform will be a solid benefit for FFH.

- During the conference call FFH said 60% of their business is in the US but did not provide an estimate for the new expected tax rate.

- RBC today lowered their effective tax rate estimate for FFH for 2018 from 26% to 19%; this is a significant reduction.

 

Interest rates:

- As short term interest rates move up FFH should see nice growth in interest income given they have about half of the investment portfolio in cash and short term investments.

- Prem said FFH has not reached for yield with its investment portfolio while other insurers have

- feels higher inflation is likely; interest rates could increase significantly and credit spreads could widen

 

Investment income

- Prem talked up recent C-span warrant deal: builds investment income by $15 million per year. With possible capital gains kicker

- similar to Corus, AGP? and Altius

- like these deals

 

Insurance rate renewals

- generally, rates are no longer going down; rates are flat to increasing (varies)

- casualty 0-5% increases;

- property 10% increases; loss affected areas seeing increases of 20-25%

 

$2.4 billion cash at hold co

- NOT looking for acquisitions

- looking to buy back stock

- Prem said during the Q&A it is highly unlikely dividend will increase

- Prem also said they would like to take Eurolife, Brit and Allied 100% private (no timeline given); this did not sound imminent to me but why mention it if it was not on the table for 2018?

 

Allied World:

- $50 million Q4 reserve increase was related to one specific claim (casualty)

- FFH continues to think they are very well reserved

- cat losses were higher than FFH expected; cat losses in the future will be less (FFH does this different than Alied World and Allied World will change to FFH practice)

 

FFH India

- FFH performance fee is paid in shares (as per agreement); ownership has increased from 30 to 33%.

- if FFH India trades at 2X book value, FFH can take performance fee in cash

- Bangalore airport designed for 20 million passengers; currently serves 25 million; under expansion to serve 65 million over next 3-4 years

- FFH India building lots of intrinsic value for shareholders

 

Gravilia & Eurobond Investments

- as Greece economy moves up continues to improve their investments should do very well

- Prem mentioned Ireland as a comparable... when the Irish economy turned for the better their investments there jumped in value significantly

 

Tail macro risks (does not expect any of these to play out)

- risks: China, world trade disruption, recession

- deflation hedge at $40 million on books; will keep position and hold as insurance for worst case scenario

 

Refinancing their high interest debt (due over next couple of years) at much lower rates available today. Looks to be a very smart thing to do if you are expecting interest rates to move higher. Hits earnings in the short term but positions the company very well for the long term (if I understand the mechanics properly)

- At the end of December the company completed an early redemption of its remaining C$388.4 million 7.5% unsecured notes due August 19, 2019 for cash consideration of C$430.6 million recognizing a loss of $26 million which is included in “other expenses.”

- On December 4, the company issued C$650 million principal amount of 4.25% unsecured senior notes due December 2027.

[ourkid8]

How quickly ppl forget that we are retaining a 25% quota share in first capital!!! FFH sold the  business at over 3x book which allows us to repurchase our stock at book value while that business supercharged their growth! Sounds like an absolute win which will benefit shareholders tremendously.

 

But 2017 bumped it up to ~9% (ex divs, so perhaps 10% with divs) by a sub sale and the rest of 2017 results.

[Dazel]

 

 

Anyone that is following the financial stocks in the U.S can see that everyone is sandbagging their 2017 earnings. The reason is that anything you write off for the year is taxed at 35% as opposed to less than 20% for most in 2018. As a whole the financials results look terrible...but forward earnings will be tremendous at lower tax rates. Why would Fairfax not take higher reserves in 2017 in their U.S business? I would be dissapointed if they didn't as their were already taking big hits on the disasters! A good business would take the opportunity to over réserve at the higher tax rates and show underwriting profit at the lower tax rates. It's common sense....and they still had a record year.

[Cigarbutt]

This post is about the underwriting side of the business.

Specifically trying to see the significance of results reported for the Allied World sub (Brit also).

 

When you see larger than expected losses in the catastrophe area, it can arise simply because of the unexpected nature of events. However it may reveal a problem going along a spectrum from simply exposure, to temporary inadequate pricing to a more widespread poor underwriting/reserving culture.

 

Actions to correct the problem should be in correlation to the severity of the problem.

 

My understanding, from numbers reported now and before, and from specific comments made on the conference call, for Allied World (and Brit), is that the problem is likely one of exposure in the property market with catastrophe exposure. Fairfax historically has worked in a decentralized fashion for the insurance and reinsurance subs but, over the years, they have built some kind of oversight (Andy Barnard) with a focus on the underwriting/reserving culture. Once again, OdysseyRe had a very strong year in 2017 despite a very unusual year for the reinsurance industry as a whole. My take is that the exposure problem can be dealt with and I don't think that Allied World (and Brit) were bad acquisitions. It means though that the relatively favorable combined ratio profile that Allied World (and Brit) reported before the recent acquisition did not adequately reflect their "true" normalized combined ratio during an unusually quiet period for the catastrophe market. So, the implication is Fairfax may have paid too much for the acquisition. In retrospect, it would have been better to wait before making the acquisition :). But: In theory, there is no difference between theory and practice but in practice there is (Yogi Berra?). My opinion is that Fairfax has been able to build an unusually strong assembly of global players in the insurance and reinsurance segments poised to grow in the right environment and I think that the relatively unexpected numbers shown by the more recent acquisitions are likely to disappear over time. Results in the catastrophe space are lumpy and fit well with Fairfax philosophy in general. You just have to make sure that you can survive and it is best to use the cycle to your advantage.

 

Underwriting problems can be more profound (Fairfax has had its share of exposure to this phenomenon a while ago) and here's a link discussing new developments at a company I have followed for a long time. 2017 was unusual in terms of frequency and severity of catastrophes and this has caused the tide to recede to some degree and has helped in defining the severity of the underlying issues.

https://www.insurancejournal.com/news/international/2018/02/16/480985.htm

 

Dazel, with all due respect, I submit that a "good business" would maintain a healthy reserving discipline whatever labile tax changes that may occur. I understand that firms may use timing but cooking the books, in my own evaluation, tends to cause a very significant dent in the intrinsic value calculation.

[ValueMaven]

Cigarbutt - what do you think of AHL here?  Stock hasnt moved in nearly 5 years and is down A LOT recently...

 

Sincerely,

VM

[Cigarbutt]

Sure. Will keep going in this thread as it is relevant to FFH also.

 

AHL (Aspen Holdings) is now trading at a slight discount to book value. The relatively long operating history, relatively low NPW to equity and relatively high investment per share (at +/- 3$ per share at end of 2017) would suggest that the shares are undervalued.

 

The following comments will focus on the underwriting side and not on the investment side of AHL.

-The positives.

They seem to show discipline in the sense that they have not grown tremendously in the last few years in a market that has been quite soft and in the sense that they have often backed words with action by switching capital around different opportunities (within insurance lines and allocation between insurance vs reinsurance).

AHL has a relative focus on specialty niches.

-The negatives.

My take is that, over time, AHL has not produced combined ratios significantly better than the industry and has had its fair share of negative underwriting results related to catastrophes.

In the last few years, the trend in their underwriting result has been unfavorable and has included positive reserve developments which can not be considered to be fixed features.

 

Overall, on the underwriting side, I think it may be reasonable to expect that AHL will continue to be an average performer or slightly better. However, AHL has existed (since 2002) in a period where industry net reseve movement has been favorable (very unusual period in terms of extent and duration of phenomeneon which would imply a very soft market). One would have to assess how AHL would differentiate itself from the industry if reserve deficiencies would become the norm for a while, especially for the longer tail liabilities. In a tougher environment, they would have to compete with survivors and with parties coming with "clean capital" just like they did when they formed in 2002.

 

To link with the present topic, unlike FFH, AHL has grown organically. FFH has grown mostly through acquisitions and that comes with its own set of challenges but FFH combined ratio numbers from the last 5 to 7 years compare favorably to AHL. The biggest differentiator may lie in the capacity for Fairfax to fully participate in a hardening market.

 

Makes sense?

 

 

[Spekulatius]

I agree with Cardboard here - I owned some AHL (purchased  the recent downdraft) and decided to sell for a small loss. I added to ACS and FFH instead, which ai think have a better outlook.

 

I sort of agree on FFH too, the results are too lumpy and just overall not good. Theüey should sell their crap investments and stuff like Blackberry and RFP and purchase something solid instead. Running an insurance company that  has reasonable underwriting isn’t really as hard as they make it, IMO.

[Dazel]

 

Cigarbutt,

 

With all due respect when you have record investment gains you have the optionality of sandbagging one time expenses against those gains. No one in industry had per share investment gains like Fairfax did. No one is even close! Has the entire board decided to just forget this fact?

 

They still had a record year....If I were running Fairfax I would have taken massive reserves this year....what an opportunity.

 

Speculitus,

 

Of course we want to see a couple of years of good solid earnings and underwriting...that’s how the revaluation happens....people are disappointed here I get it.

 

They had a record year and their long term record is amongst the best in the world...what is that worth? Well everyone will have to decide for themselves. Fairfax knows so we will see shares get bought back by the boat load.

 

My opinion...everyone’s is free to make their own.

 

Good luck all.

 

Dazel

 

[Spekulatius]

 

Cigarbutt,

 

With all due respect when you have record investment gains you have the optionality of sandbagging one time expenses against those gains. No one in industry had per share investment gains like Fairfax did. No one is even close! Has the entire board decided to just forget this fact?

 

They still had a record year....If I were running Fairfax I would have taken massive reserves this year....what an opportunity.

 

Speculitus,

 

Of course we want to see a couple of years of good solid earnings and underwriting...that’s how the revaluation happens....people are disappointed here I get it.

 

They had a record year and their long term record is amongst the best in the world...what is that worth? Well everyone will have to decide for themselves. Fairfax knows so we will see shares get bought back by the boat load.

 

My opinion...everyone’s is free to make their own.

 

Good luck all.

 

Dazel

 

It was worth a buy of a few more shares for me this Friday, but my exposure so far to FFH is small. I would not buy more, if my exposure were already fully sized or oversized.

[Cigarbutt]

"If I were running Fairfax I would have taken massive reserves this year....what an opportunity."

It's OK to keep your opinion on the topic.

I just want to underline that the decision to invest or not in Fairfax would be very easy if reserves would be "adjusted".

 

BTW, in the news release, they document the net prior years reserve development (for the different subs).

My take is that the 2017 numbers are in line with previous years and do not show what could be considered opportunistic over-reserving.

YoY, the reserve redundancy is lower and that is well explained by the single casualty surprise at Allied World in Q4 and by the general decline of reserves released at the industry level.

 

From the owner's manual (Mr. Buffett):

"At Berkshire you will find no “big bath” accounting maneuvers or restructurings nor any “smoothing” of quarterly or annual results. We will always tell you how many strokes we have taken on each hole and never play around with the scorecard. When the numbers are a very rough “guesstimate,” as they necessarily must be in insurance reserving, we will try to be both consistent and conservative in our approach."  (my bold)

[ABM]

One data point from the release that continues to bug me is the repo activity. 

 

On the Q3 call Prim made a point to say the deviation between IV and book had never been wider in the 32 year history of FFH.  He then highlighted the Q4 (subsequent to period end) activity on the call noting 166k shares were repurchased in October for $87M.  So basically I thought we were going to see bigger number than we did because just 18k shares were purchased following the Q3 call bringing the Q4 activity to 184k shares or $94M. 

 

Given the big AT cash flows from the asset sales, this level of repo I found disappointing because what better message to send to the market.  Also on the 08/24/17 asset sale call he explicitly stated "the first use of that (cash) will be our stock".

 

Any thoughts?

[petec]

ABM I'm inclined to agree. However, I have one nagging thought. Prem has mentioned how Singleton went from being an acquisition bandit to buying back shares at Teledyne. But both those phases lasted years. Prem is saying he is done with deals and will buy back stock. We all think he means now. But its possible he's signalling the focus for the next decade. NB this is nothing more than a guess.

[Spekulatius]

I would rather have FFH deliver their balance sheet a bit and reduce of the preferred or debt at the holding company.

 

There should not be a grand plan with respect to stock buybacks either, it should be done opportunistically. They should just communicate a value framework like BRK (multiple of book) and then purchase back stock when the criteria are met

[FairFacts]

ABM and Petec,

 

I was a little surprised too at the low level of repurchases, these are total guesses as to why:

 

1. We were able to refinance existing debt at 7.5% with new debt at 4.25% in December, was that because of improved debt ratings? The increase in holding company cash would have helped with this.

2. Also, we increased the LOC from $1bil to $2bil maybe getting better terms due to 1. above.

3. Fairfax India has announced that it will go back to the market for $1.5bil, will FFH maintain its existing percentage holding which will cost $495m for its share of the new issue?

4. Finally, are they worried about the AWH performance and being ultra conservative until they see how things go?

 

Other than that Prem has consistently stated that they would be buying back stock opportunistically, the current price in my view is very opportunistic indeed so why the delay?

[ourkid8]

Why is FFH not repurchasing CAD shares instead of USD?  The CAD shares have significant more liquidity compared to the USD (Bid: $495 and Ask: $550)  Maybe that has something to do with the low level of repurchases?

 

ABM and Petec,

 

I was a little surprised too at the low level of repurchases, these are total guesses as to why:

 

1. We were able to refinance existing debt at 7.5% with new debt at 4.25% in December, was that because of improved debt ratings? The increase in holding company cash would have helped with this.

2. Also, we increased the LOC from $1bil to $2bil maybe getting better terms due to 1. above.

3. Fairfax India has announced that it will go back to the market for $1.5bil, will FFH maintain its existing percentage holding which will cost $495m for its share of the new issue?

4. Finally, are they worried about the AWH performance and being ultra conservative until they see how things go?

 

Other than that Prem has consistently stated that they would be buying back stock opportunistically, the current price in my view is very opportunistic indeed so why the delay?

[ABM]

Mgmt has implied they are comfortable with BS leverage so against this assumption you would expect more repo activity unless the expected return on other investments is that much higher. 

 

At current levels, I see a 14% yield on cost for repos that delivers a 19% IRR if you re-rate to 1.5x assuming the capital base earns a AT 15% ROE.  How many investments offer that level of returns in this environment when adjusting for the risk? Not much risk in repurchasing your own stock.

[StubbleJumper]

Mgmt has implied they are comfortable with BS leverage so against this assumption you would expect more repo activity unless the expected return on other investments is that much higher. 

 

At current levels, I see a 14% yield on cost for repos that delivers a 19% IRR if you re-rate to 1.5x assuming the capital base earns a AT 15% ROE.  How many investments offer that level of returns in this environment when adjusting for the risk? Not much risk in repurchasing your own stock.

 

 

Yes, FFH's own shares are amongst the best deals available in the market today.  Hopefully they seize the opportunity to buy 1.5m or 2m of shares while they are trading near book.

 

 

SJ

[StubbleJumper]

Why is FFH not repurchasing CAD shares instead of USD?  The CAD shares have significant more liquidity compared to the USD (Bid: $495 and Ask: $550)  Maybe that has something to do with the low level of repurchases?

 

ABM and Petec,

 

I was a little surprised too at the low level of repurchases, these are total guesses as to why:

 

1. We were able to refinance existing debt at 7.5% with new debt at 4.25% in December, was that because of improved debt ratings? The increase in holding company cash would have helped with this.

2. Also, we increased the LOC from $1bil to $2bil maybe getting better terms due to 1. above.

3. Fairfax India has announced that it will go back to the market for $1.5bil, will FFH maintain its existing percentage holding which will cost $495m for its share of the new issue?

4. Finally, are they worried about the AWH performance and being ultra conservative until they see how things go?

 

Other than that Prem has consistently stated that they would be buying back stock opportunistically, the current price in my view is very opportunistic indeed so why the delay?

 

 

Holy smokes!  That's quite a spread.  Was it just a bid-ask before this morning's bell, or was it an actual spread during the trading day?

[ourkid8]

It was this morning during the trading day.  Right now it is not as bad (Bid: $510 and Ask: $520)... My question is, why did they only purchase shares in USD instead of CAD?  Due to the spread , I can understand why they were unable to buy a lot more shares -There is hardly any liquidity in USD!

 

Why is FFH not repurchasing CAD shares instead of USD?  The CAD shares have significant more liquidity compared to the USD (Bid: $495 and Ask: $550)  Maybe that has something to do with the low level of repurchases?

 

ABM and Petec,

 

I was a little surprised too at the low level of repurchases, these are total guesses as to why:

 

1. We were able to refinance existing debt at 7.5% with new debt at 4.25% in December, was that because of improved debt ratings? The increase in holding company cash would have helped with this.

2. Also, we increased the LOC from $1bil to $2bil maybe getting better terms due to 1. above.

3. Fairfax India has announced that it will go back to the market for $1.5bil, will FFH maintain its existing percentage holding which will cost $495m for its share of the new issue?

4. Finally, are they worried about the AWH performance and being ultra conservative until they see how things go?

 

Other than that Prem has consistently stated that they would be buying back stock opportunistically, the current price in my view is very opportunistic indeed so why the delay?

 

 

Holy smokes!  That's quite a spread.  Was it just a bid-ask before this morning's bell, or was it an actual spread during the trading day?

[StubbleJumper]

It was this morning during the trading day.  Right now it is not as bad (Bid: $510 and Ask: $520)... My question is, why did they only purchase shares in USD instead of CAD?  Due to the spread , I can understand why they were unable to buy a lot more shares -There is hardly any liquidity in USD!

 

Why is FFH not repurchasing CAD shares instead of USD?  The CAD shares have significant more liquidity compared to the USD (Bid: $495 and Ask: $550)  Maybe that has something to do with the low level of repurchases?

 

ABM and Petec,

 

I was a little surprised too at the low level of repurchases, these are total guesses as to why:

 

1. We were able to refinance existing debt at 7.5% with new debt at 4.25% in December, was that because of improved debt ratings? The increase in holding company cash would have helped with this.

2. Also, we increased the LOC from $1bil to $2bil maybe getting better terms due to 1. above.

3. Fairfax India has announced that it will go back to the market for $1.5bil, will FFH maintain its existing percentage holding which will cost $495m for its share of the new issue?

4. Finally, are they worried about the AWH performance and being ultra conservative until they see how things go?

 

Other than that Prem has consistently stated that they would be buying back stock opportunistically, the current price in my view is very opportunistic indeed so why the delay?

 

 

Holy smokes!  That's quite a spread.  Was it just a bid-ask before this morning's bell, or was it an actual spread during the trading day?

 

 

FFH does its financial reporting in US dollars, so any buybacks will be converted (if necessary) to US dollars before being disclosed in the quarterly or in a presser.  But, I don't recall ever seeing any text from FFH stating whether their buybacks were done on the TSX or US markets.  Do you have a presser that you recall seeing that in?

 

 

SJ

[ourkid8]

No.  I assumed they were repurchasing USD shares based on the below statement: (However, I did realize they are reporting their finances in USD but I did not realize they could be converting the amount for share repurchases from CAD to USD) - Thanks!

 

During the fourth quarter of 2017, the company repurchased for cancellation 184,367 subordinate voting shares under the terms of its normal course issuer bids at a cost of $96.2 (approximately $522 per subordinate voting share).

 

It was this morning during the trading day.  Right now it is not as bad (Bid: $510 and Ask: $520)... My question is, why did they only purchase shares in USD instead of CAD?  Due to the spread , I can understand why they were unable to buy a lot more shares -There is hardly any liquidity in USD!

 

Why is FFH not repurchasing CAD shares instead of USD?  The CAD shares have significant more liquidity compared to the USD (Bid: $495 and Ask: $550)  Maybe that has something to do with the low level of repurchases?

 

ABM and Petec,

 

I was a little surprised too at the low level of repurchases, these are total guesses as to why:

 

1. We were able to refinance existing debt at 7.5% with new debt at 4.25% in December, was that because of improved debt ratings? The increase in holding company cash would have helped with this.

2. Also, we increased the LOC from $1bil to $2bil maybe getting better terms due to 1. above.

3. Fairfax India has announced that it will go back to the market for $1.5bil, will FFH maintain its existing percentage holding which will cost $495m for its share of the new issue?

4. Finally, are they worried about the AWH performance and being ultra conservative until they see how things go?

 

Other than that Prem has consistently stated that they would be buying back stock opportunistically, the current price in my view is very opportunistic indeed so why the delay?

 

 

Holy smokes!  That's quite a spread.  Was it just a bid-ask before this morning's bell, or was it an actual spread during the trading day?

 

 

FFH does its financial reporting in US dollars, so any buybacks will be converted (if necessary) to US dollars before being disclosed in the quarterly or in a presser.  But, I don't recall ever seeing any text from FFH stating whether their buybacks were done on the TSX or US markets.  Do you have a presser that you recall seeing that in?

 

 

SJ

[cwericb]

Results came out on the 15th.

 

On the 16th, Crip and I both pointed out that there often seems to be a time lag between the time the results come out and share price movement.

 

Share price has barely moved until today and now pops 4-5%. This happens quite frequently and is almost like having advance knowledge of the results.