Fairfax stock positions

[bearprowler6]

Here you go:

 

https://finance.yahoo.com/news/fairfax-financial-holdings-limited-financial-210200147.html

 

Not surprising Brit continues its ways however more disturbing it seems Odyssey is now following Brit's lead

 

Unrealized losses on the Long Equity Exposures of $442 million? How is this possible?

[Mick92]

18 minutes ago, bearprowler6 said:

Unrealized losses on the Long Equity Exposures of $442 million? How is this possible?

 

Probably an accounting quirk, they had realized gains of 473 million so you then have to roll off the previously unrealized gains amounts as unrealized losses.

[gfp]

31 minutes ago, bearprowler6 said:

 

 

Unrealized losses on the Long Equity Exposures of $442 million? How is this possible?

 

"net unrealized losses from convertible bonds and long equity total return swaps"

 

Fairfax's own stock price was down in the quarter, which accounts for ~$85 million of the total return swaps unrealized losses.  Blackberry was also down something like $115 million for them.

 

Remember they do not mark to market some of their big positions like Resolute, Atlas and Eurobank, so unrealized gains on associates aren't available to offset the unrealized losses (although it doesn't appear those three would have produced much of a gain).  I don't know what convertible bonds they own but that looks to be where most of the losses occurred.  (unless they have a new equity position that declined)

Edited November 4, 2021 by gfp

[Pedro]

Brit is a disaster. FFH needs to move executives from their profitable underwriting companies to fix shop. Good lord. 

[StubbleJumper]

33 minutes ago, Daphne said:

-- Earnings Flash (FFH.TO) FAIRFAX FINANCIAL Posts Q3 Net Earnings of US$462.4 Million ($16.44 Net Earnings Per Diluted Share After Payment of Preferred Share Dividends)

 

 

Any time you can make a ~3% ROE in Q3 you're doing pretty well (that would be a fully acceptable annualised number).  Usually Q3 has the highest cats of the year, so....

 

Looking forward to downloading the report and seeing how it all added up.

 

 

SJ

[bearprowler6]

8 minutes ago, gfp said:

 

"net unrealized losses from convertible bonds and long equity total return swaps"

 

Fairfax's own stock price was down in the quarter, which accounts for ~$85 million of the total return swaps unrealized losses.  Blackberry was also down something like $115 million for them.

Well that (Fairfax's own stock decline plus BB's decline) accounts for $200 million of the $442 million. Another $242 million to go.....

Edited November 4, 2021 by bearprowler6

[StubbleJumper]

7 minutes ago, gfp said:

 

"net unrealized losses from convertible bonds and long equity total return swaps"

 

Fairfax's own stock price was down in the quarter, which accounts for ~$85 million of the total return swaps unrealized losses.  Blackberry was also down something like $115 million for them.

 

Was that just the common shares, or does the $115m include the mark-to-model losses on the debs?

 

SJ

[nwoodman]

Fairfax - Fairfax Financial Holdings Limited: Financial Results for the Third Quarter

 

Brit and Odyssey copped it on the nose, but other than than that looks OK at a first glance.  Should clear the air a bit, I was worried that the European flood claims might be much worse

[gfp]

10 minutes ago, StubbleJumper said:

 

Was that just the common shares, or does the $115m include the mark-to-model losses on the debs?

 

SJ

 

Not counting debs - just a quick look at common shares from dataroma.

 

Here is the full quarterly report:

 

https://s1.q4cdn.com/579586326/files/doc_financials/2021/FFH-2021-Q3-Interim-Report-(Final).pdf

 

(page 68 shows the composition of the unrealized losses for the quarter)  I think the gains and losses on the swaps on FFH's own shares are actually counted as realized each quarter.

 

They lost $42 million on stocks, $106 million on convertible bonds, and $292.4 million on "other equity derivatives," which include:

1. Other equity derivatives include long equity total return swaps, equity warrants and options and the Asset Value Loan Notes ("AVLNs") entered with RiverStone Barbados.

2. (2)  Gains and losses on equity total return swaps that are regularly renewed as part of the company's long term risk management objectives are presented in net change in

unrealized gains (losses).

Edited November 4, 2021 by gfp

[glider3834]

44 minutes ago, nwoodman said:

Fairfax - Fairfax Financial Holdings Limited: Financial Results for the Third Quarter

 

Brit and Odyssey copped it on the nose, but other than than that looks OK at a first glance.  Should clear the air a bit, I was worried that the European flood claims might be much worse

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??

 

 

 

 

Edited November 4, 2021 by glider3834

[lessthaniv]

Holding company looks much better with $1.5b in cash and the line paid off. Terms extended to 2026 for $2b unsecured revolver. 

 

On June 29, 2021 the company amended and restated its $2.0 billion unsecured revolving credit facility with a syndicate of lenders which extended the term from December 21, 2022 to June 29, 2026. During the first nine months of 2021 the company made a net repayment of $700.0 on its revolving credit facility leaving nil borrowed at September 30, 2021 (December 31, 2020 - $700.0). The principal financial covenants of the credit facility require the company to maintain a ratio of consolidated debt to consolidated capitalization not exceeding 0.35:1 and consolidated shareholders’ equity attributable to shareholders of Fairfax of not less than $9.5 billion. At September 30, 2021 the company was in compliance with its financial covenants, with a consolidated debt to consolidated capitalization ratio of 0.261:1 and consolidated shareholders’ equity attributable to shareholders of Fairfax of $15.9 billion, both calculated as defined in the financial covenants.

[Xerxes]

1 hour ago, bearprowler6 said:

Unrealized losses on the Long Equity Exposures of $442 million? How is this possible?

 

maybe due to the 8% drop on FFH share from July 1st to close of quarter. re: the derivative that they put on themselves, 

Though that is a lot for an 8% movement.

 

Blackberry also dropped 20% in the quarter. so ...

[StubbleJumper]

Overall, it was a nice quarter.  A few observations:

 

1) Underwriting is blowing the doors off!  Net Written was up by more than 25%?  I nearly shit my pants when I saw that.  It looks like the hard market is gaining speed at FFH, which is hard to believe after this many quarters of favourable conditions.  The combined ratio was actually okay.  It looks bad, but it's Q3 and that's how Q3 usually goes.  But, do a little school-boy arithmetic and strip out the cats, and you are left with a pre-cat CR of 87 in Q3 2021 compared to a pre-cat CR of 88 in Q3 last year.  You can't control the cats, but at least the core underwriting looks to be solid.

 

2) The headline EPS number is great, but we need to temper that a bit because there is once again a bit of a quality of earnings question.  Paper gains were recorded for Toys R Us ($85m), Eurobank ($130m) and Singapore Re ($32m).  But, even stripping out those paper gains, it was still a very good quarter.

 

3) Valuation is still ridiculous.  End of quarter book was US$562/sh.  Tack on another ~$18/sh for excess of fair value over carrying value, and you're at US$580.  The shares closed at US$410 today.  That's like 0.7x adjusted book.  What will we see for an end-of-year adjusted book value?  If we don't see some significant market gains in the share price over the next 7 weeks, valuation ratios will be absolutely silly at year-end.

 

4) Why are we not seeing more favourable development?  I had anticipated that the strong price movements over the past few years would have resulted in a bit more cookie-jarring of income.

 

 

If all Q3 reports were like this one, life would be grand.

 

 

SJ

[Viking]

On 9/30/2021 at 7:52 PM, Viking said:

Attached below is an estimate of the changes in Fairfax's stock portfolio for Q3 (to Sept 30). The goal of the spreadsheet is to get a general estimate of what is going on under the hood. Not all of Fairfax's holdings are captured in the spreadsheet so reported results will be different.

 

After two blow out quarters, in Q3 the mark to market holdings are down in value about $270 million = $10/share (about 26 million shares outstanding). The Associate & Consolidated equities are down about $110 million = $4/share (not captured in earnings). So in total all the positions captured in the spreadsheet are down about $380 million = $14/share. This is about a - 3.3% change in the portfolio I track. 

 

One item not captured in my spreadsheet is Digit; when it is approved the revaluation will result in an increase of $46/share for Fairfax. Not sure if we will see this in Q3.

 

Big movers:

Blackberry      - $250 million

Farmers Edge - $140

Eurobank           - $80

FFH TRS            - $65

Atlas                + $120

Quess                + $65

 

Foran Mining and Ensign Energy have been added. As per usual, please let me know if you see any big errors   

 

Fairfax Equity Holdings Sept 30 2021.xlsx 127.04 kB · 28 downloads

Blackberry (shares and debs) and TRS were down $320 million in Q3. We knew this Sept 30. The fact the entire ‘bucket’ was down $442 should not be a surprise. 

Edited November 4, 2021 by Viking

[maxthetrade]

I had expected bad results from Brit but I'm kinda dissapointed by Odyssey Re. On the other hand Allied results look pretty good and better than I expected. FFH still looks too cheap.

Edited November 4, 2021 by maxthetrade

[Parsad]

19 minutes ago, glider3834 said:

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??

 

 

 

 

 

+1!  Regarding book gains, there is $37 coming from digit in the 4th Q, plus another $19 from excess above fair value of non-insurance businesses...so book will be around $618+ USD at the end of 4th Q or about $770+ CDN per share.

 

I know some are concerned about Brit:  The losses for the last few years ensures premium pricing will go even higher for Brit's clients, so while it takes some time, I don't think we'll see such losses going forward on a cyclical basis.  

 

Odyssey's losses are about in line with their normal expected catastrophe losses based on where and the type of business they write.  I would be happy to see Brit write such business!  Allied is killing it, as are most of the other insurance businesses.  Cheers!

[Candyman1]

6 minutes ago, StubbleJumper said:

3) Valuation is still ridiculous.  End of quarter book was US$562/sh.  Tack on another ~$18/sh for excess of fair value over carrying value, and you're at US$580.  The shares closed at US$410 today.  That's like 0.7x adjusted book.  What will we see for an end-of-year adjusted book value?  If we don't see some significant market gains in the share price over the next 7 weeks, valuation ratios will be absolutely silly at year-end.

 

Not sure why you are excluding the $37 related to Digit in your pro forma book value calculation which gets one to a pro forma book value of $617.88.

[StubbleJumper]

Just now, Candyman1 said:

Not sure why you are excluding the $37 related to Digit in your pro forma book value calculation which gets one to a pro forma book value of $617.88.

 

Because it hasn't been booked yet.  That gets to my question of where we will sit at the end of Q4 in 7 weeks.  There will likely be material earnings in addition to the amount booked for Digit, which will make valuations truly silly if there is no improvement in the stock price.

 

 

SJ

[Crip1]

9 minutes ago, maxthetrade said:

I had expected bad results from Brit but I'm kinda dissapointed by Odyssey Re. On the other hand Allied results looks pretty good and better than I expected. FFh still looks too cheap.

This may be reinsurance-specific as Markel's Reinsurance combined in Q3 was 112% and is 108% for the 9 months. Fairfax' results compare favorably at 109.5% and 101.3% respectively. Though certainly possible, I am disinclined to think Odyssey Re has lost their expertice.

 

-Crip

[StubbleJumper]

4 minutes ago, Crip1 said:

This may be reinsurance-specific as Markel's Reinsurance combined in Q3 was 112% and is 108% for the 9 months. Fairfax' results compare favorably at 109.5% and 101.3% respectively. Though certainly possible, I am disinclined to think Odyssey Re has lost their expertice.

 

-Crip

 

Just looking at the numbers, ORH increased its net written by 17.5% which is pretty good!  Strip out the cats, and their Q3 2021 pre-cat CR was 90.7 compared to 89.5 last year.  That's a bit of a deterioration but almost all of it was attributable to lower favourable development this year.  The profitability of their underwriting is virtually identical, even after they grew their book by 17.5%.  That looks like a win to me.

 

 

SJ

[nwoodman]

 

Hurricane Ida - estimated losses $30bn => FFH 340.1/30000 = 1.1%

European Floods - estimated losses $11 bn  =>  FFH 173.8/11000 = 1.6%

 

 

[maxthetrade]

11 minutes ago, Crip1 said:

This may be reinsurance-specific as Markel's Reinsurance combined in Q3 was 112% and is 108% for the 9 months. Fairfax' results compare favorably at 109.5% and 101.3% respectively.

 

It's certainly reinsurance-specific. Mrkel is probably not a good comparison , quite frankly I'm not sure that reinsurance is within Markels circle of competence yet. I hope they keep it small until they've figured it out.

I think it's kinda ridiculous to strip out cats because that's part of the business, they happen every couple of years. And Ida was FAR from a real mega cat.

 

Can't say it any better than Rob Berkley on the recent conference call:

 

"In addition to that, again, as it once again crystallized in the third quarter when we think about underwriting activities and we think about volatility as a component of risk. Clearly, the industry is feeling the challenges that come along with cat activity. From our perspective, cat activity is there on a regular basis and why people choose to back it out on a regular basis doesn't make a whole lot of sense to us. Our view is that volatility is real. It is a real component of risk. When we think about running the business, it is of great priority to us and how we think about deploying capital. So I'm going to pause there but before I do, I guess one last comment. I know that there are a lot of people that will look at our numbers and Rich will walk you through it and you'll do the math and you'll come up with an ex-cat accident year loss ratio and what does that mean? It is on a combined ratio, and that'll probably get you to approximately an 86.9%. But from our perspective, if one chooses to slip off the rose-colored glasses for a moment, we generated a 90.4%. That is reality from our perspective. But in spite of the cat and the impact, we did achieve a very healthy underwriting result and in the process, we achieved a 16.6% return on equity."

 

[Parsad]

20 minutes ago, maxthetrade said:

 

It's certainly reinsurance-specific. Mrkel is probably not a good comparison , quite frankly I'm not sure that reinsurance is within Markels circle of competence yet. I hope they keep it small until they've figured it out.

I think it's kinda ridiculous to strip out cats because that's part of the business, they happen every couple of years. And Ida was FAR from a real mega cat.

 

Can't say it any better than Rob Berkley on the recent conference call:

 

"In addition to that, again, as it once again crystallized in the third quarter when we think about underwriting activities and we think about volatility as a component of risk. Clearly, the industry is feeling the challenges that come along with cat activity. From our perspective, cat activity is there on a regular basis and why people choose to back it out on a regular basis doesn't make a whole lot of sense to us. Our view is that volatility is real. It is a real component of risk. When we think about running the business, it is of great priority to us and how we think about deploying capital. So I'm going to pause there but before I do, I guess one last comment. I know that there are a lot of people that will look at our numbers and Rich will walk you through it and you'll do the math and you'll come up with an ex-cat accident year loss ratio and what does that mean? It is on a combined ratio, and that'll probably get you to approximately an 86.9%. But from our perspective, if one chooses to slip off the rose-colored glasses for a moment, we generated a 90.4%. That is reality from our perspective. But in spite of the cat and the impact, we did achieve a very healthy underwriting result and in the process, we achieved a 16.6% return on equity."

 

 

No, you don't negate the catastrophe losses, but stripping them out gives you the actual normal operating expense/loss ratio.  Which allows you to make apples to apples comparisons between insurance years, and a better understanding if they are writing higher premium/lower loss business.  

 

For example, you look at Brit's losses and all you see is loss after loss for four years.  But if you can strip out the catastrophe losses, you can get a better idea if their normal operating expenses/losses are getting better or worse.  If they are going down, then you can assume they are either running more efficiently, pricing polices at a higher premium or are benefiting from reserve redundancies.  Cheers!

[maxthetrade]

2 minutes ago, Parsad said:

No, you don't negate the catastrophe losses, but stripping them out gives you the actual normal operating expense/loss ratio.  Which allows you to make apples to apples comparisons between insurance years, and a better understanding if they are writing higher premium/lower loss business.  

 

For example, you look at Brit's losses and all you see is loss after loss for four years.  But if you can strip out the catastrophe losses, you can get a better idea if their normal operating expenses/losses are getting better or worse.  If they are going down, then you can assume they are either running more efficiently, pricing polices at a higher premium or are benefiting from reserve redundancies.  Cheers!

 

Sure, you can back out cat losses to get some analytical insight into the business but in the end you have to add a normalized cat loss estimate. If they can't write business significantly below 100 including normalized cat losses the business is a dud. Considering their past record I'm also bit worried about the growth at Brit.

[Viking]

58 minutes ago, maxthetrade said:

 

Sure, you can back out cat losses to get some analytical insight into the business but in the end you have to add a normalized cat loss estimate. If they can't write business significantly below 100 including normalized cat losses the business is a dud. Considering their past record I'm also bit worried about the growth at Brit.

@maxthetrade do you own Fairfax primarily because of its underwriting prowess?

 

YTD consolidated CR = 97.3. My guess is YE CR will be mid 96. Not as good as others but ok. And we should see improvement in 2022 (thank you hard market). 
 

Personally, i do not own Fairfax primarily because of their underwriting. I am ok with an annual CR somewhere in the 96 range (or better). Quarterly volatility does not really bother me. 

Edited November 5, 2021 by Viking