Fairfax 2021

[petec]

To double in 5 years, which is my kind of baseline for big positions, Fairfax needs to hit $840 in 2026.

 

I think adjusted BV (i.e., including the excess of fair over carrying value) is probably around $620 at the moment. So to hit $840, book value has to compound at 6.3%.

 

Serious question: who would bet against that happening, and why?

 

The other necessary input is a valuation of 1x adjusted BV. I can see multiple potential reasons why that might happen - excitement over Digit, slightly higher interest rates, the market slowly coming to believe that the days of shorting and big acquisitions are over (please, God), or just luck (the stock regularly trades at or above BV every few years).

 

Conclusion: I think Fairfax has a very good chance of doubling in 5 years. 

 

 

[petec]

Back to BlackBerry, and specifically Ivy, my first impressions are that Palantir/Wejo have a considerable head start: Wejo | A Global Leader in Connected Vehicle Data.

[Xerxes]

13 hours ago, Viking said:

Xerxes, at the time Prem bought shares (June 2020) there was NO visibility on vaccine’s: efficacy level? When they would be approved by FDA? When they would be available for the public? So it was pretty much impossible to forecast economic growth moving forward. We all saw the shit show that played out in countries like Italy and Iran (or China). Lock downs were the order of the day.
 

In Oct 2020 Fairfax was trading under US$270 a share; well below the price level Prem had bought shares at. It was not until November that we got the crazy good news from Pfizer and Moderna. And then ‘value’ stocks (Fairfax and its equity holdings) rocked - the reopening trade was born.

 

When Prem bought Fairfax in June 2020 you have to value Fairfax with the information available at that time. And, yes, you value Fairfax today with what is KNOWN today; and we know we have vaccines that are very successful in combatting the virus. So Fairfax’s current business should be valued much, much higher. And its growth potential is MUCH higher today. Given what was known at the time of purchase (then and now) i think Fairfax is much cheaper at todays prices  

 

Agreed on the first & second paragraph, but then again, when he bought it, it was 2 bets: (1) a bet with a leap of faith that the central bank action will be swift and there would a vaccine (though efficacy level completely unknown), therefore the BV - the anchor - which was then in the eye storm was depressed and (2) FFH operations would recover and do better thereafter. His thought process permeated the conference calls when he talked about the historical bounce back whenever that kind of 1-100 year event took place.

 

Today, the "recovered"-BV is normalized, so buying today, you are no longer making a bet with a leap of faith that the central bank action will be swift and there would a vaccine, as that is already in the bag. So what remains is an isolated bet on the FFH itself and its operations. So the discount is much narrower today when compared to the mid-2020, when you were being paid by the market an "additional discount" to take a macro* leap of faith. 

 

That is kind of how i see it, sorry if i am not explaining it very well.

 

*perhaps we can say that after a decade of being off on deflation/short hedges, Prem got this particular macro call 100% right, as the risk/reward were heavily tilted in his favor. The wrinkle however is that FFH, the company, did not benefit from that macro call, he personally did + those of us who chose to put in additional fund.

  

 

[KPO]

On 9/23/2021 at 9:04 AM, StubbleJumper said:

 

 

1.  Does Prem personally have any dry powder remaining?  When he announced his personal purchases last year, I posed the question on this board about where he found the US$150m to do so.  Was it loose change that he dug out of his sofa, or did he borrow the money and use the multiple voting shares as collateral.  Turning to this year, do you figure he still has more loose change in his sofa, or that he'd be keen to borrow another 9-digits of money?  I'm guessing no, but then again, I was a bit surprised that he scraped together the US$150m last year.

 

2.  The TRS surprised me even more than Prem's personal purchase.  If the underlying stock price moves in your favour, they are great, but if it moves against you, you need to periodically pony up some cash.  In that context, having exposure to 1 million shares is a manageable risk, but I question where Prem and the Jen Allen would place the ceiling.  So, if you have exposure to, say 3 million shares through a TRS, and the market goes against you by $50 (like it has done over the past four months), you need to find US$150m of cash for your counterparty.  So, what's FFH's ceiling on that kind of cashflow risk?  Given the value of the underlying, at what point can they continue to credibly describe it as a buy-back measure, and at what point does it become plainly obvious that it's pure stock price speculation (ie, TRS of a couple million shares is at least a plausible buyback measure because we're only talking about a notional value of US$800m, but once you get to 3 or 4 million shares, it's pretty clear that there's no medium-term prospect of actually making that volume of repurchases).

 

3.  It is almost certain that there will be some volume of open market purchases, but how much?  FFH is borrowing money from OMERS at 9% using Brit as collateral sold a portion of Brit to OMERS, to raise cash for the holdco, so is that really indicative of being in a position to make meaningful repurchases?  Clearly you can borrow at 9%, buyback shares on the open market at currently prevailing prices, and improve continuing shareholder wealth.  But, do you really fund large repurchases by putting your assets in hock selling portions of your assets?  I'm guessing that there will only be small-ish repurchases (ie, ~US$100m), but I've been surprised by FFH before.

 

4.  De-leveraging would be nice, but I'll believe it when I see it.  When was the last time that we saw FFH's nominal debt level decline in any meaningful way (unless you consider borrowing money from OMERS selling a portion of an asset to OMERS to repay the revolver to be a debt repayment)?  My guess is that they use the holdco cash to fund the holdco's operations for a couple of years, and allow organic growth to moderate their relative indebtedness.  If they can grow BV by 20% or 30% over the next two years, debt ratios will look a great deal more reasonable (they are already much better than they were 12 months ago).

 

5.  I hope that's what they do.  But, option #6, which you have not written, would be another acquisition.  Prem has been a serial acquirer for the past 20 or so years.  Whenever there's any financial capacity, he seems to find something to buy.  My fear is that this past habit will continue to play out.

 

 

 

SJ

I hope #2 is off the table. Buying shares back would be great here, but I don’t like having the exposure of the counter party’s incentive structure of the TRS instrument. Given the trading volume it wouldn’t be difficult to force payment through well timed short sales.  Besides, I thought they promised not to short and use instruments like this going forward. It’s like being married to a wealthy and successful doctor with a gambling problem on the side. Please just run the business, maximize free cash flow and manage the balance sheet the right way. This is one area where MKL is far superior.

[TwoCitiesCapital]

I personally feel the TRS were brilliant - particularly at the price struck where risk of further decline was relatively minimal given the already sizable discount. 

 

I probably wouldn't want them to do more at these prices just because an ill-timed 10% decline (like we've witnessed overhe last few weeks) will be problematic with a large enough notional, but the size of the current contract doesn't bother me. 

 

Keep it on. Roll it every month/quarter. And buy physical shares to remove supply from the market. 

[Viking]

On 9/23/2021 at 5:42 AM, nwoodman said:

As a follow up to the discussion on relative undervaluation I am interested in everyone’s expectations on:

 

1. Prem weighs into another pricing anomaly and buys in his personal account given this is the best value since the lows in 2020

2. Fairfax increases their TRS position 

3. Buys back shares in the open market

4. Simply has used funds raised to deleverage/de-risks and sighs relief, no criticism intended  

5. All is good and is share price agnostic +/-20% and playing the long game, wake them when cash is truly rolling in from investees

Here is my take:

1.) my guess is Prem will not be buying more shares. A year ago, in the teeth of the pandemic, he sent the market an important signal: his baby - Fairfax - was fine. Not necessary today. Yes, he will make a shitload of money from that purchase… but the guy is already worth billions… does anyone think he really needed to buy more Fairfax shares?
2.) the TRS was purely being opportunistic at a time Fairfax was cash starved. My guess is it is also a short term position (less than 3 year hold). They are no longer cash starved so why add to TRS? And I think the TRS position is weird; analysts don’t know what to make of it. Companies don’t do these sorts of things given the optics/outsized reward to juice your stock price in the short term. Now do i think Fairfax will do anything unethical? No. Sometimes that are too creative/smart for their own good. 
- selfishly i like the TRS because it HIGHLY motivates Fairfax to perform actions to get a higher stock price (which is what i also want).
3.) buy back shares on the open market: YES. Prem has telegraphed many times that big buybacks are coming. I believe him. The issue is timing… when? Priorities for cash right now are:

- take advantage of hard market for insurance: it looks like we might be in the later innings of the hard market (perhaps mid to late 2023 end?). Earnings at insurance subs is solid; investment marks are VERY favourable. This suggests the insurance subs have all the $ they need today to take advantage of the hard market.

- reduce leverage: DONE. Recent sale of Riverstone UK and 14% of Brit delivered proceeds of $1.075 billion. Credit line has been fully repaid. Hold co cash is at $1.7 billion. 
- stock buybacks are kind of like the next big obvious thing on the list of things to do with excess cash. The problem is Fairfax is not flush with $1 billion in extra cash today. Borrowing the money is not an option (would increase leverage). We are also in the midst of hurricane season. And Sept Oct can be ugly months for financial markets. So to get a big buyback Fairfax needs to do something that would bring in a big chunk of cash. So my guess is we do not see a big buyback until 2022. If we get a melt up in stocks in Q4 perhaps Fairfax starts to selectively harvest some gains. Or perhaps Fairfax does something totally unexpected… like when they sold First Capital or Riverstone. A very under appreciated part of Fairfax is how creative they can be at times. So bottom line i expect a big stock buyback in the next 18 months (min 5% of shares outstanding) and i have no idea where they will find the money to do it  

4.) reduce leverage: as stated above done with Riverstone/Brit sale.

5.) share price agnostic: perhaps the most likely outcome is we see Fairfax post good earnings and beginning in Q4 start taking out 1% of shares each quarter (at a cost of about US $110 million). The slow and steady approach. 
6.) spend excess cash on a big acquisition (stubblejumper added this one): Prem has said pretty clearly big acquisitions of new insurance companies will not be done; let’s believe him on this one. Fairfax has made a number of $100 million ‘ish investments in 2021 and we will likely see this continue into 2020. 
- they do want to buy the 30% of Allied they do not currently own; i would be surprised if this has to happen in the next year or two.
 

The bottom line, as per usual, Fairfax has lots of great USES of cash. What i like is they are finally getting to a stage where we should also start to see increasing SOURCES of cash. 

Edited September 24, 2021 by Viking

[IceCreamMan]

The clear move at this point is for Fairfax to buy TRS on Berkshire stock and for Berkshire to buy TRS on Fairfax stock. This way as Berkshire's stock goes up, Fairfax makes money, which causes Fairfax's stock to go up, so Berkshire makes money, and the cycle repeats.

[glider3834]

7 hours ago, KPO said:

I hope #2 is off the table. Buying shares back would be great here, but I don’t like having the exposure of the counter party’s incentive structure of the TRS instrument. Given the trading volume it wouldn’t be difficult to force payment through well timed short sales.  Besides, I thought they promised not to short and use instruments like this going forward. It’s like being married to a wealthy and successful doctor with a gambling problem on the side. Please just run the business, maximize free cash flow and manage the balance sheet the right way. This is one area where MKL is far superior.

I think the counterparty who has entered into this TRS with Fairfax would most likely be hedged (eg by owning the underlying shares) - so they would make their money from the floating rate payment (libor + spread) from Fairfax rather than any short sales

 

TRS position  is a calculated risk in terms of timing but looks really cheap at around US$372, if Fairfax's book value hits US$600 per share by year end (factoring in Q2 was $545 plus $46 (Digit transaction Q3/Q4 closing) plus Q3/Q4 results) & adjust BV for excess of fair value over book value of their non-insurance subs, effective TRS entry price will likely sit between 50-60% of Fairfax's adjusted y/e book value - so there is very low downside risk, high potential return IMO

 

 

 

 

 

 

 

 

[glider3834]

On 9/24/2021 at 7:00 PM, petec said:

Back to BlackBerry, and specifically Ivy, my first impressions are that Palantir/Wejo have a considerable head start: Wejo | A Global Leader in Connected Vehicle Data.

yes looks like they have a headstart

https://www.reuters.com/business/autos-transportation/exclusive-wejo-go-public-deal-values-auto-data-startup-800-mln-sources-2021-05-28/

 

& Otonomo appears to be a serious competitor as well

Otonomo was founded in 2015 and provides a connected-car data marketplace, enabling manufacturers, mobility service providers, and app developers to share and integrate car-generated data to make vehicles safe, smart, and convenient. Today, it has 40 million cars connected and is “the biggest center for automotive data in the world. There’s no other place with so much knowledge about transportation, mobility, and automotive - and we live in a world where data is king.”

https://www.calcalistech.com/ctech/articles/0,7340,L-3904451,00.html

 

I couldn't find really much google searching comparing these different platforms & Ivy is still pre-release but it looks like they are coming at this market from different approaches - here is Charles Eagan CTO Blackberry

 

Charlie Erlikh

Interesting, got it. And then maybe sticking with IoT, but now going to the IVY product. How does IVY compete against [Autonomo] Continental and any other biggest competitors out there?

Charles Eagan

So, this is an emerging market. So, I think the market is quite large, and we do expect there to be competition, but there's room for competition. BlackBerry plus AWS brings a pretty unique, right from the electrons firing up in the car up to 150 AWS features running in the cloud. That's a very comprehensive and compelling stack that is very hard to compete with.

So we have the experience of getting this technology into the embedded part of the vehicle and we know how to make data secure. So, AWS is driving AI tools and they introduced -- the introduction where AI meets the edge of the car is a great potential area that we're bringing together.

So Autonomo and others do part of this, but they rely on data being -- they rely on the data being made available by the OEMs. So where IVY's OS and hardware and cloud agnostic doesn't need to be in AWS cloud, so we think it's a very, very competitive offering.

And also, I'll point out, in our typical BlackBerry value, we don't aim to own the data. We present a solution to OEMs that allows them to use the data as they choose in a very secure way. Other players are trying to make a data place. So, we're sort of making sure the data moves securely, but we're not looking at insights into that data directly.

 

 

 

 

[Viking]

Well it looks like the US 10 year bond yield is starting to move again. It is trading at 1.48% up from 1.3% in the past week alone. It will be interesting to see how high we go from here in the coming months… 1.75%? 2%?
 

Fairfax’s bond portfolio is positioned extremely well for higher rates (given its VERY short average duration). Higher rates will cause a small hit to BV (on the few longer dated bonds they hold). However, as rates move higher they will have the opportunity to invest some of their portfolio (earning very little today) which will increase interest and dividend income in the future. I do not expect Fairfax to do much with its bond portfolio until rates are much higher than they are today. Bottom line, higher interest rates are a tail wind for Fairfax.

 

The second and bigger (in the near term) impact on Fairfax from higher interest rates is its impact on the equity portfolio. Higher interest rates usually causes a sell off in big tech (with massive market caps) and this money shifts into smaller cap stocks, many levered to the reopening trade/value/emerging markets. So we may see another large increase in the value of Fairfax’s equity portfolio in Q4. 
 

The stars are aligning for Fairfax:

1.) hard market in insurance pricing (yes, late innings)

2.) higher bond yields creating opportunity to reinvest

3.) continuing / significant increase in value of equity holdings

4.) Digit IPO in 2022 or perhaps 2023 (not that far away)

5.) opportunity to repurchase shares with stock trading at historically low valuation

 

Now let’s see what actually happens  

—————

PS: i wonder if we are not seeing the beginning of the re-opening trade Act 2. This Act anticipates an increase in global economic activity (not just the US) as global vaccination rates increase and we get to the other side of the Delta variant.

[Xerxes]

Not exactly FFH news anymore (and from late summer):  Government in Ireland is liquidating its last equity stake (13.9%) at the Bank of Ireland. Looks like FFH and Wilbur Ross's outfit cash infusion 10+ years prevented the collapse of that entity and in some ways contributed to the stability of the Irish economy. So some good came out of it.

 

Hoping to see the same framework for Greece in a not to distance future.

 

[Viking]

2 hours ago, Xerxes said:

Not exactly FFH news anymore (and from late summer):  Government in Ireland is liquidating its last equity stake (13.9%) at the Bank of Ireland. Looks like FFH and Wilbur Ross's outfit cash infusion 10+ years prevented the collapse of that entity and in some ways contributed to the stability of the Irish economy. So some good came out of it.

 

Hoping to see the same framework for Greece in a not to distance future.

 

The Greek PM did a 10 minute interview on Bloomberg a few days ago. Very smart individual. Greece has lots of tailwinds (competent, pro business government with a majority being just one). Given its size and low very valuation, Eurobank should be a strong performer for Fairfax’s equity portfolio for the next few years. 

 

 

Edited September 27, 2021 by Viking

[glider3834]

I have put this chart together to show quarterly movements in Fairfax's price (USD) to book value 

 

- my estimate current book value per share (BVPS) of $591 includes $46 Digit revaluation expected close Q3/Q4

- my estimate of current adjusted BVPS, I am including $24 (after tax) estimate of excess of fair value over carrying value for non-insurance subs at 30 Jun-21.

 

Not trying to get exact numbers (Q3 numbers not available, we can debate exact value for Digit etc)

 

Anyway looks  to me like the discount to fair value has widened further & using price to adjusted book value measure Fairfax shares look nearly as cheap as they were at Q3 2020. 

 

 

Edited September 27, 2021 by glider3834

[KPO]

 

23 minutes ago, glider3834 said:

I have put this chart together to show quarterly movements in Fairfax's price (USD) to book value 

 

- my estimate current book value per share (BVPS) of $591 includes $46 Digit revaluation expected close Q3/Q4

- my estimate of current adjusted BVPS, I am including $24 (after tax) estimate of excess of fair value over carrying value for non-insurance subs at 30 Jun-21.

 

Not trying to get exact numbers (Q3 numbers not available, we can debate exact value for Digit etc)

 

Anyway looks  to me like the discount to fair value has widened further & using price to adjusted book value measure Fairfax shares look nearly as cheap as they were at Q3 2020. 

 

 

Thanks, Glider. That was my read as well.

[nwoodman]

1 hour ago, glider3834 said:

have put this chart together to show quarterly movements in Fairfax's price (USD) to book value 

Thanks Glider, whichever way you look at it the rubber band is stretched.  Not sure what the thesis would be to sell at these prices.  Can only figure it is end of quarter dressing or algos.  What is going on under the hood at FFH all seems to be moving in the right direction.

Edited September 28, 2021 by nwoodman

[Viking]

2 hours ago, nwoodman said:

Thanks Glider, whichever way you look at it the rubber band is stretched.  Not sure what the thesis would be to sell at these prices.  Can only figure it is end of quarter dressing or algos.  What is going on under the hood at FFH all seems to be moving in the right direction.

Agreed. Energy is perhaps instructive.. only 9 months ago nobody wanted to own energy. Broken forever. Complete dog with fleas. 

 

The narrative today around energy is completely different. ‘Strong fundamentals’. And we could be shifting to the ‘castles in the air’ phase in the coming months. Now everybody loves energy! 
 

i have no doubt that as long as Fairfax continues to deliver solid results the stock price will respond eventually. It is just coiling further back like a spring. Mr Market just hasn’t decided its time has come yet. This is just how the stock market works. The key now is patience. The big money is made by sitting tight and doing nothing  

Edited September 28, 2021 by Viking

[glider3834]

10 hours ago, Viking said:

The Greek PM did a 10 minute interview on Bloomberg a few days ago. Very smart individual. Greece has lots of tailwinds (competent, pro business government with a majority being just one). Given its size and low very valuation, Eurobank should be a strong performer for Fairfax’s equity portfolio for the next few years. 

 

 

what a great personal story too - his family were refugees and now he is the PM of Greece!

[modiva]

Shareholders get their wishes answered.  Buyback up to 10% in the next 1 year.  They also bought back about 2% in the last 1 year at average price of C$ 515 (or US$ 405).  

 

Fairfax - Fairfax Financial Holdings Limited: Intention to Make a Normal Course Issuer Bid for Subordinate Voting Shares and Preferred Shares

[petec]

49 minutes ago, modiva said:

Shareholders get their wishes answered.  Buyback up to 10% in the next 1 year.  They also bought back about 2% in the last 1 year at average price of C$ 515 (or US$ 405).  

 

Fairfax - Fairfax Financial Holdings Limited: Intention to Make a Normal Course Issuer Bid for Subordinate Voting Shares and Preferred Shares

 

I think this is just a standard filing - they always have an authorisation open, but that doesn't mean they can or will use it. 

 

I think they can and will, but I don't think this announcement itself means anything much.

[modiva]

19 minutes ago, petec said:

 

I think this is just a standard filing - they always have an authorisation open, but that doesn't mean they can or will use it. 

 

I think they can and will, but I don't think this announcement itself means anything much.

 

Thanks for the insight.  I looked at the past press releases and they have made similar authorizations that weren't executed fully.  It is reasonable to expect that when such authorizations are made, the majority of such authorization is followed through, if not an update is provided.  Berkshire doesn't seem to issue such press releases but they are doing regular, and recently significant, buybacks.  

Edited September 28, 2021 by modiva

[petec]

1 hour ago, modiva said:

 

Thanks for the insight.  I looked at the past press releases and they have made similar authorizations that weren't executed fully.  It is reasonable to expect that when such authorizations are made, the majority of such authorization is followed through, if not an update is provided.  Berkshire doesn't seem to issue such press releases but they are doing regular, and recently significant, buybacks.  

Yea I wouldn’t expect updates or assume the majority happens. These are standard filings to give management flexibility - they are not promises. 

[ander]

1 hour ago, modiva said:

 

Thanks for the insight.  I looked at the past press releases and they have made similar authorizations that weren't executed fully.  It is reasonable to expect that when such authorizations are made, the majority of such authorization is followed through, if not an update is provided.  Berkshire doesn't seem to issue such press releases but they are doing regular, and recently significant, buybacks.  

my understanding is the reason for the process behind these authorizations (versus Berkshire) has to do with it being a Canadian listing and the rules there.

[glider3834]

I did a chart to estimate Fairfax's underlying combined ratio - I was curious if we strip out catastrophes, covid & favourable development what does it look like? I am not ignoring these but just trying to find the base line before we put in estimates for these costs.

 

Obviously with any of these charts I am posting, I try not to make mistakes but either way please do your own DD  

 

Anyway here it is  - whats interesting is that their reported combined ratio doesn't look like it has fallen that much if we say compare Q1 & Q2 for 2018 (avg 96%) to Q1 & Q2 of 2021 (Avg 95%) but if we look at the underlying CR it has fallen a lot more - up to 6 percentage points if we are comparing these same time periods!

 

I think in this chart you are seeing the benefits of the hard market, higher premium pricing  & so they are operating more profitably with lower loss & LAE expense & lower underwriting expense ratio (see next chart below)

 

 

I found doing the above chart useful because if we are doing the math - we can say their base line CR looks to be around 90%.

 

Then you can put in a estimate for catastrophes (avg around 5 point of CR over 2018-2020) - Q32021 will probably be higher with Ida - I guess we are trying to think of an average number which is never going to be exact.

 

Favourable development averaged around 1% over Q1 & Q2 (after taking out prior year adverse development for covid) while Current year covid averaged 0.35% over Q1 & Q2. 

 

The average CR for Q1 & Q2 2021 sits at around 95.2 - we will have to see the full effects of hurricane season & other events over Q3 & Q4 to see where they end up & if there is a bigger favourable development adjustment it will probably happen in Q4 although it has been trending lower over 2018 to 2020 period.

 

Anyway the underlying CR I think is a useful one to keep an eye on - if they can continue to bring this down it will make the business more resilient to future shocks from catastrophes etc .

 

 

 

Edited September 29, 2021 by glider3834

[glider3834]

12 minutes ago, glider3834 said:

I did a chart to estimate Fairfax's underlying combined ratio - I was curious if we strip out catastrophes, covid & favourable development what does it look like? I am not ignoring these but just trying to find the base line before we put in estimates for these costs.

 

Obviously with any of these charts I am posting, I try not to make mistakes but either way please do your own DD  

 

Anyway here it is  - whats interesting is that their reported combined ratio doesn't look like it has fallen that much if we say compare Q1 & Q2 for 2018 (avg 96%) to Q1 & Q2 of 2021 (Avg 95%) but if we look at the underlying CR it has fallen a lot more - up to 6 percentage points if we are comparing these same time periods!

 

I think in this chart you are seeing the benefits of the hard market, higher premium pricing  & so they are operating more profitably with lower loss & LAE expense & lower underwriting expense ratio (see next chart below)

 

 

I found doing the above chart useful because if we are doing the math - we can say their base line CR looks to be around 90%.

 

Then you can put in a estimate for catastrophes (avg around 5 point of CR over 2018-2020) - Q32021 will probably be higher with Ida - I guess we are trying to think of an average number which is never going to be exact.

 

Favourable development averaged around 1% over Q1 & Q2 (after taking out prior year adverse development for covid) while Current year covid averaged 0.35% over Q1 & Q2. 

 

The average CR for Q1 & Q2 2021 sits at around 95.2 - we will have to see the full effects of hurricane season & other events over Q3 & Q4 to see where they end up & if there is a bigger favourable development adjustment it will probably happen in Q4 although it has been trending lower over 2018 to 2020 period.

 

Anyway the underlying CR I think is a useful one to keep an eye on - if they can continue to bring this down it will make the business more resilient to future shocks from catastrophes etc .

 

 

 

I suspect Prem & Co are ideally targeting a 95% overall CR (see AR 2019 quote below) for the business while expecting it will be lumpy - so that would mean if they run a base line CR of 90, then they would want no more than 5 point of CR from a a combination of catastrophes & other events less any add back they might get from favourable development.

 

Recently, we have mentioned to you that we could achieve our target of a 15% annual return on our shareholders’ equity by producing a 95% combined ratio in our insurance operations and earning a 7% return on our investment portfolio. In 2019, we achieved a 97% combined ratio and a 6.9% return on our investment portfolio, which would have produced a 15% return except that some unrealized foreign exchange losses, which go directly though book value, resulted in us coming in at 14.8%, just below our long term target.

Edited September 29, 2021 by glider3834

[Viking]

10 hours ago, glider3834 said:

I did a chart to estimate Fairfax's underlying combined ratio - I was curious if we strip out catastrophes, covid & favourable development what does it look like? I am not ignoring these but just trying to find the base line before we put in estimates for these costs.

 

Obviously with any of these charts I am posting, I try not to make mistakes but either way please do your own DD  

 

Anyway here it is  - whats interesting is that their reported combined ratio doesn't look like it has fallen that much if we say compare Q1 & Q2 for 2018 (avg 96%) to Q1 & Q2 of 2021 (Avg 95%) but if we look at the underlying CR it has fallen a lot more - up to 6 percentage points if we are comparing these same time periods!

 

I think in this chart you are seeing the benefits of the hard market, higher premium pricing  & so they are operating more profitably with lower loss & LAE expense & lower underwriting expense ratio (see next chart below)

 

 

I found doing the above chart useful because if we are doing the math - we can say their base line CR looks to be around 90%.

 

Then you can put in a estimate for catastrophes (avg around 5 point of CR over 2018-2020) - Q32021 will probably be higher with Ida - I guess we are trying to think of an average number which is never going to be exact.

 

Favourable development averaged around 1% over Q1 & Q2 (after taking out prior year adverse development for covid) while Current year covid averaged 0.35% over Q1 & Q2. 

 

The average CR for Q1 & Q2 2021 sits at around 95.2 - we will have to see the full effects of hurricane season & other events over Q3 & Q4 to see where they end up & if there is a bigger favourable development adjustment it will probably happen in Q4 although it has been trending lower over 2018 to 2020 period.

 

Anyway the underlying CR I think is a useful one to keep an eye on - if they can continue to bring this down it will make the business more resilient to future shocks from catastrophes etc .

 

 

 

Glider, yes, it will be interesting to see where the CR goes in the next few years for Fairfax. In the current quarter Fairfax is likely now in the third year of getting price increases (rate on rate on rate). However, it will take time for written premiums to become earned. And if loss picks are more conservative this will also delay the benefits of current pricing flowing through to reported results - some of the benefit will come via reserve releases in future years. Significant top line growth will also lower the expense ration (and result in lower CR). Every quarter from here that we continue to get strong top line growth is just gravy. 
 

When doing some back reading i was surprised to learn that Fairfax had a pretty spectacular 4 year run consistently posting a CR in the low ‘90’s:

- 2013: 92.7

- 2014: 90.8

- 2015: 89.9

- 2016: 92.5

The driver if these stellar numbers was Odyssey Re, who posted an average CR under 85 over these 4 years. I was not following Fairfax closely at the time so was not aware what they had accomplished.

 

In a recent report RBC also stated that Fairfax tends to write more long tailed business than its other insurance peers. Long tail business usually earns a higher CR. However, regulators allow the investment portfolio of long tail business to have a higher equity weighting. Not sure how accurate RBC’s comments are. 

Edited September 29, 2021 by Viking