Fairfax 2021

[Parsad]

For those critical of FFH's board composition with two of Prem's children, how do they feel about Berkshire's board now retaining two of Buffett's children?

 

https://www.barrons.com/articles/berkshire-hathaway-names-warren-buffetts-daughter-and-money-manager-chris-davis-to-its-board-51634767965?siteid=yhoof2

 

Cheers!

[nwoodman]

3 hours ago, Parsad said:

For those critical of FFH's board composition with two of Prem's children, how do they feel about Berkshire's board now retaining two of Buffett's children?

 

https://www.barrons.com/articles/berkshire-hathaway-names-warren-buffetts-daughter-and-money-manager-chris-davis-to-its-board-51634767965?siteid=yhoof2

 

Cheers!

I am not enamoured with either situation.  

[StubbleJumper]

6 hours ago, Parsad said:

For those critical of FFH's board composition with two of Prem's children, how do they feel about Berkshire's board now retaining two of Buffett's children?

 

https://www.barrons.com/articles/berkshire-hathaway-names-warren-buffetts-daughter-and-money-manager-chris-davis-to-its-board-51634767965?siteid=yhoof2

 

Cheers!

 

Earlier this week, I believe I questioned whether we ought to start calling Buffett the "Prem Watsa of the south."  When somebody calls Prem the "Buffett of the north" it is intended as a compliment.  If Buffett is called the "Watsa of the south" it clearly isn't.

 

 

SJ

[Parsad]

My point was that at least Prem's kids have a business background, asset management skills and have studied finance.  

 

In either case, as both CEO's have long stated, their children are to act as surrogate stewards for them, maintaining the culture and legacy...not necessarily day to day operations.  I'm inclined to think that's a good thing if the offspring are anything like the parents.  

 

I know Ben and Christine much better than I know Howard and Susan...that being said, my interactions with all of them have always been very cordial and while they may not be the leaders their parents are, they are certainly their parent's children in ideals, virtues and beliefs.  

 

Cheers!

[StubbleJumper]

54 minutes ago, Parsad said:

My point was that at least Prem's kids have a business background, asset management skills and have studied finance.  

 

In either case, as both CEO's have long stated, their children are to act as surrogate stewards for them, maintaining the culture and legacy...not necessarily day to day operations.  I'm inclined to think that's a good thing if the offspring are anything like the parents.  

 

I know Ben and Christine much better than I know Howard and Susan...that being said, my interactions with all of them have always been very cordial and while they may not be the leaders their parents are, they are certainly their parent's children in ideals, virtues and beliefs.  

 

Cheers!

 

Yep.  The situation has degenerated to the point where we are left debating which appointments were merely bad, and which were atrocious.

 

 

SJ

[Daphne]

And SD, you base that assessment on what?  Gut feel, hearsay, commonly accepted biases or a deep understanding and knowledge of the individuals.

[glider3834]

1 hour ago, Parsad said:

My point was that at least Prem's kids have a business background, asset management skills and have studied finance.  

 

In either case, as both CEO's have long stated, their children are to act as surrogate stewards for them, maintaining the culture and legacy...not necessarily day to day operations.  I'm inclined to think that's a good thing if the offspring are anything like the parents.  

 

I know Ben and Christine much better than I know Howard and Susan...that being said, my interactions with all of them have always been very cordial and while they may not be the leaders their parents are, they are certainly their parent's children in ideals, virtues and beliefs.  

 

Cheers!

thanks Sanjeev for sharing - family succession is common in insurance industry - Markel Corp, WR Berkley

 

I remember Prem saying at some point he told both his kids that he didn't want them working for him early on in their careers & encouraged them to find their own way in life working for external employers - I am sure that has shaped them as well.

 

Fairfax has a great team on investment & ops side so I think the key thing is maintaining that right culture within Fairfax which is,as a shareholder I would be looking for from Ben & Christine - but lets hope Prem isn't going to disappear on us just yet

 

 

 

 

 

[StubbleJumper]

10 minutes ago, Daphne said:

And SD, you base that assessment on what?  Gut feel, hearsay, commonly accepted biases or a deep understanding and knowledge of the individuals.

 

Based on a deep understanding and knowledge that those individuals would not have had a snowball's chance in hell of ever being selected for a board of directors if they did not have wealthy parents who had a large voting stake.

 

 

SJ

[glider3834]

Are Q3 results usually on last Thursday of month - I think that would be next Thurs 28 Oct ? No CC announcement yet ...

[Daphne]

1) if you don’t know them you have no way of knowing they wouldn’t have been selected.  Unlikely yes but not impossible given their business focus and background.

2) as large shareholders and eventually very large shareholders they have the right to be there and rather sooner than later for all kinds of practical reasons.

[Daphne]

Results nov 4

[Xerxes]

Last Nov Q3 results send the stock price on a rally from deep sleep. It is possible that the samething will happen here and the window might get shut. Looking to add to FFH in 2022 in CAD terms ... as i am planning to get out of FIH and flip the US dollars to Exor.

[Viking]

Is the current insurance hard market a big deal for Fairfax and Fairfax shareholders? Yes. Why? Because it results in significant growth in premiums (top line) and a lower combined ratio (bottom line). You get a double benefit. So underwriting profitability spikes. But there is a lag (depending on the type of business written). It takes time for net written premiums to become earned premiums. (For the insurance experts on the board, please correct any errors in my comments). 

 

In the example below 48% growth in net premiums earned (over 4 years) results in an increase in underwriting profit of 120%. Easy to understand why Fairfax is prioritizing supporting growth in its insurance subs during the current hard market (over stock buybacks).

 

It is not unreasonable to estimate that Fairfax will earn $700 million in underwriting profit in 2022 = $27/ share. And the longer the hard market continues to run the higher future earnings from underwriting will be for Fairfax. 
 

     Net premiums.     YOY

               earned      growth.   CR.        Underwriting profits

2018        $11.91           -          97.3         $318      $12/share

2019       $12.54          5%.      96.9         $395      $15

2020.      $13.86         11%.      97.8         $308      $12

2021 est $16.01          16%      Est 97      $480      $18

2022 est $17.70          10%.     Est 96      $700      $27

 

Why does a hard market result in a lower combined ratio? Price increases on the same unit of exposure are the big driver. A second benefit is a lower expense ratio (as top line grows faster than expenses).

 

There is also a lag. It takes time for net written premiums to become net earned premiums. And in hard markets loss pick tend to be conservative resulting in reserve releases in future years which is good for future profits.

 

And a hard market also provides significant benefits to the investment side of the business… by significantly increasing this magical thing called float…

————-

Please note, my numbers above do not include what is left of the runoff business after the Riverstone sale. 

Edited October 25, 2021 by Viking

[Daphne]

Viking once again you’ve demonstrated through great examples and deep analysis the multi dimensional nature of this business and, by extension, the complex thinking behind its leaders’ decision-making. iMany thanks.

[glider3834]

7 hours ago, Viking said:

Is the current insurance hard market a big deal for Fairfax and Fairfax shareholders? Yes. Why? Because it results in significant growth in premiums (top line) and a lower combined ratio (bottom line). You get a double benefit. So underwriting profitability spikes. But there is a lag (depending on the type of business written). It takes time for net written premiums to become earned premiums. (For the insurance experts on the board, please correct any errors in my comments). 

 

In the example below 48% growth in net premiums earned (over 4 years) results in an increase in underwriting profit of 120%. Easy to understand why Fairfax is prioritizing supporting growth in its insurance subs during the current hard market (over stock buybacks).

 

It is not unreasonable to estimate that Fairfax will earn $700 million in underwriting profit in 2022 = $27/ share. And the longer the hard market continues to run the higher future earnings from underwriting will be for Fairfax. 
 

     Net premiums.     YOY

               earned      growth.   CR.        Underwriting profits

2018        $11.91           -          97.3         $318      $12/share

2019       $12.54          5%.      96.9         $395      $15

2020.      $13.86         11%.      97.8         $308      $12

2021 est $16.01          16%      Est 97      $480      $18

2022 est $17.70          10%.     Est 96      $700      $27

 

Why does a hard market result in a lower combined ratio? Price increases on the same unit of exposure are the big driver. A second benefit is a lower expense ratio (as top line grows faster than expenses).

 

There is also a lag. It takes time for net written premiums to become net earned premiums. And in hard markets loss pick tend to be conservative resulting in reserve releases in future years which is good for future profits.

 

And a hard market also provides significant benefits to the investment side of the business… by significantly increasing this magical thing called float…

————-

Please note, my numbers above do not include what is left of the runoff business after the Riverstone sale. 

Yes agree Viking I think they can do 700 UWP  provided we have a normal cat year - will be pressure from Ida/Euro storms on Q3 so high 90s CR would be a decent result for 2021

 

I think the operating earnings picture (excluding investment gains) will become a lot more visible over next 12-18mths - if they can do 700 UWP, 700 approx interest & divs, 500 profit from Assoc and 100 from non-insurance businesses (incl Thomas Cook, Recipe etc) that would get them to $2 bil in revenue before any investment gains.

 

Also interest on fixed income is the wild card here, 10yr has moved up to around 1.64% & Fairfax have around 39% or $18 bil in cash & short term investments (1/2yr treasuries) that are basically making close to nothing, if they can park say 50% into bonds earning an additional 1% yield, that would add $90 mil per annum to their interest income. 

 

Also Fairfax have I believe a duration of around 1.8 years on their fixed income portfolio which I think would put them at low end compared to their peers - so all else being equal if rates move higher, then Fairfax's BVPS is more insulated from higher rates (will fall less) plus they have the opportunity to dial up their interest income. 

[glider3834]

7 minutes ago, glider3834 said:

if they can park say 50% into bonds earning an additional 1% yield, that would add $90 mil per annum to their interest income. 

I suspect they would want to make more than an extra 1% but just to illustrate P&L $ impact 

[TwoCitiesCapital]

13 minutes ago, glider3834 said:

I suspect they would want to make more than an extra 1% but just to illustrate P&L $ impact 

 

I agree. They didn't buy 10-year treasuries back in 2018 @ 3.25% - nor have they said anything about being 'wrong' about sustainably higher rates....so I'd be shocked if they moved in a big way whole rates still remain sub-2%. 

[Viking]

35 minutes ago, glider3834 said:

Yes agree Viking I think they can do 700 UWP  provided we have a normal cat year - will be pressure from Ida/Euro storms on Q3 so high 90s CR would be a decent result for 2021

 

I think the operating earnings picture (excluding investment gains) will become a lot more visible over next 12-18mths - if they can do 700 UWP, 700 approx interest & divs, 500 profit from Assoc and 100 from non-insurance businesses (incl Thomas Cook, Recipe etc) that would get them to $2 bil in revenue before any investment gains.

 

Also interest on fixed income is the wild card here, 10yr has moved up to around 1.64% & Fairfax have around 39% or $18 bil in cash & short term investments (1/2yr treasuries) that are basically making close to nothing, if they can park say 50% into bonds earning an additional 1% yield, that would add $90 mil per annum to their interest income. 

 

Also Fairfax have I believe a duration of around 1.8 years on their fixed income portfolio which I think would put them at low end compared to their peers - so all else being equal if rates move higher, then Fairfax's BVPS is more insulated from higher rates (will fall less) plus they have the opportunity to dial up their interest income. 

 

@glider3834 I expect the CR will be high 90's for Q3 but I still expect full year to be solid (i.e. 97 ish) given they finished 1H at 95.1

 

And yes, the fixed income portfolio (I lump cash, mortgages etc in here) is really interesting. If there is one area where the Fairfax team has pretty consistently outperformed over the years it is with the fixed income portfolio. They have been very opportunistic. Given how the portfolio is constructed this is one area where Fairfax is making a decent sized macro call. As you describe they have positioned the bond portfolio (including the cash holdings) with exceptionally low duration. So if interest rates move a lot higher the next year or two Fairfax will be a big winner. As you mention the hit to their BV will be small (compared to other P&C insurers who have longer duration). And they will be able to redeploy the significant cash they hold at higher rates.

 

However, their current positioning does come at a cost: lower interest income today. I am ok with how they are positioned. But this is something each investor will need to decide for themselves.

 

Now of course an investor should also not look at the fixed income portfolio in isolation. After all 35% of their investment portfolio is in higher risk/much more volatile/much higher return equity/partnership/real estate type investments (much more than other P&C insurers). My guess is Fairfax has constructed the totality of their investment portfolio in a way that makes sense for Fairfax.

[glider3834]

1 hour ago, Viking said:

Now of course an investor should also not look at the fixed income portfolio in isolation. After all 35% of their investment portfolio is in higher risk/much more volatile/much higher return equity/partnership/real estate type investments (much more than other P&C insurers). My guess is Fairfax has constructed the totality of their investment portfolio in a way that makes sense for Fairfax.

true -it probably makes sense from liquidity point of view to hold a big cash position if you are over-weighted on equities (like in 2020 they were able to hold all their equity positions & were not forced sellers). So maybe higher rates could see a shift to greater bond weighting & lower cash and potentially lower equities weighting - but I am just speculating.

 

 

Edited October 26, 2021 by glider3834

[glider3834]

FFH (US listing) vs S&P500 over last 5 years - yikes 

my data estimates below - for S&P data from https://www.multpl.com, FFH data from morningstar.ca https://www.morningstar.ca/ca/report/stocks/valuation.aspx?t=0P00006821&lang=en-CA except for Fairfax price to forward book from https://seekingalpha.com/symbol/FRFHF/valuation/metrics

 

S&P multiple expansion

y/e 2016 S&P price to book 2.91 & price to sales 1.95 (& div yield 2.0%)

current   S&P price to book 4.87 & price to sales 3.13 (& div yield 1.3%)

 

FFH multiple compression

y/e 2016 FFH price to book 1.18 & price to sales 1.13 (& div yield 1.9%)

current   FFH price to book 0.7 & price to sales 0.48 (& div yield 2.4%)

 

Edited October 27, 2021 by glider3834

[glider3834]

Partner re sold for around 1.28 x BV https://leaderpost.com/pmn/business-pmn/exor-covea-clinch-9-bln-partnerre-reinsurer-deal-on-pre-pandemic-terms-2

[glider3834]

https://www.theinsurer.com/viewpoint/rock-solid-allied-world-in-bermuda/19054.article

[Dazel]

Fairfax is as cheap as I have ever seen it! 

[Viking]

On 10/20/2021 at 4:42 PM, Viking said:

@maxthetrade and @StubbleJumper thanks for chiming in… 

 

Bottom line, Q3 will be another very interesting quarter for Fairfax:

1.) size of catastrophe losses?

2.) top line insurance growth - still double digits? Rate vs exposure?

3.) how much longer will hard market continue for?

4.) annual update on reserving (i think this happens in Q3)?

5.) share of profit of associates: growing?
6.) Brit/CEO update?

7.) Riverstone / sale of 14% of Brit close: impact on financials (lower debt etc)?

8.) Eurolife - increase in ownership from 50 to 80% - impact on financials?

9.) Digit: is $46 gain in BV pushed out to Q4?

10.) GIG purchase of AXA closed in Sept 7; any impact on Fairfax’s financials?
11.) how do equity holdings perform inQ3? Any sales? Any new purchases?

12.) update on capital allocation moving forward? Do insurance subs have enough $ to grow on their own? Done repaying debt (i noticed another $85 million due in 2024 was repaid in Oct)? Are they ready to buy back stock in volume?

Ok. With Q3 results out here are some quick take answers:  

 

Bottom line, after delivering three outstanding quarters in a row, Fairfax has delivered a solid quarter in Q3. 
- net earnings of $462.4 million ($16.44/share)

- Book value was $561.88 (Sept 30) compared to $478.33 (December 31, 2020)

1.) size of catastrophe losses? CR came in at 101.1; underwriting loss of -$47.5. I was expecting high ‘90’s. Mild disappointment. 

2.) top line insurance growth - still double digits? YES! Big win. “net premiums written increased by 25.8% to $4,697.6 million from $3,735.2 million”
- Rate vs exposure? TBA

3.) how much longer will hard market continue for? TBA (looks promising given growth of 25.8% we saw in net written premiums)

4.) annual update on reserving (i think this happens in Q3)? Good. “net favourable prior year reserve development of $69.6 million”

5.) share of profit of associates: growing? YES! “share of profit of associates of $227.3 million principally reflects share of profit of $82.0 million from Resolute, $43.3 million from Eurobank and $20.3 million from Atlas Corp.” 
6.) Brit/CEO update? TBA

7.) Riverstone / sale of 14% of Brit close: impact on financials (lower debt etc)? YES! Big win.

”The company's total debt to total capital ratio, excluding non-insurance companies, decreased to 25.7% at September 30, 2021 from 29.7% at December 31, 2020, primarily reflecting lower total debt, due principally to lower borrowings at the insurance and reinsurance companies and the company having paid off its credit facility”

8.) Eurolife - increase in ownership from 50 to 80% - impact on financials?

”Upon consolidating Eurolife the company recorded a net gain of $130.5 million on remeasurement of the company's previous 50.0% joint venture interest in Eurolife to its fair value of $450.0 million, which is approximately book value.”

9.) Digit: is $46 gain in BV pushed out to Q4? Part was booked in Q3:

”Net gains on investments of $374.6 million primarily reflected net gains of $397.0 million on Digit compulsorily convertible preference shares.”

10.) GIG purchase of AXA closed in Sept 7; any impact on Fairfax’s financials? Not sure…
11.) how do equity holdings perform inQ3? Any sales? Any new purchases? Overall performance was better than i expected (ex Digit) given the known fall in value of their mark to market equities, driven by Blackberry.

- Surprise! “realized gain on the sale of the Toys "R" Us Canada operations of $85.7 million”

12.) update on capital allocation moving forward? Do insurance subs have enough $ to grow on their own? Done repaying debt (i noticed another $85 million due in 2024 was repaid in Oct)? Are they ready to buy back stock in volume? TBA

 

Homework: understand better what happened at Odyssey. Same with Brit.

 

[nwoodman]

On 10/21/2021 at 8:26 AM, maxthetrade said:

 

Okay you asked for it, Brit screwed up royally on their european catastrophe business. I know some people who were very surprised by their exposure to the german flooding.   

Nice call!