glider3834 Posted November 24, 2021 Share Posted November 24, 2021 (edited) On 11/14/2021 at 3:57 AM, Maxwave28 said: am thinking about hidden / undervalued assets at Fairfax as we head into the end of 2021. Exco Resources comes to mind given the current natural gas price environment that everyone is aware of and the dearth of information out there Prem had this to stay about Exco in the 2020 AR. "Fairfax owns 44% of Exco, a U.S. oil and gas producer. Despite weak energy prices in 2020, Exco generated $128 million in EBITDA and $36 million in free cash flow. Net debt fell to $145 million (1.1 times EBITDA). Led by Chairman John Wilder and CEO Hal Hickey, Exco achieved these results through high field level productivity and company-wide cost control. In December, Exco recorded its 73rd month without a lost time incident. Exco’s Chairman, John Wilder, is a great partner. We are well served by his leadership." Natural gas prices are up ~90% (3.8/2.0) from their 2020 avg, per https://www.eia.gov/dnav/ng/hist/rngwhhdm.htm Henry Hub Natural Gas Spot Price (Dollars per Million Btu) Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avg. 2020 2.02 1.91 1.79 1.74 1.75 1.63 1.77 2.3 1.92 2.39 2.61 2.59 2.035 2021 2.71 5.35 2.62 2.66 2.91 3.26 3.84 4.07 5.16 5.51 3.809 Would imagine more than a doubling of ebitda of $128mm and free cash flow of $36mm from 2020 at 2021 avg. gas prices but have no idea how to ball park this. Does anyone have a feel for what kind of free cash flow Exco has been doing this year or a good framework to think about this? Exco financials require a login for access and their website does not provide other useful info thank you @Maxwave28Exco Resources Chou Associates Fund are also shareholders in Exco & it appears they have increased the fair value of their Exco investment by 29% YTD to 31 Aug-21. All of this fair value increase has happened since 30 June. This fair value increase in Exco is probably what might be expected given the big jump in natural gas prices in 2021. Fair value = US$10.47 per share at 31 Dec-20 Fair value per share = $13.51 at 31 Aug-21 (assuming they held same number of shares as at 30 Jun-21) Assuming Fairfax are using similar valuation approach to Chou Funds, then we could expect approx 29% increase YTD in fair (market) value of Fairfax's stake in Exco. At 31 Dec-20, Fairfax had a fair vale of $238 mil on their Exco holding(same as carrying value). A 29% increase would be $69 mil increase in fair value on this position over carrying value. Looking at the Q3 Interim report from Fairfax, it looks like they have increased the fair value of of All other - non-insurance associates (which would include Exco) between Q2 & Q3 by $67 mil - so its possible that this Exco fair value increase has already been taken up by Fairfax - we will have to wait for the 2021 Annual report to know for sure! Edited November 24, 2021 by glider3834 Link to comment Share on other sites More sharing options...
Dazel Posted November 24, 2021 Share Posted November 24, 2021 (edited) Xerxes, Correct the financial analytics unit (TRI)They used the proceeds for a tender offer as Prem is doing. They continued to buy back stock afterward. it was a return of capital transaction. Edited November 24, 2021 by Dazel Link to comment Share on other sites More sharing options...
Dazel Posted November 24, 2021 Share Posted November 24, 2021 As I remember it…Fairfax will send out details but I believe this aligns with the sale of Odyssey Re. I am not a tax expert…so don’t take my word for it… I am of the camp that unless you get arbitrage come in Fairfax will “Not” get many shares tendered. They will use the left over proceeds for share buybacks in the open market as was mentioned earlier. off the top of my head Fairfax will have $2.5b cash at the holding company before the tender. Link to comment Share on other sites More sharing options...
SafetyinNumbers Posted November 24, 2021 Share Posted November 24, 2021 Joining this thread late but most of the responses seem to assume that Fairfax sold some Odyssey. I don't think that's what happened. I think Odyssey issued new securities worth up to ~10% of the equity. The distinction is important because this is new equity. That frees up Fairfax holdco that was likely holding excess capital to fund Odyssey growth to use it for the SIB. I think the high valuation can be explained as a conversion option. FFH peers trade at 1.4x book so this transaction seemingly priced at 1.8x book likely reflects a conversion premium. It makes sense that the pension funds would want liquidation preference over Fairfax. Perhaps there is an interest component as well which would be tax effective for Odyssey. I think a mandatory convertible bond is probably the type of security that was issued. It probably would be treated as equity by regulators. Is the general consensus that FFH will get a full fill on the SIB and if so, is there a consensus on price? Link to comment Share on other sites More sharing options...
StubbleJumper Posted November 25, 2021 Share Posted November 25, 2021 47 minutes ago, SafetyinNumbers said: Joining this thread late but most of the responses seem to assume that Fairfax sold some Odyssey. I don't think that's what happened. I think Odyssey issued new securities worth up to ~10% of the equity. The distinction is important because this is new equity. That frees up Fairfax holdco that was likely holding excess capital to fund Odyssey growth to use it for the SIB. I think the high valuation can be explained as a conversion option. FFH peers trade at 1.4x book so this transaction seemingly priced at 1.8x book likely reflects a conversion premium. It makes sense that the pension funds would want liquidation preference over Fairfax. Perhaps there is an interest component as well which would be tax effective for Odyssey. I think a mandatory convertible bond is probably the type of security that was issued. It probably would be treated as equity by regulators. Is the general consensus that FFH will get a full fill on the SIB and if so, is there a consensus on price?l Prem is offering 0.8x Q4 BV. None of the value guys will tender at that price. Seriously, guys like Mason Hawkins will not be tendering their shares. People holding in taxable accounts will not be tendering because it will trigger a shitload of income tax. So who will tender? Maybe I will, if I can juggle around some securities on my tax advantaged accounts and then buy a few shares for that specific purpose. But what will that be? Maybe I can figure out a way to buy and tender 100 shares or something? It would be an easy $5k, which is nice beer money but it doesn't do much for FFH. I am guessing the SIB will be undersubscribed. But, if they get a million shares at 0.8x, that's not a bad outcome. SJ Link to comment Share on other sites More sharing options...
TwoCitiesCapital Posted November 25, 2021 Share Posted November 25, 2021 34 minutes ago, StubbleJumper said: Prem is offering 0.8x Q4 BV. None of the value guys will tender at that price. Seriously, guys like Mason Hawkins will not be tendering their shares. People holding in taxable accounts will not be tendering because it will trigger a shitload of income tax. So who will tender? Maybe I will, if I can juggle around some securities on my tax advantaged accounts and then buy a few shares for that specific purpose. But what will that be? Maybe I can figure out a way to buy and tender 100 shares or something? It would be an easy $5k, which is nice beer money but it doesn't do much for FFH. I am guessing the SIB will be undersubscribed. But, if they get a million shares at 0.8x, that's not a bad outcome. SJ I may tender some shares just like I did FIH. If the share price remains low relative to where I think the offer could reasonable fill at, I'll buy more shares solely for the purpose of flipping into the tender. If all goes as it did with FIH, I'll fill at the high end of the offer range, get cash, book a quick 10-15% gain, and then be able to roll the cash back into more shares still trading at a discount. Link to comment Share on other sites More sharing options...
glider3834 Posted November 25, 2021 Share Posted November 25, 2021 (edited) 2 hours ago, SafetyinNumbers said: Joining this thread late but most of the responses seem to assume that Fairfax sold some Odyssey. I don't think that's what happened. I think Odyssey issued new securities worth up to ~10% of the equity. The distinction is important because this is new equity. That frees up Fairfax holdco that was likely holding excess capital to fund Odyssey growth to use it for the SIB. I think the high valuation can be explained as a conversion option. FFH peers trade at 1.4x book so this transaction seemingly priced at 1.8x book likely reflects a conversion premium. It makes sense that the pension funds would want liquidation preference over Fairfax. Perhaps there is an interest component as well which would be tax effective for Odyssey. I think a mandatory convertible bond is probably the type of security that was issued. It probably would be treated as equity by regulators. Is the general consensus that FFH will get a full fill on the SIB and if so, is there a consensus on price? @SafetyinNumbers from SEC filing On November 16, 2021, the Company executed a binding agreement to sell a 9.99% minority stake in Odyssey to the Odyssey Investors for consideration of US$900,000,000. https://www.sec.gov/Archives/edgar/data/915191/000110465921140897/tm2132409d1_sc13e4f.htm I read that as an equity sale (via new issue) for a 9.99% stake(rather than a bond issuance) If it was a mandatory convertible - it must be converted by some future date into an equity interest - but in this case the 9.99% minority stake appears to vest immediately with the purchasers (and then Fairfax has option to repurchase at some future date) I would never say never but thats just my reading based on the wording Edited November 25, 2021 by glider3834 Link to comment Share on other sites More sharing options...
SafetyinNumbers Posted November 25, 2021 Share Posted November 25, 2021 26 minutes ago, glider3834 said: @SafetyinNumbers from SEC filing On November 16, 2021, the Company executed a binding agreement to sell a 9.99% minority stake in Odyssey to the Odyssey Investors for consideration of US$900,000,000. https://www.sec.gov/Archives/edgar/data/915191/000110465921140897/tm2132409d1_sc13e4f.htm I read that as an equity sale (via new issue) for a 9.99% stake(rather than a bond issuance) If it was a mandatory convertible - it must be converted by some future date into an equity interest - but in this case the 9.99% minority stake appears to vest immediately with the purchasers (and then Fairfax has option to repurchase at some future date) I would never say never but thats just my reading based on the wording Thanks for the link! I hadn’t seen it. Looks like it’s a mix of what we thought. New issuance with a dividend up to Fairfax. ”The proceeds from the Odyssey Transaction will be paid by Odyssey to Fairfax by way of a dividend which will then be used by Fairfax to fund the purchase of Shares pursuant to the Offer. See Section 15 of this Circular, “Source of Funds”.” Link to comment Share on other sites More sharing options...
petec Posted November 25, 2021 Share Posted November 25, 2021 6 hours ago, SafetyinNumbers said: Thanks for the link! I hadn’t seen it. Looks like it’s a mix of what we thought. New issuance with a dividend up to Fairfax. ”The proceeds from the Odyssey Transaction will be paid by Odyssey to Fairfax by way of a dividend which will then be used by Fairfax to fund the purchase of Shares pursuant to the Offer. See Section 15 of this Circular, “Source of Funds”.” The press release did specify that it was a new class of security, so I think Safety is right that it’s a new class with special features. What those are, I couldn’t say, but history suggests a preferred dividend and a preset repurchase price will be in there. Link to comment Share on other sites More sharing options...
StubbleJumper Posted November 26, 2021 Share Posted November 26, 2021 The US government hit RFP with some pretty stiff tariffs on exports to the US. Seems like a strange thing to do so soon after an historic spike in lumber prices. I wonder whether the peak share price that we saw last summer wasn't a missed opportunity. SJ Link to comment Share on other sites More sharing options...
Viking Posted November 26, 2021 Share Posted November 26, 2021 @StubbleJumper i really do not understand why so many are in such a panic forFairfax to unload Resolute. Yes, it was a dog for Fairfax for many, many years. However, the company the past 3 or so years has made lots of money; and made lots of very good decisions with that money. The company has successfully pivoted to lumber and more: - it bought 3 lumber mills in the US South at the bottom of the cycle in 2020 - bought back a bunch of stock at crazy cheap prices - paid 2 large special dividends - paid back most of its debt; refinanced whats left at low rates The shares hardly look expensive. Especially if average lumber prices stay elevated (compared to historical norms) the next few years. Now i am not saying Resolute is some wonderful company. But i also do not think it is the terrible company it was 10 years ago. Yes, Resolute has been hit much harder with duties than most other Canadian lumber producers. Not sure why. They will shift and focus on selling their Canadian production in Canada. Other Canadian producers (with lower duties) will shift to selling more Canadian production into the US. Resolute does have three lumber mills producing in the US south. Bottom line, if lumber prices stay elevated Resolute will continue to earn very good money for shareholders. I think there is a good chance US housing starts will remain elevated for the next 5-10 years. If so, lumber prices will average much higher prices than in the past. I understand if Fairfax is patient with Resolute. Resolute is also sitting on more than $300 million in lumber duties (on deposit). I think the last time this happened (softwood lumber dispute) when it was finally resolved a big chunk of the duties actually went back to the lumber companies. Something to keep in mind. Link to comment Share on other sites More sharing options...
StubbleJumper Posted November 26, 2021 Share Posted November 26, 2021 @Viking I'm not sure how you can look at a chart like this and not wonder whether FFH missed an opportunity to dump Resolute during the spring/summer: It momentarily traded at a stock price that basically had not been seen for a *decade*. On a going-forward basis, how high must the annual dividend be to justify not selling at US$14 or $15? Maybe US$1/sh per year would be a bare minimum if a long-term hold is intended and no growth can be reasonably expected? So, great that they made US$5/sh in the last 12 months, but not so great if the lumber cycle and the tariffs revert back to the experience of the previous decade or so: I guess we'll see where this one goes.... SJ Link to comment Share on other sites More sharing options...
Crip1 Posted November 26, 2021 Share Posted November 26, 2021 11 hours ago, Viking said: @StubbleJumper i really do not understand why so many are in such a panic forFairfax to unload Resolute. Yes, it was a dog for Fairfax for many, many years. However, the company the past 3 or so years has made lots of money; and made lots of very good decisions with that money. The company has successfully pivoted to lumber and more: - it bought 3 lumber mills in the US South at the bottom of the cycle in 2020 - bought back a bunch of stock at crazy cheap prices - paid 2 large special dividends - paid back most of its debt; refinanced whats left at low rates The shares hardly look expensive. Especially if average lumber prices stay elevated (compared to historical norms) the next few years. Now i am not saying Resolute is some wonderful company. But i also do not think it is the terrible company it was 10 years ago. Yes, Resolute has been hit much harder with duties than most other Canadian lumber producers. Not sure why. They will shift and focus on selling their Canadian production in Canada. Other Canadian producers (with lower duties) will shift to selling more Canadian production into the US. Resolute does have three lumber mills producing in the US south. Bottom line, if lumber prices stay elevated Resolute will continue to earn very good money for shareholders. I think there is a good chance US housing starts will remain elevated for the next 5-10 years. If so, lumber prices will average much higher prices than in the past. I understand if Fairfax is patient with Resolute. Resolute is also sitting on more than $300 million in lumber duties (on deposit). I think the last time this happened (softwood lumber dispute) when it was finally resolved a big chunk of the duties actually went back to the lumber companies. Something to keep in mind. I can't speak for everyone, but from my perspective the desire to not own RFP is summarized by the Buffett quote of "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price". The info you shared suggests that management is doing an admirable job with the company, but the fact that it's a commodity business is the reason why I would love to see FFH reduce/eliminate their stake. -Crip Link to comment Share on other sites More sharing options...
Viking Posted November 30, 2021 Share Posted November 30, 2021 (edited) What will Fairfax earn in 2022? To cut to the chase, below is my summary with current estimates. Would appreciate others wading in with additional thoughts I have attached my excel file for those wanting to play with the numbers. The volatility year to year of the individual items and total results is pretty amazing. Going all the way back to 2018 allows us to see trends and also calculate averages. ---------- Please note: I have not looked in detail into three items: Life/Runoff, Corporate Overhead and Non-controlling Interest. My numbers below need some work (well, it all needs some work). - Fairfax decided to add Eurofile's Life Insurance business to runoff for reporting purposes. My guess is Life Insurance will offset some of runoffs annual losses. Just not sure how much to build in for 2022. So my conservative best guess is Fairfax will earn about US$1.4 billion in 2022 = $62/share. Digit revaluation will add $37 to BV. So between 2021 and 2022 Fairfax could earn something around $200/share. Shares are currently trading at $445. I have not built in a few important things: - where do interest rates go in 2022? Higher rates will benefit Fairfax over time: cause an immediate hit to earnings/BV but should allow Fairfax to earn more on its cash/short term investments in future years - how to account for cost of $900 million sale of 9.9% of Osyssey (need to bump non-controlling interest further?) ------------ US$ 2018 2019 2020 2021E 2022E 1.) Underwriting Profit: $318 $395 $309 $500 $750 2.) Int & Div Income: $544 $657 $561 $445 $460 3.) Share of Profit of Assoc: $94 $56 $46 $300 $400 Total Operating Income $956 $1,108 $916 $1,245 $1,610 Per Share $37 $43 $35 $48 $67 4.) Life/Runoff Exp (ex g/l): -$198 -$215 -$194 -$150 -$100 5.) Non-insurance Co (ex g/l): $380 -$2 -$179 -$75 $75 6.) Interest Expense: -$347 -$472 -$476 -$504 -$420 7.) Corp Overhead Exp: -$182 $98 -$253 $60 $60 8.) Net Gains (L) on Invest: $253 $1,716 $313 $2,754 $725 Gain on De-consol of Sub $0 $0 $117 $0 $0 Pre-tax Income $898 $2,276 $279 $3,378 $2,017 9.) Income Taxes -$44 -$262 -$207 -$642 -$383 10.) Non-controlling Interest: -$442 $33 $181 -$220 -$150 Net Earn Attrib to Sh of FFH $412 $2,047 $253 $2,516 $1,484 Per Share $15.86 $78.71 $9.74 $96.77 $61.83 Shares Outstanding (mill) 26 26 26 26 24 ----------- How should Fairfax be valued? Nov 22, 2021: There are many ways to value an insurance company like Fairfax. One thing I try and understand is what, if anything, is changing? At both the company and industry level. And are the changes good, neutral or bad for earnings. Changes likely to lead to higher future earnings i call ‘tailwinds’. Changes likely to lead to lower future earnings I call a ‘headwinds’. A scorecard can be developed for a company where change in the various items can be captured. And when tabulated this earnings scorecard can provide a pretty good estimates for the future trajectory of earnings. And higher earnings usually = higher stock price. Important: an item changing from a headwind to neutral is actually a win for shareholders. And an item going from a modest tailwind to a big tailwind is another win for shareholders. The reason i am so positive on Fairfax today is because of all the improvements to so many of the items that sum to net earnings. This tells me that earnings should be higher in 2022 and future years . And with Fairfax shares trading at US$455 this increase in earnings is NOT yet reflected in the share price. So what has been changing at Fairfax the past couple of years? Below is a summary. I will dig into the individual items in more detail in the coming days. 1.) Underwriting Profit: big tailwind (from modest tailwind) 2.) Interest & Dividend Income: neutral (from modest headwind) 3.) Share of Profit of Associates: modest tailwind (from modest headwind) Total Operating Income 4.) Life Insurance and Run-off: neutral (from neutral) 5.) Non-insurance Companies: TBA 6.) Interest Expense: modest tailwind (from modest headwind) 7.) Corporate Overhead Expense: neutral (from neutral) 8.) Net Gains (Losses) on Investments: TBA Pre-tax Income 9.) Taxes: neutral (from modest tailwind) 10.) Non-controlling Interest: modest headwind (from modest tailwind) Net Earnings Attributable to Shareholders of Fairfax Shares outstanding: big tailwind ————— P&C insurance companies are valued mostly off Operating Income. Analysts love predicability. This part of Fairfax earnings should increase nicely in 2022. ————— Nov 22: 1.) Underwriting Profit: after Investment Gains (Losses) this is the most important item impacting earnings for Fairfax. Why do i think it will be a big tailwind for Fairfax in 2022 and after? Fairfax has earned an underwriting profit of about $335 million per year on average from 2018-2020. My guess is they will earn about $500 million in 2021 (97CR) and $750 million in 2022 (96CR). Pretax Underwriting Profit Per share. YOY Inc/share 2018-2020. $335 million avg. $13.00 2021 est $500 million. $19.25. 48% (26 m sh) 2022 est $750 million. $31.25. 62% (24 m sh) Net premiums earned are growing at a 20% clip in 2021. Expectations are now (post Q3 earnings update) that the hard market will continue into 2022. Estimating that Fairfax delivers a 96CR in 2022 (= over $30 per share) is NOT an aggressive call. And if, heaven forbid, Fairfax delivers a 95CR in 2022 it will earn close to $40 per share in underwriting profit. A significant increase. (Reducing the share count from 26 to 24 million is a big deal for all the per share numbers.) So underwriting profit could be $18 per share higher than the average from 2018-2020 = 140% increase. And Fairfax shares are currently trading near their historic low price band (going all the way back to 2014) at US $455/ share. And this is just one of the tailwinds coming in 2022… Makes complete sense! ——————— 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 $16.63 20% Est 97 $500 $19 2022 est $18.63 12%. Est 96 $750 $31 On this same thread i posted a longer more detailed note on this topic on Sat Nov 13. ——————- Nov 23: 2.) Interest and dividend income -insurance and reinsurance. Please note, i decided to edit the post to capture the numbers consistent with how Fairfax reports results in their short form press releases. So i am using their Feb press releases to source my YE numbers and the Nov press release for Q3 (in case you are wondering). I also want to be able to take my individual posts and sum them to come up with an 2022 earning estimate for Fairfax. As interest rates have fallen significantly in recent years (especially since the start of the the pandemic) this item has come down significantly even as the size of the total investment portfolio has increased. This item is falling for all insurers and is one of the key drivers of the current hard market in pricing (so there is a silver lining). The drop for Fairfax in 2021 is about $100 million versus 2020 and $200 million versus 2019. Pretty significant. The good news is interest and dividend income likely has bottomed out in 2021. After earning about $445 million in 2021, My guess is Fairfax will earn about $460 million in 2022 and $500 million in 2023. Summary: Interest and dividend income will transition from a headwind to neutral in 2022 and become a modest tailwind in 2023. My estimates may prove to be too conservative. Wild card: inflation is currently running much hotter for longer than most observers expected. If this continues into 2022 we could see bond yields pop. Some former Fed officials think we could see US 10 year treasuries move to +3% over the next 24 months. If this happens and Fairfax is able to redeploy their massive cash/short term holdings we will see interest and dividend income spike and this item would become a big tailwind to earnings. I&D Amount. Per Share 2018. $544 2019. $657 2020. $561. $21.60 2021 est $445 ($341 Sept 30) $17.11 2022 est. $460. $17.70 ————— Nov 24 6.) Interest Expense: total debt levels were steadily increasing at Fairfax from 2018-2020. So interest expense has also been steadily increasing. Not ideal. However, this has changed in a major way in 2021. Proceeds from the recent sales (Riverstone UK and 14% of Brit) were largely used to pay down a big chunk of debt (paid off its credit facility completely). And Fairfax has paid off an additional $85 million of debt in Oct (redeemed notes that were due in 2024). And the insurance and non-insurance subs have also been paying down debt in 2021. As a result, Fairfax is ending 2021 with lower debt levels and they are now once again at a reasonable level (especially considering the very large increase in equity we have seen this year). Fairfax has also been very active taking advantage of the exceptionally low interest rate environment. They have been able to reduce the interest rate they pay on their debt (higher cost debt has been redeemed and replaced with lower cost debt) and maturities have been extended (locking in low interest rates many years into the future). These moves came with a short term cost - hit to earnings - $46 million ‘loss on early redemption’ was the charge in 2021. Moving forward, lower total debt levels combined with lower interest rates paid will result in much lower interest expense for Fairfax starting in 2022. This is a good example of Fairfax running their business for the long term. Interest expense averaged about $475 million 2018 and 2019. It popped to $505 in 2021. And should fall to around $420 million in 2022. Interest expense will shift from being a modest headwind to earnings to a modest tailwind. Interest Expense 2018 $347 2019 $472 (change in lease accounting caused $68 increase) 2020 $476 2021 $504. ($394 Sept 30 YTD + $110 same as Q3) - includes $46 million loss on early redemption 2022 $420 est ($105 est / quarter x 4) ————— Borrowings (at Dec 31) Fairfax/ins/re-ins. Non insurance. Total 2018 $4.9. $1.6. $6.5 2019 $5.2. $2.1. $7.3 2020 $6.6. $2.2. $8.6 2021 Sept 30 $6.3. $1.7. $8.0 2022 Dec 31 est $6.2. $1.7. $7.9 ————— Also: “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.” ————— Nov 29 How should Fairfax be valued? Here are details (with numbers) on three more of the items i highlighted in my initial post. I am using Fairfax's Feb (short form) press releases to source my YE numbers and the Nov press release for Q3 (in case you are wondering). The goal is to be able to sum the estimates from each of the individual posts and come up with a 2022 earnings estimate for Fairfax. And that should then help us understand how the shares are valued today. ---------- The most challenging part of coming up with an earnings estimate for Fairfax is trying to forecast what its investment portfolio will do. So i am going to keep things as simple as possible. I am going to ignore the fixed income (including cash) part of the investment portfolio. Let’s assume Fairfax make no big changes here. (You can overlay your own 2022 forecast for interest rates, its impact on Fairfax's bond portfolio and flow through to earnings and BV.) The equities part of the portfolio (including TRS-FFH) currently has a value around $15 billion. Let’s be conservative and assume Fairfax makes 8% in aggregate on this group of assets (by 'make' I mean primarily stock price appreciation). Why is 8% conservative? Atlas, Eurobank, Fairfax India and TRS-FFH make up more than 30% of Fairfax’s equity bucket and i expect each of these to deliver 15% returns in 2022 (based on where shares are currently trading). An 8% return equals about $1.2 billion pre-tax in ‘earnings’. Fairfax will report this value increase in three primary ways and here is my guess as to where the ‘earnings’ will show up in their financials: 3.) Share of Profit of Associates: $400 (primarily Atlas, Eurobank, Resolute) 5.) Non-insurance Companies: $100 (primarily F-India, Recipe, Dexterra, AGT) 8.) Net Gains (Losses) on Investments: $700 (mark to market equities plus TRS-FFH) I expect results of both ‘Share of Profits of Associates’ and ‘Non-insurance Companies’ to improve quite a bit from their averages from 2018-2020. They will shift from a headwind to a modest tailwind to earnings. And as the equities owned by Fairfax continue to increase in value (share price appreciation) i do expect Fairfax will start to actually sell some positions and this will boost ‘Net Gains on Investments’ even further. Important: now do i really think that $1.2 billion in 2022 will flow through to Fairfax earnings exactly as i laid out above? No, of course not. But, i do think it is reasonable to expect Fairfax’s various equity holdings to generate about $1.2 billion in ‘value’ for Fairfax in 2022. And this value will flow through the financials (earnings and BV) in different ways over the years. My belief is every equity position Fairfax currently holds will eventually be sold at some point in the future. That is why i focus on the stock price of the individual holdings (along with management, earnings outlook etc). When Fairfax sells an equity position that is when investors are ‘made whole’ from a reported financial perspective. My $1.2 billion number for 2022 is likely low. The average total of these three buckets from 2018-2021 is $1,400. I would expect Fairfax's future performance to be better than its past performance given all the fixes/improvements they have made to their equity holdings the past 4 years. Digit: To keep things simple, I am also ignoring Digit. We know a $37 increase in BV is coming in Q4 or Q1 of next year. SOPOA. NIC. NGOI Total 2018 $94 $380. $253 $727 2019 $56. $(2). $1,716 $1,770 2020. $46. $(179). $313 $180 2021Sept YTD $270. $(104). $2,754 2021 est $300. $(75). $2,754 $2,979 2022 est $400 $75. $725 $1,200 2018-2021 average = $1,400 million/year Fairfax Equity Holdings Nov 29 2021.xlsx Edited November 30, 2021 by Viking Link to comment Share on other sites More sharing options...
glider3834 Posted November 30, 2021 Share Posted November 30, 2021 48 minutes ago, Viking said: What will Fairfax earn in 2022? To cut to the chase, below is my summary with current estimates. Would appreciate others wading in with additional thoughts I have attached my excel file for those wanting to play with the numbers. The volatility year to year of the individual items and total results is pretty amazing. Going all the way back to 2018 allows us to see trends and also calculate averages. ---------- Please note: I have not looked in detail into three items: Life/Runoff, Corporate Overhead and Non-controlling Interest. My numbers below need some work (well, it all needs some work). - Fairfax decided to add Eurofile's Life Insurance business to runoff for reporting purposes. My guess is Life Insurance will offset some of runoffs annual losses. Just not sure how much to build in for 2022. So my conservative best guess is Fairfax will earn about US$1.4 billion in 2022 = $62/share. Digit revaluation will add $37 to BV. So between 2021 and 2022 Fairfax could earn something around $200/share. Shares are currently trading at $445. I have not built in a few important things: - where do interest rates go in 2022? Higher rates will benefit Fairfax over time: cause an immediate hit to earnings/BV but should allow Fairfax to earn more on its cash/short term investments in future years - how to account for cost of $900 million sale of 9.9% of Osyssey (need to bump non-controlling interest further?) ------------ US$ 2018 2019 2020 2021E 2022E Comments for 2022E 1.) Underwriting Profit: $318 $395 $309 $500 $750 96CR 2.) Interest & Dividend Income: $544 $657 $561 $445 $460 3.) Share of Profit of Associates: $94 $56 $46 $300 $400 Atlas, Eurobank, RFP Total Operating Income $956 $1,108 $916 $1,245 $1,610 Per Share $37 $43 $35 $48 $67 4.) Life/Runoff Exp (excl gains/losses): -$198 -$215 -$194 -$150 -$100 Eurolife Impact? 5.) Non-insurance Companies (excl g/l): $380 -$2 -$179 -$75 $75 F-India, Recipe, Dexterra 6.) Interest Expense: -$347 -$472 -$476 -$504 -$420 7.) Corporate Overhead Expense: -$182 $98 -$253 $60 $60 Guess 8.) Net Gains (Losses) on Investments: $253 $1,716 $313 $2,754 $725 Gain on De-consolidation of Sub $0 $0 $117 $0 $0 Pre-tax Income $898 $2,276 $279 $3,378 $2,017 9.) Income Taxes -$44 -$262 -$207 -$642 -$383 19%? 10.) Non-controlling Interest: -$442 $33 $181 -$220 -$150 Guess Net Earnings Attributable to Sh of FFH $412 $2,047 $253 $2,516 $1,484 Per Share $15.86 $78.71 $9.74 $96.77 $61.83 Shares Outstanding (millions) 26 26 26 26 24 ----------- How should Fairfax be valued? Nov 22, 2021: There are many ways to value an insurance company like Fairfax. One thing I try and understand is what, if anything, is changing? At both the company and industry level. And are the changes good, neutral or bad for earnings. Changes likely to lead to higher future earnings i call ‘tailwinds’. Changes likely to lead to lower future earnings I call a ‘headwinds’. A scorecard can be developed for a company where change in the various items can be captured. And when tabulated this earnings scorecard can provide a pretty good estimates for the future trajectory of earnings. And higher earnings usually = higher stock price. Important: an item changing from a headwind to neutral is actually a win for shareholders. And an item going from a modest tailwind to a big tailwind is another win for shareholders. The reason i am so positive on Fairfax today is because of all the improvements to so many of the items that sum to net earnings. This tells me that earnings should be higher in 2022 and future years . And with Fairfax shares trading at US$455 this increase in earnings is NOT yet reflected in the share price. So what has been changing at Fairfax the past couple of years? Below is a summary. I will dig into the individual items in more detail in the coming days. 1.) Underwriting Profit: big tailwind (from modest tailwind) 2.) Interest & Dividend Income: neutral (from modest headwind) 3.) Share of Profit of Associates: modest tailwind (from modest headwind) Total Operating Income 4.) Life Insurance and Run-off: neutral (from neutral) 5.) Non-insurance Companies: TBA 6.) Interest Expense: modest tailwind (from modest headwind) 7.) Corporate Overhead Expense: neutral (from neutral) 8.) Net Gains (Losses) on Investments: TBA Pre-tax Income 9.) Taxes: neutral (from modest tailwind) 10.) Non-controlling Interest: modest headwind (from modest tailwind) Net Earnings Attributable to Shareholders of Fairfax Shares outstanding: big tailwind ————— P&C insurance companies are valued mostly off Operating Income. Analysts love predicability. This part of Fairfax earnings should increase nicely in 2022. ————— Nov 22: 1.) Underwriting Profit: after Investment Gains (Losses) this is the most important item impacting earnings for Fairfax. Why do i think it will be a big tailwind for Fairfax in 2022 and after? Fairfax has earned an underwriting profit of about $335 million per year on average from 2018-2020. My guess is they will earn about $500 million in 2021 (97CR) and $750 million in 2022 (96CR). Pretax Underwriting Profit Per share. YOY Inc/share 2018-2020. $335 million avg. $13.00 2021 est $500 million. $19.25. 48% (26 m sh) 2022 est $750 million. $31.25. 62% (24 m sh) Net premiums earned are growing at a 20% clip in 2021. Expectations are now (post Q3 earnings update) that the hard market will continue into 2022. Estimating that Fairfax delivers a 96CR in 2022 (= over $30 per share) is NOT an aggressive call. And if, heaven forbid, Fairfax delivers a 95CR in 2022 it will earn close to $40 per share in underwriting profit. A significant increase. (Reducing the share count from 26 to 24 million is a big deal for all the per share numbers.) So underwriting profit could be $18 per share higher than the average from 2018-2020 = 140% increase. And Fairfax shares are currently trading near their historic low price band (going all the way back to 2014) at US $455/ share. And this is just one of the tailwinds coming in 2022… Makes complete sense! ——————— 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 $16.63 20% Est 97 $500 $19 2022 est $18.63 12%. Est 96 $750 $31 On this same thread i posted a longer more detailed note on this topic on Sat Nov 13. ——————- Nov 23: 2.) Interest and dividend income -insurance and reinsurance. Please note, i decided to edit the post to capture the numbers consistent with how Fairfax reports results in their short form press releases. So i am using their Feb press releases to source my YE numbers and the Nov press release for Q3 (in case you are wondering). I also want to be able to take my individual posts and sum them to come up with an 2022 earning estimate for Fairfax. As interest rates have fallen significantly in recent years (especially since the start of the the pandemic) this item has come down significantly even as the size of the total investment portfolio has increased. This item is falling for all insurers and is one of the key drivers of the current hard market in pricing (so there is a silver lining). The drop for Fairfax in 2021 is about $100 million versus 2020 and $200 million versus 2019. Pretty significant. The good news is interest and dividend income likely has bottomed out in 2021. After earning about $445 million in 2021, My guess is Fairfax will earn about $460 million in 2022 and $500 million in 2023. Summary: Interest and dividend income will transition from a headwind to neutral in 2022 and become a modest tailwind in 2023. My estimates may prove to be too conservative. Wild card: inflation is currently running much hotter for longer than most observers expected. If this continues into 2022 we could see bond yields pop. Some former Fed officials think we could see US 10 year treasuries move to +3% over the next 24 months. If this happens and Fairfax is able to redeploy their massive cash/short term holdings we will see interest and dividend income spike and this item would become a big tailwind to earnings. I&D Amount. Per Share 2018. $544 2019. $657 2020. $561. $21.60 2021 est $445 ($341 Sept 30) $17.11 2022 est. $460. $17.70 ————— Nov 24 6.) Interest Expense: total debt levels were steadily increasing at Fairfax from 2018-2020. So interest expense has also been steadily increasing. Not ideal. However, this has changed in a major way in 2021. Proceeds from the recent sales (Riverstone UK and 14% of Brit) were largely used to pay down a big chunk of debt (paid off its credit facility completely). And Fairfax has paid off an additional $85 million of debt in Oct (redeemed notes that were due in 2024). And the insurance and non-insurance subs have also been paying down debt in 2021. As a result, Fairfax is ending 2021 with lower debt levels and they are now once again at a reasonable level (especially considering the very large increase in equity we have seen this year). Fairfax has also been very active taking advantage of the exceptionally low interest rate environment. They have been able to reduce the interest rate they pay on their debt (higher cost debt has been redeemed and replaced with lower cost debt) and maturities have been extended (locking in low interest rates many years into the future). These moves came with a short term cost - hit to earnings - $46 million ‘loss on early redemption’ was the charge in 2021. Moving forward, lower total debt levels combined with lower interest rates paid will result in much lower interest expense for Fairfax starting in 2022. This is a good example of Fairfax running their business for the long term. Interest expense averaged about $475 million 2018 and 2019. It popped to $505 in 2021. And should fall to around $420 million in 2022. Interest expense will shift from being a modest headwind to earnings to a modest tailwind. Interest Expense 2018 $347 2019 $472 (change in lease accounting caused $68 increase) 2020 $476 2021 $504. ($394 Sept 30 YTD + $110 same as Q3) - includes $46 million loss on early redemption 2022 $420 est ($105 est / quarter x 4) ————— Borrowings (at Dec 31) Fairfax/ins/re-ins. Non insurance. Total 2018 $4.9. $1.6. $6.5 2019 $5.2. $2.1. $7.3 2020 $6.6. $2.2. $8.6 2021 Sept 30 $6.3. $1.7. $8.0 2022 Dec 31 est $6.2. $1.7. $7.9 ————— Also: “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.” ————— Nov 29 How should Fairfax be valued? Here are details (with numbers) on three more of the items i highlighted in my initial post. I am using Fairfax's Feb (short form) press releases to source my YE numbers and the Nov press release for Q3 (in case you are wondering). The goal is to be able to sum the estimates from each of the individual posts and come up with a 2022 earnings estimate for Fairfax. And that should then help us understand how the shares are valued today. ---------- The most challenging part of coming up with an earnings estimate for Fairfax is trying to forecast what its investment portfolio will do. So i am going to keep things as simple as possible. I am going to ignore the fixed income (including cash) part of the investment portfolio. Let’s assume Fairfax make no big changes here. (You can overlay your own 2022 forecast for interest rates, its impact on Fairfax's bond portfolio and flow through to earnings and BV.) The equities part of the portfolio (including TRS-FFH) currently has a value around $15 billion. Let’s be conservative and assume Fairfax makes 8% in aggregate on this group of assets (by 'make' I mean primarily stock price appreciation). Why is 8% conservative? Atlas, Eurobank, Fairfax India and TRS-FFH make up more than 30% of Fairfax’s equity bucket and i expect each of these to deliver 15% returns in 2022 (based on where shares are currently trading). An 8% return equals about $1.2 billion pre-tax in ‘earnings’. Fairfax will report this value increase in three primary ways and here is my guess as to where the ‘earnings’ will show up in their financials: 3.) Share of Profit of Associates: $400 (primarily Atlas, Eurobank, Resolute) 5.) Non-insurance Companies: $100 (primarily F-India, Recipe, Dexterra, AGT) 8.) Net Gains (Losses) on Investments: $700 (mark to market equities plus TRS-FFH) I expect results of both ‘Share of Profits of Associates’ and ‘Non-insurance Companies’ to improve quite a bit from their averages from 2018-2020. They will shift from a headwind to a modest tailwind to earnings. And as the equities owned by Fairfax continue to increase in value (share price appreciation) i do expect Fairfax will start to actually sell some positions and this will boost ‘Net Gains on Investments’ even further. Important: now do i really think that $1.2 billion in 2022 will flow through to Fairfax earnings exactly as i laid out above? No, of course not. But, i do think it is reasonable to expect Fairfax’s various equity holdings to generate about $1.2 billion in ‘value’ for Fairfax in 2022. And this value will flow through the financials (earnings and BV) in different ways over the years. My belief is every equity position Fairfax currently holds will eventually be sold at some point in the future. That is why i focus on the stock price of the individual holdings (along with management, earnings outlook etc). When Fairfax sells an equity position that is when investors are ‘made whole’ from a reported financial perspective. My $1.2 billion number for 2022 is likely low. The average total of these three buckets from 2018-2021 is $1,400. I would expect Fairfax's future performance to be better than its past performance given all the fixes/improvements they have made to their equity holdings the past 4 years. Digit: To keep things simple, I am also ignoring Digit. We know a $37 increase in BV is coming in Q4 or Q1 of next year. SOPOA. NIC. NGOI Total 2018 $94 $380. $253 $727 2019 $56. $(2). $1,716 $1,770 2020. $46. $(179). $313 $180 2021Sept YTD $270. $(104). $2,754 2021 est $300. $(75). $2,754 $2,979 2022 est $400 $75. $725 $1,200 2018-2021 average = $1,400 million/year Fairfax Equity Holdings Nov 29 2021.xlsx 199.56 kB · 0 downloads thanks viking - just on interest & dividend income - I think you might be looking at the interest & dividends for insurance business but not the consolidated number (ie including non-insurance subs, corporate etc) this number is higher Here is screenshot of 3Q Interim report which shows the breakdown of interest & dividends per operating segment - the total is $495 mil in interest & dividends for 9mths s to Sep-21. Link to comment Share on other sites More sharing options...
Viking Posted November 30, 2021 Share Posted November 30, 2021 11 minutes ago, glider3834 said: thanks viking - just on interest & dividend income - I think you might be looking at the interest & dividends for insurance business but not the consolidated number (ie including non-insurance subs, corporate etc) this number is higher Here is screenshot of 3Q Interim report which shows the breakdown of interest & dividends per operating segment - the total is $495 mil in interest & dividends for 9mths s to Sep-21. @glider3834 yes, you are correct. The format i used is the format Fairfax presents first when it reports quarterly results (in the press releases). Fairfax uses this format because it feels it provides investors with a better picture/understanding of the different components of their business (insurance, life/runoff, corporate). This format does report a lower interest and dividend number in the top (and adds the missing amounts into a couple of items below). Just another way of looking at all the pieces. Link to comment Share on other sites More sharing options...
klipbaai Posted November 30, 2021 Share Posted November 30, 2021 I expect Fairfax will have some exposure to the flood damage in BC. Based on similar weather related natural disasters to which it has been exposed in the past, any sense of whether or not and when they might provide announce an estimate? Will this wait until the next quarterly earnings announcement or might they release an estimate before then? Any early guesses? Link to comment Share on other sites More sharing options...
StubbleJumper Posted December 1, 2021 Share Posted December 1, 2021 31 minutes ago, klipbaai said: I expect Fairfax will have some exposure to the flood damage in BC. Based on similar weather related natural disasters to which it has been exposed in the past, any sense of whether or not and when they might provide announce an estimate? Will this wait until the next quarterly earnings announcement or might they release an estimate before then? Any early guesses? Well, it's an interesting question, isn't it? Have you seen any estimate of insurable damage? I occasionally visit Canadian Underwriter and the Insurance Journal and I've seen nothing. So, what does it all add up to? As a general rule, most Canadian buildings are not insured for overland flooding because governments in Canada have done such a piss-poor job of flood plain mapping that it's nearly impossible for an underwriter to come up with an appropriate premium for a specific piece of property. As a result, they can only quote insanely high flood coverage premiums under the assumption that there will be adverse selection. So, most houses just go uninsured for flooding, and the assumption is that the provincial government will pony up some cash to victims, or if it's a big event, the feds will step in through the Disaster Financial Assistance Arrangements. It'll be big bucks, but that won't be Fairfax's problem, right? When you insure your car, you usually get both collision and all perils coverage (many cars went for a "swim" during the floods). But, in British Columbia, which company insures cars? ICBC, right? Effectively, all of the cars are insured by a Crown Corporation. Does ICBC take out reinsurance? No idea. It wouldn't surprise me that they would want some sort of reinsurance, even if it had some relatively high attachment point, but I can't say for certain what ICBC has done. Unless ICBC's reinsurer happens to be Odyssey or Allied, the fact that thousands of cars went for a swim, which is covered under all perils, is not of much significance. So, what are we left with? Business insurance? So, business continuity insurance could be a real problem in BC as there are large areas where the flood has prevented people from accessing and running their business. Northbridge probably wrote some of that, but what does it amount to? Is it material? I wouldn't think so, but I've been surprised before. But, we are lucky to have somebody there on the ground, and it's somebody who knows about insurance. @Parsad is right there, and maybe he has some insight about potential indemnities? SJ Link to comment Share on other sites More sharing options...
klipbaai Posted December 1, 2021 Share Posted December 1, 2021 Thanks for your thoughtful response. Here's a link to an article in the Globe & Mail. B.C. floods will be Canada’s most expensive natural disaster this year - The Globe and Mail Other articles also mention that flood insurance is often not obtainable, suggesting that much of the cost may/will be borne by the Government/taxpayers and/or the unfortunate property owners. Fairfax is, of course, in the business of insurance ... their expertise is in pricing risks appropriately and holding sufficient reserves to deal with the consequences. In that context, one should expect the losses to be manageable. My interest is partly motivated by the timing with respect to the SIB. If Fairfax makes an announcement prior to completion of the SIB, might that change the possible dynamics of the outcome? For example, a drop in the current price might make tendering more attractive; provide an opportunity to add to positions; etc. The timing of an announcement might be quite significant. If Fairfax has developed an estimate and the number is material, must they disclose immediately? Or could they deliberately put off making an announcement until after completion of the SIB? While none of this is knowable in advance, I am curious what this well informed forum thinks. And, yes, it would be good to hear from Parsad given both his expertise and his long-time close experience with FFH which might perhaps give him better insight into how FFH will think about the timing of an announcement. Link to comment Share on other sites More sharing options...
StubbleJumper Posted December 1, 2021 Share Posted December 1, 2021 35 minutes ago, klipbaai said: Thanks for your thoughtful response. Here's a link to an article in the Globe & Mail. B.C. floods will be Canada’s most expensive natural disaster this year - The Globe and Mail Other articles also mention that flood insurance is often not obtainable, suggesting that much of the cost may/will be borne by the Government/taxpayers and/or the unfortunate property owners. Fairfax is, of course, in the business of insurance ... their expertise is in pricing risks appropriately and holding sufficient reserves to deal with the consequences. In that context, one should expect the losses to be manageable. My interest is partly motivated by the timing with respect to the SIB. If Fairfax makes an announcement prior to completion of the SIB, might that change the possible dynamics of the outcome? For example, a drop in the current price might make tendering more attractive; provide an opportunity to add to positions; etc. The timing of an announcement might be quite significant. If Fairfax has developed an estimate and the number is material, must they disclose immediately? Or could they deliberately put off making an announcement until after completion of the SIB? While none of this is knowable in advance, I am curious what this well informed forum thinks. And, yes, it would be good to hear from Parsad given both his expertise and his long-time close experience with FFH which might perhaps give him better insight into how FFH will think about the timing of an announcement. If your angle is the SIB, you are, IMO, thinking about this the wrong way. Even if Northbridge and Odyssey take the sort of hit that you'd typically see from a large hurricane, it wouldn't change the SIB. The insurance reserves are plentiful and are held at the insurance subsidiary level, while the cash for the SIB resides at the holdco level. The two are not linked in any meaningful way. No, I'd say that if you are worried about the SIB, you should instead be thinking about whether we are setting up for a March 2020 style pandemic market, where valuations take a significant dive over a short period. So, think back to March 2020 and look at the stock charts. Recipe went into the shitter, Resolute went lower than the shitter, and most of the other equity holdings dropped like stones. All of that was marked to market and FFH had a couple atrocious quarters, which placed pressure on FFH's debt-to-capital ratios. Access to credit in March/April was dubious for most companies, and FFH was reliant on its revolver. The reprise of that scenario is what should be your concern if you worry about the SIB. Should that re-occur, then conserving capital and cash at the holdco level might become a priority. Omicron has rocked the market on Friday and today. I don't think there's much to worry about, but never say never. If there's a risk to the SIB, it's not the flooding in BC. It's the potential for the equity portfolio to crash and burn over the next three weeks. SJ Link to comment Share on other sites More sharing options...
glider3834 Posted December 1, 2021 Share Posted December 1, 2021 (edited) 2 hours ago, StubbleJumper said: Well, it's an interesting question, isn't it? Have you seen any estimate of insurable damage? I occasionally visit Canadian Underwriter and the Insurance Journal and I've seen nothing. So, what does it all add up to? As a general rule, most Canadian buildings are not insured for overland flooding because governments in Canada have done such a piss-poor job of flood plain mapping that it's nearly impossible for an underwriter to come up with an appropriate premium for a specific piece of property. As a result, they can only quote insanely high flood coverage premiums under the assumption that there will be adverse selection. So, most houses just go uninsured for flooding, and the assumption is that the provincial government will pony up some cash to victims, or if it's a big event, the feds will step in through the Disaster Financial Assistance Arrangements. It'll be big bucks, but that won't be Fairfax's problem, right? When you insure your car, you usually get both collision and all perils coverage (many cars went for a "swim" during the floods). But, in British Columbia, which company insures cars? ICBC, right? Effectively, all of the cars are insured by a Crown Corporation. Does ICBC take out reinsurance? No idea. It wouldn't surprise me that they would want some sort of reinsurance, even if it had some relatively high attachment point, but I can't say for certain what ICBC has done. Unless ICBC's reinsurer happens to be Odyssey or Allied, the fact that thousands of cars went for a swim, which is covered under all perils, is not of much significance. So, what are we left with? Business insurance? So, business continuity insurance could be a real problem in BC as there are large areas where the flood has prevented people from accessing and running their business. Northbridge probably wrote some of that, but what does it amount to? Is it material? I wouldn't think so, but I've been surprised before. But, we are lucky to have somebody there on the ground, and it's somebody who knows about insurance. @Parsad is right there, and maybe he has some insight about potential indemnities? SJ good insights SJ - expect the insured losses to be less than the actual losses - in Calgary 2013 insured losses appear to be around about 33% of the actual losses/damages https://www.theglobeandmail.com/business/article-bc-floods-will-be-canadas-most-expensive-natural-disaster-this-year/ I am going back to 2013, floods in Alberta & Toronto. https://www.reuters.com/world/americas/canadas-10-costliest-natural-disasters-by-insurance-claims-2021-11-17/ In 2013, Northbridge Insurance had 2.52% market share & looks like Fairfax incurred around 3.6% of the insured losses. Alberta C$1.7 bil (Fairfax loss 66.3 mil or 4%) Toronto C$0.94 bil (Fairfax loss 29.56 mil or 3%) In 2020, Northbridge had approx 3.2% market share so maybe we could expect 4-5% of the insured loss based on their market share? Of course just purely an estimate & their underwriting exposures would have likely changed, but I think their market share in terms of premium does provide some help in terms of measuring potential exposure. I haven't been able to find an insured losses estimate yet but anyone feel free to post if you have. Cheers Edited December 1, 2021 by glider3834 Link to comment Share on other sites More sharing options...
klipbaai Posted December 1, 2021 Share Posted December 1, 2021 Thanks, StubbleJumper i did not mean to imply any doubt about the SIB. I was thinking more about whether or not the announcement of a significant loss might present an opportunity and when that opportunity might arise … whether before or after the SiB. Link to comment Share on other sites More sharing options...
klipbaai Posted December 1, 2021 Share Posted December 1, 2021 2 hours ago, glider3834 said: good insights SJ - expect the insured losses to be less than the actual losses - in Calgary 2013 insured losses appear to be around about 33% of the actual losses/damages https://www.theglobeandmail.com/business/article-bc-floods-will-be-canadas-most-expensive-natural-disaster-this-year/ I am going back to 2013, floods in Alberta & Toronto. https://www.reuters.com/world/americas/canadas-10-costliest-natural-disasters-by-insurance-claims-2021-11-17/ In 2013, Northbridge Insurance had 2.52% market share & looks like Fairfax incurred around 3.6% of the insured losses. Alberta C$1.7 bil (Fairfax loss 66.3 mil or 4%) Toronto C$0.94 bil (Fairfax loss 29.56 mil or 3%) In 2020, Northbridge had approx 3.2% market share so maybe we could expect 4-5% of the insured loss based on their market share? Of course just purely an estimate & their underwriting exposures would have likely changed, but I think their market share in terms of premium does provide some help in terms of measuring potential exposure. I haven't been able to find an insured losses estimate yet but anyone feel free to post if you have. Cheers Thanks for all the info, Glider. Link to comment Share on other sites More sharing options...
glider3834 Posted December 1, 2021 Share Posted December 1, 2021 1 minute ago, klipbaai said: Thanks for all the info, Glider. all good klipbaai Link to comment Share on other sites More sharing options...
glider3834 Posted December 1, 2021 Share Posted December 1, 2021 (edited) On 11/30/2021 at 1:36 PM, Viking said: What will Fairfax earn in 2022? To cut to the chase, below is my summary with current estimates. Would appreciate others wading in with additional thoughts I have attached my excel file for those wanting to play with the numbers. The volatility year to year of the individual items and total results is pretty amazing. Going all the way back to 2018 allows us to see trends and also calculate averages. ---------- Please note: I have not looked in detail into three items: Life/Runoff, Corporate Overhead and Non-controlling Interest. My numbers below need some work (well, it all needs some work). - Fairfax decided to add Eurofile's Life Insurance business to runoff for reporting purposes. My guess is Life Insurance will offset some of runoffs annual losses. Just not sure how much to build in for 2022. So my conservative best guess is Fairfax will earn about US$1.4 billion in 2022 = $62/share. Digit revaluation will add $37 to BV. So between 2021 and 2022 Fairfax could earn something around $200/share. Shares are currently trading at $445. I have not built in a few important things: - where do interest rates go in 2022? Higher rates will benefit Fairfax over time: cause an immediate hit to earnings/BV but should allow Fairfax to earn more on its cash/short term investments in future years - how to account for cost of $900 million sale of 9.9% of Osyssey (need to bump non-controlling interest further?) ------------ US$ 2018 2019 2020 2021E 2022E 1.) Underwriting Profit: $318 $395 $309 $500 $750 2.) Int & Div Income: $544 $657 $561 $445 $460 3.) Share of Profit of Assoc: $94 $56 $46 $300 $400 Total Operating Income $956 $1,108 $916 $1,245 $1,610 Per Share $37 $43 $35 $48 $67 4.) Life/Runoff Exp (ex g/l): -$198 -$215 -$194 -$150 -$100 5.) Non-insurance Co (ex g/l): $380 -$2 -$179 -$75 $75 6.) Interest Expense: -$347 -$472 -$476 -$504 -$420 7.) Corp Overhead Exp: -$182 $98 -$253 $60 $60 8.) Net Gains (L) on Invest: $253 $1,716 $313 $2,754 $725 Gain on De-consol of Sub $0 $0 $117 $0 $0 Pre-tax Income $898 $2,276 $279 $3,378 $2,017 9.) Income Taxes -$44 -$262 -$207 -$642 -$383 10.) Non-controlling Interest: -$442 $33 $181 -$220 -$150 Net Earn Attrib to Sh of FFH $412 $2,047 $253 $2,516 $1,484 Per Share $15.86 $78.71 $9.74 $96.77 $61.83 Shares Outstanding (mill) 26 26 26 26 24 ----------- How should Fairfax be valued? Nov 22, 2021: There are many ways to value an insurance company like Fairfax. One thing I try and understand is what, if anything, is changing? At both the company and industry level. And are the changes good, neutral or bad for earnings. Changes likely to lead to higher future earnings i call ‘tailwinds’. Changes likely to lead to lower future earnings I call a ‘headwinds’. A scorecard can be developed for a company where change in the various items can be captured. And when tabulated this earnings scorecard can provide a pretty good estimates for the future trajectory of earnings. And higher earnings usually = higher stock price. Important: an item changing from a headwind to neutral is actually a win for shareholders. And an item going from a modest tailwind to a big tailwind is another win for shareholders. The reason i am so positive on Fairfax today is because of all the improvements to so many of the items that sum to net earnings. This tells me that earnings should be higher in 2022 and future years . And with Fairfax shares trading at US$455 this increase in earnings is NOT yet reflected in the share price. So what has been changing at Fairfax the past couple of years? Below is a summary. I will dig into the individual items in more detail in the coming days. 1.) Underwriting Profit: big tailwind (from modest tailwind) 2.) Interest & Dividend Income: neutral (from modest headwind) 3.) Share of Profit of Associates: modest tailwind (from modest headwind) Total Operating Income 4.) Life Insurance and Run-off: neutral (from neutral) 5.) Non-insurance Companies: TBA 6.) Interest Expense: modest tailwind (from modest headwind) 7.) Corporate Overhead Expense: neutral (from neutral) 8.) Net Gains (Losses) on Investments: TBA Pre-tax Income 9.) Taxes: neutral (from modest tailwind) 10.) Non-controlling Interest: modest headwind (from modest tailwind) Net Earnings Attributable to Shareholders of Fairfax Shares outstanding: big tailwind ————— P&C insurance companies are valued mostly off Operating Income. Analysts love predicability. This part of Fairfax earnings should increase nicely in 2022. ————— Nov 22: 1.) Underwriting Profit: after Investment Gains (Losses) this is the most important item impacting earnings for Fairfax. Why do i think it will be a big tailwind for Fairfax in 2022 and after? Fairfax has earned an underwriting profit of about $335 million per year on average from 2018-2020. My guess is they will earn about $500 million in 2021 (97CR) and $750 million in 2022 (96CR). Pretax Underwriting Profit Per share. YOY Inc/share 2018-2020. $335 million avg. $13.00 2021 est $500 million. $19.25. 48% (26 m sh) 2022 est $750 million. $31.25. 62% (24 m sh) Net premiums earned are growing at a 20% clip in 2021. Expectations are now (post Q3 earnings update) that the hard market will continue into 2022. Estimating that Fairfax delivers a 96CR in 2022 (= over $30 per share) is NOT an aggressive call. And if, heaven forbid, Fairfax delivers a 95CR in 2022 it will earn close to $40 per share in underwriting profit. A significant increase. (Reducing the share count from 26 to 24 million is a big deal for all the per share numbers.) So underwriting profit could be $18 per share higher than the average from 2018-2020 = 140% increase. And Fairfax shares are currently trading near their historic low price band (going all the way back to 2014) at US $455/ share. And this is just one of the tailwinds coming in 2022… Makes complete sense! ——————— 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 $16.63 20% Est 97 $500 $19 2022 est $18.63 12%. Est 96 $750 $31 On this same thread i posted a longer more detailed note on this topic on Sat Nov 13. ——————- Nov 23: 2.) Interest and dividend income -insurance and reinsurance. Please note, i decided to edit the post to capture the numbers consistent with how Fairfax reports results in their short form press releases. So i am using their Feb press releases to source my YE numbers and the Nov press release for Q3 (in case you are wondering). I also want to be able to take my individual posts and sum them to come up with an 2022 earning estimate for Fairfax. As interest rates have fallen significantly in recent years (especially since the start of the the pandemic) this item has come down significantly even as the size of the total investment portfolio has increased. This item is falling for all insurers and is one of the key drivers of the current hard market in pricing (so there is a silver lining). The drop for Fairfax in 2021 is about $100 million versus 2020 and $200 million versus 2019. Pretty significant. The good news is interest and dividend income likely has bottomed out in 2021. After earning about $445 million in 2021, My guess is Fairfax will earn about $460 million in 2022 and $500 million in 2023. Summary: Interest and dividend income will transition from a headwind to neutral in 2022 and become a modest tailwind in 2023. My estimates may prove to be too conservative. Wild card: inflation is currently running much hotter for longer than most observers expected. If this continues into 2022 we could see bond yields pop. Some former Fed officials think we could see US 10 year treasuries move to +3% over the next 24 months. If this happens and Fairfax is able to redeploy their massive cash/short term holdings we will see interest and dividend income spike and this item would become a big tailwind to earnings. I&D Amount. Per Share 2018. $544 2019. $657 2020. $561. $21.60 2021 est $445 ($341 Sept 30) $17.11 2022 est. $460. $17.70 ————— Nov 24 6.) Interest Expense: total debt levels were steadily increasing at Fairfax from 2018-2020. So interest expense has also been steadily increasing. Not ideal. However, this has changed in a major way in 2021. Proceeds from the recent sales (Riverstone UK and 14% of Brit) were largely used to pay down a big chunk of debt (paid off its credit facility completely). And Fairfax has paid off an additional $85 million of debt in Oct (redeemed notes that were due in 2024). And the insurance and non-insurance subs have also been paying down debt in 2021. As a result, Fairfax is ending 2021 with lower debt levels and they are now once again at a reasonable level (especially considering the very large increase in equity we have seen this year). Fairfax has also been very active taking advantage of the exceptionally low interest rate environment. They have been able to reduce the interest rate they pay on their debt (higher cost debt has been redeemed and replaced with lower cost debt) and maturities have been extended (locking in low interest rates many years into the future). These moves came with a short term cost - hit to earnings - $46 million ‘loss on early redemption’ was the charge in 2021. Moving forward, lower total debt levels combined with lower interest rates paid will result in much lower interest expense for Fairfax starting in 2022. This is a good example of Fairfax running their business for the long term. Interest expense averaged about $475 million 2018 and 2019. It popped to $505 in 2021. And should fall to around $420 million in 2022. Interest expense will shift from being a modest headwind to earnings to a modest tailwind. Interest Expense 2018 $347 2019 $472 (change in lease accounting caused $68 increase) 2020 $476 2021 $504. ($394 Sept 30 YTD + $110 same as Q3) - includes $46 million loss on early redemption 2022 $420 est ($105 est / quarter x 4) ————— Borrowings (at Dec 31) Fairfax/ins/re-ins. Non insurance. Total 2018 $4.9. $1.6. $6.5 2019 $5.2. $2.1. $7.3 2020 $6.6. $2.2. $8.6 2021 Sept 30 $6.3. $1.7. $8.0 2022 Dec 31 est $6.2. $1.7. $7.9 ————— Also: “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.” ————— Nov 29 How should Fairfax be valued? Here are details (with numbers) on three more of the items i highlighted in my initial post. I am using Fairfax's Feb (short form) press releases to source my YE numbers and the Nov press release for Q3 (in case you are wondering). The goal is to be able to sum the estimates from each of the individual posts and come up with a 2022 earnings estimate for Fairfax. And that should then help us understand how the shares are valued today. ---------- The most challenging part of coming up with an earnings estimate for Fairfax is trying to forecast what its investment portfolio will do. So i am going to keep things as simple as possible. I am going to ignore the fixed income (including cash) part of the investment portfolio. Let’s assume Fairfax make no big changes here. (You can overlay your own 2022 forecast for interest rates, its impact on Fairfax's bond portfolio and flow through to earnings and BV.) The equities part of the portfolio (including TRS-FFH) currently has a value around $15 billion. Let’s be conservative and assume Fairfax makes 8% in aggregate on this group of assets (by 'make' I mean primarily stock price appreciation). Why is 8% conservative? Atlas, Eurobank, Fairfax India and TRS-FFH make up more than 30% of Fairfax’s equity bucket and i expect each of these to deliver 15% returns in 2022 (based on where shares are currently trading). An 8% return equals about $1.2 billion pre-tax in ‘earnings’. Fairfax will report this value increase in three primary ways and here is my guess as to where the ‘earnings’ will show up in their financials: 3.) Share of Profit of Associates: $400 (primarily Atlas, Eurobank, Resolute) 5.) Non-insurance Companies: $100 (primarily F-India, Recipe, Dexterra, AGT) 8.) Net Gains (Losses) on Investments: $700 (mark to market equities plus TRS-FFH) I expect results of both ‘Share of Profits of Associates’ and ‘Non-insurance Companies’ to improve quite a bit from their averages from 2018-2020. They will shift from a headwind to a modest tailwind to earnings. And as the equities owned by Fairfax continue to increase in value (share price appreciation) i do expect Fairfax will start to actually sell some positions and this will boost ‘Net Gains on Investments’ even further. Important: now do i really think that $1.2 billion in 2022 will flow through to Fairfax earnings exactly as i laid out above? No, of course not. But, i do think it is reasonable to expect Fairfax’s various equity holdings to generate about $1.2 billion in ‘value’ for Fairfax in 2022. And this value will flow through the financials (earnings and BV) in different ways over the years. My belief is every equity position Fairfax currently holds will eventually be sold at some point in the future. That is why i focus on the stock price of the individual holdings (along with management, earnings outlook etc). When Fairfax sells an equity position that is when investors are ‘made whole’ from a reported financial perspective. My $1.2 billion number for 2022 is likely low. The average total of these three buckets from 2018-2021 is $1,400. I would expect Fairfax's future performance to be better than its past performance given all the fixes/improvements they have made to their equity holdings the past 4 years. Digit: To keep things simple, I am also ignoring Digit. We know a $37 increase in BV is coming in Q4 or Q1 of next year. SOPOA. NIC. NGOI Total 2018 $94 $380. $253 $727 2019 $56. $(2). $1,716 $1,770 2020. $46. $(179). $313 $180 2021Sept YTD $270. $(104). $2,754 2021 est $300. $(75). $2,754 $2,979 2022 est $400 $75. $725 $1,200 2018-2021 average = $1,400 million/year Fairfax Equity Holdings Nov 29 2021.xlsx 199.56 kB · 5 downloads I just wanted to add a few thoughts here on my operating revenue estimates for 2022 Underwriting Profit - I think a 95-96 CR on 18 bil in net earned premium (10% increase on my 2021 estimated net premium of 16.5 bil) is reasonable which would put it at between 720 to 900 mil (what is really interesting here is every 1 CR point is equal to around 180 mil, so if we have a cat light year the underwriting profit could really blow out, but 95-96 CR would sit Fairfax in line with last 3 years CR in high 95s (excl covid losses) . Note: given the trend in their underlying CR is falling, as underwriting expenses ratio is lower on a higher net earned premium base, they could also surprise here assuming normal cat loss year. Interest & Dividend income - I am estimating 660 mil for 2021 (annualising based on 9mths to 30 Sep-21 of $495mil) & lets say 700 to 730mil for 2022 (expecting higher interest rates next year and potential lift in dividends) Profit from Associates - For all their associates, I think a number in the 500-600 mil area looks possible in 2022. I want to see the final Q4 results before drilling down on a more definite estimate/range. I am estimating around $457 mil in 2022 potentially to come from 5 key associates (Atlas,Eurobank, Resolute Forest, Quess, BIAL) which comprise 57% of $4.7 bil (mkt value) out of total of $8.2 bil of market value of Fairfax's associates (insurance & non-insurance) at 30 Sep-21. Broken down below (excluding Riverstone because any gains there will be MTM & come through as derivative gains on their repurchase option, if I understand it correctly) Atlas Corp 170 mil (use Atlas mgmt 2022 estimate 535mil less preferred dividends estimate 70mil) x 36.6% ownership (excl riverstone stake) Eurobank 167 mil (Eurobank mgmt. expect 10% ROE in 2022 – estimate 520 mil net income on 5.2 bil NTA) x 32.2% ownership Resolute Forest 80 mil (FFH 31% ownership (excl Riverstone) - 2022 Est net profit 260 mil or $3.25 per share - at lower end of analyst expectations ) Quess 10 mil (my estimate 10% ROE for 2022 (note mgmt. aim 20% ROE in 2023) - (10% x 2325 crore equity Sep-21 = USD 31 mil) x 31% ownership) BIAL 30 mil (use FFH share of BIAL profit in 2019 assuming international flights resuming by 1 Jan-22 - Omicron could be an issue??) Non-Insurance companies (pre-tax income)- this is a really interesting one - if you look at the Q3'21 report, the restaurants & retail segment had a pre-tax income of $56.8 mil but the overall result was only $35 mil pre-tax due to losses in Thomas Cook India & Other segment. The Q4 result for non-insurance segment will be a key one to see how restaurant & retail segment performs. Hopefully this Omicron variant won't throw a spanner in the works, but assuming most travel resumes in 2022 I think we can expect at least a breakeven result from Thomas Cook. Like Viking I don't think 100mil in 2022 looks unreasonable for this segment, but I think it could even be higher. Run-off & Life Insurance - run-off loss tends to be higher in Q4 & I believe this might be due to 4Q auditing of loss reserves. Would like to see how life insurance business performs in Q4. Will wait for Q4 result before forming estimate for 2022. Putting above together, I am estimating between $2 bil to $ 2.3 bil in operating revenues (excluding net investment gains) in 2022. Please note - with my estimates I am just looking at operating revenues & 1. ignoring run-off & life insurance for now which will be a sub $100 loss IMO 2. minority interests (eg Fairfax India) will claim a % of the above operating revenue number, but their net earnings share gets deducted at the bottom of the earnings statement. Edited December 1, 2021 by glider3834 Link to comment Share on other sites More sharing options...
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