Fairfax 2021

[matthew2129]

On 5/14/2021 at 11:19 AM, Xerxes said:

13F Q1

An increase on Atlas ? maybe exercising some warrants

FAIRFAX FINANCIAL HOLDINGS LTD/ CAN Top 13F Holdings (whalewisdom.com)

Fairfax Financial Holdings Ltd Can Top Holdings 13F Filings (holdingschannel.com)

I find it interesting that you can neither see Exxon nor Bank of America in the list, yet those two name make it to the conference call and letter to the shareholder. Is that some sort of Marketing on some insignificant position.

 

Any hope of us getting out of the BB commons any time soon? Prem is always reaming on FANG for their high P/E's, but BB hasn't had positive earnings in years and makes FANG look like a basket of dirt cheap deep value stocks

Edited May 17, 2021 by matthew2129

[Xerxes]

No hope. It's dormant call option with shareholder patience as its only expiry 

Interesting you mentioned the FANGs. Unrelated to BB and going back to the discussion about the bond portfolio and talks about inflation (temporary or otherwise), it occurs to me at no point in the past 4-5 years have I heard FFH management talk about the impact of deflationary forces unleashed by the rise of the Big Tech' network. It would be more fruitful for them to focus more on that (if they are not already*) as means to try to counter their permanent-inflation-is-overdue thesis as oppose to talk about FANG's lofty valuations, which if i read Globe & Mail article correctly, not so lofty given that Canadian Pacific and CN are making bids at similar earning multiples.  

I say if they are not already, just because I don't know.

[omagh]

23 hours ago, Xerxes said:

No hope. It's dormant call option with shareholder patience as its only expiry 

Permanently out of the money 

How silly to round-trip on BB and be unable to sell.  Who could have possibly foreseen this?!  

[petec]

Bloomberg reporting Fairfax has received permission to buy in the stubs in both Eurolife and SingRe.

[glider3834]

Two more analyst upgrades for Fairfax 

https://www.theglobeandmail.com/investing/markets/inside-the-market/article-tuesdays-analyst-upgrades-and-downgrades-167/

 

Scotia analyst Phil Hardie jacked up his one-year price forecast for shares in Fairfax Financial Holdings Ltd (FFH-T) after its Indian digital insurance subsidiary, Digit, announced an equity financing agreement that values the investment at $3.5-billion. The transaction is expected to result in an increase of $1.8-billion, or $61 per share, in the value of Fairfax’s stake.

“This development further underpins our thesis that 2021 is going to be a big year for Fairfax, as it benefits from both, a virtuous cycle in its insurance business, and what is likely to remain a favourable environment for value investing,” Mr. Hardie said in a note. “Aside from the expected investment gains on Digit in Q3/21, we also expect sizeable investment gains from FFH’s equity portfolio in Q2/21, along with a notable increase in the fair value of its non-insurance consolidated investments and investments in associates that do not get reflected in its book value due to their accounting treatment.”

“We believe valuation remains attractive, with the stock trading at a 34% discount to its closest peers and at a roughly 10% discount to book value,” he added.

 

Mr. Hardie raised his price target on Fairfax to C$780 from C$685. He reiterated a “sector outperform” rating.

While more conservative in its forecasts, BMO also raised its price target in light of the transaction, to C$650 (from C$600).

The average analyst target is $696.07.

 

[glider3834]

3 minutes ago, glider3834 said:

Two more analyst upgrades for Fairfax 

https://www.theglobeandmail.com/investing/markets/inside-the-market/article-tuesdays-analyst-upgrades-and-downgrades-167/

 

Scotia analyst Phil Hardie jacked up his one-year price forecast for shares in Fairfax Financial Holdings Ltd (FFH-T) after its Indian digital insurance subsidiary, Digit, announced an equity financing agreement that values the investment at $3.5-billion. The transaction is expected to result in an increase of $1.8-billion, or $61 per share, in the value of Fairfax’s stake.

“This development further underpins our thesis that 2021 is going to be a big year for Fairfax, as it benefits from both, a virtuous cycle in its insurance business, and what is likely to remain a favourable environment for value investing,” Mr. Hardie said in a note. “Aside from the expected investment gains on Digit in Q3/21, we also expect sizeable investment gains from FFH’s equity portfolio in Q2/21, along with a notable increase in the fair value of its non-insurance consolidated investments and investments in associates that do not get reflected in its book value due to their accounting treatment.”

“We believe valuation remains attractive, with the stock trading at a 34% discount to its closest peers and at a roughly 10% discount to book value,” he added.

 

Mr. Hardie raised his price target on Fairfax to C$780 from C$685. He reiterated a “sector outperform” rating.

While more conservative in its forecasts, BMO also raised its price target in light of the transaction, to C$650 (from C$600).

The average analyst target is $696.07.

 

 

 

re Scotia comment '10% discount to book value' - looks to be based on BV at 31 Mar-21 (circa CAD 620) versus current share price (circa CAD 560)

 

appears to exclude "expected investment gains on Digit in Q3/21, we also expect sizeable investment gains from FFH’s equity portfolio in Q2/21, along with a notable increase in the fair value of its non-insurance consolidated investments and investments in associates that do not get reflected in its book value due to their accounting treatment.”

[no_free_lunch]

Nice to see, hopefully it pulls on the stock.

 

I can't help thinking viking writes more detailed analysis and gets his stuff "published" faster than these guys. Still I'll take it. 

[glider3834]

4 minutes ago, no_free_lunch said:

Nice to see, hopefully it pulls on the stock.

 

I can't help thinking viking writes more detailed analysis and gets his stuff "published" faster than these guys. Still I'll take it. 

+1!

[Parsad]

7 hours ago, no_free_lunch said:

Nice to see, hopefully it pulls on the stock.

 

I can't help thinking viking writes more detailed analysis and gets his stuff "published" faster than these guys. Still I'll take it. 

 

There definitely is, and always has been, a number of shareholders who provide better analysis than the professionals.  That being said, the public listens to the professionals, not us...so we're stuck with the status quo!    Cheers!

[cwericb]

7 hours ago, Parsad said:

 

There definitely is, and always has been, a number of shareholders who provide better analysis than the professionals.  That being said, the public listens to the professionals, not us...so we're stuck with the status quo!    Cheers!

 

Ain't that the truth ...

 

Without naming names, there are a number of people on this thread in particular who do an excellent job of analyzing Fairfax - and a number ofl other companies. Yes, there are numerous others who share their opinions on other topics in various sections of COBF, but on the Fairfax section there is a very high level of research, knowledge - and most importantly - credibility.

 

I doubt you guys fully understand how much others appreciate your posts, but a sincere thank you from the rest of us!

 

[petec]

21 minutes ago, cwericb said:

sincere thank you from the rest of us!

Seconded!

[Viking]

What is great is when the community gets involved and a company is discussed/followed closely. Each person brings something different to the discussion. It might be something as simple as linking the recent news impacting the company. Someone taking the time to lay out an investment thesis. Or asking questions/discussion about a post. Or disagreeing with ideas in a post (great to hear from the other side). And over time a pretty good picture of the company emerges. And hopefully we all make some money along the way  

Edited July 7, 2021 by Viking

[cwericb]

"disagreeing with ideas in a post" 

 

Yes Viking, that is what keeps the discussion balanced and adds value. Pointing out the negatives is certainly as important as pointing to the positives. 

[Viking]

1 hour ago, cwericb said:

"disagreeing with ideas in a post" 

 

Yes Viking, that is what keeps the discussion balanced and adds value. Pointing out the negatives is certainly as important as pointing to the positives. 

 

I love it when people take the other side and challenge a thesis. When I do a deep dive and find what looks to be a good/great investment I think I have a pretty good handle on the pro's and con's. I post like crazy on certain companies to stimulate discussion. (I find writing also helps greatly to focus ones thoughts... you have to understand it to write it so that others can understand it.) And writing in some detail encourages higher level discussion/debate. This is way better than me talking to myself in my head  

 

I like to concentrate my portfolio on my best ideas. So the question i keep asking myself is 'what am i missing/why am i wrong?". Concentration and being wrong is not a good thing  So I am highly motivated to understand why I might be wrong.

 

The logic/rationale/questioning provided by those on the other side can be extremely beneficial. Fairfax, as an example, has its warts (and more than we would like) and we all need to be reminded of this from time to time.  

Edited July 7, 2021 by Viking

[Crip1]

"I find writing also helps greatly to focus ones thoughts... you have to understand it to write it so that others can understand it." - Viking

 

Concur 100%. It's tedious to be sure and time-consuming, but it really does help one to not only focus their thoughts but to actually think more. And this goes well beyond posting to this board or investing in general...it applies to most any kind of communication.

 

-Crip

[glider3834]

Article on Seeking Alpha today:

https://seekingalpha.com/article/4438293-digit-capital-raise-highlights-fairfax-financials-attractive-valuation?mail_subject=frfhf-digit-capital-raise-highlights-fairfax-financial-s-attractive-valuation&utm_campaign=rta-stock-article&utm_content=link-0&utm_medium=email&utm_source=seeking_alpha

Edited 14 hours ago by cwericb
Sorry, this should have probably been posted on the Fairfax 2021 thread

 

I liked this article but I have a different take  (please note numbers below are my own but please do your own due diligence thanks)

 

I didn't agree with author's view that 9% compounded growth in book value is a base line going forward for Fairfax & author is using BV growth that was reported over 2017-2020 as well with 2020 a far from normal year.

 

During 2017-2020, the combined ratio ran close to 100% averaged over those years (due to 2017 largely - see below), so if we use 9% as a base rate like author then we are also assuming that combined ratio will average 100% going forward. But is that realistic for Fairfax for insurance & reinsurance ops based on the current environment (hard market) & historical results - see below

 

2011-2016 - Avg CR 96%

It hit 107% in 2017 (hit a speed bump due to acquiring Allied World, reporting large catastrophe losses which were based on only 6 months of premiums which magnified the loss ratio - without Allied World combined for Fairfax was 100.9)

2018-2020 (including COVID) - Avg CR 97%

Q1 2021 - CR 96%

 

So based on above, I would expect UWP to contribute meaningfully to operating earnings - I know Prem has set a target of 95% CR as a target in shareholder letter, so they believe they can achieve solid underwriting profitability over time.

 

If we take earned premium in Q1 2021 & I am going to be really simplistic (probably will get into trouble here as ignoring renewal timings etc  but lets annualise earned premium in Q1 2021 of 3,730 by simply multiplying it by 4 = 14,920 mil

 

Then lets apply 97% CR (bit more conservative than Q1 2021) so we get UWP = 450 mil (rounding up for simplicity!)

 

So author is saying UWP will be zero & I would say it could be closer to 450 mil for 2021 - in a nutshell, hard market (higher pricing plus incentive to drive insurance cost efficiency) can provide a counter-weight to lower interest income for Fairfax (also the hard market is also arguably being driven by lower interest rates) 

 

Of course, higher interest rates will be enormously beneficial to Fairfax's fixed income returns but my counter-argument to this author & I mean it in most respectable way but there are other ways to get to the finishing line (ie double digit BV growth) and underwriting profits are one of them.

 

Interested to know what everyone else thinks too as always

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[glider3834]

1 minute ago, glider3834 said:

(also the hard market is also arguably being driven by lower interest rates) 

sorry I meant to say its one of the contributing factors cheers

[petec]

I have not done the numbers but I would agree directionally.

 

I think the hard market is indeed driven by lower rates. In the end, capital requires a return, and if it can't get it one way (investing float) it has to get it another (underwriting).

 

There are several features of hard markets that work in Fairfax/s favour:

1) Higher CR's on higher NPW = significantly higher underwriting profits.

2) Lower risk, because price is more likely to cover exposure. 

3) Greater float and therefore greater investment leverage. 

 

We all tend to focus on CR, but actually I think no3 might be the most important over time. Fairfax have said that float "won" in hard markets tends to be sticky. In other words if the investment portfolio goes from $40bn to $50bn in the hard market, you shouldn't assume it shrinks again later. I don't really understand why this is, but that was Fairfax's experience in the last hard market and it would be very positive if it happens again.

 

 

[glider3834]

7 minutes ago, petec said:

We all tend to focus on CR, but actually I think no3 might be the most important over time.

Agreed petec

 

From Q1 2021, we can see float grew 13.9% YoY

 

• Float of the insurance and reinsurance operations increased by 13.9% to $23,244.2 million at March 31, 2021 from $20,413.6 million at March 31, 2020.

https://www.fairfax.ca/news/press-releases/press-release-details/2021/Fairfax-Financial-Holdings-Limited-Financial-Results-for-the-First-Quarter/default.aspx

 

By my calcs, based on 26 mil shares outstanding, at Q1 2021 we have float per share of around USD 894 (CAD 1118)

 

Current share price around CAD $547

 

So you are getting $2 float for each $ 1 share which gives some pretty nice investment leverage at the current share price (also thats a higher ratio than historically for FFH,  which I think also supports argument FFH is undervalued currently IMO!) 

 

 

[Pedro]

I'm a foot solider in the industry and can say the hard market is in 9th inning. Insurer's books have had 2 renewal cylces to get their prices up/get off unprofitable business.  More capacity is coming back  online since prices are at attractive level in the p&c lines. 

 

All insurers now sees the rates as attractive and want to grow. I've seen this play out of before and it only goes one way - prices drop/capacity increases at sillly prices. his is why the business remains cyclical.  

 

I'd be suprised if by end of Q2 2022 if the majority of the P&C industry has postive rate increases on their book. New business wont be written at atttractive prices as the competition to keep accounts will be fierce with everyone wanting to grow grow grow!

My point here is that forecasting the hard market beyond 2022 is aggressive. I think the bunch bowl is almost empty. Could be wrong but all signs I see on the front lines are pointing to the power balance shifting from a desperate need for capacity to markets writing at silly prices. 
 

[KFS]

1 hour ago, Pedro said:

I'm a foot solider in the industry and can say the hard market is in 9th inning. Insurer's books have had 2 renewal cylces to get their prices up/get off unprofitable business.  More capacity is coming back  online since prices are at attractive level in the p&c lines. 

 

All insurers now sees the rates as attractive and want to grow. I've seen this play out of before and it only goes one way - prices drop/capacity increases at sillly prices. his is why the business remains cyclical.  

 

I'd be suprised if by end of Q2 2022 if the majority of the P&C industry has postive rate increases on their book. New business wont be written at atttractive prices as the competition to keep accounts will be fierce with everyone wanting to grow grow grow!

My point here is that forecasting the hard market beyond 2022 is aggressive. I think the bunch bowl is almost empty. Could be wrong but all signs I see on the front lines are pointing to the power balance shifting from a desperate need for capacity to markets writing at silly prices. 
 

 

Are you seeing real evidence of the hard market easing up already, or is this more of a speculation based on your past experience with cycles?  

[Pedro]

I mean I can't give you names or policy numbers but it's real from my seat

 

All the front line peons in the business see it. Find them and ask. I think you'll start to see Q3/Q4 rate numbers not being as sexy but for the sake of my net wealth being tied up in insurers,  I hope I'm wrong.

 

 

[Cigarbutt]

^Since the early 2002-4 hard market, i've used MarketScout and have found the tool useful for a general idea of the coincident market. For example, in 2002-4, it helped to map out what kind of growth (from the point of view of both price and number of policies) in NPW FFH would report.

Market Barometers – MarketScout

They think the hard market is moderating.

-----

Even if these measures are coincident and relevant, they still don't provide clear answers about the softness of the past (Mr. Stephen Catlin whose opinion needs to be respected, for example, suspects that a lot of swimmers have been naked (in some significant areas) and that the tide has not quite receded yet) and about the surprises of the future.

-----

An area of the market which may reflect the unusual risk appetite arising as a side effect of 0% interest rates is the catastrophe bond market (and the rest of the ILS market).

Catastrophe bond hard market continued to weaken in Q2: Lane Financial - Artemis.bm

The rates obtained likely point to relatively low returns going forward and leave little margin of safety (it's the insurance industry after all and we're talking catastrophes).

-----

Conclusion: this is not shaping up to be the mother of all hard markets.

[Viking]

Cigar, i agree. I like to listen to WRB and Chubb conference calls. What i heard was they were getting rate on rate increases (and rate on rate on rate in some cases... i.e. a third year of rate increases). It sounded to me like they viewed rate as more than adequate and are now looking to volume (new business) to drive future growth. They were almost appologetic over the amount of rate they have been able to get. Bottom line it looks to me like the hard market is slowing. But given the lag between written and earned we should see some pretty good results from insurance companies over the next year or two (assuming a normal cat loss years). 
 

The drivers of the current hard market remain in play: very low bond yields (low investment returns), elevated cat losses, social inflation, uncertainty over covid etc i wonder if this does not extend the hard market into 2022 with a slowing but still good pricing environment. Underwriting results for Q2 at Fairfax could be quite good. 
 

if bond yields stay at current levels (10 year at 1.35%) for many years then more and more insurance companies are going to be forced to take on more risk in their investments portfolios. 
 

Both WRB and Chubb are trading today below where they were trading back in March (with Chubb trading close to where it was back in January). This may reflect expectations that the hard market is turning. This perhaps also partly explains the weakness we have seen in Fairfax shares the past couple of months (despite the beat on Q1 earnings and Digit announcement).

[glider3834]

some interesting insights thanks guys and a consensus I think that hard market is moderating - I would also agree with Viking comment below

 

6 hours ago, Viking said:

The drivers of the current hard market remain in play: very low bond yields (low investment returns), elevated cat losses, social inflation, uncertainty over covid etc i wonder if this does not extend the hard market into 2022 with a slowing but still good pricing environment. Underwriting results for Q2 at Fairfax could be quite good.